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M.C. SHUKIA
 A MANUAL
OF
MERCANTILE LAW
r - - - - - - - t lnc/udia_a Indu strial LawJ

-By-
M.C . SHUKLA
B .A. , B.Co m. -(Birmingham), Barriste r-at-Law
Retired Professor of Commerce, and Director of Correspondence
Courses, University of Delhi

For Blanche Shukla Trust

1998
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 To
the Memory
of My Wife
Blanche Sheila Shukia
 PREFACE TO THE THIRTEENTH EDITION
The developments during the period since the publication of the last edition have been
such that this thirteenth edition has involved the most substantial revisions. Among
statutory changes, those with the most significant and immediate impact, flow from the
Companies (Amendment) Act, 1988 and various Notifications issued by the Central
Government from time to tune, and some of the labour laws, moore particularly, Factories
Act, Workmen's Compensat ion Act, Industrial Disputes Act and Payment of Wages Act -
These amendments and case law aevelopments have necessitated thorough and
extensive re-writing and updating. Case law has been updated to January, 1991.
The chapters on Contracts and Negotiable Instruments have been considerably
strengthened with revised and additional material based upon fresh case law. Apart frçm
these particular areas, where there has been any change in the law, I have revised chapters
dealing with other branches of Mercantile or Business Law. These revisions, I believe,
will bring still greater clarity to some of the more difficult parts of the hook. Great effort
has been made to further mnodernjse the hook, in the hope that it will prove much more
helpful to those for whom it is meant.
In the end, I Joust continue to offer my grateful thanks to may late wife Blanche
Sheila Shmmkla, for her unflagging assistance and advice at every stage of the publication
of the first eleven editions. The dedication of this book to her mneniory and the transfer
of royalties therefrom to a Trust created in her memory is but an inadequate expression
of my indebtedness to her.

NEW DELHI.
M.C. SHUKLA
 PREFACE TO THE FIRST EDITION
The addition of yet another book to the large number of works on Mercantile Law
demands, if not apology, certainly an excuse. The excuse for the production of this
volume is that it covers the whole teeming ground in a manner differing from the usual
textbook, by giving in one volume, a thorough, lucid and easily understandable explana-
tion of the various principles of that branch of law which has to deal with mercantile
transactions and mercantile community.
The book is intended primarily as a textbook for Pass and Honours students
preparing fom the various University and Professional Examinations in Mercantile Law,
but it cannot fail to be useful to businessmen who have from tune to time to deal with
several branches of the subject. My aim is to explain the provisions of the different
enactments, and in doing so, I have dealth with the law, subject by subject, grouping
together the sections of the respective Acts so as to make them simple and logical to the
student, convenient to the businessman and interesting to the casual reader who may
care to use it as a reference. Even lawyers and practitioners will find the book of practical
use inasmuch as it contains in a handy volume the whole range of Mercantile Law,
supported by citation of both English and Indian cases and references to the relevant
sections of the various Acts. Where controversial points occur. I have based the
exposition oil the general consensus of standard authoritative opinion of leading writers,
and tile considcredjiidgiiients of the Courts. At places I have allowed mnyaelf the freedom
of expressing my own opinion, with due deference, of course, to the authorities. To
facilitate the work of recapitulation at the time of examination, a summary is given at
the end of each chapter. To meet the needs of students preparing for the various
examiminmitions held by several British Professional Societies, English . law is explained
fully under separate heads. In short, the present work presents the subject from the
composite view-point of the student, the b sinessinan, the lawyer and the layman. A
maxinlum range of illustration has been used to illumn4mtate the subject-matter.
I am under considerable obligation to various well-known and monumental legal
treatises and take this opportunity to acknowledge the assistance I have derived from
them in the preparation of the book.
To thank my wife is but to inadequately express mny indebtedness to her, for in the
midst ofday-to-day lecture work the completion of the book would have been impossible
without her unflagging assistance and advice at every stage of its produLtion.

M.C. SI IT, KLA

July 1948
Delhi
 Table of Contents
Chapter
Introduction
Pages
1-4
Nature and Sources of Mercantile Law. Law and Society.
Sources of Mercantile Law. The Common Law. Equity. The
Law Merchant- The Statute Law.
I. Nature and Kinds of Contracts
5-106
Introduction. Definition of Contracts. Kinds of Contracts. The
Agreement. Offer or Proposal. Standard Fo ntracts and
Tickets. Duration of offer. Tenders.cce tanc Consj
dera
tion. Flaws in Contracts. Flaw in C acity. ]aw in Consent.
Ic.
Mistake. pzeuflujjn
Unlawful Agreements.
Uidiiejr
When
Quasi Contracts.
arious Discharges of Contract. The DoctrifiPjistra1on
Remedies for breach of Contract. Summary. Cases for
Recapitulation.
H. Contracts of Indemnity and Guarantee
107-123
Contract of Indemnity. Contract of Guarantee. Rights of the
Surety. Discharge of Surety . Summary. Cases for Reeanii1
tion.
III. Bailment and Pledge _
—I-24--13
Duties of Bailee. Duties ofBailnr. Rights of Bailor and Bailee
of Bailment. Finder of lost
goods. Common Car sand in
neepersa1ajlees Pledge
or Pawn. Rights of Pawnee. Rights of Pledgor. Pledge by
non-owners. Summary. Cases for Recapitulation.
IV. Principal and Agent
137-160
Definition and general rules. Creation of agency. Classes of
Agents. Delegation of authority by agent. Duties and Rights
of Agent. Extent of agent's authority. Responsibilities of
Principal to third parties. Liability of undisclosed Principal.
Concealed Principal Personal liability of Agent to third party.
Termination of Agency. Summary. Cases for Recapitulzition.
V. Lawofl'arinersiuip
161-196
Changes introduced in the New Act. Registration of Firms.
Effect of Non-registration Penalty for false statement.
Definition and Nature of Partnership Formation of Partner-
ship. Position and Rights of a Minor. Class" of Partners. Test
of Partnership Partnership dist inguished froin oilier associa-
tions. Duration of P artnership. Partnership Property. Rela-
tions of Partners to one another. Rights of a Partner. Duties
of Partners. Relations of Partners to third parties. Implied
Authority oa Partner. Dissolution. Winding up. Settlement
of Accounts. Limited Partnership. Summary. Cases for
Recapitulation.
 Pages
Chapter 197-240
VI. The Sale of Goods
Contract of Sale of Goods. Sale and Agreement to Sell distin-
guished, Sale distinguished from other Transactions. What is
Sale'? Formation of a Contract of Sale. Subject-matter of
Contract of Sale. Goods. The Price. Conditions and War .p-
ties. Caveat emptor. Implied Conditions and Warranties. Pass-
ing of Property. Transfer of Title by non-ownerS. Perfor-
mance of the Contract of Sale. Duties and Rights of Seller and
Buyer. Rights of the unpaid Seller. Suits for Breach of
Contract. Auction Sales. Summary. Cases for Recapitulation.
241-249
VII. Insurance
Nature of the Contract of Insurance. Fundamental Principles
of Insurance. Premium. Days of grace. Return of Premium.
Policy. Re-insurance. Double Insurance. Subrogation and
Contribution in Fire and Marine Insurance. Distinction.
250-268
VIII. Marine Insurance
The Policy. Insurable inteSt. Insurable value. Double in-
surance. Warranties. The voyage. Deviation and Change of
Voyage. Perils. Assignment of Policy. Losses. Kinds of los-
ses. Actual total loss. Constructive total loss. Partial losses.
Particular average. General average. Salvage.
269-273
lx. Fire Insurance
Average clause. The Risk. What is Fire? Assignment. Special
Fire Policies. Claims.
274-290
X Life Insurance
Definition. Distinction. Insurable interest. Policies. .Surrcndrr
value. Loans on Policies. Paid-up Value. Assignment.
Nomination. Claims. Proof of Age and Death. Suicide. Acci-
(tent Insurance. Summary. Cases for Recapitulation.
291-351
XL The Law of Negoliahie Instruments
Introduction. Meaning. Presumptions. Promissory Note and
Bills of Exchange. Promissory Note. Bills of Exchange. Bank
Draft. Cheques. I)istinction between Bill and Cheque. Banker
and Customer. Liability of Paying Banker. When Banker must
refuse payment. Payment in due course. Crossing of Cheques.
Inland and Forign lnsiuinents. Maturity. Parties. Holder.
Negotiation. Endorsement. Lost Instruments. Acceptance.
Presentment. Dishoriour. Discharge. Compensation. Interna-
tion Law. Hundis. Summary, Cases for Recapilulatioll.
352-385
XII The Law of Insolvency -
Definition. Objects of insolvency Legislation. Who may be
adjudged insolvent? Acts of Insolvency. Procedure, Petition.
Order of Adjudication. Effect of insolvency. Annulment of
Adjudication. Composition. Annulment of Composition.
lusolvent's property. Reputed ownership. illisclainier.
Realisation of property. Committee of Inspection. Priority of
debts. Official Assignee and Official Receiver. Discharge of
insolvent. Small insolvencies. Penalties. Summary. Cases for
Recapitulation.
 xi

Chapier Panes
XIII. Arbitration 386-399
What is Arbitration. Arbitration Agreement. Effects. Arbitra-
lion without intervention ofCouri. Thi Arbitrator. Powers and
Duties of Arbitrators. The Award, Interim Award. Setting
aside an Award. Arbitration with intervention of Court where
no suit is pending. Arbitration in suits. Statutory Arbitration.
Appeals. Cases for Recapitulation.
Xlv Carriers and Carriage of Goods 400-417
Contract of Carriage. Classification of Carriers. Railways as
Carriers. Carriage of GsySeaTCharfjirty. Implied
Warranties. Bill of Lading. Carriage by Air. Documents of
Carriage by A. Cas1or Recapitulation.
XV Securities 418-430
Pledge or Pawn. Mortgage. Definition and Nature. Kinds of
Mortgages. Rights and .Liabilities of Mortgagor. Rights and
Liabilities of Mortgagee. Priority. Marshalling and Distribu-
tion. Charge. Distinction between Charge and Mortgage. Bills
of Sale. Hypothecation. Lien.
XVI. Company Law 431-520
Nature and Classification. Legal Persons. Corporation. Corn-
jany and its meaning. Lifting the Corporate veil. Classes of
Companies. Private Company. Circumstances in which
private company becomes public company. Public Company.
Holding and Subsidiary Companies. Foreign Companies.
Government Companies. Association not for profit. Illegal
Associations. Company Law Board. Formation of Company.
Memorandum of Association. Alteration of Memorandum.
Articles of Association. Alteration of Articles. Prospectus.
Public Deposits. Membership, Public Trustee. Benarni Hold-
ing of Shares. Shares.lLutinent of Shares. Transfer ufShares.
Dividends. Borrowing Powers. Registration of Charges.
Meetings and Proceedings.. Resolutions. Accounts, Audit and
Investigation. Management of a Company. Directors. Politi-
cal Contributions. Appointment of Sole Selling Agents.
Mnagcr. Managing Director. Managing Agents. Restrictions
on Former Managing Agents. Secretary. Compromise and
Arrangement. Prevention of Oppression and Mismanage-
mnent. Winding up. Liquidators. Disclaimer. Cases for
Recapitulation.
XVII The Factories Act, 1948 521-551
Definitions. Health. Safety. Welfare. Working Hours of
Adults. Employment of Women. Employment of Young Per-
sons. Leave with Wages.

XVIII. The Workmen's Compensation Act, 1923 552-572
Definitions. Workmen's Compensation. Employer's
Liability. Meaning of Accident. Employer not Liable.
Amount of Compensation. Commissioner.
 xii

Chapter Pages
XIX. The Trade Unions Act, 1926 573-578
Definitions. Registration. Rights and Privileges of a
Registered Trade Union. Funds of the Trade Union. Separate
Fund for Political Purposes. Amalgamation of Trade Unions.
Books and Returns. Penalties. Dissolution.
XX. The Payment (Jr Wages Act, 1936 579-585
Definitions. Responsibility for payment. Wage-periods. Time
of payment. Deductions. Claims forWrongful Deductions.
X XL The Industrial Disputes Act, 1947 586-6 15
Definitions, Authorities under the Act. Reference of Dis-
putes. Procedure andPowers of Authorities. Strikes and Lock-
outs. Lay-off and Retrenchment. Special Provisions relating
to Lay-off. Retrenchment and Closure. Special provisions as
to Re-starting of Undertaking. Penalties. Miscellaneous.
Repeal of the Act (1950).
XXII. The Minimum Wages Act, 1948 616-624
Interpretation. Fixing Minimum Raics of Wages. Minimum
Rates of Wages. Procedure for fixing. Committee and Ad-
visory Boards. Payment of Minimum Wages. Register and
Records. Inspectors. Claims. Penalties and Procedures. The
Schedule.
Appendix I 625-671
The Indian Contract Act, 1872
Appendix!! 672-687
The Indian Partnership Act, 1932
Appendix III 688-701
The Sale of Goods Act, 1930
Appendix IV 702-724
Test Questions
Index 725-732
 INTRODUCTION

Nature and Sources of

Mercantile Law
PART A
LAW AND SOCIETY
Some knowledge of law is necessary to a greater or lesser extent for all persons.
The truth of this statement is obvious, because life of each member of society must
proceed to a large extent in confom rity with recognised rules and principles of social
conduct. Indeed, an individual is confronted almost daily with situations that demand
legal information for correct action. Just as a game of football or hockey could not be
played satisfactorily without rules to govern the players, so life in general and the
business world in particular could not continue without law to regulate the conduct of
people and to protect their properly and contract rights. Without rules the athletic contest
would soon become a brawl. Without law life and business would soon become a matter
of the survival not only of the fittest but also of the most ruthless. Without law, our rights
would not be secure because we would not know whether rights existing today would
be respected. tomorrow.
What is Law? Law in its legal sense, as distinguished from other uses of the term,
means those rules and principles that govern and regulate social conduct and the
observance of which can be enforced in courts. It operates to regulate the actions of
persons in respect to one another and in respect to the entire social group or society.
Law is either Public Law or Private Law. Public Law concerns the public as a
whole and is divided into three classes - Constitutional Law, Administrative Law and
Criminal Law.
Private Law pertains to individuals. It is separated into such special fields as
contracts, agencies, sales, surety-ships, negotiable instruments, etc. These areas general-
ly are the ones that pertain to business and are termed as Business Law or Commercial
Law or Mercantile Law. Our immediate concern is with this branch of law. Mercantile
Law may be defined as that branch of law which deals with the rights and obligations
of mercantile persons arising out of mercantile transactions in respect of mercantile
property. An individual, a partnership or a company, carrying on business, is a mercantile
person. This law, in turn is founded on the law of contract. The present book deajs with
the various segments of mercantile or business law as well as some sections of industrial
law.

SOURCES OF MERCANTILE LAW

Indian Mercantile Law is, in the main, an adaptation of the English law, it is
incorporated in a number of Acts, which follow to a considerable extent the English
Mercantile Law with some reservations and modifications necessitated by the peculiar
conditions obtaining in-India. To ascertain the sources of Indian Mercantile Law we
have, therefore, to trace the sources of the English Mercantile Law. The sources of
 MERCAFtLE LAW

English Mercantile Law are (1) The Common Law; (2) Equity; (3) The Law Merchant;
and (4) The Statute Law.
THE COMMON LAW
The first source of the law is the customary conduct of community life. Group life
creates customs, and when these customs become stabilized to the extent that each
member of the society is justified in assuming that every other member of society will
respect them and will act in conformity with them, it can be said that rules of conduct
have been formulated. When these rules of conduct have received the recognition of the
community in general and have become formally expressed in judicial decisions, the
'Law' is made. The court, by its decision, lays down a principle, based upon a custom
or convenience, and thus creates a precedent which will be controlling in similar future
controversies. Thus the Common Law consists of principles based on immemorial
custom and enforced by the courts. It is traditionally, unwritten law, developed fn
English courts during the period beginning with the thirteenth century and extending
into the eighteenth century, and brought to this country by the British rulers of India. It
is to be found in some thousands of volumes of reported cases and is common to the
whole realm.

EQUITY
In early times the administration of the law was not altogether free from abuses of
the grossest kind. The King's officers were sometimes corrupt and partial. In extreme
cases the poor subjects had to seek redress of their wrongs by petition to the King, who
was the ultimate fountain of justice. Originally the king heard these petitions, but later
he began to refer them to his Council. The foremost officer of the King's Council was
the Chancellor, who was in the early days generally an ecclesiastic and, therefore,
referred to as "Keeper of the King's Conscience." It was, therefore, a natural develop-
ment that after the middle of the 14th century, all "matters of grace" were addressed
directly to the Chancellor. One more cause led to the development of equity. A
common-law action was begun by the issue of a writ of summons out of the King's
Chancellery or Chancery. The Chancellor and his clerks issued an appropriate writ after
hearing the plaintiff and the subsequent proceedings in relation to the suit were deter-
mind by the Common Law Judges. In course of time the writs issued from the Chancery
became classified and rigid, as is the custom in judicial procedure. But while legal
procedure was stiffening, civilization was progressing, society was becoming more and
more complex and new relationships between persons were growing up. Who was to
supply remedies for new grievances? The common law was too stereotyped to do this.
So it came about that there was no writ suitable to meet the case presented to the Chancery
by way of petition or complaint, it was then open to the Chancellor, if he found that the
common law was deficient, to issue his own subpoena—a direction to attend under
penalty in case of disobedience—and reserve the case for hearing by the King-in-Coun-
cil. It was out of this reservation that the jurisdiction of the Court of Chancery arose.
From being an office for the issue of common-law writs, it became a court for the hearing
of special classes of cases. The rules applied by the Chancery in the exercise of this
jurisdiction became known as "Equity". Equity in a number ofcases mitigated the rigour
of the common law in order to carry out the real intentions of the parties.
Equity also developed new remedies. The common law courts only awarded
damages, and were without the remedy of injunction to prevent the commission of a tort
and had no machinery to ccmpel the specific performance of a contract. The power of
the courts of equity to compel personal obedience enabled them to invc 1li these and
 NATURE AND SOURCES OF MERCANTILE LAW

other much useful remedies. After a time the principles and procedure of equity became
virtually as fixed as those of common law. The duality of English law, and the conflicts
between law and equity were burdensome, and were put an end to by the Judicature Acts
of 1873-75, which enacted that, where the rules of law and equity conflict, equity shall
prevail. At the same time one Supreme Court was constituted with separate Divisions
for common law work (King's Bench Division) and equity or chancery work (Chancery
Division). But either division can give whatever remedy is most appropriate. In India
also, equity empowers Courts to deal with harsh cases where the ordinary law fails to
provide any remedy.
THE LAW MERCHANT
The Law Merchant was an independent body of customs and usages governing
commercial transactions of the merchants and traders of the Middle Ages, which have
been ratified by the decisions of the Courts of Law. The Common Law of England
became fixed at a time when little or no attention was paid to trading. Hence, among
traders there sprang up a number of customs and usages which were necessary for the
conduct of business. During this period the body of commercial usages was practically
uniform throughout Europe. In its earliest stages, therefore, the Law Merchant was a
kind of private international law administered by tribunals consisting principally of the
merchants themselves.
Virtually it fell into two branches, the Law Merchant properly so-called, the Law
of Fair and Market, and the Maritime or Sea Law, which early came under the dominion
of Admiralty Courts staffed by civilians (lawyers trained to Roman Law) in all the
countries of Europe. For many years the English Courts refused to recognise these
customs and usages; but a change took place when the administration of law fell into the
hands of lawyers who were not irrevocably tied down to ancient ideas. After the
beginning of the 17th century the King's Courts began to give effect to the rules of the
Law Merchant, the special merchants tribunals dwindled into insignificance and gradual-
ly died out. The first great judge to exercise his influence in the recognition of these
customs and usages was Lord Holt, but his work was overshadowed by the labours of
Lord Mansfield, who was Lord Chief Justice from 1756 to 1787. To Lord Mansfield,
Mercantile Law owes more than to many generations of England's legislators. The Law
Merchant has, since his time, been regarded as part of the Common Law and is
consequently judicially noticed so that a custom once established in Court requires a
Statute to alter it. In Goodwin v. Roberts (1875), L. R. 10 E.X. at page 346. Cockburn.
C.J. observed: ''The Law Merchant is neither more nor less than the usages of merchants
and traders in the different departments of trade, ratified by the decisions of Courts of
Law, which upon such usages being proved before them,. have adopted them as settled
law with a view to the interests of trade and the public convenience, the Court proceeding
herein on the well-known principle of law that, with reference to transactions in the
different departments of trade, Courts of law, in giving effect to the contracts and dealings
of the parties, will assume that the latter have.dealing with one another on the footing of
any custom or usage prevailing generally in the particular department. By this process,
what before was usage only, unsanctioned by legal decision, has becomb engrafted upon,
or incorporated into, the Common Law, and may thus be said to fortn part of it."
The Law Merchant, or lex rnercatoria, is the origin of much of the law relating to
negotiable instruments, trade marks, partnerships, contracts of affreightment and in-
surance. In India, the Law Merchant is codified, and the Courts are left only with the
task of interpreting the language of the Acts. But where some principles of the Law
Merchant (Indian trade customs and usages) are not covered by those Acts, the Indian
Courts generally apply the English Law on the subject.
 MERCANTILE LAW

THE STATUTE LAW

The Statute Law means Acts of Parliament. These are the most efficient and the
most usual way of bringing about changes in the law today. The authority of the
Parliament is supreme, and subject to natural limitations and those laid down by the
Constitution, it can pass any law it pleases, and is not bound by its previous Acts. It is
also within the power of Parliament to nullify the decisons of the Courts of Law. The
Statute Law, therefore, ranks in priority to .Cuiiiirion Law and Equity. But while
Parliament is supreme in legislation, the Courts of Law are the interpreters of the meaning
of the Acts of Parliament. Acts of the Indian Legislature based mainly on the English
Mercantile Law form by far the most important source of Indian Mercantile Law. Where
there are no Acts relating to certain matters or where Acts are ambiguous, the Common
Law of England is applied.
 Chapter 1

Contracts
PART 1-A
NATURE AND KINDS OF CONTRACTS
INTRODUCTION
The law of contracts forms the oldest branch of the law relating to business or to
commercial transactions. In one form or another it has existed from the beginning of
organised society. Just-as the safety of person and of property depends upon the rules of
criminal law, so the security and stability of the business world are dependent upon the
law of contracts. Indeed the basis of trade and commerce today is the enforceability of
promises. It would be impossible to plan ahead if we did not have the assurance that
agreements once made would be binding. An essential part of enterprise in our economic
system is that the rights created by promises are protected and enforced. It is with the
enforceability of these promises that the law of contracts is concerncd.'Furtherinore the
law of contracts furnishes the foundation for the other branches of commercial or
mercantile law. In fact the law of contracts affects every one of us; for every one of us
enters into contracts day after day. In every purchase that one makes, or a loan of book
that one makes to a friend of his, or a ride that one takes in a bus, in all these and many
other transactions of daily life he enters into contracts. For these reasons the study of the
general principles of contract law naturally precedes the specialised ficids of contracts.
In business transactions, where promises are very often made at one time and the
performance is to follow later, the parties have two alternatives open to them. They may
either rely upon one another's honour to ensure performance, or else there should be a
legally enforceable obligation to perform the agreement. Reliance upon honour alone is
insufficient protection. Legal, means of enforcing promises has, therefore, been
developed in civilised societies. Legally enforceable promises are termed contracts.
Promises that do not meet the requirements of a contract is the most common means of
rendering a promise enforceable. The object and function of the law of contract is to see
that, as far as it is possible, expectations created by promises of the parties are fulfilled
and obligations prescribed by the agreement of the parties are enforced. The contract is,
indeed, a cement that holds our economic system together. For this reason the sanctity
of contract has always been made an objective of social control and individual liberty.
DEFINITION OF CONTRACT
In the broadest sense, a contract is an exchange of promises by two or more persons,
resulting in an obligation to do and refrain from doing a particular act, which obligation
is recognised and enforced by law, In creating a legal obligation contract gives a right
to one person and casts a corresponding duty on another person. On account of the
presence of nghtsand obligations, the law gives a remedy for the breach of promise and
recognises its due performance as a duty. Hence a contract is sometimes defined as "an
agreement creating an obligation," which means a binding agreement. Our Contract
5


MERCANTILE LAW

Act [S. 2(h)] defines a contract as "an agreement enforceable by law." This definition 1 -
naturally resolves itself into two distinct parts. First, there must be an agreement.
Secondly, such an agreement must be enforceable by law. It will be so enforceable if
it is coupled with obligation. Therefore, a contract is a combination of the two ideas of
agreement and obligation An agreement is necessarily the outcome of consenting minds,
or there i s consensus ad idem—consent to the matter. An obligation is the legal duty to
do or abstain from doing what one has promised to do or abstain from doing. A
contractual obligation arises from a bargain between th, parties to the agreement, who
are called the Promisor and the Promisee. In most commercial contracts each party is
both a promisor and promisee; that is to say, the contract is formed by mutual promises.
If A promises to deliver B a bag of wheat in a week's time for Rs. 100, payable in a
fortnight. A is promisor as to delivery, and B is promisor as to payment, while B is
promisee of the delivery of the bag of wheat and A is promisee as regards the money to
be paid.
It follows from the foregoing discussion that where parties have made a binding
contract, they have created rights and obligations between themselves. The contractual
rights and obligations are correlative. For example, A agrees with B to sell his car for
Rs. 20,000 to B. In this example, the following rights and obligations have been created:
(i) A is under an obligation to deliver the car to B: B has a correlative right to
receive the car.
(ii) B is under an obligation to pay Rs. 20,000 to A: A has a correlative right to
receive the Rs. 20,000.
All obligations, however, are not contractual in nature. For instance the obligations
resulting from the following are not contractual, namely:-
1. Torts or civil wrongs;
2. Quasi-contracts-
3. Judgments of courts—Contracts of Record;
4. Relationship between husband and wife, trustee and beneficiary—status obliga-
tions.
As the law of contracts excludes from its purview all such obligations, and
agreements of social nature and hence is not enforceable by law. Salmond observes:
"The Law of Contracts is not the whole law of agreements, nor is it the whole law of
obligations. It is the law of those agreements which create obligations, and those
obligations which have their source in agreements." Also, agreement is the genus of
which contract is the species; and, therefore, all contracts are agreements, but all
agreements are not contracts. Only those agreements which are enforceable by law are
contracts. Thus, legally enforceable promises are termed contracts. Promises that do not
meet the requirements of a contract are not enforceable. Hence, the making of a contract
is the most common means of rendering a promise enforceable. But to be a valid contract
it must fulfil certain requirements or possess certain essential elements. We shall deal

and LroOUSC
Our definition follows Pollock's
an agreement creating and
the p mci. mtson says: A contract is an agreement
enforceable at l..w made between two or more persons. b9'which rights are acquired by one
or more to acts or forbearances on the part of the other or others. Jçak observes: "An
agreement as the source of a legal contract imports that one party
performance which the other shall have a legal right to enforce. "' ,: Williston 's definition is: "A
promise or set of promises, for the breach of which the law gives a
of which the law in some other way recognizes as a duty."
 CONTRACTS

with these essentials in me following pages, after narrating the different kinds of
contracts.

K[DS OF CONTRACTS
Contracts may be classified in terms of their form, or in terms of their enfor-
ceability, or the way they are created.
FORMAL AND SIMPLE CONTRACTS
Contracts are classified in terms of their form as (1) contracts unc' seal, (2)
contracts of record, and (3) simple or parot contracts. The first two classes are known as
formal contracts, their validity or frgal force being based upon form alone. When the
terms of ar obligation are written or.printed upon paper or parchment and are signed,
sealed, and delivered, the obligation constitutes a contract under seal. An instrument
of this nature is technically known as a deed or a common-law specialty.
An obligation imposed by the judgement of a court and entered upon its records
is often called a contract of record.
It cannot accurately be described as a contract, however, because it is really not
based upon an agreement of the parties. One form of contract of record is in fact a
contract. This kind exists when one acknowledges before a competent court that he is
bound or obligated to pay a certain sum unless specified thing is done or not done. For
example, a party who has been arrested may be released on his promise to appear in court
and may hind himself to pay a certain stim in the event that he fails to do so. An obligation
of this kind is known as a recognisance.
All contracts other than contracts of record and contracts under seal are called
simple or parol contracts, whether they are in writing or merely oral. A parol or simple
contract, whether oral or in writing, must be supported by consideration.'
Formal contracts or contracts under seal, recognised under the English law, do no
find any place in the Irdian law. The simple or parol contract supported by consideration
is the type of contract largely recognised under the Indian Contract Act. Form alone does
not allow to dispense with consideration under the Indian Act. But S.25(l) of the Act
makes provision for a kind of contract which to some extent resembles the formal
contract or specialty of English law, and is enforceable, if it satisfies four conditions,
namely,—(l) the contract must be in writing, (2) it must be registered according to the
law of registration of documents, (3) it must be between parties standing in near relation
to each other, and (4) it should proceed out of natural love and affection between the
parties.
EXPRESS AND IMPLIED CONTRACTS
Simple contracts may be classified in terms of the way in which they are created
as (1) express contracts, and (2) implied contracts.
An Express Contract is one in which the parties have made an oral or written
declaration of their intentions and of the terms of the transaction. In other words, an
express contract is one, the terms of which are stated in words, spoken or written.
An Implied Contract is one in which the evidence of the agreement is not shown
by words, written or spoken, but by acts and conduct of the parties. Such a contract arises
when one person, without being requested to do so, renders services under circumstances
indicating that he expects to be paid for diem, and the other person, knowing such
circumstances, accepts the benefit of those services. An implied contract cannot arise
 MERCANTILE LAW

when there is an existing express contract on the same subject. Thus, contracts in which
the manifestation of assent is purely acts rather than words are termed implied contracts.
Under certain conditions the law creates and enforces legal rights and obligations
when no real contract, express or implied, exists. These obligations are known as
quasi-contracts. A quasi or constructive contract rests upon the equitable principle that
a person shall not he allowed to enrich himself unjustly at the expense of another. In
truth, however, it is not a contract at all. Duty, and not a promise or agreement or
intention of the person sought to be charged, defines it - We shall have more to say about
it at a later stage.
VALID, VOIDABLE, y Ou) AND UNENFORCEABLE CONTRACTS
Contracts may beclassified also in terms of their enforceability or validity as (I)
valid contracts, (2) voidable contracts, (3) void contracts or void agreements, and (4)
unenforceable contracts.
A Valid Contract is an agreement which is binding and enforceable. It has all the
essential elements to be stated and discussed later.
A Voidable Contract is an agreement that is binding and enforceable hut, because
of the lack of one or more of the essentials of a valid contract, it may be repudiated by
the aggrieved party at his option. If the party having the right to avoid his obligation does
not exercise the right within a reasonable time, the agreement is binding and enforceable.
A Void Contract is really not a contract at all. The term means an agreement which
is without any legal effect. Thus an agreement by a minor is void under the Indian law.
An Unenforceable Contract is one which, though perfectly valid in all other
respects, lacks some technical requirement needed to make it enforceable, e.g., some
necessary written evidence. Such a contract will not be enforced by the courts unless and
until the defect is rectified. Thus contracts for the sale of land or any interest therein must
be evidenced in writing, signed by the defendant, before they can be the subject of a
successful action at law.
But such unenforceable contracts are not void, and therefore if they have been
performed and property has been transferred the court will not intervene to set the
agreement aside. Thus, if A really agrees to buy B's house and pays a deposit to B. then
later changes his mind and refuses to sign a written contract to purchase the house, B
will be unable to sue A for damages or performance of the contract but will be able to
keep A's deposit. and the court will not assist A to recover it.

EXECUTED AND EXEU'1'ORY CONTRACTS

Contracts may be classified in terms of the extent to which they have been
performed or carried out as (1) executed contracts, and (2) executory contracts.
An executed contract is one that has been completely performed. In other words,
an executed contract is one under the terms of which nothing remains to he done by
either party. A contract may be executed at once. (i.e., at the time the contract is made),
as in the case of a cash sale; or it may become executed in the future by its terms being
carried out in due time.
An executory contract is composed of undertaking in which one or both panics
are under an obligation to çlo or not to do certain things. In other words, under the terms
of the contract something remains to be done. For example, if an electric supply company
agrees to furnish electricity to another party for a specified period of time at astipulated
price, the contract is executory. If the entire price is paid in advance, the contract is still
 CONTRACTS

deemed executory; although, strictly speaking, it is executed on one side and executory
on the other.
BILATERAL AND UNILATERAL CONTRACTS
An agreement may originate in one of the several ways. First, there may be an offer
of a promise and a simple assent. This is possible only when the promise is under seal
or of record, in which case it is binding because of its form alone. This way or mode of
making contract is applicable in English law and not in Indian law. Second way in which
there may be an offer of an act for a promise, as when a public omnibus by running on
its route makes an offer of its services for the promise of the one entering to pay his fare.
Third, there may be an offer of a promise for an act, as one promises to pay a specified
sum for the performance of an act, such as the returning of lost goods. Fourth, an
agreement may originate in an offer of a promise for a promise, as when one person
offers to pay Rs. lOC) in return for the promise of another to paint his car. The first three
methods result in Unilateral cdntracts, because in each instance there is an obligation
to perform on the part of only one party. The fourth or last method creates a Bilateral
contract, iii that there is an obligation on the part of both to do or to refrain from doing
a particular thing. In the case of a unilateral or one-sided contract, one party to the
contract has performed his part even at the time of its formation and an obligation is
outstanding only against the other. In the bilateral or two-sided contract, at the time
of its formation there are two outstanding obligations, one on either party to the contract,
e.g., A promises to paint a picture in one month in return for whichB promises to pay
Rs. 100. Here, there are two promises and each party is a promisor in respect of one
promise and a promisee in respect of the other, and as such each can hold the other liable
for the breach of his promise.
It follows from the above distinction between executed and executory contracts
and between unilateral and bilateral contracts that a contract is a contract from the
time it is made and not from the time its performance is due. Thus, the fact that in
an executory contract, both the parties have to perform their parts of the contract does
not affect the validity of the contract. It was stated inSahab Ram v. Ram Niwa.s (1953)
I All. 494 (F.B.), that the fact that the agreement has not been executed or performed
does not mean that the agreement was not entered into. Similarly, there may be cases in
which performance of a contract is postponed or deferred. Thus, where A agrees to supply
100 quintals of wheat three months after the date of contract, the perfonnance will
become due three months after the date of the contract but the contract will be a contract
on the date when the offer is accepted and other conditions of a valid contract are
complied with.
In the following sect ions of this chapter are discussed the foregoing types or èlasses
of contraç,ts, starting with a valid contract and its essentials.
ESSENTIALS OF A VALID CONTRACT
In order to be an enforceable contract, there must be (1) an agreement, (2) based
upon the genuine assent of the parties, (3) supported by consideration, (4) made for a
lawful object, (5) between competent parties. These requirements of valid contract may
be analysed into the following elements, all of which must be present:
1. Proposal or offer by one party and acceptance of the proposal or offer by ano,her
party, resulting in an agreement_ .-Conse,ssus ad.idem;
2. An intention to create legal relationship or an intent to have legal consequences;
3. Genuine, (i.e., free and real) conse'nt between the parties (i.e., not marred by
mistake, undue influence, coercion, fraud or misrepresentation);
10 MERCANTILE LAW

4. The parties to the contract are capable of contracting;

5. The object contracted for is legal and is not opposed to public policy;
6. There are at least two persons to make the contract;
7. The agreement is supported by lawful consideration (or, under English law, proper
form is used);
g . The agreement is capable of being performed.
9. The terms of the contract are certain.

PART 1-B

rilE AGREEMENT

A contract is a legally binding agreement. This agreement results when one person,
the offeror or promisor, makes a proposal or offer and the person to whom the offer is
made, the offeu'ee or promisee, accepts it. For an agreement to arise, there must be two
or more parties to the transaction. As it is imperative that there be a concurrence of a
least two minds, it is impossible for one person to make ail with himself. To
illustrate, when a person in his official capacity, a Managing Director of a company,
makes a promise to hirnsel(, as an individual, no agreement is fored m by an acceptance
in the latter capacity. Plurality of persons is an essential characteri stic of an agreement.
These persons must come. to an understanding with a view to creating a right in one party
and a corresponding duty on the other. The Contract Act Is. 2 (e)) defines ail
as ''every promise and every set of promises, forming the consideration for each other."

CONSENSUS AD IDEM OR MEETING OF MINDS

To constitute an agreement or a contract there must he a meeting of the minds of
the parties and both must agree to the same thing in the same sense.This means the will
of the parties must meet, or there must be consensus ad idern. For example, A. a painter,
agrees to paint the house of B and B agrees to pay A the sum of Rs. 2,000 upon the
satisfactory completion of the work. In this case, there is a meeting of the minds of A
and B oil subject of what is to be done and at what price. Generally speaking, it is
true that the minds of the parties must meet, but it is not literally or universally true; for
in a few peculiar situations the law finds an agreement even though the minds of the
parties have not its fact met. For example, ail may say, ''Who will pay Rs. 100
for this beautiful vase?" If a person in the crowd present there raises his hand while
looking at the auctioneer, his action is regarded by the law as an offer to pay Rs. 100:
and, if the the auctioneer then brings down his hammer and says. "Sold for Rs. .100,"
there is an acceptance and a binding contract. The man who raised his hand cannot be
allowed to say that when he raised it, he did not mean to make an offer but was merely
stretching his arm. What was in his mind is immaterial because it was reasonable for the
auctioneer to assume that the man's motion was ail The real lest, therefore, is not
whether the minds of the parties met but whether under the circumstances one party was
reasonably entitled to believe that there was an offer and the other to believe that there
was an acceptance.
When we say that there Must be a meeting of the minds of the Plies, we are not
thinking of the subjective thing known as meeting of the minds, but the oljective thing—
manifestation of mutual assent. Therefore, it is not the meeting of the minds, but the
expression of mutual and final assent that is necessary to complete a binding agteement.
The reason for the rule is that the inner intention of parties to a conversation cannot be
taken to bind the parties, but it is what is said or done. Innermost thoughts of a party are
 CONTRACTS 11

known only to him, and the other party can depend upon what is said or done. Thus, if
A signs an agreement to purchase a certain gold watch for Rs. 1.000 from B, the
agreement is binding, although A later testifies that he never actually intended to buy it.
By his conduct he led B, as a reasonable man, to think that he would buy it. Such conduct
is all that the law requires. To repeat, the phrase meeting of the minds' does not mean
that the par-ties must have arrived at a common mental state touching the matter in hand.
The standard by which their conduct is judged and their rights are limited is not internal
but external. In the absence of fraud or incapacity, the question is: what did the parties
say and do? In other words, there. is an agreement when the parties lead each other
reasonably to believe that they are of the same mind about a given transaction; they have
come to the point of agreement and the offer and acceptance have coincided. This is
because consensus ad idem is the bedrock of contractual jurisprudence.

OFFER OR PROPOSAL

One of the early steps in the formation of a contract lies in arriving at an agreement
between the contracting. parties by means of offer and acceptance. One party makes a
definite proposal to the other, and that other accepts it in its entirety. In its general terms,
an offer or proposal is a statement by the offeror of what he will give in return for some
actor promise of the offeree, Section 2 (a) of the Contract Act defines an offer or proposal
as follows: "When one per-sop signifies to another his willingness to do or to abstain
from doing anything, with a view to obtaining the assent of that other to such act or
abstinence, he is said to make a proposal." In simple words, an offer ii a proposal by
one person, whereby he expresses his willingness to enter into a contractual obligation
in return for a promise, or act, or forbearance. Note the offer consists of two parts: (I) a
promise by the offeror, coupled with (2) a request addressed to the offeree for something
in return. The promise that the offeror makes is not binding upon him until the offeree
unconditionally assents to the terms contained in the offer. For example, A offers Rs. 5
to B if he would mow his lawn. The promise to pay R. 5 is binding as sooh as B promises
to mow the lawn. Until then A is free to withdraw his offer.
REQUIREMENTS OF AN OFFER

A valid offer must meet the tests of (1) contractual intention, (2) definiteness, and
(3) communication to the offeree.
(1) Contractual Intention—To Constitute an offer, the offeror must intend to
create a legal obligation. When there is a lack of such intention on his part, it makes no
difference whether the offeree takes any action concerning the offer. Parties are free to
make their- own agreement, and if they agree that the breach of either party will not give
rise to legal rights, there is no contract, even though the offer and acceptance have been
reduced to writing. Hence, an offer oust contemplate to give rise to legal consequences
and be capable of creating legal relations. The following are the examples of lack of
contractual intention on the part of the offeror.
(a) Social Invitations—ordinary invitations to social affairs are not offers in the
eyes of the law, because the idea of bargain is absent in such cases and there is no intention
to create a legal relationship. An agreement between two persons to go together to
pictures, or for a walk does not create a legal obligation on their part to abide by it, as it
relates to social matters.
A invited B to dinner at his house on a specified date. On the stated date, A forgot
all about the dinner and his invitation to B. When B arrived at A's residence A was not
there and no dinner was ready. This agreement did not give rise to a legally binding
12 MERCANTII.-E LAW

agreement, and B could not enforce it or claim compensation for expense and incon-
venience.
Agreement between a husband and wife who are living in friendly intercourse are
not contracts but only domestic arrangements.
In Balfour v. Balfour (1919) 2 K.B. 571, the husband promised to pay £30 to his
wife every month. On his failure to pay, the wife sued him for the recovery of the amount.
Held, she could not recover as the agreement did not create any legal relationship.
Warrington. L. J. observed: "...There is no contract here. These people never intended
to make a bargain which could be enforced in law. The husband expressed his intention
to make this payment, and he promised to make it, and was bound in honour to continue
it so long as he was in a position to do so. The wife, on the other hand, made no bargain
at all."
In the words of Danckwert U in Jones v.Padavalian (1969) I WLR 328, the
Balfour "principle applies to dealings between other relations, such as father and son,
daughter and mother".
But in Williams v. Williams (1957)1 WLR 148, a wife deserted her husband. He
entered into an agreement by which he promised to pay her 30 shillings a week if she
would maintain herself and undertake not to pledge his credit. He fell in arrear with the
payments, and the wife sued him. He pleaded in defence want of consideration. Held,
there was consideration and the husband was liable to pay.
Also in Merril v. Merril (1970)1 WLR 1211, an agreement to transfer to the wife
the beneficial ownership of the matrimonial home made at the time of separation was
held to be binding.
However, even in business matters parties may wish to rely on each other's good
faith and honour and not on the courts. Thus, for example, in Rose and Frank Co. v.
J.R.Cronmpton (1923) 2 K.B.261, an agreement contained the following clause: "This
arrangement is not entered into as formal legal agreement and shall not be subject to a
legal jurisdiction in the law courts." Held, the document did not constitute a binding
contract as there was no intention to create legal relations.
(b) Offers made in Jest or Excitement—A person may make a proposal or
statement in a jest without any thought or intention of creating a binding obligation. A
proposal mne in jest, cannot be expected by the offeree as a reasonable man, to have
been made with the intention of making a contract. Also, a person, labouring under the
stress of great emotion or excitement., may make a statement that cannot be treated as an
offer on account of the fact that it would be obvious to a reasonable man that a legal
relation is not contemplated. Promises held out over loudspeakers are often claptrap of
politics. Also, as pointed out by Chandrachud, J. later (C.J.) in Banwarilal V.
Sukhdars/man Dayal (1973) 1 S,C.294, "microphones have not yet acquired notriety as
carriers of binding representations. In the instant case, the announcement was, if at all,
a puffing up of property for sale". In this case, in an auction sale of plots of land, a
loudspeaker was spelling out the terms of the sale. One of the statements made was that
a plot of certain dimension would be reserved for Dimararnshala, but the plot was sold
for private purposes. In an action to restrain the sale of the plot, it was held that the
statement was not binding.
(c) Invitation to Negotiate—The first statement made by one of the two persons
is not necessarily an offer. In many cases there may be preliminary discussion or an
invitation by one party to the other to negotiate or talk business. If A asks B, "Do you
want to buy this car of mine?" he is not making an offer but is inviting an offer from B.
If B then says, "I will pay you Rs. 3,000 for the car," he is making an offer that A can
accept or reject. On the other hand, after A's invitation, B may continue the preliminary
 CONTRACTS 13

negotiations by saying, "What do you want for it?" If A then replies, "I will sell it to
you for Rs. 8,000," A makes an offer.
A offered to buy M's bungalow for Rs. 6,000 and M's agent in India cabled to M
in England: 'Have had offer Rupees Six thousand for immediatepossession". To this
the agent received a reply by cable: "Won't accept less than ten thousand". On inquiry
by A the agent replied:" I received yesterday a cable from Col. M regarding your offer
which reads: as follows: ''Won't accept less than rupees ten thousand". A accepted the
price of Rs. 10,000 and confirmed it by letter to the agent. But M sold the bungalow for
a higher price to another. A sued for specific performance of the contract. The Supreme
Court held that a mere statement of the lowest price at which the vender will sell contains
no implied contract to sell at the price to the person making the inquiry. There was no
offer by M and the whole transaction was still at the negotiation stage (Macpherson v.
Apcinna(l941)S.C.184.)
(d) Invitation to offer—Ordinarily, marked prices of goods, do not constitute an
offer so as to compel the tradesman to sell those goods at the marked prices. Similarly,
advertising is not held as offers. Advertisements are generally assumed to constitute
"invitations to trade" rather than offers. The trader merely indicates that he is willing
to consider an offer made by a buyer on these terms. In other words, he is inviting an
offer and not making one. Also, a circular inviting tenders for sale or purchase does not
amount to an offer, but only an invitation to offer and unless an offer is accepted no
contract is made. Again, an announcement that a person will sell his property at public
auction to the highest bidder is a mere declaration of intention to hold an auction at which
bids will be received. A bid is an offer which is accepted when the hammer falls, and
until the acceptance of the bid is signified in some manner neither party assumes any
legal obligation to the other. At any time before the highest bid is accepted, the bidder
may withdraw his offer to purchase or the auctioneer his offer to sell. The owner's offer
to sell is made at the time through the auctioneer, and not when he advertises the auction
sale.2•
A merchant advertises that on a certain day he will sell his goods at bargain prices;
but no one imagines that the prospective buyer, who visits the store and is denied the
right to buy, has an action for damages against the merchant. He merely offers to buy,
and if his offer is refused, he has no remedy, although he may have lost a bargain, and
have incurred expenses and lost time in visitin.g the store. The analogy between such a
transaction and an auction is at least close. In view of the various points discussed above
an offer must be distinguished from a mere quotation or an invitation to offer.
(2) Definite offer—An offer must be definite and certain. If it is indefinite, loose
or vague or if an essential provision is lacking, it cannot be accepted. The reason is that
the courts cannot tell what the parties are to do. Thus an offer to conduct a business for
such time as should be profitable is too vague to be considered a valid offer, as it does
not consist of a definite promise to be bound. Where A, who has bought a horse from B,
promises to buy another if the first one proves lucky, and refuses to buy the second horse,
cannot enforce the promise, it being loose and vague.
(3) Communication of I he offer—An offer must be communicated to the offerce.
Until an offer is made known to the offeree, he does not know what he has to accept. An
offer becomes effective only when it has been communicated to the offeree. The mere
desire to enter into an agreement, which remains hidden in the recesses of one's mind,
can never constitute an offer. Lord Lindlay says: "A state of mind not communicated
cannot be regarded in dealings bew&n man and man." The writing of a letter embody-

2. Executive Enguicerv. Ma. Praaad Sahu, 1990 oil. 26.

14 MERCANTILE LAW

ing a definite proposition will also prove futile unless the letter is posted and reaches the
offeree. Again, an offer must be communicated by the offeror or his duly authorised
agent. If the offeree learns of the offeror's intention from some outside source, no offer
results. An offer to the public may be made through the newspapers, but it is not effective
so far as a particular md ividual is concerned until he learns that the offer has been made.
To the existence of a contract there must be mutual assent—offer and consent to the
Offer. Without that there is no contract. How can there be consent or assent to that of
which the party has never heard. Where A, without knowing that areward is offered for
the arrest of a particular criminal, apprehends the cnminal, he cannot recover the reward
if he learns of the reward after apprehending the criminal. He had no knowledge of the
offer and could not be taken to have accepted it.
A.L.J. 489, 0 sent L, his servant, in search
In Lalman Shukia v. Gauri Dun, 11,
of his missing nephew. Subsequently. G announced a reward for information relating to
the boy. L, before seeing the announcement, had traced the boy and informed G. Later,
on reading the notice of reward, L claimed it. His suit was dismissed on the ground that
he could not accept the offer unless he had knowledge of it.

STANDARD FORM CONTRACTS AND TICKETS

In recent times large corporations have found it useful to adopt, as the, basis of their
transactions, standard forms instead of drawing up a separate contract with each
individual. These standard forms contain the terms and conditions of the contract,
including several conditions in fine print which restrict and often exclude liability under
the contract. Similarly, transport tickets by air, sea or rail are issued ''subject to speciaF
rules". These forms and tickets coritai fling exempting clauses are required to be accepted
by the offerec in solo without any change or modification. Accordingly, the offiree either
accepts the document as a whole or refuses to do so; there is no scope for discussion.
Such contracts are termed as contracts of adhesion, as the conditions are fixed by one
of the parties in advance and are accepted or adhered to by the other. As the offcree,
being the weaker party, often signs the document presented by the offeror, without
reading the fine print, the large company is in a position to take advantage of, the
exclusionary clauses.
The rule of law, as laid down in L'Est range v. Graucob Ltd., (1934) 2 K.B. 394,
is if the document is signed by the offeree lie is hound by all the conditions in the documen
signed even if he has not read them.
In that case, Mrs. L signed an agreement without reading it under which she
purchased a cigarette vending machine. The agreement excluded liability of the vndor
for all kinds of defects in the machine. The machine was totally defective. In a suit by
her in respect of the defective machine, it was held that the clause was binding on her,
although the vendor made no attempt to read the document to her or call her attention to
the clause and she had not read the document.
But the offeree will not be bound if he can prove -
(a) that he signed the document under a fundamental mistake as to its nattfre (not
merely as to its contents), as for example, where a person is induced to sign a
negotiable instrument on the mistaken assumption that it is merely a guarantee:
(b) that he was induced to sign as a result of a fraud or misrepresentation by the offeror,
or the offeror's agent: Curtis v. Chemical Cleaning & Dyeing Co. Ltd. (1951) 1
K.B.805. In this case the plaintiff took a wedding dress, with heads and sequins,
to the defendant's shop for cleaning. She was asked to sign a receipt which
contained the following clause: "The company is not liable for damage howsoever
 CONTRACTS 15

arising". The plaintiff asked what the effect of the document was, and the assistant
told her that it exempted the company from liability in certain ways, and particular-
ly that in her case she would have to take the risk of damage to beads and sequins.
Thereupon the plaintiff signed the document without reading ii The dress was
returned stained, and the plaintiff sued for damages. The company relied on the
exemption clause. Held, The company could not rely on the clause because the
assistant had misrepresented the effect of the document so that the plaintiff was
merely running the risk of damage to the beads and sequins.
If the document is unsigned, as in the case of Tickets and Receipts, the offeree is
bound by all the terms in the document or annexed to it if—
(a) a reasonable man would assume the document to be contractual, e.g. not merely a
receipt for money. A document is contractual if it embodies the contract, and the
person to whom it is delivered should know that it is supposed to contain certain
conditions: Chapelton v. Barry U.D.C(l4O) 1 K.B.532.
In this case, C took a deck-chair at a beach from a pile under a notice, "Hire of
Chairs-2d". Later an attendant came round to collect the money and C paid him,
receiving in return a ticket which said on it, "The Council will not be liable for any
accident or damage arising from hire of chair". C put the ticket in his pocket without
reading it, thinking it was merely a receipt. The chair collapsed and he was injured, and
sued the Council. held, the clause was not binding on C. The board by the chairs
stating—"Hire of Chairs -2d". did not limit or exempt the Council fromliability, and
it was unreasonable to communicate conditions by means of a mere receipt..
(b) Reasonable care was taken by the offeror to bring the terms of the offer to his
attention, e.g. by a notice "for conditions see Company's rules and regulations"
clearly displayed on the face of the ticket.
If the notice given is reasonable the contract is binding whether the offeree reads
the conditions or not, or even whether the offeree is illiterate and unable to read them,
or even when the notice is in a language that he does not understand. It is his duty to ask
for the translation, and if he does not do so, he will be presumed-to know the conditions
and be bound by them?3
Three cases will clarify the situation:
(i) In Henderson v. Stevenson (1875) 2 1-i.L.S.C. 470, a passenger bought a
steamer ticket on the face of which were these words-only: "Dublin to Whitehav,en",
on the back were printed certain conditions one of which excluded the liability f the
company for loss, injury or delay to the passenger or his luggage. The passenger never
looked at the back of the ticket, and no one told him to do so, and the front of the ticket
bore no reference to the back. The vessel was wrecked and the passenger's luggage was
lost. His claim for damages was upheld by the House of Lords in spite of the exemption
clauses. It was stated that the passenger could not be said to have accepted a term which
he has not seen, of which he knew nothing, and so there was no sufficient communication
of the exceptional terms contained on the back of the ticket.
The result would have been different if words like 'For conditions see back" had
been printed on the face of the ticket to draw the passenger's attention to the exemption
terms.
(ii) In Parker V. South Easternn Rail Co. (1877) CPD 416, a handbag deposited
in thee loakroom of a railway company was lost, and the owner claimed L24-10S., being
its value. The railway company's defence was a condition exempting it from liability for
articles exceeding £10 in value unless extra charge was paid. The words "see back"

3. Mackiuigan v. Compagnie de Message ries Maritime (1867)6 Cal. 227

16 MERCANTTLE LAW

were printed on the face of the ticket. A notice to the same effect was also hung up in
the cloak-room. The holder of the ticket admitted knowledge of the printed matter on
the ticket, but denied having read it. His suit was dismissed. The railway company had
given notice of the special condition, and the holder of the ticket must suffer for his
carelessness.
(iii) In Richardson v. Rowntree (1894) A.C.217, R booked her passage on a ship
and received a ticket folded so that no writing was visible until it was opened. field, R
was not bound by the cond i t i on which limited the shipowner's liability for loss to £50.
It is, however, essential that the notice of the terms is contemporaneous with the
making of the con! ract. The notice of the terms exempting a party from liability should
be given before or at the time of the contract. A subsequent notice will amount to a
modification of the original contract and will not bind the other party unless he has
assented thereto.
In 011ey v. Marlborough Court Lith (1949) 1 K.B.532, 0 and his wife registered
at a hotel and paid for a week's board and residence in advance. They went up to the
bedroom allotted to them. On one of the walls of the room was a notice excluding the
hotel's liability for articles lost. They locked the room and went out after handing over
the key at the counter. On return later to their room they found their furs missing. 011ey
was held entitled to recover damages for the loss of the furs. He made his contract when
he signed the visitors' register, and the hotel could not rely on the exclusionary notice
since it was not brought to his attention at the time of making the contract.
But the Court may infer notice from previous dealings between the parties. In the
above case, if 011ey and his wife had stayed before at the hotel, they would have known
of the limiting notice and would have been bound by it.
Sometimes the exemption clauses are so unreasonable that the court will not allow
their operation even if the other party had notice of them. A term is said to be
unreasonable if it would defeat the very purpose of the contract or if it is repugnant to
public policy.
(i) In Lilly White v. Mannuswamy. 1966 Mad. 13, a laundry receipt contained a
condition that the customer would be entitled to claim only 15 per cent of the market
price or value of the article in case of loss. The plaintiff's new sari was lost. The court
held that the laundry could not take advantage of the limiting term and should pay the
full value of the sari. It was observed by the Court that the term would place a premium
upon dishonesty inasmuch as it would enable the cleaner to purchase new garments at
15 per cent their price and that would not be in public interest.
(ii) In M. Siddalingappa v. T. Nataraf, 1970 Mys.154, the laundry receipt
contained a condition that only 8 per cent of the cost of a garment would be payable in
case of loss. The condition was held to be unreasonable and full value was required to
be paid to the owner of the garment. As pointed out by Lord Denning L.J. "There is the
vigilance of the common law which, while allowing freedom of contract, watches to see
that it is not abused".
It is also important to remember that exemption clauses are construed strictly, so
that where the words are capable of bearing wider as well as narrower construction the
narrower construction would be preferred and against the party who has inserted the
exemption clause "contra profererue'n
Liability In Tort
Even where an exemption clause is exhaustive enough to exclude all kinds of
liability under the contract, it may not exclude liability in tort. Thus, in White v. John
Warwick & Co., (1953) 1 WLR 1285, the plaintiff hired a cycle from the defendants.
 CONTRACTS 17

The defendants agreed to maintain the cycle in working order and a clause in the
agreement provided: "nothing in this agreement shall render the owners liable for any
personal injuries...... " While the plaintiff was riding the cycle the saddle tilted and he
was thrown and injured. It was held that although the clause exempted the defendants
from their liability in contract, it did not exempt them from liability in negligence (under
law of torts).
AN OFFER MAY BE GENERAL OR SPECIFIC
An offeror may make an offer to a particular person because he wants orly that
person to do what he has in mind. When it is addressed to a particular person the offer
is called a Specific Offer, and it can be accepted only by that person. The offeror may,
on the other hand, make the offer to the public at large because he does not care by whom
something is done so long as it is done. Such an offer is called a General Offer, but it
cannot form the foundation of a contract until it has been accepted by an ascertained
person. Offers made by advertisement are the commonest form of general offers made
to the general public. For example, when a reward is offered to the public for the return
of lost property, the offeror does not care who returns the property. Anyone who, after
having read about the reward, returns the property is deemed to have accepted the offer
by conduct and i's entitled to get the reward. The leading case on the subject of general
offer is Carllil v. Carbolic Smoke Ball Co. (1893) 1 Q.B. 256.
In this case, the Company offered by advertisement a reward of £100 to anyone
who contracted influenza after using their Smoke Ball for a fortnight according to printed
directions. Mrs. Carilil, on the faith of the advertisement, bought a Smoke Ball and used
it as directed, but was attacked by influenza. She sued for the advertised reward. The
court decreed the suit on the ground that the advertisement was not a mere statement of
an intention to give reward but a definite promise, and although the offer was not made
to any particular person but to the whole world, it was capable of being accepted by one
or more persons who accepted by conduct or performance of conditions. In such a case
acceptance and performance go together, and no communication of acceptance is
necessary.

DURATION OF OFFER
An offer that has been communicated properly continues as such until it lapses, or
until it is revoked, rejected, or accepted. The offeror is considered to be contnua1ly
renewing the offer until one of the above takes place.
(1) Offer lapses after stipulated or reasonable time.—An offer does not remain
open indefinitely, although the offeror fails to withdraw it. If the offer stipulates the
period during which it is to continue, it automatically lapses at the end of ,that period.
An attempted acceptance after that date could only amount to a new offer being made
by the offeree of the original offer. An offer which provides for no time limit remains
open for a reasonable time.—a reasonable time being such period as a reasonable person
might conclude was intended.
(i) In Head v. Diggon, 3 M. and R. 97, a seller on Thursday offered wool to a
buyer, and gave him three days in which to accept. The buyer accepted the offer on
Monday but the seller, after waiting for three days, had sold the wool. It was held that
the offer had lapsed by Monday morning by its express terms, and the seller was not
bound.
(ii) In Ramsgaie hotel Co. v. Montefi ore (1866) 1 Ex. 109, M applied for shares
in June, but the allotment was not made till November. Held, that the offer to take shares
Is MERCANTILE LAW

had lapsed, as the reasonable time had passed since the making of the offer, and M was
not hound to take the shares.
or the otieree before
(2) An offer lapses by the death or insanity of the offeror
acceptance.—If the offeror dies before acceptance, there is no offer to accept, and if
the acceptance is made it becomes infructuolts. "A dead man can no more continue to
offer than he could begin to offer." In the same manner, the offerce's death without
accepting the offer puts an end to the offer, and his heirs or executors cannot accept for
him. But if the acceptance is made in ignorance of the death or insanity of the offeror,
there would be a valid contract. In English law, the death or insanity of the offeror or
offeree causes an offer to lapse even though the other party has no notice of the death.
S owned certain debentures of a company. K offered to buy them. S died without
accepting the offer. His administrator accepted the offer and sped K for damages when
he refused to perform the contract. Held, the death of S terminated the offer to buy, and
his administrator after S's death could not accept.
(3) An offer lapses by subsequent illegality—If the performance of the contract
becomes illegal after the offer is made, it lapses. Thus if an offer is made to sell alcoholic
liquors but a law prohibiting the sale of liquors is enacted before the offer is accepted,
the offer is terminated. -
(4) An offer lapses by not being accepted in the mode prescribed, or if no
mode is prescribed, in some usual and reasonable manner—According to English
law, once the offer has lapsed on this account, there cannot be a further acceptance, unless
the offeror agrees thereto. In Indian law, if the offer prescribes the manner ir. which it is
to be accepted and the acceptance is not made in such a manner, the proposer or offeror
may, within a reasonable time after the acceptance is communicated to him, insist that
his offer shall be accepted in the prescribed manner and not otherwise. If he fails to do
so, he accepts the acceptance as made.
accepted by the
(5) A conditional offer lapses when the condition is not
offeree. Pipraich Sugar Mills Lid. v. Its Ma:door Union, 1957 S.C. 95.
offeree—If the offeree rejects
(6) An (lifer lapses by rejection of offer by the
the offfer by distinct refusal, he cannot revive the offer by attempting to accept it, unless
the offeror renews the proposal.
Is) rejection
(7) An offer lapses by counter-offer by the offeree, as it amounts
of the offer. If A makes an offer to B to sell his car for Rs. 5,000 and B, instead of
accepting the offer, makes an offer to buy it for Rs. 4,000, the original offer by A is
terminated, B in effect saying. "I refuse your offer, but in its place. I make a different
offer." Such an offer by the offeree is known as a counter-offer. In substance, the
counter-offer presupposes a rejection of the original offer. If theoriginal offeror, who
is now the offeree, accepts the counter-offer, a binding contract results.
Where, however, the offeree does not make a counter-offer, but only desires to
know if the offer does not lapse and may be accepted at any time before it is withdrawn.
In Slevenson v. Mclean,4 Lush J. says "If there is nothing specific by way of offer or
rejection but a mere inquiry, it should be answered and not treated as rejection of the
offer." For example, A offered to sell his house to B on an instalment payment basis,
'but also asked B to make a cash offer. B made a cash offer which A rejected. B then
accepted the instalment payment basis. A refused to perform the contract and B sued
him. A claimed there was no contract. Held, B was entitled to the decree, as under the
circumstances, the making of the cash offer was not a counter-offer, so as to reject the
instalment payment basis. When B accepted that offer after his cash proposal was

4. (1880)5 Q.B. D. 346atp. 350.

 CONTRACTS 19

rejected, a legal contract was created because the offer was still in existence and could
be accepted (Quinn V. February, 252 Mich. 526).
(8) Revocation of the offer by the offeror—Ordinarily, the offeror can revoke
his offer before it is accepted. If he does so, the offeree cannot create a contact by
accepting the revoked offer. Thus, the bidder at an auction sale may withdraw (revoke)
his bid (offer) before it is accepted by the auctioneer by using any of the customary
methods, e.g., fall of hammer. The auctioneer thereafter accepts the revoked offer
(withdrawn hid). An offer may be revoked by the offeror before its acceptance, evei
though he had originally agreed to hold it open for a definite period of time. So long as
it is a mere offer, it can be withdrawn whenever the offeror desires. The rule applies even
though the offer expressly stipulates that it may not be withdrawn without the consent
of the other party. Thus, if the offeror agrees to keep his offer open for a specified time,
he may nevertheless revoke it before the expiration of that time, unless (i) the offer has
in the meantime been accepted before notice of revocation has reached the offeree, or
(ii) there is consideration for keeping the offer open, e.g., option contract.
(i) In Cooke v. Oxley (1790)3 T.R. 653, A offered to sell 266 hogshead of tobacco
at a certain price and promised to keep it open for acceptance by B till 4p.m. of that day.
Before that time A sold them to C. B accepted before 4 pm., but after the revocation by
A. It was held that the offer was already revoked.
(ii) In Dickinson v. Dodds (1876) 2 Ch. D. 463, A agreed to sell property to B by
a written document which stated: "This offer to be left over until Friday 9a.m." On the
Thursday A made a contract to sell the property to C. B heard of this from X, and on
Friday, at 7 a.m. he delivered to A an acceptance of his offer. Held, B could not accept
A's offer after he knew it had been revoked by the sale of the property to C.
Communication of Revocation.—A revocation of an offer must be communi-
cated or made known to the person to whom theoffer was made. Until it is communicated
to the offeree, he has reason to believe thai there is still an offer which he may accept,
and he may rely on this belief and accept the offer. A letter or telegram revoking an offer
made to a particular offeree is effective and a revocation against the person who makes
it when it is put into course of transmission, (i.e.. when the telegram is handed in at the
telegraph office or the letter is posted) and as against the offeree when the revocation
comes to his knowledge, (i.e., he receives the telegram or letter).
Revocation of a general offer can be made by giving the same publicity as was
given to the original offer itself. For example, an offer of a reward that is made to the
general public by advertisement in a newspaper may be revoked in the same manner. As
a result, a member of the public cannot recover the amount of the reward by thereafter
performing the act for which the reward was originally offered, even though he has not
seen the revocation. Let us assume that on April 15, A offered a reward of Rs. 500 by
means of an advertisement in all the English language daily newspapers published in
Delhi to be paid to any one who may find and deliver him his lost dog. On April 25, A
caused to be published in the same newspapers an advertisement withdrawing hcs offer
of reward. On April 30, B, who had read the notice of the reward but not the notice of.
the withdrawal of the offer, found the dog and delivered it to A. His claim of the reward
will not be upheld, as the offer had been withdrawn by A through the same channel in
which it was made before B had found the dog. The same notoriety was given to the
revocation that was given to the offer, and it did not matter that he had not read the
revocation in the papers. The offer of the reward not having been made to him directly,
but by means of a published notice: he should have known that it could be revoked in
the manner in which it was made.
20 MERCANTILE LAW

NOTE: An offer for shares or debentures in a public company made by application in

pursuance of a prospectus cannot be revoked until after the expiration of the
5th day after the time of the opening of the subscription lists: Companies Act,
1956, Sec.72(5).

TENDERS
A tender is an offer and may be either (a) a definite or specific offer to supply
goods or services, or (b) a standing offer.
Tender as a definite offer: Where tenders are invited for the supply of specified
goods or services, each tender submitted is an offer. The party inviting the tenders can
accept any tender he chooses, and thus bring about a binding contract. For example, if
A company requires a thousand tonnes of coal and invites tenders for the supply of this
quantity, and accepts B's tender there is a contract between A company and B. The terms
of the Contract are that B shall supply and the A company shall accept and pay for one
thousand tonnes of coal.
Tender as a standing offer. Where tenders are invited to supply goods or services
as and when demanded, a trader who submits a tender is making a standing or continuing
offer. The "acceptance" of such a tender does not convert the standing offer into a
binding contract, for a contract of sale implies that the buyer has agreed to accept the
goods. For example. where A invites tenders foi the supply during the coming year of
coal not exceeding 1,000 tonnes at the agreed price when A from time to time deman4s
a precise quantity. A tender by B to supply coal as and when demanded by A aznoqns
to a standing offer and cannot be accepted generally so as to form a binding contract; it
is accepted from time to time whenever an order is given for any quantity within the
maximum quantity stated in the tender. An "acceptance" of such a tender merely
amounts to an intimation that the offer will be considerea to remain opn during the
period specified. Thus where a standing offer has been made. there is a separate
acceptance each time an order is placed and, accordingly, a distinct contract is made on
each occasion with respect to the quantity ordered, resulting in a series of contracts?
With regard to further supply, the offer may be revoked by notice to the offeree
just as the tenderor has the right to revoke his tender as to future orders, so also the
acceptor of the tender has the right to refuse to place any orders. Contract results only
when an order has been placed, and once an order is placed it must be executed.
ACCEPTANCE
An agreement consists of an offer by one party and its acceptance by the person
or persons to whom it is made. Acceptance is the manifestation by the offeree of his
assent to the terms of the offer. Mathematically stated, Offer and Acceptance--Contract.
The acceptance must be absolute and unconditional. It must accept just what is offerçd.
No particular form of words or mode of expression is required for an acceptauce. Any
expression of an intention to agree is sufficient. An acceptance may be indicafed, for
example, by saying "Yes", or by an informal "O.K."by a mere affirmative nod of the
head, or in the case of an offer of a unilateral contract, by performing the act called for.
Who can accept.—An offer may be accepted only by the person to whom it is
made. If anyone else attempts to accept it, no contract with that person arises. Thus, if a
person intends to contract with B, A cannot give himself any right under the offer to B.

5. The Bengal Coal Co. v. Homiwadia & Co; (1899) 24 Born. 97; Jaravia Mall V. Geogopsi
Dass (1922)43 MIT 132; Secy. of State v. Madho Ram (1923) 10 lah. 493.
 CONTRACTS
21

In Boo/ion v. Jones (1857) 157 E.R. 232. A sold his business to

his manager
without disclosing the fact to his customers. On the afternoon of the day on which
the
sale was carried through a customer (Jones), who had a running account, sent an order
for some goods addressed to the vendor of the business by name. The new owner of the
business executed the order without disclosing that the business had changed hands. It
was held that he could not recover the price, as there was no contract.
If the offer is directed not to a specified individual but to the public at large, it may
be accepted by any member of the public at large who has knowledge of the existence
of the offer. Carl/il v. Smoke Ball ((r h (supra)
is the leading case on the point.
Modes of Acceptance,—.. .T1> make a concluded contract, the acceptance must be
unequivocal, unconditional and without any variance of any sort between it and the
proposal. A hindimig contract can only occur when the offer made is met by an acceptance
which corresponds with the offer made in every particular. If, therefore, the acceptance
does not conform to the terms of the offer in all respects, or contains any new terms or
conditions, it becomes a counter-offr and thus rejects the original offer. For example,
where all was to hwy fully paid up shares and partly paid shares were allotted, there
was no acceptance and so no binding agreement.
An absolute and unqualified assent by which acceptance is made may be shown
by the acceptor saying Yes" to the person making the offer, or by doing the act
requested in the offer, or hy taking benefit or service offered by the offeror.
Where the acceptance is not by conduct, the assent must be actually exptessed.
Like an offer, it most he coininumi mcated. The act of making up one's mind isnotsufficiellt.
for a mere mnciit:il act of assent will not be treated as a communication. A mental
d etermination not indicated by speech, or put in course of indication by act to the other
party, is 1101 an acceptance.
In b'liagwandav v, Girdhan La!, I 966 S.0
543, Shah J. (afterwards C.J.) observed:
"An agreement does not result from macre state of mind; intent to accept an offer or
even a mental resolve to accept an offer does not give rise to a contract. There must be
some external mantlestasion of that intent by speech, writing or other act.''
In l!roth'n v. Meiropohi an Rh'. Co
(1877) AC. 666, a draft agreement relating
to the supply of coal was sent to the mn:om:iL'cr of a railway com1ipaii for his acceptance.
The manager wrote the word 'approved" and put the draft in a drawer intending to send
It to the company's solicitors for formal contract being drawn up. By an oversight, the
.documnent remained it, the drawer and was never completed.
Held, this mental act did
not amount to acceptance and so did not complete the contract.
W hile comomnonicat ion of an acceptance is essential, it is open to the offeree to
waive it. But in law, silence does nut give consent; althou g h nodding one's head intimates
acceptance. As tile offeror cannot force the olferec to speak, inere silence in most cases
does not zuootoit t o acceptance. Ordinarily, the offeror cannot frartie his offer in such a
sway as to in.ike the silence or inaction of the otferce operate as an acceptance. For
example, when a seller writes to another with whom he has not had any prior dealing
that ''unless notified to the contrary" he will send to that person certain quantity of goods
to be paid for at specified Prices, there is no acceptance if the offeree ignores the offer
and does nothing. The silence of the person receiving the letter was not intended by him
as an acceptance, and the seller as a reasonable man should nut have believed that it was
so intended. It was staled in Gopi v. Ruçliu, 1949 Pat. 522 that when the offeror says
that acceptance will be presumed if no reply is received, absence of reply cannot mean

6. (1893)IQ.B.256.
7. Life Ins, Corporation of India v. Raja Vasiraddy K. Kawha, 1984 SC 1014.
 MERCANTILE LAW
22

acceptance of the ilfer. Mere silence is not assent or acceptance. In the case of prior
dealings between parties. the offeiec i'say have a duty to reject an offer expressly, and
his silence may be regarded as an acceptance. For instance, A subscribed to the Daily
News for one year. After the expiration of his subscription, the newspaper company
continued to send him the paper by mail for 5 years. A continued to use the paper but he
failed to pay any of the hills sent to him. He would he liable to pay oil ground that
his continued use of the newspaper was an acceptance of the offer made by sending him
the newspapers.8
If the offeror makes an offer of a unilateral contract, communication of acceptance
is ordinarily not required. In such a case, the offeror calls for a completed or accomplished
act. If that act is performed. the offer is accepted without any further action by way of
notifying the offeror. As a practical matter there will eventually be some notice to the
offeror because the offerce who has performed the act will ask the offeror to cariy out
his promise. It should be outed that the offer is accepted only by the completion of the
performance requested Accordingly, if A offers B Rs. 100 to paint A's house, and after
B has finished nine-tenths of the work. A says to B: ''Stop. I withdraw my offer,"thcre
is no contract, but B can recover from A the reasonable value of the services he has
rendered. The basis of A's liability here is not contract, but quasi-contract, to prevent an
unjust enrichment at the expense of B.
There may he acceptance by taking benefit or enjoying the service offered. A bus
driver offers to carry passengers from New Delhi to Kashmnere Gate for 30 P. A gets into
the bus at the Plaza stop and is taken to Kashmoere Gate. A has taken the benefit or enjoyed
the service offered and has thereby agreed to pay the contract price for the ride.
An acceptance should always he accepted in the manner required by the offer. If
the offeror specifies that the acceptance must he written, an oral acceptance is ineffective.
If the acceptance is required to he given by a specified date, a late acceptance has no
effect. If the offer says, 'Please wire reply" and the reply is sent by post, that is no
compliance with the offer unless the offeror chooses to accept it as such. Remember,
Sec. 7(2) of our Contract Act imposes the duty on the offeror to i ntimate to the offcree
that the acceptance is not according to the prescribed manner, and if he keeps quiet, he
is deemed to have accepted the acceptance as made.
An acceptance must he made before the offer lapses or is revoked. We have already
considered this in connection with the lapse or revocation of an offer. In English law,
the moment a person expresses his acceptance of an offer, that moment the contract is
concluded, and such an acceptance becomes irrevocable, whether it is made orally or
through the post. In Indian law, the position is different as regards contract through post.

CONTRACTS 'lIIROU(;u POST

In English law, the letter of acceptance is effective and the contract comes into
being at the moment the letter is dropped into the mail box, properly addressed and
hearing sufficient postage. even if the letter is not received by the offeror. The Indian
Law on the point i's contained in Sections 4 and 5 of the Contract Act and is summarised
as follows:
An offer or proposal is made when the letter containing the offer is delivered to
1.
the offeree.
2. As regards acceptance the Indian Law has two prinCil)leS
(a) Once the letter of acceptance properly addressed and stamped is posted the
acceptance is made and hinds the offeror, as he is deemed to have received the acceptance

8 Sec Ranji Dayawala & So,ms P. l.id. v. Invest Import. 1981 s.c. 2085.
 CONTRACTS
23

at the moment when it is dispatched so as to be out of the power of the acceptor" and
it becomes a promise on which the acceptor can sue even if the letter never reaches the
offeror but
(h) a rt binds the acceptor only when it reaches the offeror. This is done
to give art to the acceptor to revoke his acceptance, which is not permitted
in English law. As a result of this rule, the acceptor gets the double advantage that, once
he Posts the letter, he is free from the responsibility and also gets an oppertonity to revoke
the acceptance.
Regarding revocation the position is like this. An offer may be revoked by an
express notice at any time before it is accepted. 'flierefore, lie offer must he revoked
before the letter of acceptance is posted. An acceptance, in English law, cannot he
revoked, so that once the letterof acceptance is properly posted the contract is concluded.
In Indian law, the acceptor can revo'ke his acceptance any time before the letter of
acceptance reaches the offeror, If the revocation telegram arrives before or at the same
time with lie letter of acceptance, the revocation is absolute.
CONTRACTS OVER TUE TEIJ]1-IONE
The law with regard Lu contracts over the telephone is ti l e same both in England
and India. The role in England, as laid down in Eat ores Ltd. v. Miles Far Eastern
Corporation (1955) 2 All. E.R. 493, is that in Telex 9
or telephonic communications the
panics are to all intents and purposes in each other's presence and where a contract is
negotiated by such instantaneous communications, there is no binding contract until the
notice of he acceptance is received by the offeror. Explaining the necessity of applying
the role that acceptance is incomplete until received by the offeror in cases of contracts
concluded during the course of conversation over the telephone, Denning, L.J. observed:
'Now take a case where two people make a contract by telephone. Suppo s e. for
Instance, that I make an offer to -I by telephone, and, in he middle of his reply, the
line goes "dead'' so th at I do not hear his words of acceptance. There is no contract at
that moment. The other mail riot know the precise moment when the line failed. But
he will know that the telephone conversation was abruptly broken off, because people
usually say something to signify the end of the c o nversation. If he wishes to make a
contract he must therefore get through again so as to make sure that I heard. Suppose
next that the line does not go dead, but his nevertheless so indistinct that I do not catch
what he says and I ask him to repeat it. He then repeats it and I hear his acceptance. The
contract is made, not on the first tine when I do not hear, but only the second time when
do hear. If he does not repeat it, there is no contract. The contract is only complete when
I have his answer accepting the offer.''
It will he noticed that contracts by instantaneous communication such as telephone
or Telex are not treated III same way as contracts by postal co min unication. The
contracts over the telephone are regarded the same in principle as those negotiated by
the parties in the actual presence of each other.
The same rule has beeti applied in India, because the Indian Contract Act, which
is not exhaustive, does not provide for contracts over the telephone; and it is an
established rule that when any matter cannot he brought within particular provisions of
the Contract Act, it would be permissible to nri!' : '! h principles in dealing with the

9. Telex is all with the help of ssh,ihi messages can be despatched by a teleprinter
operated like a typewriter in one counmuy'and atmost instantaneously received and typed In
another.
24 MERCANTILE LAW

) 10 In this case. Dixit, J., in

matter (Kanhalvalal v. Dinesliis'arcliandra, 1959 M.P. 234
applying the principles of the English law, observed:
"Now, when the parties negotiate a contract orally in the presence of each other
or over telephone and one of theni makes an oral offer to the other, it is plain that an oral
acceptance is expected, and the acceptor must ensure that his acceptance is audible, heard
and understood by the offeror. The acceptance in such a case must be by such words
which have the effect of communicating it. If the words of acceptance are inaudible and
have not been heard or understood by the offeror, then the acceptance is incomplete and
no contract would be tormed until the aceptor repeats his acceptance so that offeror can
hear it. . . . the provisions of S. 4 of the Contract Act with regard to the completion of
the coinmunicat ion of aceptance, which are meant for contracts through the post, have
no applicability where parties negotiate a contract in the presence of each other or over
telephone. The object of Sections 4and 6 is to f i x the point of time at which either party
negotiating the contract is precluded from changing his mind. When iheparties negotiate
a contract face to face or over telephone, no question of revocation can possibly arise
for in such instantaneous communications a definite offer is made and accepted at one
and the same t iine.
It will be interesting to quote Sir William Ansun who sums ill) the position
humorously as follows : tt ''Acceptance is to offer what a lighted match is to a train of
gunpowder. It produces something which cannot he recalled or undone. But the powder
may have lain till it has become damp, or the man who laid the train may remove it before
the match is applied. So an offer may lapse for want of acceptance. or be revoked before
acceptance. Acceptance converts the offer into a promise, and then it is too late to
remove. This means that as soon as a lighted match is brought in contact with a train
of gun j xwder, the gunpowder explodes. Gunpowder by itself is inert; it is the lighted
match which causes the gunpowder to explode. Similarly, an offer from the offeror does
not by iislf create any legal relationship between the offeror and the ufferee; offer by
itself is inert. But as soon as the offer is accepted by the ofleree; a legal relationship is
established between the parties; the offer is converted into a promise which imposes an
obligation on the offeror. Offer is thus compared to gunpowder and accept:ulce to lighted
match; and an offer, when accepted, explodes into a contract and cannot he revoked.
Cross offers. No contract arises froin cross offers. It means that when two parties
make identical offers to each other, without knowledge of each other's offer, thiçre is no
completed agreement, for there cannot be acceptance. For this reason it is well said that
two manifestations of willingness to make the same bargain do not constitute a contract
unless one is made with reference to the other. An offcree, therefore, cannot accept an
offer unless its terms have been coin in un icated to him by the offeror." loTion v. J/offnian
& Co (1873) 29 L.J. 272. A's offer to sell 800
tons of iron at 69S per ton crossed B's
offer to buy 800 tons at 69S per ton. held, there was no contract, as they were merely
counter-offers not accepted yet.
An agreement to agree in the future is not a contract, because unless all the
material terms of the contract are agreed there is no binding obligation. It was stated by
Maugtiatn L.J. In Foley v. Clas.vtque Lid. (1934) 2 K.B. 2
at p. 13: ''It is indisputable
that unless all the material terms of the contract are agreed there is no binding obligation.
An agreement to agree in the future is not a contract; nor is there a contract if a material
tenn is neither settled nor implied by law and the document contains no machinery for
ascertaining it." It was also stated in hlajee v. Murugesa. 1958, Kerr. 195
that a contract
to enter into a contract is not a valid contract.

10. See also Bhagwandas v. Girdhanlal & Co.. 1966 S.C. 543.
Ji. Law of Contract. p. 40.
 CONTRACTS 25

PART 1-C
CONSIDERATION
The Need for Consideration.—Contracts result only when one promise is made
in exchange for something in return. The something in return is what we mean by
consideration. The requirement of consideration stems from the policy of extending the
arm of the law to the enforcement of mutual promises of parties. We know from our
study of offer and acceptance that a mere promise is not enforceable. There must be an
offer, which is a promise conditional upon the making of a certain promise by the othem
party, and the offer must be accepted by a return promise. For example, a mere prom ,e
to make a gift, although presumably creating a moral obligation, is not enforceabl at
law, as the person to whom the promise of a gift is given does not give anything in return.
To be enforceable a promise must be-purchased, or the consideration he bargained for
or given in exchange for the promise.
The requirement of conideration limits the cnfocement of promises to those in
which each of the parties has bargained to give or surrender something. The fact that
each parr' has agreed to give or surrender something suggests that the parties have
devoted some reflection to the matter and that they seriously desire the promises to have
legal consequences. Thus it is said that the justification for the doctrine of consideration
is that it provides at least some objective guarantee of deliberation, a certain protection
against hasty and ill-considered contracts. Consideration is an aid in determining that
promises are worthy of enforcement. Some degree of riciprocity and mutuality of
undertaking is requisite before promises will be enforced; and the doctrine ofconsidera-
tion is the most important test of the enforceability of executory promises.
The Trinity.—In order that a contract may arise, three things must concur: first,
the offer; second, the acceptance; and third, the consideration. Mutual assent, we have
seen, takes place by offer and acceptance; but to have mutual assent, there rust be
something to be assented and agreed to on each side. That something is consideration.
Hence, consideration in its essential nature is an aspect merely of the fundamental notion
of bargain, other aspects of which are offer and acceptance. Consideration, oJfer and
acceptance are an indivisible trinity, facets of one identical notion which is tlmnt of
bargain.
Definition orConsideration—S is Frederick Pollock has defined consideration as
the price for which &pro ise i.slxiught (i.e., as quid pro quo)." In Currie v. Misa
(1875) 10 Ex. 153, Lush J., defined consideration as 'some right, interest, profit, or
benefit accruing to one party for some forbearance, detriment, loss or responsibility
given, suffered, or undertaken by the other.''
Section 2(d) of the Indian Contract Act, 1872, defines consideration thus:" When,
at the desire of the promisor, the promisee or any other person has done or abstained
from doing, or does or abstains from doing or promises to do or to abstain from doing
something, such actor abstinence or promise is called a consideration for the promise."
Jnsimple terms, onsiderahon means the element of exchange in a bargain, and in
order to satisfy the requirements of law consideration must be an actor forbearance of
some value in the eye of the law; the promisee must suffer a legal detriment. It may take
the form of money, goods, srvices, a promise to marry, a promise to forbear from suing
the promise, etc. It is the giving up by the promisee of a legal right; the refraining from
doing what he has the legal right to do, or the doing of what he has the legal right not to
do. So, a benefit to the promisor or a detriment to the promisee is a sufficient considera-
tion for a contract. It was stated in Fazaluddin Mandal v. Panchanan Das, 1957 Cal, 92,
A single consideration may support more than one promise and may move from the
26 MERCA11LE LAW

promisee or any other person. Reciprocity is not necessarily as essential ingredient for
consideration, which can as well be an act done or forbearance made in return for a
unilateral promise. Consideration, as; stated earlier, is the price or a return for a promise—
a quid pro quo something given or taken as equivalent to another. It is some value
received as inducement for the promise. Thus, the doctrine of consideration is that a
promise will he enforced only when it has been paid for or purchased either by a
promise, ail or a forbearance.
Forbearance means refraining from doing an act. In other words, the promisor may
desire to buy the inaction of the other party of his promise not to act. Examples of
forbearance as good consideration arc: forbearance to exercise a legal right, e.g., if at the
instance of the debtor the creditor forbears to sue there is sufficiency of consideration.
Forbearance to sue for ejectment is good consideration for ailagreement to pay enhanced
promise in writing to pay a
rent (Lak.s/wii ('izund v. 'Niadar Ma). 1961 All, 495). A
tosie-barred debt is good consideration. Forbearance to sue on an old contract, or a fresh
contract is a good consideration for dispensing with the performance of a prior contract
(Bhioori V. lhakur Cobb Sin,tIi, 1958 Raj. 10).
It should, however, he noted that promise and the consideration must purport to
he the motive each for the other, in whole or at least in part. It is not enough that the
promise induces the detriment or the detriment in tuces promise if the other half is
wanting. If promises B tQ make him a gift ofsubstantial wealth, cons ideration is lacking
though B has rc000ilce&l other opportunities for betterment in the faith that the promise
will be kept. There is no mutuality, as each party is not doing or agreeing to do something.
Such situations usually arise in cases relating to subscriptions for charity, where promises
are tuitiius.
7In Ahdubflziz v. Masum Ali (1914)36 All. 268, a person had verbally promised to
thsccretary of the Mosque Committee to subscribe Rs.500 br the rebuilding of a
Mosque. Out a suit by the secretary to enforce this simple promise it was held that the
Promise was not enforceable for there was no consideration in the sense of benefit to the
proinisor or detriment to the promisee. It was said, "the person who made the promise
gaineot nothing in return for the promise made, and the secretary of the Committee to
whom the promise was made suffered no detriment in getting the promise from
subscriber," and the suit was dismissed.
But a promise, though gratuitous. 'ould be enforceable if on the faith of the
promise, the promisee suffers a detriment or undertakes a liability. This is based upon
what is called the doctrine of' 'promissory estoppel". which is applied to avoid the harh
results of allowing the promnisor in such a case to repudiate. when the promisee h4s acted
in reliance upon the promise. Here the person makes a donative promise without
expecting an equivalent.
In Kedarna!Ii v. Gori fl,falmonmi'd (1886) 14 Cal. 64, the defendant had agreed to
subscribe Rs. 100 towards the construction of a Town Hall at Howrah. The secretary,
oil faith of the promise. called for plans and entrusted the work to contractors and
undertook liability to pa theni. /1e1!, though the promise was to subscribe to a charitable
institution and there was no henetut to the proinisor, yet it was supported by consideration
in that the secretary suffered a detriment in having undertaken a liability to the contractors
on the faith of promise made by the defendant.
KINDS OF CONSIDERATION
A consideration may he: (a) Executory or future, (b) Executed or present, or (c)
Pas'.
(a) Executory consideration means that it takes the form of a promise to be
pci formed in the future. It is the price promised by one party in return for the other party's
promise, e.g. an engagement to marry someone, or a promise to deliver goods or to render
services at a future date.
 CONTRACT'S 27

(b) Executed or present consideration means consideration which takes place

simultaneously with the promise. The act constituting the consideration is wholly or
completely performed. If A buys a book from a hook-seller and pays the price and the
book-seller delivers the book to A there and then, the consideration in this case is
executed or present, s ince it is performed simultaneously by both the parties.
(c) Past consideration means a past act or forbearance, that is, one which took
place and is complete before the promise is made. If A does H a good turn in 1974, and
in 1975 B makes a promise to A to supply him with certain goods in consideration of
this act, A will be able to enforce B's promise, as in Indian law, past consideration is
also good consideration. But in English law, past consideration is no consideration, and
in the above example, A will he unable in English law to enforce B's'promise.
But even in English law, there are exceptions to the rule that past consideration is
no consideration, namely:
(i) When services are rendered at the express or implied request of the promisor
in circumstances which raise an implication of a promise to pay.
(ii) When a time-han-ed debt is acknowledged in writing.
(iii) Under S.27 of Bill of Exchange Act. 1882, past consideration will support a
bill of exchange.

RULES GOVERNING CONSIDERATION

(a) A simple coritracl, whether oral or in writing, must be supported by
consideration, otherwise it will be normally void. A contract without consideration is
a gratuity, or, in the words of Salmond, ''a promise without consideration is a gift; one
made for a consideration is a bargain". Hence, 'bargain without consideration is a
contradiction in terms and cannot exist."
(b) In Indian law, consideration must move at the desire of the promisor. The
promisor must desire the act or forbearance. The act performed at the desire of third party
cannot he Consideration. But the promisor need not necessarily derive any benefit from
the contract. The benefit may be intended for a third party. Under Sec. 2(d), all that is
necessary is that .the desire of the promisor and the action of the promisee should have
a connection (Gopal Co. v. Firm llazarilal, 1963 M.P. 37). Again,.for consideration to
be present, it is essential that what is done irnist have been done at the desire of the
promisor, and not voluntarily. If notices B's house being on fire and rushes voluntarily
to B's help, there is no consideration If, however, A goes to H's help at B's desire, there
is good consideration
(c) In Indian law, consideration may move from the promisee or any other
person_Thus, in India " law, a stranger to consideration may maintain a suit. In
Cliin,iava
Rau v. Raniayva (1881)4 Mad. 137, A, an old lady, by a deed of gift, made over certain
property to her daughter with a direction that the daughter should pay an annuity to A's
brother as had been done by A. By an agreement of even (late between the daughter of
A and the brother of A, the daugl.ter promised to pay the annuity. The daughter, however,
did not pay the annuity as promised. A's brother sued the daughter. It was held that the
consideration moved from A, the donor of the estate, though not from her brother. That
was sufficient consideration for the daughter's promise to A's brother, because the
consideration in India need not move from the promnisee, but can move from any other
person. Similarly, in Samuel V. Ancjnj1isianiI (1883) 6 Mad. 351, the administratrix of
an estate agreed to pay S his share of the estate, if would give a promissory note for
portion of a barred debt claimed by A from her. S executed a promissory note in favour
of A. gave it to the administrat yjx, and received his share of the estate. A sued S on the
promissory note and it was held that there was considerition for the same. Hence, in
28 MERCANTILE LAW

Indian law, a stranger to the consideration can sue to enforce the contract, though a
stranger to the contract cannot sue.
But the stranger to consideration cannot be a minor, for a minor cannot contract.
An agreement for gervice, entered into by a father on behalf of his minor daughter, is not
enforceable at law, as it is without any consideration and therefore void (Raj Rani V.
Preni Adib (1949)51 Born. L.R. 256). In this case the defendant Prem Adib had agreed
with the father of Raj Rani (the plaintiff), who was a minor, to employ her as an artist in
the defendant's concern called the Prein Pictures for a year at a salary of Rs. 9,500 to be
paid in 12 equal monthly instalments. As the plaintiff was a minor, her father had entered
into this agreement on her behalf and for her benefit. According to the conditions of this
agreement the plaintiff attended all rehearsals at the studio, and attended in the taking of
the picture which was being produced by the defendant. She was paid her first monthly
instalment also. -Me defendant then terminated her services. She sued for damages for
the breach of the agreement. It was held that as she was a minor at the date of the
agreement made oil behalf by her father her agreement was void for want of
consideration. Her prolnlSe to serve supplied no consideration for the promise made by
the defendant tci the plantiff's father regarding the employment of the plaintiff as an artist
in his studio. Therefore the contract between the plaintiff's father and the defendant was
void being without any consideralion moving from the promisee (the father of the minor
plaintiff); and the plaintiffs promise to serve with the defendant did not constitute any
lawful promise or valid consideration in law, as it was void under section 11 of the
Contract Act.
It was also held in this case that a contract of marriage entered into on behalf of a
minor by her or his parent, for the benefit of the minor, stands on a different footing. So
also a contract of apprenticeship stands on a different footing. Both these contracts (viz.,
contract of marriage and the contract of apprenticeship) can he enforced when niade by
the parent or guardian of the minor. But a contract of personal service is different; the
mere fact that the contract of service is for the benefit of the minor does not entitle the
minor to sue on the contract.
Under English law, however, a stanger to the consideration cannot sue to enforce
the contract. The person to whom the promise is made (the promisee) must furnish the
consideration. As a result, the person seeking to enforce a simple contract in court must
prove that he himself has given consideration in return for the promise he is seeking to
enforce. For example, A. B. and C enter into an agreement under which A promises to
do certain work for B if B will pay £50 to C. If A does the work, he can sue B on the
promise; but C cannot sue, for he gave no consideration to B.' 2 The underlying
assumption in English law is that a contract is a bargain. If a person furnishes no
consideration, he takes no part in the bargain; if he takes no pall in a bargain, he takes
no part in a contract.
(d) Though, in Indian law, a stranger to the consideration can sue, yet both
in English law and Indian law, a stranger to a contract cannot, as a rule, sue on it,
even though it is made for his benefit. 13 The basis of this rule is that a contract isaprivate
relationship between the parties who make it, and no other person can acquire rights or
incur liabilities under it. This nile is usually designated as the doctrine of Privily of
contract.
Privity or Contract—In general third parties cannot sue for the carrying out of
promises made by the parties to a contract.

12. Price v. Easton (1833)411 & Ad. 433; Tweddle v. Atkinson, (1861)1 B & S 393.
13. Dunlop v. Self ridges (1915) A.C. 847; State of Bihar v. Charanjit Lal 1960 Pat 139.
 CONTRACTS 29

(i) Dun/op Tyre Co. v. Selfridges lid. (1915) A.C. 847, is the leading case on this
point. Dunlops supplied tyres to a wholesaler, D, oil that any retailer to whom
D resupplied the tyres should promise D not to sell them to the public below Dunlop's
list price. D supplied tyres to Selfridges ulxm this condition, but nevertheless Selfridges
sold them below the list price. Held there was a contract between Selfridges and D, and
a contract between Dunlops and I), but no contract between Dunlops and Selfridges.
Therefore, Dutilops could not obtain damages from Selfridges. 14
(ii) In S/zanA-ar v. Umbahhai (1915)37 Roin. 471, A effected a policy of insurance
on his own life, and the policy was expressed to be for the benefit of his wife. The wife
was held not entitled to sue the insurance company, as she was not a party to the contract
of assurance. She could have sued if the policy had been assigned in writing to her by
the assured, or a trust had been created by the assured.
Exceptions to the Doctrine of Privity. There are, however, exceptions to the rule
ofprivity of contract recognised both by the English law and the Indian law, under which
a person who is not a party to a contract can sue on it. The exceptions to the rule are:
(i) Constructive trust. If the right of the third party does not arise out of contract
but out of a trust, the ces!ui que trust or the beneficiary has a right of action (Des Raj
v. Rabi Ram, 1957 J & K 10). The stranger should, however, be clearly designated as a
beneficiary (Sivarania Konar v. Thirui'aa'inadi4 Pillai, ' 1957 Travancore 189). Thus, if
A and B agree to confer a benefit o il B would he regarded as a constructive trustee
for C of the benefit of bc contract. C would thcn be entitled to sue B (and join A as
co-defendant).
In /tmirullalz v. Central Government 1959 All. L.J. 271, it was pointed out that the
addressee of an insured article is the beneficiary under the contract between the sender
and the Central Government who is liable for compensation under Sec. 33, Post Offices
Act, for non-delivery. A trust of movable property is deemed to be declared by the sender
from the fact that he addressed the insured cover as deliverable to the addressee. A
congtuctivc trust having been created in favour of the addressee, he is entitled to have
the benefit as against the trustee, the Cental Government through the Post Office, and
sue it.
Similarly, persons not parties to transactions like partition or family arrangements
conferring benefits on them become beneficiaries. Such transactions are in the nature of
trusts. 15
In Kliwaja Mohammed V. liussaini lgum (1910) 32 All. 410, a Muslim lady H
stied her father-in-law K to recover Rs. 15,000 being the arrears of allowance called
K/tare!ia-i- Pandczn—betel box expenses, i.e. ''Pin money" payable to her by K under
an agreement made between K and her father prior to and in consideration of her marriage
to K's son D. Both Hand D were minors at the time of the marriage. The Privy Council
held the promise to he enforceable by H and declared the suit rejecting the contention
on behalf of K that H could not sue as she was no party to agreement.
(ii) Agency. A principal, even if concealed, may sue on a contract made by an
agent. Thus, where A is secretly acting as agent for P. P can intervene to enforce the -
contract between T and A.'6
(iii) Charge in favour of a person. When a charge in favour of a person has been
created oil immovable property, such charge is enforceable at the instance of

14. 'flat
CaSe has been ccifirnied by the House of lords in Midland Silicones lad v. Scnntous
Ltd. (1962) A.C. 446. See also M.C. Chacko v. The State Bank of Travancore,
1970 S.C. 504.
15. Ktuiiniiiiiiii Veeranima v Kc>niminini Appaya 1966 Andh. W R. 476.
16. This exception is perhaps more apparent than real, because in fact the principal
is the
contracting party who has merely acted through t he instrumentality of the agent.
30 MERCANTILE LAW

the person beneficially interested, though he may not be a party to the document cTeatmg
the charge.
- (iv) Family settlements. The fourth exception arises in cases of family arrange-
ments or marriage settlements or otherwise when a charge is created (as above) on
specific immovable property intended to benefit a third person or where provision is
made for the marriage expenses of female members (Saiyed Sajad All Khan v. Ms!
Badshah Beguni, 1936 Qudh 385; Rakhniabai v. Govind (1904) 6 Born. L. R. 421). In
a sister sued successfully for'marriage
Sun4aryya v.LakshmiArwna! (1915)38 Mad. 788,
expenses provided in a partition between brothers.
(v) Fund in hand of a party. Where a fund is created in the hands of one of the
contracting parties in favour of a third party, it may be possible to give the latter a remedy
in quasi-contract on the grounds that to allow the contracting party to keep the fund
would be to allow unjust enrichment- Thus, if A admits to C thathe had reccivedmoney
from B for payment to C, then C can successfully recover the amount from A)7
In Shamia v.Joory (1958) 1 Q.B. 448, the defendant was an Iraqi merchant having
a business in England, and he employed the plaintiff's brother as an agent in Baghdad.
At the end of 1952 the defendant admitted that he owed his agent £1,300. The
defendant was requested to pay £500 of this as a gift to the plaintiff, who was at that time
a student in England. He agreed to do this, and the agent wrote to the plaintiff, his brother,
informing him of the defendant's promise. The defendant confirmed this and informed
the plaintiff that he would send the money to him. On the defendant's failure to pay, the
plaintiff sued him to recover £500 as money had and received to his use (an action in
quasi-contract), and it was held that he must succeed,
(vi) Assignment. The assignee of a debt or an actionable claim may, if the
assignment is legal assignment, sue the original debtor.
(e) The fifth rule governing consideration is that there must be mutuality, i.e., each
party must do or agree to do something. A gratuitous pmise, as in the case of a
subscription for charity, in not enforceable.
() Consideration need not be adequate, but must have some value, however
slight. It is up to the parties to fix their own prices. For example, where A voluntarily
agreed to sell his motor caf for Rs. 500 to B it became a valid contract despite the
inadequacy of the consideration. The parties are presumed to be capable of appreciating
their own interests and reaching of their own equilibrium and the law, as a general rule,
leaves people to make their own bargains, and does not concern itself with the adequacy
of consideration. If a person, voluntarily chooses to make an extravagant promise for an
inadequate consideration it is his own affair. Thus, it was said in Haig v. Brooks (1839)
that the courts do not exist to repair had bargains and though consideration must be
present, the parties themselves must attend to its value. But the value must be of an
economic character, and mere natural affection of itself is not enough. Nevertheless, acts
or omissions even of a trivial nature may be sufficient to support a contract (Chappell
v. Nest le ( 1960) A. C. 87).
However, where the consideration embodied in a deal is woefully inadequate, it
may raise a suspicion of fraud, coercion or undue influence on the part of the, j':rson
gaining the advantage. Because of the rule of inadequacy of consideration being no bar
to a valid contract, it has been said that "in many eases, the doctrine of consideration is
a mere bchnicality irreconcilable either with business expediency or common sense."
(g) Consideration must be competent. Though the consideration need not be
adequate to the promise. it must be competent, real and not illusory, impossible,

17. Lily v. Hays (1886) lii E.R. 1272; Joan Chandra Mukherjee v. Manoranjan Mitra. 194 Cal.
251.
 CONTRACTS 31

uncertain, vague or ambiguous. Consideration must be real, though it may be nominal.

A son's vague promise to "stop being a nuisance" to his father is no consideration.
(h) Consideration must be lawful, e.g., -not some illegal act, such as paying
someone to commit a crime. If the consideration is unlawful, the contract i' void and
unenforceable.
(i) Consideration must be something more than the promisee is already
bound to do for the promisor. Thus, an agreement to perform an existing obligation
made with the person to whom the obligation is already owed, is not made for
consideration. For instance, discharge of public duty imposed by law is not considera-
tion; nor is the performance of a contractual duty already owed to the defendant. But
performance by A of an existing duty owed to B will suffice to support a promise by C
to A. Thus. A was engaged to marry B, and C promised A an annuity of £150 in
consideration of his marrying B. On his marriage with B, it was held that the fulfilment
of A's contract with B was consideration to support C's promise to pay the annuity
(Shadwell v. Shadwell (1860) 3 L.T. 628).
NO CONSIDERATION NECESSARY

The general rule is that an agreement made without consideration is void. But
Section 25 of the Act lays down three exceptions which make a promise without
consideration valid and binding. Thus, an agreement without consideration is valid—
1. if it is expressed in writing and registered if so required by the law relating to
registration of documents and is made out of natural love and affection between
parties standing in a near relation to each other; or
2. if it is made to compensate a person who has already done something voluntarily
for the promisor, or done something which the promisor was legally compellable
to do; or
3. if it Is a promise in writing and signed by the person to be charged therewith, or
by his agent, to pay a debt barred by the law of limitation.
These exceptions are based on principles of equity. In the first and the third
instances the promises having been evidenced by writing it would amount to hardship
if they were not recognised by the Courts. Thus, a registered agreement between a
Mohammedan husband and his wife to pay his earnings to her is a valid contract, as it
is in writing, is registered, is hctwecri parties standing in near relation, and is for love
and affection [I'oonoo Thbi v. Fyaz Buksh (1874) 15 Born. L.R. 571. So is a registered
agreement whereby an elder brother, on account of natural love and affection, promised
to pay the debts of his younger brother f i'enkaiaswaniv v. Ranga.s-o'anv (1903) 13
M.L.J. 4281. But nearness of relation does not necessarily import natural love and
affection. Thus, where a Hindu husband by a registered document, after referring to
quarrels and dsagreemnent between himself and his wife, promised to pay his wife a sum
of money for her maintenance and separate residence, it was held that the promise was
unenforceable (Raj/ukliy Dabec' v. B/wot,iai/i (1990) 4 C.W.N. 4881. Agreements
simpliciter are not required to be registered. Thus, in Lalit Mohan I)aita v. Basudeb
Daua, 1976 Cal. 430, an agreement was executed by the suns in favour of their father
in consideration of the great regard they had for their father, but the agreement was not
registered. held, the agreement, hcing a siinpliciter agreement did not require registration
and was valid and enforceable. Also the rule which insists on the presence of considera-
tion for every agreenmcmu does not affect gifts. Explanation I provides: "Nothing shall
affect the validity, as between the donor and dunce, of any gift actually made."
ACCORD AND SATISFACTION

Under Indian law, the parties to the contract can agree that their respective
32 MERCA".TtLF. LAW

performances may not be enforced, or the promisee may waive or remit the performance
by the promisor. Section 63 of the Contract Act provides: "Every promisee may dispense
with or remit, wholly or in part, the performance of the promise made to him or may
extend the time for such performance, or may accept instead of it any satisfaction which
he thinks fit." Thus, if A owes B Rs. 1,000. and B tells A that he will take R..800 in
full satisfaction of the debt, A will be discharged from his obligation if he pays Rs. 800
to B and B cannot site A for the balance of Rs. 200.
But under English law such waiver orremissiors is not binding unless consideration
is given for it, So, under English law, in the above example, A will remain liable to pay
the balance of Rs. 200. Where A has performed his part of the contract, but B has not,
A may release B from his obligations under the contract, butonly if the release is under
seal or if A receives valuable consideration for forgoing his rights. Such an agreement,
where there is the necessary consideration, is called Accord and Saiisf'action.
8
Accord and Satisfaction has been judicially defined as follows:
'Accord and Sa!isfaction is the purchase of a release from an obligation, whether
arising Wider contract or tort, by means of any valuable consideration, not being the
actual performance of the obligation itself. The accord is the agreement by which the
obligation isdischargcd.The satisfaction is the consideration which makes the agreement
operative."
The rule that payment of a smaller sum of money is not discharge of Liability to
pay a larger sum, even though the creditor agrees to take it in full discharge is an ancient
one and an early example of it was found in Princf case (1602) as approved by the
House of Lords in ['oakes v. [Jeer (1881) 9 App. Cas. 605. The practical effect of the
rule, however, has been considerably reduced by the following facts:
(i) Payment of a sinalls'r sum at the creditor's request before the due date is good
consideration for a promise to forgo the balance, for it is a benefit to the creditor to be
paid before he was entitled to payment, and a corresponding detriment to the debtor to
pay early.
(ii) When the creditor agrees to take something different in kind, e.g. a chattel,
the debt is discharged by substituted Performance.
here there is a dispute as to the sum owed, if the creditor accepts less than
Where
he thinks is owed to him, the debt will be discharged.
(iv) If the debtor makes an arrangement with his creditors to compound his debts,
e.g.. by paying 80 p. in the £, he is satisfying a debt for a larger sum by the payment of
a smaller sum. Nevertheless, it is a good discharge, the consideration being the agreement
by the creditors with each other and the debtor not to insist on their full rights.-19
20
(v) Payment of a smaller sum by a third party operates as a good discharge.
(vi) Forbearance to sue at the request of the debtor will be good considera-
tion.
It may he reiterated that the doctrine of Accord and Satisfaction does not apply in
India, nor does the doctrine of Consideration as extended to the discharge of contracts,
because of S.63 of the Contract Act, 1872.

18, British Russian Gazette, Lid. v. Associated Newspapers. Lid. (1933)2 K.B. 616.
19. Good v. Cheeseman (1831)2 B.& Ad. 328.
20. Welhyv. Drake (1825)t C.& P 557.
21. Combev. Combe (1951)2 KB. 215.
 CONTRACTS 33

PART 1-D

FLAWS IN CONTRACTS

VOID AND VOIDABLE CONTRACTS

We have already seen that a contract is always based on agreement. But an apparent
agreement is not always a real agreement. One party may have deceived the other party,
or in some other way there he 110 genuine consent. The parties may be labouring under
a mistake, or one or both parties may be incapable of making a contract. In all such cases
there is no rhl agreement, and where there is no real agreement the law has three
remedies. Firs!, the contract may be treated as of no effect, and it will then be known as
a void contract. Secondly. the law may give the party aggrieved the option of getting
out of his bargain, and the contract is then known as voidable. Lastly, the party at fault
rnayk?e compelled to pay damages to the other.
A void contract is without legal effect. Such a contract is a nullity and no right is
acquired under or through it, and is void ab iniiio. Technically, the words 'void contract'
are a contradiction inierrns. A void contract is not a contract at all. It is a legal nullity,
a legal cipher. But despite semantic inconsistency in using the words 'void contracts,'
they provide a useful label for describing the situation that arises when a contract is
claimed but in fact does not exist. For example, a contract with or by a minor is void and
a1s6 where it is made by parties who are labouring under a mistake of fact material to
the contract.
A voidable contract lies in a middle zone between valid and void contracts. A
contract is voidable when it is enforceable by law at the option of one party but not at
the opinion of tIle other. It is an agreement that is binding and enforceable, but because
of the lack of free consent of one of the parties, it may be rejected by the aggrieved party
if he so desires. Thus, the party aggrieved and so enjoying the option may either elect to
be bound by the contract or to repudiate it. When the contract is so repudiated it becomes
void, but until it is so disowned it continues to be valid. Hence, the difference between
void and voidable contracts is significant. A voidable contract is valid if action is not
taken to avoid it. A void contract is and remains a legal cipher; it is non-existent.

FLAWS IN CAPACITY'ro CONTRACT

Broadly speaking, every person is presumed by law to he competent to enter into
contract, and if any one claims exemption from liability on the ground of incapacity to
contract, lie must strictly prove such capacity. Section 11 of the Indian Contract Act
provides ... Every person is competent to contract who is of the age of majority according
to the law to which he is subject. and who is of sound mind and is not disqualified from
contracting by any law to which he is subject.' This Section hstating the law in the
positive enables us to consider the incapacity to contract. incapacity to contract may
arise out of (a) Mental deficiency, or (h) Status. Infants or minors, lunatics, idiots and
drunken persons fall under (a) and Foreign Ambassadors or Sovereigns, etc., alien
enemies, professional people, corporations and married women fall under (b).

MINORS
In Indian law, tIle Majority Act, 1575, Section 3, declares th a t every person
domiciled in India shall he deemed to have attained his majority when lie shall have
completed his age of 15 years, and not before. In case, however, a guardian has been
appointed to tile minor under the Guardianship of the Court of Wards, the age of majority
54 MERCAsT11.E LAW

is extended to the date when he completes his age 0121 years. Infancy is said to be a
disability, but in practice it is really protection granted by the Law Court-c. It has been
rightly observed: "The law protects their (infants') persons; preserves their rights and
estates, excuseth their laches, and assists them in their pleadings; the Judges aje their
Counsellors, the Jury are their servants and Law is their guardian."
MINORS IN INDIAN LAW
Sections 10, 11 and o g of the Indian Contract Act deal with the matter of capacity
of the contracting parties. Section II lays down the rule: "Every person is competent to
contract who is of the age of majority according to the law to which he is subject .
If we convert this into a negative proposition, it will read thus: no person is competent
to contract who is not of the age of majority, etc. . . . This clearly shows that a minor is
not competent to contract.
The Privy Council's categorical declaration in Mo/ion llibi v.1) liaraniodas Ghose
(1903) 30 Cal, 539, makes it absolutely clear that a minor's contract under the-Indian
law is absolutely void and therefore there is no possibility or question of ratification by
the minor on coining of age. In Moliorifiibi'scase, the minor had executed a mortgage
for the suin of Rs. 20,000 out of which the lender had paid the minor only about Rs.
1,000. The minor then filed a suit for setting aside the mortgage. It was contended that
as the contract was voidable and the minor was now repudiating it the amount of Rs.
8,00() actually paid to the minormnust he refunded under Section 65 of the Indian Contract
Act, The Privy Council pointed out that as the minor's contract was absolutely void no
question of refunding money could arise in these circumstances.
The present position of the law in India regarding minor's capacity to contract may
he stated thus;
I. A minor's contract is altogether void in law, and a minor therefore cannot
bind himself by a contract. There is, however, nothing in the Contract Act which
prevents a minor from becoming a promisee. A minor is incapable of making an
22 A duly executed
instrument but is not incapable of becoming a payee or endorsee.
23
transfer by way of sale or mortgage in favour of a minor who has paid the consideration
money is not void, and it is enforceable by him or any other person on his behalf. The
reason for this rule is that incapacity means, incapacity to bind oneself by a contract or
be bound by a contract. All those contracts to which a person incompetent to contract
is a party are void, as against him, but he can derive benefit under them. Minority
is a personal privilege and only the minor can take advantage of it; the other party is
bound. The rule of mutuality does not apply to minors.
2. The incapacity of minorin India is so important that even if a minor does not
take the plea of minority it is the duty of the court to protect him and give effect to the
statutory prohibition. 24
3. Since the contract is void ab in/ho, the minor need not sue to set it aside, 25 nor
can the minor ratify it on attaining the age of majority.
4. If the minor has obtained any benefit, such as money on a mortgage, he cannot
be asked to refund, nor can his mortgaged property be made liable to pay.
5. A minor purchaser of property is entitled to a decree for possession of the

22. Goekda Ltcharaov. Vishwanadham Bhowayya. 1956 Andhra 182.

23. Ragavi v. Srinivis (1917) 40 Mad. 308 (FIt).
24. Jawahirv. Mauva, 124 I.C. 436.
25. Laliv. Nagendra,, 1940 Cal. 589.
 CONTRACTS 35

property purchased from the vendor. 2 If he is dispossessed of such property by a third

party, the minor can sue successfully his vendor for refund of the purchase money. If a
minor supplies goods to a major person, he can sue for a decree for the price of the
27
goods.
6. A minor can always plead infancy and is not stopped to do so even where he
had procured a loan or entered into some other contract by falsely representing that he
was of full age, when in reality he was a minor. 2 The rule of estoppel does not apply to
a minor oil ground that if it applied it would give a handle to dishonest traders t
obtain false declaration in writing from the minor that he was a major at the time of
entering into the contract. But it may he noted here that where the loan was obtained by
fraudulent representation by the minor or some property was sold by him and these
transactions are set aside the court may direct the minor to restore the property to the
other party, 2 for "Minors can have no privilege to cheat men.'' If a minor fraudulently
overstates his age and takes delivery of it car after executing a promissory note in
favour of the trader for its price, the minor is not estopped from pleading minority and
can escape liability under the promissory note. But the Court on equitable considerations
will order the minor to return to the trader the car, if it is still with him. But the trader
cannot sue on the pronote for the price, or damages.
However, where the minor invokes the aid of the Court for the cancellation of his
contract the Court may grant relief subject to the condition that he shall restore all benefits
obstained by him under the contract, or make suitable compensation to the other party.
For example. iniagannath Sirigh v. La/la Pra.scul (1909)31 A1l.2 1, a minor was allowed
to recover possession of property sold by him only subject to the condition that he
restored the consideration. In Khan Gulv. Lak/ma Singh, 1928 Lah 609, Sir Shadilal CJ.
of Lahore High Court ordered the minor to refund Rs. 17,500 which he had taken in
advance for the sale of land when he refused to complete the contract.
And now Section 33 of the Specific Relief Act. 1963, recognises the principle of
restifulion in such cases and provides: "(I) when a void or voidable contract has been
cancelled at the instance of a party thereto, the Court may require him to restore such
benefits as he has received under the contract and to make any compensation to the other
party which justice may require. (2) Where a defendant successfully resists any suit on
the ground that the contract, by reason of his being incompetent, is void against him, he
may he required to restore the benefits, if any, obtained by hon under the contract but
only to the extent to which he or his estate has benefited theteby.
But thcCouri will not compel any restitution by a tnmnorcvert when he is aplaintiff,
where the other party was aware of the infancy so that he was not deceived. (Bhirn Mandell
v. Ma.ngaram Carom, 1961 Pat 21.).
7. A nmmnar's estate is liable for neces.raries supplied to him or his wife according
to his slows in life. Therefore, a tradesman who supplies necessaries can always recover
under Section 68 of the Contract Act which provides for liability in respect of necessaries
supplied to a person incapable of entering into a contract. It must he noted here that for
necessaries soplied to a minor, it is only his property th:mt is liable, not the minor himself
personally. In English law, an infant is personally liable for necessaries suplied. Thus in
India if a minor has been supplied with necessaries and he fails to pay and owns no
properly, the tradesman will lose the price of necessaries. As in English law necessaries
must he according to the position and status in life of tile minor, and must be things which

26. Collector of Mecrui v. Flardian. 195 All. 155.

27. Abdul Gaff;mr v. Piare Lai (1935) 16 Lab. I.
28. Gadigappa v. Balangowda. 1931 ibm. 561 (FIt.); Khangul v. Lakha Singh (1928)9 Lah 701.
29. Mohd. Said v. Poshanibbar Math (1923)45 All. 645.
36 MERCANTILE LAW

the minor actually needs. Therefore, it is not enough to show that the articles supplied
were of the kind which a person of his position and station may reasonably require for
ordinary use; they will not be necessaries if he is already supplied with things of that
kind. The onus is on the supplier to make sure that the minor actually needs the articles
at the time of sale and delivery. Objects of mere luxury are not necessaries nor objects
which, though ofreal use, are excessively costly. For example, buttons are normally used
30
in men's clothing, but pearl or diamond buttons are not necessaries. The following
have been held as ''necessaries" in India. Costs incurred in successfully detending a
suit oil of a minor in which his properly was in jeopardy:' Costs incurred in
defending him in a prosecution. 3 A loan to minor to save his property from sale in
execution of a decree. 33 Money advanced to a Hindu minor to meet his marriage
expenses.34
It is important to note in this connection that ''necessaries" must have been
supplied to the minor for his benefit. The liability of the minors estate rests on this factor
and not because it is erconlractu. The relief to be given does not depend on any cuntract.
The liability of minor's estate is independent of any contract and is purely statutory
consequent oil provisions of S. 68.
Position of Minor's Parents,—A contract with a minor does 001 give the creditor
any rights against the minors parents, whether the contract is for necessaries or not. The
moral obligation of a father, for instance, to provide for his child does not impose on
him any liability to jiay the debts incurred by the child. The only ease where a parent
all for the parent.
may he liable is when the child is contracting as

IDIOTS AND LUNATICS

is
Contracts other than those for necessaries by idiots and lunatics are void. An
insane person can make a valid contract during lucid intervals.

DRUNKEN PERSONS
Drunkenness is on the same footing as lunacy. A contract by a drunken person is
altogether void. It must be remembered that partial or ordinary drunkenness is not
sufficient to avoid a contract. It must be clearly shown that, at the time ol contracting,
the person, pleading drunkenness, wasso S intoxicated as to he temporarily deprived of

reason arid so could not give valid consent to the contract. Illustraiton (b) to Section 12
of the Indian Contract Act reads: ''A sane niau who is delirious from fever or who is so
drunk that he cannot understand the fernis of a contract or form a rational ju dgi neSt as
to its effects oil interest cannot contract while such delirium or drunkenness lasts."
This illustration clearly shows that in India a contract by a drunken person is void and
not voktah Ic. Drunken persons are liable kmr necessaries supplied.

ALIEN ENEMIES
A person who is not an Indian is all An alien may he either an alien friend
or an alien enetny. An alien friend or a foreigner whose Sovereign or State is t peace
with the Union of [ndia, has usually the full contractual capacity of a natural-born Indian
subject, except that he cannot acquire property in an Indian ship, nor can he be employed

30. Johnstone v. Marks (1887)19 Q.B. 609: Jogzm Ram v. Mahadro I'd. (1909)36 Cal. 768.
31. Ryder v. Womukwell (1868) R.L. 4 Ex. 32.
32. Watkins v. l)humimioo ltaboo (1881)7 (al. 140: Palaram v. Ayub Khan (1926)49 All. 52.
33. Sham (liarain Mat V. (luowdtmry Lehya Sitigh (1894)21 Cal. 872.
34, Kidar Natlm v. Ajmidlmia (1883) l'.R.No. 183.
35. liidcrSiumgh v. Pcnneshwari Singh, 1957 Pam 491.
 COFRACTS 37

as Master or any other Chief Officer of such a ship. On the declaration of war between
his country and the Union of India lie becomes an alien enemy, and the following rules
will apply to him: (I) During the subsistence of the war, all enemy cannot contract
with an Indian citizen nor can he sue in an Indian Court, except by licence from the
Central Government, in case he is permitted to stay on Indian territory. (2) Contracts
made before the war between all enemy and an Indian citizen are either dissolved,
as being against public policy, particularly if their performance would involve inter-
course with or help to the enemy, or suspended for the duration of the war and revived
after the war is over, provided they have not already become time barred. It may be
noted that for the purposes of civil rights "an Indian citizen or the subject of a neutral
State who is voluntarily resident or who is carrying on business in hostile territory is to
be treated as an alien enemy.
FOREIGN SOVEREIGNS AND AMBASSADORS
Foreign Sovereigns and accredited representatives of a foreign State or Anibas-
sadors enjoy a special privilege in that they Cannot be sued in our Courts, but they can,
if they choose, enter into contracts and then enforce these contracts in our Courts. This
immunity of a Sovereign continues even if he engages in trade. But an ex-king is not
entitled to the privilege and can thus be sued against in our Courts. In India, under S. 86
of the Civil Procedure Code, in order to sue rulers of foreign States, Ambassadors and
Envoys, previous sanction of time Central Government must be obtained,
PROFESSIONAL PERSONS
The only class of professional persons who suffer a handicap in the matter of
capacity to contract is that of Barristers practicing in England. They are not allowed to
enter into any contract relating to their profession or to sue for their fees or to be sued.
Their fees are deemed to be debts of honour from the solicitors to them. Iii India, since
the passing of the Bar Councils Act of 1927. a Barrister who is in the position of an
Advocate with liberty both to act and plead, has a right to contract and to sue for his fees.
1i
A decision of the Full Bench of the Allahabad High Court has recognised 1 right of a
Barrister enrolled as an Advocate of an Indian High Court to sue his client for his fees. 36
CORPORA1'IONS
A corporation is an artificial person created by the process of law. It exists only in
onteniplatiun of law and has no physical shade or form. Therefore it can only contract
through human agents. Its contractual capacity is determined by its constitution. The
contractual capacity ofa statutory corporation is expressly defined by the statute creating
it. The contractual capacity of a company registered under the Companies Act is
determined by the objects clause of its memorandum of association. Any act done in
excess of the powers given in the memorandum is ultra mires and void.
MARRIED WOMEN
A Woman, married or sin g le, in md man law is under nod is:mhi lity as regards entering
into contracts. Thus, a Hindu, or Muslim or a Christian wife call into contracts and
bind her property. Under English law, married women used to he under certain dis-
abilities iii re g ard to the making of contracts and the holding of properly. Formerly,
therefore, a husband was responsible fol his wife's contracts but since 1935 this disability

36. Nihal ('hand v. Djlawar Khan (1933)55 All. 570; 1933 At!. 3417 (RB.)
 MERCANTILE LAW
311

no longer arises. A married woman now has full contractual capacity even in English
law and can sue and he sued in her own name.

PART 1-E
FLAW IN CONSENT

REALITY OF CONSENT
A contract which is regular in all other respects may still fail because there is no
consensus ad :deni or meeting
real consent Co it by one or both of tile parties. There is no
of the minds. Consent may he rendered unreal by mistake, misrepresentation, fraud.
coercion or undue influence. When there is no consent at all, as in mutual mistake, there
so that there was not
is no contract. This is described by Salinond as error in consensus,
at the relevant time any veal agreement or common intention between the parties, or their
minds had not net. Error in conenstiS—a in]sLin(lerst.-tndiiig—preverits the existence of
and therefore of any contract. Where there is consent, but no free
any consensus oil ji/i'ni
consent, there is generally a contract voidable at the option of the party whose consent
was not free, as in the case of misrepresentation, undue influence or coercion. This is
In this case a true contract is constituted by tire consent of the
known as error in iausa.
parties. but tIre consent of one of the parties was induced or caused by the supposed
existence of a fact which actually did not exist. If he had known the truth he would not
have entered into the contract. Such error in cause makes the contract voidable at the
option of the party whose consent was not free. In a mutual or bilateral mistake of fact
the consent is altogether absent or excluded, the minds of the contracting parties fail to
meet and the contract is void. Unilateral mistake, undue influence or coercion vitiates
consent and the contract is voidable.

MISTAKE

The law believes that contracts are macic to be kept; the whole structure of business
depends oil as the businessmen depend on the validity of contracts. Accordingly,
the law says most clearly that it will not aid anyone to evade consequences on the plea
that he was mistaken. Oil the other hand, the law also realises that mistakes do occur,
and that these mistakes are so fundamental that there is no contract at all. So, if the law
recognises mistake in contract, that mistake will render the contract void. Thus is the
basic law of in in contract.
The general common law rule is that mistake made by one or both parties in making
a contract has no effect on the validity of the contract. For example. an error of judgment
is not an operative mistake and does not affect the validity of the contract. If A buys an
article thinking it is worth Rs. 1(X). when in fact it Is worth only Rs. 50, the contract is
good and A most hear the loss if there has been no misrepresentation by the seller. In
the words of Anson. ''We are not concerned with cases in which a mart finds the
obligation of a contract more onerous than Ire intended or is disappointed in the
performance which he receives from the other party." This is NOT mistake, but
miscalculation, or possibly. error of judgment. Similarly, a mistake by one patty as to
his power to perform the contract is not an operative mistake. Where A agrees to build
a house by September IS, and finds he cannot complete the work before November 15,
he will be Liable to an act i on for damages.
MISTAKE OF I'A(:T OR VITAL OPERATIVE MISTAKE
Section 20 of the Contract Act provides: ''Where both the parties to an agreement
are under a mistake as to a matter of fact essential to agreement, the agreement is-void."
Thus, to be operative (so as to render the contract void) the mistake most be (i) on the
 ('ONTRACTS 39

part of both the parties. (ii) of fact and not of law or opinion, and (iii) so fundamental as
to negative agreement. Therefore, where the parties contracted under a fundamental
mistake of fact, the contract would be void. Such a mistake prevents the formation of
any contract at all, and the court will declare it void. But as Section 22 provides unilateral
mistake of fact will not render the contract voidable.
MISTAKE OF LAW

If there is a mistake of law of land, the contract is binding because everyone is

deemed to have knowledge of his own law, and ignorance of law is no excuse-
isnoranhia ions hood excusa:. But mistake of foreign law and mistake of pri vat rights
are treated as mistakes of fact, and are excusable. The laws of a foreign country require
to be proved in Indian courts as ordinary facts, and So a mistake of foreign law makes
the contract void. Similarly, if a contract is made in ignorance of private rights, it would
be void, e.g., where A buys property which already belongs to him [Cooper v. Phihhs
(1867)L.R. 2 H.L. 1491.
OPERATIVE MISTAKE OF FACT

Olramive mistakes may he classified into the following categorie:

1. Mistake as to the nature of the contract itself.
2. Unilateral mistake, i.e., mistake made by one party only.
3. Bilateral mistake, where txiih parties make a mistake, which may he either (a)
Common Mistake, or (b) Mutual Mistake.
.' Conmnion Mist :Ac occurs where hot/i p arties have made the same mistake and may
also he designated as identical bilateral mistake. A1ival A c occurs where both
parties nmake thereni mistake and may also he called ,ion.idc'n:ical hi1i era! mistake.
These are clearly di erent mated in following paragraphs between themselves and con-
trasted with unhluicral in istake.
MISTAKE AS TO NKUJRF: OF CONTRACT

The general rule is that a person who signs an instrument is hound by its terms
even if he has not read it(L'Esirangc v. Grancob(1934) 2 K.B. 394). A lady bought an
automatic machine from the defendants on terms contained in a document described as
a "Sales Agreement," and including a number of clauses which she signed but did not
read. It was held that she was bound by these terms and no question of notice arose. But
if a person signs a contract in the mistaken belief that he is signing a document of a
different nature, there will be a mistake which avoids the contract. The mistake must be
as to the nature of the contract and not merely-as to the contents of the document, and
also the mistake must be due to either (a) the blindness, illiteracy, or senility of the person
signing, or (b) a trick or fraudulent misrepresentation by the other party as to the nature
of the document, In Porter v. Mac.,&innopm (1869) L.R. 4 C.P. 704, M, a senile man of
feeble sight, endorsed a bill of exchange for £3,000 thinking it was a guarantee. Held,
there was no contract and so he was not liable on it. He could plead non esJi:urn. When
a lady was induced to sign a deed of exchange and gift on the representation that it was
a power of attorney, the document was held to be void, as her mind did not go with her
37
signature. In such cases the person signing will not be liable even if he is negligent.38
In this case B was fraudulently induced to sign a guarantee in the belief that it was a
proposal for insurance. Held, the guarantee was not binding.

37. SaratCha,ndra v. Kanai L.al, 1921 Cal. 786.

38. CailiiIe and Cumberland Ranking Co. v. Rrapg (1911)1 K.B. 489: Dulari Devi v. Janardhan
Singh, 1990 S.C. 1173.
40 MERCM'TILE LAW

UNILATERAL MISTAKE
Unilateral mistake occurs when one of the parties to a contract is mistaken as to
This latter
some fundamental fact Concerning the contract and ilieother party knows this.
requirement is important because if B does not know that A is mistaken, the contract is
good.
(I) 11)ENTIT' OF PARTY
The cases of unilateral mistake are mainly concerned with MISTAKE by one party
as to the IDENTITY OF THE OTHER PARTY. It is a rule of law that if a person intends
to contract with A, B cannot give himself any rights under it. Here, when a contract is
made in which personalities of the coii(Iacting parties arc or may be of importance, no
other person can interpose and adopt the contract. For example, where M intends to
contract only with A but enters into contract with B, believing him to be A, the contract
H.N.
is vitiated by mistake, as there is no Consensus ad idern (Boulion v.Jones (1857)2
5681.
Remember that mistake as to identity of the person with whom the contract is made
will operate to nullify the contract only if:
(a) the identity is of material importance to the contract. and
(b) the mistake is known to the other party, i.e., he knows that it is not intended
that he should become a pally to Lhe contract but some other person is intended, as it
happened in Corn/v v. Lindsay (1878).
A.C. 459. one Blenkarn by imitating the signature
In Corn/v v. Lindsa y (1878)3
of a reputable lirni called Blenkiron & Son, induced Lindsay to supply him with goods
on credit, which he afterwards sold to Cucidy, an innocent purchaser. Lindsay claimed
the recovery of tile goods, or their val iie fr om Cundy. It was held that the contract between
Blenkarn afnd 1.indsay was void for mistake, and that no property passed to Cundy
Cumidy was liable to Lindsay for the value of the goods.
In Philips v. Brooks (1919)2 K.B. 243, the. plaintiff was a jeweller. One North
entered his shop and asked to see some jewellery. He chose one ring worth £450 and a
pearl necklace, priced £2,25() and offered to buy them. The j eweller accepted the offer.
North then offered to pay by cheque. The jeweller accepted the cheque, but said delivery
would be delayed until the cheque was cleared. North then said that he was Sir George
Bullougli, a well-known person, and gave a London address, which the jeweller checked
in the directory. Since North had signed the cheque as George Bollough, the jeweller
was deceived as to his identity and allowed him to take away the ring. North promptly
pledged the ring with Brooks. a pawnbroker. for £350. The cheque was dishonored and
the jeweller claimed to recover the i ing from Brooks. It was held that the contract was
made before the identity became inlixirtant, therefore it was not void oil ground of
mistake. The jeweller intended to contract, and did contract with the person present,
whoever he was. The misrepresentation took place at the time of signing the cheque after
the contract of sale had been made and the property in the jewellery had passed to the
man who had bought it, namely. North. The contract could he avoided on the ground of
fraudulent misrepresentation before the ring was pawned. but since at the time the ring
was pledged it had not been avoided, the pawn broker got good title.
A woman, by falsely representing to a firm
In Lake v. Sininion,s (1927) A.C. 487.
of jewellers that she was the wife of a certain Baron, obtained two pearl necklaces on
the pretext of showing them to her husband with a view to buying at the agreed price.
The woman then sold the necklaces to all buyer. It was held that there was no
contract between the jewellers and the woman and therefore the buyer from her must
return the necklaces to the jewellers. Though the woman got th e physical possession of
 CONTRACTS 41

the necklaces, there was no menial assent, as the jewellers intended to deal not with her
but quite a different person, namely, the wife of the Baron.
In Said v. Bun (1920) 3 K.B. 497. B, the manager director of a theatre, gave
instructions that a ticket was not to be sold to S. S knew this, and asked a friend to buy
a ticket for lion. With this ticket, S went to the theatre, but B refused to allow him to
enter. It was held that there was no contract with S. as the theatre company never intended
to contract with S. By mere device of an agent he could not constitute himself as the
contractor with the theatre owners who had already refused him ticket. In the words of
Sir William Anson: 'If a man accepts an offer which is plainly meant for another, or if
he becomes party to a contract by falsely representing himself to be another, the contract
in either case is void, or to put it more accurately, no contract ever comes into existence.
In the first case one party takes advantage of the mistake, in the other creates it."
(ii) UNILATERAL MISTAKE OF OFFEROR
Where the offeror inakci a material mistake in expressing his intention, and the
offerce knows, or is deemed to know of the error, the mistake is operative and the contract
is void. In liartog v. Co/in & Shields (1939)3 All. E.R .566, H claimed damages for
breach of contract, alleging that C had agreed to sell him 30,000 Argent iniun hare skins
and had failed to deliver them. C contended that there was a material mistake in the offer
and that H was well aware ofihis mistake when he accepted the offer. Thcrnistake alleged
by C was that the skins were offered at certain pricesperpourid instead of per piece. In
the negotiations preceding the agreement, reference had alsays been made to pricespe,
piece, and it was also the custom of the trade. held, the contract was void for mistake.
H could mt reasonably have supposed that the offer expressed C's real intention: H must
have known that it was made under a mistake.
In Webster v. Cecil (1861)54 ER, 812, A offered to buy certain property from B
for f2000, but B declined he offer. Later B wrote to A offering to sell it forfl,250. This
was a mistake tmmr,25C. A immediately, on receipt of the offer, wrote accepting it; but
B realizing that lie had mistakenly written ;f for £2,250 immediately gave notice
to A of the error. lie/il, the contract would not be specifically enforced as A had snapped
at an offer he perfectly well knew to be made by mistake.
But if there is mistake oil part of one party alone, and the other does not, and
cannot he deemed to, know of the mistake, the contract is binding. In Van Praagh v.
Everidge ( 1902) 2 Ch. 266, at a sale ollanded properties by auction, E purchased one
lot in mistake for another. The price was not extravagant and the mistake was solely due
to his own carelessness. Held, the contract was binding on E.
BILATERAL MISTAKE

A bilateral mistake, as observed earlier, arises when both parties to a contract are
mistaken as regards a fact essential to the contract. They may have made a common or
identical ,ri,sitjAe or a mutual or non -identical mistake.
Coniniopi mistake as to the C.sisiCflCe of the subject -matter. Where both parties
believe the suhject . niatter of the contract to he in existence at the time of the contract
but in fact it is not in exisience, there is operative mistake and the contract is void. If A
agrees to sell his car to B, and unknown to them both the car had at the time of the sale
been destroyed by fire, then the contract will be void because A has innocently
undertaken an obligation which he cannot possibly fulfil. In Scott v. Coo/son (1903) 2
Ch. 249, C agreed to assign to F! a policy of assurance upon die life of L. L had died
before the agreement was made. !im'ld, no contract on account of common mistake. Again
in Couturier v. liastie (1857) 8 Exch. 40. 'there was a contract to buy cargo described as
shipped from port A to port B and believed to he at sea which in fact had got lost earlier
42 MI;R('ArTI1.E LAW

unknown to the parties and hence not in existence at the time of the contract. It was held
that the contract wa, void due to the common inistae of parties.
But where the circumstances are such that the seller is deemed to have warranted
the existence of the goods, the seller is probably liable to the buyer for breach of contract
if the goods are non-existent. In Mc Rae v. Comrnonweallli Disposals Commission
(1951) Argus LR 771: 84 C.L.R. 377, the defendant Commission invited tenders for
the purchase of a wrecked oil tanker, and plaintiff's tender of L285 was accepted. After
the plaintiffs had spent considerable sums in searching for the tanker it was ascertained
that no tanker had been wrecked in the named locality. The Australian High Court held
that the contract was not nullified by mistake. A party cannot rely on mutual mistake
where the mistake consists of a belief... entertained by him without any reasonable
ground and . . . deliberately induced by him in the mind of the other party." The
Commission had contracted that there was a tanker and, since there was no such tanker,
a breach of contract had been committed." The Court awarded the plaintiffs £.285
damages.
Common ,p ii.s!ake as to a fact furtdamc'iial to time agreement. Where the parties
have made a contiact based on a common misapprehension relating to the fundamental
subject -matter of time contract there is operative mistake'. This means that the contract
actually mn;mde is csscmitiall different from the contract the parties intend to make. In
Gut lowa y v. Gollouav (1914) 30 T.L.R .531, A qnd B, believing themselves to be
married, made a separation agreement in which A agreed to pay B £1 a week. It was later
discovered that the y were not validly married. B claimed the promised payments.
held,
the agreement was 'void, as there was a mistake oil their part of fact which was material
to the existence of their agreement.
Mutual or non -nlv'niical mistake as to time identit y of time subject-matter. Where the
parties are both mistaken as to a fundamental fact concerning the contract but each party
has made a different mistake, there is a mutual or non-identical mistake. Thus, if A offers
to sell his Ambassador Car, and B agrees to buy thinking A means his Fiat Car, there is
a bilateral mistake which is imttual or non-identical. The contract does not come into
existence under such a mistake, because there is no consensus ad idem. The parties have
negotiated completely at cross-purposes and they were never in agreement. In Raffles v.
lVjcI11'1Iu,mts(18(4) 2 H. & C. 906, A agreed to buy from B a cargo of cotton to arrive
''ex-Peerless from Bombay''. There were two ships called ''Peerless" sailing from
Bombay, one arriving in October and the other in December. A meant the earlier ship
and B the latter. Held, the contract was void for mistake.
There would be no contract even if the mistake was caused by the negligence of a
third party.
lit v. Pope (1870) 6 E. 7 , P wrote to H inquiring the price of rifles and
suggested that he might buy as many as fifty. On receipt of a reply he wired ''send three
rifles". Due to the mistake of the telegraph clerk the message transmitted to I-I was "send
the rii1c.' H despatched 50 rifles. held. [here was no contract between the parties.
MioAea.s to Quality 1 f,mmlect-nuiIter or Promise. Mistake as to the quality raises
difficult question. If the mistake is bilateral and because of the mistake the thing does
not possess the quality bargained for the contract is obviously void. But if the mistake
is only unilateral difficulty arises Mere mistake as to quality of the subject-matter of a
contract does not i6a1idate it, but mistake of one party to the promise of the other party
as to quality of subject-matter. known to that other party, does invalidate the contract-
Such ii question generally arises in cases of sale of goods. The principle commonly
applicable is caveat empior—Let the buyer beware. There is generally no obligation on
a contracting party to enliglten the other party even where he knows or suspects there
 CONTRACTS 43

is a misapprehension. For example. A offers to sell a watch to B, and B, thinking it is a

gold watch, offers Rs. 500 for it. A, knowing the watch is not gold, accepts B's offer
without enlightening him. The contract is binding, provided A made no representation
in the matter.
In Leaf v. international Galleries (1950) 2 K.R. 86, L bought from G a painting
which both mistakenly believed to be by Constable and of great value. Later L discovered
it was by an unknown artist and comparatively worthless. field, L could not avoid the
contract, as his mistake related only to the quality of the subject-matter, and 0 had made
no representation. But where a party knowing that the other was labour g under a
mistake"snatches a hirgain''by hurnedlyclositig theiransaction, thisunila.!al mistake
will enable the party to avoid the contract.
Mistake through non-disclosure in contracts uberrtniae fidei. A contract uber-
rintaefide; is a contract of utmost good faith. In such a contract the law imposes a special
duty to act with the utmost good faith, i.e. to disclose all material information. Failure
so to disclose all facts truthfully renders the contract voidable at the option of the other
party. Here silence can amount to misrepresentation.
CONTRACTS UIiERR'IMAE F/DEl
Contracts uherrintai.'fiu/ei are—
(a) Contracts of insurance of all kinds. The assured must disclose to the insurer
all material facts and non-disclosure or misstatement will render the contract of
insurance void (Ratm La! v. ;tfi'tro1 oJlitan Co.. 1959 Pat. 413).
(h) Contracts to take shares in a company under a /)rOL/)ei los. When a company
invites file public to subscribe for Its shares by mneancofa prospectus, it is unde statuto:y
obligation to disclose truthfully the various matters set out in the Companies Act, 1956.
Any person responsible for the nun-disclosure of any of these matters is liable in
damages. Also, the contract to take shares is voidable where there is a material
non-disclosure in the prospectus.
(c) Contracts for the sale of hind. The vendor is under a duty to purchaser to show
good title to the land he has contracted to sell. He must, therefore, disclose all defects in
title. This ditty does not extend to physical defects in the property itself.
(d) Contracts of family arrangements. When members of a family make agree-
ments or arrangements for the settlement of the family property, each member of tme
family must make full disclosure of every material fact within his knowledge.
(e) Suretyship and partav-aiop con! rod .v. Contracts of suretyship and contracts
cif partnership, though often described as contracts ubc'rrinuaefidei, are not properly so
described: they do not require utmost g ood faith at their fonn:ution. In both cases, after
the contract has been made there is a duty of utmost good faith on the parties to disclose
to each other all irmaterial fzcts coming to tight after the making of the contract.
(f) A conjulential relationsluj, between the contracting parties gives rise to a duty
to disclose material facts. This is really based on the equitable concept of fiduciary
relationship.

MISREPRESENTATION
A represetitation is a statement of fact made by one party to the contract to the
at her which induces that other to enter into tile contract. A misrepresentation ion is a
represent it ion that is untrue. But representation always means a statement of fact not a
statement of intention or of opinion or of law.
An untrue statement or misrepresentation may be either (i) Innocent, or (ii) Wui
or Deliberate with mtltc'nt to deceive and is called Fraud.
44 MEKC'AI\mLE LAW

INNOCEN'I' MISREPRESENTATION
Innocent misrepresentation is a misstatement made innocently and with an honest
belief as to its truth. It is sometimes called "Invalidating Misrepresentation". The effect
of innocent niisrcpresentationm of fact is that the party misled by it may repudiate the
contract and (i) raise the misrepresentation as a defence to any action the other party may
bring against him, or (ii) sue for rescission of the contract and restitution of anything he
has transferred to the misrepreseimtcr.
Generally, the injured party cannot gel damages for innocent misrepresentation.
But in the following exceptional cases he can get damages:
(a) From promoters or directors who make such misrepresentation in a prospectus
under Company Law;
(b) Against an agent who commits a breach of warranty of authority;
(c) From :I who (at the Court's discretion) is stopped from denying a
statement he has made where (i) he made a positive statement intending that it should
be relied on, and (ii) the innocent party did rely on it, and thereby suffered damage.
It should be remembered that ill to avoid ,I on the ground of
mirel)reL'ntamim, it is liccessary mu prove that (i) the[ c was a representation or assertion,
(ii) such representation induced the party aggrieved to enter into contract, (iii) the
assertion was of fact (and not oh law, as ignorance of law is no excuse); (iv) the statement
was not a acre opinion, or hearsay, or coinmendal mon (i.e. reasonable praise) or
tradmiian's ''puff''. (v) the statement, which has become or turned out to he untrue,
was made with arm honest belief in its truth.
In all misrepresentation, the pai ty aggrieved may avoid the agreement,
even though the statement was true at the time it was made but became untrue later by
reason of change of circumstances (O'Flwia'an's Case (1936) 1 Ch. 575).
WILFUL MISREPRESENTATION OR FRAUD
Section 17 olmlme Contract Act defines Fraud as follows; Fraud means and includes
any of the following acts committed by a party In a contract, or with his connivance or
by his agent, with intent to deceive another party thereto or his agent, or to induce him
to enter into the contract:
I. the suggestion as to a fact, of that which is not true, by one who does not believe
it to he true;
2. the active concealment of a fact by one having knowledge or belief of the fact;
3. a promise made without any intention of performing it;
4. any oilier act fitted to deceive;
5. any such act or omission as the law specially declares to be fraudulent.

B Lit mere silence as to facts likely to affect the willingness of a person to enter into
a contract is not fraud, unless the circumstances of the case are such that, regard being
had to them. it is the duty of the person keeping silence in speak or unless his silence is,
in itself, equivalent to speech.
In the word'. of Lord Herschel in Derrv v. Peek (1999) 14 App. Cas. 337, Fraud
is 'an untrue statement made knowingly, or without belief in its truth, or recklessly,
careless whether it he true or false" with intent to deceive. In simple terms, fraud is false
statement or wilful concealment of a material fact with intent to deceive another lUY
The party deceived or defrauded call the contract and also claim damages.
The essential characteristics of fraud are
 CONTRACTS 45

(a) There must he representation or assertion and it must be false, or there must
be acute or wilful concealnieni qf a mat c'rialfact. We have already considered this point
under innocent misrepresentation. If there is an actual false statement, the case is simple.
A, intending to deceive B, falsely represents that the Television set he is offering for sale.
is German make, when it is in fact a locally made set. If concealment is alleged mere
non-disclosure of material facts, however morally censurable, does not render a contact
voidable. Mere silence is not misrepresentation, unless silence is in itself equivalent to
speech, or where it is the duty of person keeping silence to speak; as where a fiduciary
relation exists between the contracting parties or the contract requires utmost good faitht
Disclosure is also essential where part-truth amounts to falsehood. If part only of facts
is disclosed, and the undisclosed jxtrt so modifies the part disclosed as to render it, by
itself, substantially untrue, there is a duty to disclose the full facts. Non-disclosure will
amount to fraud. In R. v. Ky/snot (1932) 1 K.B. 442, a prospectus contained statements
which were true, that the coinpaliy had paid dividends every year between 1921 and
1927. In fact, in each of these years the company had incurred substantial losses, and
was only able to pay the specified dividends out of secret reserves. No disclosure was
made of these losses. lie/cl, the prospectus was false, because it put before intending
investors IgLires which apparently disclosed the existing position of the company, but
in fact it hid it. and Lord Kylsant, a director, who knew that it was false was guilty of
fraud;
(h) The representation must be of fact. The assertion must be of fact and not a
mere expression of opinion, or hearsay, or puffery or flourishing description. Thus, if A,
who is about to sell a horse to B, says that the horse is a Beauty and is worth Rs. 1,000,
that is A's opinion and B is at liberty to reject it. But if in fact he paid only Rs, 500 for
it, then A has misstated a fact, and if B has been induced by that statement to buy the
horse, he may rescind the contract on the ground of fraud.
(c) There must be knowledge of the falsehood of the representation or a reckless
disregard as to its being true or false. In a reckless misstatement the person is not sure
as to the fact in his own mind; he feels a doubt, yet he represents to the other party, as if
he is certain about the truth of the fact represented by hint Such misrepresentation is
fraud. Also a promise made without an intention of performing it is fraud. To buy goods
with the preconceived idea of getting goods without paying for them is fraud.
(d) The representation must be made with the object of inducing the party deceived
to act upon it. The assertion must he made with the intention of inducing one to act on
the assertion who does so act. This means that there is an inducement in fact and the
assertion is one which necessarily influenced and induced the party to act. The party
misled must not have exercised his own skill of judgment.
(e) The representation must in fact deceive The representation must be acted upon
as it was intended to be acted upon so that the party misled is actually deceived. Adeceit
which does not deceive is not fraud.
(fl The plaintiff must be thereby damnified. It is a common saying that ''there is
no fraud without damage", for an action being one of deceit, and unless the plaintiff has
sustained damage or injury, no action will lie. The damage may consist of actual and
temporal injury, that is, some loss of money or money's worth, or some tangible
detriment capable of assessment.

COERCION

Coercion is defined by section 15 of the Contract Act as "the committing or

threatening to commit, any act forbidden by the Indian Penal Code, or the unlawful

39. Peek v. Gurney (1873) 6 H.L 377.

40. Horsfalj v. Thomas (1862) 158 E.R. 813.
46 MERCANTILE LAW

Jetaining, or threatening to detain, any property to the prejudice of any person whatever,
with the intention of causing any person to enter into an agreement." The doing of any
act forbidden by the Indian Penal Code will still be coercion, even though such an act is
done in a place where the Penal Code is not in force.
What is coercion in India is 'duress' under English law, but coercion covers much
wider field. Duress is limited to actual violence or threats of violence to the person, or
impi isonment or the threat of criminal proceedings to the person coerced or those near
or dear to him, such as his wife, children or parents. Threats to property are nof duress.
Coercion, on the other hand, may he against person or property, and the person coerced
may be any person, not necessarily the party to the contract or his wife, parent or child.
In Muthia/i C/n'itiar v. Karuppan Cheiii(1927)50 Mad. 786, an agent refused to
hand over the account hooks, bonds etc. of the business to his successor agent unless the
principal gave him a release of all liabilities during the term of his agency. The principal
did so hut later succeeded in the suit to declare the release deed as vitiated by coercion.
In Kes/uivji v. Ilarjitan (1887) Rom.566, a son forged his father's endorsement to
promissory notes on the strength of which the bankers advanced monies. When the fraud
was known the hankers wanted to launch a prosecLitmo0 against the son. The father was
induced to come in a settlement with the Bank to save the son. The settlement was set
aside on the ground of coercion, as the father was not a free agent.
In Cunmniinc v. lace L.R. I H.L. 2(X), an old lady was induced to settle properly
Oil oL)e of her relatives by the threat of unlawful confinement in a mental home,
held,
the settlement could he set aside on the ground of duress, i.e.. the threat of fa1s
imprisonment. In Kaufuiwm V. Gerson (1904) 1 K.B. 591. K sued G Oil contract, made
in France. which K had coerced G into niakimig by threats of prosecuting G's husband
foracrimninaloffence which he had coIs)fnitlCdhlCld, G was not liable under the cáritract,
as her consent was obtained through coercion. In RanRanayaka nmnna v. A/war Seili
(1890) 13 Mad. 214, art adoption by a girl, aged 13, was held not binding, when it had
been obtained from her by her husband's relatives by pressure on her by obstructing the
removal of her hushand'd dead body.
It should, however, he noted that mere threat by one person to another to prosecute
him does not amount to coercion. There must be a contract made under the threat, and
that contract should be one sought to be avoided because of coercion (Rantchandra v.
Bank of Kolilapur. 1952 Bum. 715). It may be repeated that coercion may proceed from
any person, and may be directed against any person, even a stranger, and also against
goods, e.g., by unlawful detent ipn of goods.

UNDUE INFLUENCE

Undue influence occurs where a party enters into a contract under any kind of
influence, mental pressure or persuasion, which prevents him from exercising a free and
independent judgment. It in the contract voidable by the party influenced or whose
consent was not free. Section 16 of our Contract Act states that a contract is induced by
undue influence where the relations subsisting between the parties are such that one of
the parties is in a position to dominate the will of the other and uses that position to'ohtain
an unfair advantage over the ocher. It further states that a person is deemd to be in a
position 4o dominate the will of another (i) where he holds a real or apparent authority
over the ocher, or (ii) where he stands in a fiduciary relation to the other; or (iii) he makes
a contract with a person whose mental capacity is temporarily or permanently affected
by reason of age, illness, Or mental or bodily distress.
It is clear from this definition that contracts which may be meseinded for undue
influence fall into two categories; Firstly, those where there is no special relationship
 CONTRACTS 47

between the parties. Secondly, those where a special relationship exists. In the first case,
undue influence must be proved as a fact, by the party alleging it, in the gecond it is
presumed to exist. In litigation, however, the two classes are not mutually exclusive and
a plaintiff inay allege both that undue influence be presumed and that it existed in fact
(Re Graig. Menecc's v. Middleton (1971) Ch. 95). It was stated in Smith v. Kay (1859)
7 H.L.C. 750: "The principle of undue influence applies to every case where the
influence is acquired or abused, where confidence is reposed and betrayed". Undue
influence is a kind of' 'mental coercion'', it destroys the free agency of one and constrains
him to do which is against h i s will, and which he would not have done if left to his own
judgment and volition, so that his act becomes the act of the one exercising the influence,
rather than his own act.
Where no special relationship exists between the contracting parties, the plaintiff
(i.e. the party influenced) must prove two things: (i) that the other party was in a position
to dominate his will, (ii) that the contract was substantially unfair giving the dtminant
party unfair advantage.
It was observed in Rho/a Ram v. Piari Devi, 1962 Pat. 168, undue influence has
its origin in coercion or fraud. Domination of the will of a person is a kind of mental
coercion and the use of his position by a person who dominates the will of the other to
obtain an unfair advantage to himself or to his near relations is a variety of fraud.
In Karnal Distillery Co. Ltd. v. Lad/i Prasad, 1958 Punj 190, confirmed by the
Supreme Court in 1963 S.C. 1279, the elder brother was shown to have exercised undue
influence over his younger brother in respect of a compromise arrangmnent, the trans-
action was held to be voidable at the instance of the younger brother. It was observed
that when one memberof the family exercises weighty influence in the domestic counsels
either from age, from character or from superior position acquired from other circumstan-
ces an inference of undue influences has to lie drawn. The influence subjugates theother's
will to his injury. It is a subtle species of fraud, whereby mastery is obtained over the
mind of the victuli by imisiduous approaches and seductive activities. It was further stated
in this case that once the position of dominance is proved to exist, it is deemed to continue
till its termination is established. So all transactions during such dominance are vitiated.
However, a plea of undue influence caii only be raised by a party to the contract and not
by a third party, unless there was any connivance between the person using undue
influence and the third party belle fit ing by the contract.
Jr. the second class of cases, undue influence is presumed either because of an
exceptional authority one has over the other or lie stands in a fiduciary position to the
other and owes a duty to give that other a disinterested advice. The possibility that he
may put his own interest uppermost is so obvious that lie comes under a duty to prove
that lie has nu abused the position [A//card v. Skinner (1887) 36 Ch. D. 1451. Whether
fi'uciary orcunfmdentmal relationship exists or nut, the question is always the same—was
undue influence used to procure the contract or gift? But the burden of proof is differenL
If B seeks to avoid a contract with A, then in the absence of any confidential relationship,
the entire onus is on B to prove undue influence, but if lie shows the existence of such
relationship, the onus is on A to prove that undue influence was not used. A must rebut
the presumption of undue influence.
To dieharge the onus that he did not employ undue influence, the party must show
that the other party to whom he owed the duty in fact acted voluntarily, in tOe sense that
he was free to make an independent and iilfornled estimate of the expediency of the
contract or other transaction. The other party received independent advice before he

41. Kotuniall v. Nur Mohd. 1931 Sind. 78.

48 MERCANTILE LAW

completed the contract. A few examples will illustrate undue influence. A, having
advanced money to his son B during his minority, upon B's becoming major obtained,
by misuse of parental influence, a bond from B for a greater amount than the sum due
in respect of the advance. A employed undue influence. A, a man enfeebled by disease
or age, is induced by B's influence over him as his medical attendant, to agree to pa" B
an unreasonable sum for his professional services. B employs undue influence. 4 A
Hindu, well advanced in years, with the object of securing benefits to his soul in the next
world, gave away his whole property to his Guru or spiritual adviser. Tlieic was undue
influence. Similarly, where acestui que trust (beneficiary) had no independent advice it
was held a gift by him to the tnistce of certain shares forming part of the trust fund was
void.
In Debi Pra.cad v. Cithotey La!, All. 438, D was the grandson of C's own brother,
and attended to the comforts of C in his illness, as he was also old, infirm and weak. C
executed a deed of gift at the behest of D. The deed was vitiated by undue influence as
it was clearly an unconscionable transaction. D was held to have had dominant influence
over C, a sick, infirm and old man. Undue influence was presumed because of fiduciary
relation.
Rut, as was held by the Supreme Court in Cliandra v. Ganga Prasad. 1967 S.C.
878, there can be no presumption as to undue influence simply because the donor was
related to the party and that he was of a weak disposition. What is essential of proof is
the dominating will of the donee and if he used that position to obtain an unfair advantage
over the donor.'
In Afsar Shaikh v. Solernan Bihi, 1976 S.C. 163, the Supreme Court again
emphasised that a general allegation in the plaint that the plaintiff was a simple old man
of ninety who had reposed confidence in the defendant is much too insufficient to amount
to an averment of undue influence. Merely relying on the other for advice does not
amount to being unduly influenced. But if the transaction appears lobe unconscionable,
then the burden of proving that it was not induced by undue influence is to lie upon the
person who was in a position to dominate the will of the other.
A third party contracting with notice of the exercise of undue influence by another
is in no better position than if he had 6xercised undue influence himself. In Lancashire
Loans Ltd. v. Black (1934) 1 K.B. 380, B, a married woman, under the undue influence
of her mother, who was an extravagant woman, borrowed money on the security of her
own property. The daughter did not understand the nature of the transaction, and the only
advice she received was from a solicitor acting for the mother and the moneylenders.
The moneylenders, therefore, knew all the circumstances between B and her mother.
Field, the moneylenders were in no better position than the mother, and the contract was
voidable by the daughter.
UNCONSCIONABLE TRANSACTIONS
When a person, withootug fraudulent, forces another to enter into an agreement
by making an unconscietious use of his superior power he is said to make an "uncon-
scionable bargain." Such a bargain is voidable. The test is that between two prties on
unequal footing one has sought to make an exorbitant profit of the other's distress.

42. E)iala Ram v. Sargha. 1927 l.ah. 536.

43. See also Nellie Wapshare v. Pierce Leslie Co.. 1960 Mad. 411. and Lakshmi Amma v. T.N.
Bhaita, 1970 S.C. 1367; In Tapan Ranjan Das v. Sint. Jolly Das, 1990 Cat. 353, no undue
influence by husband.
 CONTRACTS 49

Where a person is heavily indebted to another and for a fresh loan is made to agree to
pay extortionate rate of interest, it will he an unconscionable transactioti. Similarly,
where an heir to an estate borrowed Rs. 3,700 to enable him to prosecute his claim when
he was without even the means of subsistence and gave the lender a decree only for Rs.
3,700 with interest at 20% per annum. Also, where a spendthrift and a drunkard 18
years of age executed a bond in favour of his creditor agreeing to pay compound interest
at 2 percent per annum with monthly rests, it was held the bargain was unconscionable. 45
In the following two cases the bargain was held unconscionable: where a poor Hindu
widow borrowed Rs. 1,500 from a moneylender at 100% per annum for the purpose of
enabling her to establish her claim for maintenance; and where all agriculturist
heavily indebted to a moneylender sold his land worth thrice the amount of the debt
under pressure of payment. It must be remembered that in such cases the moneylender
must be "in a position to dominate the will" of the borrower, and the bargain must he
unconscionable within the meaning of clause 3 6f Sec. 16. The mere fact that the rate of
interest is exorbitant is no ground for relief under this section unless it be shown that the
creditor was in a position to dominate the will of the borrower. Nowadays, however,
drastic legislation in most of the States has provided greater protection to debtors.
PURI)A NISIUN WOMEN
The law throws around a Purda Nishin woman a special cloak of protection, and
demands that person who deals with her trnmsl show affinnatively and conclusively that
the deed was riot only executed by, hut was explained to, and was really understood by
46
the lady. It roust also he proved that no coercion or undue influence was exercised on
her, either by the party to the transaction or by a third party, and that she had executed
the document of her rree v. ilL' The reason is that the ordinary presumption that a person
understands the document to which lie has affixed his name does not apply in the case
49
of a Purda Nishin Woman. But a lady. whether Hindu or Muslim, who is claiming
to be Purda Nishin must prove complete seclusion; and some degree of seclusion is
not sufficient to entitle her to get special protection.

PART 1-F

UNLAWFUL AGREEMENTS

A contract may have been made with due observance of legal formalities, and may
yet he unenforceable, because it is unlawful. An agreement is unlawful and therefore
unenforceable, when the object for which it is made is forbidden by law, or if permitted,
would defeat the provisions of law, or, is fraudulent, or involves an injury to the properly
of another, or in the eyes of the court, is immoral or op[x)sed to public policy (S. 23). In
simple words, an a greement may be unlawful because it is:
(a) Illegal, i.e., contrary to positive law, being forbidden either by Statute law or
Common law;
(b) Immoral, i.e., contrary to sound and positive morality as recognised by law;
and

44. Ctiurimrr Kaur v. Rup Singh (1888) 11 All. 57, confioried oui appeal to P.C. (1893)20 LA. 127;
15 All. 342.
45. Kirpa Ram v. Sanil-ud-Din (1903)25 All. 284,
46. tthikary v. S. II. Mohd . 1958 Orussa 62.
47. Ranee Anna Punil v. Swanijriartia (1910)34 Mad. 7.
48. Asghar All v. Dchroos ftmmmoo flegum (1877)3 Cal. 324.
50 MERCANTILE LAW

(c) Opposed to Public Policy, i.e., contrary to the welfare of the State as tending
to interfere with civil or judicial administration, or with individual liberty of citizens.
Thus, an agreement will not become a contract or will remain unenforceable, if it
is made for an unlawful consideration and with an unlawful object. If both parties
contemplate an unlawful manner of performance, the case falls within the rule that a
contract lawful in itself is illegal if it be entered into with the object that the law should
be violated." Therefore, if both the parties know of the wrongful or immoral intention,
the agreement is void; if the party who is to furnish property or money does not know
of it, the contract is voidable at his option, when he discovers the other party's intent.
Further, an agreement may be rendered unlawful by its connection with a past as well
as with a future unlawful transaction. But a contract will be valid if its object is not to
defeat the provision of any law. 49 This leads us to make a distinction between Void and
Illegal Contracts.
VOID AND ILLEGAL CONTRACTS
A void contract is one which has no legal effect. An illegal contract like the void
contract has no legal effect as between the immediate parties, but has this further effect
that transactions collateral to such a contract become tainted with illegality and are,
therefore, not enforceable. A borrowed Rs. 100 from B in order to bet with C as to the
result of a horse race. A contract of betting in respect of horse-racing is void under Section
30 of the Act, and if A loses, C cannot recover from A. But B can recover the sum of
Rs. 100 from A, since his transaction with A is only collateral to a void contract and is
enforceable. On the other hand, if B had borrowed Re. 1000 from A to buy a revolver to
shoot C, the question whether A can recover from B depends on whether A was aware
of the purpose for which the money was borrowed. If A knowing the illegal purpose,
had lent the money, he cannot recover, because his loan was an aid to an illegal object
of B, and illegal object taints the collateral transaction also. 0 If, on the other hand. A
did not know the purpose of the loan, even though B had bought the revolver and shot
C, A can recover. All illegal agreements are void, but all void agreements are not illegal.
A minor's contract is void but not il]egal.
CONSEQUENCES OF AN ILLEGAL CONTRACT
A contract that is illegal as fanned and is therefore voidab initio is treated by the
law as if it had not been made at all. As it is totally void and non-existent, no remedy is
available to either party. Hence, parties to an illegal contract cannot get any help or
protection from a court of law, because, "no polluted hand shall touch the pure fóuntan
of justice." Thus, in the case of an illegal contract for the sale of goods, the buyer, even
though he has paid the price, cannot sue for non-delivery; the, seller who had made
delivery cannot recover the price. A servant cannot recover arrears of salary under an
illegal contract of employment (Miller v. Karlinski (1945)62 T.LR. 85). Even though
the illegal object fails, as., money paid under the illegal contract cannot be got back. The
effect of this principle is that the plaintiff who founds his cause of action upon an illegal
act will not et any assistance from the court, and the defendant, though equally guilty,
will benefit. No suit can be filed in respect of an illegal contract. The maxim is Lx zurpi

49. Bkiahan v. Laa.man, 1951 Nag. 187.

50. Fishes v. Bridges (1854) t 18 E.R. 1283. There was an iflepi contract under which F agreed
to sail ceziain land to B. B paid the purchase price except fof63O, and the land was conveyed
to him. By a aq,erate deed B promised to pay £630 to F. HeLd the collateral agreement under
seal was tainted with illegality.
51. Virayya v. Suite Ran, 1959 A.P. 647; Ramjanam Rharaihi v. D. Kuer, 1959 Pab. 506.
 CONTRACTS 51

causa non oritur actio—from an evil (illegal) cause, no action arises. As the court refuses
to help either party, the plaintiff appears to be punished and the defendentis helped. But
actually the court is neutral and the defendant gets the advantage of the court's
neutrality. The maxim is: in pari deliciô polior esi condi:io defendentis_"jn cases of
equal built, more powerful is the condition of the defendant." Similarly, an agreement,
the consideration is which is immoral or fraudulent, cannot be enforced at law. Er
dolo nwlo non orilur actio— No right of action can arise out of what is fraudulent or
immoral." To right of action can arise out of what is fraudulent or immoral." To repeat,
neither party can recover what he has given to the other under an illegal contract if in
order to substantiate his claim he.is driven to disclose the illegality (Cheu jar v. Che lay
(1962) A.C. 294). The maxim inpari delictopotior esi conditio dej'endenzis applies and
the defendant can keep what he has been given.
This principle, however, is subject to the following exceptions:
(a) A plaintiff may recover money, goods or land transferred under an illegal
contract to the defendant, if he can frame a cause of action entirely independent of the
contract. Any rights which he may have irrespective of his illegal interest will, of
course, be recognised and enforced" (Scott v. Brown (1892)2 Q . B. 724). Where A has
let a house knowingly to a prostilue, he cannot recover the rent from her, but he can sue
for ejectment and forossession as the owner of the house, and he does not have to
disclose the illegality.
(b) Where the transferor is not in pari delicto (equally guilty) with the defendant
(i.e., the transferee), e.g., he was induced to enter into the contract by the fraud of the
defendant, or where an ignorant man enters into an illegal contract under the influence
of a cleverer man. In I(uhes v. Liverpool Friendly Society (1916)2 K.B. 482, T effected
five policies with L. Company, and then decided not to keep them up The L.Company's
agent fraudulently represented to H who had no insurable interest in the lives insured,
that if she paid the arrears on the policies and paid the premiums in the future, she would
be çntitled to the policy monies. T knew nothing of this arrangement. On learning that
the policies were illegal, H sued to recover the premiums she had paid. Held, H, not
being in pario delicto, succeeded in recovering the monies paid by her.
(c) The third exception to the principle is that a party to a contract, despite its
illegality, is allawed to repent in case the contract is still executory. That is to say, where
the illegal purpose has not yet been substantially carried into effect, he may recover what
he has transferred to the other party.
The next point to note is that the court presumes that a contract is legal, and where
a contract is capable of two constructions, the one making it valid and the other void,
the first will be adopted. Where a contract is alleged to be illegal, it is for the party so
alleging to prove conclusively its illegal charter. Where a contract consists of t/o parts,
one part legal and the other illegal, and the legal part is separable from the illegal one,
the court will enforce the legal part. If the legal and illegal part cannot be separated the
whole contract is unenforceable. Similarly, if part of the consideration for a contract be
illegal, that would taint the whole contract.
ILLEGAL AGREEMENTS FORBIDDEN BY LAW
A contract that is expressly or impliedly prohibited by statute, e.g., by Indian Penal
Code, or by some other special legislation, or by regulations, or by ordinances is illegal.
If there is an express prohibition, the contract is undoubtedly illegal. A sub-lease of a

52. See Sita Rain v. Radha Bai, 1968 S.C. 534.

53. See M/s Anand Prakash Om Prakash v. MIs Oswal Trading Agency. 1976 Delhi 24.
52 MERCANTILE LAW

54
licence for manufacture and sale of country liquor (under the Abkari Act), or of opium
(under the Opium Act) 55 was held to be void as the prohibition is for the protection of
the public as well as the revenue. A loan granted to the guardian of a minor to enable
him to celebrate the minor's marriage in contravention of the Child Marriage Restraint
56 An agreement to pay consideration to a tenant
Act is illegal and cannot be recovered.
to induce him to vacate premises governed by the Rent Restriction Act is illegal and
cannot be enforced. 57 An agreement to withdraw a criminal prosecution for burning a
house, on payment of compensation by the accused is void, a it is fur ah illegal
58
purpose. Where an agreement to sell spindles was entered into without prior permission
of the Textile Commissioner as required under the control order issued under the
Essential Commodities Act, the agreement being illegal, could not be enforced. For
similar reasons, the buyer who had paid advance would not be able to recover it. 59 The
principle underlying all these and similar cases is: "You cannot make a trade of a
felony."
Where the statute does not prohibit a contract but imposes penalties merely to
protect revenue, the contract in violation of the terms of the statute is not illegal. A statute
may require a trader to take out a licence; or to furnish certain particulars. If he fails to
do this, the contract he has made is not prohibited and is in no sense tainted with illegality.
A tobacconist had failed to take out a licence as required by law under a penalty of L200.
He was held entitled to recover the price of tobacco delivered, for the object of the
legislation was to imppse penalty for failure to take out a licence for the purposes of the
revenue and not to probihit a contract 60 . Also, it has been held in India that where the
holder of licence for collecting tolls, sub-leased it in violation of the terms of the.,
61 and where the licence of a right to cut grass from a forest, assigned it to
licence'
62 when the licence provided a penalty for doing so, the transactions were not
another,
void though they might expose the wrongdoer to the stipulated penalty.

IMMORAL AGREEMENTS
A contract is illegal for immorality:
(a) where the consideration is an act of sexual immorality, e.g. an agreement for
63 or a settlement in consideration of concubinage. An
future illicit co-habitation,
agreement between husband and wife for future separation is bad, though one for
65
immediate separation is enforceable;
(b) where the purpose of the contract is the furtherance of sexual immorality, and
both parties know this. If a landlord knowingly lets out his premises for immoral
purposes, e.g., for running a brothel, he cannot recover any rent. In Pearce v. Brookes
(1866) L.R. 1 Exch, 213, A let a cab on hire to B a prostitute, knowing that it was to be
used for immoral purposes, i.e., soliciting. held, A could not recover the hire.

54. Devi Prasad v. Rup Ram (188) 10 All. 577.

55. Raghunath v. Nathu (1894) 19 Born. 626.
56. Snnivas v. Raja Ram Mohan (1951)2 M.L.J. 264.
57. Mohanchana v. Mahindra, 1955 Cal. 442.
58. Shivram Darshne v, Visvanath, 1956.
59. Universal Plast Ltd. v. Santosh Kumar Gupta 1985 Del. 383; See also Naveen Chandra v. 6th
Addle. Distt. & Session Judge, 1983 All. 116.
60. Smith v. Mawhood (1845) M. & W. 452.
61. Bhikanbhai v. Hiralal (1900)24 Born. 622.
62. Na.zarali v. Babamiya (1946)40 Born. 64.
63. Hussain Ali v. Dinabãi, 1923 Born. 135.
64. Suhava Yellapa v. Yamavappa Sabu, 1933 Born. 209.
65. Brodie v. Brodie (1917) p. 271; Wilsos v. Wilson (1848).
 CONTRACTS 53

WAGERING CONTRACTS
Meaning ofa Wager. A Wager is a promise to pay money or transfer property upon
the determination or ascertainment of an uncertain event, e.g., a horse race, or a football
match. In Carlill v. Carbolic Smoke Ball Co. (1892) 2 Q.B. 484, Hawkins, J., give the
following definition of a wagering contract which laterreceived the unqualified approval
of the Court of Appeal in Ellesmere v. Wallace. (1929)2 Ch. 1:
"A Wagering Contract is one by which two persons, professing to hold opposite
views touching the issue of an uncertain event, mutually agree that, dependent upon the
determination of that event, one shall win from the other, and that other shall pay or hand
over to him, a sum of money or other stake; neither of the contracting parties having
any other interest in that contract than the sum or stake he will so win or lose, there
being no otherreal consideration for the making of such contract by eitherof the parties."
There are several aspects of this definition which must be emphasised Thus, the
following points are essential to make a contract a wagering contract.
1. In the first place, there must be a promise to pay money or money's worth.
2. Secondly, the promie must be conditional on an event happening.
3. Thirdly, the event must be uncertain, either because it has to happen in the future
and no one knows whether or not it will happen, or though it has happened, the
contracting parties do not know of the result.
4. Fourthly, one parry has to win and the other to lose on the conclusion of the event.
Each party must stand either to win or lose under the terms of the contract. But if
one party may win but cannot lose, or if he may lose but cannoi Win, or if he can
neither lose nor win, it is not a wagering contract. As was observed by the Supreme
Court in Firm Pratap ChandNopaji v. Firm of Kotrike VenkataSetty & Sons, 1975
S.C. 1223: In a wagering contract there has to be mutuality in the sense that the
gain of one party would be the loss of the other on the happening of the uncertain
event which is the subject-matter of the wager.
5. The last essential feature of a wager is that the stake or bet must be the only
interest which the parties have in the contract, and there must no( be ano other
consideration for the snaking of the contract by either of the parties. For example,
if A lays B ten to one in rupees against a particular horse, B stands to win Rs. 10,
A stands to win Re. 1, but neither of them has any other interest whatsoever in the
contract
Wagering contracts are void and not illegal except in Bombay, where they have
been declared illegal under the Avoiding Wagers (Amendment) Act, 1861. Therefore,
in Bombay, a wagering contract, being illegal, is void not only between the immediate
parties, but taints and renders void a contract collateral to it. In the rest of India, wagerin
contracts are only void, so that a contract collateral to a wagering contract is not void.
The winner of a wager cannot sue the loser for his winnings, even though the loser makes
a fresh promise to pay. Thus, whe re A bets with B and loses; applies to C for a loan in
order to pay B. C gives the loan to A to enable him to pay B. In Bombay, C cannot
recover his money from A. because this is money paid "under" or 'in respect of" a
wagering transaction which is illegal there. But in the rest of India such a transaction
would be void and not illegal and C could recover from A. 67 Money paid to a stakeholder
to retain pending the result of a wager can be recovered from the stakeholder by the payer

66. Chenilal v. Mahadeodas, 1959 S.C. 781 Soorajmal v. Dogçrnza1, 1959 Raj 27
67. Rarniniatjhodas Y. Kau shal Kishor (1900)2 All. 452.
54 MERCAN'flLE LAW

any time before he has handed it over to the winner of the wager, but winner cannot sue
the stakeholder for the money.
There is an exception in favour of subscriptions or contributions or agreements to
subscribe or contribute for plate or sum of money or prize of the value or amount of Rs.
500 or upwards for the benefit of the winner of any horse race. Gaines other than horse
race are not exempted, so that the same may be wagering and thus void.
Commercial Transactions and Wagers- Wagering Contracts may assume a
variety of forms and it may sometimes be difficult to distinguish between genuine
commercial transactions and mere Wagering contracts. If two persons A and B contract
for the sale and purchase of 100 bags of wheat at Rs. 400 per hag, to be delivered two
months hence, it may he difficult to say whether it is good commercial transaction with
tho object of delivering the goods or whether the two merchants are really speculating
and wagering upon the prices two months hence, with a view to paying the difference.
Where delivery of goods is intended to he given and taken it isa valid contract, but where
only the differences are intended to he paid, it will he a wagering contract and
unenforceable. Therefore, in order to constitute a wagering contract, neither party should
intend to perform the contract itself, hut pay the differences. 6 It is not sufficient if the
intention to gamble exists oil part of only one of the contracting parties. A contract
will be a wagering contract only if both contracting parties at the time of entering into
contract had the intention not to take delivery of goods. There must be common intention
to wager. 6 A suit will not lie for the recovery of money deposited with a person on
account of Salta transaction by way of security.
Teji Mandi Transactions or Option Dealings—These transactions are in the
nature of speculation pure and simple, and the Stock and Commodity Exchanges provide
good facilities to Bulls and Bears to enter into speculation freely. There was a time when
it was believed that such transactions were by way of wager and so void under Section
30. But at the present time the presumption is that Teji Mandi is not a wagering
transaction, and is valid and binding between the parties, unless it is positively proved
that both parties intended not to give and take delivery. The English equivalent of the
terms Teji Month is "Option Dealing" and means a right to buy or sell certain goods at
a price by a certain date. In Bombay by virtue of Act XXV of 1930, options in cotton
are prohibited and declared void. But cross transactions, i.e., forward contracts of sale
and purchase which sometimes balance each oilier when the settlement date comes, are
valid because Of file botiafide intent to do business, even though no delivery may actually
have taken place. Option dealings ]it on stock exchanges are now prohibited
by the Securities Contracts (Regulation) Act. 1956.
Agreements between Pakka Adatia and his Constituents--A Pakkafldalia is
not merely the agent )f his constituent, and thus a disinterested middleman bringing two
principals together, but is a principal. Therefore, a transaction between a Pakka Adatia
and his Comistiiocnt may he by way of wager like any other transaction of the nature of
a wager between two contracting parties. As between a Ka!elma Adatia and his Curt-
stituent there cannot he dealings by way of wager. as the relation between them , is that
of agent and principal and not that of principal and principal as between Pakka Am/cilia
and his Cun.t ituent.
Lotteries--A wagering contract amounting to lottery is not only void but illegal.
A lottery is a game of chance, Therefore an agreement to buy a ticket for lottery is a
wagering agreement, and all transactions in connection with a lottery remain illegal even

68. Perosha v. Manekji (1898)22 Born. 699.

69. (iherulal Mahadeodas, 1959 S.C. 781: See also Firm of Pratap Chand Nopaji v. Firm of
Korike Venkata Setty & Sons. 1975 S.C. 1223.
 CONTRACTS 55

if the Government has authorised the holding of lottery. The only effect of such
permission is that the persons conducting the lottery will not be punished. 70 But in Anraj
v. Govt. of TarnjlNadu, 1956 SC 63, has held lotteries, with the prior permission of the
Central Govt. as valid so that the winner is entitled to receive the prize.
Crossword Competitions— A Crossword competition is not, in so far as it
involves, for a successful solution, a good measure of skill, a wager. But in an English
case it has been held that a crossword puzzle in which prizes depend Upon correspon-
dence of the competitor's solution with a previously prepared solution kept with the
editor of a newspaper, is a lottery and, therefore, a wagering transaction. 71 Prize
competitions which are games of skill, e.g., picture puzzles, athletic competitions, etc.,
are not wagers, but those involving prizes of more than Rs. 1,000 have been declared
gambling and so void, by the Prize Competition Act, 1955. Also, if the agreement does
not involve loss to either parry, it is iot a wager. Thus, an agreement to enter into a
wrestling contest, in which the winner was to be rewarded by the whole of the sale
proceeds of tickets and the party failing to turn upon that day would have to forfeit Rs.
500 was held not to he a wagering contract. 72
Contracts of Insurance are not wagering agreements even though the payment
of money by the insurer may depend upon a future uncertain event. Contracts of
insurance differ from wagering agreements as follows:
(a) It is only a person possessing insurable interest that is allowed to insure life or
property, and not any person, as in the case of wager. An insurance contract is, therefore,
entered into to protect an interest. In a wagering agreement Were is no interest to Protect.
(b) In the case of fire and marine insurance only the actual loss suffered by the
party is paid by the insurer, and not the full amount of the policy.
(c) Even in the case of life insurance, the amount payable on the assured's death
is fixed because of the difficulty in estimating the loss caused by the death of the assured
in terms of money, but the underlying idea is that of indemnification; not so in a wagering
agreement.
(d) Contracts of insurance are regarded as beneficial to the public and are,
therefore, encouraged. Wagering agreements do not serve any useful purpose and are
considered to be against public policy.
AGREEMENTS OPPOSE!) TO PUBLIC POLICY
An agreement which tends to prejudice the welfare of the comin'ini1y or the State
is said to be contrary to Public Policy and thus unenforceable. Public Policy is that
principle of the the law which holds that no subject can unlawfully do that which has a
tendency to be injurious to the public or against the public good. it is difficult to give a
clear cut classification of agreements which are bad on the ground of public policy, for
"public policy" is a rather vague and elastic term, and it may vary with different judges.
Lord Halsbury observed in boson v. Drieftc.in Consolidaied Mines Ltd., A.C. 44, "that
categories of public policy are closed, and that no court can invent a new head of public
policy." This view is, however, too rigid; and S. 23 of the Indian Contract Act seems to
provide that it is open to the Court to hold that the consideration orobject of an agreement
is unlawful on the ground that it is opposed to what the Court regards as public policy.
In India, therefore, it cannot be affirmed as a matter of law that no Court can invent a

70. Dorabij v. I.aii ce (1918)42 Born. 676.

71. Coles v. Odharn's Press (1936) 1 K.B. 416; see also J.N. Gupta v. State of West Bengal, 1959
Cal. 141; R.M.D. Chamarbaugwala v. Union of India. 1957 S.C. 628; State of Bombay v.
R.M.D. Chamarbaugwala, 1957 S.C. 699.
72. Babasaheb v. Rajaram (1931) 33 Born. L R. 260.
56 MERCANTILE LAW

new head of public policy but the dictum of Lord Davey in the same case I(190) A.C.
4841 that 'public policy is always an unsafe and treacherous ground for legal decision"
may be accepted as a sound cautionary maxim in considering the reasons assigned by
judge for his decision. The doctrine should only be invoked in clear cases in which the
harm to the public is substantially incontestable, and does not depend upon the
idiosyncratic inference of a few judicial minds. In popular language, the contract should
be given the benefit of the doubt, and enforced.
the doctrine of' public policy'
In G herula!Parakh v. Mahadeodas. 1959. S.C. 781,
has been described in the following manner:—
'Public Policy' is a vague and unsatisfactory term, and calculated to lead to
uncertainty and error when-applied to the decision of legal rights; it is capable of being
understood indifferent senses. Therefore, it is an illusive concept; it has been described—
as "untrustworthy guide", "of variable quality", 'uncertain one". "unruly horse",
etc. The primary duty of a Court is to enforce a promise which the parties have made
and to uphold the sanctity of contracts which form the basis of society, but in certain
cases, the Court may relieve them of their duly on a rule founded on what is called the
public policy. The doctrine of public policy is only a branch of common law and, just
like any other branch of common law, it is governed by precedents; the principles have
been crystallized under different heads and though it is permissible for the Court to
expound and apply them to different situations, the doctrine should only be invoked, in
clear and incontestable cases of harm to the public. Though the heads are not closed and
though theoretically it may be permissible to evolve a new head under exceptional
circumstances of a changing world, it is advisable in the interest of stability of the society
not to make any attempt to discover new heads in these days. As is stated by Cheshire
and Pifoot, 'The juljes must expound, not expand, this particular branch of the law"
(i.e., public policy).
Some of the commonly accepted grounds of public policy (including those
contained in Sections 26-28 of the Indian Contract Act) are dealt with in the following
paragraphs:
Trading with enemy—It is a long settled law that an Indian National cannot trade
with an alien enemy without the Government's licence. So all trade with the Union's
enemies without licence is unlawful. If the performance of a contract made in time of
peace is rendered unlawful by the outbreak of war the obligation of the contract is
suspended or dissolved according as the intention of the parties can or cannot be
substantially carried out by postponing the performance till the end of hostilities.
Agreement for stifling Prosecution—Such agreements are a well-known class
of those contracts which the Ccurts refuse to enforce on this ground. The law is "you
cannot make a trade of your felony. You cannot convert a crime into a source of profit."
If a person has really committed a crime he should be prosecuted, and if found guilty,
sentenced. If he is not guilty, the contract is only a blackmail. "No court of law can
countenance or give effect to an agreement which attempts to take the administration74 of
law out of the hands of the judges and put it in the hands of private individuals. Where
A, Knowing that B has committed an offence, obtains a promise from B, in consideration
of not exposing B, there is a case of stifling prosecution. The agreement is void. But an
agreement in writing between persons not to resort to a Court of law, but to refer their
dispute to arbitration is not opposed to public policy, and is valid.
Agreements to vary the Periods of Limitations-__Agreemeflts curtailing or
extending the period of limitation prescribed by the Law of Limitation are not enforce-
able, as the object of such agreement will be to defeat the provisions of the law.

73. Law of Contract. (8th Edn) p. 322. v. Philip 1960

74. Sudhindra Kumarv. Ganes j chandra 1938 Cal. 840; Ea,lem Mercantile Bank
Ker, Narsimhraj v. Guni Raju, 1963 S. C. 107.
 CONTRACTS
57

Agreements in fraud of insolvency law are illegal and void. Thus, an agreement by a
creditor to forbear opposition to the discharge of the insolvent, or an agreement
interfering with an equal distribution of the assets will he void. Agreements to the
Indemnity Bail are void on the ground of public policy, as the law requires people to
stand bail staking their own money on the conduct of the accused. Where A, the accused,
pays money to B and requests bins to stand bail, A cannot recover back the money, even
lithe bail is over. 75 Again, if B forfeits his hail on account of A's absconding, B cannot
sue and recover the money from A's property either on an express or an implied
purpose. 76
Agreement tending to an abuse of legal process—Ma j ntenanee anr
Champerty_known to English law—are two important types of agreements under mis
head. Maintenance has been defincd as the promotion of litigation in which a person nas
no interest of his own. Champerly has been defined as a bargain whereby one party is
to assist another in recovering property and is to share the proceeds of the action. The
difference between Maintemsncc and Champerty is this: In Charnperty the desire is to
share in the proceeds of the litigation, in Maintenance, the desire is to stir uplitigation.
Both of them are illegal and unenforceable in English law. In Indian law, however,
Champerty and Maintenance are not illegal and the spccific rules of English law Against
these have not been adopted here. In Bhiagwut Dval Singh v. Debi Dyal
Sa)iu (1908)
35 I.A.48; 35 CaL420, Their Lordships ofthe Privy Council clearly laid it down that an
agreement Champertous according to English law was not necessarily void in India; it
must be against public policy to render it void here. The-principle is taken to be part of
the law of ''Justice, equity, and good conscience," and if any agreement tends to go
against, these, it would not be enforced. A fair agreement to supply funds to carry on a
Suit in consideration of having a share of the property, if recovered is notper se opposed
to public policy. If, however, agreements of this kind are made not with the honafide
object of assisting a cIlim believed to he just and of ohtainimg reasonable recompense
therefore, but for Improper objects as for the purpose of gambling in litigation, or of
injuring or oppressipg others by abetting and cncouraing unrighteous suits so as to he
contrary to public effect will not be given to them. Where in consideration of the
plaintiff agreeing to defray the expenses of prosecuting the defendant's suit to recover
a certain propert/, the defendant agreed to transfer to plaintiff, in one case 55 P. share
of the property, 7 in another 12 P. share, and its a third 50 P. share, it was held that the
agreement was extortionate and inequitable, 79 andthe plaintiff was awarded the expenses
legitimately incurred by him with interest. Similarly, where the claim was of a simple
nature and in fact no suit was necessary to settle it, an agreement to pay Rs. 30.000 to
the plaintiff for assisting in recovering the claim was held to be extortionate and
inequitable. In re G.. Senior Advocate of the Supreme Court, the Supreme Court
held
that an agreement to render services for the conduct of
litigation in consideration of
payment of 50 per cent of the amount recovered through Court would be legally
enforceable and valid as the rigid English rules
of charnperty and maintenance do not
apply in India.

75. Fateh Singh v.. Sauwal Singh (1878)1 All. 751.

76. Bhupau v. Chowdry (1919)24 C. W. N. 368.
77. Ram Kuniarv. Chander Kant (1876)2 Cal. 233 (P. C.), see also 1931 P.C. tOO.
78. Kanwar Ram Lal v. Nil Kant (1893)20 I.A. 112; Alopi Prsssad v. Court of Wards 1938 Lah.
23.
79. Ilarilal v. Rhailat. 1940 Born, 145.
80. 1954S.C.554
58 MERCANTILE LAW

Interference with course of Just ice—An agreement for the purpose or to the
effect of using improper influence of any kind with judges or officers of justice is void.
Thus an agreement whereby one person agreed to assist another in carrying out till ation
for the purpose of delaying execution of a decree was held to be unenforceable.
RESTRAINT OF PARENTAL RIGHT
According to law the father is the guardian of his minor child, and in the absence
of the father, the mother has the Light of guardianship. This right cannot the bartered
away by any agrccment. 5 Thus, where a father having two minor sons agreed to transfer
guardianship of those boys iii favour of Mrs. Annie Besant and also agreed not to revoke
the irarifer, but suhsequgntly changed his mind and filed a suit for recovery of the boys
and a declaration that he was the rightful guardian. the Court held hint to be the rightful
and proper guardian and also held that he had the right to revoke his authority and get
84
hack the children.
AGREEMENT IN RESTRAINT OF MARRIAGE
The law regards marriage and the married status as the ordinary right of every
individual, and so according to Section 26 of the Indian Contract Act every agreement
in restraint of the marriagt of any person, other than a minor, is void. Therefore in India,
there is a prohibition on restraints on marriage, whether partial or complete, so that a
Contract agreeing not to marry a certain person or class of persons is void. But in English
law only an absolute restraint is void. e.g.. an agreement to marry noone hut the promisee
is void.
MARRIAGE' BROKERAGE OR BRUCAGE CONTRACTS
Agreements to procure marriage for reward are void, as being opposed to ' public
policy. When a purohit was promised Rs. 20 in consideration of procuring a second wife
for the defendant, the promise was held invalid for where the agreement is by a person
to pay money to a stranger hired to procure a wife for him, it is opposed to public policy
and void. 85 An agreement to pay money to parent or guardian in consideration of his
giving his daughter in marriage is void as, opposed to public policy. The validity of the
marriage is not affected, because Asura form of marriage is recognised by Hindu Law.
So, money, if actually paid cannot he recovered back, and if not paid, a suit therefor
86
would not lie. In India converse eases are more common, where moneys are promised
to be paid by the girl's parent orguardian to the bridegroom or his parents inconsideration
of marriage. Such contracts are equally illegal. Thus, where a sum of money has been
promised, and the marriage takes place, the money cannot be recovered on the promise,
as it is illegal. Where the moneys have been paid they cannot he got back. Where,
however, moneys have been paid hut no marriage has taken place they could be recovered
since the illegal purpose has not been earned out. A promised to pay a sum ofRs. 1.100
to B, the father of the bridegroom, and actually paid Rs. 400. The marriage fell through.
The Court held that Rs. 400 were recoverable by A.87

81. Guhihdiind v. Kudilal. 1966 S. C. 1734.

82. Nandkishorc v. Kuurjhcchan. 1903 All. 103.
83. Re c'arotl (1931) 1 K. B. 307.
84. Gddu Narayariisls v. Mrs Annie l(esaiit (1915138 Mad. 807 1914 P. C. 41.
85. Vaidyanathan V. Gangaritu (1890)17 Mad. 9
86. Baldeudas v. Maliaiiiaya (1911)16 C.W. N. 447, see also Abhaskhan v. Nurkhan (1920) I
l..ah.. 574. Veiskaikristiiia v. Venkaichiatan (1908)32 Mad. 185.
87. Dharani v. Kaiihji.1949 Pat. 250; Rajindra v. Roshan, 1950 All. 592.
 CONTRACTS 59

Traffic In ensions.—S. 12 of the Pensions Act prohibits traffic in pensions.

Therefore, traffic in pensions is opposed to public policy and void .88
Sale of Public Offices and Titles—Traffic by way of sale of public offices and
appointments obviously militates against public service. An agreement to transfer office
from one person to another or In secure an office or honour or title for monetary
consideration, is totally bad, because if such an agreement is enforced in law, it will
impair the efficiency, and corrupt the administration of the State. An agreement to pay
money to a Government servant to induce him to retire before the due time, in order to
make room for another, was held to be illegal as amounting to sale of public office and
moneys paid were held irrecoverable. 89
Agreements tending to create monopolies are void as opposed to publicpolicy.
Agreements not to bid at an auction Sale may be unlawful if made with the object of
defrauding a third party Again an agreement which involves an injury to the properties
of other persons is void under S.23 of the Contract Act (K. Abdul Khadar v. P1anzaion
Corpn of Kerala Lid., 1983 Ker.1). But a combination of persons at an auction sale
between two persons not to bid each other and to convey half the property to the other
if the bid of the one was accepted is per se not against public policy (Sujan Singh v.
Mohkani Chand, 1983 P & H 180.
RESTRAINT OF TRADES
It has long been aprinciple of English Law that it is for the good of the community
that everyone should be at liberty to use his skill, where, when, and how he likes.
Contracts by which a man fetters his liberty in this direction are presumptively to the
detriment of the general good, and the Courts are prepared to treat them as void. Thus,
if a father were to bind his son not to enter various specified trades, the contract would
b e void even if under seal and supported by consideration paid by the father to the son.
It was, however, found that in result, this strict rule defeated its own purpose and was,
therefore, relaxed. Thus, in English Law, though general and total restraints will be had,
reasonable restraint will he enforceable. In other words, if the restraint is limited to such
a space, and is only for such a time, as will he reasonably sufficient to carry out the
intentions and objects of the parties, it will be enforceable. The character of particular
trade may justify a very wide restraint.
In Indian Law, a contract in restraint of trade is void. Sec. 27 of Indian Contract
Act reads: "Every agreement by which any one is restrained from exercising a lawful
.profession, trade or business of any kind, is to that extent void." Acording1y, in India,
all agreements in restraint of trade, whether general or partial, qualified or
unqualified, are void, and the fact that the restraint is limited in point of time or place
is immaterial. It is, therefore, not open to the Courts in India to enter into any question
of reasonableness or otherwise of the restraint. 92 In S/talk/i Kalu v. Rarn.saran Bhagal
(1909) 13 C.W.N. 388, 29 out of30 makers of combs iii the city ofPatna agreed with R
to supply him with combs and not to sell combs to any one else leaving R free to reject
the goods if he found there was no market for them in Patn Calcutta or elsewhere, the

88. Ra!deo Jha v. Ganga Prasad, 1959, Pat 17.

89. Saminatha 't. Muthuswamy (1907)30 Mad. 530; Karuppin v. Pannuochami 1933 Mad.. 768.
90. Somu Pillai v. the Municipal Council Mayavaram (1905) 28 Mad. 520. Ma]arajadhiraja Sir
Kameshwer Singh v. Yasin Khan 1938 Pat 473. District Board of Jhelum v. Ilarichand 1934
L.ah. 474.
91. Ramial Misra v. Rajendranath, 1938 Oudji 124; But see (1950) 2 M. L J. 634.
92. Khemchand v. Dayaldas, 1942 Sind. 114.
60 MERCANTILE LAW

agreement was held void. As between an employer and an employee there can be no
agreement whatever in restraint of trade after the term of employment is over. In Oakes
& Co. v. Jackson (1876) 1 Mad. 134, J who was an employee of Oakes & Co.. agreed
not to employ himself in any similar concern within a distance of 800 miles from Madras
after leaving the company's service. This restraint was held void. 93 A restraint imposed
upon a servant is not valid and is not reasonable even in English law. But an agreement
of service by which a per sun binds himself during the term of the agreement not to take
service with any one else or directly or indirectly take part in or promote or aid any
business in direct competition with that of his employer is not in restraint of a lawful
profession, trade or business and is valid?' A agreed to become assistant for 3 years to
B who was a doctor practising at Zanzibar. It was agreed that during the term of the
agreement A was not to practise on his own account in Zanzibar. At the end of one year.
A ceased to act as B's assistant and began to practise on his own account. It was held
that the agreement was valid and A could be restrained by an injunction from doing so
But if a servant is wrongfully dismissed by the employer he may treat the dismissal as
the repudiation of the contract and is free from the restrictive covenant.
Trade Combinalions—It should be remembered in this connection that, while
agreements operating as a bar to the exercise of a lawful business are void, agreements
merely to restrain freedom of action in detail in the actual exercise of a lawful business
are valid. Section 27 is not intended to take away the rights of a trader to regulate his
business according to his own discretion and choice. Thus, an agreement between
manufacturers or traders not to sell their goods below a certain price, to pool profits and
to divide business and profits in certain proportion does not amount to a restraint of trade
and is perfectly valid. An agreement in the nature of a trade combination for theurpose
of avoiding competition is not necessarily unlawful, even if it damages others . If the
agreement was not clearly for the mutual benefit of the parties but was an attempt to
create a monopoly, it would be void as against public policy. It was observed in
Vancouver Brewery Co. v. V. Breweries (1934) P.C. 101, that "Liberty of trade is not
an asset which the law will permit a person to barter away except in special circumstan-
ces.
WHEN A CONTRACT IN RESTRAINT OF TRADE IS VALID
We have noted above that every restraint is bad in law, but certain exceptions to
the general rule are recognised and, if a partial and reasonable restraint falls under any
of these exceptions the contract will be enforceable. The exceptions are as follows:—
(a) Sale of goodwill—Exception 1 to Section 27 of the Contract Act provides that a
seller of goodwill of a business may agree with the buyer to refrain from carrying
on a similar business, within specified limits as to territory and time so long as the
buyer or his representative in title carries on a like business, and the restraint
appears to the Court reasonable. Thus, a restraint clause in the sale of a right to ply
ferries was held to be enforceable as it was a reasonable covenant in a sale of
goodwill.

93. See also Brahmputra Tea Co. v. Scarth (1985) 11 Cal. 545, Cohen v. Wilkie. (1912) 16 Cal..
W. N. 534; Kors v. Kolok (1957)3 All. E. K. 158. Superintendence Co. of India (P)Lid. V.
Knahan Murgai, 1982 Sc 1717.
94 Charles v. Macdonald (1899)23 Born. 103.
95. ibid.
96. Desh Pa.ndc v. Arvind Mills (1946)48 B. L R. 90; sec also Niranjan Golkan v. Century Mills
Lid., 1967 S. C. 1098.
97. Daulat Ram v. Dharam Chand. 1934 Lah 110.
98. Chandra v. MullicIc (1921)48 Cal. 1030. P. C. 167.
 CONTRACTS 61

(b) Partners' agreements Section II (2) of the Indian Partnership Act permits
contracts between partners to provide that a partner shall not carry on any business
other than that of the firm while he is a partner.
(c) Section 36 (2) of the same Act provides that a partner may make an agreement
with his partners that on ceasing to be a partner he will not carry on any business
similar to that of the firm within aspect lied period or within specified local limits;
and the agreement shall be valid if the restrictions are reasonable.
(d) Section 54 of the same Act provides that partners may, upon or in anticipation of
the dissolution of the firm, make an agreement that some or all of them will not
carry on a business similar to that of the firm within a specified period or within
specified local limits; and such agreement shall be valid if the restrictions imposed
are reasonable.
(e) Section 53(3) of the Act provides that a partner may, upon the sale of the goodwill
of a firm, make an agreement that such partner will not carry on any business
similar to that of the firm within a specified period or within specified local limits;
and such agreement shall he valid if the restrictions imposed are reasonable.
RESTRAINT OF PERSONAl, FREEDOM
The law generally allows all persons freedom to enter into any contract they please,
but at the same time, if the Court finds that the contract unduly restrains individual liberty
and virtually amounts to slavery, it will refuse to enforce it. Where a borrower in an
agreement with the money-lender, undertook not to change his address nor his employ-
ment, not to consent to reduction of salary, not to part with any property, not to incur
obligations on credit, not to incur any obligations legal or moral, without first obtaining
in each case the moncy . lender's express permission in writing, it was held that the
agreement was void as agaist public policy. Again, where a borrower executed a bond
to do work in lieu of interest, and the work was paid for at very low rate the Court held
th-at the agreement was not enforceable, as it virtually amounted to slavery. 100

VOID AGREEMENTS
All the agreements which are or are declared by the Contract Act to be void are
summed up here for the convenience of the reader.
1. Contracts by a minor or a person of Linsound mind (Sec. 11).
2. Contract made under a mistake of fact material to the agreement on the part of both
the parties (Sec. 20).
3. An agreement of which the consideration or object is unlawiul (Sec. 23).
4. II any part of a single consideration for one or more objects, or any one or any part
of any one of several considerations for a single object, is unlawful, the agreement
is void (Sec. 24).
5. An agreement made without consideration (Subject to 3 exceptions already noted)
(Sec. 25).
6. An agreement in restraint of marriage (Sec. 26).
7. An agreement in restraint of trade (Sec. 27).
8. An agreement in restraint of legal proceedings (Sec. 28)
9. Agreements, the meaning of which is not certain, or capable of being made certain
(Sec. 29).

99. Harwood v. Miller's T& 1' Co., (1971) K. B. 305.

100.Ranma Sastier v. Ambcta Korea 1929 Mad. 167.
62 MERCANTILE LAW

10. Agreements by way of wager (Sec. 30).

11. An agreement to enter into an agreement in the future,
12 An agreement to do an act impossible in itself [Sec. 56(1)].

%VII1N CONTRACT BECOMES VOID

An agreement not enforceable by law (as in the above 12 cases) is void ab inhIiO
(2(g)1.
But a contract which ceases to he enforceable by law becomes void when it ceases
to be enforceable [20)l.
A contract becomes void when, by reason of some event which the prornisorcould
not prevent, the performance of the contrct hec011ics impossible. The impossibility must
happen after the formation of the contract A and B contract to marry each other. Before
the time fixed for the marriage. A goes mad. The contract becomes void.
A contract also becomes void by reason of subsequent illegality. A in England
agrees to supply goods to B in Germany. After the formation of the contract war breaks
out between England and ermany, and the supply of goods to Germany is prohibited
by legislation. The contract becomes void.
A contingent contract to do or not to do anything if an uncertain future event
happens becomes void if the event becomes impossible.
Where a contract is voidable at the option of the promisee the contract becomes
void when the promisee exercises his option by avoiding the contract.
R EST 1'I, U'l'ION
When the contract becomes void, it need not be performed by either party; but
where any paily has received any benefit under such a contract from the other party he
must restore it or make compensation for ii Lo the other party. A agrees to sell to B after
6 months a certain quantity of gold and receives Rs. 500 as advance. Soon after the
grecrnent, private sales of gold are prohibited by an Act of the legislature. The contract
becomes void, but A must return the sum of Rs. 500 to B.
Restitution is also provided for by Sec. 65 where an agreement is discovered to be
void. A pays B Rs. 500 in consideration of B's promising to marry C, A's daughter. C
is dead at the time of promise. The agreement is discovered to be void, but B must pay
back Rs. 500.
To sum up, Sec. 64 provides that the party rescinding voidable contract shall, if
he has received any benefit thereunder from another party to such contract, restore such
benefit, so far as may be, to the person from whom it was received.
Section 65 gives a right of restitution (i) when an agreement is discovered to be
void, and (ii) when a contract becomes void. It should he noted that iii the first case the
agreement never amounted to acontract because it was void oh imt in. the fact of its being
void being discovered at a later stage. The second pall deals with a contract which was
enforceable at its inception but becouties void at a later stage.
The section. however, does not apply to a case where the parties are wholly
incoifl1eteflt to conttact, e.g.. where one of the parties is a minor. The minor cannot be
asked to restore the benefit; although where he had misrepresented his age, the court
may, on equitable grounds, order for the restoration of the benefit received or pay
corn petis at ion.

tOl. V. PilIai v. A. Chcttiar, 1941. Mad 641; B. Verraiiah v. Sarraju. 1959 A. P. 100; but see
Dyavish v. Shivamma, 1959 Mys. 188.
 CONTRACTS 63

Where benefit cannot be restored, the party may he asked to make compensation
for it.

PART 1-G
QUASI-CONTRACTS
OR
CERTAIN RELATIONS RESEMBLING THOSE OF CONTRACTS

A contract to be enforceable must have certain essential elements, namely, offer

and acceptance, genuine consent, lawful consideration, lawful object, and capacity to
contract. But under certain conditions the law creates and enforces legal rights and
obligations when no real contract exists. Theseobligations are known as quasi- con-
tracts. OiiConiract Act describes ilcin as certain relations resembling-.those of
contracts.
A quasi or constructive contract rests upon the equitable prijje that a person
shall not be allowed to enrich himselfuijustly at the expense of another. ThëTh1 ii"
liena jus!ua—No man mu , rw rich out of another
person's loss". lii IrLith, it is not a contract at all. It is wt ohligatiQn whichflw creates,
inahscicfan.aeeinent, when and because the acts of the parties or others hive
placed in the possession of one person ino'hey, or its equivalent, under such circumstan-
ces that in equity and good conscience he ought not to retain it, and which ex aequo bono
(in justice and fairness) belongs to another. Duty, and not a promise or agreement or
intention of the person sought to be charged, defines it. It is fictitiously deemed
contractual, in order to fit the cause of the action to the cöñtractual remedy" (Miller v.
Schloss. 218 N.Y. 400, 113 N.E. 337—An American case).
The following types of quasi-contracts have been dealt with in the Contract Act.,
Sees. 68-72:-
1. Necessaries supplied to a person incapable of contracting or on his behalf (Sec.
68).
2. Suits for money had and received (Sees. 69 & 72).
3. Quarnuni Mc'riiij.
4. Obligations of a finder of goods (Sec. 71).
5. Obligations of a person enjoying benefit of a non-gratuitous act (Sec. 70).'.
Necessaries supplied to a person incapable of coniraclirig—We have already
seen that contracts by minors, idiots, lunatics, etc., are void, but Sec 68 provides that
their estates are liable to reimburse the trader who supplies them with necessaries of life.
This is on Oie basis of quasi -contract.
Suit for money had and received—The right to file a suit for the recovery of
money under this head may arise:
(a) Where lIlt' plaintiff paid money to the defendant (i) under a mistake, (ii) in
Pursuance of a contract the consideration for which has failed. (iii) under coercion.
oppression, extortion or other such means. A debtor may recover from a creditor the
amount of an overpayment made to him if it was made by mistake.
The mistake may be mistake of fact or that of law. The term 'mistake' used in Sec.
72 of the Contract Act has been used without any qualification or limitation whatever
and comprises within its scope a mistake of law as well as a mistake of facL There is no
conflict between the provisions of Sec. 72 on the one hand and Sees. 21 and 22 on he
on e party under a mistake, whether of fact or law, pays
other. The true principle is that ifj
64 MERCANTILE LAW

to another party money which is not due by contract or otherwise, that money must be
d. The mistake lies in itking that tie money pai wasd in in 1iIiT
due, that mistake, if established, ent tics the party paying the money, (even if it is a tax
paid), to recover back from the party receiving it (Sales Ta.x Officer v. Kanhaya Lal,
1959 S.C. 135.)
In this case, K was levied a sales tax on his forward transactions in Bullion which
he paid. The levy of this tax was declared ultra vires. K demanded refund of the amount
of the sales tax on the ground that payment was made under a mistake of law. held, that
he was entitled to the refund. It was observed that no distinction can be made ill respect
of a tax liability and any other liability on a plain reading of Sec. 72 of the Act.
It was held in Shiba v. Srish, 1949 P.C. 297 that money paid under a contract
caused by mistake of law cannot be said to have been paid tinder mistake of law. Thus,
although the contract will stand yet the money paid under mistake of law which is not
due under the contract or otherwise, call recovered. (The Romanathapurarn Market
Committee v. East India Corporation Lit!., 1976 Mad. 323). Moneys to be recovered in
respect of consideration which has failed are only recoverable if the whole consideration
has failed and not a part of the consideration. If only a part of the consideration has failed,
the case must be such that the consideration is a separable part. If an apprentice paid
premium to a master and before the relationship had commenced the master died, the
money would be recoverable, but not if the relationship had commenced. Where money
has been obtained by coercion, oppression, fraud, or extortion the plaintiff can recover
it as the money is paid involutarily. Cases generally arise when money is paid under
protest in discharge of an illegal demand, e.g.. where a pledgee refused to deliver goods
unless extra amount was paid. This extra amount could be recovered. If a person pays
money to save his property which has been wrongly attached in execution, he is entitled
to recover it. Money paid to avoid prosecution can be recovered. T was caught travelling
without ticket ona tramcar and paid on demand by the Traffic Supervisor Rs. 5 as penalty
2 But money paid under compulsion
to avoid prosecution. held, he could recover.'
cannot be recovered. Thus, where the Official Assignee in Insolvency paid a creditor
under directions of the Court. he cannot recover it oil ground that it was paid by
Excess aymenI made tinder the belief that price paid was controlled price
mistake ' 03.
can he recovered.(
(b)
(b) Payment to third party of money which another is hound to pay—Cases
under this head usually arise where the properties of a person get into the hands of third
parties who will not release them unless some amount due from another is paid. It must
he remembered that, in order to he able to recover, the plaintiff must have been compelled
by law to pay. or the plaintiff himself has interest in payment. Where A's goods are
wrongfully attached in order to realise arrears of Government Revenue due by B, and A
pays the amount to save the goods from being sold, he is entitled to recover tile amount
from B. The payment. however, must have been made on behalf of 105 the person who was
bound by law to pay it, whether in contract or in tort or by statute.
(c) Money obtained by the defendant from third parties—This usually
happens where the defendant being the agent of the plaintiff obtains a secret commission
or fraudulent payment from a third party. In such cases, the principal has a right to obtain
the payment from his own agent as money paid to the use of the plaintiff.

1954 Born. 427.

102. Tnkmadas Udeshi v. Bombay Municipal Corporaikin.
234.
103, Official Assignee v. Dayahhoy. 1937 RAng.
104.Lakshnianprasad v. Kamal Bai. 1960 Mad. 335.
105.Govin4.i. Gotdal State, 195Q P. C. 99.
 COrrrRAcrS 6

QUANTUM MERUIT
lie expression Quantum Meniit" literally means "as much as earned." It is
used where a person claims reasonahle remuneration for the services rendered y him
w hen there was no express proffi-ise to pay the dèiinite remuneration 06 e e ule
is that where a party to a contract has not fully perfonnhi_ihcon act demands as
a tti opziyment, he ring rio act pnf forjtwhichbe has ôn
E.R. 573, a mate was engaged on the terms that he would
be paid a lump sum for a complete voyage. He died before the voyage was completed.
It was held his representatives could not recover the lump sum, neither could they sue
for payment for the services rendered by the deceased. The first claim failed because the
deceased had not completed his part, the second could not be made because the existing
contract was the only basis for action and it was indivisible and so made full performance
a condition precedent to the ship owner's liability. Moreover, the shipowner did not
prevent the completion of the work.
ut where one party who has performed part of his contract is prevented by the
act of the o tlier rum coinplejpgiissi e of -the contract, he may sue on a quantum meruil,
fo' ueowhat he has done. This is not a claim on the contract but is a claim on
the q-Lia,-;i---c-
o -tiTritu-aTt-)-bTigat
- ion which the law implies in these circumstances.
In William Laiev (buns/ow) Ltd. v. Davis (1957) All E.R. 712, W. Co. was asked
by D for tender in connection with a reconstruction scheme, W. Co. was given to
understand that it would receive the contract and thereafter did on behalf of D a
considerable amount of work of calculations for timber and steel requirements which
fell right outside the work of a builder. As a result of the estimates and other information
provided by W. Co. I) was able to get increased price for the premises. D therefore gave
up the idea of rebuilding and sold the premises, and thus failed to give any contract to
W. Co. who sued D claiming damages for breach and, alternatively, remuneration as on
a quantum meruit in respect of the work done by it subsequent to the tender. The claim
for damages failed, but Barry, J. held that as the builder had done work in a belief (mutual
to both parties) that he would get a contract for re-building the premises, a promise by
D to pay to W.Co. a reasonable remuneration (quantum ineruit) for its work could be
implied.
The claim on a quantum meruit also arises 441"'hen one party abandons or
refuses to perform the contract.
Plane/i v. Colburn (1831) S Bing. 14. P was engaged by C to write a booz to
be publisheTin in a weekly magazine. After a few numbers had appe&ed
the magazine was abandoned. Held, P could recur-on quantum meruil for the work
done under.Jlw contract.
work. has been done and accepted under a void contract.
In Crai'an_Ellis v. Canons, Ltd. (1936) 2 K.B.403, C was employed as managing
director by a coinpny u ' a ' 'ritten contract. The contract was not binding, because
the directors who made it were not qualified. C rendered the services and sued for
remuneration. Held, he could recover on a quantum nieruil.
A party in default may also site on a quantum meruit for what lie has done if the
contract is divisible and the other party has had the benefit of the pan which has been
perfonned as in Ritchie v. Atkinson (1808), where a ship-owner recovered pro-rata
freight although he had failed to take a complete cargo.
But if the contract -is not divisible, the party in default cannot claim the value of
what he has done.

106.B. N. Rly. v. Raianji. 62 Cal. 175.

66 MERCANTILE LAW

In Sumpter v. hedges ( 1898) 1 Q.B. 673, S. a builder, agreed with H to erect a

house for £565. He did work to the value of 033 and then abandoned the contract. H
thereupon completed the contract. held. (i) S could not recover anything under the
original contract because he was only entitled to payment on completion of the work;
(ii) S could not recover on qua-n! urn meruil based on H's acceptance of his work, because
1-1 had no option but to accept the work, and no fresh contract to pay could be implied
from his acceptance.
But where there is a lumpsum or indivisible contract Which is completely per-
formed, though badly, the person who has done the work can recover the lump sum, less
a deduction for his bad work [Dakin v. Lee (1916) 1 K. B. 566].
In Hoeing v. Isaacs (1952) 1 All. E.R. 176. A agreed to decorate B's flat and to
lit a wardrobe and a book case for a lump sum of £750. The work was done, but B
complained of faulty workmanship, the cost to remedy which being £294. held, A could
recover from B £750 less 4f294.
Obli at ions of Finder of Goods.—The liability of a finder of goods belonging
to some se is stated to be the S ti !a aieeSec.71). The rcspon71ity
i;Fr)ailee is indicated in See: 151 which provides that the bailee must take as much care
riloods as a man of ordinary prudence would, under similar circumstances, take of
his own goods of like destiption, quality andvalue- Thus, so far as theical owner is
concerned the finder Js_the bailee and must try to find out the owner and must not
approp atethe ro er to his own use, and if the owner is traced, must restore it to hint.
A finder who appropriates sue property to is own use when he knows and has means
of discovering the owner, or before he has used reasonable means to discover the owner,
or has kept the property for an unreasonable time, is guilty of criminal misappropriation
of the property under Sec. Q3...o.f.Indian Penal Code. The finder is entitled to recover
from thQ ,ner any expense he miZht have incurred in protecting and preserving the
ro it . It is clear, therefore, ti finding is not keeping, unleisit is reasonably certain
at the–, eal owner cannot be found,
Obligations of a person enjoying benefit of non-graluilous act—Wlera
1 n lawfully qsmething for errson, or delivers anything to um without
ayI!iofl ol doing so gratuitously and the other person ncept. and enjoys the benefit
the fthjatter irust compensate the foiiier orres(oto hj,thingsoelivered
(Sec. 70). When one of the two joiiiants pays the whole rent to the landlord, he is
entitled to compensation from his co-tenant.t '' And where one of the two mortgagors
paid off the mortgage amount to save e property from sale. he was held entitled to
compensation from his comortgagor'° 8 'here a person managed the estate of his wife
and his sister-in-law and believed that he would jet remuneration for his services, he
was entitled to claim reaonable compensation.JWhere S ploughed the field of R with
a tractor in the presence of the son of R to the satisfaction of R, gws held that S was
entitled to payment as the work was not intended to be gratuiEou , 7.f A, a tradesman,
delivers abag of wheat by mistake at B's house instead of at C's there is an obligation
on the part of B to return the bag of wheat to A or to pay its value, If it is not possible to
return the bag. Here the parties never intended to enter into contra5ty)ut the law implies
a coniract)For Sec. 70 to apply two thigs are essential, viz., act must not have
been intended to be gratuitous nti a è'3 partyrwbojn the act is done must have
enjoyea a benefit of it. - - - -
The contract found to be void should not be one whose consideration or object is

107. Nirdosh v. Jakaria (1914)20 Cal. Li. 492.

108. Babi Rhagwati v. Maiyan Mural (1931)10 Pat. 528.
109. Palanivelu v. Neela Vati 1937 P. C. 50. 39 B. L. R. 720.
Ito. R. Shanker Rao v. Kangoo Bai. 1959 Born. 519.
 CONTRACTS 67

unlawful (Rakurti Mankvani v. Methli Sa!yanaravan, 1972 A.P. 367). It was stated by
the Supreme Court in Pwmalc,l v. Deputy Commissioner, B/jun clara (1973) I S.C. 639,
that the real basis of the liability under Sec. 70 is the fact that the person for whom the
work has been done, has accepted the work and has received the benefit thereunder.
What Sec. 70 prevents is unjust enrichment. Further, the real basis of a claim under Sec.
70 is not the tejins of the contract but the quantum of the benefit actually derived.

PART I-Fl
VARIOUS DISCHARGES OF CONTRACT

Modes of discharge or termination of contracts—Contracts may be dis-

charged or terminated by any one of the following modes:-
1. By performance.
2. By consent or agreement.
3. By impossibility.
4. By lapse of torte.
5. By operation of law.
6. By breach.
BY PERFORMANCE
The obvious indc of discharge of a contract is by performance, for that is what
the contracting parties had contemplated at the time ofentcrtng into it. Every person who
is bound by an obligation must be ready to perfonn it at the time when lie had promised
to perform it (Sec 37). No difficulties arise where the contract is fully performed, nor
are there any serious difficulties when the contract consists of an absolute promise by A
made it') for a consideration already received. In this latter case, if A does not fulfil his
promise. B can site hini for damages for breach of contract. But betwçen these simple
casd lie several more complicated cases arising out of the fact that in several different
ways a promise may be conditional and not absolute. From this point of view contracts
are of two kinds. Contracts Absolute and Contingent or Conditional.
CONTINGENT CONTRACTS
An absolute contract is one in which .tlie promise has to be performed inde-
pendently of any contingency or condition. A Contingent contract is a contract to do or
not to do something, if some event, collateral to such contract, does or does not happen
(Sec. 31). A con tracts to pay B Rs. 10,00) if B's house is burnt. This is a contingent
contract—a contract of fire insurance. Quite a good part of commercial buiciness
transactions consists of contingent contracts; all contracts of insurance, indemnity and
guarantee are contingent contracts. A wager is a contingent agreement, but Sec. 30
prevents it from being a contract. Such comitrcts are also called ''conditional contracts'';
but a contract in which performance by one party is conditional upon the performance,
or readiness and willin g ness to perform, by the other, is conditional, but not contingent.
If A agrees to deliver 100 bags of wheat and B agrees to pay the price only afterwards,
the obligation of B to pay is conditional upon A's delivering the wheat, but this is not a
contingent contract, because the event oil B's liability depends is a part of the
promise itself (a condition precedent) and not a collateral event. Also, if A offers a reward
for the recovery of his lust dog, there is not a contingent contract; there is no contract at
all unless and until someone, acting on the offer, finds the dog and brings it to A. A
mail
contract to pay a a piece of 'cork on the terms that he is to have no pay till the
woik is all (lone, is not contingent, because the completion of the work is the very thing
contracted tor, and is not collateral to the contract Also, a promise amounts to no promis e
63 MERCANTILE LAW

if its operation depends upon the mere will or pleasure of the promisor. If A promises to
pay B Rs. 500 if he so chooses, or says he will pay for B'services whatever he himself
thinks reasonable, it is not a contingent contract.
RULES REGARDING CONTINGENT CONTRACTS
The rules as deduced from Secs. 32-36 are given below:
1. Contracts contingent upon the happening of a future uncertain event, cannot be
enforoed by law unless and until that event has happened. If the event becomes
impossible, such contracts become void (Sec. 32).
Illustrations:
(a) A makes a contract to buy B's horse if A survives C. This contract cannot be
enforced by law unless and until C dies in A's lifetime.
(b) A contracts to pay B a sum of money when B marries C. C dies without being
married to B. The contract becomes void.
2. Contracts contingent upon the non-happening of an uncertain future event, can
be enforced when the happening of that event becomes impossible and not before
(Sec. 33).
A agrees to pay B a sum of money if a certain ship dues not return. The ship is
sunk. The contract can be enforced when the ship sinks.
3. If a contract is contingent upon how a person will act at an unspecified time,
the event shall be considered to become impossible when such person does ariyth ig which
renders it impossible that he should so act within any definite time or otherwise than
under further contingencies (Sec. 34).
A agrees to pay B Rs. 1,000 if B marries C. C marries D. The marriage of B to C
must now be considered impossible although it is possible that D may die and that C
may afterwards marry B.
4. Contracts contingent on the happening of an event within a fixed time become
void if, at the expiration of the time, such event has not happened or if. before the time
fixed, such event becomes impossible (Sec. 35).
A promises to pay E a sum of money if a certain ship returns within a year. The
contract may be enforced if the ship returns within the year, and becomes void if the ship
is burnt within the year.
5. Contracts contingent upon the non-happening of an event within a fixed time
may be enforced by law when the time fixed hasexpired and such event has not happened,
or before the time fixed has expired, if it becomes certain that such event will not happen
(Sec. 35).
A promises to pay B a sum of money if a certain ship does not return within a year.
The contract may be enforced if the ship does not return within the year, or is burnt
within the year.
6. Contingent agreements to do or not to do anything if an impossible event.
happens, are void, whether the impossibility of the event is kown or not to the parL es to
the agreement at the time when it is made (Sec. 36)
(a) A agrees to pay B, Rs. 1.000 if two straight lines should enclose a space. The
agreement is void.
(b) A agrees to pay B Rs. 1.000 if B will marry A's daughter C. C was dead at the
time of agreement. The agreem ent is void.
ORDER OF PERFORMANCE OF RECIPROCAL PROMISES
A contract consists of reciprocal, proniises when one party makes a promise (to do
 CONTRACTS 69

or not to do something in the future) in consideration of a similar promise (to do or not

to do something in the future) in by the other party. Reciprocal promises are of three
classes: (1) Mutual and Independent; (2) Mutual and Dependent; (3) Mutual and
Concurrent.
1. Where each party must perform his promise without waiting for the perfor-
mance or the readiness to perform of the other, the promise is Mutual and Independent.
Sec. 52 of the Contract Act deals with this kind and provides: Where the order in which
reciprocal promises are to be performed is expressly fixed by the contract, they shall be
performed in that order; and, where the order is not expressly fixed by the contract, they
shall be performed in that order which the nature of the transaction requires.
(a) A and B contract that A shall build a house for B at a fixe 'd price. A's promise
to Imild the house must be performed before B's promise to pay.
(b) If B promises to deliver his goods on 15th May and A promises to pay the
price on 10th May, A's paying the price is independent of B's dclivering the goods on
the 15th May. B can, of course. sue A for damages and the payment of price.
2 Where the per(ormance of one party depends oil prior performance of the
other party the promise is Mutual and Dependent Sec. 54 provides for this:
When a contract consists of reciprocal promises, such that one of them cailnot be
performed, or that its performance cannot be claimed till the other has been performed
and the promisor of the promise last mentioned fails to perform it, such promisor cannot
claim the performance of thereciprocal promise, and most make compensation to the
other party to the contract for any loss which such other party may'sustain by the
non-performance of the contract.
(a) A contracts with B to construct a building for a fixed price. B supplying the
necessay timber. B fails to supply the timber and the work cannot be executed. A need
not work and B is bound to compensate A for the loss caused to A.
(b) A promises B to sell him 100 hales of cotton, to be delivered next day, and B
promises A to pay for them within a month. Adoes not deliver according to his promise.
B's promise to pay need not be performed, and A must make compensation.
3. Where each promise has to he performed at the same time, it is a Mutual and
Concurrent promise. Sec. 5 1 provides'. When a contract consists ofreciprocal promises
to he simultaneously performed, no promisor need perform his promise unless the
promisee is ready and willing to perform his reciprocal promise.
A and B contract that A shall deliver goods to B to be paid for by B on delivery.
Here the promise ofcach should be performed at the same time, and so A need not deliver
the goods unless B is ready and willing to pay for the goods on delivery; and B need not
pay for the goods unless A is ready and willing to deliver them on payment.
4. When a contract contains reciprocal promises, and one party to the contract
prevents the other party from performing his promise, the contract becomes voidable at
the option of the party so prevented; and he is entitled to compensation from the other
Party for any loss which lie may sustain in consequence of the non-performance of the
contract (Sec. 53).
A and B contract that B shall execute certain work for A for Rs. 1,000. B is ready
and willing to do the work, but A prevents him from doing so. The contract is voidable
at the option of B; and, if he elects to rescind it, he is entitled to recover from A
compensation for any loss he has sustained by its non-performance.
Mode of performance—Broadly speaking, a person who is bound to perform a
contract must be ready to perform it at the time when he has undertaken to do so - But.
70 MERCANTILE LAW

under the Indian law, the promisee has to demand performance, unless the promisor has
absolutely bound himself to perform even without a request or demand (Sec. 48). Where
the time and place are prescribed by the promisee, the performance must be at the
specified time and place. If no time and place are mentioned, then the agreement must
be performed within a reasonable time (Sec. 50), and with regard to the place the promisor
must ask the promisee where he would like the contract to be performed (Sec. 49).
Further,, it is essential for the discharge of a contract that the performance must be in
strict accordance with the terms of the contract. The promisor has no right to substitute
for what he has promised something eke which is equally or even more advantageous
to the promisee.
APPROPRIATION OF PAYMENTS
It may happen that a debtor owes several debts to the same crditor, and makes
payment, the question w ill arise, as to which of these debts the payment is to be applied.
Sees. 59, 60, 61 contain the answer to this question. Where the debtor has stated that the
payment made by him should be appropriated to a particular debt, the creditor must do
so ( Wasudr'o v. Nanuh'o. 1951 Nag. 155). But where he does not express his intention,
the law will gather his intention from [Ile circumstances attending the payment. For
example, if the ainount paid b y tIme debtor is the exact amnount of 'one of the debts, it must
be used to discharge that one. If time creditor asks for the payment of a specific debt, the
payment made in response to thisdemnand most he applied to that debt. Where thecreditor
demands discharge of several debts and the debtor sends a lump sum, the same will have
to be applied proportionately to the several debts. But if there is no indication and it
cannot be reasonably ascertained ('ruin time circumstances in respectol which thepayment
has to be appropriated then it is open to the creditor to apply the payment to any debt
lawfully due from the debtor, irrespective of the question of limitation. But the creditor
cannot apply the payment to a disputed debtor an unlawful debt. The creditor is not
bound to appropriate the payment immediately; he may wait to the last moment. He may
appropriate even during the pendency of the suit concerning the payment (Uthup v.
Kai/manar, 1960, Ker. 90). And where neither the debtor nor the creditor has made any
appropriation, then according to law, it has to be applied in discharge of the earlier debt
in the order of time. Endorsement of payment not slating whether it is towards interest
or principal; paym ent must first be applied towards interest and balance to principal
(1950 Fed. C.3X).t
Who can demand performance? The person to demand performance is the party
to whom lice promise is made, even though the promise is not made for the benefit of
the promisee, hut for the benefit of some third person. A promises B to give C Rs. 100
in favour ofC. The hanker makes a mistake as to A's balance and refuses payment. The
person to whom the Banker is liable is A and not C. In case of the death of the promisee
his Legal representatives can demand performance.
Who may perform? In cases involving personal skill, taste, orcredit, the promisor
most himself perform the contract. The court will enforce the intention of the parties. In
all other cases time promisor or his representative may employ a competent person to
perform it. A promises to paint a picture for B. A must paint it personally. But where A
promises to pay B a slim of money. A may pay the money personally or cause it to be
paid to B by another.
1963 S.C.
(i) Lola Kapur Cimand God/ia v. Mir Nawab Hirna yatali Khan Aznmiah,

III. Sec also Srinivasulu v. Kondappa 1960, A. P. 174. and Megh Raj v. Mst. Bayabai, 1970 S-
C. 161.
 CONTRACTS 71

250. A, owing a large amount to B. found a friend C who offered to pay B a lesser sm
in full settlement or satisfaction of B's claim on A. This was accepted by B. held, the
case is covered by Sec. 63 and since the plaintiff had accepted the payment in full
discharge he could not sue A, the defendant, for the balance in view of Sec. 41.
(ii) Tc.siile and Yarn (P) Ltd., v. India National Steamship Co. Lid., 1964 Cal.
362. The Calcutta High Court following the rule laid down by the Supreme Court in the
aforesaid case held that a consignee after having received compensation for loss from
the insurer, cannot again sue the carrier for recovery of the damages for the loss of goods
in view of Sec. 41.
But Sec. 41 applies only to executory contracts and the stranger must have fully
performed it and not in part (Chandrev SJu'/Jiar ilebbar v. Vixtala !3handari, 1966 Mys.
84). Moreover, the payment must the unconditional if Sec. 41 is to be attracted.
(iii) Union of India v, iltndu.viàn Aeronautics. 1968 Mys. L.J. 240, the suit for
damages was against the Unipn of India, the Railway Administration and several
insurance companies. The Insurance companies (third defendants) settled the chum by
paying full amount on the stipulation that the plaintiff would continue to prosecute the
suit against the othcrdefcnclant.s, viz., the Union of India and the Railway Administration
and to pay to the third defendants whatever is recovered from tlmcm. IkId, the settlement
being conditional, the pla i ntiff could continue the suit and Sec. 41 was not attracted.

DEVOLUTION OF JOIN'i RI(;IITS AND LIABILITIES

Two or more persons may enter into a joint agrecinemu with one or more persons.
For example A. B and C jointly borrow froin P a sum of Rs. 3.000 and jointly promise
to repay tile said amount. In such cases question arises who is liable to pay. The rules
on the subject are stated in Sees. 42-45.
1. When two or more persons make a joint promise, the promisee may, in the
absence of express agreement to the contrary, compel any one or more of such joint
promisors to perform the whole of tile promise. In the above earnple, in case of default,
P may r'alise the entire amount from A, or B, or C, or from all or any two of them. A
promisor cannot claim the right of being sued only along with his co-promisors.1 12 The
liability in India is joint and several. If, however, the promisee sues only one or some of
1mc several joint promnisors, and obtains a decree against him or them, his claim merges
in the decree, and he is precluded from suing the others if he fails to realise the whole of
the decretal amount.
The English law is different. Under that law the liability is joint so that all joint
promisors must be sued jointly.
2. The joint promisors during their lives must jointly fulfil the promise. After the
death of any one of them his legal representative jointly with the survivor or survivors,
must fulfl I the promise. After the death of the last survivor, the legal representatives of
all the original proinicors bust jointly fulfil the promise. The above rule regarding the
devolution of joint liability shall not apply when a contrary intention appears from the
contract. It would he noted that though the joint promisors or the legal representatives
are required to perform the promise jointly the promisee may compel any one of the joint
promnisors to perform the promise. That is, as against the promisee, their liability is joint
as well as several.
3. If one of the joint promisors is made to perform the whole contract, he can ask
for equal contribution from the others. In our example, if A is compelled to pay the entire

112. Jainarain Ram v.Surajrnati Saganmiall (1949) F. C. R.379; Jodh Singh v. KesarSiogh, 1950-
& K. 96.
72 MEKrAtIIJ LAW

amount of Rs. 3.000. A can realise from B & C Rs. 1.000 each. This rule is also subject
to any contrary intention of the parties. If any one of the joint prom isars makes default
in making contribution the remaining joint promisors must bear the loss arising from
such default in equal shares. If C. in our example, is compelled to pay one half of his
debts. C is entitled to receive Rs. 500 from B's estate, and Rs. 1.250 from A. But for B's
default in paying Rs. 500 out of his contribution. C could not have received more than
Rs. 1.000 from A.
4. In ease of a joint promise, if one of the joint promisors is released from his
promise, his liability to the promisee ceases but his liability to the other promisors to
contribute does not cease.
In English law, as the liability is joint, the question of contribution between joint
promisors does not arise: for the promisee must sue all )he promisors. Also, release of
one promisor under English law releases all the promisors.
The rule of contribution does not, even in India, apply as between the principal
debtor and his surety, even though as against the creditor they are joint promisors. So a
surety can recover from the principal debtor the entire amount paid by him on behalf of
the principal debtor, who in his turn cannot ask for any contribution from the surety if
the entire amount is recovered froin him by the creditor, because by paying his debt he
is discharging his own liability.
5. When one person has made a promise to several persons jointly, the right to
claim performance rests on all the promisee jointly so long as all of them are alive.
When one of the pronilsees dies the right to claim performance rests with his legal
representative jointly with the surviving promisees. When all the promisees are dead,
the right to claim performance rests with their legal represetatives jointly.

Assl(;NMEN'F OF CONTRA-CTS
The Indian Contract Act has no section dealing generally with assignment of
contracts. But the following rules have been accepted by courts in India in respect of
assignment of contract. Broadly speaking, an obligation under or burden or liability of
a contract cannot he assigned; for instance, if A owes B Rs. 1,000. and A transfers his
liability to C. i.e., asks C to pay the sum to B, this would not hind B and B may not
consent to this arrangement as he may know nothing of C's solvency. But if B consents
to accept performance from C. there is a substitution of new contract and the old contract
disappears and all rights and liabilities undet it areexiinguished. This is technically called
'Novation' (Sees. 41. 62). It is, however, open to a party to have the cqntract performed
vicariously by another person provided the contract does not expressly or imnplicdly
contemplate performance only by the promisor. But in such cases, the promisor will
continue to he liable under the contract. For ifa person employs an agent to do something
for him, the agent's act will be taken to he that of the principal. It will he noted that even
here it is really not the assignmciit of burden but the obligation is discharged by a
delegated P erformance. It must he remembered that where the performance of the
contract depends on the personal skill or solvency of the contracting party, it cannot be
assigned: e.g.. where A promises to paint a picture for B, A cannot get it done by another,
but most paint it himself (SccAO).
Though the liability tinder a contract cannot generally he assigned without the
consent of the promnisee, the rights and benefits under a contract may be assigned and
the assignee call performance against the other contracting party (the promisor).
But this call he done only subject to all tile equities if any, cxist i ngas between the original
con'tacting parties. Thus, if A owes B Rs. 1.000 and if B, the creditor, transfers his right
to C, C can demand payment from A. But if A can prove thCt he has already paid, say
 coN'Tkscrs 73

Rs. 500, to B C will be bound by that payment and can get only Rs. 500, the balance
due. And, if A has already discharged the total debt. C will gel nothing. Therefore, in
order to protect the rights of innocent third parties, the law requires that the party who
gets the transfer, must give notice to the party liable under the contract giving intimation
of the transfer and calling upon him for payment. After such fl(,tLce has been given, any
payment to the original party will not hind the assignee. In other words, the debtor can
assert no equity against the assignee arising out of the transaction with the assignor after
notice of assignment but he may set off a debt existing at the time of notice. Any payments
obtained by the assignor after assignment and before notice, should be accounted for to
the assigec. A contract for the future delivery of goods cannot be assigned under the
Indian Law, because the burden of a n executory contract cannot be assigned. Where A
agrees to sell goods to B deliverable it a future date, neither the seller nor the buyer can
assign the contract before the date fixtd fur delivery to a third person without the consent
of the oilier so as to entitle the assignee to site in his own name. There is, however, no
objection to a suit being brought by the assignor and assignee as co-plaintiffs for when
the suit is by them both there is no (lLieStt()n as to which of them is to recover.'
An actionable claim (chose in action of the English law) can always be assigned;
but assignment to be complete and effectual must be effected by an instrument in writing,
and upon the execution of such instrument all the rights and remedies of the assignor
vest in the assignee, who may thereupon sue in his own name without making the
assignor a party to the suit. It has been held in Jo/Jar Meliar Ali v. Budge Budge Jute
MilisCo., (1906)33 Cal. 702 affirmed on appeal in 34 Cal. 289; and inllansrajMorarji
v. Na.shoo Gangarani (1907)9 Ruin. L.R. 839 that the interest of a buyer of goods in a
contract for forward delivery is an actionable claim and may he assigned as such so as
to enable the assignee to sue iii his own name. There is no definite decision with regard
to the seller's right to call for payment of price on delivery of goods but the dicta iniaffar
Me/iar All v. Budge Budge Jute Mills Co., .re wide enough to cover the seller's interests,
and it is probable that a seller can also assign his interest. But a claim for damages for
breach of contract, after breach, is not an actionable claim and cannot, therefore, be
tt
assigned. 1 An option to reptirchaseIopertY sold is priniafacw assignable, unless it
is meant to be personal to the grantee. - What is an actionable claim or chose in action?
An actionable claim is defined in Sec. 3 of the Transfer of Property Act. 1882 as "a
claim to any debt (except secured debt), or to any beneficial interest not in movable
property in the possession. either actual or constructive, of the claimant, whether such
debt or beneficial interest he existent, accruing, conditional or contingent." With regard
to chose in action. Channel. .1., in Trokintu pi v. Al ogee (1902) 2 K.B. 427 (430). says:
A chose in action is a known legal expression used to describe all personal rights of
property which can only be claimed or enforced by action, and not by taking physical
possession.' It means a thing reducible to possession only by an action at law.
DISCHARGE BY TENDER
We have seen that a contract is discharged by performance. But it may sometimes
happen that a person who is bound to perform a promise has been ready and willing to
perform and has ofred to perform his promse at the proper time and place, but the other
party will not accept performance. In such a case, the contract is discharged because of
the wrongful refusal to accept performance. Tender is called attempted performance, and
to discharge, the party tendering it most fulfil all the features of a proper performance.

113.Tad v. 1.aksboiidas (1892) 16 Boom. 441: ,lissan V. Ihaji Oosiiiaii (1903)6 Boin. L.R. 373.
114.Mahonied v. Ctiuimder (1909) 36 Cal. 345; Varabaswanii v. Ramctiaidra (1915) 38 Mad 138,
140: 18L.C. 520.
115.Vishwestiwar Narsahhaita v. Durguppa (1904) Born. 674; A.I.R. 1904 Born. 339: 191 1. C.
139.
74 MERCANTILE LAW

If the promise is to deliver goods at the premises of the buyer the seller must take the
good.s of the identical description to the place of the other party during office hours and
offer to deliver, there and then, the whole lot of goods which he is bound to deliver under
the contract. If it is a promise to pay money then the promisor must go to the creditor,
and offer the whole amount to him in such a way that the creditor might take the whole
amount due to him. (Bank of Mysore v. Naidu. 1954 Mys. 168). An offer of money in a
locked box would not be a proper tender. Similarly, payment by cheque will not be a
proper tender, unless the other party agrees or has asked for payment by cheque.
Section 38 deals with performance by tender and lays down the essential conditions
of a valid tender as follow:—
Where a promisor has made an offer of performance to the proinisec, and the
offer has not been accepted, the promisor is not responsible for non.performance, nor
does he thereby lose his rights under the contract.'' The section then goes on to state the
essential conditions for a valid tender as given below:
ESSENTIALS OF A VALID TENDER
Every tender must fulfil the following conditions:—
I. It iiiitst he unconditional.
2. It must he made at z proper time and place.
3. It must be made under circumstances enabling the other party to ascertain that the
party by whom it is made is able and willing then and there to do the whole of
what he is bound by his promise to do.
4. If the tender relates to delivery of goods, the promisee must have a reasonable
opportunity ofsecitig that the thing offered is the thing which the promisor is bound
by his promise to deliver.
Tender made to one of several joint promisees has the same effect as a tender to
all of them.
InscHMu;F. BY MUTUAL AGREEMENT OR CONSENT
By agreement of all parties to the contract, or by waiver or release by the party
entitled to performance, a contract may be discharged. The discharge by consent may
he expressed or implied: and an expressed consent may be given at the time of the
formation of the contract or subsequently. For example. it may be agreed at the time of
making the contract that on the happening of an event one or both parties will be absolved
from performance. A buyer may he given the option to return the goods sold within a
specified period of time, if certain conditions are not fulfilled.
In hew! v. Tattersall (1871) 7 Ex. 7, the contract was for the purchase of a horse
o il the understanding that the buyer could return the same within two days, if the horse
had not been hunted with the Bicester hounds. The horse was returned within two days
as it had not been hunted with the Bicester bo.inds. The Court held the return valid.
Express consent subsequently to the formation of the contract inay be given by
waiver: release, abandonment, nuvation. remission, alteration, rescission, and in English
law, by accord amid satisfaction. Each one of these methods is dealt with here. Sees. 62
amid 63 expressly provide fur these methods and are reproduced here:—
See. 62—It the parties to a contract agree to substitute a new contract for it, or
to rescind or alter it. the original contract need not he performed."
"Sec. 63—Every promisee may dispense with or remit, wholly or in' part, the
performance of the promise made to him, or may extend the time for such performance.
 CONTRACTS 75

or may accept instead of it any satisfaction which he thinks fit."

NOVATION
Novation occurs when a new contract is substituted for an existing contract, either
between the same parties or between different parties, the consideration mutually being
the discharge of the old contract.
(a) A owes money to B under a contract. It is agreed between A. B. and C that B
shall thenceforth accept C as his debtor, instead of A. There is novation. The' ld debt of
A to B is at an end, a new debt from C to B has been contracted, f
(b) M insured his life with X Co. The X Co. became amalgamated with the Y
Co., and a memorandum was endorsed on M's policy that the Y Co. would be liable for
the policy money. Held, There was a complete novation and M could reco"er from the
Y Co. [In re: European Ass. Society (1876)3 Ch . D 391].
ALT E RATION
Alteration of a contract takes place when one or more of the terms of the contract
are changed. Alteration is valid when it is made with the consent of all the parties to the
contract.Where, however, an alteration of written contract is made by one party to the
contract without the consent of the other party and of a material fact, so that the legal
effect of the instrument is changed, the contract is discharged and the other party is also
discharged from his duties.
RESCISSION
A contract may be rescinded by agreement between the parties at any time before
it. is discharged by performance or in sonic other way. For example, a contract fcfr the
sale of goods can be discharged by mutual agreement between the buyer and the seller
at any time before delivery of the goods or payment of the price.
Rescission may also take placce in the following manner: where a party to a
contract fails to perform his obligations, the dther party can rescind the contract without
prejudice to his rights to receive compensation for breach pf contract. In a voidable
contract, one of the parties has the option of rescinding the contract.
(i) A promises to deliver certain goods to B on a certain date. Before the date of
performance. A and B mutually agree that the contract will not be perfonned. The
parties have rescinded the contract.
(ii) A was induced to enter into an agreement by coercion. He can rescind the
contract.
REMISSION
Remission is the acceptance of lesser sum than what was contracted for or a lesser
fulfilment of the promise made. Sec. 63 specifically provides for remission of perfor-
muance or promise. Thus, the la y in India is different from that in England. In the latter
country, remission inusthe supported-by a fresh consideration. In India, under Sec. 63,
a promisee may remit or give up a part of his claim and a promise to do so is binding
even though there is no consideration for doing so. (11ari Chand Madan Gopal Y. Stale
of Punjab (1973) 1 S.C. 204).
(i) A owes B Rs. 5,000. A pays to B and B accepts in full satisfaction Rs. 2,000.
The whole debt is discharged.
(ii) A owes B Rs. 5,000. C pays to B Rs. 1,000 and B accepts them in satisfaction
of his claim on A. This payment is a discharge of the whole claim.
76 MERCANTILE LAW

ACCORD AND SATISFACTION

As we have already seen, these two terms are used in English law and find no place in
Indian law. According to English law, a promise to accept less than what is due under
an existing contract, is not enforceable, because it is not supported by consideration. But
an exception is made where the lesser sum is actually paid or lesser obligation actually
performed and accepted by the promisee. In such a case the old contract is discharged
by accord and satisfaction. Accord means the promise to accept less than what is due
under the old contact. Satisfaction means the payment or the fulfilment of the lesser
obligation. An accord is unetiforceable; but an accord followed by satisfaction discharges
the pre-existing obligation. Accord without satisfaction is not discharge.
(i) A owes B Rs. 5,000. B agrees to accept Rs. 2,000 in full satisfaction of his
claim. This promise is unenforceable in English law. But when Rs. 2,000 is actually paid
and accepted, there is accord and satisfaction and the original debt is discharged.
(ii) If A owes H Rs. 1,000 and B agrees to take a cheque for Rs. 500 in full
settlement, there is an accord. This agreement is unenforceable. As soon as B accepts
the cheque there is both an accord and satisfaction. If B will not accept the cheque when
it is offered, the agreement can be enforced by counterclaim when B sues for Rs. 1,000.
WAIVER
Waiver means the intentional relinquishment of a right which a person is entitled
to. A party may waive his rights under the contract, whereupon the othcrparty is released
from his obligations. In the ease of an executory contract, (e.g., an agreement to sell and
buy), each party may excuse the other from paying for or from buying the goods. In the
case of a unilateral promise, the party entitled to performance may waive performance
of it. In English law, waiver is possible only by release under a deed.
M FR C ER
When a superior right and an inferior right coincide and meet in one and the same
person, the inferior right vanishes into the superior right. This is known as merger. Thus,
merger is where a party to a contract takes a better security than the one he has already.
To effect a merger. three conditions must be fulfilled, namely,—(l) the two securities
must be different in their legal operation, one higher than the other, (2) the subject- matter
must be the same; (3) the parties must be the same. Therefore, there can be no merger
when the securities are of equal degree, so that an oral agreement is not merged in a
written contract to the same effect.
A man holding property under a lease, buys the property. His rights as a lessee
vanish. They are merged into the rights of ownership which he has now acquired.
DISCHARGE BY IMPOSSIBILITY OF PERFORMANCE
The law relating to discharge by impossibility of performance of a contract is laid
down in Sec. 56 of the Contract Act. Sec. 56 says:
"An agreement to do an act impossible in itself is void. A contract to do an act
which, after the contract is made becomes impossible, or, by reason of some event which
the promisor could not prevent, unlawful, becomes void when the act becomes impos-
sible or unlawful.
Where one person has promised to do something which lie knew, or, with
reasonable diligence, might have known, and which the promisee did now know to be
impossible or unlawful, such promisor must make compensation to such promisee for
any loss which such promisee sustains through the non-performance of the promise."
 CONTRACTS 77

This section covers a wide range of cases and lays down certain clear rules. It is
clear from the different parts of the section that impossibility is of various kinds. The
impossibility may be absolute, i.e.. inherent in the nature of the matter promised; or it
may exist only relatively to the ability and circumstances of the promisor. The former is
objective, (viz., inherent in the nature of the thing to be done) anddischarges the contract.
The latter is subjective impossibility, i.e., it is due to the inability of the individual
promisor to perform his promise, and does not discharge a contractual duty.
The performance may be impossible as a matter of fact; or it may be impossibly
by the rules of law. The impossibility may exist at the time of contracting either with or
without the knowledge of the parties or it may arise subsequently to the making of the
contract, and in the latter case, it may be caused by events beyond the control of the
parties or it may be caused by some act of the promisor or promisee. The impossibility
may affect the promise or consideration for the promise. These variations in the nature
and incidence of the impossibility producce corresponding modifications in its ef-
16
fects1 Thus, a contract may be impossible of performance at the time it is made, or it
may become impossible or unlawful after it was made. In the first ease the contract is
void ab iriitio. In the second case it becomes void. This is known as the doctrine of
supervening impossibility or supervening illegality.
IMPOSSIBILITY AT THE TIME OF CONTRACT
A contract to perform something that is obviously impossible, e.g.. a promise to
ride a horse to the moon, is void because there is no consideration for the contract. Here
both parties are aware of the impossibility. It may be that at the time of the agreement
both parties are ignorant of the impossibility. In such a case also the contract is void on
the ground of mistake. In either case the contract is void oh iaiiio. In such a case, there
is no contract to terminate and the parties are excused from performance (Sec. 56, Para
1). Promises which are manifestly impossible cannot be binding. Impossible promise is
no consideration for a contract which fails in its very foundation and is therefore
unenforceable. If, however, the promisor alone knows of the impossibility then existing,
he is bound to compensate the promisee for any loss he may suffer through non-
performance of the promise (Sec. 56, Para 3).

SUBSEQUENT OR SUPERVENING IMPOSSIBILITY

Paragraph 2 of Sec. 56 provides that subsequent or supervening impossibility or
illegality will make the contract, void in certain circumstances and the contract will be
discharged. Supervening impossibility may occur in many ways, some of which are
explained below.

DISCHARGE BY SUPERVENING IMPOSSIBILITY

A contract will be discharged by subsequent or supervening impossibility in any
of the following ways:—
(1) Destruction of Subject-matter--When there is a contract in respect to a
particular subject-matter which is later destroyed without the fault of the parties, the
contract is discharged.
(I) In Taylor v. Caldwell (1863) 122 E.R. 299, the leading case on this point, a
music hall was agreed to be let out for a series of concerts on certain days. The hail was
burnt down before the date of the first concert. The contract was held to have become
void and the owner of the hall was' absolved from liability to let the hail as promised.

116. See Leake on Contracts, p.513.

78 MERCANTILE LAW

Blackburn J. observed in this case as follows: "In contracts in which the performance
depends on the continued existence of a given person or thing, a condition is implied
that.the impossibility of performance arising from the perishing of the person or thing
shall excuse the performance."
(ii) In i/owe!! v. Coupland (1876) 1 Q.B.D. 258. a person contracted to deliver a
part of a specific crop of potatoes. The potatoes were destroyed by blight through no
fault of the party. The contract was held to be dischargd.
- (iii) In V. L.Narasu v. P.D.V. !ycr. I.L.R. (1953) Mad. 931.'a contract was entered
into between a producer and a theatre owner to exhibit a picture at the latter's theatre for
a particular period and share the profits. The exhibition of the picture had to be stopped,
because the building was demolished under the orders of the authorities on account of
its being defective and unsafe. The owner had no knowledge of the defective and unsafe
nature of the building. held, that the cOntiued existence of the theatre was a fundamental
basis of the contract and the demolition discharged the contract.
The destruction of the subject-matter need not be total, as long as it is sufficient to
prevent the contract from being carried out.
InNickvll & Knight v.Ashion. Eldridge & Co. (1901)2 K.B. 126, A sold to N a
cargo of cotton seed to be shipped by a specified ship in a named month. Before the time
for shipping arrived, the ship was so injured by stranding as to be unable to load by the
agreed time. Field. the contract was discharged.
If A in the above case, had not named the ship on which the cargo was to be loaded
in his contract, he would not have been excused from performance by the destruction of
the ship on which he had intended, in lis own mind, to load the cargo.
(2) Non-existence of a state of things necessary for perrormance—Wheti a
contract is entered into on the basis of the continued existence of a certain state of things,
the contract is discharged if the state of things changes or ceases to exist. hi this case
there is no destruction of any property affected by the contraot, but the use of that property
contemplated by the contract has become impossible.
(i) In Krell v. Henry (1903) 2 K.B. 740, H hired a room from K for two days. The
room was taken for the purpose, as both parties well knew, of using the room to view
the coronation procession of King Edward VII, although the contract contained no
reference to the coronation. Owing to the King's illness the procession was abandoned.
Field, that H was excused from paying rent for the room, as the existence of the procession
was the basis of the contract, and its cancellation discharged the contract.
(ii) A & B contract to marry each other. Before the time fixed for the marriage, A
goes mad. The contract becomes void [Illustration (B) of Sec. 561.
(3) Death or personal incapacity—Where the personal qualification of a party
is the basis of the contract, the contract is discharged by the death or physical disablement
of that party. In other words the death or illness of a particular person whose action is
necessary for the promised performance discharges the duty to render that performance.
(i) In Robinson v. Davison (1871) L.R. 6 Ex. 269. R contracted with D thatD
should play the piano at a concert given on a specific day. D was ill on the day in questior.
and unable to perform. The contract was discharged and D's illness excused him from
performance.
(ti) A contracts to act at a theatre for six months in consideration of a sum paid in
advance by B. On several occasions A is too ill to act. The contract to act on these
occasions becomes void [Illustration (e) of Sec. 561.
DISCHARGE BY SUPERVENING ILLEGALITY
A contract which is contrary to law at the time of its formation is void. But if, after
 CONTRACTS 79

the making of the contract, owing to an alteration of the law or the act of some person
armed with statutory authority the performance of [lie contract becomes impossible, the
contract is discharged. This is so because the performance of the promise is prevented
or prohibited by a subsequent change in the law.
(i) In Rally v. De Crespignay (1869) L. R. 4 Q. B. 180, D leased some land to B
and covenanted that he would not erect any but ornamental buildings upon the adjoining
land. A railway company, under statutory powers, took this adjoining land and built a
railway station on it. held, D was excused from performance of his covenant, because
the railway company's statutory powers had rendered it impossible.
(ii) In re. Shipton, Anderson . Co. (1915) 3 K.B. 676, A sold to B a specific parcel
of wheat in a warehouse in Liverpool. Before delivery, the wheat was requisitioned by
the Government under statutory power. held, the delivery being now legally impossible,
the contract was discharged.
(iii) In Noorbux v. Kalyan. 1945 Nag. 192, A had agreed to transport goods
belonging to B from one point to another. Subsequent to the contract, A's trucks were
requisitioned by the Government under a statutory power. Held, the contract was
discharged.
On the other hand, if at the time of the making of he contract, compulsory powers
are in existence, Ihe exercice of which may affect the contract, a party knowing of those
powers cannot rely on the fact that they are subsequently exercised as a defence to his
breach of contract. The exercise of the compulsory powers was an event which might
have been anticipated and guarded against in the contractt 17, Also, a continuing contract
is not discharged by a prohibitive regulation which may be determined or varied and
leaves a substantial part of the contract capable of execution. So, where a notification
regulating retail prices was issued which did not make the performance of the contract
tS
impossible or unlawful, the parties were not discharged. But if a contract to be
performed in a foreign country becomes illegal owing to a change in the law of that
country, the contract is discharged. t 19
DECLARATION OF WAR

A contract entered into during war with an alien enemy is void ab mu io. A contract
entered into, before the war commenced, between citizens of countries subsequently at
war, remains suspended during the pendency of the war, provided it does not involve
intercourse with the alien enemy or is not helpful to him or his country. Such a cntract
will be revived and may be enforced at the end of the war. If a contract entered into
before the outbreak of the war amounts to aiding the enema, in the pursuit of war, it would
be abrogated or discharged and not merely suspended. 12 It will also be discharged if it
cannot remain suspended, e.g., the contract involves the continuous perfrmance of
mutual duties.

CASES WHICH ARE NOT COVERED BY THE DOCTRINE OF

SUPERVENING IMPOSSIBILITY
Apart from the cases mentioned above, impossibility does not discharge contracts.

117. Walton Harvey, Ltd., v. Walker and }lornfrays, Lid. (1931) 1 Ch. 274.
118. Sarada Prasad v. Btiutnath (1941)2 Cal. 78.; 1942 Cal. 231; The Naihatti Jute MillsLsd. v.
Khyaliram Jagannath, 1968 Sd. C. 522.
119. Ralli v. Compania Naviera (1920) 2 K. B. 287.
120. Esposito v. Bowden, 7 E. & B. 763.
80 MERCANTILE LAW

121
Therefore, impossibility of performance is, as a rule, not an excuse from performance.
He that agrees to do an act should do it, unless absolutely impossible which may l)appen
in any one of the ways discussed above. It may be stated, as a general rule, that
impossibility to perform arising subsequently to the agreement will not, as a rule,
discharge the promisor, because when there is a positive contract to do a thing Which is
not unlawful, the promisor must perform it, or pay damages for not doing it, although
the performance becomes unexpectedly burdensome or even impossible on account of
unfoteseen events. The supervenning event should destroy the contract itself. Merely
making the contract difficult cannot attract Sec. 56 (Rcsni,Ji Rao v. NiI(or Nair. 1967 Ker.
LR. 771). Some of the circumstances in which a contract is not discharged on the ground
of supervening imossibility are stated here.
(1) Dirnculty of performance—The mere fact that performance is more difficult
or expensive or less profitable than the parties anticipated does not discharge the duty
of performance. Increased or unexpected difficulty and expense do not, as a rule, excuse
from performance.
(i) A sold to B a certain quantity of Finland timber to be delivered between July
and September. 1914. No deliveries were made before August when war broke out and
transport was disorganised so that A could not bring any timber from Finland. Held, B
was not concerned with the way in which A was going to get timber from Finland and
therefore the impossibility of getting timber from Finland did not excuse performance
[Blackburn Bobbin Co. v. Allen & Sons (1918)2 K.B. 467].
(ii) A promised to send certain goods from Bombay to Antwerp in September In
August war broke out, and the shipping space was not available except at very high rates.
field, the increased freight rates did not excuse performance (40 Born. 301).
(2) Commercial impossibility to perform a contract will not discharge the
contract. A contract cannot be said to be impossible of performance because expectation
of higher profits is not realised (Sac/tindra v. Gopal, 1949 Cal. 240). A promnisor's
contractual duty to lay gas mains is not discharged because the outbreak of war makes
2
it expensive to procure the necessary materials.
(3) The principle of supervening impossibility does not extend to the case of a
third person on whose work the promisor relied.
(i) In Ganga Saran v. Firm Rain Charan, 1952 S.C. 9, a contract between the
parties provided that "61 bales as noted below are to be given to you by us; we shall go
on supplying goods to you of the Victoria Mills as soon as they are supplied to us by the
said mill." In a suit for damages for non-delivery of goods the defendants pleaded
impossibility and frustrotion on the ground that the goods were not supplied to them by
the mill. field, that the law is contained in Sec. 56 of the Act, and the words "as soon
as they are supplied to us by the mill" simply indicated the process of delivery and did
not convey the meaning that delivery was contingent on their being supplied by the mills.
The case did not fall within the provisions of Sec. 56, as the default was due to the fault
of the defendant.
(ii) In Toolsidas v. Venkala, 25 C.W.N. 26 P.C., a contract regarding the sale of
dyes contained a stipulation about the adjustment of prices according to rates published
by a syndicate but the war destroyed the syndicate. The contract was not discharged as
it was not dependent upon the conlinuancce of the syndicate.
(4) Partial impossibility rarely discharges a promisor beyond the extent of the
impossibility. Thus, if the state of things in question is not the sole basis of the contract,
so that there will still remain a substantial portion, though not all, of what was contracted

121. Ka Ron Lanong v. State of Assam, 1959 Assam 75.

322. Sec M/.AIopi Prasad v. Union of India. 1960 S. C. 588.
 CONTRACTS SI

for, the contract will not be discharged. In other words, where there are several purposes
for .vhich a contract is made, failure oboe of the objects does not terminate the contract.
In H.B. Steamboat Co. v. lluzion (1903)2 K.B. 683, the Company agreed to let a
boat to H to view the naval review at the coronation and to cruise round the fleet. Owing
to the King's illness the naval review was cancelled, but the fleet was assembled, and
the boat might have been used for the intended cruise. Held, the Co. were not discharged
from performance as the naval review was not the sole basis of the contract.
(5) Strikes, lockouts and civil disturbances like riots do not terminate contracts
unless there is a clause in the contract providing that in such cases the contract is not to
be performed or that the time of performance is to be extended.
(i) The lessee of certain salt pans failed to repair them according to the terms of
his contract, on the ground of a strike of the workmen. Held, a strike of workmen is not
sufficient reason to excuse performance of a term of the contract (52 Born. 142).
(ii) In Jacobs v. Credit Lyonnais (1884) 12 Q.BD. 589, a contract was entered
into between two London merchants for the sale of certain Algerian goods. Owing to
riots and civil disturbances in that country, the goods could not be brought. Held, there
was no excuse for non-performance of the contract.

THE DOCTRINE OF FRUSTRATION

The Common law of England started with t he harsh doctrine that unless the parties
expressly stipulated to the contrary, impossibility was no defence to an action for breach
of a contract. In course of time, however, exceptions were introduced to modify the
severity of the Doctrine. In English cases, it has been now held that when the common
object of a contract can no longer be carried out, the court may declare the contract to
be at an end. This is known as the Do.trine of Frustration. The doctrine developed in
England under the guise of reading implied terms in contracts. The idea was that they
could not have intended to stick to a contract the purpose of which has disappeared.
Thus, when the performancce depends on the continued existence of a given person or
thing, a condition is implied that impossibility of performance arising from the perishing
of the person or thing shall excuse performance, lithe act became impossible sub-
sequently by reason of some event which the promisor could not prevent, the contract
is discharged. This is based on the maxim Les non cogi: ad irnpossihilia—the law does
not compel the impossible. This discharge of a contract rendered impossible of perfor-
mance by external causes beyond the contemplation of the parties is known as frustration.
Frustration, as said above, is a device by which the rule as to absolute contracts are
reconciled with a special exception which justice demands. It has become a gloss on the
older theory of impossibility which it has greatly developed under the guise of reading
123
"implied terms" into contracts. Therefore, as observed by Lord Radcliff. "frustra-
tion occurs whenever the law recognises that without default of either party a contractual
obligation has become incapable of being performed because circumstances in which
performance is called for would render it a thing radically different from that which was
undertaken by the contract. Non haec infoedera veni—' 'It was not this that I promised
todo.L4
Furthermore, under the doctrine of frustration the fundamental assumption under-
lying the contract becomes impossible. The performance of the contract may not be
actually impossible, but if the contract cannot be performed as originally contemplated

123. Darwood v. Q . his. Co., 1949 Cal 390.

124. Davis Contractors, lid. v. Farchani (1956) A. 696.
82 MERCANFILE LAW

by the parties, there is frustraion. In such a case, there is a frustratin of the object of the
contract. Where, for instance, goods were seized as prize and then released and tran-
shipped so that they arrived two years late, the arrival was not such as was contemplated
by the parties 125 . The discharge of a contract by reason of frustration follows automat-
ically when the relevant event happens and does not depend on the volition or election
126 The doctrine applies if the disturbing cause goes to the extent of
of either party.
substantially preventing the performance of the whole contract. Thus, a contract may
become frustrated or impossible of performance by an Act of Legislature, or by operation
of law; it may be discharged by a subsequent declaration of war, or by emergency
regulations. The frustration of venture may arise through an Act of God or vis najeur or
by restraints of princes subsequent to the promise. An Act of God or vis majeur is "an
accident due to natural causes, directly and exclusively, without human intervention and
which could not have been avoided by any amount of foresight or care." In British
Movie( one News Limited v. London and District Cinemas, Limited (1943) A.C. 2 the
House-of Lords based the doctrine of frustration on the principle of "Construction." It
was said that where the court gathers as a matter of construction that the contract itself
contained implie-dly or expressly a tenn, according to which it would stand discharged
on the happening of circumstances, the dissolution of the contract would take place under
the terms of the contract itself.
The doctrine of frustration has no application to a demise of land [Matihey v.
Curling (1922) A.C. 1801, to a lease of furnished house, or to a building lease for 99
years [Linghton's Investment Trust v. Cricklewood Property Co. (1943) 2 K.B. 4931. It
does not extend to the case of a third person on whose work the promisor relied.
Commercial impossibility also does not frustrate a contract. The doctrine does not apply
where the event which is said to have frustrated the object of the contract arises from an
intentional act or election of a party [Maritime National Fish, Ltd. v. Ocean Trawlers,
Ltd. (1935) A.C. 524 (P.C.)1.
INDIAN LAW REGARDING FRUSTRATION.
In India, the law is codified and Sec. 56 which deals with this subject provides for
dischage of contract by impossibility of performance or frustration. Paras 1 and 2 of Sec.
56 read as follows:
"An agreement to do an act impossible in itself is void."
'A contract to do an act which after the contract is made, becomes impossible, or
by reason of some event which the promisor could not prevent, unlawful, becomes void
when the act becomes impossible or unlawful..
It is clear from the language of the section that it departs from the English law to
a large extent and lays down positive rules of law which according to English decisions
are only matters of construction depending on the intention of parties. There is no
question of reading implied terms in contracts. In India frustration of contract is
equivalent to supervening impossibility or illegality. The point of frustration raises some
difficulties but a recent pronouncement of the Supreme Court has clarified the position.
In Salyabral Chose v. Mugneeram Bangur & Co., M & Co., who were the owners
of a large tract of land started a scheme for its development for residential purposes and
accordingly divided it into a large number of plots for the sale of which they invited
offers from intending buyers. The company's plan was to acccept a small portion of the
price by way of earnest money from the buyers at the time of agreement, construct the

125.Gounshankcrv. Moitra (1921)26 C. W. N. 573.

126. D. M. and D Ltd. v. James B. D. F. & Co. Ltd. (1944) A. C. 265.
 CONTRACTS 83

roads and drains itself and within one month after their completion call upon the buyers
to complete the conveyance by paying one-third of the price at the time of the registration
and the balance within 6 years bearing interest at 6 per cent per annum, time being
deemed the essence of the contract.
B entered into a contract on those terms with M & Co., on 5-8-1940 and later on
assigned the contract to S. Shortly prior to that assignment a portion of the land covered
by the scheme ws requisitioned for military purposes by the Government under the
Defence of India Rules, and later the rest of the land was also requisitioned. M & Co.
thereupon informed B that the land pertaining to the scheme was taken possession of by
the Government and there was no knowing how long the Government would retain
possession and that the company could not, therefore, take up the construction of roads
and drains during the continuance of the war and possibly for many years after its
termination. The company also wrote to B to treat the contract as cancelled and take back
the earnest money. This letter was handed over by B to his assignee S. who asserted that
the company was bound by the contract and could not resile. S filed a suit for declaration
that the contract dated 5-8-1940 was subsisting and that S. as the assignee of B, was
entitled to get the conveyance executed and registered by the company on payment of
consideration mentioned in the agreement and in the manner and under the conditions
specified therein. The company contended that the contract of sale became discharged
by frustration as it became impossible of performance by reason of supervening events.
On appeal the Supreme Court held that it could not be said that the requisition order
vitally affected the contract or made its performance impossible and accordingly the
appeal was allowed and the Suit was decreed.
The law relating to frustration in India as laid down by the Supreme Court in
Salyabrat Chose's case may be summed up as follows:—
"The Courts in India should look primarily to the law as embodied in Sees. 32 and
56 of the Indian Contract Act Indeed, the above sections of the Contract Act embrace
the vThoie of the Indian law on the subject. Sec. 32 applies in cases of contingent contract
and Sec. 56 covers the rest. Under either, however, impossibility is the central or
dominating idea and the determining factor. "The essential idea upon which the doctrine
of frustration is based is that of impossibility of performance of the contract In fact,
impossibility and frustration are often used as interchangeable expressions. The changed
circumstances make performance of the contract impossible and the parties are absolved
from the further performance of it as they did not promise to an impossibility 127. The
doctrine of frustration is in reality an aspect or part of the law of discharge of
contract by reason of supervening Impossibility or illegality of the act agreed to be
done and hence comes within the purview of Sec. 55128 To the extent that the Ccintract
Act deals with particular subject, it is exhaustive upon the same and it is not permissible
to import the principles of English law 'de hors' those statutory provisions. The decisions
of the English Courts possess only a persuasive value and may be helpful in showing
how the Courts in England have decided cases under circumstances similar to those
which have come before Indian Courts. In deciding cases in India the only doctrine that
we have to go by is that of supervening impossibility as laid down in Section 56, taking
word impossible in its practical and not literal sense.
Section 56 lays down a rule of positive law and does not leave the matter to be

127. Satyabrat Chose v.Mugneeram Bangur & Co.. 1954 S.C. 44; M/s. Alopi Prasad v. Union of
India, 1960 S.C. 588; IJari Singh v: Dewani Vidyawaiti, 1960 J & K. 91; Union of India v
Kishorilal. 1959 S. C. 1362.
128. See also Ka Ron Lanong v. State of Assam, 1959; Assam 76; M. Bangur v. G. Singh, 1959
Cal 576.
94 MERCANTILE LAW

determined according to the intention of the parties. Therefore, in India, the doctrine of
frustration is applied not on the ground that parties themselves agreed to an implied term
whioh operated to release them from the performance of the contract. The relief is given
by the Court on the ground of subsequent impossibility when it finds that the whole
purpose or the basis of a contract was frustrated by the intrusion or occurrence of an
unexpected event or change of circumstances which was beyond what was contemplated
by the parties at the time when they entered into the agreement. When such an event or
change of circumstances occurs which is so fundamental as to be regarded by law as
striking at the root of the contract as a whole, it is the Court which can pronounce the
contract to be frustrated and at an end.
In applying this rule the Court has to examine the nature and terms of the contract
before it and the circumstances under which it was made and to determine whether or
not the disturbing clement which is alleged to have happened in the particular case has
substantially prevennted the performance of the contract as a whole. If the answer be in
the affirmative, the contract will stand dissolved or discharged by virtue of Sec. 56, as
it is well settled that, if and when there is frustration the dissolution of the contract occurs
automatically. In ascertaining the meaning of the contfact and its application to the actual
occurrences, the Court has to decide, not what the parties actually intended, but what as
reasonable men they should have intended) 29 The Court personifies for this purpose the
reasonable man. In construing the word 'impossible' in Section 56, it should be noted
that the word has nol been used in the sense of physical or literal impossibility. The
performance of an act may not be literally impossible but it may be impracticable and
useless from the point of view of the object and purpose which the parties had in view
and if an untoward event or change of circumstances totally upsets the very foundation
upon which the parties rested their bargain. it can very well be said that the pr9mnisor
finds it impossible to do the act which he promised to do.
In Stale of Rajat/zan v. Madanswarup, 1960 Raj. 138, Mjan advocatç of Bikaner
High Court, was appointed by the Bikaner State to look after its criminal work in the
High Court. After mergerof Bikaner, its High Court was abolished and anew High Court
for the United State of Rajasthan was established at Jodhpur by an Act of Legislature.
Thereafter the services of M were terminated by the successor State. M sued the State
of Rajasthan for damages for breach of contract. held, that in view of the change of
circumstances the contract became virtually impossible and all that could be said was
that it was discharged or put an end to and not broken. The doctrine of frustration was,
therefore, applicable so that M could not found an action for damages on that account.

EFFECT OF SUPERVENING IMPOSSIBILITY OR FRUSTRATION

Sections 56 and 65 of the Indian Contract Act expressly provide for the conse-
quences of impossibility of perfonnance as follows:-
1. When the performance of a contract beccomes subsequently impossible or
illegal, the contract becomes void—Sec. 56, Para 2.
2. When a contract becomes void, any person who has received an advantage
under it must restore it. or make compensation for it to the person from whom he received
it.
The English law on this point is laid down in Fibrosa, etc., v. Fairbairn, etc.,

129. Joseph C.S. Line Ltd. v. Imperial S. Corp. Lid. (1942) A. C. 154. See also Mugneeram Bangur
& Co. v. Gurcharan. 1959 Cat. 576, which has followed the law as laid down by the Supreme
Court in Salyabrat Ghose case, and held that there was no frustration on simitar facts as in the
Supreme Court Case.
 CONTRACTS

(1943) A.C. 3 in these words: All sums paid to any party in pursuance of the contract
before it is discharged are recoverable. Sums payable cease to be payable.
In this case, English sellers agreed to sell machinery to Polish buyers, part of the
price to be paid in advance. The buyers paid £1,000. Performance became impossible,
as before delivery was due Germany occupied Poland. Held, the contract was discharged
by frustration, and the buyerss could recover £1,000 paid and were not liable to pay the
balance.
3. Where one person has promised to do something which he knew, or with
reasonable diligence, might have known, and which the promisee did not know to be
impossible or unlawful, such promisor must make compensation to such promisee for
any loss which such promisee sustains through the non-performance of the promise—
Sec. 56, Para 3.
A contracts to marry B being already married to C, and being forbidden by the law
to which he is subject to practise polygamy. A must make compensation to B for any
loss caused to her by the non-performance of his promise.
DISCHARGE BY LAPSE OF TIME
The Limitation Act, in some circumstances, affords a good defence to suits for
breach of contract, and in fact terminates the contract by depriving the party of his remedy
at law. For example, where a.debtor has failed to repay the loan on the stipulated date
the creditor must file the suit against him within three years of the default. If the three
years expire and he takes no action, he will be barred from his remedy, and the other
party is discharged of his liability to perform. The period of limitation for simple
contracts is three years in India and six years in England, and in the case of special
contracts it is twelve years.
DISCHARGE BY OPERATION OF LAW
Discharge under this head may take place as follows:
By merger—Where the parties embody the inferior contract in a superior contract.
When between the same parties, a new contract is entered into, and a security of higher
degree, or a higher kind is taken, the previous contract merges inthe higher security.
Where securities of the same kind of degree are taken there is no merger.
By the unaulhorjsed alteration of terms ola written document—Where aparty
.to a contract in writing makes any material alteration without the knowledge and consent
of the other, the contract can be avoided by the other party. An alteration even by a
stranger will entitle the other party to avoid the contract, but where the alteration is due
to mere accident or is not material contract cannot be avoided.
By insolvency—The Insolvency Acts provide for discharge of contracts under
particular circumstances. So, where the Insolvency Court passes an order discharging
the insolvent, this order exonerates or discharges him from liabilities on all debts incurred
Previous to his adjudication.
DISCHARGE BY BREACH OF CONTRACT
We have seen that contract must be strictly performed according to its terms. But
where the promisor has neither performed his contract nor tendered performance and
where the performance is not excused by consent, express or implied, or where the
performance is defective, there is a breach of the contracct by him, which entitles the
other party to file a suit. If the contract is unilateral the only remedy for the other party
is to claim relief for breach. In the case of a bilateral contract, the party not in breach can
claim relief for breach and also in certain circumstances is exonerated from liability to
56 MERCANTILE LAW

perform his part of the contract. The breach of a contract may be (i) actual, or (ii)
constructive or anticipatory. The actual breach may take place (a) at the time when
performance is due, or (b) when actually performing the contract. The constructive or
anticipatory breach of contract, i.e., a breach before the time for performance has arrived,
may also take place in two ways, namely. (a) by the promisor doing an act which makes
the performance of his promise impossible or (b) by the promisor in some other way
showing his intention not to perform his promise.
Where a
Actual Breach of Contract at the time when Performance is due
person fails to perform a contract, when performancCe is due the other party can hold
him liable for breach. But, if a party who has failed to perform the contract at the
appointed t ime, subsequently expresses willingness to perform, the question whether he
dmtract
can do so or not would depend upon whether time was of the essence of the
or ñ.e/tn all mercantile contracts time is of the essence of the contract and a breach of
contrzkt results on failure to perform within the limited time. This is specially so in
shipping contracts. In a sale of goods subject to rapid fluctuations of market price, the
time of delivery is of the essence. There are other transactions, e.g., contract relating to
sale of land in which time is not deemed to be of the essence unless parties specially
stipulate to that effect. But the terms of the contract, or the nature of the property sold,
will determine whether time was of the essence. In the ease of sale of a house to be
immediately occupied or sale of a business as agoing concern, time will be of the essence.
In Indian law, where in a contract time is not of the essence and the party expresses
willingness to perform it after the apponted time, the law permits him to do so subject
to payment of compensation for failure of due performance. The party accepting
performance after the due date is required to give notice while accepting that he intends
to claim compensatin, otherwise he is deemed to have waived the right to compensation
(Sec. 55).
a party apparently
Breach during the Performance of the Contract—Where
performs the promise but the other party says that it is not a proper performance according
to the contract, the question arises whether there is a breach of the contract exonerating
the other party from performance of his part of the bargain. If breach is of a condition
vital to the contract, the contract is discharged and the other party need not perform his
part of the bargain. In the case of sale of goods by description, unless the goods answering
to the description are offered, the buyer is not bound to take delivery or to pay for them.
But if the breach is only of a collateral term (non-essential condition) this will not
exonerate the party from performanccc of his part of the bargain, but only entitle him to
claim damages. Where the buyer has obtained possession of goods and his right of
enjoyment is disturbed in any way, he can claim damages caused by the breach of the
implied warranty of quiet possession. Where the promisor had mode more than one
promise, or a divisible promise, his repudiation must either be of the whole contract, or
of a part of it which is a condition precedent to the promisee's liability, else the promisee
will not be entitled to treat such repudiation as equivalent to the breach of the whole
contract.
CONSTRUCTI V E OR ANTICIPATORY BREACH OF CONTRACT
It may sometimes happen that even before the time of performance arrives, the
promisor may do some act which makes the performance impossible or may definitely
renounce the contract or show his intention not to perform it. Thus where A promised
to assign to B within 7 years from the date of promise all his interest housesin for
4
£140, and before the end of the 7 years assigned all his interest to another to another
sue for breach
person, it was held. that without waiting for the 7 years to elaspe B could
 CONTRACTS

of his promise. 130 In another case a courier was engaged in April to accompany his
employer on a tour of three months to commence on June 1. On May 11 the employer
wrote to the courier that he had changed his mind and declined his services but refused
to make him any compensation. On May 22 the courier brought his action for breach of
contract, and the defence was that there could be no breach before June 1. It was held,
that the courier was entitled to treat the letter of May 11, equivalent to breach of contract.
It is to be noted that a constructive or anticipating breach of contract does not give rise
to a right of action, unless the promisee elects to treat it as equivalent to actual breach.
Thus, instead of bringing an immediate action, as in the examples given above, the
promisee may treat the conduct, act or notice of the promisor as inoperative, and wait
for the time when the contract is to be performed, and then hold the promisor responsible
for all the consequences of non-performance. But in that case the promisee keeps the
contract alive for the benefit of the promisor as well as his own, he remains liable under
it, and enables the promisor not only to complete the contracct in spite of previous
repudiation, but also to avail himself of any excuse for non-performance which may have
come into existence before thetime fixed for performance. Thus, in our second example,
if the courier had waited till June 1, the employer could withdraw his letter of May 11,
and ask the courier to accompany him on tour, or if the performance had become
impossible due to some cause, such as the declaration of war, the courier would have
lost his remedy and the employer would have been excused from performance. A party
putting an end to the contracct must restore any advantage he may have received. 31
LIABILITY OF PARTY PREVENTING PERFORMANCE

When a contract contains reciprocal promises, and one party to the contract
prevents'the other from performing his promise, the party so prevented can avoid the
contract and claim compenation for any loss he may sustain (Sec. 53). Where A and B
contract that B shall execute a certain work for A for Rs. 1,000. and B is willing and
ready to do the work, but A prevents him from doing so, the contract is voidable at the
option of B. If he elects to rescind it, he can recover from A compensation for any loss
which he has su ffered'by non-performance of the contract. This is based on the principle
that one of the contracting parties is exonerated from the performance of a contract when
it is prevented by the wrongful act of the other party. No person can take advantage-of
the non-fulfilment of condition the performance of which has been hindered by himself.
Money paid or ornaments given for the benefit of the bride or bridegroom or of both,
can be recovered by suit, if the marriage contract is broken (Dholidas v. Futchand, 26
Born. 638). A betrothal is a contract; when it is broken or otherwise becomes void, parties
are entitled to the return of the gifts made by them. (Rajendra v. Roshan, 1950 All. 592).

PART 1-I
REMEDIES FOR BREACH OF CONTRACT

Where there is a breach of contract on the part of one party, the injured party
becomes entitled to any one or more of the following reliefs:
1. Rescission of the contract with the result that the injured party is freed from all
obligations under the contract;
2. Suit for damages;
3. Suit upon a quanlum meruil,

130. Lovelock v. Franklyn (1849)8 Q-B. 317.

131.Muraliv.I Film Co., 1943P.C.34.
88 MERCANTILE LAW

4. Suit for specific performance of the contract;

5. Suit for an injunction.
RESCISSION
If one party has broken his contract, the other party may treat the breach as
discharge, and refusc to perform his part of the contract. He may also successfully defend
an action for non-performance, or an action brought for specific performance. Sec. 75
further entitles him to compensation for any damage he may have sustained through the
non-fulfilment of the contract. For instance, A. a singer, contracts with B, the manager
of a theatre, to sing at his theatre for two nights in every week during the next two
months. and B engages to pay her Rs. 100 for each night's performance. On the sixth
night, A wilfully absents herself from the theatre, and B, in consequence, rescinds the
contract. B is entitled to claim compensation for the damage which he has sustained
through the non-fulfilment of the contract.

DAMAGES
Where a contract has been broken, the party who suffers by such breach is entitled,
under Sec. 73, to receive fi-oin the party who has broken the contract, compensation for
any toss or damage caused to him thereby, which naturally arose in the usual course of
things from such breach, or which the parties knew, when they made the contract, to be
likely to result from the breach of it. But compensation is not to be given for any remote
or indirect loss or damage sustained by reason of the breach. Compensation is also
available against a party for breach of a quasi-contract. Sec. 73 is based on the leading
case of Iladley V. &Lrcndale(1854)9 Ex. 34. the facts of which areas follows:
The plaintiff, an owner of a mill, delivered a broken shaft to the defendant, a
common carrier to take to a manufacturer, to copy it and make a new one- The carrier
delayed delivery of the shaft beyond a reasonable time, as a result of which the mill was
idle for a longer period than should have been necessary. The plaintiff did not make
known to the defendant carrier that delay would result in a loss of profits. Held, the carrier
was not liable for loss of profits during the period of delay. Alderson, B. oberved:
"When two parties have made a contract, which one of them has broken, the damages
which the other party ought to receive in respect of such breach should be either such as
may fairly be considered as arising naturally, i.e.. according to the usual course of things.
from such breach of contract itself, or such as may reasonably be supposed to have been
in the contemplation of both the parties at the time the contract was entered into as a
probable result of the breach."
The principle enunciated in Sec. 73 is that a party who suffers by the breach of
contract is entitled to:—
(a) such damages as naturally arose in the usual course of things, as a result of the
breach;.
(b) and if he claims special damages for any loss sustained (which would not ordinarily
flow from tile breach) he must prove that the other party knew at the time of making
the contract that the special loss was likely to result from the breach of the contract,
(c) such compensation is not to be given for any remote and indirect loss or damage
sustained by reason of the breach;
(d) compensation for quasi-contract as damages is the same as for a contrast.
LIQUIDATED DAMAGES AND UNLIQUIDATED DAMAGES
Where there is a breach of contract by one party, the other party is entitled to sue
 CONTRACTS 89

for damages. Therefore, unless the court passes a decree for a specified amount, the claim
for damages is merely a right to sue and not a debt or actionable claim. Consequently,
this claim can be assigned or transferred, since it is not a debt under the law (MirzaJaved
Murtaza v. U.P. Financial Corporation, 1983 All. 234 Union of India v. Raman Iron
Foundry, 1974 s.c. 1265). The suit may be for liquidated damages or unliquidated
damages. Liquidated damages are damages agreed upon by the parties in the contract
itself to be paid by the party breaking the contract in case of breach. The plaintiff has
only to prove the breach of contract, and no proof of loss is required. But liquidated
damages must appear to be a genuine pre-estimate of the loss that will be caused to one
party if the contract is broken by the other.
Where no damages are fixed by the contract, but the amount of compensation
claimed for a breach of contract is left to be assessed by the court, damages claimed are
called unliquidated damages.
Unliquidazed damages may be èlassified as follows:
(a) Ordinary, General, Compensatory or Substantial damages;
(b) Special damages;
(c) Exemplary, Punitive or Vindictive damages:
(d) Nominal damages;
(e) Contemptuous damages.

ORDINARY OR COMPENSATORY DAMAGES

In deciding a suit for damages, the court has to answertwo questions: (I) Proximity
and remoteness ofdamnagc, (ii) measure of damages. The judge has to first decide whether
or not the damage has resulted from proximate consequences of the breach, for remote
consequences are not regarded. Once the court has decided that the damage is sufficiently
proximate, it will then turn to the measure of damages, that is, the amount of money that
will compensate the plaintiff. The question of remoteness of damage is governed by the
maxim (recognised in Hadley v. Baxendale and Sec. 73 of our.Contract Act): Injure non
remotci causa, red proxirna spectatur—' 'in law, not the remote cause, but the proximate
cause is taken notice of". Thus, if the damage or loss suffered by reason of the breach
of the contract is remote or indirect no compensation would be allowed. The aggrieved
party, however, would in case of breach of contract, be entitled to recovercompcnsation
for damage or loss caused to him thereby, if such loss or damage arose naturally and
directly in the usual course of things from such breach, or which the parties to the contract
knew, at the time of making the contract, to be likely to result from breach of contracL
The first part of this rule states the case for ordinary damages and the latter concerns
with special damages.
In Hadley v. Ba,vendule, the common carrier negligently delayed delivery of the
broken shaft to the manufacturer who had to copy it and make a new one. On account
of the delay by the common carrier the mill remained idle fora longer period than should
have been necessary. The plaintiff did not make known to the defendant, the common
carrier, that for want of the shaft the mill would remain idle which would result in a loss
ofprofit. The plaintiff was held entitled to recover damages for delay in delivery but not
for loss of profits occasioned by the closure of the mill since there was no way the
common carrier could have foreseen that the mere absence of a shaft would cause the
closure of the mill. The mill-owner could have recovered damages for loss of profits if
he had informed the carrier of the likely result of delayed delivery.
The test of remoteness of liability as laid down in this case was reformulated by
90 MERCANTILE LAW

K.B. 528, in
Asquith, L.J. in Victoria Laundry Lid. v. Newman IndusiriesLid. (1949)2
the following propositions:
"In cases of breach of contract, the aggrieved party is only entitled to recover such
part of the loss actually resulting as was at the time of the contract reasonably foreseeable
as liable to result from the breach. What was at that time reasonably so foreseeable
depends upon the knowledge then possessed by the parties or, at all events, by the party
who commits the breach.
For this purpose knowledge 'possessed' is of two kinds: one imputed, the other
actual. Everyone, as a reasonable person, is taken to know the 'ordinary course of things'
and consequently what loss is liable to result from a breach of contract in that ordinary
course. This is the subject-matter of the 'first rule' in Hadley v. Baxendale. But to this
knowledge, which the contract-breaker is assumed to possess whether he actually
possesses it or not, there may have to be added in a particular case knowledge which he
actually possesses of special circumstances outside the 'ordinary course of things', of
such kind that a breach in those special circumstances would be liable to cause more
loss. Such a case attracts the operation of the 'second rule' so as to make additional loss
also recoverable.
K.B. 528, the
In Victoria Laundrv Lid. v. Newman Industries lid., (1949) 2
plaintiffs, launderers and dyers, with a view to extending their business and also for the
purpose of obtaining certain dyeing contracts of an exceptionally profitable character.
bought a boiler from the defendants who undertook to deliver it on 5th June. The boiler,
however, was not delivered until the 8th November. The defendants were aware of the
nature of plaintiffs business and they were informed in more than one letter before the
conclusion of the contract that the plaintiffs were "most anxious" to put the boiler in
use "in the shortest possible space of time". In an action for breach of contract, the
plaintiffs claimed (1) loss of profit the laundry would have made had the boiler been
delivered in time, (2) loss of exceptional profit expected to arise under the valuable
dyeing contracts. held, the plaintiffs could recover damages for loss of ordinary profits
occasioned by the delay since the defendants knew the laundry would be closed pending
delivery of the boiler: but the loss on the valuable contract could not be recovered as the
defendants were not informed of this at the time of the contract. This being an extension
of the plaintiff's business, it could not be recovered.
In The Heron 11(1969) 1 A.C. 350, a ship owner agreed to carry a cargo tf sugar
belonging to A from Constanza to Basrah. He knew that there was a sugar market at
Basrah and that A was a sugar merchant, but did not know that he intended to sell the
cargo immediately on its arrival. Owing to the shipowner's default, the voyage was
delayed by at least 9 days, and the sugar fetched a lower price than it would have done
had it arrived on time. It was held by the House of Lords that the consequential loss fell
to be borne by the shipowner under the first branch of rule laid down by Hadley v.
Baxendale. Although he had no knowledge of special circumstances he could and should
at the very least have contemplated that if the ship arrived 9 days late A would suffer
some financial loss. The criterion for determining remoteness of damage arising from a
breach of contract was laid down as: "Whether the probability of its occurrence was
within the reasonable contemplation of both parties at the time when the contract was
made, having regard to their knowledge at that time."
Mesure of damages. The measure of damages is the estimated loss directly ljz
and
naturally resulting in the ordinary course of events, from the breach of contract. The

132. Union of India v. Vasudeo Agarwal, 1960 Pat 87.

 CONTRACTS 91

injured party is to be put in the same financial position as he would have been if the
contract had been performed according to its terms) 3 In the case of sale and purchase,
the damages payable would be the difference between the contract price and the market
price at the date of the breach. The damages are calculated as on the date of breach and
any subsequent change of circumstances tending to an increase or reduction of damage
cannot be taken note of. In a contract of sale of shares the buyer broke the contract, and
seller sued for damages on the basis of the difference between the contract price and the
market rate on the date of the breach. The buyer proved the price of shares subsequently
rose and that the seller did not really suffer any damage. But the court held, that the
damages should be ascertained as on the date of breach and any risk of profit or loss
arising from a subsequent increse or decrease is entirely vendor's and has nothing to do
with the other party. If, however, at the date of the breach the price of the goods is
higher than the contract price and so the seller does not suffer any loss, he will receive
only nominal damages.
Damages may also be claimed for breach of warranty or condition and such
damages will include a,ll damages flowing from the breach. A cow was sold with the
condition that it was free from disease. The cow was suffering from foot and mouth
disease at the time of sale. Not only did the cow die but it also infected other cows of
the buyer. held, damages could be recovered for the entire loss. ] 35
SPECIAL DAMAGES
Special damages are those resulting from a breach of contract under some special
or peculiar circumstance. If at the time of entering into a contract a person has notice of
special circumstances which make special loss the likely result of the breach in the
ordinary course of things, then upon his breaking the contract and the special loss
following the breach he will be required to make good the special loss. If therefore there
be any special damage which is attributable to the wrongful act, then special damages,
if proved, will be awarded. Hence, if an unusual damage is likely to be sustained as the
result of breach of contract, its nature should be communicated to the other party before
the contract is made so that he contracts subject to the prospective liability. Thus, if in
Hadley v. Baxendale, the mill-owner had told the carrier that delay would result in a loss
of profits through stoppage of the mill, he would have recovered damages for such a
loss. Similarly, in Victoria Laundry v. Newman Industries, if the launderer had told the
defendants that he was expecting a valuable contract and that delay would result in loss
of special prof-it he would have recovered that, too.

EXEMPLARY OR PUNITIVE DAMAGES

These damages are a sum awarded beyond the pecuniary loss sustained by the
injured party. Ordinarily, damages for breach of contract are intended to compensate the
plaintiff, not to punish the defendant. The object of exemplary damages is to punish the
defendant, and to deter him and others from similar conduct in the future. Award of
exemplary damages is made in nly two cases: (i) Breach of Promise of Marriage cases;
(ii) where a bank wrongfully dishonours a commercial customer's cheque. In a breach
of promise to marry, the amount of the damages will depend upon the extent of injury
to the party's feelings. It is really an additional sum known as a Solaxium awarded to the
jilted woman as a solace for her injured feelings. In the case of wrongful dishonour of a

133. B. Sunley & Co. Ltd. V. Cunard White Star Ld. (1940) 1 K. B. 740.
134. Jamal v. MaulJa Dawood & Co. (1916)43 Cal. 193 (P. C.); Trojan v. Nagappa 1953 S. C.
135.
135. Smith v. Green (1876) 1 C.P.D. 92.
92 MERCAN11I.E LAW

cheque of a customer who is a trader the rule is 'the smaller the cheque dishonoured the
greater the damage.'
Note: Since the coming into force on January 1, 1971, of the Law Reform
(Miscellaneous Provisions) Act. 1970, actions for breach of promise to marry have been
abolished in England. In England, therefore, no suit for damages for breach of promise
to marry can be filed.
NOMINAL DAMAGES
Nominal damages consist of a small sum of money. e.g.. a rupee. They area token
award where there has been an infringement of contractual right, but no actual loss has
been suffered. These damages are awarded to establish the right to decree for breach of
contract.
CONTEMPTUOUS DAMAGES
Damages are said to be contemptuous, when the court finds that a breach nas been
committed, but that the breach is so insignificant or petty that a reasonable man would
not have filed the suit. A rupee or even less may be awarded to mark the court's
disapproval of the plaintiff's conduct in bringing the action. The law does not take
account of trifling things; and where it does, it awards also something of a contemptuous
character. Such damages have been awarded to male plaintiffs in breach of marriage
actions.
RULES REGARDING AMOUNT OF DAMAGES
The rules applicable to the awarding of damages may be summarised as follows:
1. Where a party sustains a loss by reason of a breach of contract he is, as far as
money can do it, to be placed in the same situation with respect to damages, as if the
contract has been performed.
2. Subject to the above rule, the measure of damages is the estimated loss directly
and naturally resulting in the ordinary course of events, from the breach of the contract.
Ordinarily, therefore, the injured party can recover by way of compensation only the
actual loss suffered by him.
3. Remote damages, i.e., damages for remote consequencces, or those not natural-
ly arising out of the breach are usually not allowed.
4. The damages should be such as both parties would reasonably assume to be the
result of a breach of contract.
The court may allow remote damages, if such damages may reasonably be
supposed to have been in the contemplation of both the parties at the time they made the
contract.
5. It follows that to recover special damages the special circumstances must be
communicated to the other party at the time of the contract.
6. If the parties agree about the amount of the damages for breach of contract, no
more than the agreed amount can be recovered.
7. Exemplary damages cannot be awarded for breach of contract, except for breach
of promise to marry or against a banker for wrongful dishonour of a cheque.
Note: Under English law, actions for breach of promise of marriage have been
abolished with effect from January 1, 1971.
8. In a breach of contract for the sale of goods, the damages payable would be the
difference between the contract price and the market price at the date the breach takes
place.
 CONTRACTS 93

9. It is the duty of the injured party to minimise the damages by mitigating the
loss consequent on the breach. Thus, the plaintiff must take all reasonable steps to
mitigate the loss resulting from the breach, and if he fails to do that he will not get any
damage resulting from such failure.
10. The fact that damages are difficult to assess does not prevent the injured party
from recovering them. The court will always attempt to assess damages, and award them
for prospective as well as the actual loss.
In Chaplin v. hicks (1911) 2 K.B. 786, H advertised a beauty competition, by
which readers of certain newspapers were to select fifty ladies, from whom H himself
would select twelve and for whom he would provide theatrical engagements. C was one
of the fifty selected by readers but by H's breach of contract, she was not present when
the final selection was made. Held, although it was problematical whether she would
have been one of the selected twelve, and although it was difficult to assess damages. C
was entitled to have damages assessed.
LIQUIDATED DAMAGES AND PENALTY
Where the parties have fixed at the time of the contract the damages that would be
payable in case of breach, a question may arise (in English law at least) whether the
provision amounts to "liquidated damages" or a "penalty". Courts in England give
effect to liquidated damages, but they relieve against penalty. The test of the two is that
where the amount fixed is a genuine pre-estimate of the loss in case of breach; it is
liquidated damages and will be allowed; and if the amount fixed is without any regard
to probable loss, but in lerrerem as it were, to prevent a party from committing breach
of contract, it is a penalty and will not be alJowed. 13 In Indian law, there is no such
difference between liquidated damages and penalty, as Sec. 74 specifically provides
payment of only "reasonable compensation." Sec. 74 reads:
"When a contract has been broken, if a sum is named in the contract as the amount
to k paid in case of such breach or if the contract contains any other stipulation by way
ofpenally the party complaining of the breach is entitled whether or not actual damage
or loss is proved to have been caused thereby, to receive from the party who has broken
the contract a reasonable compensation not exceeding the amount so named or, as the
case may be. the penally stpulaledfor.
Explanatiorz—A stipulation for increased interest from the date of default may be
a stipulation by way of penalty1
The party suffering from breach is entitled to get the actual damages he has
suffered. With regard to the amount named in the contract, the compensation payable is
the reasonable amount up to the stipulated amount whether it is by way of liq4idated
damages or penalty. A contracts with B to pay Rs. 1,000 if he fails to repay B Rs. 500
on a given day. A fails to repay B Rs. 500 on that day. B is entitled to recover from A
such compensation, not exceeding Rs. 1.000, as the Court considers reasonable. But
where a contract provides for payment in a number of instalments but on the failure to
pay any instalment the whole amount is to be paid forthwith, such a stipulation is not a
penalty and the contract can be enforced according to its terms.' 38
Payment or Interest—With regard to the payment of interest the following rules
have been laid down:-

136. Union of India v. Vasudeo Agarwa], 1960 Pat. 87.

137. See Nageswaraswami v. Viswasundararao (1953) S. C. R. 894, where the Supreme Court did
not allow compound interest in p1ce of simple interest as originally fixed in case of breach;
Fatch ('hand v. Balkishan Das, 1963 S. C. 1405.
138. Tayya v. Gangayya (1927) M. W. N. 597; 53 M. L J.. 562.
94 MERCANTILE LAW

1. Where a contract provides that the amount should be paid by a particular date
and in default, it will be payable with interest, the Court will give effect to the stipulation
if the interest is reasonable. Where the interest is exorbitant, the Court Will give relief.
2. Where the bond provides that in default of the payment of the principal by a
stated date, enhanced interest should be payable, if the enhanced interest is made payable
from the date of default and is resonable, it is regarded reasonable compensation and is
alloved. But if the enhanced interest is exorbitant, e.g.. increase from 12 per cent to 75
per cent, it will be penalty and relief will be granted against it.
3. The Courts do not lean towards compound interest, they do not award in the
absence of stipulation, but where there is a stipulation for its payment it is, in the absence
of disentitling circumstances, allowed, i.e.. it will be allowed only if it is not an enhanced
rate.
SPECIFIC PERFORMANCE
Instead of, or in addition to, awarding damages to the injured party, a decree for
specific performance nlay be granted. Specific performance means the actual carrying
out by the parties of their contract, and in proper cases the Court will insist on the parties
carrying out their agreement. This remedy, however, is discretionary, and will not be
granted in the following cases:-
1. Where monetary compensation is an adequate remedy.
2. Where the Court cannot supervise the execution of the contract, e.g., a building
contract.
3. Where the contract is for personal services.
4. Where one of the parties is a minor.
Specific performance is usually granted in contracts connected with , land, e.g.,
purchase of a particular plot or house, or to take debentures,in a company. In the case of
sale of goods, it will only be granted in the case of specific goods and is not ordered as
a rule unless the goods are unique and cannot easily be purchased in the market, or are
of special value to the party suing by reason of personal or family associations.
It is, however, to be noted that the plaintiff who seeks specific performance must,
in his turn, perform all the terms of the contract which he ought to have performed at the
date of the action (Pudi Lazarus v. Rev. Johnson Edward, 1976 A.P. 243).
INJUNCTION
An injunction is a mode of securing the specific performance of a negative term
of the contract. It is an order of the court whereby an individual is required to refrain
from the further doing of the act complained of. It may be used to prevent many wrongful
acts, e.g., torts, but in the context of contract the remedy will be granted to enforce a
negative stipulation in a contract in a case where damages would not be an adequate
remedy. Thus, where a party to a contract is doing something which he had promised
not to do, the court may. in its discretion, issue an order to the defendant restraitting him
from doing what he promised not to do. Its application may be extended to contracts
where
where there is no ecctual negative stipulation but where one may be inferred. In
Metrojiolih2n Electric Supply Company v. Ginder (1901) 2 Ch. 799. (3 agreed to take
the whole electric energy required by his premises from the plaintiffs. H eld, this was in
substance an agreementnol to take energy from any other person and it could be enforced
by injunction.
In a proper case injunction may be used as an indirect method of enforcing a
contract of personal services, but in that case a clear negative stipulation is required. In
 coNrpAc'rs 95

Lumley v. Wagner (1852) 1 De G.M. & C. 604, W agreed to sing at L's theatre and
nowhere else. W, in breach of her contract with L. entered into a contract to sing for Z.
Held, although W could not be compelled to sing at L's theatre, she could be restrained
by injunction from singing for Z. Again, in Warner Bros. v. Nelson (1937) 1 K.B. 209,
the defendant, the film actress Bette Davis, had enterd into acontract in which she agreed
to act exclusively for the plaintiffs for 12 months. During the year she contracted to act
for X. Field. she could be restrained by injunction from acting for X.
OPERATION OF CONTRACT
A contract cannot impose liabilities upon one who is not a party to the contract. In
McGruther v. Pitcher (1904) Ch. 306. A sold to B some rubber heels packed in a box,
in the lid of which was a notice that the heels were sold on the express agreement that
they were not to be re-sold below certain prices. Z bought the heels from B with notice
of the agreement, but re-sold them below the prices. Held, as there was no contract
between A and Z, A could not enforce the agreement.
A contract imposes a duty on third party not to induce others to commit a breach
of contract. In Lumley V. Gyc (1853) 2 E ans H 216, L engaged W. an opera singer, to
sing in his theatre for a season, and G, knowing of his contract, induced W to break it
and to sing for him. held, L could recover damages from C.
INTERPRETATION OF CONTRACT
Construclion. It often happens that, because of a difference of opinion, the two
parties are in doubt as to their rights and obligations This is not to say that they are in
mistake, which would render the contract void. They are merely in dispute. The contract
is still valid, still carries rights and obligations, but the two parties cannot agree on what
these rights and obligations are. For example, two parties may contract on ajob "to be
completed during the summer of the year 1976." One side expects the job to be finished
by the end of June. the other contends that in India, August is still summer, being still
quite hot. Only the Court can decide whether, having regard to all the facts. August is
summer or not.
In a case like this the law must construe the contract. First the court will seek to
discover the intention of the parties. Hut, as judges are human, the law does not try to
give them a superhuman task. It is therefore assumed that "the intentions of the parties
are set out in the memorandum to the contract, and must be discovered from ,vhat is
written within the four corners of the contract." If it is written, and is reasonable, the
law must, of necessity, assume what is written was intended. 139 Of course, if there is no
writing, the court will have to consider evidence of behaviour. But 'construction' is
usually confined to "construction of documents," and will be dealt with here on that
basis.
Extrinsic evidence. Intention of the parties must be discovered from what is
written, not what may be surmised on howsoever probable grounds. Accordingly,
extrinsic evidence is not allowed to contradict, add to, or vary contractual terms. But it
may be used to explain the terms, where these are in dispute. This distinction is very
importanL and must be borne in mind at all times.
Parol evidence can be given to prove a trade usage or a local custom. It is legal for
courts to add words which have clearly and obviously been omitted in error. It must,
however, be remembered that the law does not exist to make contracts: it is only there

139. See State of Gujarat v. Ws. Variety Body Builders, 1976 S. C.. 2108.
96 MERCANrII.E LAW

to interpret them. Only when the contract is defective will the law do anything, and then
only the minimum needed to give "business efficacy to the contract.
The canons or construction. Because construction cases come before the courts
in such large numbers, the courts have laid down a number of canons of construction.
The Canons are as follows:
(a) The word or words will be construed according to their plin and ordinary
dictionary meaning.
(b) The words will be considered in their context--the context of the document,
and of the contract.
(c) The contract must be construed as a whole. In this context, where written words
have been inserted, any printed words which contradict them will be deleted. The fact
of writing shows second thoughts.
(d) The terms must be construed in such a way as to make the contract effective
Ut res magis valet quain pci-eal—"the thing shall be valid rather than perish". If one
construction renders the contract effective, whilst another makes it ineffective, the former
shall be adopted. A contract must be interpreted in such a manner as to give it efficacy
rather than to invalidate it (Union of India v. Basudev Duita, 1976 S.C. 430).
(e) If the contract fails to express the undoubted intentions of the parties, the court
will rectify it so as to in it express such intentions.
(f) Where a clause is ambiguous, it shall be most strongly construed against the
party who inserted it. This is the contra proferenlem rule—against him who puts forward.
It is assumed that the party putting in a clause does so in full knowledge of allfaults. It
is particularly important where large firms have standardized printed forms of contract.
(g) Lastly, the ejus dcn generis rule, under which general terms must be construed
against the special terms referred to in the document. In simpler language, general terms
which follow special terms are restricted in meaning to sub-groups of the special term.
Thus, in "loss through flood, rue, earthquake, or any other cause, however occasioned",
the general terms (which are underlined) would be construed as of the same kind as
"flood, lire, earthquake" and would not cover theft or piracy.

SUMMARY
A contract is an agreement enforceable by law. A contract will be enforceable at
law where there is an intention to create legal obligation.
ESSENTIALS OF VALID CONTRACT
1. Proposal or offer and acceptance of that proposal or offer.
2. An intention to create legal relationship.
3. Free and real consent between the parties.
4. Each party capable of contracting.
5. Contract is for legal object.
6. There are two parties to it.
7. The agreement is supported by laawful consideration.
OFFER AND ACCEPTANCE
Every contract is the result of the acceptance of an offer or proposal.
An offer or proposal is made when, and not until, it is communicated to the other
party.
The terms of an offer must be certain and not loose and vague.
 CONTRACTS 97

An offer must be distinguished from a mere quotation or an invitation to offer.

An offer may be specific or general, but no contract can result until it has been
accepted by an ascertained person.
An offer may lapse or be revoked before acceptance.
An offer lapses by rejection or by counter-proposal.
An offer lapses by the death of the offeror or the offeree.
Acceptance of an offer can be made by the person to whom the offer is made by
giving absolute and unqualified assent in the mode prescribed by the terms of the offer.
An acceptance must be made before the offer lapses or is terminated.
Like an offer, an acceptance must be communicated.
An acceptance can be revoked before its communication.
Acceptance by post is communicated when the letter of acceptance ha reached
the offeror.
CONSIDERATION
A contract must be supported by a consideration, unless it is in writing and
registered under the Registration Act, and made for natural love and affection between
parties standing in near relation to each other, or is a promise to compensate for
something done, or is a promise in writing to pay a debt barred by limitation law.
Consideration is a technical term used in the sense of quid pro quo and must be either a
benefit to the promisor or a detriment to the promise or both.
Consideration must move at the desire or request of the promisor, so that an act
done at the desire of a third party is not a consideration.
In English law, consideration must move from the promisee. In Indian law, it may
proceed from the promisee or any other person, with the result that in India a stranger
to a consideration may maintain a suit
A consideration may be
£xeculory or future, which means that it takes the form of a promise to be
performed in the future, or
Executed or present, in which it is an act or forbearance made or suffered for
promise, or
Part, which means a past act or forbearance, i.e., one which is complete befpre the
promise is made. In English law, as a rule, past consideration is no considera-
tion; but in Indian law, past consideration is valid.
A consideration need not be adequate but it must be competent, real and not
illusory, illegal, impossible, uncertain or ambiguous.
FLAWS IN CONTRACTS
A contract destitute of legal effect is void.
A void contract is a nullity and no right is acquired under or through it. It is bad
ab inilio.
A contract is voidable When it is enforceable at the option of one party and not at
the option of the other. The party aggrieved may elect to be bound by the contract or
repudiate it. When the injured party repudiates the contract it becomes void.
A contract is unlawful where the subject-matter is one forbidden by law.
CAPACITY OF PARTIES
In general, every person is presumed by law to be competent to contract, and any
98 MERCANTILE LAW

one claiming exemption from liability on the ground of incapacity to contract must
strictly prove it. Incapacity to contract may arise out of (a) mental deficiency or (b) status.
Minors, lunatics, idiots and drunken persons fall under (a) and Foreign Sovereigns;
Ambassadors, alien enemies, professional people, corporations and married Won-Len
under (b).
A minor's contract is absolutely void. He is not bound by it, nor can he ratify it on
attaining the age of majority. It is void even where the minor misrepresented his age.
The property of the minor is, however, liable for necessaries supplied to him according
to his station in life provided he was in need of them at the time of sale and delivery. A
contract for minor's benefit is valid.
Contracts by idiots and lunatics are void except for necessaries. A lunatic can make
a valid contract during lucid intervals. Similarly, a contract by a drunken person does
not bind him, but he can make a valid contract when he is sober.
An alien can make binding contracts in India, but on the declaration of war between
his country and the Union of India he becomes an alien enemy, and cannot enter into a
contract. Contracts made before the war are dissolved if they involve contract v.ith the
enemy or they are likely to help the enemy, or they are suspended during the war. Foreign
Sovereigns and Ambassadors cannot be sued in our Courts but if they submit themselves
to the jurisdiction of our Courts they will be treated as commoners.
A contract by the directors of a company made beyond the powers of the company
as stated in the Memorandum of Association is ultra vires the company and thus not
binding on it, nor can it be ratified at a general meeting of the shareholders.
A married woman can contract in respect of her private property.
FLAW IN CONSENT
Mistake of material fact on the part of both the parties renders the contract void.
Mistake of law, however, is not excused.
Mistake of fact may be as to the nature of the transaction, identity of party and the
subject-matter. Mistake as to subject-matter may relate to its existence, identity, title of
the party, price, quantity or quality.
Misrepresentation is a mis-statement made innocently and with an honest belief
as to its truth, and renders the contract voidable at the option of party misled by it.
Fraud or wilful misrepresentation is the representation either by words or conduct
that something is true which is not so, so as to deceive another person, either intentionally
or with reckless disregard as to the truth or falsehood of the words or conduct. The party
defrauded either by mis-statement or wilful concealment can avoid the contract and claim
damages.
Coercion is doing of anything forbidden by the Indian Penal Code, and a contract
made under coercion is voidable.
Undue influence—A contract is said to be induced by undue influence where the
relations subsisting between the parties are such that one of the parties is in a position
to dominate the will of the other and uses that position to obtain an unfair advantage over
the other. A contract made under undue influence is voidable at the option of the party
so influenced.
As a rule, undue influence will be presumed between parent and child, guardian
and ward, trustee and beneficiary, solicitor and client, doctor and patient, Guru and
disciple, Malik and cultivator.
Unlawful Agreements—An agreement may be unlawful because it is
 CONTRACTS 99

(a) Illegal, i.e., opposed to positive law, being forbidden either by statute law or
common law.
(b) Immoral, i.e., contrary to positive morality as recognised by law.
(c) Opposed to Public Policy, i.e., contrary to the welfare of the State as tending to
interfere with civil or judicial administration, or with individual liberty of citizens.
An agreement will not become a contract or will remain unenforceable if it is made
for unlawful consideration and with unlawful objects.
VOID AND ILLEGAL CONTRACTS DISTINGUISHED
A void contract is one which has no legal effect. An illegal contract, like the void
contract, has no legal effect as between the immediate parties, but has this further effect
that transactions collateral to such a contract become tainted with illegality and therefore
become unenforceable.
Wagering Contracts—In Bombay Presidency, wagering contracts are unlawful
by Statute, and taint collateral transactions rendering them void. In the rest of India
wagering contracts are only void, and thus collateral contracts are not affected.
What is a Wager—A wager is a promise to pay money or transfer property upon
the happening of an uncertain event. Betting on the results of a horse race, a wrestling
match, are examples.
Commercial transactions may amount to wagering contracts if both parties at the
time of entering into contract have the intention not to give and take delivery of goods,
but only to settle differences. Teji Mandi transactions or option dealings are good
contracts. Agreements in respect of immoral purposes are not only void but illegal. A
transaction collateral to an immoral contract knowingly entered into is equally unenfor-
ceable.
Agreements Opposed to Public Policy:—
(a) trade with Indian Union's enemies without the Union's licence is unlawful;
(b) agreements for stilling prosecution and for ousting jurisdiction of courts are
unlawful;
(c) agreements curtailing or extending the period of limitation prescribed by law are
not enforceable;
(d) agreements in fraud of insolvency law are illegal;
(e) agrements for using improper influence of any kind with judges or officers of
justice are void;
(f) agreement in restraint of the marriage of any person other than a minor is void;
(g) agreements to procure marriages for reward are void;
(h) agreements to pay money to parent or guardian in consideration of giing his
daughter in marriage is void. Similarly, a promise by the bride's parent to pay
money to the bridegroom or his parent is illegal;
(i) traffic by way of sale in public offices and appointments or titles for monetary
consideration is illegal;
(j) agreements tending to create monopolies are void;
(k) agreements in restraint of trade are void. Partial restraint is allowed in sale of
goodwill.
(1) contracts unduly restraining individual liberty are unenforceable.
Quasi Conlracts—In the Indian Contract Act such contracts are described as
"certain relations resembling those created by contracts." In certain circumstances the
law implies from the conduct of the parties a promise imposing an obligation on one
party and conferring aright in favour of the other, although there is no offer or acceptance.
100 MERCANTILE LAW

no consent, and, in fact, no agreement or promise. The Contract Act deals with the
following types of Quasi contracts:-
1. A person incapable of contracting is liable for necessaries supplied to him or on
his behalf.
2. Suits for money had and received. Aright to sue fQr recovery of money may arise—
(a) where plaintiff paid money to the defendant,
(i) by mistake of fact or of law
(ii) In pursuance of a contract the consideration for which has failed, and
(iii) under coercion, undue influence, fraud, etc.;
(b) when plaintiff paid tothird party money which another is to pay;
(c) where defendant obtained money from third parties, e.g., agent making secret
profits.
3. Quaniun, Meruit—No claim can be made on an entire and indivisible contract until
the entire work is done. Payment can be claimed under quaUum nwruil for part
performance if the contract is divisible into parts so that payment for each part can
he made.
4. A finder of goods lost by another must try to find the owner and must not
appropriate the property to his own use. I-Ic can recover from the owner expenses
incurred in protecting and preserving the properly. Finding is not keeping, unless
it is reasonably certain that the real owner cannot be found.
5. person enjoying benefit of non-gratuitous act is under an obligation to compen-
A
sate the other party.
Discharge of Contract—A contract terminates by-
Performance.—Performance means the actual carrying out of all the terms of the
contract. Performance must be in accordance with the obligations under the contract. In
a conditional contract, with condition precedent, performance becomes dud only on the
happening of the event, certain or uncertain; and with condition subsequent, performance
ceases to he due on the happening of some event. Where one party has performed his
obligation the other must perform his bargain. Where both promises are outstanding, the
order of performance may be—
Mutual and Independent— Where each party must perform his promise inde-
pendently and neither can say that he did not perform because the other failed to perform
his promise.
Dependent—Perfonriance ofthe one promise depends upon the prior performance
of the other. Performance of one is condition precedent to performance of the other.
Mutual and Concurrent—Here the two acts are done at the same time. Promisee
alone can demand performance, or if he has died before performance, his legal repre-
sentative can demand it. Promisor must perform the promise and in case of his death,
his legal representatives.
Assignment of Contracts--As a rule, an obligation under contract cannot be
assigned. It can never be assigned when performance depends on the persona' skill of
the promisor. An actionable claim can always be assigned in writing.
Discharge by-Tender—Where one party is ready and willing to perform his
prom ise and has offered to do so at the right time and place, but the other party does not
accept performance, the contract is discharged by tender or "attempted performance."

Discharge by Covenant or Agreement

Waiver of perfonnance by the promisee or rescission by both will discharge the
contract.
 CONTRACTS 101

Release—Where one party agrees to excuse performance by the other after breach
by the latter.
Novation—By agreement between parties that the performance may be carried
out by different parties. A fresh contract is substituted in place of the original one.
Discharge bylmptied Consent or Impossibility of Performance—The law does
not compel a man to do the impossible thing. Contract is discharged when performance
becomes impossible-
4 due to destruction of the subject-matter;
(ii) due to death or incapacity of the promisor in a contract for personal services;
(iii) due to subsequent change of legislation;
(iv) due to non-existence or cessation of a state of affairs the existence or continuance
of which formed the basis of the contract;
(v) due to such an alteration of circumstances as to bring about complete frustration
of commercial object.
Discharge by Lapse of Time—Contract is discharged if the suit is not brought
by the injured party within the time permitted by the Limitation Act, for breach of
promise. For example, if, on the debtor failing to pay a loan on the stipulated date, the
creditor does not file a suit within 3 years of the default, the contract is discharged and
the creditor is barred from his remedy.
Discharge by Operation of Law may take place—.
By Merger, where the parties embody the inferior contract in a superior contract.
The lower security merges in the higher security.
By the unauthorised alteration of terms of a written document— Where a
material alteration is made by one party the other can avoid the contract.
By insolvency—Where an insolvent is discharged by the Court he is exonerated
or discharged from liability on all debts incurred before adjudication.
Discharge by breach—Breach of contract may be Actual or Constructive or
Anticipatory.
Actual breach may take place—
(a) At the time when performance is due, in which case the other party can sue
the defaulter for breach of contract. If party, failing to perform at the appointed time,
subsequently expresses willingness to perform, he can do so if time is not of the essence
after paying compensation. In mercantile contract time is of the essence.
(b) During performance of the Contract—Where a party apparently performs
the promise, but the other party says it is not a proper performance, then the other party
is exonerated from performance of his part of the bargain, if the breach is of a condition
vital to contract.
Constuctive or Anticipatory Breach, i.e., breach before performance is due, may
take place—
(a) by the promisor doing an act which makes the performance impossible,
(b) by the promisor in some other way showing his intention not to perform his
promise.
The promisee may, if he likes, elect the breach as equivalent to actual breach and
sue the defaulter, or he may wait till the time of actual performance. In the second case
the promisee keeps the contract alive for the benefit of promisor and his own. He remains
liable under it, and enables the promisor to perform in spite of previous repudiation and
also to avail himself of any excuse for*non.performance which may come into existence
before time for performance.
102 MERCANTILE LAW

Remedies for Breach of Contract:—

Damages— Breach of contract entitles the injured party to file a suit for damages.
Damages are the money awarded to a person who has a right to sue for breach of contract.
General or Ordinary Damages will be awarded if actual loss has been suffered
from the proximate consequences of the breach. The amount awarded will be compen-
sation to the plaintiff for loss sustained and not punishment of the defendant.
Special Damages are those which result from a breach of contract under some
special circumstances. If special loss is likely to be sustained as a result of the breach,
this should be communicated to the other party; otherwise special damages will not be
awarded.
Exemplary Damages are the exceptions to the rule that damages are not' to be in
the nature of punishment, but only compensation for the loss sustained.
Exemplary damages will be awarded:—
(a) In suit for breach of promise of marriage, and the amount will depend upon the
extent of injury to the lady's feeling;
(b) In suit against bank for wrongfully dishonouring customer's cheque.
The customer, though he has sustained no pecuniary damage, may recover sub-
stantial damages for injury to his credit.
Nominal Damages consist of a very small amount of money, e.g., a rupee.
Nominal damages are awarded where the plaintiff has proved a breach of contract but
has suffered no real damage. Nominal damages are awarded to establish right to decree
or to vindicate plaintiff's honour.
Specific Performance— Where for the breach of a contract damages are inade-
quate remedy, the party at fault may, at the discretion of the Court, be ordered to perform
the contract in specie. But specific performance will not be granted—
(a) to enforce a contract for personal service;
(b) in cases where Court cannot supervise performance of contract,
(c) where damages are adequate reined)';
(d) contract contains ambiguous terms;
(e) contract by its nature is revocable;
(f) contract by or on behalf of public company in excess of its power;
(g) contract which can be performed in more thart three years;
(h) where subject-matter or major part of such subject-matter of contract has, unknown
to both parties, ceased to exist before contract is made.
Injunction.— This is another discretionary remedy granted to secure specific
performance of negative terms of the contract. Injunction restrains a person from doing
or continuing to do something which amounted to breach of contract.
CASES FOR RECAPITULATION

1. An auctioneer advertised in the newspapers that a sale of office furniture would

be held at Connaught Circus, New Delhi. A broker with a commission to buy office
furniture came down from Bombay to attend the sale, but all the furniture was withdrawn.
The broker thereupon sued the auctioneer for his loss of time and expenses. It was held
that a declaration of the intention to hold auction did not create a binding contract with
those who acted upon it; it was only an invitation to offer and so the broker could not
recover [harris v. Nickerson (1873) L.R. S Q.B. 2861.
2. An actress was engaged for a provincial tour. The agreement also provided that
if the piece came to Delhi she would be engaged at a salary "to be mutually arranged
 CONTRACTS 103

between us." Held, no contract. The parties had not agreed on the terms of the contract
but had made an agreement to agree in the future [Loftus v. Roberts (1902) 18 L. T. R.
532].
3. B ordered some machinery from J. & Co. Before the company had taken any
action on the order, it received a letter from B cancelling the order. The company refused
to recognise the cancellation and sued B for the purchase price. held, B is not liable. An
order is merely an offer which must be accepted by the seller before there is a binding
contract. Before acceptance the offeror may remove his order (Owens Co. V. Bemis. 22
N.D. 159).
4. On June, 1. 1968. A advertised in a newspaper that he would pay Rs. 100 to
any one who would find his lost dog before July 1, 1968. On June 10, A advertised in
the same newspaper that he had cancelled his offer of June 1. On 15th June, B, who had
read the first advertisement, but not the second one, found the lost dog and claimed Rs.
100 from A. Held, B could not recover, as the offer had been revoked before it was
accepted. The revocation was given the same publicity as was the offer of the reward
and it did not matter that B had not read the second notice cancelling the offer (Shuey v.
U.S Govt. 92 U.S. 73).
5. The defendants advertised in their paper that their city editor would be glad to
advise the readers of the paper with reference to investments. The plaintiff wrote for
advice and asked for the name of a good stock-broker. The editor recommended a broker
who was an undischarged bankrupt, though this fact was not known to the editor. Relying
on the recommendation, the plaintiff sent sums of money to the broker for investment
and the broker misappropriated them. field, the plaintiff is entitled to recover from the
defendant.. The price paid by him for the paper he bought was good consideration and
hence there was a contract between him and the defendants IDe Ia. Bere. v. Pearson
(1908) 1 K.B. 2801.
6. M lost a sum of Rs.8,500 to L. & Co. on bets on horse races and on his failure
to pay was reported to the Royal Calcutta Turf Club. M subsequently executed in favour
of L. & Co. a hundi for,Rs. 8,500 in consideration of their withdrawing his nanle from
the Club and thereby preventing his being posted as a defaulter. When L. & Co.
demanded payment M pleaded that the consideration was unlawful. field, M was liable
to pay as the consideration in the shape of L & Co.'s promise to withdraw M's name
from the club in order to prevent M being posted as a defaulter was legal. A wagering
contract is only void and so does not affect the collateral transaction (Leicester & Co.,
v. S. P. Mullick, 1923 Cal. 445).
7. During a strike by the workers in a coal mine, the police authorities thought it
enough to provide a mobile force for the protection of the mine. The colliery manager
wanted a stationary guard. It was ultimately agreed to provide the latter at a rate of
payment by the company owning the colliery, which involved a sum of £2,200.
Subsequently, the company refused liability to pay, pleading absence of consideration.
Held, that the promise to pay the amount was not without consideration and the company
was liable to pay. It was said that the police, no doubt, were bound to accord protection,
but they had a discretion as to the form it should take. The undertaking to provide more
protection than what they deemed to be necessary was a consideration for the promise
to pay the amount [Glass-brook Bros. Y. Glamorgan Country Council (1925) A.C. 2701.
8. A minor falsely representing himself to be of age, enters into an agreement to
sell his property to R and receives from him as price a sum of Rs. 10,000 in advance.
Out of this sum the minor purchases a car for Rs. 6,000 and spends the rest on a pleasure
trip. After the minor has attained majority, R sues him for the conveyance of the property
or in the alternative, for the refund of Rs. 10,000 and damages. Held. R cannot succeed
104 MERCANTILE LAW

in his suit for conveyance of property or refund of the amount. A minor's contract is void
and he is not liable under it. Since he falsely misrepresented himself to be of full age the
court may, in its discretion, order him to hand over the car to R [R. Leslie Ltd. v. Sheil
(1914)3 K.B.6071.
9. E. who was on the staff of a foreign embassy, was a tenant of M's house. M
sued him for arrears of rent. Held, whether E owed the rent or not, no action could be
brought against him, as he was protected by diplomatic privilege [Engelke v. Musnjan
(1928) A.C. 4331.
Juvenile
10. The defendants had commenced a periodical publication, called the
Library, and had engaged the plaintiff to write a volume on ancient armour for it. For
this he was to receive the sum of100 on completion. When he had completed part of
his volume, the defendants abandoned the publication. The plaintiff sued the defendants
for recovery of the amount contracted alternatively by way of (i) damages, or (ii) a
quantum meruii Held, that the plaintiff is entitled to get damages for breach of contract
and payment on quantum meruil (Planche v. Col burn (1831)8 Bing 141.
11. A, a Madras doctor, employed another doctor B, as an assistant for a period
of three years on a salary of Rs. 1,000 per mensem. The agreement between A and B
provided that after the termination of his employment B should not practise as a doctor
in Madras within a radius of one mile of his dispensary for a period of one year, and if
B did so, B should pay Rs. 10,000 to A as 'liquidated damages.' Immediately after the
termination of his employment B begins to practise as a doctor nest door to A's
dispensary. A sued B for the recovery of Rs. 10,000. Held, A could not recover, as the
contract was altogether void being in restraint of trade. In Indian Law, a restraint, whether
general or partial, qualified or unqualified, is void if it is in the nature of a restraint of
trade bakes & Co. v. Jackson (1872) 1 Mad. 1341.
12. A and B were joint proprietors of a hotel. Water connection to the hotel had
been taken from the Municipal Board in the name of A. Subsequentlty B made an
application to the Board for recording his name as tenant jointly with A in respect of
water rates payable by the hotel. The Board refused to do so, as B would not give an
undertaking to fulfil certain conditions proposed by the Board. Later on the Board filed
a suit for recovery of arrears of water rates against A as the promisor and B as the
beneficiary under the contract. Field. B is not liable to pay as a beneficiary under the
contract, as the Board had refused to recognise B as a tenant. The acceptance and
enjoyment of the thing delivered or done, which is the basis for the claim under Section
70 of the Contract Act, must be voluntary. In this case the services were rendered against
the will of B for whose use they were supposed to have been rendered and hence the
Board could not recover under Section 70. Also, there was no privity of contract between
B and the Board [Jaygopal v. J.W.W. Committee. (1964) Orissa 69].
13. In May. 1936, a building lease was made to the lessees for a term of 99 years.
Before any buildings had been erected the war of 1939 broke out and restrictions were
imposed by the Government on the supply of building materials. As a result, the lessees
were unable to carry out any building on the land covenanted in the lease. In an action
against them for the recovery of the rent the lessees pleaded that the lease was frustrated.
Held, by the House of Lords that the doctrine of frustration, even if it were capable of
application to a lease, did not apply in the instant circumstances. The compulsory
suspension of building did not strike at the root of the transaction, for when it was
imposed the lease still had more than 99 years to run, and therefore, the interruption in
the performance was likely to last only for a small fraction of the term [Cricklewood
Property & investment Tru.'.I Lid. v.Leightons investment Trust Lid. (1945) A.C. 2211.
14. S entered into a contract with K in July. 1952 for the sale of 200 tons of scrap
 CONTRACTS 105

iron at the controlled price of Rs. 70 per ton plus incidental charges. Subsequently in
January, 1953, when the controlled price was the same as in July. 1952, K agreed to
supply the scrap iron to E for expoJt. S, who had no knowledge of this subsequent
contract, failed to supply the scrap and, as a result, K could not comply with his contract
with E, who purchased the necessary scrap iron from the open market and obtained from
K Rs. 20,700 being the difference between the contract price and the market price. K
sues S for the recovery of Rs. 20,700 as damages for breach of contract, field, by the
Supreme Court that K was not entitled to claim damages from S at an amount equal to
difference between the price paid by his vendee, E and the price he would have paid to
S for 200 tons of scrap iron, as he had not entered into the contract with S after informing
S that he was buying for further sale. In fact, he was not entitled to claim any damages,
as the price was the same at all times, and if the third party had bought from the
uncontrolled sources and paid more, it was not his responsibility (Karsan Dosv. Saran
Engineering Co. 1965 S.C. 1981).
15. L had entered into an agreement with two of his employees whereby he
promised to pay, and did iii fact pay, considerable sums to them in compensation for the
premature termination of their contracts of service. This payment, however, was strictly
unncessary, for during their employment the two men had been guilty of certain breaches
of duty which would have entitled L to dismiss them immediately. When L discovered
this fact, he claimed to avoid the contract and recover the money paid on the ground,
inter alia, that the employees were bound to disclose to him those breacheof duty. The
1-louse of Lords held that L could not avoid the contract and recovei back the money
paid to the two employees, as they were not bound to disclose to him the breaches of
duty. Lord Atkin observed: "It is a contract of service which does not fall within the
category of contracts uberrirnaefidei which require disclosure" [Bell y. Lever Bros. Ltd.
(1962)A.C. 1611.
16. X offered to buy a car from Y and to pay by cheque. Y refused The offer and
the cheque, as she did not know him. X then convinced her that he was a well-known
person, and being convinced, she accpted his cheque and let him take the car. He sold
the car to L and the cheque proved worthless. Y filed a suit to recover the car from L.
Held, Y could recover the car from L. The contract between X and Y was void for
mistake, since the mistake occurred during the negotiations and Y would not have
accepted X's offer if she had not ben convinced of his identity X had no title to the car
and could give none to L (Ingram v. Little (1 86 1) I Q.B. 31).
17. A letter accepting an offer of employment was followed by a further letter
Withdrawing the acceptance, Both letters were received by the offeror by the same post.
Held, the acceptance was validly revoked, (Dunmore (Coutess) v. Alexander (1830) 9
Sh. 190).
18. A minor purchased certain property from B, and sued for possession, Held, if
the minor has performed his obliga t ions, he is allowed toenforce the obligations against
the other party. He was given a decree for possession of the property purchased by him.
(Collector of Meerut v. Hardian, 1945 All. 156).
19. A's suif against B for possession of premises and arrears of rent was decreed
and in execution A obtained an order for attachment of moveables of B. Then, in
consideration of B agreeing not to appeal against the decree. A allowed him one month's
time to pay the balance of the decretal amount and vacate the premises. field, the
uide:taking not to appeal against the decree was lawful consideration and the agreement
was valid (Gousmohaddin Gajabur Saheb Bhagwan v. Appa Saheb, 1976 Karnazak 90).
20. A supplied goods to B pursuant to an agreement far the sale of goods entered
into between the parties in the black market and the consideration for the promise to
106 MERCANTILE LAW

supply the goods was to consist of unaccounted funds popularly known as the "black
money". It was held that the contracL which is exfacie innocuous, could not be said to
be tainted with illegality under Sec. 23 of the Contract Act. Sec. 23 makes a contract
unlawful of which the consideration or the object is contrary to public policy. The
consideration in the instant case could not be said to be contrary to public policy because
the corresponding considerations are the payment of money and the delivery of goods.
The object of the contract is also not opposed to public policy because the object of the
contract was not to consume or generate unaccounted funds or to defraud the revenues.
The object obviously was to do business so far as the seller is concerned, to sell the
goods and so far as the buyer is concerned, to buy the goods for further sale-and in the
process to make income (Mix Anand Prakasli Om Prakash v. MIs Oswa! Trading Agency,
1976 Delhi 74).
21. A finn paid sales tax of more than Rs. 26,000 in respect of sales to consumers
outside the State of Bombay and which were, therefore, not liable to any sales tax. The
firm had itself collected the Lax money from its customers. The amount was ordered to
be refunded as the sales tax was paid under a mistake of law (TrilokchandMotichandv.
Con&nr of Sales Tax, 1970 SC898).
 Chapter II

Contracts of Indemnity and

Guarantee
PART 2-A
CONTRACT OF INDEMNITY
The Indian Contract Act (Section 124) defines a contract of Indemnity as "a
contract by which one party promises to save the other from loss caused to him by the
conduct of the promisor himself, or by the conduct of any other person". The person
who promises or undertakes to indemnify or make good the loss is called indemnifier
and the promisee or whose loss is made good is called the indemnified. Where 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, there is a contract of indemnity. If B is ordered
to pay to C Rs. 200 and costs of suit, A shall be required to pay B the total amount.
Now, according to the above definition the loss to be made good must be caused
either by the conduct of the promisor himself or by the conduct of any other person, and,
so if loss is caused by accident or by the conduct of the promisee, it would not apparently
amount to a contract of indemnity. If this strict view were accepted the contracts of
insurance might have to be excluded. It may be submitted that such a strict application
of the definition so as to have excluded contracts of insurance and certain other relations
was not intended by the Legislature. The Indian Courts have, therqfore, applied the
English equitable principles to indemnity for as was stated in a Bombay case by Chagla,
J., "...I have already held that Secs. 124, 125, Contract Act, are not exhaustive of the
law of indemnity and that the Courts here would apply the same equitable principles that
the Courts in England do......
In English law, a contract of indemnity has been defined as "a promise to save
another harmless from loss caused as a result of a transaction entered into at the instance
of the promisor." It includes the loss caused by events or accidents which may not or
do not depend upon the conduct of any person, or by liability arising from something
done by the promisee at the request of the promisor. The English definition is more
happily worded and the English law in respect of indemnity has been followed by Indian
Courts.
A contract of indemnity may either be express or implied, and the latter may be
inferred from the circumstances of a particular case, e.g., acts done by A at the request
of B. or money paid by A under compulsion of law in respect of liability imposed on B.
or may be based on the obligation caused by the relationship of the parties, e.g., (the
obligation ofa beneficiary to indemnify his trustee, the relation between auctioneer and
client, principal and agent). The promisee (indemnified) in a contract of indemnity, can
recover from the promisor (indemnifier) all the damages that he may sustain, and if there
has been any suit against the promisee, any cost therein, and any amounts bonafide paid

1. Gajnan Moreshwar v. Moreshwar, Madan, 1942 Born. 302.

107
108 MERCANTILE LAW

in respect of any compromise, provided the promisee had acted as a prudent man and
there has been no express direction by the promisor not to compromise (Section 125).
Since the Contract Act has not staled the time of the commencement of the
indemnifier's liability to indemnify and the word "loss" has been used in Section 124,
doubt has arisen as to the commencement of the promisor's liability. The High Courts
2, Nagpu?, and Bombay have held that the indemnifier does not become
of Lahore
liable until the indemnified has incurred an actual loss. But the High Courts of Calcutta5,
Madras6. Allahabad7 , and Bombay (not following the earlier decision) 8, have decided
that the promisee (indemnified) may compel the indemnifier to place him in a position
to meet liability that may be cast upon him, without waiting until the promisee (indem-
nity-holder) has actually dis,charged it.
It is submitted that the latter view is more correct. We may quote with profit the
observation of Chagla. J. in the Bombay case. The learned Judge says: "It is true that
under the English Common Law no action could be maintained until actual loss has been
incurred. It was very soon realized that an indemnity might be worth very little indeed
if the indemnified could not enforce his indemnity till he had actually paid the loss. If a
suit was filed against him, he had actually to wait till a judgment was pronounced and
it was only after he had satisfied the judgment that he could sue on his indemnity. It is
clear that this might under certain circumstances throw an intolerable burden upon the
indemnity-holder. He might be in a position to satisfy the judgment and yet he could not
avail himself of his indemnity till he had done so. Therefore, the Court of Equity stepped
in and miigated the rigour of the Common Law. The Court of Equity held that if his
liability had become absolute then he was entitled either to get the indemnifier to pay
off the claim or to pay into Court sufficient money which would constitute a fund for
paying off the claim whenever it was made. Sections 124 and 125 Contract Act, are not
exhaustive of the law of indemnity and the Courts here would apply the same equitable
principles that the Courts in England do. Therefore, if the indemnified had incurred a
liability and that liability is absolute, he is entitled to call upon the indemnifier to save
him from that liability and pay it off." In Osman Jamal & Sons v. Gopal, 9 the plaintiff
company before having actually made any payment to the vendor in respect of its liability
to him was held entitled to recover from the indemnifier under contract of indemnity.
"Indemnity is not necessarily given by repayment after payment. Indemnity requires
that the party to he indemnified shall never be called upon to pay."
A contract of indemnity, being a species of contract, is subject to all the rules of
contract, such as, genuine consent, legality of object, etc., and an indemnity procured by
fraud will not he enforced, or where A asks B to beat C. promising to indemnify B against
the consequences and B beats C and is fined Rs. 500. B cannot recover the amount
from A.

PART 2-B
CONTRACT OF GUARANTEE

A person who seeks to borrow money or to undertake some other obligation may

2. Sh.mi Sunder v. Cliandra 1-al 1935 lah. 974.

3. Ranganath v. Padusoo 1935 Nag. 147.
4. Sanker Nimha 1 i v. 1.azman Napu 1940 Boni.161.
5. Kamiiaiinalh lthattacharjee v. Nohokurnar(l899)26Cal. 241.
6. RamadigalhudaYar v. Munaindai AcId (1915)38 Mad. 791,25 I.C. 835.
7. Shiamlal v. Abdul Salal 1931 All. 754; Abdul Majid v. Abdul Rashid 1936, All. 598.
8. Gajnan Mureshwarv. Mureshwar Madan 1942 Born. 302.
9. (1919)56 Cal. 262; Profulla v. Gopee 1946 Cal. 159.
 CONTRACTS OF INDEMNITY AND GUARANTEE 109

be required to pledge some property with the creditor as security. But the creditor may
be willing to lend money to a person if he can get some other person to assume personal
liability as security for the payment of the loan or for the performance of the promised
acts. In this case the creditor gives a loan to the debtoron the combined financial standing
of the debtor and some third persoh, called the surety.
Section 126 of the Contract Act defines a contract of guarantee as: "A contract to
perform the promise, or discharge the liability of a third person in case of his default.
The person who gives the guarantee is called the 'Surety', the person for whom the
guarantee is given is called 'Principal Debtor', and the person to whom the guarantee
is given is called 'Creditor.' " In India a guarantee may be either oral or written, although
in English law it must be evidenced in writing.
Suretyship is the lending of credit to aid a principal debtor who has not sufficient
credit of his own. It follows that in a contract of guarantee there must be three parties,
viz., the creditor, the principal debtor and the surety, the debtor being primarily Liable to
discharge his debt or perform his promise and the surety being secondarily liable.
When A requests B to lend Rs. 5,000 to C and guarantees that C will repay the
amount-within a stated time, and on C's failing to pay he will himself pay to B, there is
a contract of guarantee.
It will be noticed that in a contract of guarantee there are three separate contracts
giving rise to a triangular relationship. These are: (i) between the creditor and the debtor,
creating the debt; (ii) between the surety and the creditor, creating a liability of surety in
case of debtor's default, and (iii) an implied contract between the surety and the debtor
that the debtor will indemnify the surety after the latter has paid the creditor on the
debtor's default. A guarantee may be given not only in case of a debt, but also where a
party wants to buy goods on credit, and for the good conduct of another person. The
English definition brings out this more clearly, which says: "A guarantee is a promise
made by one person to another to be collaterally answerable for the debt, default or
miscarriage of a third person." To constitute a guarantee, however, it is not necessary
that the surety must undertake to be personally liable for the default of the principal
debtor; it would be sufficient if a person deposits documents of his property by way of
security with the creditor. 10
Fiduciary Relationship.—A contract of guarantee is riot, as is the contract of
insurance, a contract uberriniaefidei, so that neither theereditor nor the principal debtor
is under any legal duty to disclose to the guarantor facts which might influence him
against entering into the contract. Thus, if A offers to guarantee B's bank account, the
bank is under no obligation to reveal matters which show that B is a bad risk. 1 But
active misrepresentation by the creditor (or the debtor with the creditor's knowledge)
will be grounds for rescission. Active concealment will amount to misrepresentation.
However, once the contract is made, the creditor owes a duty of the utmost good faith
to the guarantor, who is entitled to be discharged if this duty is not observed. Thus the
creditor must disclose material facts coining to his knowledge and affecting the surety's
risk, but need not disclose mere suspicions, e.g., A guaranteed B's bank account, and B
overdrew on the guaranteed account to pay off debts to another creditor. The bank
suspected that A was being defrauded, but did not disclose this. Held, the banker was
under no duty to do so IProvincial Ila,ik v. Glanusk (1913)].
Guarantees in the nature of insurance are uberrimae fidel e.g., "fidelity
guarantee" of the conduct and good faith of some third person. In such a guarantee the

10. J.igjivandas v, King Kamiton & Co. (1931)55 Born. 677: 1931 Born. 337; Re Coutey (1938)
2 All E.R. 127.
11. Wythes v. Labouchere (1859)
110 MERCANTILE LAW

creditor (e.g.. the employer must disclose the material facts about the principal debtor
(i.e.. the employee), otherwise the surety will be discharged. Thus A gave a fidelity
gu.rantee in respect of L to L's employer. B. B omitted to disclose that L had
misappropriated some of B's money and was only being retained in employment in
reliance on A's guarantee bond. Held. L's former dishonesty should have been disclosed,
and A was not liable on his guarantee. t In other kinds of guarantee, the rule is that the
creditor need not offer information if the surety has equal opportunity to discover facts
about the principal debtor.
DISTINCTION BETWEEN INDEMNITY AND GUARANTEE
(1) In indemnity a promisor is primarily and independently liable to the promisee,
and, therefore, there are only two parties. In a guarantee, the liability of the surety is
collateral or secondary, the primary liability being that of the principal debtor; and, hence,
here the concurrence of three persons is essential.
(2) In the case of a contract of indemnity it is not necessary for the indemnifier to
act at the request of the debtor, whereas in the case of a contract of guarantee it is
necessary that the surety should give the guarantee at the request of the debtor.13
(3) In the case of guarantee there is an existing debt or duty, the performance of
which is guaranteed by the surety, while in the case of indemnity, the possibility or risk
ofany loss ha1lning is the only contingency against which the indemnifier undertakes
to indemnify.
(4) In a contract of guarantee, where the surety discharges the debt payable by the
principal debtor to the creditor, the surgty, on such payment, is entitled in law to proceed
against the principal debtor in his own right, while in the case of indemnity, the
indemnifier cannot sue third parties in his own name, unless there be assignment. He
mustbring the suit in the name of the indemnifled.IS
(5) The person giving indemnity has some interest-in the transaction apart from
his indemnity, while the guarantor is totally unconnected with the contract except by
means of his promise to pay on debtor's default. In fact, the guarantor must not have any
financial interest in the contract.
(6) Rights of indemnity may arise out of express or implied contracts or out of
obligations imposed by law, e.g., as between principal and agent, or as between master
and servant. The liability of the surety arises only out of contract between him and the
creditor. The surety undertakes an obligation at the express or implied request of the
principal debtor (P.N. Bank v. Sri Bikra'n Cotton Mills, 1970 S.C. 1973).
(7) In English law, a contract of guarantee to be actionable, must be evidenced by
a memorandum or note as required by section 4 of the Statute of Frauds while a contract
of indemnity need not be in writing and an oral promise will be enforceable. But this
distinction does not prevail in India, as both the contracts of indemnity as well as
guarantee are valid whether they are written or oral.
Like a contract of indemnity, a guarantee must also satisfy all the essential elements
of a general contract. There is, however, a special feature to be noted with reference to

12. Lndon General Omnibus Co. v. Holloway (1912)

13. Brahmayya v. Srinivasan, 1959 Mad. 122.
14. Guild v. Cinrad (1894)2 Q.B. 885.
15, Periamramma Marakkayar v. Banias & Co. (1926) 49 Mad. 156: 1926 Mad. 445; Vyavan
Chettiarv. Official Assignee (1932)55 Mad. 949, 139 I.C. 562.
 CONTRACTS OF INDEMNITY AND GUARANTEE Ill

consideration in a contract of guarantee; the consideration received by. the principal

debtor is sufficient for the surety. The detriment suffered by A lending money to or
dealing with B at C's request is a sufficient consideration for C's promise to stand surety
(Section 127).
Surety and minor debtor. In Kashiba v. SripaI 16, the Bombay High Court held
that where the principal debtor is a minor and so is not liable, the surety is liable. It was
observed that the contract between the surety and the creditor is not collateral but
independent and the surety is held liable as principal debtor. Later decisions of the
Bombay High Court and a recent decision of the Madras High Court have taken the
contrary view and the surety is held not liable. In E.KRambiar v. M.K. Rwnan, 1957
Mad. 164, Rajgopala Ayyangar, J. observed; .. ....the liability of the surety is only
ancillary and can rest only on a valid obligation on the part of the party whose debt or
obligation is guaranteed." "AS the obligation of a surety is an obligation accessory to
that of the principal debtor, it follows that it is of the essence of the obligation that there
should be a valid obligation of a principal debtor, consequently if the principal debtor is
not obliged, neither is the surety as there can be no accessory obligation without a
principal obligation". (Pothier). In the words of Chitty: "In the case of guarantee as
distinguished from indemnity, the sine qua non is the existence of the liability of the
principal debtor. So the surety is not liable if the debt of the principal debtor (minor) is
itself void". Hence a surety for a minor debtor is not liable, as a minor cannot be regarded
in default. But a discharge of the principal debtor by operation of law does not discharge
I?
the surety.
NATURE OF SURETY'S LIABILITY
The liability of a surety is variously described as secondary, accessory or contin-
gent, in the sense that the surety is liable only on default of the principal debtor. So,
unless the principal debtor has made a default, the surety cannot be called upon to pay,
and where the surety becomes insolvent before default by the principal debtor, the
creditor cannot prove against surety's assignee in insolvency. But the moment the
principal debtor defaults in the payment or where the guarantee was for the conduct of
a party and, there is some breach of duty by the party causing damage to the holder of
the guarantee, then, immediately, the surety becomes liable, as if he were the principal
debtor. It is obvious that the surety has no right to ask the creditor to exhaust his remedy
against the principal debtor nor can he demand a notice from the creditor, that the
principal debtor has defaulted, for according to law it is the surety's duty to see.that the
principal debtor pays or performs his obligation.' 8 Therefore, as soon as the time for
payment has come and the principal debtor does not or Is unable to pay the surety
becomes liable to pa Thus, the creditor may file a suit against the surety without suing
the principal debtor. A suit may also be maintained against the surety for the full
amount of the debt where the principal debtor has been adjudged insolvent or has gone
into liquidation. 20 Again, where a creditor holds securities from the principal debtor for
his debt, the creditor need not first resort to these securities before suing the surety. Of
course, a contract may specially provide that the creditor must exhaust his remedies
against the principal debtor, or give notice of default or proceed against the securities.

16. K3shiba v. Shiipat (1894)9 Born. 1697; Sohan Lai v. Puran Singh 1916 Punj. Rec. No. 54,
165; Tikki Lai v. Karnal Cband (1940) Nag. 1632, 1940 Nag. 327; But see Courts & Co. v.
Brown. Lecky (1947) K.B. 104.
17. Subramanian v..Paichu Rowthar(1914) Mad. 45.
18. Bank of Bihar v. Damodar Prasad, 1969 SC 297.
19. Sankana v. Virupokahapa (1883) 7 Born. 146; Inayatutlah v. Rani 1886 All. W.N. 306; Depat
Dart C'haudhri v. Secretary of State 1929 Lab. 393.
20. Jagannath v. Shivanarayan (1940) Born. 387: 1940 Born. 247.
112 MERCANTILE LAW

And, since the surety is liable only for the guaranteed debt, if the sum or part of the sum
has been paid by the principal debtor, the surety cannot be liable for more than the amount
remaining unpaid.
Similarly, the surety will not be liable for the cost of fruitless action against the
debtor, unless the creditor has given previous notice of his intention to sue. But apart
from agreement, the surety will be liable for interest, he is liable for all that the principal
debtor would be liable for. Hence, once the liability of the surety arises, it is co-extensive
with that of the principal debtor. It will be neither more nor less, although by a special
contract it may be made less than the principal debtor's but never greater (Section 128).
The law does not teat the principal debtor and surety as one person; therefore, any
admission by the principal debtor or a judgment obtained against the principal debtor
will not be enforceable against the surety, without a special agreement to that 'effecL
Similarly any acknowledgment or part payment made by the principal debtor with a view
to saving limitation will not be binding upon the surety. Further, it is not open to the
creditor to call upon the surety to pay under the contract of guarantee unless the creditor
has performed his part of the contract. 7'2 For this reason the surety is sometimes called
a "Favoured debtor." "A surety is undoubtedly and not unjustly, an object of some
favour both at law and at equity" (Lord Selborne)

KINDS OF GUARANTEE
A contract of guarantee may be for an existing debt, called "Retrospective"
guarantee, or for a future debt termed as "Prospective" guarantee. It may. again, be a
"Specific" guarantee. when it is given for a single debt, and comes to an end when the
debt guaranteed has been paid, or a "Conti'nuing" guarantee, when it extends to a series.
of distinct and separable transactions. It is a continuing guarantee where A, in considera-
tion of B's discounting. at A's request, bills of exchange of C, guarantees to B. for 12
months, the due payment of all such bills to the extent of Rs. 10,000, or Abecomes
answerable to C for B's purchases from C for 6 months to the extent of Rs. 1,000. A
continuing guarantee can be revoked by the surety as to future transactions, by notice to
the creditor; but the surety remains liable for all transactions, previous to the notice of
revocation. So, if during the three months B has discounted bills for C to the extent of
Rs. 2,000, and A revokes the guarantee, then A will be discharged of all liability to B
for any subsequent discount. But A is liable to B for Rs. 2,000 on default of C. When a
guarantee is continuing it is not exhausted by the first advance or credit up to the
pecuniary limit. A guarantees B's overdraft up to Rs. 1,000. If B overdraws up to Rs.
1,000 and then reduces his overdrafts to Rs. 500 and subsequently increases it to Rs.
1,000 again. A is still liable if his guarantee is a continuing one. A guarantee given for
an entire consideration, is not continuing and cannot be revoked during the continuation
of the consideration, unless a material change occurs in the situation, such as miscarriage
of the person whose fidelity is guaranteed. So, a guarantee of the fidelity of a person
appointed to a place of trust, e.g., in a bank, is not a continuing guarantee. 23 Nor is a
24
guarantee for the payment by instalments of a certain sum within a definite time.
Agair, the guarantee may be for an ascertained debt, e.g., for a loan of Rs. 5000,
or in respect of a floating balance. e.g., a trade debt with a running balance of account
not exceeding Rs. 5.000. Further the guarantee may be for the whole amount or for a

21. Exparte Young (1181) 17 Ch. D. 688: Shree Menakshi Mills v. Ratilal Tribnavindas (1941)
Born. 273: 1941 Born. 108. See also 1950 Mad. 79. and 1951 Mad. 48 (F.B.).
22. Probodh Kumar v. Gillanders & Co. 1934 Cal. 699; Pratapsingh v. Keshavlal 1935 P.C. 12;
Necresalinghum v. Subhoraduda 1939 Mad. 932 and also 1939 Mad. 152.
23. Sen v. Bank of Bengal (1929)47 I.A. 164; 58 I.C.I.
24. l3hagwandas v. Secretary of State 1924 Born. 465; 96 I.C. 248
 CONTRACTS OF 1M)EMNTY AND GUARANTEE 113

limited amount. Difficult questions, however, arise in the case of a guarantee for a limited
amount, for an important distinction exists as to guarantee limited in amount. A surety
may guarantee only a part of the whole debt or he may guarantee the whole debt subject
to a limit. For instance, where B owes A Rs. 5,000 and C has stood surety for Rs. 3,000
the question may arise whether C has guaranteed Rs. 3,000 out of Rs. 5,000 subject to
a limit of Rs. 3.000. This matter becomes important when B is adjudged insolvent and
A wants to prove in B's insolvency and also enforce the liability against C. If C has stood
surety only for a part of the debt and if B's estate can pay only 25 Paise dividend in the
rupee, then A can get Rs. 3,000, the full guaranteed amount from C and Rs. 500 from
B's estate being one-fourth of the balance of Rs. 2.000, which was not guaranteed. Since
alter paying Rs. 3,000 to A, C can step into his shoes and claim from B's esate, C will
get from B's estate Rs. 750, being one-fourth of Rs. 3,000 paid by C to A. If, on the
contrary, C has stood surety for the whole debt of Rs. 5,000 subject to a limit of Rs.
3,000, then A can recover from C Rs. 3,000 and from B's estate 25 Passe dividend on
the entire amount of Rs. 5,000 i.e., Rs. 1,250, and C will not be entitled to get any
dividend, unless A has been fully paid and this can happen only if B's estate declares
higher dividend, say 50 Paise in the rupee. For, in that case, B's estate will pay Rs. 2,500
and then C can get half of this amount.
Where there is a floating or running balance of account and the guarantee 6js only
of a portion thereof such a contract applies prima facie to a part of the debt only. Thus.
C guarantees A against trade debts to B contracted by B as a running balance of account
to any amount not exceeding Rs. 3,000, and B becomes indebted to A for Rs. 5,000 and
then becomes insolvent. If a dividend of 50 Paise in the rupee is declared, A will get Rs.
2,500 from B's estate and only Rs. 500 from C and not the balance ofs. 2,500 as the
guarantee by C was only for Rs. 3000 and that amount A has recovered. 7 If the liability
is not for a floating balance, but in respect of a debt already ascertained, then prima facie
the contract would be construed as security for the whole debt. In such cases, it is a
question of construction as to whether the intention was to guarantee the whole debt with
a limitation on the liability of the surety or to guarantee part only of the debt. It is,
however, open to parties to contract, even in case of a floating balance, that a limited
guarantee shall be applicable to the whole debt. In such a case, the creditor can in the
event of principal debtor's insolvency, prove for the whole debt without any deduction
and the surety cannot stand in the creditor's shoes until creditor has been paid 100 paise
in the rupee.

RIGHTS OF THE SURETY

The surety has certain rights against the creditor, the principal debtor and his
co-sureties, and such rights include those of exoneration, subrogation, indemnity, and
contribution.
RIGHTS AGAINST THE CREDITOR
Right of Exoneration: In the case of fidelity guarantee, the surety can call upon
the creditor or the employer to dismiss the employee whose honesty he has guaranteed,
in the event of proved dishonesty of the servant. Also, the surety may file a suit for
declaration that the principal debtor is the person to pay the amount. In that event the
surety is exonerated.
At the time of payment, a surety can ask the creditor to marshal his securities. Thus,

25. Gray v.Seckhan(1872) Ch. Ap.690 Philipsv. Mildiell (1930) 57 Cal. 764; I930CaL 17.
26. Ellis v.Emnianual(l876)Ev. Div. 157.
27. Bardwell v. Lydall (1831) Bing. 489.
114 MERCANTILE LAW

where the creditor has got two or more securities from the debtor in respect of the same
debt, the surety can compel the creditor to resort to those securities first which are
exclusively the creditors, and to that extent he is exonerated.
If the surety learns that the debtor is about to remove his property from the
jurisdiction to avoid his creditors, the surety may call upon the creditor to take steps
against the principal debtor to enforce his right. If the creditor fails to take action against
the principal debtor, the surety is released to the extent he has been harmed.
Right to Securities: On paying off the creditor, the surety steps into his shoes
and is entitled to all the securities which the creditor may have against the principal
debtor, whether the surety is aware of the existence of such securities or not. " It is the
duty of the creditor to keep the securities intact; not to give them up or to burden them
with further advances". Further, the creditor must hand over to the surety the securities
in the same condition as they formerly stood in his hands. If the creditor loses, or, vithout
the consent of the surety, parts with the securities, then the surety is discharged to the
extent of the value of the securities.
Difficulty arises, when the surety has guaranteed only a part of the debt and
consequently even when he has paid all that he was liable to pay, the creditor's claim
against the principal debtor is not yet fully satisfied. The Bombay High Court held in
Goverdhan Dos v. The Bank of Bengal (1851)15 Born. 48, that the surety was entitled
to the securities only after the creditor has been paid fully even when the surety has paid
his guaranteed amount. So, where A owed a total debt of Rs. 3,15,000 half of which was
secured by a mortgage and the other half guaranteed by C. C, on payment of Rs. 1,25,000
claimed that he was entitled to that extent to stand in the place of the creditor and to
receive a share of the proceeds of the securities proportioned to the sum which he had
paid. But Farran J. held that although the equity between the creditor and the surety is
that the creditor shall not do anything to deprive the surety of his right, yet the creditor's
right to hold his securities is paramount to the surety's claim upon such securities, which
only arises when the creditor's claim against such securities has been satisfied."
However, the Madras High Court has held differently in Bhushayya v.
Suryanarayna, 1944 Mad 195. Kiishnaswami Ayyanger, J. held that the sureties who
have paid off their obligations were entitled to a proportionate share in the mortgage,
even when a part of the creditor's claim against the principal debtor was still unsatisfied.
The learned Judge said: "The condition laid down by Section 140 for this right to arise
is that the payment by the surety of all that he is liable for, and not the payment of all
that may be due to the creditor who holds the securities. Where theguaranteed debt is a
fraction only of the debt, the surety's right comes into existence immediately on payment
of that fraction, for that fraction is, so far as he is concerned, the whole"
Right to Share Reduction : In Hobson v. Bass (1871) 6 Ch. D. 792 J gave a
guarantee to B in the following words: "I hereby guarantee to the payment of alt goods
you may supply to 1-1, but so as my liability to you under this or any other guarantee shall
not at any time exceed the sum off 250". E gave a similar guarantee. B supplied goods
to H to the amount of £ 657. H became bankrupt. B proved the whole sum in the
insolvency of H and then called upon the guarantors who paid him £ 250 each.
Subsequently, B received from the Receiver a sum of 2 S. I d, in the pound on £657. It
was held that each of the guarantors was entitled to a part of the dividend bearing to the
whole the same proportion as £ 250 to £ 657"
Right of Set off: If the creditor sues the surety the surety may have the benefit of
the set off, if any, that the principal debtor had against the creditor. He is entitled to use
the defences of the debtor against the creditor. If. for example, the creditor owes the
debtor something, or has in his hand something belonging to the debtor for which the
debtor could have counter-claimed, the surety can also put up that counter-claim. He can
 CONTRACTS OF INDEMNifY AND GUARANTEE 15

claim such a right not only against the creditor, but also against third parties who have
derived their title from the creditor.
RIGHT AGAINST THE PRINCIPAL DEBTOR
Right of Subrogation When the surety has paid the guaranteed debt on the
default of the principal debtor, he steps into the shoes of the creditor and will be able to
exercise as against the principal debtor all these rights and remedies which could be
exercised by the creditor. In other words, the surety is subrogated to all the rights which
the creditor had against the principal debtor. In Aniritlal Goverdhan Lallan v. State of
Travancore, 1968 SC 1432, the Supreme Court has laid down that the surety will be
entitled to every remedy which thecreditor 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 transferred to him, 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........"
Right to Indemnity: In every contract of guarantee there is an implied promise
by the principal debtor to indemnify the surety; and the surety is entitled to demand from
the principal debtor whatever he has paid under the guarantee. But if he pays any amount
which the principal debtor is not liable to pay, he cannot demand indemnification from
the principal debtor.
RIGHTS AGAINST CO-SURETIES
Contribution Sometimes it may happen that one and the same debt has been
guaranteed by two or more sureties either jointly or severally. Section 146 provides for
a right of contribution between co-sureties. When a surety has paid more than his share
of the debt to the creditor or a decree has been passed against him at the Suit of the
creditor, for more than his share, he has a right of contribution from the co-sureties, who
are equally bound to pay with him.
'A. B and C are sureties to D for the sum of Rs. 3,000 lent to E. E makes default in
payment. A, B and C are liable, as between themselves, to pay Rs. 1,000 each, and if
any one of them has to pay more than Rs. 1,000, he can claim contribution from the other
two to reduce his payment to only Rs. 1,000.
If one of the sureties becomes insolvent, the co-sureties shall have to contribute
the whole amount equally. Although a surety can file a suit for a declaration against the
other co-sureties before he is actually compelled to pay, yet he cannot ask for contribu-
tion, unless he has actually paid more than his share. Also all the sureties are entitled to
share in the benefit of any security or indemnity which anyone of them has obtained
from the principal debtor, and this whether they knew of it or riot. 28 Where the creditor
releases any of the several sureties, that does not operate as a discharge of his co-sureties.
But the released co-surety will remain liable to the others for contribution in the event
of default (Sri C/tend v .JagdishPa/'>Kisltanchand 1966 SC 1427).
It should be noted that the right of contribution is available only when all the
sureties guarantee one and the same debt. It cannot be exercised where more persons
than one become sureties by distinct and separate obligations for different portions of a
debt..29 Where the co-sureties have agreed to guarantee different sums they are bound
under Section 147 to contribute equally up to the maximum of the obligation of each
one.
A, B, and C as sureties for D, enter into three several bonds, each in a different

28. Steel v. Dixon (1881) 17 Ch. D. 325.

29. Ce,e v. Tyyan (1823) Turn & Roth 420; 24 R.R. 89.
116 MERCANTILE LAW

penalty, viz., A in the penalty of Rs. 10,000. B in that of Rs. 20.000, C in that of Rs.
40.000 conditioned for D's duly accounting to E, D makes default to the extent of Rs.
30,000. A, B and C are each liable to pay Rs. 10,000. But if makes default to the extent
of Rs. 40,000, then A is liable to pay Rs. 10,000 (his maximum obligation) and B and
C will pay equal shares of the balance, i.e., they will pay Rs. 15,000 each. ft }gain, if
makes default to the extent of Rs. 70,000, then A, B, and C will each pay the full penalty
of his bond.
The rule in these cases is that subject to the limit fixed by his guarantee, each surety
is to contribute equally and not proportionately to the liability undertaken.

DISCHARGE OF SURETY
A surety may be discharged by (1) the revocation of the contract of guarantee, (ii)
by the conduct of the creditor, or (iii) by the contract of suretyship being invalid. Each
of these main grounds of discharge of surety has further classes. The classification is
given in the following chart.

1. By Revocation

2. By conduct
I 1.
2.
3.
Revocation by Surety (Sec.130)
Death of Surety (Sec.131)
Novation.

1. Variation of terms without consent

of Surety (Sec. 133).
2. Release or Discharge of Principal
of Debtor without Surety's consent
creditor (Sec.134).
Discharge 3. Compounding by Creditor with
of Principal Debtor without Surety's
Surety consent (Scc.135).

By Invalidation] 1. Creditor's act or omission impairing

of Surety's eventual remedy (Sec. 139).
Contract 2. Guarantee obtained by Fraud or
Misrepresentation (Sec. 142) or by
J Concealment (Sec. 143).
3. By failure of Consideration.

By Revocation of Contract of Guarantee - We have been seen that a contract

of guarantee may be either specific or continuing. A specific guarantee, i.e., guarantee
relating to one transaction, cannot be revoked if the liability is incurred. Thus, if A lends
B a certain sum on the guarantee of C, then C cannot revoke the contract of guarantee.
But it can be revoked by notice if the liability has not been incurred. So, where A has
not yet given the sum to B, even though the guarantee has been executed by C, C may
revoke the contract by giving notice to the creditor, and if A gives the money to B after
this notice then C will not be liable to pay on B's default. Where the guarantee is a
continuing one and extends to a series of transactions, it may be revoked by the surety
as to future transaction by giving notice to the creditor. The Act contemplates series
of distinct and separate transactions to constitute a continuing guarantee which can be
revoked by notice. The test adopted by Courts in order to find out whether revocation
for the guarantee is entire, supplied at one time; or whether it is fragmentary, supplied
from time to time. A guarantee by C of payment of monthly rent by B in respect of a
 CONTRACTS OF INDEMNITY AND GUARANTEE Ill

lease for five years is not revocable, as the guarantee is for five years and the considera-
tion isa lease for 5 years. But, if A. in consideration of B's discounting bills of exchange
for C, guarantees, for six months, the due payment of all such hills to the extent of Rs.
50,000, and B discounts bills to the extent of Rs. 20,000, and after this A revokes his
guarantee, this revocation discharges A from all liability to B for any subsequent
discount. But A will remain liable for Rs. 20,000 in case of default by C. The guarantee
by A is nothing more than an offer by him and does not become binding unless accepted
by B by discounting C's bills. Each discount being a separate transaction, the standing
offer can be revoked with regard to future acceptance.
Revocation by Death—As a continuing guarantee can be revoked with respect to
future transactions, so does the death of the surety act as revocation and the surety's
estate will not be liable for any transactions after his death. For the death of the surety
to act as revocation it is not necessary that the creditor must have known of the
surety's death. So, if the creditor enters into fresh transactions after the Surety's death
without any knowledge of such death, then the deceased surety's estate will not be liable
for such transactions. In English law, however, notice of surety's death is essential before
the rule will come into ope'ration,
Revocation by Noation—A contract of suretyship may be discharged by nova-
lion, i.e.. fresh contract being entered into either between the same parties or between
other parties, as a consequence of which the original contract of suretyship becomes
discharged.
Discharge by Conduct of Creditor - A surety is discharged by the conduct of
the creditor. As a surety is liable only for what he has positively undertaken in the
guarantee, any alteration made without the surety's consent in the terms of the contract
Octween tile principal debtor and the creditor, will discharge the surety as to transactions
subsequent to the variation.30 In Kahan Singh v. Tek Cliand, 1968 1 & K 93, where after
decrease had been passed against the principal debtor and Sureties, the creditor and
principal debtor compromised without consulting the sureties, the sureties were held
'discharged. A surety is bound to the letter of his engagement, and it is incumbent on the
creditor to show that the terms of guarantee have been strictly complied with. An
alteration without the surety's consent even for his benefit will discharge him, as Lord
Westbury said ill v. Brown (1862)45 E.R. 1225: 135 R.R. 181: ........you bind him
[surety] to the letter of his engagement ........If that engagement he altered [without the
surety's consent] in a single line, no matter whether it he altered for his benefit, no matter
whether the alteration be innocently lna(k, he has a right to say: 'The contract is no longer
that for which I engaged to be surety; you have put an end to the contract that! guaranteed
and my obligation therefore is at an end'. A guarantor cannot be held liable beyond the
liability undertaken by him or beyond the terms of his contract (State of M,Iiara./itra
v. Kau[, 1967 S.C. 1634). There is, however, one qualification to this general rule that,
where a guarantee is for the performance of several distinct debts, duties or ubligatijns.
a variation in the nature of une of them will not discharge the surety as to the rest: A
contract of repurchase of goods h' the seller from the buyer (whose puichases were
guaranteed) does not discharge the original contract but the two contracts stand together
and, therefore, the surety under the original contract is not discharged. .Similarly. a
contract of resale to the vendor does not dischar g e a surety from his original contract.
Again, an attempted var i at ion which is uni perat ive, as being against law appl icab [e as
between the creditor and the principal debtor will not discharge the surety. A surety will

30. Narayan v. Markanitya, 1959 Born. 516. See also C.N amnhiar v. Raman Nair 1959 Ker. 176:
Indian Hank v. Knslmswamy, 1990 Mad. 115.
31. Crcmyden Gas Co. v. Dickenson (1876)2 C.P.D. 56; Skillet v. Wtcicher (1866-67) 1..R.l.C.P.
217:2 ('P.469.
its MERCANTILE LAW

not be discharged by a variation to which he has assented, but the onus is on the creditor
to show that the surety assented to the alteration.
By Release or Discharge of Principal Debtor—A surety will be discharged if
the creditor makes a contract with the principal debtor by which the principal debtor is
released, or acts or makes an omission which results in the discharge of the principal
debtor (Section 134). A supplies goods to B on the guarantee of C. Afterwards B
becomes embarrassed and contracts with A to assign his property to him inconsideration
of his releasing him from his demands on the goods supplied. Here B is released from
his debt, and C is, in consequence, discharged from his suretyship. Or, again, where A
contracts with B for a fixed price to build a house for B within a stated time, B, supplying
the necessary limber. C guarantees A's performance of the contract. B omits to supply
the timber. c is discharged from his suretyship. But if the principal debtor is discharged
of his debt by the operation of law, e.g., is discharged in insolvency; this will not operate
as a discharge of the surety. And, if the creditor expressly reserves his remedies against
the surety, the surety will not be discharged. Also, where there are cosureties, a release
by the creditor of one of them does not discharge the others (Srichand V. Jagdishchand,
1966 S.C. 1427): neither does it free the surety so released from his responsibility to
other sureties (Section 138). But in English law, if the cosureties are jointly liable, the
release of one will discharge the others.
CREDITOR'S OMISSION TO SUE WITHIN LIMITATION PERIOD—
WHETHER DISCHARGES SURETY

Where the creditor failed to sue the principal debtor within the period of limitation,
thereby, in effect, discharging the principal debtor, opposite views have been taken by
the Indian Courts. But the Privy Council ruling confirming the majority view has set at
rest the conflict, and the law may be taken as settled now. Accordingly, omission of the
creditor to sue within the period of limitation does not discharge a surety. Of course,
even Section 137 provides that mere forbearance on the part of the creditor to sue the
principal debtor or enforce any other remedy against him does not discharge the surety.
B owes to C a debt guaranteed by A. The debt becomes payable. C does not sue B for a
year after the debt has become payable. A is not discharged from his suretyhip. A surety
cannot compel the creditor to enforce his rights against the principal debtor.
Corn pounding by Creditor with Principal Debtor—Where the creditor, without
the consent of the surety, makes an arrangement with the principal debtor for composition
or promises to give him time or not to sue him, the surety will be discharged (Section
135). This section will apply only where there is a binding contract, though it need
necessarily be expressed as even a tacit or implied contract inferred from the acts of the
parties, is equally binding as an express one. And, forbearance to sue, exercised in
pursuance of an agreement without consideration, would not discharge the surety, as it
is nothing more than "forbearance" within Section 137. The acceptance of interest in
advance by a creditor without the consent of the surety, operates as an agreement to give
time and will discharge the surety, for the creditor cannot sue the principal debtor until
the time covered by the payment in advance has expired. 32A consent decree, made
without the surety's consent, for payment by instalments of the sum due from principal
debtor discharges the surety as payment by instalments gave time to the debtor. 33 The
mere fact of striking a balance between the creditor and principal debtor so as to decide

32. Kalir Prasanna v. Arnbica Charan (1872) 9 B.L.R. 261: Protab Chundra v. Tour Chunder
(1878)4 Cal. 132.
33. National Coal Co. v. Kashitish Bose & Co. 1926 Cal. 818.
 cotrntAcTs OF 1NDEMNTY AND GUARANTEE 119

what is due does not discharge the surety for it could not extend the time BAnd, if the
surety has paid part of the debt before the composition, he is as to that not a surety, but
a principal creditor and cannot recover it under section 135 .351t is laid down in Section
136 that where the contract to give time to the principal debtor is made by the creditor
with a third person, and not with the principal debtor, the surety is not discharged. C, the
holder of an overdue bill of exchange drawn by A as surety for B and accepted by B,
contracts with M to give time to B. in consideration of an undertaking by M to see the
bill paid. A is not discharged.
By Creditor's Act or Omission Impairing Surety's Eventual Remedy—If the
creditor does any act which i s' against the rights of the surety, or omits to do any 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 surely is discharged (Section 139).
Where against the terms of the guarantee the Government allowed the contractor (the
principal debtor) to remove felled trees from a forest, the surety was held to be discharged
(State of M.P. v. Kaluram, 1967 Sc 1105). Again, A puts M as apprentice to B, and gives
a guarantee to H for M's fidâlity. B promises on his part that he will, at least once a
month, see M make up the cash. B omits to see this done, as promised and M embezzles.
A is not-liable to B on his guarantee. But mere passive acquiescence by the creditor in
irregularities on the part of the principal debtor such as laxity in the time and manner of
rendering accounts by a collector of public moneys whose fidelity is guaranteed will not
itself discharge the surety. Neither is the surety discharged from liability for the principal
debtor's default by saying that default would not have occurred, if the creditor had
exercised all powers of superintending the performance f the debtor's duty. For, the
employer of a servant whose due performance of work is guaranteed does not contract
with thç surety that he will use the utmost diligence in checking the servant's work.
Likewise, the mere passive inactivity of the credi4or to whom a guarantee is given or his
neglect to call the principal debtor to account in reasonablc time and to enforce payment
against him does not discharge the surety. There must be some positive act done to the
prejudicof the surety, or such degree of negligence as to imply connivance and amount
to fraud. But where the surety bond in respect of a decree in instalments provided that
the decree-holder should execute the decree if default was made, and the decree-holder
allowed the decree to become time-barred, the surely was discharged. 37 Also, where a
person stood surety to a bank for payment of a customer's current account, the act of
the bank in allowing such customer to open a separate account in his own name, was
held to discharge the surety. 38 Similarly, where one stands surety for several defendants
and the decree-holder proceeds 39 againstone of them only, the surety will be discharged
by virtue of the exoneration of the other defendants. Sec. 139 is similar to Sec. 40 of the
Negotiable Instruments Act, 1881. which discharges the indorser from liability in cases
where the holder destroys or impairs indorser's remedy against a prior party.
By Invalidation or Contract - A contract of guarantee, like any other contract,
may be avoided, becauseit is either void or voidable. If the debt itself is void for illegality,
it cannot be recovered from the guarantor. So, guarantees have been held void given for
a secret preference by a bankrupt for compounding a debt. Also, where guarantee is
obtained by coercion or undue influence, it would be void. Therefore, a contract of

34. Devidas v. Sant Mohan Singh 1931 Lah. 627.

35. Bombay Co. Ltd. v. Official Assignee (1921) 44 Mad. 381.
36. Black v. Oitomami Bank (1862) IS E.R. 573; R.R. 101.
37. Hazan v. Chumu Lal 8 Al!. 259,
38. Chuzanvi v. National Bank of India (1916)20 C.W.N. 562.
39. Sitaramaswamy Sastmi v. Basavayya (1921)60 T.C. 114; 12 LW. 536.
 MLR(A-.Ilt.fi 1J'\V

not liable, if it is void, at the option of

uretsl)il) will he un iforeahk and .i surety is
the surely, as in the case of mistake or traod. Sections 142 and 143 read:
142. Any guarantee which has been obtained by means of misrepresentation
made by the creditor, or with his knowledge and assent, concerning a material part of
the transaction, is invalid.''
143. Any guarantee which the creditor has obtained by means of keeping silence
as to material circwnstance is invalid.''
FailureofcoflsideI'aIifl—A surety will be discharged ott the Ia t lureofconsidera-
tion. But there must be substantial failure of consideration in order to operate as
discharge. Where it was intended that two or more co-sureties should join, but it was
discovered that they did not join, then the surety who actually signed under the
impression that others were going to join is discharged from his suretyship. This is
provided in Section 144.

St.' \1 \i A I V

I udemnit y—Wherc a person promises to indemnify the other or make good hm

loss caused io him by the conduct of time promisor or any other person or by accident,
there is a contract of indemnity. A contract of insurance is a contract of indemnity.
There are two parties to a contract of indemnnity—the i ndeniiniricr who promises
to make good the loss, and the mndemonifled, whose loss is made good.
Indian Contract Act is silent on the point of time for indeinnifie's liability to
indemimmmify. There is a conflict of opinion of various High Courts. Better view appears to
nnified h:Ls incurred an absolute Ii:Lbility, though not actual loss,
be that where the ii le i
he is entitled to call upon the indemnnifler to save him from that liability and pay it off.
Guarantee - A contract to perform the promise, or discharge the liability of a
third p . oi) in case of his default, is called a contract of guarantee or suretyship.
The person who gives the goaraimlee is called Surety: the person for whom the
and the person to whom guarantee is
guarantee is given is called the Priori/ui! Debtor,
given is called tIme Creditor.
In Indian Law, a guarantee imly he oral or in writing. In English Law it must be
evidenced by a memorandum.

Indemnity and Guarantee Distinguished

Guarantee
Indemnity
Promo is or primarily and inde- 1.Liability of surety is collateral or
1.
secondary, the primary liability being
pendently liable to the promisee.
that of the principal debtor.
Only two parties are required to 2. Three parties are essential to this con-
2.
tract.
contract.
3. Indemnity depends 01)011 the pos- 3. In guarantee there is an exis'ing debt
or duty performance of which is
sibility or risk of some loss.
guaranteed by the surety.
Indemnifier cannot site third par- 4. Surety on payment of debt to the
4.
creditor can proceed in his own name
ties in his own name, unless there
against the principal debtor.
is assignment. He must sue in the
name of the indemnified.

Consideration received by the principal debtor is sufficient consideration for a

contract of guarantee.
 (ON1RAC1S OF INI)t:MNITY A) GUARANTEE 121

It is obvious that creditor and surety must he competent to contract and so also the
principal debtor.
Surety will be liable to pay the creditor on default by principal debtor.
Discharge of principal debtor by operation of law does not discharge the surety.
Nature of Surety's Liability—Surety's liability is secondary. He is liable only
on default of the principal debtor. As soon as the time for payment has come and principal
debtor does not or is unable to pay, the surety becomes liable to pay. But surety is liable
only for the guaranteed debt and only the part remaining unpaid. Surety's liability, once
it has arisen, is co-extensive , with the pi incit)al debtor: it inay be made less by special
agreement, but never greater than that of he principal debtor.
Kinds of Guarantee

Retrospective Guarantee is for an existing debt.

Prospective Guarantee is for a future debt- It is specific, when it is given for
single debt, and cont in U 01g, when it extends to a series of distinct and comparable
transactions.
Rights of Surety: against creditor in fidelity guarantee. Surety can call upon
the creditor or the employer to dismiss the employee, in the event of proved dishonesty
of servant. In a loan guarantee he may, before paying, get declaration by Court that the
principal debtor is bound to pay.
At the tune of payment surety can ask the creditor to marshal his securities.
Surety's Rights: against principal debtor. After paying the debt or performing
the duty, the surety stands in the shoes of the creditor and can sue principal debtor for
payment. He is suhrogatcd to all the rights which the creditor had against the principal
debtor.
Suret y 's Rights: against co-sureties. When a surety has paid more than his share
of the guaranteed debt to the creditor he has a right of contribution froin the co-sureties.
Discharge of Surety—A surety may he discharged-
(a) By revocation by the surety, which can be done only in the case of a continuing
guarantee in respect of future liability;
(b) by the death of the surety;
(c) by Novation;
(d) by variation of terms of contract without his consent;
(e) on the principal debtor being released or discharged by the creditor without
surety's consent;
(1) compounding by creditor with principal debtor without surety's consent;
(g) where creditor's act or omission impaired surety's eventual remedy;
(h) where guarantee was obtained by fraud, tnmsreprese:mtat ion orconcealment of some
fact;
(I) on failure of consideration.

CASES FOR RECAPITULATION

1. H and A guarantee C's debt with D, who had as security three policies on C's
life. H later on paid off the debt and took an assignment of the policies. In an action for
contribution against A, it was held that was entitled to contribution from A, on bringing
into account the value of the policies. lI,i re Arcedeckne (1883) 24 Ch. 13.7091. The law
Oil the point is that, before rec overing contribution, time guarantor who has paid the debt
122 MRCANT1LE LAW

must bring into account all securities he has received from the creditor in respect of the
debt-
2. C and D go into a shop. C says to the shopkeeper-
(i) "Let him (D) have the goods, I will see you are paid." The contract is one of
indemnity;
(ii) "Let D have the goods, and if he does not pay you, I will." This is a contract
of guarantee [Birkinyr v. Darnell (1704) 1 Salk, 271.
3. T bought from M a motor car under a hire-purchase agreement by which he was
to pay Rs. 1,500 per month. N guaranteed these payments. T fell into arrear with his
instalments, and it was agreed between T and M that T should give a cheque for Rs.
2,500 and pay the rest of the arrears at the end of the month. Held, N was discharged
from the whole contract, because M had agreed to give time to T, and the contract was
one contract and not a series of monthly contracts [Midland Motor Showrooms v.
Newman (1929)2 K.B. 2561.
4. A gives a guarantee to C for goods to be supplied by C to B. C supplies the
goods to B in due course. Afterwards B becomes financially embarrassed and contracts
with all his creditors to assign to them all his property in consideration of their releasing
him from their demands. The sale proceeds of the properly are just sufficient to pay 80
paise in the rupee. Here B is released from his debt by the contract with C and as a result
of this release A is discharged from his suretyship [Illustration (a) to Sec. 1341.
5. A agreed to stand surety for an overdraft allowed by the T. Bank to S. The Bank
required a guarantee in the form which was handed over to S. S got it filled by A for a
sum of Rs. 25,000. Th T bank declined to accept this letter of guarantee. S took back
the letter and after some time brought it back with the figures so changed as to read Rs.
20,000. The Bank accepted the letter and kept it. In respect of this transaction there was
no prior agreement between A and the Bank; and the letter of guarantee was given by A
after the loan of Rs. 20,000 had already been made. On the failure of S to repay the loan,
the Bank sued A upon the letter of guarantee. A pleaded discharge from liability .on the
ground of a material alteration of the instrument. It was held by the Supreme Court that
A was not discharged from his liability, as there was no material alteration by the creditor.
The alteration was made by S who was at that time acting as the agent of A and who
brought the document to the Bank on both occasions. A must be deemed to have held S
out as his agent for this purpose and this created an estoppel against A, because the Bank
believed that S had the authority. The offer thus remained in its amended form au offer
by A to the Bank and the Bank by accepting it turned it into a contract of guarantee which
was backed by the past consideration on which the offer of A was originally based.
(Anirudham v. Tijonico's Bank, 1963 S.C. 746).
6. S guaranteed the honesty of a servant-in the employ of C. The servant was guilty
of dishonesty in the course of his service, but C continued to employ him and did not
inform the defendant of what had occurred. Subsequently the servant committed further
acts of dishonesty. C seeks to recover his loss from S. Held, S is discharged and C
cannot recover his loss from him (Co. op. Commission Shop v. Udlia,n Sing/i,
1944
Lah. 424).
7. G made an offer to P that if he would discount bills for D he would guarantee
the payment of such bills to the extent of Rs. 6,000 during the period of 12 months. Some
bills were discounted by P and duly paid, but before the 12 months had expired, G
revoked his offer and notified that he would guarantee no more bills. P continued to
discount the bills, some of which were not paid by D. P sued G on the guarantee. G was
discharged after revocation from all liability to P for any subse .qucnt discount, and is not
liable to pay to P. Illluslration(a) to Sec. 1301.
 CONTRACTS OF INDEMNifY AND GUARANTEE
123

8. A guarantees C against the misconduct of B in an office to which he as

appointed by C and of which the duties are defined by an Act of Parliament. By a
subsequent Act, the nature of the office is materially altered. Afterwards B misconducts
himself. A is discharged by the change from future liability under his guarantee, though
the misconduct of B is in respect of a duty not affected by the later Act [Illustration (b)
to Sec. 133].
9. A held partly paid shares in a company and D guaranteed the payment of his
unpaid calls to the company. The company called upon A to pay the calls and, on default
being made, forfeited the shares under a power given in the articles. held, the company
by forfeiting the shares had deprived 0 of his lien on the shares to which he would have
been entitled had he been compelled to pay the calls, and he was, therefore, discharged
from his liability as surety under the guarantee [In re Darwen & Pearce (1927) 1
176]. Ch.
10. B pointed A as his agent to collect his rents, and required him to
execute a
fidelity bond in which C was surety. C died. In a suit by B against C's legal repre-
sentatives, it was held that C could not revoke his liability under the bond during his
lifetime, and consequently his death did not release his estate from liability [Baijour v.
Crace (1902)1 Ch. 7331.
11. K was appointed the manager of the T.C. Bank and C executed an indemnity
bond rendering himself liable in the sum of Rs. 4,500 as guarantee for the fidelity of K
in the performance of his duties as manager. Two years thereafter K committed suicide.
It was discovered that K had misappropriated about Rs. 1,72,350 by fa1si'ing accounts.
No scrutiny into cash balance was ever made by directors as required by the provisions
of the bye-laws; in fact; the directors had shut their eyes to the fraudulent career of the
manager. In a suit by the batik for the recovery of Rs. 4,500, the guaranteed amount,
froin C. it was held that by the conduct of the directors, the guarantor (indemnitor) stood
discharged from his obligations under the indemnitybond. It was stated that no employer
who secures a fidelity guarantee can tell his guarantor that the guarantor is liable even
if an act of infidelity was assisted by the ernplçyer himself. A person in vhose favour a
guarantee is given is bound to a faithful observance of the rights of the surety and to the
performance of every duty necessary for the protection of those rights (Chandrasekharan
Pal v. Town Co-op. Bank Ltd-, 1965, Mysore 209).
12. An agreement between the Corporation and M/s Sadhu & Co. contractors
required a bank guarantee to be .fuj-nished by the contractor for due performance. A
guarantee was furnished by Punjab and Sindh Bank. Disputes arose between the
Corporation and the contractor and suit was pending in the court. The Corporation
demanded payment (Rs. 5 lakhs) from the Bank; and the contractor applied for
injunction restraining the Bank from releasing the amount. It was held that no injunction
could be issued and the Bank must release the amount on demand by the Corporation.
The court observed, "The Bank guarantee constitutes an agreement between the Bank
and the contractor under which there is an absolute obligation of the Bank to make
payment to the Corporation ..... .'National.Projeci Construction Corporation Ltd. v. Ws
Sadhu & Co., 1990 P.H. 300).
 Chapter III

Bailment and Pledge

PART 3-A
A bailment arises when one person (the bailor) transfers possession of goods to
another person (the bailee) on condition that the bailee will restore them to the bailor
after the purpose for which they were delivered is accomplished. Bailments may be
divided into three main classes -
1. Those for the exclusive benefit of the bailor, e.g., where your neighbour agrees to
look after your dog while you are out of station.
2. Those for the exclusive benefit of the bailee, e.g., where you lend your book to a
friend.
3. Those for the mutual benefit of both parties, e.g. where you hire furniture against
payment of hire charges.
The first two are Gratuitous bailments and the third type is bailment for Hire or
Reward, and is the most usual and important.
Section 148 of the Contract Act reads: A bailment is the delivery of goods by some
person to another for some purpose, upon a contract that they shall, when the purpose is
accomplished, be returned or otherwise disposed of according to the directions of the
person delivering them. The person delivering the goods is called the "bailor". The
person to whom they are delivered is called the "hailec"
E.ip.anaiion. If a person already in possession of the goods of another contracts
to hold them as a bailee, he thereby becomes the bailee and the owner becomes the bailor,
of such goods although they may not have been delivered by way of bailment
The definition emphasises the following essential features of bailment:
(1) There must he actual or constructive delivery, (2) of goods, (3) by the owner
called the bailor, (4) to another person called the bailee. (5) for a specific purpose, (6)
either in their original or in an
oil that the goods shall be returned in specie
altered form or shall be disposed of according to the directions of the bailor.
To constitute abailment there must be delivery olpossession of goods for a specific
purpose.
a!wPcrunialv. Vi 1938 Mad. 32, a lady employed a goldsmith for
the purpose o melting old jewellery and making new out of the same. Every evening
she used to receive the half made jewels from the goldsmith and put them into a box
which was left in a room in the goldsmith's house of which she retained the key. One
night the box was stolen. It was held that the goldsmith was not in possession of the
jewels, as he had given hack to the lady the jewellery bailed to him. As the key to the
room was with the lady, there was no re-bailment with the goldsmith. Furthermore, no
negligence on the part of the goldsmith was proved. Therefore, the goldsmith was not
liable for the loss of the jewellery.
As staled earlier, the delivery of possession may be actual or constructive. It is
actual when the bailor hands over to the bailee physical possession of the goods: and it

124
 BAILMENT AND PLEDGE 125

is constructive delivery when there is no change of physical possession, the goods

remaining where they are, but something is done which has the effect of putting them in
the possession of the bailee. For example, delivery of the railway receipt amounts to
delivery of goods (tslorvi Mercantile Bank v. Union of India (1965) S.C. 1954).
Similarly, where a person pledged the projector machinery of his Cinema under
an agreement which allowed him to retain the machinery for the use of the Cinema, there
was a constructive delivery, or delivery by attornment to the hank (Bank of Chinor V.
Narnimbubi, 1966 Al' 163).
Again, although Section 148 speaks of delivery of goods on a contract, bailment
can arise even where there is no contract. Iii Lasalgaon Merchants' Cooperative Bank
Lid. v. Prabhudas //athibhai, 1966 F3oin.134, the Bombay High Court has imposed the
obligation of a bailee without a contract. In the opinion of the Court, where certain goods
belonging to an individual are seized by the Government, the latter becomes the bailee
thereof even if there is no suggestion of a contract between the Government and the
indivdua1. Similarly, the Supreme Court in State of Gujarat v. Mernon Mohammed,
1967 SC 1885, has recognised bailment without a contract, and held the State liable for
damage to goods while in its custody. Certain Motor Vehicles and othergoods belonging
to the plaintiffs were seized by the State in the exercise of its powers under a SeaCustoms
Act. The goods, while in the custody of the State, remained totally uncared for and were
heavily damaged. In a suit for damages the Site contended that it was not liable as a
bailee, as there was no contract of bailment. Shellat J., observed as follows: "The
contention is not sustainable. Bailment is dealt with by the Contract Act in cases where
it arises from a contract, but it is not correct to say that there cannot be a bailment without
an enforceable contract .....Nor is consent indispensable for such a relationship to
arise. A finder of goods of another has been held to be a bailee in certain circumstances".
Since the essence of bailment is the delivery of goods for a stated purpose and their
return in specie, it is only the possession that passes from the owner to the other and not
the ownership. So, where goods are transferred by the owner to another in consideration
of money price, it is a sale, or where the goods are not to be delivered back in specie but
their price is paid it is not a bailment. Again, where money is deposited by a customer
with a bank in a current, savings bank, or fixed deposit account, and, therefore,
there is no obligation to return the identical money but an equivalent of it there is
no bailment, but a relationship of creditor and debtor is created SJmanii Prasad v.
Director of Enforcement. 1962 S.C. 1764)1 But if valuables or even coins or notes in a
box are deposited for safe custody there is a contract of bailment, for these arc to be
returned as they are, and not their money value. The point is important for the purposes
of limitation, for if the transaction amounts to a loan, the cause of action for recovery
commences froirm the date of the loan, and if it is a bailment from the dale ofdmand for
the return. Goods given on hire, or handed over to be turned into something, e.g., gold
to be made into ornaments, or left with a warehouseman for safe keeping, or given to a
factor for sale, or entrusted to a carrier for conveyance from one place to another, or
something left with a friend for use or to be looked after, are all examples of bailment,
as also where the Master of the ship leaves the goods in the custody of the Port Trust.2
DUTIES OF BAILEE

1. To lke care of goods baiid.—The first and most important duty.stf.a-bailee

is_tj Jccare of the goods entrusted imnT1e Contract c(lkaiiot recognise any
distinction between agr jJo us bailment and merforreward anyon
uniTorra standard of care for all types oDbalThnts. Sec 151 an - rca

1. Union Bank of India v. K.V. Venugopatan, 1990 Ker. 223 — No Banker's lien as no bailinenL
2. G.E. Shipping Co. v. S.M.S. Saheb & Co.. 1919 Mad. 367.
126 MERCANTILE LAW

"151. 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 hisown goods of the same bulk, quality and values as the goods bailed."
The bailee, in the absence of any special contract, is not responsible for the
loss, destruction or deterioration of the thing bailed if he has taken the amount of care
of it described in Section 151
The degree of care that is expected of a bailee is that of the ayerage prudent man
in his own affairs under similar circumstances, and if, in spite of that much care any
damage is caused to the goods, the bailee will not be liable. But if he does not lake as
much care of the goods as a man of ordinary prudence would do of his own goods, in
like circumstances, he will be liable for negligence and will be required to make good
the loss. Section 152 contemplates enlargement of legal liability by special agreement-
Thus, a bailee may agree to keep the property safe from all perils and answer for
accidents or thefts. But, even such a bailee will not be liable in case of loss happening
by an Act of God, such as fire or tempest, or by public enemies. The bailee is not an
insurer ofgoods deposited with him.
• Section 151 expressly provides for the standard of care expected of a bailee; and
the liability cannot be reduced by contract below the limit prescribed by this section.
Also, where the master is the bailee, and the servant is either dishonest or negligent in
dealing with goods bailed, the master is liable if the goods are lost due to the negligence
of ttie servant (B.C. Co-op Bank-v. Stase. 1959 M.P. 77).
Not to make any unauthorlsed use of Goods,—The bailee is under a duty not to
use the goods in a manner inconsistent with the terms f the bailment. If he does so, the
bailor can terminate the bailment; and if any loss or damage results from the use of goods
for a purpose other than the one agreed upon, or in a manner opposed to the one stated,
the bailee becomes responsible for such a loss, unless such a use is necessary for its
preservation. There is a breach of good faith. A lets to B his horse for his own riding. B
cannot drive the horse in his carriage, or lend it to another person for any purpose. If B
drives the horse in his carriage or lends it to someone else. A can terminate the contact,
and if the horse is injured, A can also claim damages for the injury.
Not to mix Bailor's Goods with his own Goods.—The next duty of the bailee is
to keep the goods of the bailor separate from his own. Sections 155, 156 and 157,
however, lay down certain circumstances in which intermingling is permitted. The
intermixture of goods of the bailor and bailee may take place with the consent of the
bailor, or it may be the result of accident, mistake or inadvertence, or it may be wilful
or intentional. If the intermixture be with the consent of the bailor, then the bailor and
the bailee become joint owners and possess common interest in the goods in proportion
to their respective shares. Where the intermixture is made without the consent of the
bailor and the goods so rtii xed are separable or divisible, such as articles of furniture, the
parties remain the owners of their respective shares, and so each party can claim
proportionate share; but the cost of separation, or any damage as a result of mixture, shall
be borne by the bailee. Where the mixture without the consent of the bailor is inseparable
or indistinguishable so that the hailor's goods cannot be returned, the bailee is bqund to
compensate the bailor for the whole of the goods. If X deposits a tin of A grade ghee
with Y and V mixes it with his ghee of grade B, Y must pay the price of A grade tin.
Where, however, a bailce, by accident or inadvertence, mixed the goods left by bailor
with his own goods or where the mixttire is the result of an Act of God or of an
unauthorised third party, and the mixture consists of goods of similar kinds and quality,
such a mixture belongs lo both parties in proportion to their shares, but the cost of
separation will be borne by the bailee. -
Not to set up Adverse Title.— Generally, the bailee has no right to deny the
bailor's title or set up against the bailor his own title or the right of a third party. He will,
 BAILMENT AND PLEDGE 127

however, refuse to deliver goods to the bailor if there is an effective pressure oCan adverse
claim amounting to an actual eviction by a paramQunt title. This is Common Law rule
and is laid down in Section 117 of the Evidence Act, 1872.
To return the Goods.—It is the duty of the bailee to return or deliver the goods,
- without demand, on the expiry of the time fixed or when the purpose is accomplished.
If he does not return or deliver as directed by the bailor, or tender the goods at the proper
time, he becomes liable for any loss, destruction or deterioration of the goods even
without negligence during the period it is detained. Post Office is a bailee of the articles
of the sender. Where goods are delivered to the Post Office for transmission by V.P.P.
to a buyer, they must be delivered to the buyer on payment by him of the price. Delivery
of the goods by the Post Office without receiving the price will render it liable as abailee
for delivering goods against directions (Income-tax Commer, Y. V.P.M. Raihod & Co.,
1959 S.C. 1394). If the bailee sells the goods, the, bailor can in equity follow the goods
or their proceeds, wherever they may be. If the bailor does not take delivery when it is
offered at the proper time, the bailee can claim compensation for necessary expenses of
and incidental to the safe custody. Where, however, the article bailed or hired does not
serve the purpose, the bailee may leave the article where it is and give notice to the bailor
that it is unfit for the purpose. Where the goods are lost before the proper time without
negligence on the part of the bailee he will not be liable for the loss, and a bailee, who
returns the goods in good faith to the bailor who really had no title to the goods, is not
responsible to the true owner of the goods.
A bailee is excused from returning the goods to the bailor where the goods were
taken away from him by authority of law exercised through regular and valid proceedings
[JugllalKamlapa1 OijMjllv. Union of India, 1976 S.C.2271. In this case a consignment
of oil from Kanpur to Calcutta was accepted by the Railway under Risk Note Z and after
the wagon had reached Calcutta with locks and seals intact, the delivery could not be
made as the oil was seized by the Food Inspector of Calcutta in pursuance of an order
of Health Officer of Calcutta Corporation under S. 419 of the Calcutta Municipal Act
and was destroyed under the order of the High Court as the contents were found to be
adulterated. The Railway was not liable.
As regards the return of goods bailed by two or more joint owners, the bailee may
return the goods to any one without the consent of the bailors, provided that there is no
contract that delivery must be given to all. It is to be noted that the word used in Section
165 is "may" and not ''must" with the effect that no one bailor can compel the bailee
to return him the goods. But the bailee may, if he likes, do so. But even where thett is a
contract asking the bailee to redeliver only to all joint owners, and he returns them to
one of the joint owners, no suit can be filed by the others against the bailee joining the
one who got the goods and he cannot be a party to a suit, for the breach is occasioned
by his act.
In the absence of any contract to the contrary, the bailee must return to the bailor
any increase or profits which have accrued from the goods bailed. This usually happens
in the case of animals. So, where A leaves a cow in the custody of B to be taken care of,
and the cow gets a calf, B is bound to deliver the cow as well as the calf to A. Similarly,
new shares allotted in respect of shares that have been pledged are an increase which the
pledgor is entitled to get. 3 And where a bailee entrusted with some goods for some
purpose finds something else hidden in them, such other goods belong to the owner and
not to the bailec.
DUTIES OF BAILOR
To disclose Known Facts—The first and foremost duty of the bailor is to disclose
3. Lucknow Municipal Board v. Abdul Razzaq 1931 Oudh 15.
125 MERCANTILE LAW

III far as they are known to him; and if he fails to do that

the faults in the ood.s hailed
ole to pay such damages to the bailee as may have resulted directly from
lll be I-1 -al to B, without disclosing this
theJl$. A lends a horse, which he knows to be VICIOUS,
B. in ignorance of the horse's vicious nature, 'ridcs the horse and is thrown off and
responsible to B for damages sustained. Or. A delivers to B, a carrier, some
injured. A is
explosives in a case, but does not warn B. The case is handled without extraordinary
care necessary for such articles and explodes. A porter is injured and some other goods
are damaged- A is liable for all the resulting damage In the case of bailment of hire a
still greater responsibility is placed oil bailor. He will be liable for all damages as
above even if he did not know of the defects. A hires a carria g e of B. The carriage is
unsafe, though B does not know this. A is injured. B is responsible to A for the injury.
It follows from this that a gratuitous lender is not liable for defects in the things lent of
which he is not aware. Thus, if the carriage were lent gratuitously. B would not be liable
under the circumstances.
To bear Extraordinary Expenses—The bailee is, no doubt, required to pay the
ordinary and reasonable expenses of the bailment, but for any extraordinary expenses
the bailor would he responsible. If a horse is lent for a journey, the expenses of feeding
the horse would, of course, he borne by tne bailee. But, if the horse becomes sick and
expenses have been incurred, the bailor shall have to pay these expenses. The parties
III case of bailment without
can, how ver, enter into any conhrao t as regards expc:ses.
remuneration to the hailc4Sectiomi l5 provides that all the necessary expenses incurred
by the bailee in connection with the h:mmlincnt must he paid by the hailor.
To indemnify Bailee—The bailor is hound t indemnify the bailee for any cost
or loss which the bailee may incur because of the defective title of the bailor to the goods
hailed (Section 164). This right to indemnity extends also to a suit by third parties, even
after the goods are returned to the bailor or delivered to someone else according to his
direct ions.
Bailee's Lien—Where the goods are bailed for a particular purpose, and the bailee,
in due performance of bailment, expends his skill he has a lien on the goods, i.e., the
bailce can detain the goods until his charges in respect of labour and skill used are paid
by the bailor. But, if the bailee does not complete the work within the agreed time, or a
lien to the goods. A gives a piece of cloth to B, a
reasonable time, he is not entitled to -,I
tailor, for making it into a suit. B promises to have the suit ready for delivery within a
fortnight. B has the suit ready for delivery. He has a right to retain the suit until he is
paid his dues. But, if B takes a month to complete the suit, he has no lien. Further, the
right of lien arises only where "labour and skill" have been used so as to confer an
additional value nit the article. So, a person who takes an animal for feeding has no lien,
but a veterinary surgeon has. And also the bailee keeping the article to enforce his lien
cannot charge for keeping it.
one
Liens are of two kinds: Particular Lien and General Lien. Apariicular lien is
which is available only against that property in respect of which the skill and labour are
on the other hand, is a right to detain any property belonging to
used. A general lien,
the other and in the possession ofihe person trying to exercise the lien in respect of any
the right to retain the property of another
payment lawfully due to him. A general lien is
j,ar!icu!ar lien is a right to retain it only for a
for a general balance of accounts; but a
charge on account of labour employed or expenses bestowed upon the identical property
detained. We have so far dealt with the particular lien, and that is the lien to which a
bailee is ordinarily entitled. The right of general lien is specifically given by Section 171
only to the Bankers, Factors, Wimarfingers. Attorneys of a High Court. and Policy-
brokers. These persons are authorised, in the absence of a contract to the contrary, to
retain the goods hailed to them as security, for any debt due to them. A hanker has a
general lien on cash, cheques, hills of exchange and securities deposited with him in his
 BA1LME"1 AND PLEDGE I

character of a banker for any money due to him as a banker. But, where valuables and
securities are deposited for a specific purpose, e.g.. for safe custody, the hanker has no
general lien oil A factor "is an agent entrusted with the possession of good ,; for
the purpose of sale." If any money i s' due to him by his principal, he can retain the
principal's goods, in exercise of his right of general lien until his dues are paid. This lien,
however, applies only to debts due to the factor in that character: it does not extend to
debts which arose prior to the commencement of his relation as a factor to his principal.
It extends to all his lawful claims against the principal as a factor, whether for advances,
or reinuneration. or for losses, or liabilities in the course of his employment as a factor.
A wharfinger can, as a rule, exercise general lien oil as regards claims against the
owner of the goods. Therefore, he has no lien as against a buyer for charges becoming
due from the seller after the wharfinger had notice of the sale.
An attorney (i.e. a solicitor) of lIigli Court has a lien on all papers and documents
belonging to his client which are in his possession in his professional capacity for his
professional fees, but not for ordinary loans and advances. A solicitor who is discharged
by his client holds the papers entrusted to him subject to his lien cost, but if he discharges
himself he is not entitled to a lien.
RIGHTS OF IIA1[OR AND BAILEE AGAINST THIRD PARTIES
As the bailee is the person entitled to the possession of the goods bailed, the law
(Section ISO) vests in him a right to such remedies as the owner would have had, if no
bailment had been made. Thus, if a third person wrongfully deprives the bailee of the
use or possession of the goods bailed, or causes thein any injury, the bailee may file a
suit for trespass or cnvcisioi1 or for damages. He can recover from time wrong-doer in
this manner even when he is not himself responsible to the bailor for loss and damage
to the goods. The section further gives an option to the bailor also to sue for the injury
or deprivation caused by the third party. As between the bailor and bailee it is provided
that whatever is recovered from the third party by way of relief or compensation, is to
be apportioned according to their respective interests. If, for instance, the bailee recovers
more than his interest he must account for it to the bailor. It does not matter which of
thein recovers first or whether one sues or both: a recovery by one will oust the other of
his recovery from the third party, for there cannot he a double satisfaction. And the
defendant cannot he liable in all or more than the value of the goods, and special damages,
if a ny.
TERMINATION OF BAII.'\IEN'f
Where the bulee does any act with regard to goods bailed inconsistent with the
condition of bailment, e.g.. wrongfully uses or disposes of them, the bailor may
determine the bailment.
As soon as the period of bailment expires or the object of the bailment has been
achieved, the bailment comes to an end, the bailee must return the goods "without
demand" by bailor.
A gratuitous hzmilinciii can be terminated by bailor at any tune, even before the
stated time, subject to the limitation that where such a termination of bailment before
the stipulated period causes loss in excess of benefit, the bailor must compensate the
bailee.
A gratuitous bailment terminates by the death of either the bailor or the bailee.

FINDER 01" LOS'f GOODS (Sections 168 and 169)

We have seen under Section 71 that the position of finder of goods is exactly that
of a bailee. It is true that a person who comes by an article is not obliged to take charge
130 MERCANTILE LAW

of it; but if he does pick it up, he becomes a bailee. The rights of a finder are that he can
file a suit against the owner for any reward that might have been offered, and may retain
the goods until he receives it. But where the owner has offered no reward, the finder has
only a particular lien and can detain the goods until he receives compensation for the
trouble and expenses incurred in preserving the property or for finding out the true ownes
but he cannot file a suit for the recovery of such compensation. In English law, however,
the finder has, in the absence of an offer of reward, no right to any remuneration or lien,
as the service is rendered without request.
As against everyone save the true owner, the property in the goods found in a
public or quasi public place vests in the finder on his taking possession of it. Thus, a
person who picks up a purse or a ring, accidentally dropped by a stranger, can keep it as
his own as against the whole world, except the true owner. The finder keeps the article
in trust for the real owner, and according to common law cannot sell it even if the true
owner has not turned up. But, in Indian Law, the finder is given aright to sell the property
(1) where the owner cannot with reasonable diligence be found, or (2) when found, he
refu€es to pay the lawful charge of the finder and (a) if the thing is in danger of perishing
or losing greater part of its value, or (b) when the lawful charges of the finder for the
preservation of goods and the finding out of the owner amount to two-thirds of the value
of this thing.
COMMON CARRIERS AND INN-KEEPERS AS BAILEES
The Contract Act does not deal with carriers and innkeepers, but to complete the
subject of bailment, we may consider these here.
Common Carriers A common carrier is one who undertakes to carry from place
to place the goods of all persons indiscriminately who are willing to pay his usual or
reasonable rates. The liability of common carriers in India is governed by the Common
Law in conjunction with the provisions of the Carriers Act. 1865. Under Common Law.
he is an insurer of goods, but the Carriers Act enables him to limit his common law
liability of insuring the goods by special contract in the case of certain goods such as
valuables, erishable goods, or explosives, but not so as to get rid of liability for
negligence. As regards railways, their liabilities, before 1961, were those of a bailee.
But now railways are common carriers subject to the provisions of sections 72 to 78B
of the Railways Act, 1890.
Inn-Keepers- The liability of a hotel-keeper is governed by sections 151 and 152
of the Contract Act and is that of an ordinary bailee with regard to the property of the
guests.
In Jan & Son. v Cameron (1922)44 All. 735, C stayed in a room in a hotel. The
hotel-keeper knew that the room was in an insecure condition. While C was dining in
the dining room, some articles were stolen from his room. It was held that the hotel-
keeper was liable as he should have taken reasonable steps to rectify the insecure
condition of the room.

PART 3-B
PLEDGE OR PAWN
A pledge or pawn is a special form of mutual benefit bailment by which one person
transfers possession of some article to another to secure the payment of debt or the
performance of a promise. A pledge is thus a security device based upon a bailment. The
bailor is called the "pawnor" and the bailee the "pawnee." Note, deposit of goods as

4. Orient S.S. Co. v. K.S.S. Co., 1951 Tray. Coch.l.

 BAILMENT AND PLEDGE 131

security for a loan is necessary, and if there is no transfer of possession of goods, no

pledge in created. Since pledge is a branch of bailment, the pawnee is bound to take
reasonable care of the goods pledged with him. He must not use the goods pledged, and
if he does so, he would be responsible for damages and any loss occasioned by such
uses.
A pledge is distinguished from other types of bailments by the nature of the lien
possessed by the pledgee. The pledge lien gives the pledgee the right to sell the goods
in the event of the non-payment of the debt or non-performance of the obligation secured.
PLEDGE, LIEN AND MORTGAGE DISTINGUISHED
A pledge is something between a simple lien and mortgage. In the case of a lien
there is no transfer of any interest, the person exercising a lien has only a right to retain
the subject-matter of the lien until he is paid. In the case of a mortgage the property passes
to the mortgagee; he has an absolute Interest in the property subject to a right of
redemption by the mortgagor. But, in the case of a pledge, though the deposit of goods
is made security for payment of a debt or performance of a promise, the pledgee has only
a special property in the pledge, while the general property therein remains in the pledgor
and wholly reverts to him on the discharge of the debt or the performance of the promise.
On the contrary, the pledgee can sell the goods after notice if the pledgor fails to discharge
the debt on the stipulated date. (3. & K. Bank v. Tekchw2d, 1959 J.& K. 67; Narsyyanvna
v. And hra Bank, 1960 A.P. 273).
RIGHTS OF THE PAWNEE
No properly or ownership in the goods pawned passes to the pawnee but be
(pawnee) gets a "special properly to retain possession even against the true owner until
the payment of the debt, interest on the debt, and any other expenses, incurred in respect
of the possession or for preservation of the goods" (Section 173). The pawnee must,
therefore, deliver the goods to the pawnor on the tender of all that is due and if he persists
in retaining the goods thereafter, he will make himself a 'wrong-doer', and his 'special
properly' is determined and the pawnor can recover the goods. As the pledgee does not
transfer ownership, the mere right to retain confers no title to alienate except upon default
of payment in accordance with the terms of the contract. Hence, the pawnor cannot, apart
from the above circumstance, confer a good title upon a bonafide purchaser for value.
Further, the articles pledged are security only for the particular debt, unless the parties
contract that they shall be security also for any other subsequent debt (Section 174). We
have said above that for necessary expenses incurred in the preservation of the pawned
goods the pawnee has a right of lien, but if there be any extraordinary expenses ("the
cost of curing a pawned horse which meets with an injury by accident"), he has only a
right to sue the pawnor for recovery of such extraordinary expenses, and cann'ot retain
the goods for such expenses (Section 175).
Should the pawnor make a default in payment of the debt, or performance of the
promise, at the stipulated time, the pawnee may either (i) file a suit for the recovery of
the amount due to him while retaining the goods pledged as collateral security, or (ii)
may sue for the sale of the goods and the realisation of the money due to him, or (iii)
may himself sell the goods pawned, after giving reasonable notice to the pawnor, sue
for the deficiency if any, after the sale (Section 176). If the sale of the goods is made in
execution of his decree, the pawriee may buy the thing at the sale. But he cannot sell it
to himself, and if he were to do so, then it would be treated as wrongful sale and the
pawnor will have the right to recover the article on payment of the pawnee's dues
according to the terms of the contact. While exercising either of his first rights of suit
the pawnee need not give any notice to the pawnor, but if the pawnee wants to sell the
goods, he must give reasonable notice of his intention notwithstanding any contract to


132 MERcAerTu LAW

the contraly.S And, should he sell the goods in default of payment, and find the proceeds
insufficient to meet his full dues, he may recover the balance from the pawnor, but if
there i a surplus, he must pay it over to the pawnor. In this respect, the right of a pledgee
or pawnee differs from the right of an unpaid seller, because if there is a surplus, the
unpaid seller can retain the surplus. Furthermore, the pawnor can redeem at any time
before sale, though the time for payment has expired for the rights of the pawnee depend
solely upon possession and he does not own the subject-matter. Hence the rule that tender
of the amount due or even the pledge coining to the hands of the pawnor otherwise than
for a limited purpose will extinguish all the pawriee's rights in respect of the pledge.
Thus, an agreement that the pledge should become irredeemable, if it is not redeemed
after a certain time, would be invalid.
RIGHTS OF l'LEI)GOR
on
We have seen above that in case of default by the pledgor to repay the stipulated
date, the pledgee may sell the goods after giving the pledgor a reasonable notice. This
notice is compulsory in all cases of pledge, even when the instrument of pledge contains
an unconditional power of sale. Therefore, if the pledgee makes an unauthorised sale
(i.e. without giving the notice as required under Section 176), the pledgor has the
following courses open to him:
1. to file a suit for redemption of goods by depositing the money, treating the
sale as if it had never taken place; or
2. to ask for damages on the ground of conversion.
A pledgor who impugnes the sale hy'the pledgee cannot sue for a declaration that
the sale is contrary to law and does not affect the rights of the pledgor lNarsaywnnia
v. Andhra Bank. 1960 A.P. 273; Neckranm Dobav v. Bank offlengal (1892)19 Cal. 3221.
PLEI)GE BY NON-OWNERS
(i) Mercantile Agents—Hitherto we have as iimed that the person creating the
pledge is the owner of tile goods. But the law permits under certain circumstances a
pledge by a person who is not the owner but is in possession of goods. In the first case,
a mercantile agent who is, with the consent of the owner, in possession of goods or
documents of title of goods may. 19 tile ordinary course of his business as a mercantile
agent, pledge the goods, and such a pledge will hind the owner. it will also be a valid
pledge even when made by tile mercantile agent without the authority of the owner,
provided that the pawns'e has acted in good faith and did not have at the time of the
pledge notice that the pawnor had no authority to pledge the goods. A mercantile agent
has been defined by Sec,2(9) of the Indian Sale of Goods Act as a ''mercantile agent
having in the customary course of business as such agent authority either to sell.gouds,
or to raise money on the security of goods." Thus a commission agent, or a broker may
make a valid pledge of thegoods, but aperson in bare possession cannot do so. Similarly,
a person entrusted with goods for a specific purpose cannot pledge the goods. it must be
noted that a mercantile agent like an owner can create a pledge by the delivery either of
goods or of the document of title to goods (Morvi Mercantile Bank v. Union of Thdia.
1965 S.C. 1954).
(ii) Seller or buyer in possession after sale—A seller, left in possession of goods
sold, is no more owner of the goods, but a pledge created by him will be valid, provided
the pawnee acted in good faills and had no notice of the sale of goods to the buyer. Where

5. Narsavyunmna v. Anutira Bank, 1960 A.P. 273. 1'S. Kotagi v. Tahsildar. (ladag, 1985 Kant
265.
6. Visalakshi V. Janopakara. 1942 Mad. 298.
 BAILM1Xr AND PLEDGE 133

B buys goods from A, pays for them, but leaves them in the possession of A, and A then
pledges the goods with C who does not know of the sale to B, the pledge is valid.
Similarly, where a buyer or a person who has agreed to buy, obtains possession of goods
with the seller's consent, before the payment of price, pledges these goods to a pawnt-e
who takes them in good faith and without notice of the seller's right of lien or any other
right of the seller, the pledge i3 valid.
(iii) Pledgor having Limited Interest— When the pawnor is not the owner of the
goods but has a limited interest in the goods which he pawns, e.g.. where he is mortgagee
or he has a lien with respect to these goods, the pledge will be valid to the extent of such
interest. A found a watch on the road and had it repaired. paying Rs. 10 as repairing
charges, and then pledged it for Rs. 50. The real owner can recover the watch only on
paying Rs. 10 to the pledgee.
(iv) Pledge by Co-owners--One of the joint owners in sole possession of goods,
with the consent of the others, can mike a valid pledge.
(v) Pledge by person ip possession under voidable contract—A person may
obtain possession under a contract which is voidable at the option of the lawful owner
oil ground of fraud, misrepresentation, coercion or undue influence. Possession so
obtained is not by free consent, but it is nevertheless pos s ession by consent, and the
person in possession may make a valid pledge of the goods provided the contract has
not been rescinded at the time of the pledge. But in a case where there is no real consent
as where goods have been obtained by means of theft, no pledge can be made. A thief
has no title and can give none.

SUMMARY

A ''Bailment'' is (i) the actual or constructive delivery, (ii) of goods. (iii) by the
owner called bailor, (iv) to another pe;un called bailee, (v) for a specific purpose, (vi)
on condition that goods shall be returned in specie either in their original or in an altered
form, or shall he disposed of according to directions of bailor.
In a bailment, only possession of goods passes to the bailee and ownership remains
with the bailor.
Bailment may he -
(a) for the exclusive benefit of the bailor:
(b) for the exclusive benefit of the bailee:
(c) for the mutual benefit of both.
DUTIES OF BAILEF-
1. To take as much care of goods bailed as a man of ordinary prudence would, in
similar circumstances, take of his own goods of similar nature.
2. Not to make any unautliorised use of goods.
3. Not to mix his own goods with hailur's goods.
4. Not to set up adverse title.
5. To return file goods in specie.
DUTIES OF BAILOR—
To disclose known facts relating to the goods hailed.
To bear cxtraordinary expenses incurred by the bailee in connection with bailment.
To inderni lify the bailee for cost or loss incurred because of the defective title of
bailor.
134 MERCANTILE LAW

4. Bailee has lien on the goods, i.e., he can retain the goods until his charges in respect
of labour and skill used by him with respect to the goods are paid.
TERMINATION OF BAILMENT-
1. The bailor may determine the bailment, where the bailee does any act with regard
to goods inconsistent with conditions of bailment.
2. A bailment comes to an end as soon as the period of bailment expires or the object
is achieved. Goods must be returned without any demand by bailor.
3. A gratuitous bailment can be terminated by bailor at any time, provided that the
termination before the stipulated period does not cause to the bailee a loss greater
than the benefit.
4. A gratuitous bailment terminates by the death either of the bailor or the bailee.
Finder of Lest Goods--A finder of goods is a bailee, with all his rights and
liabilities, as against the real owner, and an owner as against the rest of the world.
A finder can sell the property found-
1. where the owner cannot with reasonable diligence be found, or
2. when found, he refuses to pay the lawful charges of the finder, and
3. if the thing is in danger of perishing or losing greater part of its value, or when
lawful charges of tinder for preservation of goods and finding out the owner
amount to two-thirds of the value of thething.
Carrier as Bailee—A common carrier undertakes to carry goods of all persons
who are willing to pay his usual or reasonable rates. He further undertakes to carry them
safely, and make good all losses, unless they are caused by Act of God or public enemies.
Carriers by land, including railways, and carriers by inland navigation, are common
carriers. Carriers by sea for hire are not common carriers and they can limit their liability.
Railways in India are now common carriers.
Inn-keepers--in India the liability of inn-keepers or hotel-keepers in respect of
goods belonging to guests appears to be that of a bailee.
Pledges—A pledge or a pawn is a contract whereby an article is deposited with a
lender or prom isee as security for the repayment of a loan or performance of a promise.
The bailor or depositor is called a Pledgor or Pawnor and the bailee or depositee the
Pledgee or Pawnee.
Pawnee must take reasonable care of the goods pledged with him. He must not use
the goods pledged, and if he does so, he may be liable for any loss caused by user.
Rights of Pawnee—A pawnee gets special property in goods pawned, and he can
retain them until payment of the principal, interest and any other expenses. If the debtor
fails to pay on the stipulated date, the pawnec . may, after giving due notice, sell the goods
pawned, and if there is any deficiency, sue for the balance. Any surplus must be paid
over to the debtor.
Pledge by Non-Owner—A mercantile agent in possession of goods with owner's
consent can pledge the goods. A seller in possession of goods may pledge to a pawnee
who acts in good faith and has no notice of the sale to buyer. Buyer in possession with
seller's consent may pledge before paying the price. A person with limited interest in
the goods, e.g.. mortgagor, a person in possession under voidable contract. may pledge
the goods. A thief cannot create a valid pledge of stolen goods, as he has no title and can
give none.
CASES FOR RECAPITULATION
1. A finds a costly ring and, after making reasonable efforts to discover the owner
 BAILMENT AND PLEDGE 135

sells it to B who buys without knowledge that A was merely a finder. The true owner
sues B to recover the ring, field, the owner can recover the ring. The mere fact of an
innocent and bonafide purchase frçm a person with no title is no answer to the claim of
the true owner [Farquharson Bros. v. King and Co. (1902) A.C. 3251.
2. B hired from G a van and driver for three hours for the purpose of delivering
goods to his customers expeditiously. During the Journeys, the van driver left the van
unattended for an hour in order to have a meal, and the goods were stolen while he was
away. An exemption clause in the contract of hire stated '0 does not hold himself
responsible for loss or damage to goods in the van.' B sued G for the value of the goods
and, alternatively, for damages for breach of contract. Held, C is liable to pay damages
to B. The Court of Appeal declared that, even though G had effectively excluded his
liability in tort, he could not exclude his fundamental duty under the contract to deliver
the goods forthwith to their destination. C had failed to perform the contract into which
he had entered, and was bound to pay damages for this fundamental breach [Bonlex
Knitting Works Lid. v. Si. John's Garage (1944) 1 All. E.R.3811.
3. A. a jeweller, was entrusted with a diamond by P with the instructions-that A
should obtain offers for it, and if any such offer was approved by P. A should sell it to
the offeror. Acting contrary to P's instructions, A sold the diamond to S who bought it
in good faith. Thereafter A absconded with - the price money. In a suit by P against S to
recover the diamond, it was held that P could not recover the diamond from S. as the
sale was made by A, as a meroentile agent in the ordinary course of his business, though
contrary to P's instructions. (1929) 3 Born. L.R.
4. A guest, arriving late for dinner at a hotel, saw a number of ladies' coats left in
an ante-room which was previously used as a supervised cloak-room. At that time,
however, there was no attendant in the room. Nevertheless, she left her mink coat with
the other coats. Whilst she was dining, the coat was stolen. It was held that the
hotel-owners were liable to pay for the loss.
5. Some cattle belonging to A were agisted with B. Without any negligence on B's
part the cattle were stolen. B did not inform the owner or the police immediately, or made
any efforts to recover them because he thought that it would be useless to do so. field,
B was liable for the loss, unless he could prove that, even if he had reported the loss, the
cattle still could not have been recovered [Coidman v. 11111 (1919)f K.B. 443].
6. A gives an electric kettle to B, an electric repairer, on condition that the kettle
must be returned completely repaired within a fixed period. A part only of the work is
'done within the period. When A asks for the return of the kettle, B claims to retain it
until he is paid due remuneration for the work done by him. Held, B cannot refuse to
deliver the ktlentil payments for part of the work done by him are made. He has lost
his right of lien as he has failed to complete the work within the agreed period and A can
take it back without payment [Judah v. Emperor (1925) 53 Cal. 1741.
7. H, the owner of a motor car, agreed with the C.M. Co., that the company would
maintain and garage her car for three years, on being paid an annual sum by H. H was
entitled to take the car out of the company's garage as and when she liked. The annual
payment being in arrear, the company detained the car in the garage and claimed a lien,
Held, as H was entitled to take the caraway as and when she pleased, the company had
no lien (Hation v. Car Maintenance Co., Ltd. (1915) 1 Ch. 621].
8. Six boxes containing menthol crystals were consigned by H to 'self' and
entrusted to the railway for carriage from Bombay to Delhi under a railway receipt. H
borrowed Rs. 20,000 from M Bank, executed a promissory note for the amount and
endorsed the RIR pertaining to the six boxes in favour of the Bank as security for the
loan. The consignment did not reach Delhi and the railway failed to deliver the boxes to
the Bank. The Bank. claiming to be the pledgee of the goods, sued the Union of India
136 MERCANTILE LAW

for the recovery of Rs. 35.000. being the value of the goods. as damages. The Supreme
Court held that the Bank is entitled to recover the full amount of Rs. 35,000. The owner
of goods can make a valid pledge of them by transferring the railway receipt representing
the said goods. The Bank is a pledgee and as such can sue for the value of the goods.
Sec. 180 gives the hailec the same remedies against third parties as are available to the
owner of the goods. The three transactions, viz., the advancing of loan, the execution of
the promissory note and the endorsement of the RIR, together form one transaction. Their
combined effect is that the Bank would be in control of the goods till the debt was
discharged. Such a transaction is a pledge (Morvi Mercanlile Bank v. Union of India,
1965 S.C. 1954).
9. In D's shop, a customer. P put down her coat with a brooch. She forgot to pick
it up. One of the assistants of 1) found it and placed it in the drawer. It was weekend and
on Monday it was missing. It was held that D was liable to P as he did not exhibit the
ordinary care which a person in his situation (a bailee) would have taken (Newman v.
Bourn and f/n i/in ts W( j rt 6 (1915) 31 TLR209).
10. H, while serving in the Royal Artillery, was stationed in a house requisitioned
e Government. He accidentally found a brooch in an upstairs room occupied by
by Government.
him. I-Ic handed over the brooch to the police, and they, failing in their attempts to
discover the ri g htful owner, delivered it to P who was the owner of the house. P sold the
jewel for £66. H sued for the recovery of the brooch or its value, on the ground that he
was the finder. P contended that he was entitled to it as the owner of the property on
which it was found. P was never in possession of the house and had no knowledge of
the brooch until it was brought to his notice by the police. It was hLld that P had neither
defielo control nor animus of excluding others and as such had no possess ion. Therefore,
H was entitled to the broorh or its value since his claim as finder prevailed over all but
the rightful owner (I/anna/i v. Peel (1945) 2 All. E.R. 288).
11. G had loaned his car to his brother, who obtained petrol on credit front X
took possession of the car and refused to return it until he was paid. G is entitled under
Sec.1 80 of the Contract Act to sue X for unlawfully taking the car from the possession
of his brother, the bailee.
12. Certain goods were with the Bank of Bilar. These goods were seized by the
State of Bihar for certain liabi l ities of the pawnor. It was held that the seizure could not
deprive the pledgee of his right to realise the amount for which the goods were pledged
and, therefore, the State was bound to indemnify hi l n upto the amount which would
have been realised from the goods (Bank of Biiiar v. .Siaie of Bihar, 1971 SC 1210).
13. The defendant borrowed Rs. 20.00) front plaintiff on a promissory note
and gave his aeroscrapes with atxut Rs. 35()00 as security for the loan. The plaintiff
sued for the repayment of the loan, but was unable to produce the security, having sold
1322).
it. His suit fur the loan was rejected (La/lan Pra.vad v. Ralinial Au, 1967 SC


CHAPTER IV

Principal and Agent

PART4-A

DEFINITION AND GENERAL RULES

far we have been conside ri ng our legal persons asa ting entirely by themselves,
and as being set f-sufticient for their necessary legal action.. In real ILfe we do not always
act ourselves. We cm lo a me o distribute our 'ti n • we ask our ro er o u
ares. and on. nfact, much, and under Corporate organisation,al. of the busins
< m us t eco n d ucted trirough representatives agents. In law, a person who acts in pacc
Ot another is Ca e an ageni. and the person _on

relation based upon an express or implied agreement whereby one

person, the agent, is authorised to act for another, his principal, in transactions with
third persons. The idea of relation indicates that the agent is merely a connecting link
betnth g pji al and the third p q^i y . TLie 'enthinithejirincipa1 to third
persons or give the p cJai rights amst e third persons. Agency is based upon
coniii and foTiffFreason, it is called a consensual relation. If consideration is present,
the relationship is also contractual.
er rat
One with certain exceptions
whatever a iiiaii nay lawfully do of him- self he may do by another. In other
words, a person may, in general, act through an agent. The second rule follows from the
first: the acts of the agent are the acts of the principal. The maxim is quifacit per a/him
facit per se—he who acts through an agent is himself acting. The agent is clothed with
the capacity of the principal.
Who may be a Principal—Any person if he is competent to act for himself, may
at through an agent. A person under a legal or natural disability or incapacity cannot
appoint an agent. For example, the appointment by a minor is held void, and if an agent
acts for a minor, he will be personally liable to the third party.
an
Who may be Agent—Since a cuntractmade by an agent is in law the contract
of the principal, it is immaterial whether or not the agent has legal capacity to make a
contract for himclf. Thus it minor can be agent; the agent is only a connecting link and
is not personally hound by his acts performed oil principal. The law requires
the principal and the third party to he competent to contract.
In considering, however, whether the contract of agency itself as between the
principal and agent is enforceable, the contractual capacity of the agent becomes
important. Where an agent is an adult of sound mmd (competent to enter into contract)
then, where the agent has misconducted himself in the business of agency, he will be
responsible to the principal for damages arising from such misconduct. But, if the agent
happens to be a person incapable of entering into a contract, e.g., a minor, then the
principal cannot hold the agent liable, in case of misconduct or negligence (Sec. 194).
For example, where P. a principal, gives A, a minor, a ring worth Rs. 500 and asks him

137
 138 MERCANI1LE LAW

not to sell it on credit or for less than Rs. 450, and A sells the ring to C on credit for
Rs. 350, the transaction will positively bind P and C. but P will have no right to claim
damages as against A for his misconduct, since the latter happens to be a minor, and the
contract with a minor is void. Had A been an adult, he would have been liable to P for
damages sustained by his misconduct.
Capacity to contract must be distinguished from authority to contract. Capacity
ieans power to bind oneself; authority means power to bind another. Capacity is part
JJf the law of status; authority is part of the law of principal and agent. Capacity is usually
a question of law; authority is usually a question of fact. Thus, a minor has no capacity
to contract, but he may have authority to act as agent-
CREATION OF AGENCY
A contract of agency, like any other contract, may be express or implied; but
consideration is not an essential element in this contract. The fact that the principal has
consented to be represented by the agent is a sufficient 'determinant' and consideration
to support the promise by the agent to act in that capacity. It is of importance to remember
in this connection that if no consideration has passed to the agent, he is only a gratuitous
agent and is not bound to do the work entrusted to him, although if he begins the work,
he must do it to the satisfaction of his principal. Agency may also arise by estoppel,
holding nut, necessity or subsequent ratification by the principal of the act done by
the agent. The last type is sometimes called ex post facto Agency. The relationship of
principal and agent may be created by statute.
Express Agency—The contract of agency, with certain exceptions, as to writing
and registration, may be made orally or in writing. In fact, in a large number of business
dealings agencies are created by word of mouth. The usual form of a written contract of
agency is the Power of Attorney, which gives him the authority to act as agency on behalf
of the principal in accordance with the terms and conditions mentioned therein. Where
an agency is created to transfer or assign immovable property, the power of attorney or
authority must also be registered in India, and in England it should be given by Deed.
Powers of attorney vary very much in scope, and may be divided into three classes—a
general power of attorney, a special power, or a particular power. A general power of
attorney authorises the agent to do all things on behalf of the principal, i.e., to act
generally in the business of agency. A special power of attorney empowers the agent to
perform a single transaction e.g.. selling a house or borrowing money on a mortgage. A
particular power of attorney is one which authorises an agent to do a single act, e.g., to
present a document before the Registrar for registration.
Implied Agency— Implied authority may arise by conduct, situation of parties,
or the necessities or circumstances of the case. Implied agency would, therefore, include
agency by estoppel, agency by holding out, agency of necessity.
-"Agency by Estoppel—The rule of estoppel may be briefly stated thus: Where a
person by his words or conduct has wilfully led another to believe that certain set of
circumstances or facts exists, and that other person has acted on that belief, he is estopped
or precluded from denying the truth of such statements. In the words of Lord Halsbury,
"Estoppel arises when you are precluded from denying the truth of anything which you
have represented as a fact, although it is not a fact." Thus, where A tells B in the presence
and within the hearing of P that he (A) is P's agent and P does not contradict this
statement, and later on B enters into a transaction with A bonafide believing that A is
P's agent, then P is bound by this transaction, and in a suit between himself and B. cannot
be pennitled to say that A was not his agent, even though A was not in actual fact his
agent. It is, tFrefore. said, "If you lure a person out on a limb, you cannot saw the limb
o,,
 PRINCIPAL AND AC 139

Agency by Holding Out—This is something more than estoppel. Here, there is

some affirmative conduct by P indicative of A being held out as his agent. Thus, P sends
his servant A asking him to get goods on credit from C, and pays the bill A later abuses
P's authority and buys goods on credit from C for himself. C sues P. P cannot plead that
A had no authority on the second occasion to purchase on credit. P is bound by his prior
conduct in holding out that A was his agent.
In both agency by estoppel and agency by holding out, although there is no express
appointment of the agent by the principal, the agent acquires authority th,ugh the
principal. Thus, in these circumstances implied or apparent or ostensible al cy is as
effective as an agency expressly and deliberately created. Appearance and reality are
one.
Agency of Necessity—Agency may also arise from the necessities of the case.1
In certain circumstances, a person who has been entrusted with another's property, may
have to incur unauthorised expenses to preserve it. In such a case, although specific
authority to act does not exist, .the law presumes it. Such an agency is known as agency
of necessity. A master of a ship is entitled, in cases of accident and emergency, to enter
into a corttract which will bind the owners of the ship or cargo, notwithstanding that it
transcends his express authority, if it is bonafide made in the best interest of the owners
concerned. The same power is possessed by a land carrier in respect of perishable goods.
In Sims & Co. v. Midland Rly. Co. (1913) 1 K.B.103, a quantity of butter was
consigned with the defendant railway company. It was delayed in transit owing to a
strike. The goods being perishable the company sold them. The sale was held binding
on the owner. The company action was justified by the necessities of the case and it was
also not practicable to get instructions from the owner. The doctrine of necessity applies
only when there is real emergency, the agent is not in a position to get instructions from
the principal and acts bonafide in the best interests of the principal.
A deserted wife orone compelled to live apart from the husband (e.g., citherejected
or ill-treated by him) and lacking means of support for herself and her children becomes
an agent of necessity and can pledge her husband's credit fornecessaries, provided she
has not been given an adequate allowance. But if she voluntarily leaves, there is no
agency of necessity.
Agency by Ratification—If the agent had no authority to contract on behalf of
principal or exceed such authority as he had, the contract is not binding on the principal.
No one can become the agent of another person except by the will of that person. The
principal may, however, afteardcon1iiqi anJ a4ot the contr
known as ratification; agency by ratification or by subsequent authority arises. This is
alspost facto agency or agency arising alter the event. The effect of
ratification is to render the contract as birding on the principal as if the agent had been
properly authorised beforehand. Ratification relates back to the original making of the
contract, so that the agency is token to have come into existence from the moment the
agent first acted, and not from the date of principal's ratification. The rule is Omnis
ratiltabiüo retrorraizi:urer nanda:o prior acquipara:ur (every ratification relates back
and is equivalent to a previous command or authority). The legal result of ratification is
that a present act is recognised as binding retroactively. This is so even if the other party
has in the meantime purported to repudiate the transaction. Ratification is tantamount to
prior authority, or, ratification is equivalent to an antecedent authority.
In Bolton Partners v. Lambert (1889) 41 Ch. D. 295, L made an offer to M, the
managing director ofacornpany. M accepted the offeron the company's behalf, although
he had no authority to do so. L then gave notice to the company that he withdrew the

1. See Hindustan Ins. Co. v. Jayalakshmamma, 1959, AT 562.

140 MLt&CANTII.t LAW

offer. The company subsequently ratified Ms unauthorised acceptance- Field, as the

ratification dated back to the Lime of the acceptance, the withdrawal of the offer was
inoperative. An offer once accepted cannot be withdrawn.
But where an agent purports to accept an offer ''subject to ratification" the rule
of relation back does not apply so that the contract will be deemed to have been made
oil date of ratification or approval by the principal and the offer can be withdrawn,
before such ratification. In the above case M. the agent, had warranted his authority and
so the contract was complete and the ra1ifiation related back to the time of the acceptance
by M. In Watson v. Davies (1931)1, Ch. 455, the agent had expressly accepted an offer
subject to the principal's approval and had thus made his lack of authority known so that
there has been no finality about his acceptance, which had been conditional, and the third
party could withdraw his offer before ratification.
A contract can only be ratified under the following conditions:-
1. The agent must avowedly or expressly contract as an agent for a principal in
contemplation [Keighl(-v v. 1)urent (1901) A.C. 24 01 . In other words, the act ratified
must have been done by the agent not for himself but intending to hind a named or
ascertainable principal. So that at the time of the act the third parties know that the agent
is acting for a principal [Imperial Bank if Canada v. Mary Begley (1936) P.C. 1931.
The agent must not allow the third party to imagine that he is really the principal.
2. The contract can, therefore, he ratified only by a principal who was named or
ascertainable at the time of the contract. If the principal is named, he can ratify the
contract even if the agent never intended that he should do so, but wanted to keep the
benefit of the contract for himself (Re Tu'dernann (1899) 2 Q.B. 661.
3. The person ratifying must have been not only in contemplation but he must have
also been in existence at thetiine of ihe contract. Thus contracts entered into by promoters
of a company on its behalf before its incorporation, cannot be ratified by the company
after it comes into existence (Ki'lner v. Basler (1966) 2 C.P. 1741.
Moreover, the person who ratifies must be the person on whose behalf the agent
purported to contract.
4. The principal must have contractual capacity at the date of the contract and at
the date of ratification. Thus a minor on whose behalf a contract is made cannot ratify it
on attaining majority.
In Boston Deep Sea Fishing, etc., Lid. v. Farnham (1957) 3 All. E.R. 264,'after
the fall of France in 1940. a Fresh trawler, S.S. Jena, came to an English port and was
managed by the appellant company. In 1945 the French company which owned the
trawler purported to ratify the acts of the appellant. Field, it was unable to do so because
at the time when the acts were done the French company was an alien enemy and
therefore not competent principal.
5. The principal most, at the time of ratification, have full knowledgeof the material
facts or intend to ratify the contract whatever the facts may be (Sec. 198).
6. The principal roust ratify the contract as a whole. He cannot ratify in part and
repudiate in part. He cannot reject the burdens attached to the transaction and accept only
the benefits. Either the contract is accepted in its entirety or rejected. If the principal
ratifies part of a contract he is taken to have ratified it in into. A person cannot approbate
and reprobate.
7. The ratification must take place within a reasonable time after the contract is
made, and, must he of the whole contract-
9. The ratification must he of such acts as the principal had the power to do, e.g.,

2. Taquiddinv. Gulani Mohd. 1960 AT. 340.

 PRThC1PAL AND AGENT 141

acts of directors which are ultra vires the powers of a company cannot be ralified so as
to bind the company.
9. Ratification can be made of voidable contracts or even of tortious acts of the
agent, but it cannot be made with regard to void or criminal acts. An act which is a legal
nullity cannot be ratified.3
10. Ratifier must communicate his ratification to the agent.
11. The act of the agent must relate to an existing thing. Thus when the tenancy
has ceased there is no meaning in ratifying it.
12. Ratification cannot be made so as to subject a third party to damages, or
terminate any right or interest of a third person (Sec. 200).
A not being authorised thereto by B, demands on behalf of B. the delivery of a
chattel, the property of B, from C who is in possession of it. This demand cannot be
ratified by B, so as to make C liable for damages for his refusal to deliver. Or, A holds
a lease from B, tenninable on 3 months' notice. C, an unauthorised person, give notice
of tennination to A. The Notice cannot be ratified by B, so as to be binding on A.
Agency by Statute—By virtue of Sec.18 of the Partnership Act, 1932, every
and his other partners for the purpose of the business of
partner is an agent of the firm and
the firm. Under the Companies Act, in the exercise of their express or implied authority,
the directors (the Board of directors) are the agents through whom the company acts and,
in order to bind the company, must act collectively as a Board. An individual director is
not an agent of the company, unless he has been given authority by the Board to act for
the Company.
CLASSES OF AGENTS

- Agents are c!assmliediñ various ways according to the point of view adopted. They
may be divided into Mercantile or Commercial Agents, and Non-mercantile or Non-
commercial Agents. Another classificat as based upon the extent of their authority,
may be made into Special Agents. General Agents, and according to some writers,
Universal Agents.
ecial agent is appointed for a specific purpose or occasion to which his
authority is res icted. He has authority only to do that particular act or acts in that
particular transaction. Ifa special agent does anything outside his authority, the principal
is not bound by it; and a third party is not entitled to assume that the agent has unlimited
powers, but should make due enquiry as to the extent of his authority. A eneral agent,
on the other hand, is appointed to do an 'thin wit
principal in all transactions,ojaa transactions relating to a specified trade or matter.
Third parties may assume that such an agent has power to do all that it is usual for a
general agent to do in the business involved; and even where the principal has limited
the agent's authority the third party may safely do business with him generally, unless
he is aware of the limitation, in which case he is bound by the limitation of the agent's
authority. A_unjv4agent is said to be one whose authority is unlimited and who can
do anything on behalf of his principal. Strictly speaking, there is no such agency, and
the so-called universal agent is no other than a general agent with extensive powers. For,
there are many acts which cannot be performed by an agent We do not get married by
proxy, nor we paint a picture through an agent. In fact, where the work to be done is
obviously personal to a particular individual, no agent can be employed.
MERCANTILE OR COMMERCIAL AGENTS
Factors—A factor is a person to whom goods or bills of lading or other documents

3. Mohd Dilawar Ali v, A.P. Muslim Wakf Board, 1967 A.P. 291.
142 MERCANTILE LAW

of title are consigned for sale by a merchant residing abroad or at a distance from the
place of sale. He is entrusted with possession of goods, and usually sells in his own name,
without disclosing that of his principal. A factor may sell upon usual terms as to credit,
may receive payment of the price, and give valid receipts. He may pledge the goods in
his possession. He has general lien on the goods in his possession for all charges and
expenses, and also an insurable interest in them. He may also warrant the goods he sells.
Brokers—"A broker is one who makes bargains for another, and receives
commission (brokerage) for doing so." Thus, a broker is an agent employed to buy and
sell goods for compensation known as "brokerage", and differs fiorn a factor in not
being entrusted with the possession of goods for sale, and in not having authority to
contract in his own name. He makes a trade of finding buyers for those who wish to sell,
and sellers for those who wish to buy. When he makes a contract, he enters the terms in
his book called the memorandum book and signs it. He then sends out "Bought Note"
and "Sold Note" to the buyer and seller respectively. As long as he describes himself
as broker, whether with or without the -name of his principal, he incurs no personal
liability on his contracts. A broker has no lien on the goods, as he has no possession of
goods; but on any books and papers of his principal in his possession he has a lien. An
insurance broker will have a lien on the policy for his general balance.
Commission Agents—A commission agent ordinarily is a person employed to
buy goods in a foreign market. He buys as principal, in the fixed foreign market and
ships the goo to is own principal charging a fixed commission on the price paid. He
is bound to get the goods as cheap as he reasonably can. He is an agent so far as he is
bound to do his best for his principal, and may not make any profit beyond his agreed
commission. He is in the position of an independent purchaser so far as his right to the
goods is concerned. He cannot pledge his principal's authority without previous sanction.
The term 'commission agent' is also used for an agent commissioned to act on behalf of
his principal within the country under different circumstances and on different terms.
Generally speaking, as pointed out by Viscount Simon L.C. in Luxor (Etuiborne) Ltd.
v. Cooper, 1941 A.C. 108 at p.120, such contracts can fall in three classes:
1. The first is the class in which the agent is promised a commission by his
principal if he succeeds in introducing to his principal a person who makes an
adequate offer usually an offer of not less than the stipulated amount.
2. The second class is of cases in which the property is put into the hands of the
agent to dispose of for the owner and the agent accepts the employment, and,
it may be, expends money and time in endeavouring to carry it out.
3. The third class is of cases where the agent is promised his commission only
upon completion of the transaction which he has endeavoured to bring about
between the offeror and his principal.
In the cases falling under the first class the only thing which the agent undertakes
is to introduce to his principal a person who is ready, willing and prepared to take the
property for the stipulated amount. He does not undertake to do anything furthes and if
he performs what he has undertaken to do he earns his commission. In the second class
of cases the agent is given full authority to transfer the property after he has found a
possible purchaser. He has accepted to expend time and money in carrying out his part
of the work and there is a sort of implied term that the principal will not withdraw the
authority he has given after the agent has succeeded in finding a possible purchaser. In
such cases, if the principal withdraws his instructions after the agent has found a
purchaser, the commission will still be payable. In the third class must be put contracts
by which a person instructs an agent to arrange for the transfer of a property and promises
to pay a sum of money only in case the agent succeeds in getting the transfer completed.
The intention is to pay the amount of the consideration of the transfer when it is received
 PRINCIPAL AND AGENT 143

by the principal. It is obvious that in this class of cases the commission will be payable
only if the agent succeeds in having the transaction completed. Till that event happens
he has no claim (Raja Ram laiswal v. Ga,zesh Prashad, 1959 All. 29).
Del Credere Agents—A Del Credere agent is an agent, who in consideration of
an extra remuneration called the Del Credere Commission guarantees to his principal
that the third persons with whom he enters into contracts shall perform their obligations.
Thus such an agent guarantees to his principal that he will only sell to persons who will
pay for what they buy; and if the buyer does not pay, he (Del Credere agent) will pay.
The position of a Pakka adaüa as agent is analogous to that of a del cre4ere agent. His
legal position like that of a del credere agent is partly that of an insurer, and partly that
of a surety. He agrees for a special remuneration to find a buyer or seller for his
up-country constituent; and if he fails to do so he is liable in damages. But a Katcha
adatia is merely an agent and does not make himself responsible to the principal for
the non-performance of the contract by the third party. He is, however, responsible to
the other adatia or shroff who acts on behalf of the other contracting party.
Auctioneers—An auctioneer is an agent who sells goods by auction, i.e., to the
highest bidder in public competition. He has no authority to warrant the goods sold and
can deliver the goods only on receipt of the price. He is the agent only of the vendor; but
in English law, he is also the agent of the buyer for the purpose of signing the
memorandum under the English Sale of Goods Act. As he has possession of the goods,
he is bound to arrange for their proper storage, and is responsible to the owner for any
damage caused through his negligence. He is authorised to receive proceeds of the sale
of goods, but on a sale of land to receive only a deposit. He enjoys a lien on the goods
for his cbatges.
,'—J)nkers—The relationship between a banker and his customers is ordinarily that
of debtor and creditor, but he is an agent of his customer when he buys or sells securities,
collects cheques, dividends, bills or promissory notes on behalf of his customer. The
banker is an agent in so far as he must pay the customer's cheque when the account is
in ctedit. The banker has a general lien on all securities and goods, in respect of the
general balance due to him by the customer which has come into the banker's possession
in the course of his dealings as banker with his customer and which security and goods
have not been left for specific purposes, e.g., safe custody.
IJ)NTORS

An indentor or indenting agent is one who, for a commission, procures a sale or a

purchase on behalf of his principal, with a merchant abroad.
NON-COMMERCIAL AGENTS

Non-commercial agents may be Estate Agents, who are employed to negotiate the
sale and purchase, or lease, of immovable property, or House Agents, who are similarly
engaged with respect to houses, shops, etc., or Law Agents, whose business it is to look
after the legal affairs of their principals. Besides, there are Counsel (Barrister or
Advocate), and Attorney and wife.
Counsel (Barrister or Advocate)—According to the practice and traditions of
the English Bar, an Advocate or Barrister, accepting a brief is not an agent of the client,
and although he undertakes a duty on his client's behalf, he does not enter into any
contract with him. As a consequence, the ordinary rule as to limits of an agent's authority
does not apply, and a counsel has wide powers as to the mode of conducting the case for
his client, and can even compromise it on his client's behalf. The same is the case in
India, at least in the three Presidency towns.
144 MERCANTILE LAW

Attorney—The English and Indian rule with regard to the attorney is that he can
make 'a reasonable bonafide compromise if not specifically prohibited by the client.
Vi1e—Thc relationship between husband and wife has sometimes led to difficult
questions, as to how far the wife is the agent of the husband. The Full Bench of the
Allahahad High Court has laid down the rule in Gird/ian La/v. Cravj'ord (1887)9 All.
146 at p. 156, that 'the liability of a husband for a wife's debt depends on th principles
of agency, and the husband can only be liable, when i: is shown thai he has expressly or
impliedly sanctioned what the wife has done. Where the husband has expressly
authorised his wife to borrow money or pledge his credit, the position is simple: the
husband is liable. The question becomes difficult when a wife is regarded to have
implied authority as agent of her husband. Where the husband and wife are living
together, the wife is presumed to have implied authority to pledge the husband's credit
for necessaries. But the husband may escape liab i lity if he can prove that (i) he has
expressly forbidden his wife from borrowing money or buying on credit, (ii) the goods
purchased were not necessaries, (iii) he has allowed sufficient funds for purchasing the
articles she needed to the knowledge of the tradesman, or (iv) the tradesman has been
expressly told to give credit to the wife." Where the wife lives apart from the husband,
through no fault of hers, and is therefore entitled to claim Support or maintenance, she
has an implied authority to bind the husband for necessaries of life, if the husband does
not provide for her maintenance. But if the wife lives apart of her own will and without
any justification. she istot her husband's agent and cannot bind him even for necessaries
as the husband is under no obligation to maintain her.
DELEGATION OF AUThORITY BY AGENT
When the fact of agency is established, it is also established that the agent has some
authority, depending upon the type of agency, to act on behalf of the principal and bind
him by his acts. The nature and (ILIantUin of authority need further discussion;-but at this
stage, it is advisable to state that ordinarily the agent is expected to perform his duties
as agent himself personally. Delegatus non potest delegare—a delegate cannot further
delegate, is the maxim, An agent, being himself a delegate of his principal, cannot pass
on that delegated authority to some one else. The reason for this rule is that confidence
in a particular person is at the root of the contract of agency. An agent is usually selected
in reliance upon some personal qualifications, and it would he unfair, if not injurious to
the principal, if the authority to act could be shifted to another. This is particularly true
when the agent is appointed for the performance of any task requiring discretion or
judgment. But to this general rule there are certain exceptions, when the agent is
permitted to delegate his authority. He may appoint sub-agents in the following cii'-
cumstances:
crc the principal has expressly permitted delegation of such pow (2)
ere the custom of the trade permits delegation; (3) where the principal knows that the
agent intends to delegate his authority; (4) where the nature of the authority is such that
a deputy is necessary to complete the business; (5) wmicre the act to be done is rely
ministcialand does not involve the exercise of discretion, e.g., clerical or ro eWork;
(6) in an un o enc , the agent can always delegate.
SUB .A g ENT AND SUBSTITUTED AGENT
Where an agent under express or implied authority of delegation, appoints another
person to act in the matte( of the agency, such other person is called a "sub-agent", if
he works under the control of the agent: and a "substituted agent." if the agent walks
out of the transaction and the newly appointed agent carries on the business of the agency.
The relation of the sub-agent to the original agent is as between themselves, that of agent
and principal. As the sub-agent acts under the control of the agent, there is no privity of
 PRINCIPAL AND AGENT 145

corflract between the principal and the sub-agent, and, therefore, the sub-agent cannot
use the principal for any moneys due, although the sub-agent binds the principal, as
regards third parties. But the principal and the sub-agent have right to sue only the
"agent", who is the immediate contracting party, for anything clue to principal from the
sub-agent and for remuneration payable to the sub-agent by the principal. To this rule,
there is one exception that, if the sub-agent is guilty of fraud or wilful wrong, the principal
has a concurrent right to proceed both against the agent and the sub-agent. The privily
of contract between the principal and the sub-agent is established in such a case. Where
an agent improperly appoints a sub-agent, i.e. appoints without authority to appoint, the
principal will not he bound by the acts of the sub-agent, nor can he hold the sub-agent
responsible for the latter's fraud or wilful wrong. The acts ofthe sub-agent will, however,
bind the agent, as regards third parties as well as the principal.
The Indian Contract Act makes a distinction between an 'ordinary sub-agent"
and a person who is put in relation with the principal and called the ''substituted agent"
or' agent of the principal.'' The important difference between the two is that in the case
of the substitute there is privity of contract between him and the principal so that the
principal can sue the substitute for accounts or damages and the substitute can sue the
principal for remuneration. The original agent who appointed or named this agent drops
altogether froin the transaction. Where A instructs B, his solicitor, to sell his property
by auction, and to employ an auctioneer for the purpose, and B names C, an auctioneer,
to conduct the sale. C is not a sub-agent, but he is A's agent for the conduct of the sale,
and will be called a substitute or substituted agent. As the original agent walks out of the
transaction, he is required to exercise due diligence and care in choosing the substitute,
and if he is negligent in his choice he will be liable for damages to the principal. Diligence
here means the diligence which a mail of ordinary prudence would exercise in his own
affairs.
AGENT, SERVANT OR INDEPENDENT CONTRACTOR
An agent may he either a servant or independent contractor; but every servant or
a coptractor is not necessarily an agent. The relation between master and servant and
that between principal and agent was explained by the Supreme Court in
Laksimrninarayan Ram Gopal & Son Lid. v. The Government of Hyderabad, 1954 S.C.
364. Briefly stated, it is as follows: A principal directs the agent as to what is to be done,
while a master has the further right to direct how the work is to be done. A servant acts
under the control and supervision of his master and is bound Co conform to all reasonable
orders given to him in the course of his work. An agent, though bound to exercise his
authority in accord:iiice with all lawful instructions of the principal, is not subject in its
exercise and the direct control ur supervision of the principal. An agent as such is not a
servant, but a servant especially in superior service, is generally for some purposes his
master's implied agent, the extent of agency depending on the duties or position of
the servant.,)t is for this reason that an agent is sometimes described as a "superior
servant.' '..n independent contractor is independent of any control or interference by
the employer and uses his own means to produce the result. Thus if the agreement
between E and C provides that C is to accomplish a certain result, e.g., to build for E a
boat for Rs. 500, and has full control over the manner and methods to be pursued in
bringing about the result, (i.e., building the boat he is deemed an independent contractor
and E, who receives the benefit of his services, is in no sense responsible to third parties
for his actions. -

4. See also State of Madras v. J.R.M. Contractors Co. 1959 A.P. 352.
146 MERCANTILE LAW.

PART 4-B
DUTIES AND RIGHTS OF AGENT

DUTIES OF AN AGENT
1. To carry out the work undertaken according to Instructions—If The agent
fails to act according to instructions, the ordinary rules of contract will apply and he will
become liable for breach. He must act within the scope of the authority conferred upon
him and carry out strictly the instructions of the principal. Thus, where the principal
instructed the agent to warehouse the goods at a particular place, and the agent
warehoused them at another place equally good but cheaper, and the goods were
destroyed by fire, it was held that as the agent had not acted according to instructions of
the principal, he was liable for the loss, even though he had acted for the benefit of the
principal and the loss had ensued without any neglect on his part.
2. To follow the custom in the absence of instructions—Where the principal has
not given any express instructions, the agent must follow the custom prevailing in the
same kind of business at the place where the agent conducts business, otherwise he will
be liable for any loss sustained by the principal (Sec.211).
3. To carry out the work with reasonable care, skill and diligence—What,is
reasonable care and diligence depends on the circumstances of each case, but generally
the agent must at least exercise the same degree of care, skill and diligence as he would
exercise about his own affairs. Where, by the nature of his profession, the agent purports
to have special skill, then the degree of skill reasonably to be expected from the members
of that profession must be shown. Thus a solicitor, who is an agent of his client, may be
held liable for not possessing the requisite skill. For example, where he. instituted
proceedings in a Court having no jurisdiction, or where he started proceedings under a
wrong section, and the suit was therefore dismissed, the solicitor was held liable for
damages.
4. To communicate with the principal—In cases of difficulty, the agent must
communicate with the principal and get his instructions (Sec. 214). Thus, where the
goods were consigned by the principal to a place and the agent took them to a different
place for sale in order to minimise the loss without communicating and getting principal's
instructions, and the loss resulted, the agent was held responsible.
5. Not to make any profit out of his agency other than his agreed or reasonable
remuneration—As the agent acts on behalf of his principal, all moneys received by him
on the principal's behalf must be paid over to the principal. The agent can, however,
deduct all moneys for his remuneration or expenses properly incurred. This duty to pay.
over moneys includes also the duty to pay over all illegal gratification received by the
agent. Where an agent receives some moneys bonafide, he will be required to pay over
the same to the principal, but he is entitled to his remuneration; but where his acts are
not bonafide, he will also lose his remuneration. Thus, where P directed A to s41 a shop
at the best price obtainable, and A sold it to B on the understanding that B would'pay A
Rs. 200, it was held that A must pay over Rs. 200 to and forgo his commission. Where
the third party is guilty of fraud, the principal may rescind the contract.
6. To keep and render accounts—It is the duty of the agent to keep true and
correct accounts of all his transactions and to be always ready to produce them to his
principal. In general, he should not mu moneys belonging to his principal with his own
money, and in these circumstances the agent is the trustee of the funds in his hands. But,
where the terms of the agency permit mixing, the agent may do so, when he ill be
 PRINCIPAL AND AGENT 147

treated a debtor of the principal. Thus a banker holds his customer's funds as the
customer's debtor and is entitled to mix them with his own.
7. Not toeai on his own account—An agent must not deal on his own account
in the business of the agency, as no agent is "permitted to put himself in the position
where his interest conflicts with his duty." An agent must not become a principal party
to the transaction as against his principal. But, if he wants to do so, he must fully disclose
to the principal all the facts in respect of the transaction and obtain his consent, before
acting on his own account. Thus a broker employed to sell stock, can not himself buy,
nor can a broker instructed to buy, become the seller himself, without obtaining a distinct
consent to do so. If the agent acts on his own account without obtaining consent and
without disclosing all the material information the principal may claim the profits which
the agent might have made, or disclaim the losses if the business had ended in a loss;
and where there has been an executed contract the principal may obtain rescission of the
same without proving fraud on the part of agent. So where a vakil, employed to bid for
certain properties, purchased the properties himself, it was held that the principal could
claim the properties. Or, where an agent, employed to buy grain, delivered his own grain
to the principal at a rate higher than the market rate, it was held that he must account for
the profit. Again where an gent for sale, purchased the property himself, it was held that
the sale was not binding. But, if the agent had, in the above cases, told the principal that
he himself was purchasing or selling, and had given the principal free and unbiased use
of his own discretion and judgment in the matter, the transaction would be binding.
8. Not to set up adverse title—When the agent has obtained goods or property
from the principal as an agent, he is precluded from setting up his own title or setting up
the title of third parties to the property.
9. Not to use Information obtained In the course of the agency against the
principal—Where an agent has obtained any information in the course of agency, the
agent must on no account use it against the interest of the principal. If an agent does
make use of such information, the principal can stop him from doing so by an injunction.
10.Not to delegate authority—Subject to the six exceptions noted above an agent
must not delegate his authority to another person, but perform the work himself.
RIGHTSOF AN AGENT
—Th
1. Right to receive remuneration—Where the services rendered by the agent
were not voluntary or gratuitous, the agent is entitled to receive the agreed remuneration
or if none was agreed, a reasonable remuneration. An agent becomes entitled to receive
remuneration as soon as he has done what he had undertaken to do even though the
transaction has fallen through either because the principal has failed to carry out his part
of the contractor because the third party has backed out. But the agent must show that
he has done all that he had agreed to do, before he can claim his remunerajion. Thus,
commission becomes due to the broker, where he has procured a party who is willing to
open negotiaon on a reasonable basis and is desirous of entering into a contract with
the principal, The agent is entitled to commission, where he has procured orders for the
manufacturers, and they are unable to execute them owing to the outbreak of the war.
Even where the contract becomes void because of bonafide mistake, the agent .will be
entitled to remuneration, if hhas carried out what he had bargained to do. Where the
agent is prvented from earning his remuneration by some wrongful act or default of the
principal, the agent can recover by way of damages the actual loss sustained by h9
which, in cases where he has done everything will be the full amount of remuneration.
5. D.S. Sahni v. Faqir Singh, 1960J. & K. 6; Raja Ram v. Ganesh Praud, 1959 All. 29; Roopji
& Son: v. Dyer Meaken, 1930 All. 545; Fand Baksh v. ilergulal Singh, 1936 A.U. 1163;
Giddy: v. Horsfall (1747) 1. A.E.R. 460; E.H. Bennett v. Millet (1948) 2 A.E.R. 929.
6. Abdullah Ahmed v. Animendra K. Miner (1950) S.C.R., 30
148 MERCANTILE LAW

But where the agent has misconducted himself in the business of the agency, he will not
be entitled to his remuneration (Sec. 220). A principal is entitled to have an honest agent
and it is only the honest agent who is entitled to any commission, a
2. Right of lien—Certain classes of agents, e.g.. factors, who have the goods and
property of their principal in their possession, have a lien on the goods and property in
respect of their remuneration and expenses and liabilities incurred. This lien is generally
a particular lien confined to claims arising in respect of the partic ular goods and property.
But by special contract, an agent factor may get a general lien extending to all claims
arising out uf the agency. For the exercise of a lien, the goods must be in actual or
constructive possession of the agent. and the possession must ha y e been acquired by the
agent without prejudice to any of his duties. Thus, if the goods are in the agent's
possession the lien will not be affected even by the subsequent insolvency of the
principal. A properly appointed sub-agent also enjoys the right of lien against the
principal's goods. But an agent loses his right of lien, where he parts with the possession
of the goods. If, however, at the time of parting with the goods he reserves the right of
lien or where goods are obtained from him by fraud or other unlawful means, he will not
lose his lien.
3. Right of stoppage in transit—This right is acquired by the agent in two cases.
If he has bought goods on behalf of his principal either with his own money, or by
incurring a personal liability for the price, he stands towards the principal in the position
of an unpaid seller, and as such possesses the right to stop the goods in transit, if they
have been delivered to the carrier for transmission to the principal. Conversely, where
an agent (del credere) is personally liable to his principal for the price of the goods sold,
he may exercise the unpaid seller's right to stop the goods in transit oil insolvency
of the buyer.
4. Right of Inde mnificat ion—As the agent represents the principal, the agent has
a right to be indemnified by the principal against all charges, expenses and liabilities
properly incurred by him in the course of the agency. Although the right of indemnity
covers all liabilities incurred by the agent, yet the damages which the agent can recover
from the principal are those which directly, immediately and naturally flow from the
execution of the agency. K carried on the business of commission agents. B entered into
several forward contracts for the purchase and sale of bullion through K. The transactions
proved unprofitable to B and loss aggregated to a sum of Rs. 21,500. The entire amount
was paid to third arties by K on behalf of B. Held, B must indemnify K, as K had paid
the losses for B. Sec. 225 of the Indian Contract Act gives right to the agent to
compensation for injuries sustained by him by neglect or want of skill on the part of the
principal. He can also claim against his co-agents on the same grounds. But the principal
is entitled to plead contributory negligence or common employment, wherever possible.

PART 4-C
EXTENT OF AGENT'S AUTHORITY AND
PRINCIPAL'S RESPONSIBILITY

SCOPE AND EXTENT OF AGENT'S AUTHORITY

When the fact of agency is established, it is not enough to know that he has
authority to hind his principal, but we must know the scope and quantum of authority.

7. Kishanlal v. Rhanwarlal. 1954 S.C.. 500.

 PRINCIPAL AND AGENT 149

The need to consider this fact arises because the agent is bound to obey the instructions
of the principal, having no right to depart from them even for the principal's benefit. But
he has also, what may be called incidental or irnplid authority. Sec. 188 9 of the Contact
Act gives him an implied authority to do all that may be reasonably necessary for doing
the act authorised by the principal. Oil basis of the section the authority of an agent
includes that which is—
expressly given by the principal—Express or Declared authority;
incidental to the authority that is expressly given by the principal—Incidental or
mplied authority;
4101-11tistolliary for such agent to exercise—Custonsary authority;
an apparent or ostensible authority, which arises by estoppel.
The first three kinds of authority may be classified as Real Authority as distin-
guished from Apparent or Ostensible Authority.
Express Authority—An authority specifically bestowed by the principal on an
agent through written or oral communication is termed express authority. Here the
principal tells the agen(to perform a certain act.
Incidental or Implied Authority—An agent has implied authority to perform an
act reasonably necessary to execute the express authority. To illustrate, if the principal
authorrses the agent to purchase goods without furnishing funds to pay for them, the
agent has implied incidental asithority to purchase the goods on credit. Similarly, where
A is employed to find a purchaser for property he can describe the property and state
any circumstances which may affect the value. Again, where A is engaged to recover a
debt due to the principal abroad, he can adopt any legal process necessary for the purpose
and give a valid receipt for the money received. Also, the secretary of a co-operative
society authorised to carry on its business oil lines is deemed to have implied
authority to buy goods oil But where A is authorised to find a buyer, he cannot
enter into a contract of sale' . A station master has no authority to pledge the credit of
the railway for medical attendance on a sick passenger.t'
Agent's Authority in Emergency—An agent has authority to do all such things
which may be necessary to protect the principal from loss in an emergency and which
he would do to protect his own property under sitnilarcircumnstancc (Section 189). This
kind of authority arises only when the agent has no opportunity to contact the principal
and request instructions. For example, where owing to delay in transit, butter may be in
danger of becoming useless, its sale by the railway for the b e st price wil l be justified, as
an authority exercised in emergency.
Agent's Authority by Custom—An agent has authority to do any act which,
according to the custom or usage of the trade, usually accompanies the transaction for
which he is authorised to act as agent. For example, where a salesman is authorised to
receive payments for cars sold, he would he deemed to have implied authority to accept
a cheque instead of cash in the usual or customary way. But all with authority to
receive cheques in payments dr..es not have implied authority to cash them.
Apparent Authority—Apparent authority, if it may be called authority, is one
which is not real but which the principal by his words orconduct reasonably leads a third
party to believe that the agent possesses. If a principal creates an appearance that

8. ''Section 188. An agent having in authority to do an act has authority to do every lawful thing
which is necessary in order to do such act. Ail having an authority to carry on a business
has authority to do every lawful thing necessary for the purpose, or usually done in the course
of conducting business."
. Valapad Co-op. Stores v. Srinivasan lyer, 1964 Ker. 176,
10. Durga v. Rajendra. 1923 Cal. 57.
II. Cox v. Midland Countries Rly. Co. (1849)3 Ex. 268.
 MERCA]".IlLE LAW
ISO

reasonably leads another to believe that his agent has the authority to make contracts
for him, he cannot deny this authority when a third party relies upon this appearance by
making a contract with that agent. The result of apparent authority is that a person is
bound on a contract he never wished to make- The policy behind apparent authority is
similar to that ofestuppel. Looking at the reasons from a broader perspective, the policy
behind apparent authority is of practical nature. Remember that almost all business is
carried on by agents. If business firms could avoid their contracts merely by denying the
authority of their agent in a particular case, almost no contract would be enforceable.
Business as it is known in the modern world could not be conducted. Because of these
pragmatic considerations, the opposite approach is taken- Businessmen are entitled to
assume that an agent has the authority that his principal causes him to appear to have.
For all these reasons, a contract negotiated by an agent whom the principal has clothed
with an appearance of authority may he enforced just as if the agent actually had the real
authority he appeared to have. Tills will be so even if the principal has instructed the
agent not to make that very sort of contract.
The reason is obvious. If the principal has clothed his agent with authority to
perform certain acts but has given the agent certain secret instructions which limit his
authority, the third person is allowed to take the authority of the agent at its face value
and is not hound by the secret limitations of which he has no knowledge. If the third
person is aware of the limitation s , as for example, contained in a written authority, he
cannot hold the principal l ia ble for acts of the agent which are in excess of limitations.
The purpose of the rule that a principal is bound by apparent authority is to protect
innocent parties, and it has no application when the person dealing with the agent has
actual knowledge of the agent's powers.
Very often a title or a position automatically gives an agent a measure of apparent
authority. A store manager, for exaimiple, would have rather broad powers to contract.
Therefore, naming an agent as General Manager but secretly limiting his authority to an
unusual degree will result in his having an area of apparent authority. The apparent
authority in this case stems from the title 'general manager'.
It may be observed that the mere assertion by the agent that he has a certain
measure of authority does not create apparent authority. The source of the apparent
authority must he traceable to some deed or word of the principal. Were this not the case,
any one could a.ssumne the power to contract for almost any principal, mnerey by telling
third parties that he possessed the authority to do so. This sort of thing is beyond the
control of any principal. For this reason, the burden is placed upon the third party to
ascertain that there is reasonably convincing evidence, stemming from circumstances, a
statement, or an impression that stein from the principal, that the agent does have
authority for his act.
RESPONSIBILITIES OF PRINCIPAL TO THIRD PARTIES
The principal is bound by all acts of the agent done within the scope of actual,
apparent and ostensible authority. In other words, the principal is liable for acts done by
the agemif when actually authorised to do those acts, as also for such acts as are necessary
for the proper execution of such authority. Again, where a principal gives general
authority to conduct any business, he will be bound by every act of the agent incidental
to such business, or which falls within the apparent scope of the agent's authority 12 or
as it is often called the ''ostensible authority" of the agent. We have already dealt with
the doctrine of apparent authority. which may be reiterated for purposes of emphasis.
When an appearance has been created by the principal that his agent has a certain rrreasure
of authority, and relying upon this appearance a third party enters into a contract, the

12. Gayarsilal. v. Sits Charan. 1963 M.P. l.

 PRINCIPAL AND AGENT 151

prinipa] will be liable for this apparent authority even if he has instructed the agent not
to make that sort of contract. An apparent or ostensible agency is as effective as an
agency deliberately created. Appearance and reality are one. Where P authorises A to
sell goods, but privately instructs him not to sell for credit, and A sells them for credit
to C, who does not know of the limitation, the sale is binding oil Where, however, the
agent exceeds the authority granted to him by the principal, the principal may either
disown such an act as in excess of the authority or ratify the same.
* The principal is liable for misrepresentation or fraud of the agent committed in the
course of the employment or within the scope of the employment or within the scope of
the agent's apparent authority (Section 238). It is immaterial whether soch acts are done
for the benefit of the principal or exclusively for the benefit of the agent, and against the
principal's interest.
The principal is bound by the admissions made by the agent. For example, where
a passenger lost his article by theft and the station master reported to the police that the
porter had absconded with the parcel, it was held that the admission made by the station
master was binding on the railway, and the company was responsible to pay for the
parcel.
The principal is bound by the information obtained by the agent in the course of
the business of the principal, on the presumption that the agent has done his duty and
communicated the inforniationo the principal, even though, in fact, he has not done so.
Knowledge of the agent is said to he the knowledge of the principal: the p rincipa l is said
to have constructive notice. But, to he binding on the principal, the inThrniation must be
material to the business of the agency and not irrelevant to it. Constructive notice will
not be presumed where the agent is guilty of fraud, for it cannot be reasonably expected
that the agent would ever communicate his own fraud to the principal.
LIABILITY OF UNDISCLOSED PRINCIPAL
The principal even though his name was kept secret by the agent at the time of the
contract is, on being discovered, responsible for the contracts of the agent—It may
sometimes happen that an agent discloses the fact that he is an agent. but at the same
time conceals his principal's name. Here the principal is liable, and not the agent, unless
there is a trade custom making the agent liable. But it is essential that the undisclosed
principal exists and is, in fact, the, principal at the time the contract is made. He cannot
be brought into existence as a principal after the contract has been concluded.
CONCEALED PRINCIPAL

The principal is liable to third parties even where the agent is also liable, unless
the third parties have elected to sue the agent, or led the principal to believe that th'e agent
alone will be held responsible. The law which superadds the liability of an agent does
not detract from tile liability of the principal. This will happen where an agent conceals
not merely the name of the prinei'-'al but also the fact that there is a principal. In this case,
the third party must necessarily look to the agent for payment or performance, and the
agent may sue or be sued on the contract. Careful consideration must be given to the
position of the tirineipal: (i) when the third party discovrs his existence and wants to
make use of discovery, and (ii) when the principal decides to intervene and assert any
rights he may have against the third party. In the first case, when the third party discovers
that there is a principal, if lie has not already obtained judgment against the agent, lie
(third party) may site either the principal or the agent, or both, and the principal is not
released from liability until a clear election has been made by the third party to proceed
against the agent alone. If the third party chooses to sue the-principal and not the agent,
he must allow the principal the benefit of all payments made by him to the agent on
152 MERCANTILE LAW

account of the contract before the agency was disclosed. Secondly, if the principal
intervenes and sues the third party, then in the same way the third parry is entitled to be
placed in the same situation at the time of the disclosure of the real principal as if the
agent had been the contracting party. For example, if the third party has made part
payment to the agent, he must be allowed the benefit of it. Para 2 of Section 231. however,
states that "if the principal discloses himself before the contract is completed. the other
contracting party may refuse to fulfil the contract if he can show that, if he had known
who was the principal in the coiitiact, or if he had known that the agent was not a
principal, he would not have entered into the contract." -
It is clear from the three circumstances that the effect of a contract made by an
agent varies according to-the circumstances under which the agent contracted. i.e., for a
disclosed, undisclosed or concealed principal.

PART4-D
I'CRSONAL LIAII1LJ'l'Y OF AGEN ' TO l'l-lllW PARTY
We have seen above that when an agent contracts as agent on behalf of a principal
whom he names to the other party, the agent is merely a connecting link between his
principal and the other party, and incurs no personal liability. As we have seen earlier,
the essential characteristic of an agent is that lie is invested with a legal power to alter
his principal's legal relations with third parties; the principal is under the a correlative
liability to have his legal relations altered. To this rule, there are certain exceptions. An
agent w I he personally liable in the following cases:—
\'hen the contract expressly provides—The third party may, when contracting
with an agent, stipulate that the agent should make himself personally liable on the
contract. If the agent agrees to this stipulation he will be personally liable for any breach
of the ontract.
When the agent signs a negotiable instrument in his own name without
making it clear that he is signing it only as agent, he would be personally liable as the
maker of the note, even though lie may be described in the body of the note as the agL 't.
hen the agent acts for a foreign principal, it is the agent who is liable, not the
princip I.
hen acting for a concealed principal—The agent would be personally liable
where he acts for a concealed principal because the third party could not look to the credit
of a principal whose existence is not disclosed, and relies mainly on the credit of the
agent. The third party may, however, on discovering the identity of the principal sue the
principal also if lie so cho oses-
,/'When acting for principal who cannot be sued—Where the name of the
principal has been disclosed, but no suit can be filed against him, agent will be personally
liable as the credit is presumed to have been given to the agent and not to the principal.
For example, where an agent acts for a minor or an Ambassador, he will be personally
liable ( nion of India v. Cliinoy C/iabla,mi & Co., 1976 Cal. 467).
gent liable for breach of warranty—A person who professes to act as agent,
but has no authority from the alleged principal or has exceeded his authority, is liable to
an action for breach of warranty of authority at the suit of the party with whom he
professed to make the contract lCohen v. Wright (1857) 8 E. & B. 6471. The action is
based not on the original contract, but on implied promise by the agent that he had
authority to make the original contract. For instance, where an agent acts for a non-
existing principal, he is personally liable. But before the agentcould be held responsible,
it must first be shown that: (i) he had made an untrue representation; (ii) the third party
 PRINCIPAL AND AC NT 153

had been misled or induced to deal with the agent on the faith of such untrue repre-
sentation; (iii) the principal had repudiated or refused the transaction; (iv) loss had
occurred to the third party; and (v) the untnie representation was one of fac; and not one
of law. In ilaji Ismail v. James Short (1910) M.L.J. 383, where broker acted upon a
wrong telegram due to a mistake on the pail of the telegram authorities, it was held that
the broker was personally liable
oney paid by mistake or fraud—Where all receives money by mistake
or fraud from third parties, he call sued therefor. Similarly, where an agent has paid
money by mistake or fraud to third parties, the agent can himself file a Suit for the
recovery of the amount.
When authority is one "coupled with Interest" or where trade-usag or
custom makes agent personally lialile—Where an agent has an interest in the suect-
matter of the contract which he signs, his authority is said to be coupled with interest.
He is really a principal to th€'extent of that interest and may sue in his own name or be
sued. A authorises B to sell A's land and out of the sale proceeds to pay himself the
debts due to him from A. B's a'uthority is coupled with interest. If a factor is authorised
to pay himself out of the sale proceeds, or he is autliorised to sell at the best possible
price and if the proceeds are insufficient to pay him off, to draw on the principal, this
gives the factor an interest in the goods. In these cases he becomes personally liable to
the extent of his interest.
For hi.c Tort independently of contract or tort arising out of the contract, as where
it has been induced by the fraud of the agent, the agent is severally and jointly liable with
his principal. In the particular form of agency known as partnership, a partner is both an
agent and principal, and as such personally liable.

PART4-E
TERMINATION OF AGENCY

Agency may terminate in the same manner as any other contract, viz., by the
operation of law or by the act of parties. In particular, a contract of agency may come to
an end.—
fly performance of the contract ofagency—Where the agency is one for a single
transaction, the agency terminates when the transaction is completed. For example, an
agency for the sale of property ends when the sale is completed and does not continue
until payment of the price.
By agreement hetseen the parties—The agency can be terminated at any time
and at any stage by the mutual agreement between the principal and the agent.
By expiration of the period fixed for the contract of agency—If the authority
is given for a fixed period, the agency comes to all on the expiry of the period even
if the business is not completed.
By the death of the principal or the agent—An agent with a power of attorney
to present a document for registration, presented it for registration after the death of the
principal, and the Registrar knowing of the death of the principal registered the docu-
ment. The registration was held to be invalid. 1301, the termination of the agency by the
death of the principal the agent must, on behalf of the representative of his late principal,
take all reasonable steps to protect the interests of the principal entrusted to him (Section
209).
Bythe Insanity of either party—Doubt less it is true an agent need not be a person

13. Majd-in-Njssa v. Abdu, R3hini (1900) 23 All. 233.

154 MERCANTILE LAW

capable of entering into a contract so that a person can appoint even a lunatic as his agent,
if he so desires, but if an agent becomes insane during the agency, the agent's auihority
terminates as soon as the agent becomes insane. The authority will, of course, terminate
on the principal becoming insane, iii which case the agent is required to do everything
for the protection of the principal's interests.
By the insolvency of the principal and in some cases that of the agent—The
banluutcy of the principal terminates the agency, and also that of the agent, except in
14
cases where the act which the agent is to do is merely formal.
Where the principal or agent is an incorporated company, by its dissolution.
A company, after being dissolved, comes to an end, and its powers as principal or agent
terminate thereafter.
By the destruction of the subject matter—Where the subject-matter in respect
of which agency was created has been destroyed, the agency comes to an end. Thus,
when the agency was created for the sale of a horse or a house, and the horse dies or the
house is destroyed by fire, the agency necessarily comes to an end.'
By the renunciation of his employment by the agent—Generally, an agent can,
after giving a reasonable notice of his intention, renounce the contract of agency, for a
person cannot be compelled to continue as agent against his will. Where an agency is
for a fixed period and the agent renounces it without sufficient cause before the time
fixed he shall have to compensate the principal.
By revocation by the principal—The principal can revoke the authority of the
t
agent at any time. Wli're the agent is appointed to do a single act, he authority can be
revoked any time before the act is begun. In the case of a continuous agency, notice of
revocation is essential to the agent and also to the third parties who have acted on the
agency with knowledge of the principal. If reasonable notice is not given the principal
will be liable to compensate the agent, and he bound by the acts of the agency with
respect to third parties. Notice to the agent is also necessary in the case of agency for a
fixed period.
AN AGENCY IS IRREVOCABLE IN TIlE FOLLOWING CASES:

(i) Where the agency is one coupled with interest, i.e., one created for effectuating
any security or protecting any interest of the agent, it is irrevocable during the existence
16
of such interest. Where a factor has made advances to the principal and is authorised
to sell at the best price and recoup the advances made by him, or where the agent is
authorised to collect moneys from third parties and pay himself the debt due by the
principal, the agencies are those coupled with interest and irrevocable. Even the death
or insanity of the principal does not terminate the authority in this case.
(ii) When art agent has incurred personal liability the agency becomes irrevocable,
for the principal cannot be permitted to withdraw, leaving the agent exposed to risk or
liability he has incurred.
(iii) When the authority has been partly exercised by the agent it becomes
irrevocable, in particular with regard to obligations which arise from acts already done
(Section 204).
WHEN TERMINATION OF AGENCY TAKES EFFECT
Termination of agency takes effect or is complete when it becomes known to the
agent, and as far as the third parties are concerned, when it becomes known to them

14. Re l'olIitt (1893) I Q.R. 455.

15. French & Co. v. Leesten Shipping Co. (1922) A.C. 451.
16. Ramchandra v. Chinubhai (1943) 45. B.LR. 1075.
 PRINCIPAL AND AGENT 155

(Section 208), and in case of termination by revocation not from the moment revocation
is made by the principal but from the time of the knowledge of the agent or the third
parties of such revocation. Therefore, if an agent, knowing that his authority has
terminated, enters into a contract with a third party who deals with him bonajide the
contract will he binding on the principal as against the third party.
Sub-Agents--The termination of an agent's authority puts an end also to the
authority of the sub-agent appointed by the agent (Section 210). But the authority of a
substituted agent will not be affected thereby.
MEANING OF AUTHORITY COUPLED WITH AN INTEREST
An agency is coupled with interest when the agent has an interest in the authority
granted to hiin or when the agent has arm interest in the subject-mailer with which he is
authorised to deal. An agent hasan interest in the waizority when he has given a
consideration or has paid for the rjght to exercise the authority granted to him To
illustrate, if the agent, in return for making a loan of money to the principal, is given as
security authority to collect rents due to the principal such authority cannot be revoked
by the principal. An agent has an interest in 1/ic subjeci .nmaieer when for a consideration
he is given an interest in the propcziy with which he is dealing. Hence, when thb agent
is authorised to sell certain property of the principal, and is given, as security for a debt
owed to him by the principal, a lien oil property, his authority to sell cannot be
revoked by the principal.
The employment must, in its nature, be such as the authority of the agent cannot
be revoked without loss to the agent. The interest must be a substantial interest in the
subject-matter of the agency, and not time ordinary interest which a man usually has in
getting remuneration for his services. A mere arrangement that the agent's remuneration
be paid out of the rents collected by him as such does not give him interest in the property
within the meaning of Section 202 of the Contract Act. Thus, an agent who sells cloth
and is entitled by an agreement with his principal to retain part of the price of the goods
has no interest in the cloth kept with him and is not a person who has an interest in the
property which forms the subject-matter of the agreement within the meaning of his
section (Dalc/iand v iIa:arinial, 1932 Nag. 32). But a vendee retaining a part of the
price to pay off encumbrances is an agent with interest of the vendor (Subba Row V.
Varadjah, 1943 Mad. 885). In the words of Willis. CJ. in Smart v. Sanders 5 C.B. 917,
"the authority must have been given by an agreement entered into for sufficient
consideration for the purpose of conferring some benefit oil donee of that authority."

S t: M MARY

Principal and Agent—A person employed by another to act on behalf of or

represent that other in dealings with third parties is called the agent. Theperson on whose
behalf the agent acts is known as the principal.
Generally, what a person can do himself, he can do through an agent. And the acts
of the agent are the acts of the principal, for he who acts through an agent is taken to be
acting himself. Although the principal and the third party must be competent to cOntract,
an agent need not have capacity to contract, as the agent is only the connecting link
between the two parties, and his acts are the acts of the principal. But a minor agent is
not liable to the principal for misconduct or negligence. Thus, a minor can he an agent
and can effectively bind his principal, but he is not bound to the principal.
but
consideration is not an essential element in this contract. The fact that the principal has
consented to be represented by the agent is sufficient determinant, and consideration to
support the promise by the agent to act in that capacity.
156 MERCANTILE LAW

Agency may also arise by estoppel, holding out. necessity, or subsequent ratifica-
tion by the principal
In a er of business
large dealings, agencies are created by word of mouth or
numb
in writing, and are called express agencies. ilie best example of written contract of
agency is a Power of Attorney. A power of attorney may be general. which authorises
the agent to do all things on behalf of the principal; or special, which empowers the agent
to perform a single transaction.
Implied agency may arise by conduct, situation of the parties, or the necessities or
circumstances of the case. An implied agency includes agency by estoppvl, agency by
holding out, and agency of necessity.
An agency by estoppel arises where A tells B in the presence and within the
hearing of P that he (A) is P's agent and P does not contradict this statement, and A
contracts oil of P with B. P is bound by this transaction, and in a suit between
himself and B he will he estopped or precluded from saying that A was not his agent
Agency by holding out arises where a person holds out another as his agent and
thin] parties contract with the agent oil faith of the conduct of the principal. The
principal is liable.
Agency of necessity may arise in a number of circumstances. A wife is an agent
of necessity of her husband and can pledge his credit to buy all necessaries of life
according to his station in life. A master of a ship may pledge owner's credit for the
purchase of necessities for the voyage. A person may become an agent of necessity in
an emergency.
where a person acts on behalf of
Agency by rati1mcation_expos1faC10_J15e5
another without knowledge or assent and afterwards his act is adopted or ratified by the
latter. If the act is not ratified, there is no agency and the person acting as agent is
personally liable.
Agency may be general or special. They may be mercantile or non-mercantile.
A general agent is appointed for general purposes, all matters concerning the type of
business on which he is employed. A special agent is appointed for a special or a
particular transaction.
ercantile agents are:
Factor is a person to whom goods or bills of lading or other documents of title are
consigned for sale by a merchant residing abroad or at a distant place He gets the
possession of goods and may sell in his own name.
Broker makes bargains for another, and receives commission for so doing. He
does not buy or sell in his own name. He is merely a connecting link betweenhis principal
and the third party.
Commission Agent is a person employed to buy goods in foreign market as
principal and then ship them to his principal, charging a fixed commission.
Del Credere Agent, in consideration of an extra remuneration, guarantees to his
principal the performance of the contract by the third party. This agent makes himself
liable for the performance of the contract on the default by the third party.
III law, he
Auctioneer sells goods by auction as an agent of the owner.
also becomes the agent of the buyer after the sale is made.
Bankers are agnts of their customers for collecting cheques, dividend warrantS,
etc., and for sale and purchase of securities for their customers.
Non-commercial agents are estate agents, law agents, counsel, attorney, pleader
and wife.
 PRINCIPAL AND AGENT 157

An agent cannot delegate his authority, as he himself is a delegate. There are a

number of exceptions to this general rule.
An agent may delegate his authority in the following cases :-
(a) where principal has expressly permitted delegation; (b) where trade usage or
custom permits delegation; (c) where the nature of the authority is such that deputy is
necessary to complete the business; (d) where acts to be done are purely ministerial, i.e.,
clerical or routine work; (e) where an unforeseen emergency has arisen.
The person to whom authority is delegated is called a sub-agent, who is really an
agent of the original agent. He is responsible to the agent and can demand remuneration
from him. He will, however, bind the principal to third parties, althou h there is no
contract between him and the rincipal.
Duties of an agent—(l) To carry out the work undertaken according to instruc-
ons. (2) To follow the custom in the absence of instruction. (3) To carry out the work
ith reasonable care, skill and diligence. (4) To communicate with the principal. (5) Not
to make any profit out of his agency other than his remuneration. (6) To keep and render
true accounts. (7) Not to deal on his own account. (8) Not to set up adverse title. (9) Not
to use information obtained in the course of the agency against the principal. (10)
delegate authority.
m s o an agent—(l) To receive remuneration for the work done. (2) To
exercise lien, where in possession of goods. (3) To stop goods in transit. (4) To claim
indemnification for all charges, expenses and liabilities incurred in the course of the
agency.
Liability of principal to third parties—(I) The principal is hound by all acts of
the agent done within the scope of actual, apparent and ostensible authority. (2) Principal
is liable for agent's fraud and misrepresentation during the course of the agency. (3)
Principal is hound by the agent's admission. (4) He is bound by the information obtained
by the agent in the course of the principals business. (5) An Undisclosed Principal is,
on being discovered, responsible for the contract of the agent. A Concealed Principal is
liable even where the agent is also liable, unless the third party has elected to sue the
agent, or has led the principal to believe that the agent alone will be responsible.
Agent's personal liabililies to third pauiies----An agent is personally liable: (1)
when the contract expressly provides for his personal liability. (2) agent signs a
negotiable instrument without making it clear that he is signing it only as an agent, (3)
when the agent acts for a foreign principal, (4) when acting for a concealed principal,
(5) when acting for a principal who cannot be sued, (6) when acting for a non-existing
principal, (7) where there is a breach of warranty of authority on his part, (8) where he
receives money by mistake or fraud from a third party, (9) where authority is one coupled
with interest, (10) where trade usage or custom makes agents personally liable, (11) for
his torts during the course of the agency, (12) in the particular form of agency known as
partnership, each partner is liable as an agent of the others.
Termination of Agency—By performance of the contract of agency. (2) By
expiration of the period fixed for the contract. (3) By the death of either the principal or
the agent. (4) By the insanity of either. (5) By the insolvency of the principal. (6) Where
the principal or agent is an incorporated company, by its dissolution. (7) By the
destruction of the subject-matter. (8) By mutual agreement between the principal and
the agent to terminate the agency. (9) By renunciation of his employment by the agent.
(10) By revocation by the principal.
Agency is Irrevocable
(i) Where agency is one coupled with interest;
158 MERCANTILE LAW

(ii) When agent has incurred personal liability;

(iii) When the authority has been partly exercised by the agent.
Termination of agency takes effect when it becomes known to the agent, and as
far as the third parties are concerned, when it becomes known to them.
The termination of an agent's authority also puts an end to the authority of the
cub-age nt.
CASES FOR RECAPITULATION

1. H, the owner of a restaurant, sold the restaurant to F, who continued H as

manager. W, who knew nothing of this transaction or of F. sold cigars to H for use of
the restaurant. H had been expressly forbidden by F to purchase cigars on credit. Being
unable to obtain payment from H, W sued F. field, W is entitled to recover from F because
(i) cigars and cigarettes would usually be dealt in at such a restaurant, and H was acting
within the scope of his apparent or ostensible authority as manager in ordering cigars;
(ii) F could not, as against W, set up any secret limitation of that authority [Watteau v.
Fenis'ick(1893) 1 Q.13.346].
2. L owned soe cottages and consulted C & Co., solicitors. She was seen by S,
their managing clerk, who had authority to transact conveyancing business on behalf of
his employers. S fraudulently induced L to sign deeds, which in fact transferred the
cottages to S. With the help of the documents S sold the cottages and absconded with
the proceeds. L sued C & Co., for the recovery of the price of the property. Held, C &
Co., were liable for the fraud of S, as the fraud was committed in the course of his
employment.
3. A instructs B, a merchant, to buy a ship for him. B employs C, a ship surveyor
of good reputation, to choose a ship for A. C makes the choice negligently and the ship
turns out to the unseaworthy and is lost. The surveyor is liable to A for the loss of the
ship and not B. B had exercised due care in selecting the agent for his principal
[Illustration (a) to Section 195].
4. A, at the request of a party, B. purchased and sent certain goods to C. C
appropriated the goods for himself and wrote to A that he would pay him the price in
few days. B was declared insolvent. A sued C for the price of the goods. held, C is not
liable to pay A. A was acting as the agent of B and could claim only from him. C's letter
(in the absence of any proof to the contrary) must be taken to have been written by C as
B's agent. It did not create any personal liability of C [Khushi Ram v. Mat hura Das,
1917 Lab. 4041.
5. S. who was a corn factor, was entrusted by Smart with a certain quality of wheat
to sell oil behalf. S subsequently advanced the sum of L 3,000 to Smart, which Smart
failed to repay. Smart gave orders that the wheat was not to be sold. Notwithstanding
this S sold it to secure his advance. In an an action against him S pleaded that the agency
was irrevocable, field, the agency was not irrevocable, as the authority had not been
given to secure the advance off 3.000, since it had been given prior to, and independently
of the loan [Smart v. Sanders (1848) 5 C.B. 8951.
6. R, authorised by K to buy wheat at a certain price, exceeded his authority and
bought at a higher price from D. R bought in his own name, but intended to buy for K.
K agreed with R to take the wheat at the price, bu t failed to take delivery, field, K was
not liable to D, as he could not ratify R's contract for K and had not disclosed his intention
to D (k'ei,ç)ilci. Maxsted & Co. v. Durant (1901) A.C.240].
7. K agreed to sell a hotel to B. who was acting as agent for a company which was
about to be formed. held. B was personally liable on the contract and no subsequent
 PRINCIPAL AND AGENT 159

ratification could be made by the company, as at the time of the contract the company
was not in existence [Kelner v. Baxter (1866) L.R.2 C.P. 1741.
8. M employed B & Co., as his agents to collect a debt from X. To do this B &
Co. properly employed F, who collected the debt, B & Co. owed F money and F, not
knowing at the time he was employed that B & Co. were agents, claimed to set off the
debt against the money owed him by B & Co. Held, he was entitled to do so. If an agent
acts for a concealed principal, the principal may sue the third party but subject to right
of the third party to exercise any defence which may be available to him against the agent
before the third party discovered the existence of the principal [Monla,gu v. Forwoqd
(1893)2 Q.B. 3501.
9. A enters into a contract With B forhuying B's motor car as agent ofC and without
C's authority. B repudiated the contract before C comes to know of it. C subsequently
ratified the contract and sued to enforce it. Held, B was bound to sell the motor car to C,
as ratification by C related back to the date of the contract made by the agent and
repudiation by B was ineffective [fib/ion Partners v. Lambert (1889) 41 Ch. D 295].
10. In Soul/tern Railway Ltd. v. S.M. Krishnan, 1990 S.C. 673, the agent was
allowed to remain in possession of company's premises for carrying on agency business
of the company. After termination of agency by the company, the agent has no right to
remain in possession of the premises. He is not entitled to interfere with company's
business.
11. The conductor of a bus, who had temporarily taken over the wheel in the
absence of the bus driver, injured A, a passer-by, by his negligent driving. A claims
damages from the bus company. l/e11, the bus company is not liable to pay damages to
A. The principal is, no doubt, liable for all torts committed by an agent (or servant) in
the course of employment, i.e., where the agent or servant does improperly what he is
employed to do properly. But in the present case the driving of the bus by the conductor
could not be regarded as part of the course of employment, since this was not what he
was employed to do, and therefore his tort would not make his employer or pñncipal
liable. [Beard v. London General Omnibus Co. (1900) 2 Q.B. 5301.
12. A picture dealer in Bombay sends pictures to an agent in Delhi, some being
for sale and some for exhibition only. The dealer shortly afterwards revokes the agent's
authority either to sell or to exhibit the pictures and directs him to return them. In defiance
of these instructions the agent pledges the pictures with a pawn broker. The pawn broker
got title to the pictures. The agent was in possession of the pictures with the consent of
the owner, and would almost certainly be rearded a mercantile agent. This would give
him a general authority to pledge the goods in the ordinary course of his business, and
the pawn broker would get a good title if he acted in good faith and without knowledge
that the owner had withdrawn his instructions [Moody v. Pall Mall Deposit Co: ( 1917)
33 T.L.R. 306].
H. D, a carrier, discovers that a consignment of tomatoes owned by E has
deteriorated badly before the destination had been reached. He therefore sells the
consignment for what he can get : this is about a third of the market price for good
tomatoes. E has now sued D for damages. D claims he was an agent of necessity. Held,
that since the tomatoes would have become valueless by the time they reached the
destination and the carrier acted boriafide in the interest of all concerned, D will be
entitled to claim that he was agent of necessity provided it was practically impossible
for him to obtain fresh instructions from E. If it was possible to get instructions, and the
carrier failed to do so, he will be liable in damages toE. [Springer v. G.W. Rly. (1921)
1 K.B. 2571.
14. K bought a statuette which he later left with X to arrange for a photograph of
the statuette to be taken and signed by the sculptor's widow. X handed the statuette to
160 MERCANTILE LAW

S. who was an auctioneer, with instructions to sell it. S gave him an advance. Held. K
was the true owner, X was not a mercantile agent under the Factors Act, 1889, and S
was ordered to deliver the statuette to K. X was ordered to repay the advance paid by S
and also to pay all costs. (Kendrick v. Sotheby & Co. (1967) 117 New L.J. 408).
15. A authorised B to carry on business on his behalf in any manner he liked. B
appointed C as commission agent to buy and sell bullion on his behalf. Position of C
vis-a-vis B held was of a sub-agent to A. As a sub-agent is not answerable to A the suit
by A for accounts against C was not maintainable. (Ragliuna:h Prasad v. Firm Sewa
Rum Tikko Dos, 1980 All 15).
 Chapter V

Law of Partnership
PART 5-A
Partnership is now governed by the provision of the Partnership Act, 1932, which
came into force on October 1. 1932. excepting Sec. 69 relating to registration of firms
which came into force a year later. This Act repeals Chapter XI (Sec. 239-266) of the
Indian Contract Act, 1872, which contained the law relating to partnerships.
The present enactment does not purport to alter in any substantial way the law of
partnership, but only to clarify it with a view to avoiding doubts and difficulties, and
also for making it uniform with the law in force in England and other parts of the
Commonwealth. For this purpose the present Act is mainly based on the English
Partnership Act, 1890, and practically codifies the Indian law of partnership, though, as
was to be expected, it expressly provides (Sec. 3) that it is a branch of the general law
of contracts and that the rest of the provisions of the Contract Act shall continue to apply
to partnerships, except so far as they are inconsistent with the express provisions of this
Act,

CHANGES INTRODUCED BY THE NEW ACT

REGISTRATION OF FIRMS
One important change brought about by the Act is that every partnership firm
should be registered with the Registrar of Firms, in the form of a statement signed by all
the partners, and accompanied by a registration fee of Rs. 3, stating—
(1) The name of the firm. (2) The principal place of business of the firm. (3) Names
of other places (if any) where the firm carries on business. (4) The date on which each
partner joined the firm. (5) The names in full and addresses of the partners. () The
duration of the firm. -
It is also provided that every change in the names and addresses of the partners or
place of business should be duly notified to the Registrar. It is to be noted that the Act
does not expressly make registration compulsory, nor does it provide penalty for
non-registration as does the English law, but it introduces certain disabilities, which make
registration necessary at one time or other. In fact, the Act has effectively ensured the
registration of firms without making it compulsory. If all the requirements, as stated
above, are satisfied, registration cannot he refused on the ground that a firm of the same
name had already been registered (HiralalAgarwal v. The State of Bihar, 1972 Pat. 507).
EFFECT OF NON-REGISTRATION

As stated above, though registration in India is optional, it becomes indirectly

necessary, so that if a firm is not registered the following consequences will ensue:
1. A partner (or a person claiming to be or to have been a partner) cannot bring a
suit to enforce a right arising from a contract or conferred by this Act, against the flu-rn

161
162 MERCAI'ZTILE LAW

or his co-partners unless the firm is registered and the name of the partner suing appears
in the- Register of FirMs as a partner in the Firm. The only remedy of the partner or
partners desiring to bring a suit in such a case will be to ask for dissolution of the firm
and accounts or for accounts if the firm is already dissoed. For example, a partner of
an unregistered firm cannot sue his co-partners (the unreistcred firm) for damages, for
wrongful dismissal or for share of profits, unless he also asks, in the suit, for the
dissojution of the firm or for accounts if the firm is already dissolved. A is a partner in
• firm and is wrongfully dismissed from the firm by the other partners. A aitnot bring
• Suit asking merely for damages or share in the profits, if his firm is unregistered; but
he can bring such a suit by adding in it a prayer for dissolution of the firm, or, if the firm
is already dissolved, for accounts of the dissolved firm, and in such a case the suit would
be maintainable at law, on the ground that it is a suit substantially for dissolution of the
firm or for accounts of a dissolved iinn—(Rad/iey Shyam v. Beni Ram, 1967 All- 28).
However, a reference to arbitration is not covered by Sec. 69(3). Therefore, a reference
to arbitration made or entered into by an unregistered firm is valid. The word
proceeding" under Sec. 69(3) does not cover reference to arbitration (Ghela/ibai v.
Chunilal, 1941 Rang. 219)'. Although non-registration of firm does not invalidate
arbitration clause in the partnership deed and reference can be made to arbitration under
it, the firm cannot move the court under Sec. 20 of the Arbitration under it, the firm
cannot move the court under Sec. 20 of the Arbitration Act, 1940, to enforce arbitration
(Smi. Rampa Devi v. B,i shanjher Nath Purl, 1976 All. 19).
2. An unregistered firm cannot file a suit, or take other legal proceedings, to enforce
a right arising from a contract, or to claim a set-off in any suit filed against the firm, until
registration of the firm is effected, 2 and the persons suing are shown as partners in the
Register of Firms. 3 But an unregistered firm can bring a suit to enforce a right arising
otherwise than out of a contract, e.g.. for an injunction against a person wrongfully using
the name of the firm, or for wrongful infringement of trade mark, trade name, or patent
of the firm.
3. As registration is not compulsory, an unregistered firm is not an illegal
association
4. The entries found in the register would be conclusive of the fact, and if
4.
subsequent changes or modifications are not noted (as required under Secs. 60-63), they
will not be taken into account.
The registration can, however, be effected at any time, so that it is open to the
partnership firm on the eve of a suit to ask for registration. Even if a suit has been filed,
it would be open to the firm to withdraw the suit, get itself registered and file a fresh suit
if it is within time. The same is true where a suit was dismissed merely on the ground
of non-registration of the firm. The firm can file another suit within limitation period
after registration for doing this, no permission of the court is needed (MIs Be/marl Trading
Co. etc v. Mis Buihari T1ading Co., 1983 IMU 10). But registration pending the suit
does not cure the defect-
The non-registration of a firm does not affect the following rights, namely,:

I. See Jagat Mittar Saigal v. Kailash Chandra Saigal 1983 Del. 134 and Jagdish Chandra Gupta
v. Kajana Traders Lid. 196 S. C. 1882.
2. See Govindrnal Gianchand v. Kunjheharilal. 1954 Born. See also Sudarsanam v. Viswanadham
Bros. 1955 Andhra 12..
3. V. S. Bahat v. Kanpur & Co. 1956 Punj. 24.
4. Badridas v. Nagarmat. 1959 S. C. 559.
5. Jammu Cold Storage v. K. L & Sons.1960 3 & K. 101: D. N.. Singh v. G. ChaEmdra. 1953 Cal.
497: Prithvi Singh v. Ilasan Ali, 1951 Born. 6.
 LAW OF PARTNERSIIIP 163

1. Thiight of the third party to sue the firm or any partner.

2. The right of the partner to sue for dissolution of the finn or for accounts if the in-rn
is atrea' dissolved or for his share of the assets of the dissolved firm.
3. The right of an'unregistered firm to bring a suit to enforce a right arising otherwise
than out of a contract, e.g., for the injunction against a person wrongfully,' using
the name of the firms or for wrongful infringement of trade mark, or patent of the
firm. An application by a partner for reference to arbitration can be made.6
4. The power of an Official Assignee or Receiver to realise the property of an
insolvent partner.
5. The rights of firms or partners or firms having no place of business in India.
6. A suit or set-off not exceeding Rs.100 in amount which is of a nature cognisable
by Small Causes Court.
PENALTY FOR A FALSE STATEMENT
The Actalso provides that if any information supplied to the Registrar of Finns is
false to the knowledge of the person supplying the same, he is liable to a penalty of
imprisonment up to three months or fine or both.

PART 5-B
DEFINITION AND NATURE OF PARTNERSHIP

Partnership is defined by the Act (Sec.4) as 'the relation between persons who
have agreed to share the profits of a business carried on by all or any of them acting for
all." The English Act defines it as ''the relation which .suhsisLs between persons carrying
on business in common with a view of prolit. There are five expressions in these
definitions which, if studied carefully, will tell us a good deal about partnership, namely:
1. An association of two or more persons.
2. An agreement entered into by all persons concerned.
3. Business.
4. Carried on by all or any of them acting for all.
5. For sharing profits (of the business).
An Association or two or more Persons—It is essential that there must be more
than one person to constitute a partnership, as no one can be a partner with himself The
Act (Sec.41) also provides that when the number of partners in a partnership gets reduced
to one whether by death or insolvency, it would cease to be a partnership. The Partnership
Act does not say anything about the maximum number of partners, but Sec. 11 of the
Companies Act, 1956, lays down the maximum number at 10 for a partnership carrying
on banking business and at 20 for a partnership carrying on any other business for gain.
Accordingly, a partnership is illegal if it consists of more i/ian 20 persons, and if it is a
banking partners/zip of more i/ian 10 persons. Besides, a partnership may be illegal on
the same ground as a general contract, namely, when its object is forbidden by law, or
is immoral or opposed to public policy, or where it has become illegal by some
supervening illegality, e.g.. wart
An Agreement or Contract—A partnership can only arise as a result of an
agreement or contract, express or implied, 5 between daC partners; it does not arise from
status. This is an important feature that distinguishes it from variousotherrelations which

6. Mohindn v. Gurdayal. 1951 Pat. 196

7. Badn Prasad v. Nagannal. 1959 S. C. 559.
8. In re, Kakana Narasayya, 1953 Mad. 516.
164 MERCAWFILE LAW

arise by operation of law and not from agreement. The co-owners, or co-legatees do not
simply by reason of their community of interest become partners. Where, for instance,
a sole proprietor of a business dies, leaving a number of heirs, who naturally inherit the
business, such heirs do not ipso facto become partners. Before a partnership can come
into existence there must be an express or implied agreement among the heirs that the
business should be continued in common. The agreement must be to carry on business
by way of present partnership, and an agreement to carry on business from a future date
will not result in partnership until that date arrives.
Business—It is essential that there must be a business for a partnership-to exist.
Partnership implies business, and where there is no combination to carry on business
there is no partnership. The term "business" is, however, used in the widest sense, and
covers all sorts of enterprises. It includes every trade, occupation, or profession It is not
confined to lengthy operation, but may consist of a single adventure or a single
undertaking (Sec. 8). Persons may be partners for a single voyage of a ship, or for one
performance of a play, or a single contract to build for someone.
Carried on by all or any of them. Mutual Agency—This is a very important
ingredient of partnership, as the undei lying and fundamental principle which constitutes
partnership is the idea of 'Agency'. The other partners are bound by the act of one of
them only on the principle of agency. Agency is the foundation of a partner's liability;
in fact, the law of partnership is a branch of the general law of agency. Each partner is
both an agent and principal for hnnselt and others; a partner embraces the character bath
of a principal and of an agent. That is to say each partner is an agent binding the other
partners who are his principals and each ,partner is again a principal, who in turn is bound
by the acts of the other partners. Thus, an implied agency flows from their relationskip
as partners with the result that every person who conducts the business of the firm is in
doing .so deemed in law to be the agent of all the partners (Sec. 18). It is not necessary,
however, that every partner must be actively concerned in Lhe conduct of qie business.
What is essential is that the business is carried on, on behalf of all the partners. So, the
fact that partners have agreed that the management of the finn is to rest with one of the
partners does not negative the existence of partnership.
Sharing profit—The essence of a partnership is the attempt to make profit in
business for the partners. Therefore, a piece of philanthropy, though it may involve a
good deal of business, cannot he a partnership. And this principle applies to each
individual, as well as the whole body carrying on the undertaking. Thus, if A carries on
a business with B and C on terms which exclude A from sharing any profit, A is not a
partner, as his carrying on of business is not for profit. Though sharing in the profits of
a business is essential, it does not follow that everyone who participates in the profits of
a business is necessarily a partner. A manager with a share of profits may claim to be a
servant of the firm and not a partner.
"FIRM" AND "FIRM NAME"

-'J"Persons who have entered into partnership with one another are called individually
''partners" and collectively "a firm," and the name under which their business A carried
on is called the "firm name" (Sec.4).
In law ''a firm" is only a convenient phrase fordescribing the two or more persons
who constitute the partnership, and the finn has no legal existence apart from those
persons. It is neither a legal entity, not is it a person as is a corporation; it is a collective
name of members of a partnership. For the purposes of "determining legal rights, there
 LAW OF I'ARTNERSIIIP 165

is no such thing as a firm known to the law." 9 The rights and obligations of the firmare
really the rights and obligations of the individuals cOIfl[X)Sifl the firm; and it is difficult
to think of the firm apart from the members constituting iL Thus, a firm, not being a
legal entity, cannot maintain a suit for libel or slander. After all, libel or slander of the
firm is really the libel or slander of the partners. So the partners, not the firm. can file a
suit for libel or slander. All partners are not necessarily to join in such a Suit. Any one
or more of the aggrieved partners may file the suit and the other partners may be joined
as pro forrna defendants (P.K. Ooj'all hosiery Mills v. Ti/ak Chond, 1969 Punj. 150).
But for the purposes of the Indian Income-tax Act it is an entity quite distinct from the
partners composing it. Under Sec. 3 of that Act it is assessable as distinct from the
individuals composing 11.1
The language in use iii mercantile circles does not tally with this and may easily
mislead. It is undoubtedly convenient to speak of the firm's property, debts of the firm,
but these are not legal phrases and we countenanced by the Act to a limited extent. The
legal position has been expressed thus: 'The firm cannot possess property; therefore, it
cannot be a debtor or a creditor. The rights which a partner enjoys, and the duties which
Ire owes, are enjoyed against and owed to the other partners, and not to the firm; and if
an action between the partners he necessary to enforce such rights and duties, the
individual partners, and not the firm, are the parties to the action." Yet the "firm" is
often regarded as a ''convenient symbol" or "shorthand funn'' for collectively desig-
nating all partners regaided as joint creditors or debtors; and for convenience the Finn
name may be used for the purpose of suing and being sued, provided that the names of
all the partners are disclosed. A firm as such cannot be aineniber of a partnership, nor
call firm and a Hindu Joint family legally constitute a partnership.
Partnership and Firm—Partnership' is the relation that exists between persons
who have agreed to do business for gain and to share the profits thereof, each person
being the agent of the rest of the partners. The 'Finn' does not denote relationship; but
it means the partners who carry oil business as agents of each other. The Act also
says: Persons who have entered into partnership are called collectively 'a finn".
Firm Name—Persons have a right to carry on business under any name and style
which they choose to adopt, whether it he a combination of their own several names or
the names of others or fancy names, provided they do not violate the rules relating to
trade name or goodwill. They must not adopt a name calculated to mislead the public
into confusing thein with a Firm of repute already in existence with a similar name. They
roust not use words implying the sanction or patronage of the Government, except with
the express permission of the Government. A partnership finn cannot use the word
"Limited" as pail of its name.

FORMATION OF PARTNERSHIP
,—,^ [n. contract of partnership, all the elements required for a valid contract must be
present. There must he free consent, consideration, lawful object and the parties must be
competent to contract. 'Thus, all alien friend can enter into partnership, an alien enemy
cannot. A person of unsound mind is riot competent, not is a minor. Though a minor
cannot become a partner in a firm, yet if all the partners agree, he may he admitted to
the benefits of partnership.

9. Per S. R. Das, C. J. in Duhicti.mnd V. 1. T. Conmnrr. Nagpur 1956 S. C. 354.

10. Kaaha y alal v. Devi Dayai, 1936 L-sti. 514; Mohd. Abdul Karim & Co. v. Commissioner of
Incomemax, Madras (1948) 161. T .R. 412.
11. Commissioner I. T., W. Bengal v. A. W. Figg & Co. S. C. 455.
166 Mli(CAN'liLIi LAW

POSITION AND RIGhT OF A MINOR

Partnership is a relation resulting from contract, and a minor's agreement is
altogether void. Accordingly, a minor, being incompetent to contract, cannot become a
partner, nor can a partnership be created with a minor as a partner. But he can be admitted
t2
to the benefits of all existing partnership if all the partners agree to admit him.
However, even afici such admission he does not become one of the group of persons
called a firm. He is not personally liable nor is his separate property for the debts of the
firm; but his share in the partnership property and profits will he so liable. A minor cannot
be adjudged an insolvent even where the adult partners have been so adjudged. Sec. 30
lays down the rights and liihilities of a minor admitted to the benefits of a partnership
as follows: (1) A minor cannot become a partner in a firm. (2) A minor may with the
consent of all partners, be 4diiiiiied to the benefits of the partnership. (3) A minor so
admitted will he entitled to his agreed share and can inspect hooks of account of the firm.
(4)1 Ic will not be personally liable for the debts and obligations of the finn, though his
share in property and the profits of the firm will be liable for the same. (5) He can bring
a suit for account and for his distributive share when he intends to sever his connections
with the firm, but not otherwise. But he has access to the accounts of the firm and can
inspect and copy any of them. (6) Within six months of his attaining majority or when
he comes to know of his being so admitted (whichever date is later), he has to elect
whether he wants to continue his relation and become a full-fledged partner, or sever his
connection with the firm. He may give public notice 13 of his election to continue or
repudiate, but if he fails to give any public notice within the period stated above, lie will
be deemed to have elected to become a partner in the firm. It is well said: "If he chooses
to be inactive, his opportunity passes away; if he chooses to be active the law comes to
his assistance." (7) A minor who thus becomes a partner will become personally liable
for all debts and obligations of the firm incurred since the date of his at/emission to the
benefits of [lie parIiers/iip. 11 In this respect the Indian law is different from the English
law; according to the English law, a person who does
from the date of his attaining majority and not from the date of original admission. (8)
Where the minor on becoming major or obtaining knowledge elects to sever his
connections with the firm all his liabilities will cease from the date of the public notice
to this effect. (9) Although the rights and liabilities of the minor during the six months
after his attaining the age of majority continue to be those of a minor, yet, if lie has during
s
this period repre ented himself to he a partner to a party, he will be liable to that party
on the ground of holding out. But if a minor becomes major after dissolution of
partnership and fails to exercise his option, he is not liable [Shiva Gauda v.
Chiandrakant,
1965 S.C. 2121.
CLASSES OF PARTNERS

Extent and I)uration of their Liability—A person who deals with a firm, so long
as matters proceed smoothly and debts are paid or goods delivered, possibly does not

12. Devi Dma v. 'lliarunal (1933) 142 1. (.203: 1933 l.n. 180. aotclal v. Raj Mal. 1951 Nag.
449. hut see Sahau Bros. v. I. T. ('olunir. 1958 Pat. 177.
13. A public notice, as required by Sec. 72. is a notice to the Registrar of Finns, and publication
district
in i l i e local official Gazette and in at least one vernacular newspaper circulating in LbC
here the firm has its place oj principal place of business. This notice is also aecessary in
%A

nisiters relating 10
(a) retirenicot or expulsion of a partner, or
'h) disoltiiion of finn.
lii sihr cases, notice to Registrar of Firms is not necessary.
li. See Bhagil:ml v I. 1. Commr. 1956 Born, 411.


LAW OF PARTNERSI[II' 167

worry as to who the partners are; but as soon as he has a claim against the Tinu which is
not met, he has to look for individuals who may be liable to mccl his claim. Further, from
a legal point of view there are two aspects of a partnership, one from within and the other
from outside. The inside agreement wUl bind the partners, but may have no effect on
outsiders. Therefore, the claimant would like to know who are the partners; and to what
extent each is liable. The position of different classes of partners may be examined as
follows:—
ACTUAL PARTNER
A person who has by agreement become a partner and who takes active part in the
conduct of the partnership business is an actual or ostensible partner. He is the agent of
the other partners for the purposes of the business of the partnership. All his acts
performed in the ordinary course of the business, so far as third parties are concerned,
bind him and the other partners.
PARTNER BY ESTOPPEL OR HOLDING OUT
As observed above, with regard to the partners themselves, a partnership is created
by agreement between the partners, and in no other way. Rut, as regards outsiders the
partnership relation may also arise h the conduct of the partncr ãthistn spite of
c agreement between themselves. is is sai o onilie principle of estoppel
or holding out, and the partners are called partners by estoppel or partners by holding
out. We have already had examples of this principle in agency. Seç.28(l) of the
Partnership Act states that any one who by words spoken or written or by conduct
represents himself, or knowingly permits himself to he represented, to be a partner in a
j7rrn is liable us a partner in that firm to any one who has on time faith of any such
representation given credit to the firm, whether the person representing himself or
represented to be a partner does or thM's not know that the representation has reached
the person so giving credit.''
¼-hether a person conducts himself as to lead another to believe him to be a
partner, although really he is not and on that belief the other person gives credit, then he
is estopped from denying that he is a partner-His jouth is shut by his own conduct, and
he is treated as aprtoier b y estoppel. Thus, if A. B and C carry on a'business for profit,
that C is to contribute neither labour nor money,
and not to receive any profits, but to lend to the firm his name as a partner, then C will
beIl , to every outsider who gives credit relying on his being there as partner.
iinilary where a person is held out as a partner by another, and does not disclaim the
partnership relation even after knowledge that his name is being used as partner, he will
be liable as partom b y lw/din out to any one who has given credit on the faith of this
representation. Thus, if A and B hold C out to be a partner, they cannot afterwards turn
round and deny to a creditor, who has acted on these representations, the fact of C being
a partner, though C himself might not be able to claimto he a partner. Nor can C, if he
has allowed himself to be repreenEed as a partner, escape a partner's liability. Such a
person, not being in fact a partner, will not he entitled to any profit, but lie will be liable
as partner for the firm's obligations. 1k is held liable on the principle of holding out,
estoppel, representation, ostentation, acquiescence [Bond V. Pittard, (1838) 3 M. &
W. 357; S.W.F. Product (P) Ltd. v. So/ian/al Bag/a, 1964 Cal, 209]. Instances usually
arise where a partner having retired from the firm, fails to give public or actual notice of
his retirement and if his name is continued to be sued as a partner in the bills, letterheads,
etc., of the firm, and if lie does not take steps to stop his name being so used, he will be
liable to creditors who have lent on the faith of his being still a partner. But, where after
the retirement of one partner another is brought in, the eremtor cannot sue all of them.
He must either depend upon estoppel or the real facts. Thus where A and B carried on
168 MERCANTILE LAW

partnership business under an assumed name 'Z and Company." A retired, but gave no
notice of his retirement, C. a new partner, joined and the firm continued in us old name
Z and Company". A creditor filed a suit against A. B and C partners; it was held that
he could not do that. He must either proceed aainst A and B or against B and C but
never against A. B and C. as A never held himself out to be a partner with C.'5
DORMANT OR SLEEPING PARTNER
A person who is in reality a partner but whose name does not appear in any way
as partner, and therefore, he 050 outsiders as ijhg r, is called a
dormant, ski'ping or secret partner. Such a partner will be liable to third parties who
lent to the firm even without knowing of his being a partner but subsequently discovering
the fact. The Act says that if an act is binding on the firm, every partner will be liable
for it. A dormant partner's liability may he said to test on his being in the position of an
undisclosed principal. So, a party dealing with ostensible partners and intending, at the
time, to give credit only to them. may nevertheless proceed against the dormant partner
when discovered. While, as long as he remains a partner, he is liable for the debts of the
partnership, his liability ceases imiriedialety on his retirement from or on dissolution of
the firm. He is not required, like other known partners, to give notice in order to absolve
himself from liability for acts of other partners afterhe ceases to be a partner. The dormant
partner, as a rule, has no duties to perform, and consequently, his insanity will not be a
ground for dissolution, but he has the right to have access to books of accounts and to
examine and copy them.
NOMINAL PARTNER
A person whose name is used as if he were a me bcr of the firm, but who is really
not a member, and, is not entitled to. ha y e the profits of the concern, is called a nominal
partner. Such a person is not a necessary party to a suit relating to the firm, except in
cases of suits on negotiable instruments. But he is liable for all acts of the firm as if he
were a real partner.
PARTNER IN PROFITS ONLY
A partner may stipulate with the other partners that he will be entitled to a certain
share of the profits only without being liable for the losses.. Such a partner may be called
a partner in profits only. He will doubtless be liable to third parties for all acts of the
firm. Partners of this kind generally have no pat in the management of the business.
WORKING PARTNER
It may, at times, he agreed between the partners that one of them shall, because of
certain special qualifications, work the business and have control over it. Such a partner
is commonly known as a working partner. It may be noted that the fact that the other
partners do not take any part iti the management of the business does not absolve them
of liability to third parties.
SUB-PARTNERS
Where a member of the firm agrees to share the profits derived by him from the
partnership with a stranger, there arises a sub-partnership between the conttactiflg
:T.cinicr and the stranger. Such stranger is said to he a sub-partner. although he is in no
sense i partner in the original Finn and has no rights against it nor is he liable for its
dcbts.

15. Scan .Jardine (1882)7 A. C. 345.

6. Sugar Syndicate v. Commr. I. T. (1957) Andh. p. 332; Deviji v. Maganlal. 1965 S. C. 139.
 I AW OF PARTNERSIUP 169

INCOMING PARTNERS
A person who is admitted as a partner into an already existing firm either with the
consent of all the parties or in accordance with a previous contract between the partners
permitting the introduction of a new partner or partners is called a new partner. The
incoming partner does not become liable for any act of the firm done before he became
a partner, unless he agrees to be liable for obligations incurred before his admission into
the firm. Even such an agreeincntwith his co-partners to bear past liabilities only binds
the partners inlerse. It will not entitle the creditors of the fInn to hold him liable for debts
incurred by the finn before he joined, in spite of the agreement, for there is no privity of
contract between the creditors and the incoming partner, and the other partners were not
his agents when they acted, nor can there be a presumption of ratification, as ratification
can only be of an act done on behalf of the person who ratifies it. As the liability of the
incoming partner ordinarily commences from the date when he is admitted as a partner,
so in order to hold him liable for the debts incurred by the firm before he became a
partner, it must be proved that:-
(i) the firm as constituted after his admission assumed the liability to pay the past
debts, AND
(ii) the creditor agreed to accept the new firm as his debtors and to discharge the
old partnership from the liability.
The position of a minor ho has been admitted to the benefits of the partnerships
and who, on attaining the age of majority, becomes a partner, is not the same as that of
anew partner. Such minor becomes liable to third parties for all the debts and obligations
incurred since the date when he was admitted to the benefits of the partnership and not
since the date of his becoming a partner.
RETIRED OR OUTGOING PARTNERS
A partner who goes out of a firm in which the remaining partners continue to carry
on the business is called a retired or outgoing partner. A partner may retire from a firm
(i) with the consenf of all the other partners. (ii) in accordance with an agreement by the
partners, or(iii) where the partnership is at will by giving notice in writing to all theother
partners of his intention to retire ISec.32 ( 1 )] . A partner, whether active ordormant, who
retires from a firm does not thereby cease to be liable for partnership debts or obligations
incurred before his retirement. For example, A, B and C are partners. D is the creditor
of the firm. A retires from the firm. A still remains liable with B and C to D. If two years
after A's retirement the firm becomes insolvent, A will still be liable for such debts as
were in existence at his retirement and are still undischarged. A retiring partner will also
be liable to third parties for all transactions of the finn begun but unfinished at the time
of his retirement, even though notice of his retirement is given to the third parties.
Furthermore, a retiring partner should see that all creditors of the firm have proper notice
of retirement, as he may be liable for debts incurred after his retirement, if credit is given
to the firm in the belief that he is still a partner. This is another instance of the doctrine
of 'holding out'. Thus a duty is cast on the partner who retires from the firm to give
public or actual notice of his retirement, and if he fails to give such notice he will he
liable for the subsequent acts of the firm to all persons having knowledge of the fact of
his being a partner and he will still be liable even though the creditors had never dealt
with the firm before his retirement but only subsequent to his retirement.t
A retiring partner may, however, be discharged from his liability by the consent
of the creditors, and this consent need not be embodied in a formal agreement, but may

17. Jagat Chandra v. Guony (1925)30 C. W. N. II, 1920, Bengal National, Bank v. Jogndra nath
(1927) Cal. 714.
 70 MERCANTILE LAW

be left to be inferred as a fact from the course of dealing between the creditors and the
firm as newly constituted. This rule is the application of the general rule of the law of
contract known as "Novation." When a debt originally payable by one set of partners
becomes payable by another set of partners the technical phrase for what has happened
is "a novation of the debt". It is a well-settled law that when a creditor of a finn agrees
with the continuing partners to their security in discharge of that of the former partners,
the outgoing partner is discharged for any liability to pay the debt. But there is not a
priori presumption to the effect that a creditor who is infonned of the retirement of a
partner and does nothing is deemed to agree to discharge the latter form liability. Also,
the mere fact that a creditor of the firm, after knowledge of the retirement of a partner,
has treated the continuing partners as his debtors is not sufficient evidence of 'novation'.
Thus, where a creditor has proved his debt in the insolvency of the continuing partners
or has received higher rate of interest than before, or has taken additional securities, these
facts do not in themselves show that he did not intend to hold the retiring partner liable
for the debt. To prove iiovatiOfl, it is essential io show that there was agreement, express
or implied, to make the new finn liable in place of the old. Where, after the retirement
of a partner, a new partner has been introduced and the reconstituted firm has adopted
an old debt and the creditor with knowledge of the facts has treated them as liable to him,
s
theCourt will infer that right against the retiring partner was relinqui hed and the liability
of the new partner was accepted in its place along with the liability of the continuing
partners. This is acase ofnovationby implied agreement, as the old and the reconstituted
18
firm cannot both be liable at once for the same debt.

PEEL) OF PARTNERSHIP
A partnership is not necessarily created by an agreement in writing. It may be by
oral agreement, or agreement Itlay be inferred from the conduct of the parties'9 though
the business may involve lakhs of rupees. But the agreement may be contained in an
elaborate document called the Deed of Partnership and drafted by a lawyer. The deed
roust he stamped according to the provisions of the Stamp Act. Broadly, the deed should
provide for the following: (I) the nature and place of business, the name of the finn and
names of partners; (2) the date at which partnership is to commene and the period of
its duration; (3) capital, banking account and who is to sign cheques; (4) how profit and
losses are to he shared; (5) management; (6) account; (7) whether firm to continue after
the death or insolvency of a partner; () arbitration clause.

TEST OF PARTNERSHIP

PARINFRSIIU' OR NO l'ARTNFRSIIII'
It is often a very difficult matter to determine, in the absence of a definite
partnership agreement, whether a partnership does or does not exist. Sec.6 of the Act
provides that "in determining whether a group of persons is or is not a firm, or
whether a person is or is not a partner in a firm, regard shall be had to the real
relation between the parties, as shown
20
by all relevant facts taken together," and
not merely on their expressed intention. Individuals cannot create a partnership merely
by intending that partnership relation shall exist between them. To create a partnership
there mnut be present the three elements, via., (I) agreement, (2) agreement to share
profits of a business, (3) business carried on by all of them acting for all. This relation

351.
8. P. D. Sharma v. Plianindra Nath (1931) C. W. N. 593; Scarfe v. Jardine (1882) A. C. 345.
19, Somayya v. Cornmr. F. P. T. (1956) l-lyd. 87.
20. ibid. Cox v. Hickman (1960) 8 II. L C. 268; Maobbaribai v. B. Mills. 1956 Nag. 225;
Musa
Saheb v. N. K. Mohd. Choose, 1959 Mad. 379.
 LW of PARTNERSHIP 171

may he shown by books of account, correspondence, evidence of employees. etc. In

addition to this rule, the section lays down:
The joint use of the property, while not conclusive, is evidence that a partnership
exists, if the property is used incoinillon in business for sharing profits. Further, an active
participation in the conduct of a joint business venture may, in conjunction with other
circumstances, lead to the conclusion that a partnership exists, although even a servant
may manage the business and he is not a partner. Also, absence of management does not
prevent one from occupying the position of a partner. Also, ajoint venture th 5 does not
contemplate a quest fur mutual profit cannot qualify as a partnership. But, ,mile there
can be no partnership without the sharing of profits, a sharing of profits is not a
conclusive test that a partnership exists. It is a strong evidence but not conclusive.
Therefore, explanation II to Sec. hmnakes it clear that the receipt of a share of profit or
of payment contingent or varying with rrolits does not of itself make the recipient a
partner in the business or liable as sijch. It goes on to specify certain persons who may
receive a share of the profits and yet be-not partners. These persons are (1) a lender of
money; (2) aservant or agent receivingshare of profits as his remuneration; (3)the widow
or child of a deceased partner receiving annuity; the seller of goodwill of the business.
The reason for specifying these persons who may share in the profits is that in eai.h case
one of the essential elements of partnership is wanting, namely, the agency and authority.
The persons carrying on the business cannot be said to be carrying it on, on behalf of the
lender, servant, agent, annuitant or seller of goodwill, and thus are not agents of the
specified persons. Therefore, it is said thai the true test of partnership is Agency. and not
22
sharing of the profits.
The Cloth Dealers' Association, the members of which could buy cloth only from
the quota allotted to the Association by the Central Government and the margin of profit
was also fixed by the Central Government. is not a partnership merely because its
members shared the profits earned by the Association, The doctrine of partnership
necessarily involves mutual agency between the parties. If the relationship constituted
between the parties in respect of a certain matter does not expressly or by necessary
implication involve the right of one party to pledge the other as an agent, there is no
partnership (Bhiawaiii La! Laclic/ii Rant v. Badri La!, 1964 M.P. 153; see also Chirnn
Rant v.Jayuntilal. 1939 Bom.410).
CREDITOR OR PARTNER
A creditor who advances monies on the stipulation that he will have a share in the
profits earned by the firm besides a certain rate of interest and further he is to have control
over the conduct of the business, does not thereby become a partner, but he is a creditor.
Similarly, where a man advances money at a rate of interest varying with the profits, he
is only a creditor. To constitute a partnership there must he a communit y of benefit and
not a conflict of interest as in the case of creditor and debtor.
PARTNER OR SERVANT
The mere fact that a servant or an agent of a firm is given a share of the profits of
the business either in lieu of his remuneration or in addition to it does not make him a
partner with his employer or principal. It is a common practice in India to pay a gonia.sJita
orniunim, or manager a certain share of profits in the firm, in lieu of or in addition to
his salary, in order to encourage industry on his part, and not to make him a partner.

21. Debi Prashad v. hiram Das, 1952 Punj. 284.

22. Cox v. Hickman (1860) II. C. L 268; Musa Saheb v. Mohd. Ghouse, 1959 Mad. 379; Deviji
v, Magn1a1, 1965 S. C. 139.
23. Mottwo, March & Co. v. Court of Wards (1872) L. R. 4 P. C. 436.
172 MLRCANTII.E LAW

SELLER OF GOOD WI Ii.

A person who by way of honofide agreement receives by way of annuity or
otherwise, a portion of the profits, in consideration of the sale by him of the goodwill of
the business will not by reason only of such receipt become a partner.
There are some other cases which are often confused with partners. Where a
retiring partner leaves his property in the firm as loan, hut receives a share of profits as
interest, he will be a creditor. Similarly, where in a partnership a share of the profits is
paid to the widow or child or executyr of a deceased partl)er, the mere fact of the receipt
of such share will not make the widow or child a partner in the business.

PARTNERSIIII' DIS'l'INGUISHEI) FROM OTHER ASSOCIATIONS

CO-OWNERSHIP AND PARTNERSHIP

There is a possibility that two co-owners may employ their property in a business
and shaie the profits, and still be not partners. We may distinguish the two. Co-ownership
is not always the result of an agreement: ii may arise by the operation of law or from
status, e.g.. co heirs of a property, persons to whom property is guveiijointly.Partncrship,
oil contrary, must arise of an agreement, express or implied. There is no implied
agency between co-owners, which exists in the case of partners. Co-ownership does not
necessarily involve commiumoty of profit arid loss, partnership does. One co-owner can
without the consent of the others transfer his rights Arid intere y s to strangers, a partner
cannot do so without the consent of all the partners. A partner, being an agent of the
other partners. has a lien on the partnership property, a co-owner has no such lien on the
J oint property. A co-owner can demand division ofproperty in specie, but no partner an
ask f:r division iii specie. His only right is to have a share of the profit out of the
properties.
COMPANY AND l'ARlNl;lzslll
In a partnership, the members c nstituting it do not form a whole as distinct from
the individuals composing it. The firm Ii as no legal entity and has no rights and
Obligations separate from the partners. A company, as soon as it is incorporated, say by
registration, becomes a legal entity and can sue and be sued as company like any natural
person. Iii the case of partnership, there are rights and obligations as against individual
partners, but in the case of a company the rights and obligations are as against the
fictitious whole, the company, and not the members composing it. The liability of
partners is unlimited, but time shareholders' liability is limited. Further, dissolution of the
firm by death of a partner, inability of a partner to transfer his interest so as to substitute
another person in his place as paltrier without the consent of his co-partners, mutual
obligations of partners to one another, are some of the other featLires which distinguish
a pamsnership from an incorporated company.
PARTNERSHIP AND HINDU JOINT FAMILY FIRM
In Hindu law, a business is as heritable as any other property. Ajoint Hindu family
which carries on a trade handed down from its ancestors becomes a trading family. The
interest in the trade passes by survivorship to the surviving members, and every member
acquires by birth an interest in the profits and assets of the trade. This is not partnership,
but a co-parcenery, a relationship, created by Hindu law, and each member is allcd a
co-parcener. A joint family firm is created by the operation of law, whereas a partnership
is the result of a contract. In a partnership, the death of a member dissolves the
partnership, the death of a co-parccner does not dissolve the joint family firm. In a joint
 LAW OF PARTNERSI[IP 173

family firm only the Karla or manager has an implied authority to borrow and bind other
members, in a partnership each partner can do this. In partnership every partner is
personally liable for the debts and lihilities of the partnership, while in a joint firm, it
is only the manager who is personally liable for the firm's debts. The junior adult
members are liable only if they are actual contracting parties or if they have by their
conduct adopted or ratified the transaction. Minor members of the family are never
personally liable, but only liable to the extent of the family property. The partners have
a right to demand accounts of the partnership finn, a co-parcener cannot ask for an
account of past dealings; his only right is to ask for partition of the assets of the firm. All
associations arising by the operation of law or by status, and particularly the Hindu Joint
Family Finn are excluded from the operation of the Indian Partnership Act (Sec. 5)
A Hindu Joint family is not a juristic person for all purposes, so that as a joint
family it cannot enter into partnership nor can the Karta do so oil of the joint
family. The individual members can, however, enter into partnership with individual
members of another Hindu joint family or with other individuals ( Venkideswara Pro bhu
Ravindranai/ma Prabliu v. Surendranailia Prab/mu Sudliakar Prahliu, 1985 Ker. 265).
CLUBS
Clubs are not associations for gain and are not therefore partnerships. The members
of a club are not liable for each other's acts, but the partners are so liable. No member
of a club is liable to a creditor of the club. A member of a club has no transmissible
interest so that on his death his heirs cannot claim to inherit any of his rights.

DURATION OF PARTNERSHIP

The parties are at liberty to fix the duration of the partnership or say nothing about
it. Where the partners stipulate that they should carry on business for a definite period
of time, it is called partnership for a rued term. When the term is over the partnership
comes to an end; but if the business is continued after the period originally fixed, the
renewed partnership will become a partnership at will, and in the absence of any
agreement or any course of dealing varying by implication any term of the original
agreement, the mutual rights and duties of the partners remain the same, as far as they
are not inconsistent with a partnership at will. Where a partnership is formed for the
purpose of carrying on particular adventures or undertakings, it is called a Particular
Partnership which would presumably last only so long as the business is not completed
(Sec. 8). But if the firm proceeds to carry out other undertakings, then, in the absence of
agreement to the contrary, the rights and duties of the partners in the new undertakings
will continue to be the same as in the original undertaking. It is also open to the partners
either to say nothing about the duration or to agree that the business shall be carried on
not for any fixed period, but so long as the partners are inclined to carry it on. Such a
partnership is called a partnership at will, because it is carried on at the willingness and
desire of the partners and is determinable at tie will of any of the partners, on his giving
notice. Where, however, it is stipulated that the partnership should dissolve by "mutual
agreement only." it will not be a partnership at will determinable by notice, for, unless
all the partners agree, dissolutioi will not take place. Such a partnership can be dissolved
by court under Sec. 44 of the Act. (See lqhalnat/z Premnath Anand v. Rameshwarnaih
etc., 1976, Born. 405).

PARTNERSHIP PROPERTY

It is open to the partners to agree among themselves as to what is to be treated as

the property of the firm, and what is to be the iep'sIc property of one or more partners,
174 NUikCANTILE LAW

although employed or used for the purpose of f he firm. Therefore, in the absence of any
such agreement, express or implied, the properly of the finn is deemed to include—
(a) all property. rights and interests which have been brought into the common
stock for the purposes of the partnership by the individual partners, whether
at the commencement of the business or subsequently added thereto;
(h) those acquired in the course of the business with money belonging to the firm,
including secret profit and personal benefit derived by a partner;
(c) the goodwill of use business.

Difficulties, sometimes, arise where a partner has drawn money out of the
partnership and acquired immovable and movable properties in his own name. In general
such acquisitions by a partner in his sole name, made with the partnership funds, will be
treated as the property of the firm. But to ascertain whether the property standing in the
name of a partner belongs to him or the firm, recourse should be had to the account books
of the finn, which may show how it has been dealt with. If it is credited as part of the
capital of that partner, it will be his property; but, if it has been treated as part and parcel
of the partnership property in the course of dealing between the partners, it will be
deemed to be the properly of the firm. Further, any secret profit or personal benefit
derived by a partner will be deemed as acquired forthe firm and will have to be accounted
for and paid to the firm. But the mere fact that certain property is used or employed for
the purposes of the firm does not necessarily raise a presumption that it is property of
the firm. Thus, where a colliery belonged to A. but it was worked in partnership by A
and B, who shared the profits of the venture, the colliery did not become the properly of
A and B firm, but remained the property of A. But, where a colliery was token on lease
by A and B for the purpose of working it, it would be presumed to be the property of the
firm. In the latter case, it would become necessary to see whether the property was treated
by the partners as part of the common stock or was merely as ancillary to the carrying
on of the partnership business.
GOODWILL
The Act spcciallyrovidcs that goodwill of the firm is partnership property. Lord
Macnaughten describes goodwill as "the advantage which is acquired by a business,
beyond the mere value of the capital, stock, fund and property employed therein, in
consequence of the general public patronage and encouragement which it receives from
constant or habitual customers. By Goodwill is meant the approbation of the public as
regards the business, an approb, ation varying with the age, credit and stability of the firm.
Says Mr.'Justice Warrington, 2 "itis the advantage which a person gets by continuing
to carry on and being entitled to represent to the outside world that he is carrying on a
business which has been carried on for some time previously." "Goodwill, I
apprehend", said Wood V.C.. 26 "must mean every advantage . . . . that has been
acquired by the old firm in carrying on its business, whether connected with the premises
in which the business was previously carried on, or with the name of the late firm, or
with any other matter carrying with it the benefit of the business," In a recent Bombay
case it was stated:2 "The goodwill of a business is inclusive of positive advantages,
such as carrying on the commercial undertaking at a particular place and in a particular
name, and also its business connections, its business prestige, and several other intangible
advantages which a business may acquire". It is this which constitutes the difference

24. Trrgo v. llumt (1896) A. C. 7. leading case on the subject.

25. 11111 v. Feanes (t905) 1 Ch. 466 at 471.
26. Churtonv.Douglas(1859)John 176,188.
27. New Gujarat Cotton Mills Ltd., v. Appellate Tribunal,1957 Born. Ill
 LAW OF PARTNERShIP 175

between a businessjust started, which has no goodwill attached to it, and one which has
acquired goodwill by established reputation, and business connections. The goodwill of
a firm may have an appreciable value, often it is the very sap and life of a bUsiness,
without which the business will yield little or no fruit. It is part of the partnership property
in which all the partners are jointly interested, and can be sold either separately or along
with the other property of the finn [Sec. 55(1)1. Every partner is entitled to have the
partnership property used exclusively for the purposes of the partnc:ship.

PART 5-C
RELATIONS OF PARTNERS TO ONE ANOTHER
The relation of partnership comes into existence by an agreement between the
partners, and such an agreement may provide for the mutual rights and duties of the
partners. It is indeed usual for partners to agree at the time of the formation of partnership
about the conduct and management of the business, by providing as to the capital each
partner has to contribute, the proportion in which each partner will share the profits, and
the rights and duties of the partners in the business. Where, however, partners fail to
provide for any of these things, the rules laid down in the Act., and examined below, are
applicable.
RIGHTS OF A PARTNER
1. Right to take part in Management [Sec. 12 (a)].—Every partner has a right
to take part in the conduct and management of the business. It may be pointed out again
that this rule, like most of the following rules, is subject to any contract to the contrary
between the partners. and applies only when no agreement regarding conduct of business
exists.
2. Right to be consulted [Sec. 12(c)].—Every partner has a right to be consulted
and heard in all matters affecting the business of the partnership. Where there is a
difference of opinion between the partners, the decision of the majority of the partners
will prevail, but only in ordinary matters of routine, and that too if the majority has acted
in perfect good faith and as far as possible every partner has been consulted. If the
partners are equally divided in opinion, those who are against the proposition in dispute
will have their way. That is to say, the particular resolution will not be carried. But, where
the matter is of importance and affects the policy and nature of the business, or relates
to an alteration in 1/re partnership constitution, a majority will not be sufficient and
unless all 1/ic partners agree, no change can be effected. Thus, in matters affecting the
nature of business, even one dissenting partner can prevent any change. To illustrate,
there must be unanimity among the partners to change from life assurance business to
marine insurance, to select the place of business, to enlarge the business requiring
additional capital or to sell the whole business.
3. Right of Access to Accounts [Sec. 12(d)J—Every partner, active or dormant,
has a right to free access to all records, books and accounts of the business and also to
examine and copy them. The partner is not bound to exercise this right personally but
may engage an agent for the purpose, provided that the other partners have no particular
objection to that agent. But a minor admitted to the benefits of the partnership has only
a right of access to "accounts" and inspect and copy them, but not to "books".
4. Right to Share Profits [Sec. 13(b)]—Every partner is entitled to share in the
profits equally, unless different proportions are stipulated. There is no connection
176 MERCANI1LE LAW

between the proportion of capital contributed by the partners and the share in the profits
earned, nor will the fact that the work done by the partners is unequal affect the question
of their shares. So, in the absence of special agreement, "equality", says Pollock, "is
equity, not as being absolutely just, but because it cannot be taken that any particular
degree of inequality would be more just.' • It may be noticed that a MINOR in the firm
has no right to sue for his profits when severing his connection with the firm.
5. Interest on Capital [Sec. 13(c)].—No partner is entitled to interest on the capital
subscribed by him unless there is an agreement express or implied or a trade custom to
that effect. Again, interest-which is allowed by agreement or trade custom, is payable
only out of Size profits, if any, unless agreed to be paid even in the absence of profits.
Further, where interest is payable on capital it stops running at the date of dissolution,
unless otherwise agreed.2
6. Interest on Advances [Sec. I 3(d)I.—A partner who has contributed more than
the share of the capital for the purposes of business is entitled to interest at a rate agreed
upon, and where no rate is stipulated for, at six per cent per annum. This interest is
payable out of the partners/lip properly as an item of epense and not necessarily out of
the profits. A partner is not entitled to any interest on undrawn çrofits left in the business,
0
unless there is an agreement express or implied to that effect.
7. Right to Indemnity [Sec. 13(e)[—A partner is entitled, in the absence of an
agreement to the contrary, to be indemnified by the firm for all acts done by him in the
course ofthe parthershp business, for all payments made by him in respect ofpartnershi
debts or liabilities and expenses and disbursements made in an emergency for protecting
the finn from loss, provided he acted as aperson of ordinary prudence would have acted
in similar circumstances,
8. Joint Owner of Part nership Property (Sec. I 4)—Every partner is, as a rule, a
joint owner of the partnership property, and in the absence of an agreement providing
for the interest of each partner in the property every partner is presumed to have an equal
share in it. Every partner is entitled to have the partnership property used exclusively for
the purposes of (lie partnership.
9. Powers in an emergency (Sec.2 1 )—A partner has power to act in an emergency
for protecting the firm from loss. But in doing so, he must act as a prudent person would
act in his own affairs in similar circumstances. A partner's right to be indemnified by
his co-partner for payments made or liabilities incurred in acting for the furn in an
emergency is co-extensive with his authority.
10. No New Partner to be introduced (Sec. 31(1)1.—Every partner is entitled to
prevent the introduction of a new partner into the firm without his consent, unless there
is an express contract permitting such introduction.
11. No liability before joining the firm (Sec. 31 (2)1—An incoming partner will
not be liable for any debts or liabilities of the firm before he became a partner, excepting
by his own consent.
12. Right to retire [Sec. 32(1)]—Every partner has a right to retire, if the contract
so provides, failing which, with the consent of other partners 1 arid if the pa nemihp be
one at will, at any time on giving notice to the other partner. 3
13. Right not to be expelled [Sec. 33(1)]—Every partner has a right to continue
in the partnership and not to he expelled from it, excepting when there is a clause in the

28. Soma Sundaram Oidüa. Savl8an Qiettiar (1930) Mad M. am alao ' . '-hs Ram v. Tej
Bhan, 1958 Pwij. 5.
29. Motilal v. Sarup Chand (1936)38 Born. L. IL 1039.
30. Dinham v. Brandford (1890) Cjh. 519.
31. Anand Prasad v. Rhagwant (1932) All. 926.
 LAW OF PARTNERStW' 177

agreement conferring a power of expulsion by majority or any particular partndrs. But

a power of expulsion, where it exists, must be exercised bonafide, and in good faith
and not with any ulterior motive of getting an advantage, eg purchasing his interest in
the fit-ni at a favourable rate.
14.Right to carry on competing business (Sec. 36)—Every outgoing partner has
a right to carry on a competing business, but without using the firm name or soliciting
the firm's customers or in any way representing himself as carrying on the business of
the firm unless he has been restrained by a reasonable agreement from carrying on a
similar business for a specified period of time within specified local limits. 32
15. Right alter retirement to share in profits or interest (Sec. 37)—Where a
member of a firm dies or otherwise ceases to be a partner as a result of retirement,
expulsion, insanity, or any other cause and the surviving or continuing partners carry on
the business with the property of the foist without any final settlement of accounts, viz.,
without the share of the assets of the outgoing partner being paid over, or without his
interest being purchased by the remaining partners, the estate of such deceased partner
or the partner himself, as the case may be, is entitled to share in the profit earned with
the aid of the assets of such outgoing partner or interest at six per cent per annum at
the option of the legal representative of the deceased partner or the outgoing partners.
The rule applies to the case of an alien enemy where partnership is dissolved on the
outbreak of war, the alien enemy in such case has a right to claim share of profits or
interest after the war is over. 34 The option to claim a share of the profits or interest can
be exercised only when the accounts of the subsequent business are made. And, as the
right is an alternative one, a claim both for share of the subsequent profits as well as
interest will not he allowed. Further, once the election has been made, the party will not
be allowed to go hack on it, nor will he be permitted to claim profits for part of the period
and interest for remaining period. -
DUTIES OF PARTNERS
The relation of partners is founded oil mutual confidence and the law requires that
a partner shall act towards the other members of the fit-rn with the utmost good faith.
Every partner must use his knowledge and skill for the benefit of the firm. The
fundaciental duties of partners are contained in Sec. 9 which reads: "Partners are bound
to carry on the business for the firm to the greatest common advantage, to be just and
faithful to each other, and to render true accounts and full information of all things
affecting the firm to
to any partner or his legal-representative."
Lb work for the greatest common advantage—Every partner is bound tocarry
c's the business of the fit-in to tie greatest common advantage. This is one of the Itt-st
principles of law of partnership, for, like agency, mutual confidence is the foundation of
pat-i nersh p.
2. To be just and faithful—Every partner must be just and faithful to the other
partners. Partnership being a fiduciary relationship, it is the duty of each partner to
exercise the utmost good faith and fairness in his dealings with his co-pat-triers. A partner.
for instance, must be 'air when buying the share of another or when exercising right of
expulsion of another pat-trier.
3. To render true accounts_A partner is bound to keep and render true, proper,
and correct account oldie partnership. He must permit the other partners to inspect such
accounts and to take copies of thin either by themselves or by their unobjectionable

32. Manstia Ram V. Tej lthan, 1958 Punj. 5.

33. Nagarajan v. Robert lioiz. 1954 Punj. 278: Mansha Ram v. Tej Rhan, 1958 Punj.. 5.
34. Hugh Stevenson & Sons v. Aktiengesimechafi Co. (1918) A. C. 239.
35. Vyse v. Foster(t874)7 H. t. C. 318.
178 MERCANTILE LAW

agent at all reasonable times. In addition to submitting statements of accounts, he should

be ready to explain them and also hand over to firm all monies of the firm which may
have come to his hands, and produce relevant vouchers.
4. To give full Information—Utmost good faith between the partners is the rule
and one partner must not take advantage of the other. Every partner is an agent of the
other partners and as such is bound to communicate full information to them. Thus a
partnr who acquires any information in the course of the partnership must pass it on to
the other partners, so that notice to uoe partner is taken to be notice to all partners.
5. To indemnify for fraud (Sec. 10)—Every partner is bound to indemnify the
firm for any loss caused by his fraud in the conduct of business. The liability of a partner
is absolute and no partner can contract himself out of it. If a partner commits a fraud on
his copartners, he must indemnify theirs for any loss caused to them by his fraud.
6. To indemnify for wilful neglect [Sec. 23(f).—Every partner who is guilty of
wilful neglect in the conduct of the business and the firm suffers loss in consequence, is'
36 It is to be noted that the
bound to make compensation to the firm and other partners.
liability here is for wilful neglect or what is also called-culpable negligence, and not for
failure on the part of a partner to carry'out his ordinary duties. Not only that, but the
partners can contract themselves out of this liability which they cannot do in the case of
fraud.
7. To share losses [Sec. 13(h)]—As in the ease of profits. in the absence of an
agreement to the contiary, every partner is bound to share the losses equally with the
others. If there is an agreement, then in the proportion as the agreement provides.
8. To attend diligently without remuneration [Sec. 12(b), 13(a)1—Eveiy
partner is bound to attend diligently to the business of the firm and, in the absence of
any agreement to the contrary, he is not entitled to any remuneration whether in the shape
of salaiy, commission or otherwise, on account of his own trouble in conducting the
partnership business. Thus, even a managing partier or a partner who does much more
work than the others will not get any remuneration. But it is usual for partners to.agree,
that a certain partner, e.g.. managing partner, is to receive in addition to his share a salary
or commission for his trouble in conducting the business of the firm. Such an arrange-
ment would ordinarily come to an end on dissolution of the firm. But in exceptional
cases where, for instance, one or more partners have additional burden thrown on them
owing to the inactivity or idleness or inability of another partner to do his share of the
37
work, such partners would be allowed compensation for such additional services. This
rule is based on the duty of a partner to compensate other if he deliberately ceases to do
his duty, so that the neglectful partner would be required to pay out of his share to the
partner who has to do his work also. In Gokul v. Sas/zinwkhi (1911) 16 C.W.N. 299,
where the partnership was with the Pardanashin widow of a diseased partner and
surviving partners, remuneration to the active partner was allowed.
9. To hold and use property for the firm (Sec. 15)—In the absence of an
agreement to the contrary, every partner is bound to hold and use the partnership property
exclusively for the firm. The property of the firm, being the property of all the p.rtners,
must be held and used only oil of land for the common benefit of all the partners.
10.To accountfor private proflts [Sec. 16(a) and 601—The partnership property
belongs to all the partners, and so a partner cannot directly or indirectly use the property
of the firm for his own private purposes. or try to get any advantage because of his
connection with the firmand if any such advantage is derived by him, he must account

36. Thomas v. Atherstonc (1878) lOCh. D. 185.

37. lIar-i-is v. Sleep (1897)2 Ch. 80; Krishnatnachan v. Samkaraska (1920)23 Born. L R. 1343.
1921 P.C.91.
 LAW OF PARTNERSHIP 179

for the samc and pay it to the firm. A partner, like a trustee, cannot make private gain by
reason of his membership with the firm. Thus, where a partner in the course of the
business has received an information and uses it for any purpose competing with the
partnership business, he must pay over any benefit that he may have obtained by the use
Of such information. Where T was common partner in two firms publishing newspapersg
he was prevented from conveying information and news of the firm to the other. 3
Further, a partner cannot sell his own property to the firm or purchase the firm's property
without making full disclosure. He cannot bargain for a private gain from the customers
of the firm. This obligation continues even after dissolution of the firm by the death of
a partner, for any profits made by any surviving partner or any representatives of the
deceased after dissolution and before winding up belong to the firm. Thus, the liability
of a partner to account to the finn extends to any benefit derived by him from any
transaction affecting the partnership. The application of the rule is, of course, subject to
any agreement between the partners.
11. To account for profits of competing business [Sec. 16(b), 1l(2)]—Sec.12
of the Indian Contract Act provides that an agreement in restraint of trade is void. But
Sec. 11(2) of the Partnership Act permits an agreement between partners that a partner
shall not carry oil other than the business of the partnership as long as he is
partner. In practice, such a clause generally appears in partnership agreements: In the
absence of any such arrangements, partners are free to be interested in private business
of their own, provided the same does not compete with the business of the partnership.
The rule contained in Sec. 16(b) may be stated thus: No partner can carry on any business
which is likely to compete with the business of the partnership, except with the consent
of the other partners. If a partner, without obtaining the consent of the other partners.
carries oil a competing business, he must account for the profits of such business to the
firm, and must also compensate the firm for any loss sustained by his carrying on such
competing business. Not only during the continuance of the firm, but also after dissolu-
tion of the firm, and during the winding up, a partner may be prohibited and can be
restrained from carrying on a competing business in the name of the firm or using the
property of the firm (Sec. 53).
12. To act within authority—Every partner is bound to act within the scope of
the actual authority conferred upon him. Where he exceeds his authority, he shall have
to compensate the other partners for any ensuing loss, unless they ratify his act.
13. Not to assign his rights [Sec. 29 (1 & 2)]—No partner can assign or transfer
his partnership interest to any other person, so as to make him a partner in the business.
But a partner may assign the profits and share in the partnership assets. Where such
assignment is made, the person in whose favour it is made, would have no right to ask
for the accounts or to interfere in the management of the business so lung as the business
is continuing; he would be entitled only to share the actual profits. Where, however, the
partnership is dissolved, he would he entitled to the share of the assets and also to
accounts but only from the date of dissolution.

PART 5-D
RELATION OF PARTNERS TO THIRD PARTIES

POWER OF PARTNER TO BIND THE FIRM

Every partner is an agent of the finn for the purposes of the business of the firm
(Sec. 18). The law of partnership has often been stated to be a branch of the general law

38. Glassiiigton v. 'llmwanes (1823) Sam. and St. 124; Abdul Razak v. M. Din Ahmed. 1959
Cal. 660. -
I O MERCANTILE LAW

of principal and agent; this section expressly recognises that doctrine. If two or more
persons agree to carry on a partnership business and share its profits, each is a principal
and each is an agent for the other, and each is bound by the other's contract in carrying
on the business, as much as a single principal would be bound by the act of an agent.
who was to give the whole profits to his employer. This is the true principle of partner's
liability (Cot v. Hickman (1860)8 H.L.C. 2681. A partner, indeed, virtually embraces
the character both of a principal and of an agent. So far as he acts for himself and
his own j titiest in the common concern of the partners he may properly be deemed an
agent. The main distinction between him and a mere agent is that he has a community
of the partnership; while an agent as such has no interest in either. Since, as between the
partners and the outside world (whatever may be their private arrangements between
themselves), each partner is an unlimited agent of every other in every matter connected
with the partnership business, his acts hind the firm. The general authority of a partner
as agent of the firm is variously described as 'ordinary', 'apparent', ostensible' or
'implied'. The Indian Partnership Act calls it 'implied authority' of a partner.
IMPLIED AUTHORITY OF A PARTNER
Sees. 19(1) and 22 read together provide that the act of a partner which is done to
carry on, in the usual way, business of the kind carried on by the firm, binds the firm,
provided the act is done in the Finn name, or in any manner expressing or implying an
intention to bind the firm. Such an authority of a partner to bind the firm is called his
Irnp!ied Authority. The implied authority of a partner to bind the firm is restricted to
acts usually done in the business of the kind carried on by the firm. A partner can no
doubt do certain acts in an emergency so as to bind the firm, but these acts do not form
part of his implied authority. The words "in the usual way" are put in because as soon
as a usual act is done in an unusual way the outsider may well be put on inquiry into the
unusual circumstances under which he is being called upon to give credit. It is not
unreasonable to expect him to ask whether the partner has authority to act as he is doing.
If the outsider chooses to pass what is unusual then he must not seek to charge persons
other than theone with whom he is actually dealing. So, a partnerhas imrlied authority
to bind the firm by all acts done by him in all matters concerned with the
partnership business and which are done in the usual way and are not in their
nature beyond the scope of the partnership.
The question whether a given act has been done in carrying on a business in the
way in which it is usually carried on must be determined by the nature of the business,
and by the practice of the persons engaged. What is usual for one kind of business may
be unusual for another, e.g.. it is usual for one member of a firm of bankers to draw,
accept or endorse a bill of exchange on behalf of the firm, but it is not usual for one of
several solicitors to possess a similar power, for it is no part of ordinary business of a
solicitor to draw, accept or endorse bills of exchange. In the ease of commercial
partnerships (trading firms), every partner has an implied authority to pledge or sell the
partnership goods, buy goods on credit for the partnership, borrow money, contract debts
and pay debts, on account of the partnership, make, draw, sign, endorse, accept, transfer,
negotiate, get discounted negotiable instruments, in the name and on account of the
partnership. Where the business is not of commercial nature. i.e., does not involve buying
and selling of goods, a partner has no implied authority to borrow, pledge or to make or
issue negotiable instruments, though he may sign a cheque. Even in the case of a cheque
a partner has no implied authority in a non-trading concern to bind his co-partners by
giving a post-dated cheque, for he will in effect be drawing a bill of exchange; and he
cannot draw or accept a bill of exchange. Any admission or any representation made by
any partner concerning the partnership business is evidence against the firm and will
 LAW OF PARTNERSHIP

bind ii This is again on the principle that every partner charges the partnership by virtue
of an agency to act for it. An admission or representation will hind the firm even though
made by a partner in fraud of his co-partners. B ut, of course, if such fraudulent admission
is made by the Partner in collusion with the oilier party who seeks to rely on it, it will
not bind the firm. Again, it is not within the implied authority of a partner to set-off his
own separate debt against a debt due to his finn: and such payment by way of set-off
does not bind the firm (Dalicitand PareAlt v. Mat/iuradjs Ravfi, (1957) 59 Born. L.R.
1066).
NO IMPLIED AUTHORITY (Sec. 19(2)]

The Act, with a view to avoid litigation and to make the law as definite as possible,
has specifically enumerated certain acts which do not, in the absence of any usage or
custom of trade to the contrary, fail within the implied authority of a partner stated in
Sec. 19(1) above. Sec. 19(2) reads
"In the absence of any usage or custom of trade to the contrary the implied
authority of a partner does not empower him to—
(a) submit a dispute relating to the business of the finn to arbitration
(b) open a banking account on behalf of the firm in his own name,
(c) compromise or relinquish any claim or portion of a claim by the firm,
(d) withdraw a Suit or proceeding filed on half of the firm,
(e) admit any liability in a suit proceeding against the firm,
(0 acquire immovable property on behalf of the firm,
(g) transfer immovable properly on behalf of the firm.
(h) enter into a partnership on behalf of the firm."
D holds permanent leasehold right over a colliery and had worked the colliery
himself for sonic time. In 1949, he grated a sub-lease of the colliery to M, a partner in a
firm having 3 other partners, for a term of 5 years. The colliery was worked and Rs.
57,000 became due to D. D filed a suit for the recovery of the amount against M, the
three partners and tho firm. The other partners deny liability on the ground that there was
no privity of estate between them and D. Held, D can recover only from M; there was
no contract between D and the firm. It was only between I) and M, as M had no implied
authority to enter into such a contract (Devjj v.Ma, arzLa1, 1965 S.C. 139).
It is, however, open to the partners by means of an express contract to extend or
limit the implied authority, but third parties will be bound by such limitation only when
they have notice of such curtailment (Sec. 20).40
LIABILITY OF PARTNER FOR ACT OF FIRM
Sec. 25 of the Act lays down the general rule that every partner is liable for all acts
of the finn done while he is a partner and that the liability is joint and several. Sec. 2(a)
defines an Act of the Firm as an "act or omission by all the partners, or by any partner
or agent of the firm which gives rise to a right enforceable by or against the firm." It
follows that all partners are liable jointly and severally for all acts or omissions
binding on the firm including liabilities arising from contracts as well as torts. In
order that an act done may be an act of the firm and therefore binding on the firm, it is
necessary that the partner or the agent doing tile act on behalf of the finn must have done
that act in the name of and on behalf of the firm and not in his personal capacity; and
the act must have been done in the ordinary course of the business of the rirm. Two

39. In Calcutta there is a trade usage pennilting a partner to refer firma diqutez to
arbiiratidn.
40. Sarnia1 v. Puran Chand (1924)48 Born. 170 1924 Born. 260.
182 MERCANTILE LAW

important points should be noted in this connection. First, that if any act is binding on
the firm every partner, whether active or dormant, will be liable for it. Secondly, to be
binding on a partner, the obligation must have been in such a way as to bind the firm.
An act done or instrument executed by a partner will bind the firm only if it is done or
executed in the firm name or in a manner expressing or implying an intention to bind
the firm. That is to say, the partner should not have acted in his individual or personal
capacity but as a partner of the firm and as agent of the other partners and in the firm
name. The act of a partner must be within the scope of the actual authority of the partner.
Thus, if a partner buys on credit usual stock-in-trade, all the partners are liable for the
debt so incurred. If the purchase does not fail within the business of the firm, it is not an
act of the firm and so does not bind the other partners. Where A, B and C carry on the
partnership business as cloth merchants, and A orders on credit two cases of Kulu apples
on his own initiative, but sends the order on the firm's note paper and in the firm's name,
the order is so clearly not for the purpose of the business of the firm that he alone is
liable. A is not an agent of B and C for buying fruit, for the business is actually and also
ostensively that of cloth merchants and not that of fruiterers, and a third party cannot
reasonably assume authority to buy fruit.
LIABILITY FOR THE WRONGFUL ACTS OF PARTNER
Every partner is liable for the negligence and fraud of the other partners in the
course of the management of the business.. A partner charges the finn by virtue of an
agericy to act fur it. A principal is liable for the loss or injury caused to any third person
by any wrongful act or omission of an agent while acting in the ordinary course of
business. A principal is also liable for the tort of his agent if he has expressly directed
him to do it. On the same principle the firm is liable for any loss or injury caused to a
third party by the wrongful acts or omissions of a partner if they were done by him while
acting in the ordinary course of the business of the firm, or with the authority of his
co-partners. Where one of the partners bribed the clerk of the plaintiff, who was a
competitor in the business, to disclose certain confidential information, which it was the
business of the firm to obtain by legitimate means, the firm was held liable.
Fraud—B and C, who carried on business in partnership as wine merchants, were
employed by A to purchase wine for him and sell the same on commission. C represented
that lie had bought the wine, had sold part of it at a profit and paid the proceeds of such
supposed sale to A. In fact C had neither bought nor sold any wine, and the transactions
of which he rendered accounts to A were fictitious. B was wholly ignorant of C's fraud.
In a suit by A against both, it was held that B was liable for the false representation of
C.42
Negligence—So also, all the partners in a firm are liable to a third party for loss
or injury caused to him by the negligent act of a partner acting in the ordinary course of
the business. Thus, in Blyili v. Fladgate (1891)1 Ch. 337, partners in a firm of solicitors
were held liable in damages on the ground of negligence of a partner for failure to
discharge the duty entrusted to him. A firm of taxi drivers would be liable for the
negligent driving of one of them, and a firm of surgeons for the professional negligence
of one of the partners, and a firm of newspaper proprietors for the liability of one of them
and so on.
Misappropriation of money (Sec. 27)—Where a partner acting within his
apparent authority receives money or property from a third party and misapplies it, or a
firm in the course of its business receives money or property from a third party, and the
money or property is misapplied by any of the partners while it is in the custody of the

41. llanilyn v. Houston & Co. (1903) K. B. 81.

42. Rapp v. Latham (1819)213 & A 795.
 LAW OF PARTNER.SflP 183

firm, the firm is liable to make good the loss (Sec. 27). This is the liability of the partners
for misappropriation of money or property belonging to a third party. But if the receipt
of money by one partner is not within the scope of his authority, then this receipt cannot
be treated as receipt of the firm, and the other partners are not liable, unless money
received comes into their possession or under their controL43
Failure to Communicate Information (Sec. 24)—Notice to a partner who
habitually acts in the business of the' firm, of any matter relalihg to the affairs of the firm
operates as notice to the firm; except in the case of fraud on the firm committed by or
with the consent of that party (Sec. 24). All the partners are deemed to have received
any information obtained by one of them in the course of the partnership business, so
that it can be said that notice to a partner is notice to the firm. When the partner is a
party to a fraud and keeps back the information, the firm will not be imputed with notice.
LIABILITY WHEN CEASES
Every partner is liable for all the obligations of the firm until the date of his
severing connection with ) he firm but his liability will continue to creditors subsequently
also, unless there be a fresh contract or what is called Novation or a tripartite
agreement, by which the creditors agree to accept the liability of the other partners and
the incoming partners, if any, and exoneratm the retiring partner [Sec. 32(2)]. Further
every partner, though he might have retired from the partnership, would still be liable
for the acts of the firm, even after retirement, if he has failed to give public notice as
required by the Act. Similarly, after dissolution of a firm the liability of partners to third
parties for acts of their partners which would otherwise have been binding on all partners,
continues until proper notice is given that the firm is dissolved. But the estate of the
deceased partner or the insolvent partner will not be liable for such act after the demise
or adjudication, even if no notice is given. The partner's liability would also continue
even during a winding up for such acts of another partner as may be necessary foT
purposes of winding up but not for the acts of an insolvent partner [Secs.45(l ) and 471.

PART 5-E
DISSOLUTION

The Indian Partnership Act has introduced a distinctioii . beemi the 'dissolution
of partnership' and'dissolution of firm'. Sec. 39 provides that the dissolution of
partnership between all the partners of a firm is called the "dissolution of the firm." It
follows that a partnership may be dissolved without dissolving the firm. Dissolution of
partnership involves a change in the relation öl the partners, but it doe not end the
partnership. For example, where A. B and C were partners in a firm and A died or was
adjudged insolvent, the partnership firm would come to all but if the partners had
agreed that the death, retirement, or insolveucy of a partner would not dissolve the firm
then on the happening of any of these contingencies, the "partnership" would certainly
come to an end although the "loin" or as the Act calls it, a' reconstituted lurm" might
continue under the same firm name, Legally speaking, where A has gone out, the
relationship which subsisted between A, B and C, hiving broken up and a fresh
re?itionship between B and C, or if D is brought in between B, C and D having been
created, there will be new or reconstituted firm. For, the partnership composed of A, B
and C is not the same partnership as that between B and C, or between B, C and D. This
fact is further emphasised by the Act, and Sec.38 provides to the effect that a continuing
guarantee for the liabilities of a firm ceases as soon as there is a change in the constitution

43. Mara v. Browne (1895)2 Ch. 69.

154 MERCANTILE LAW

dissolution
of the firm. Sothe dissolution ofa partnership may or may not include the
44, but dissolution of the firm necessarily means the dissolution of the
of the
partnership as well. O dissolution of partnership the business may be carried on
by the reconstituted i.,'I, osron the dissolution )f the firm all business must be stopped,
the uets of the firm realised and distributed among the partners, the jural relation
between all partners of the firm is discontinued (KcxIiavlcil Pale! v. Naranda.c, 1968
Guj. Il7).
DISSOLUTION OF PAR ThER'HII'
It may he repeated that the dissolution of partnership may also involve the
dissolution of the firm, (i.e.. severani.e of the partnership relation between all the
partners). The dissoh.ition of partnership takes place in any of the following circumstari-
ces:-
1. By the expiry of term—Where the partnership is for a fixed term, the firm gets
dissolved at the end of the period, unless the partners have made a contract to the contrary
[Sec. 42(a)].
2. By the completion of adventure—Where a partnership has been constituted
for carrying out a particular adventure, such partnership comes to an end on the
completion of the adventure, in the absence of. ny contrary agreement [Sec. 42(b)] 45.
3. By the death of partner—A partnership, whether at will or for a fixed period,
is dissolved by the death ofa partner, unless there is a contract to the contrary [Sec.
42(c)].
4. By the insolvency of a partner—Subject to the contract between the partners,
a partnership whether for a fixed period or at will, is dissolved by the adjudication of a
partner as an insolvent [Sec. 42(d)].
5. By the retirement of a partner—Where a partner retires from the partnership,
then also the partnership gets dissolved, but not the firm. If, however, a partnership
firm cOnsists of two partners only, then on the retirement of one of the partners, the
remaining partner alone cannot constitute a partnership and it ceases 47
to exist, as there
cannot be a partnership firm unless there are at least two partners.
In all the cases mentioned above the remaining partners may continue the turn in
pursuance of an express or implied contract to that effect. If they do not continue, the
dissolution of finn takes place automatically.
Dissolution of Firm—In the following cases there is necessarily a breaking up or
extinction of the relationship which subsisted between all the partners of the firm, and
closing up ofjhe business:-
1. By mutual consent—A firm may he dissolved where all the partners agree that
it should be dissolved. Just as a partnership is formed by the consent of all the partners,
similarly a partnership, the firm, gets dissolved by all the partners agreehing to such a
dissolution. This is an application of the general rule that a contract may be discharged
by mutual agreement.
2. By the insolvency of all the partners but one—We have seen that the
insolvency of one or more partners would only dissolve the partnership if the remaining
solvent patners are two or more and-they agree to continue the business of the firm: yet,
if all the partners or all the partners but one become insolvent, there must necessarily

44. See Sundarsanarn v. Viswanadham Bros. 1955 Andhra 12.

45. Gherulal Parakh v. Mahadeoda. 1959 S. C. 781.
46. Sundarsanam v. Viwanadham Bros. 1955 A. P. 12. Bishnu Oandrav. Cliandnka Prasad 1983
S. C. 523.
47. Chunital v. Ahm]d Rowthcr. 1960 Ker. 156.
 LAW OF PAR11Ei,.,11P 185

be a dissolution of the firm. The disso] tit ion is automatic or compulsory [Sec 41(a)).
But the insolvency of partnership firm does not ipso facto result also in the insolvency
of its partners. To make them insolvent it is essential to make them party to the insolvency
proceedings of the firm (Jayanlilal Mo/ianlai v. Narain Dos & Sons, 1983 Born. 226).
3. By business becoming illegal—The firm is in every case dissolved if the
business of the partnership is prohibited by law, i.e., the object for which the partner-ship
was formed is unlawful or becomes illegal as a result of some subsequent events. Here
also the dissolution is automatic or compulsory [Sec. 41 (b)]. There is operation of law.
4. By notice of dissolution—Where the partnership is at will, whether originally
so or subsequently becoming one by a partnership for a fixed time being continued
beyond the stated period, the firm may be dissolved at any time, by any partner givin
notice in writing of his intention to dissolve, to all the other partners. The dissolut n
in such a ease takes place from the date mentioned in the notice, or if no date is mentio ed
form the date of the communication of the notice to the other partners (Sec.43). The
notice must not be ambiguous or vague. It must be effected. And a notice once given
cannot be withdrawn without the consent of the other partners. But if the partner giving
the notice dies while the notice is in the post, the dissolution will be by death and not by
notice. The mere filing of a suit for dissolution does not amount to notice of dissolution
(Ban,arsidas v. Kans/ii Ram. 1963 S.C. 1165). Also, a transfer of running business does
not by itself bring about dissolution of a firm (Rod/ma Soarni Sahha v. Pavan Electric
Co. 1967 All. 9). A firm cannot however, be dissolved by forcible expulsion ofapartner
in violation of contract of partnership. 4
DISSOLUTION THROUGH COURT
A partnership for a fixed period, unlike a partnership at will, cannot be dissolved
by a notice and where it is not dissolved for any of thereasoos mentioned above it would
be possible to dissolve it only by a Court of Law at a suit of a partner. The remedy of
a suit Isopen to partners olall kinds of partnersl .liist It is of practical importance
In the case of partnership for a fixed period.
The following are the circumstances provided by Sec. 44 in which a firm may be
dissolved by the Court:— -
1. When a partner becomes of unsound mind—The luna insanity of a
partner does not ipso facto dissolve the partnership, and the partner's auLhom1y to bind
the firm continues, and also the ' ] tinatic partner's property continues to be liable for
subsequent debts till actual dissolution. Even the acts of a lunatic p-tzIr will continue
to bind the firm till dissolution is decreed. Therefore, the lunatic himself through his
guardian in order to protect his interests, or other partners, having lost his services or to
save themselves from the acts of the lunatic, may file a suit for the dissolution of tne
firm. In either case the Court may order dissolution which will commence from the date
of the order of the Court. In the case of insanity of a dormant partner dissolution will not
be ordered by the Court, unless a very special case is made out for dissolution.
2. Permanent incapacity of a partner—As partnership proceeds on the assump-
tion that all partners would attend diligently to the partnership business, the firm may be
dissolved by theCourt at the instance of any of the co-partners of a partner who becomes
permanently incapable of performing his duties as a partner, e.g., he becomes blind,
paralytic, etc. This rule will not apply to a dormant partner who has not taken an active
part in the business and whose incapacity is not likely to affect the partnership business.

48.. Sriknslman Gupta Y. Ram Babu Gupta 1990 All. 171.

49. Rmnnarsyan v. Kashinath. 54 r Pat. 53,
156 MEt..ANT1LE LAW

3. Misconduct of partner affe'ting the business—Where a partner is guilty of

misconduct which is likely to affect prejudicially the business of the firm, the Court may
dissolve the firm at the instance of any of the other partners. The guilty partner evidently
is not entitled to file a suit for dissolution. Where the partnership is at will he can get the
firm dissolved by notice. It is not essential that misconduct must be in the actual carrying
on of the business, all that is required is that the misconduct must be likely to affect
prejudicially the carrying on of the business. Gambling by partner, misapplication of a
clients money by a solicitor, issuing of puffing advertisements by a partner in dentist's
firm, conviction of a partner for travelling without tick't, have been held to be sufficient
misconduct for dissolution of a firm.
4. I'ersistent disregard of partnership agreement by a pariner—Where a
partner frequently commits breaches of the partnership agreement and the other partners
find it impossible to carry on the partnership business, the Court may dissolve the firm
at the instance of any of the other partners. Constant refusal to perform duties or studies,
prolonged and continued inattention to the affairs of the business by a partner, or
continuous quarrels, misappropriation of income and erroneous accounts by a partner
are good grounds for dissotution50
5. Transfer of interest or share by a partner—A partner cannot assign away his
interest so as to introduce a new partner into the firm. Therefore, where a partner has
transferred the whole of his interest to a third person or where his share has been attached
under a decree or sold under process of law, the other partners may sue for dissolution.
The partner at fault, of course, cannot apply for dissolution
6. Business working at loss TheCourt may dissolve a partnership when it is
satisfied that the bus ness of the firin cannot be carried on save at a loss. Thus, where
the partners find that the business cannot be carried on at a profit which was the motive
for the formation of the firm, but must necessarily end in loss, if continued for the
stipulated period, or in order to complete the particular adventure, the partners may ask
for dissolution through Court.
7. Where just and equitable—As the grounds mentioned above upon which a
partner may apply for dissolution are not exhaustive the Act in sub-section (g) permits
a partner to seek dissolution on any other ground which would satisfy the Court that
dissolution is just and equitable. The sub-section gives a discretion to the Court to
dissolve a firm where it appears that a situation contrary to the good faith and essence
of agreement between the partners has arisen, or where the substratum of the partnership
firm has gone or where there is a complete deadlock, and there is complete detruction
of confidence between the partners or they can no longer perform their duties.

WINDING UP

On the dissolution of a firm, whether by an order of the Court or otherwise, it

becomes necessary that the affairs of the firm should be wound up, the assets realised,
the liabilities paid out and the surplus, if any, distributed to the partners or their
representatives according to their respective rights.
Partner's lien—Sec. 46 provides to the same effect and lays down the rule that
on dissolution of firm, for the discharge of the liabilities of a partner qua partner, each
partner orb is representative has right to have the property of the firm applied in payment
of the debts of the firm. With regard to the division of the surplus assets, if any, a partner
has a right to have the accounts adjusted and the net assets divided among the partners
according to their rights. In other words, he has a right to have whatever may be due

50. Bhagwan Ram Kairi v. Radhika Ranjan Das. 1953 Ass. 125.
5I. See 1954 Mad. 9 and 1954 V. P.43.
 LAW OF PARTNERSF[II' 17

from co-partners deducted from what would be otherwise payable to them in respect of
their shares. This right of a partner is often called apariner's lien. But, as pointed out in
Babu v. Gokuldas. 1930 Mad. 393, affirmed on appeal to the Privy Council (1934)
M.W.N. 717, it is merely a convenient mode of referring to the right and the word "lien"
in relation to partners is not used in its technical sense.
Alter dissolution, the rights and obligations of partners continue in all things
necessary for the winding up of the business. Thus, after dissolution, the surviving
partners have a right to continue the business, in so far as it is necessary for the purpose
of winding up, and all the acts done by such continuing partners for the purpose of
winding up will be binding upon the other partners. 52
This provision has been made to
enable the partners to complete all unfinished transactions, and if necessary for winding
up, to borrow money or continue business in order to sell the assets. But the authority
given here is only for the winding up of the affairs of the firm, and so. though unfinished
transactions of the firm may be completed, the continuing partners have no right ib enter -
into fresh contracts or incur fresh liabilities; and no partner can carry on any competing
business, and if he does so, the partners can restrain him until the affairs of the firm 'are
fully wound Lip (S/madilal v. Nagin Chand ( 1973)1 S.C. 185). It will be remembered that
the estatb of the deceased partner or the insolvent partner is not liable for the acts of the
firm, after the demise or adjudication, in spite of the fact that no notice of dissolution is
given (Sec. 45 Proviso). In a winding up, however, all the property of the firm will have
to be sold and realised.
Goodwill—We have seen that the goodwill of the business s one of the important
items in a partnership. It may be sold either separately oralorg, with the other property
of the firm. Its valuation will depend upon the facts and circumsThnces of each case. It
was stared in Page v. Rat1ffe (1896)75 L.T. 371 that its value nmy1 w tken to be equal
to three years' net profits. It is open to any of the partners to purchase the goodwill and
carry on the business under the firm name.
Restraint of trade by buyer of goodwill—Since ordinarily every partner woAL
have a right to carry on a business competing with that of the buyerof goodwill, provided
he does not use the firm name or solicit the old customer or make it appear that he is
continuing the old business, it becomes necessary for the buyer of the goodwill in his
own interest to impose a reasonable restraint on such partner from carrying on a similar
business within specified limits and for a specified period; and such restraint would be
binding on the partner (Sec. 55). Further, such a contract in restraint of trade may be
made upon or in anticipatio of the dissolution of the firm by partners even when
goodwill is not sold (Sec.54).

SETTLEMENT OF ACCOUNTS

Usually the "articles of partnership" contain an accounting clause according to

which the final accounts between the partners are settled. But in the absence of an
agreement between the partners the rules stated in Sec. 48 are to be observed. The mode
O f settlement of accounts between the partners after dissolution, as dealt with in the
section which incorporates the Rule in Garner v. Murray (1904) 73 L.J. Ch. 66, is as
follows:—
(a) Where the firm has suffered losses, or where the capital has dwindled, in either
case, the undistributed profits, if any, should first of all be applied to the payment of such
loss and to the making up of the deficiency of capital. If the profits prove insufficient.
the capital must be applied for the payment of the losses. If even then there is loss, the

52. KedarNath v. Firm Rekh Oand Dasu Ram, 1983 All. 270
53. Krishnarao v. Shariker. 1954 [toni. 532.
 MERCANTILE LAW
188

in the proportion in
partners must contribute from their separate property pro rata, i.e.,
which they would be entitled to share the profits if profits had resulted.
(b) The second rule which deals with the distribution of the assets may be stated
thus:
The assets of the finn, including the original contributions of the partners, and
subsequent ones, if made to make up deficiencies of capital, must first be applied on
paying the debts of the firm doe to third parties. If after paying these liabilities, there be
surplus, such surplus should be applied to the payment to each partner of any advance
received from him over and above the capital contributed by each. But if the amount is
not sufficient to pay up fully the advances, then the advances should he paid rateably.
If, however, there remains surplus after payment of these advances, then the surplus is
to be paid rateably to each partner on account of capital. The residue, if any, is to be
divided among all the partners, pro rub, i.e., in the proportion1966 in which they were
S.C. 1300). If,
entitled to share profits. (Addanki Naravanappa v. Bltasknra,
however, the assets are not sufficient, and the partners have agreed to share equally the
profits and losses but have contributed unequal amounts towards the capital of the firm,
then, in the absence of any contrary agreement on the point, the deficiency of capital
most be regarded as losses and must be made op by contributions by the partners in equal
shares, with the result that the losses fi li ally suffered by the partners will be equal. The
contributions b y the partners towards the deficiency need not be actual; they may be
notional, i.e., by adjustment of the amounts payable to the partners as the distribution of
capital. if, in such a case one partner is insolvent and nothing can be recovered from him
as his contribution to make op the deficiency, the solvent partners will not be liable to
contribute for liiin After the partners contribute their share of the deficiency they will
be paid rateably the amount due to them by way of return of their capital (Sec. 48; Garner
v. Murray).
I. A, B and C were partners who had agreed to share equally in the profits and
losses of the firm, and had contributed to the capital Rs. 20,000, Rs. 10,000 and
Rs. 2,000 respectively, making a total capital of Rs. 32.000. On dissolution it is found
that, after paying the debts of the firm and advances made by the partners, the assets are
Rs. 14,000, which leave a deficiency of Rs. 19,000. This amount being tosses, each
partner must contribute Rs. 6.000 to make it up. After this is done the assets then
available, Rs. 14,000 + Rs. 18,000 = Rs. 32.000 will be distributed rateably among the
partners, so that each will have suffered a toss of Rs. 6.000. In actual practice it will not
be necessary for A and B to pay Rs. 6.000 each in cash but notional adjustment may be
made so that C, whose capital contribution was only Rs. 2,000 will have to pay Rs. 4.000,
and out of the amount of Rs. 14,000 + Rs. 4.000 = Rs. 18,000. A will get Rs. 14,000 and
B Rs. 4,000.
2. Difficulty may arise where one or more of the partners is insolvent and so cannot
contribute anything toward the deficiency. Thus in the above case if C is insolvent and
nothing can be recovered from him the assets will be distributed as follows: A and B
will have in the first place to contribute their share of the deficiency, i.e., Rs. 6,000 each:
and the assets then available, Rs. 14,000 + Rs. 6,(X)0 + 6, 000 = Rs. 26.000 will be
distributed between A and B in the proportion of their contribution to the capital. i.e.. in
the ratio of 2 to 1. A will get Rs. 17,333.67 p. and B Rs. 8,666.33 p. and the ultimate
result will be that A on the whole will have lost Rs. 8,666.33 p. and B Rs. 7,333.67 p.
case on
This is in accordance with the rule laid down in Garner v. Murray. a leading
the subject. The effect of the rule is that in such a case a partner who has contributed a

2. whei
54. Mulchand v. Bhcmnial 1948 Sind. 35. Sec Venkayyamma v. Tnupaya. 1955 Mad.
partner has died.
 LAW OF PARTNERSHIP 189

greater part of the capital may lose more than his other partners, otherwise sharing equally
with him in the profits and losses of the firm.
3. The same principle will apply if in the case mentioned in illustration 1 above,
though not insolvent, fails to contribute his share of the deficiency. Out of the actual
amount of Rs. 14,000, A will get Rs. 11,333.33 p. and B Rs. 2,666.67 p. and the Court
will pass a decree for Rs. 2.66667 p. in favour of against C and for Rs. 1,333.33 p. in
favour of B against C.
PAYMENT OF FIRM DEBTS AND PRIVATE DEBTS (Scc.49)
Difficulty sometimes arises when the assets of the firm are insufficient to pay the
firm's debts or where the partners themselves have becomeinsolvent or are not otherwise
able to pay their private or individual creditors. In such a case there is likely to be a
scramble between the partnership creditors and partner's private creditors, and difficult
questions may arise as to how to distribute the available funds between them. The Act
lays down that the partnership creditors should he first paid out of the partnership assets
and similarly private creditors out of the private assets. Iii both cases, if there be surplus,
the other set of creditors will be entitled to share in it. It may he observed that this rule
applies only when a question arises as to the order iii which the Finn debts and separate
debts are to he paid from the joint and separate property of partners. It does not, however,
entitle a partner to insist that a creditor of the finn must proceed against the assets of the
firm before proceeding against the partner individually. All the partners, we have seen,
are jointly and severally liable for all the acts of the firm and it is, therefore, open to a
creditor of the firm to proceed against the firm (all the partners) or against any one or
more of them.
RETURN OF PREMIUM ON PREMATURE DISSOLUTION (Sec. 51)
It may sometimes happen that a person is admitted as a partner into an already
established business on the newcomer paying a "premium" to the other partners for
their personal use and benefit. The consideration for such premium is not only the
Creation of a partnership with the newcomer but the continuance of that partnership for
the period fixed. Sec. SI, dealing with the question of the return of premium on premature
dissolution of the firm, provides to the effect that where a partner has paid a premium
on entering into partnership for a fixed term, and the firm is dissolved before the expiry
of that term for any reason other than the death of the partner, he (the newcomer) shall
be entitled to a refund of the whole or a reasonable portion of the premium, as on a failure
of consideration. But he will not be entitled to claim the refund where the dissolution is
brought about by his own misconduct or where the partnership is dissolved by agreement
and this agreement does not contain any provision for the refund of the premium or any
part of it.
There are two points of great importance to he noted in this connection. First, the
rule stated above applies only to a partnership for fixed term; and does not deal with the
case of a partnership at will Secondl y, the premium is paid by the incoming partner to
the other partner or partners for their personal use and not as a contribution for the firm.
In fact, preirriurn has been defined as 'a sum of money paid by an incoming partner to
the other partner or partners. not by way of contribution to the firm in which the payer
is about to acquire an interest, but for personal use and benefit of the other partner or
partners" (Stralian). It follows that the refund or repayment is by a partner or partners
who had received the premium and not by the firm; it cannot, therefore, be allowed to
come in competition with the claims of the creditors of the firm:

55. Bury v. Allen 0845) 1 Cal. 589; hxpaiie Broom (1811)1 Rose 69.
190 MERCANTILE LAW

LIMITED PARTNERSHIP

The Indian law does not recognise Limited Partnership, but, as we have referred
to English law also throughout the book, it may not be out of place to describe here the
important provisions of the English Limited Partnership Act, 1907.
The ubjet of the Act is to allow some of the partners to be responsible only for
the capital actually found by them, thus limiting the liability ofthose partners and leaving
the others fully liable for the debts of the firm. It will be noted the limitation of liability
is entirely different in scope, though similar in nature, to that constituted by the
Companies Act. The Act ddes not create limited partnership in the sense that the
Companies Act creates limited companies. The principle of unlimited liability is left
untouched for debts as regards partnership, and where one or more partners are respon-
sible to an unlimited extent for the debts of the firm, the Act enables a new class of
partners to be added whose liability is limited. So, we may say, that it is an Act for
creajing partners with limited liability, but not partnerships.
Sec. 4 of the Act contains the important rules, and it rcads:"A limited partnership
must consist of one or more persons called general partners, who shall be liabk for all
debts and obligations of the firm." These partners, it will be noticed, are liable as any
partners under the general partnership law. The sectio further provides that the limited
partnership must also contain "one or more persons, to be called limited partners, who
shall at the time of entering into such partnership contribute a sum or sums of capital, or
property valued at a stated amount, and who shall not be liable for the debts and
obligations of the firm beyond the amount so contributed." It will be noted that a
limited-partner is very much in the position of a fully paid shareholder. On the same
analogy his share capital must not be returned to him as long as the partnership continues.
Sec. 4 further provides that "a limited partner shall not during the continuance of the
partnership draw Out or receive back any part of his contribution, and if he does so draw
out or receive back any such part he shall be liable for the debts and obligations of the
firm up to the amount so drawn out or received back." A limited partner must not take
part in the management of the partnership business, and has no power to bind the firm;
but he has the right to inspect the books of the firm, and to examine into the state and
prospect of the partnership business, and he may advise with his partners thereon. If a
limited partner takes part in management he is liable for all debts and obligations of firm
incurred while he so takes part in the management as though he were a general partner.
A limited partner may, with the consent of the general partners, assign his share in the
partnership. and upon such an assignment the assignee becomes a limited partner with
all the rights of the assignor.
(a) Every limited partnership must be registered. (b) registration is effected by
sending to the Registrar a signed statement containing the following particulars: (i) The
firm name. (ii) The general nature of the business. (iii)The principal place of the business.
(iv) The full name of each parrtner. (v) The term for which the partnership is entered
into, and the date of its commencement. (vi) A statement that the partnership is limited,
and the description of every limited partner as such. (vii) Te sum contributed by each
limited partner and whether paid in cash or how otherwise.

SUMMARY

Partnership is defined as: "the relation between persons who have agreed to share
the profits of a business carried on by all or any of them acting for all." The definition
contains five elements which make a partnership, namely:

56. Adapted From Tillyard, Commeroal Law.

 LAW OF PARTNERSHIP 191

I. partnership results from a contract

2. between two or more persons who
3. agree to carry oil
4. with the object of making and sharing profit;
5. this business is conducted either by all the persons or by any of them acting for
all.
The minimum number of persons required to constitute a partnership is two and
the maximum number prescribed is lOin the case of a banking firm and 20 in other cases.
The essence of partnership is the attempt to make profit in business for the partners.
Existence of contract, business and the intention to make and share profit must be there.
Persons who enter into partnership with one another are called individually
'partners" and collectively 'a firm". "Firm" is only a convenient phrase to describe
the partners and has no legal recognition or existence apart from those persons.
In a contract of partnership, all the essential elements of a valid contract must be
present. A minor cannot become a partner by contract but he may be admitted to the
benefits of an already existing partnership by the consent of all partners. Minor so
admitted is entitled to his agreed share and can inspect books of account, but he is not
personally liable for the debts and obligations of the firm, though his share in the property
of the firm and the profits of the [inn will be liable. A minor must, within six months
fonn his attaining the age of majority, or on coining to know of his being so admitted
(whichever date is later), elect whether he wants to continue in the firm or sever his
connection with it. He must give a public notice of his intention within this period and
if he fails to do so, he will be deemed to have elected to be a full partner. If he elects to
continue or fails to repudiate, he will be liable for the firm's debts incurred since the date
of his original admission to the partnership.
Partnership is all extension of agency, and every partner is an agent of the other
partners, so that the acts of a partner during the course of business of a firm bind all the
partners. Partners are of different kinds with different liabilities, namely,—
Actual partner who has by agreement become a partner and takes active part in
the conduct of the business. All his acts for the business bind the other partners.
Partners by estoppel or holding out—A person may become apartncr by implied
contract arising out of the conduct of the parties. Where a person conducts himself so as
to lead another to believe him to be a partner, though really he is not one, and on that
belief the other person gives credit, then he is estopped from denying that he is a partner.
Such a partner is called a partner by estoppel. Similarly, where a person is held out as a
partner by another, and does not disclaim the partnership relation, he will be liable as a
partner to any one who gives credit oil faith of this representation. He is a partner by
holding out.
Dormant or sleeping partner is one who is in reality a partner but whose name
does not appear in any way as partner, and who is not known to outsiders as partner. He
is liable to third parties who subsequently discover this relationship. His position is
similar to that of an undisclosed principal.
Nominal partner is a person whose name is used as if he were a member of the
firm, although he is not really a partner and is not entitled to share the profits of the
concern. He is, however, liable for acts of the firm.
Partner in profits only is a person who gets a share of the profits and does not
share losses. He is liable to outsiders. He takes no part in the management of the business.
Sub-partner—Where a partner in a firm agrees to share with a stranger the profits
derived by him from the partnership there arises a sub-partnership between the contract-


192 MERCANTILE LAW

ing member and the stranger, and the latter is called a sub-partner. A sub-partner has no
rights against the firm, nor is he liable for its debts.
New partner is one who is admitted into an already existing partnership. He does
not become liable for debts and obligations of the firm incurred before his joining the
firm, unless he agrees to that. The creditors of the firm can, in no case, look to him for
payment of past debts.
Retired or outgoing partner—An outgoing partner continues to be liable for
obligations incurred before his retirement, and will continue to be liable even for future
obligations, if he does not give public or actual notice of his retirement.
Formation of part nership—A partnership may be formed orally or in writing;
but where it is reduced to writing, the deed of partnership must be stamped according to
the provisions of the Stamp Act.
Test of partnership—To determine whether or not the relation of partnership
exists between two or inure parties, it is essential to look to the intention of the parties
and their contact as it appears from the whole facts of the case. To constitute apartnership,
two or more persons must agree to carry on sonic business in common for sharing profit.
Therefore, two co-owners of property hld not for carryiig on business with the object
of making profit do not constitute a p.vincrship. Their relation will only result in
co-ownership. The co-owners are i. t agents infer ve and one cannot bind the other by
his acts.
A creditor of this firm who stipulates to receive interest on the loan in the form of
share of profit of the firm, and also to have some control over the conduct of the firm's
business does not thereby become a partner.
A servant of the firm getting a share ofihe profits of the business either in lieu of
remuneration or in addition to it is not a partner.
Duration of partnership—A partnership may he for a fixed period, and when the
period so fixed for its duration is over, it comes to an end. Where after expiration of fixed
period the business is carried on, the partnership will become a partnership at will. Where
nothing is said as to the duration of partnership and the partners are free to carry on
business as long as they like, it is a partnership at will. It may also he a single adventure
or a single undertaking, when it lasts only until the undertaking is completed.
Partnership properly—The partners may agree among themselves as to what is
to be treated as the property of the firm, and what is to be separate property of - one or
more partners, although employed for the purposes of the firm. In the absence of any
such contract, the property of the firm is deemed to include—
(a) all property, rights and interests which have been brought into the common stock
for purposes of partnership by the individual partners,
(b) those acquired in the course of the business with money belonging to the firm, and
(c) the goodwill of the business.
Goodwill is the advantage which is acquired by a business beyond the mere value
of the capital, stock, fund and property employed therein in consequence of the gweral
public patronage and encouragement which it receives from constant or habitual cus-
tomers.
RIGHTS OF PAR1'NEIS
1. To take part in the management of the business, unless otherwise stipulated.
2. Every partner has a right to be consulted and heard in all matters affecting the
business. In case of difference of opinion, the decision of the majority of partners
does not prevail unless the matter is unimportant.
 LAW OF PARTNERSHIP 193

3. Every partner has a right of free access to all records, books and accounts of the
business, and also to examine and copy them.
4. Every partner is. in the absence of a contract to the contrary, entitled to equal share
in the profits of the business.
5. A partner is entitled, in the absence of contract to the contrary, to be indemnified
by the firm for all acts done, for all payments made and for all expenses incurred
for and on behalf of the firm.
6. Every partner is, as a rule, a joint owner of the partnership property and each
partner is presumed to have equal share in it.
7. Every partner has a right to prevent the introduction of a new partner into the firm
without his consent, unless there is an express contract permitting such introduc-
tion.
8. Every partner has a right to retire, if the contract so provides, failing which with
the consent of other partners, and if the partnership is at will, at any time on notice
to the partners.
9. Every partner has a righi not to be expelled from the firm.
10. An outgoing partner can carry on competing business without using the firm name
or soliciting firiis'scustoincrs.

Duties or partners:
1. To work for the greatest common advantage.
2. To be just and faithful.
3. To render true accounts.
4. To give full information. -
5. To indemnify for fraud and wilful neglect.
6. To share losses.
7. To attend diligently without remuneration.
8. To hold and use the partnership property for the firm.
9. To account for profits.
10. To account for profits of competing business.
11. To act within authority.
12. Not to assign his rights.
Relations of partners to third parties
All the partners are jointly and severally liable for all acts done by any partner in
the course of business.
Every partner has an implied authority to hind other partners.
An implied authority of a partner consists in doing an act to carry on in the usual
'ay the business of the firm provided the act is done in the finn name or in any manner
expressing or implying an intention to bind the finn.
A partner has, iii the absence of usage or custom of trade, no implied authority
to—
(a) submit a dispute relating to the finn to arbitration,
(b) open a banking account on behalf of the firm in his own name,
(c) compromise or relinquish any claim or portion of claim by the firm,
(d) withdraw a suit or proceeding filed on behalf of the firm,
(e) admit any liability in a suit or proceedings against the mm,
(f) acquire iThmovable property on behalf of the firm,
194 MERCA!rnLE LAW

(g) transfer immovable property belonging to the firm, or

(h) enter into partnership on behalf of the firm.
Every partner is liable for the negligence and fraud of other partners in the course
of the management of the business.
All partners are liable for misappropriation by a partner of money or property of
a third party received for or lying in the custody of the firm.
,All the partners are deemed to have received any information obtained by one of
them in the course of partnership business.
Dissolution or partnership-
1. By the expiry of term.
2. By the completion of adventure.
3. By the death of a partner.
4. By the insolvency of a partner.
5. By the retirement of a partner.
Dissolution of firm—
By mutual agreement.
By insolvency of all the partners but one.
By business becoming illegal.
By notice of dissolution by any partner, where partnership is at will.

Dissolution through Court-

1. When a partner becomes of unsound mind.
2. Where a partner becomes permanently incapable of performing his dutiçs.
3. Where a partner is guilty of misconduct which is likely to affect prejudicially the
business of the firm.
4. Where a partner persists in disregarding the partnership agreement-
5. Where a partner transfers his share or interest in the partnership to a third person.
6. Where the business cannot be carried on save at a loss.
7. Where the court finds it just and equitable to dissolve the firm.
Settlement of accounts after dissolution—
Payment of losses—Where the firm has suffered losses or where the capital has
dwindled, the undistributed profits, if any, should first of all be applied to payment of
losses and to making up of deficiency of capiial. If profits prove insufficient, the capital
must be applied to pay losses. If even then there are losses, the partners must contribute
from their separate property pro rala.
Distribution of assets—The assets joust first be applied in paying the debts of the
firm due to third part ics. Any surplus should then be used to pay off partners' advances,
if any. Any further surplus is to be distributed among partners rateably on accaunt of
capital. The residue, if any, should be divided among all partnerspro rala.
Payment of firm debts and private debts—Partnership creditors are first paid
out of the partnership assets, and similarly private creditors out of the private assets; if
there he a surplus, the other set of eredilors will be entitled to share in it.

CASES FOR RECAPITULATION

I. Certain iron merchants, being in tinancial difficulties, assigned their busirit

 LAW OF PARTNERSHIP 195

to trustees for the benefit of their creditors. The trustees carried on the business with the
object of paying off the creditors out of the business, ikid, the creditors were not partners
in the business. The trade was not carried on by or on account of the creditors, but the
trade still remained the trade of the debtors. The debtors were still the persons solely
interested in the profits, save only that they had mortgaged them to their creditors (Car
v. Hickman (1860)8 H.L.C. 2681.
2. A firm consisting of A and B partners and doing export and import business
entered into a contract with C. the creditor. C. in consideration of moneys advanced or
to be advanced froin time to time by him, was to receive a share of the net profits of the
business of the firm and large powers of control over the conduct of the business. But C
had no power to direct transactions or the course of trade. Held, C's powers were powers
of control only, given to provide to him largest possible security. This was not sufficient
to Constitute him a partner with A and B. [Mollwo, March & Co. v. Court of Wards
(1872)L.R. 44191.
3. A and B purchase a tea shop and. incur additional expenses for purchasing
utensils, etc., each contributing half of the total expense and the shop is leased out on a
daily rent which is divided between them both, A and B are co-owners and not partners
(Govindan Nair v. Nagabhuslmananmna.l, 1948 Mad. 343.1.
4. A, B and C carried on a business of profit. C contributed neither labour nor
money, and did not receive any profits, but lent his name to the firm. Held, C was liable
to every outsider who gave credit on his being there as partner [Waugh v. Carver (1793)
2 H.B.I. 2351.
5. J and W are in partnership as solicitors. P pays £ 1,500 to both of them to be
invested on a mortgage of a specified real estate, and they jointly acknowledge receipt
of the amount for that purpose. Afterwards P hands over another £ 1,500 to W alone on
his representation that it will he invested on a mortgage of some real estate of F, another
client of the firm, such estate not being specially described. J dies and afterwards both
these sums are fraudulently applied to his own use by W. W also dies, having paid interest
to P on both the sums till within a short time before his death. W's estate is declared
bankrupt. Held, is estate is liable to make good to the loss sustained by him on account
of W's fraud only to the extent of £ 1,500 (the first £ 1,500 paid by Plo both J and W)
and not for the second £ 1,500 paid to W alone. The first amount was token for the
purpose of making a specific investment or mortgage which was in the ordinary course
of business of a firm of solicitors. The second sum of £ 1,500 was taken by W fot the
general purpose of investing it, as the problem states the money 'will be invested on a
mortgage of some real estate ofF. .... such estate not being specifically described.' To
receive money for general purpose investing it is not an act within the scope.of the
ordinary business of firm of solicitors Illar'nan v. Johnson (1853) 2 E. & B. 611.
6. A, B, C and D enter into a partnership agreement for ten years and B, C. and D
are placed in charge of the management of the business. They carry on the business well
and make it a successful concern. A, in order to resile from the agreement, creates
obstructions in the way of B, C, and D and sues for dissolution. Held, he cannot succeed,
for the court will not interfere at the suit of partner who is himself guilty of,misconduct
(Manila! v. Keshabjipitaniber, 1952 Pat. 33).
7. M was a partner in a firm. The firm ordered goods in M's lifetime, but delivery
was not made until after M's death. held M's estate was not liable for the price of the
goods in M's lifetime [Bagel v. Miller (1903)2 K.B. 2121.
8. A, B & Co. is a newly constituted firm and commences business without
registration. Y is indebted to the firm in the sum ofRs. 500 and the finn files a suit against
Y for the recovery of the said sum and immediately thereafter gets itself registered. held,
196 MERCANTILE LAW

the suit was not maintainable as the firm was not registered and the subsequent
registration was of no avail [Ram Prasadv. Kamia Prasad(1935)33 A.L.J. 1243].
9. An unregistered firm sold glass phials worth Rs. 2.700 to B, who gave a cheque
for the amount on the H.C. Bank, but the cheque was dishonoured. R. who was a partner
in the firm, demanded money from B who paid only Rs. 1,500. In the meantime, the firm
was dissolved and the sum of Rs. 1,200, the unpaid balance, was assigned to R for
realisation. R sued B for the ic o\ery of the amount- B contends that the suit is not
maintainable as the firm was not registered. The firm was dissolved before the suit was
filed- Section 69(3) makes an exception in favour of a suit for realising the assets of a
dissolved firm (Radhey Shvani V. Rem Pam Mool Cliand 1967 All. 28).
10. B & NI carried on business in partnerships as proprietors and managers of
picture houses. The partnership deed prohibited a partner from borrowing money on
behalf of the firm. NI borrowed money from H, representing that it was required for
partnership purposes. Held, H was not entitled to recover the loan fioin the firm, because
it was not a trading finn and M had no implied authority to borrow on behalf of the firm.
A trading firm is one which depends oil and selling of goods, and the firm in
question did not do so (higgins v. Beauchamp (1914)3 K.B. 1192).
11. A, B and C as partners bought the property of consisting of plots of land and
shares in a company. The company also owned some other plots of land in the same
locality. B and C thereafter apart from A purchased the company's other plots of land
and mode good profits. A sued B and C for the share of the profits so made. 11cM, A was
not entitled to a share in the profit so made, as this transaction was not within the scope
of the partnership and was not shown to be in rivalry with or in any way injurious to the
business of the finn (Trimble v. God'er y (1906) A.C. 494).
12. lain Bros. Hosiery, a partnership firm, was allotted woollen yarn quota.The
Finn was dissolved and S. one of the partners, took over the entire business assets of
the firm along with goodwill and liabilities. He therefore carried on the business in the
same name and continued to obtain the quota. The other (retired) partners claimed
one-third share of the quota on the ground that it was not part of goodwill and the
remaining partner was drawing oil basis of the basic period when they were partners.
Held, quota attaches to the owner of business at the point oltime the quota is granted.It
is the business at the relevant time which obtains the quota. Quota cannot be an asset of
the partnership. Assets are divisible among pariners. Quota cannot be divided. Hence
the other two retired partners (respondents) have no proprietary claim in the appellant's
quota (Sliadilal v. Nagin Cliand & others, (1973) 1 S.C. 185).
 Chapter VI

The Sale of Goods

PART 6-A

Not every one who agrees to buy or sell goods is fortunate enough to find that the
transaction turns out as he had hoped. In many cases those who are disappointed have
to seek the assistance of the law in order to enforce their rights. The law defining those
rights is codified in an enactment known as the Indian Sale of Goods Act, 1930, which
came into force on July 1, 1930. The Indian Sale of Goods Act follows more or less
closely the English enactment.
CONTRACT OF SALE OF GOODS
According to Section 4 of the Act, a contract of sale of goods is a contract whereby
the seller (I) transfers or (ii) agrees to transfer the properly in (ownership of) goods to
the buyer for a price. A contract of sale may be (1) absolute or (2) conditional according
as the parties desire. It may be between one part-owner and another. The term "contract
of sale" is generic term. It includes an actual sale as well as agreement to sell, Where
the contract of sale is executed, i.e., the property in goods has passed froin the seller to
the buymr, it is called a sale; but where the contract is executory, i.e., the transfer of the
properly in goods is to take place at a future lime or subject to some condition thereafter
to be fulfilled, it is in all to Sell.
SALE AND AGREEMENT TO SELL DISTINGUISHED'
The differencehetween sale and agreement to sell is of vital importance as the two
have different legal effects. The difference between the two may be considered in the
form of points of distinction.
1. In a sale, the property in goods sold passes to the buyer so that the seller is no
more the owner of the goods, but it is the buyer who owns them; while in an agreement
to sell, the ownership does not pass to the buyer at the time of the contract so that the
seller continues to be the owner until the agreement to sell becomes an actual sale by the
expiry of certain time or the fu!Iilnicnt of some condition.
2. An agreement to sell is an executory contract, while a sale is all
contract.
3. An agreement to sell is a contract pure and simple, and thus creates mneelyjus
in per.sonan, i.e., gives a right to either buyer or scl!cr against the other for ally default
in fulfilling his part of the agreement. A sale is contract plus conveyance, and createsjus
in rem, i.e.. gives right to buyer to enjoy goods as against the whole world.
4. In a sale, the seller can sue for the price, even though goods are in his possession;
but in agreement to sell, his only remedy is to sue for damages if buyer fails to accept
and pay for the goods.
5. In an agreement to sell, the seller being still the owner, he can dispose of the

1. Se Sales Tax Offlcr v. Budh Prakasts, 1954 S.C. 459.

197
198 MERCANTILE LAW

goods as he likes and the buyer's remedy for seller's breach is a suit for damages. In a
sale, however, seller's breach gives the buyer double remedy; a suit for damages against
the seller, and the proprietary remedy in respect of the goods so that if the goods are sold
to third parties, he can in many cases sue and recover them as owner from the thud
parties.
6. If there is an agreement to sell and the goods are destroyed by an accident, the
loss, as a rule, falls on the seller, evcii though the goods are in the possession of the buyer.
In a sale, the loss falls on the buyer, even though the goods are with the seller.
7. If, in an agreement to sell, the buyer who has paid the price, finds that the seller
has become insolvent, his only remedy would be to claim a rateable dividend. In a sale,
however, on the seller becming insolvent the buyer, as an owner, would be entitled to
recover the goods from the official Receiver zir Assignee in insolvency.
S. If, in an agreement to sell, the buyer is adjudged as insolvent before he pays for
the goods, the seller may refuse to deliver the goods unless paid for, as ownership has
not passed to the buyer. In a sale, however, in these circumstances, the seller, in the
absence of a lien over the goods, must deliver to the official Receiver or Assignee and
will be entitled only to a rateable dividend for the price due.

SALE DISTINGUISHED FROM OTHER TRANSACTIONS

As the transfer of ownership by the buyer for a price paid or payable in money is
an essential ingredient of sale, it differs from several other classes of contracts, which
resemble sale in some respects. Since the Sale of Goods Act applies only to contracts of
sale of goods and to no others, it is expedient to note the points of distinction bçtween
sale and other contracts.
SALE AND BAILMENT
In a contract of bailment, goods are delivered by one person to another for a certain
purpose on the condition that when that purpose is over the goods will be returned in
specie. The ownership does not pass to the bailee. It is only the possession that is given
to him. In sale, the delivery of goods is made by the seller to the buyer for a price, and
the buyer becomes the owner of the goods and can deal with them as he likes.
SALE AND GIFT
Where goods are transferred by one person to another without any price or other
consideration being given in return the transaction is called a gift. In a gift the ownership
of the goods passes to the donee gratis, and thus the price element is absent; it is not a
sale.
SALE, BARTER AND EXCHANGE
It is necessary for sale that goods must be exchanged for a money consideration
called the price. Where goods are exchanged for goods, it does not amount to sale but
only to biter. If money is exchanged for money, it will be a transaction of exchange and
not a sale. But if the consideration consists partly of money and partly of goods, it would
be contract of sale. If goods on either side are delivered in an exchange, any balance of
money payable may be recovered as on a contract of sale. So also, if the party liable to
deliver goods in exchange refuses to do so or is unable to do so, the other party may
recover the value of the goods given in exchange.
MORTGAGE, PLEDGE AND HYPOTHECATION OF GOODS
A mortgage of goods is a transfer of interest in goods from a mortgagor to a
 THE SALE OFGOODS 199

mortgagee to secure a debt. A pledge is a bailment of goods by one person to another to

secure payment of a debt. If the pledgor makes default in paying the debt the pledgee
may sell the goods after due notice to the p]edgor. A hypothecation of goods is an
equitable charge on goods without possession, but not amounting to a mortgage. All the
three are different from sale, for the ownership is not transferred by one party to the other
in any of them. The essence of a contract of sale is the transfer of general property in
goods for a price. The essence of a contract of mortgage is the transfer of special property
in goods from the mortgagor to the mortgagee in order to secure a debt.
SALE AND HIRE-PURCHASE AGREEMENT
A transaction of hire is a kind of bailment which differs form a contract of sale in
that, even though the hirer pays money on consideration of the use of goods, yet the
ownership continues with the person who gives goods on hire. The hire-purchase
contract is adeveloprnent of modern commercial transactions. Here the owner of goods
delivers the goods to a person who agrees to pay certain stipulated periodical payments
as hire charges. Though tJie possession of the goods is with the hirer, the ownership still
remains with the original owner. If the payments are made regularly, the hirer gets the
option or purchasing the goods on makingthe full payment. Before this option is
exercised, the hirer may return the goods hired. The essence of hire-purchase agreement
is that there is no agreement to buy, but only an option is given to the hirer to buy under
'certain conditions so that the hirer has a right to become the owner after paying regularly
the stipulated rent or to return the goods and out an end to hiring. Mere payment of price
by instalments does not make it a hire-purchase; it is a sale.
In K.L. Johar & Co. v. Deputy Cornniercial Tax Officer, 1965 S.C. 1082,
W4flchoO J. (afterwards CJ.) said "The essence of a sale is that the property is
transferred from the seller to the buyer for a price whether paid at once or paid later in
instalments. On the other hand, a hire-purchase agreement has two aspects. There is first
the aspect of bailment of goods subject to the hire-purchase agreement, and there is next
an element of sale which fructifies when the option to purchase is exercised by the
intending purchaser." Where the hirer does not have the option to return the goods, it
will be an agreement to buy even if the price is payable by instalments.
Toe distinction is of great importance. If the hirer becomes insolvent or fails to
pay any instalments, the owner may seize the goods and sue for arrears of instalments
upto the time of seizure (as these 'are treated as hire charges), no benefit being allowed
to the hirer for the fact that the owner has resold the goods at a higher price (Enayatullah
v. Jalan T. Co., 1965 Pat. 214). Since the hirer is not the owner of the goods, but only a
bailee, he cannot pass on any title even to innocent and bona-fide third parties.
SALE AND AGENCY
A transaction of sale must be distinguished from one of agency, forwhere aretailer
obtains goods from a manufacturer or wholesaler, it may become important to know
whether he has got theinon his own account or as an agent. The significance of the
distinction becomes very important in case of loss of the goods or insolvency of either
party. Where A & Co. were appointed sole agents for three years for the sale of all the
bricks of the manufacturers, it was held that the relation was one of vendor and purchaser
rather than of agent and principal.
SALE AND SKILL AND LABOUk
In Lee. v. Griffin (161) I B.& S.272, where the contract was to make false teeth
and lit them to the mouth of a person, Blackburn, J., ruled that if the contract results in
the transfer of the property in the goods from one person to another, it is a contract of
sale. This statement was considered too sweeping and was not followed in Robinson v. -
200 MERCANTII.E LAW

579, where it was held that a contract to paint a portrait was a

Graves (1935)1 K.B.
contract for skill and labour and not a contract for the sale of goods, despite the fact that
it was the object of the contract to transfer the property in the completed portrait.
However, much depends upon the circumstances, and a contract for the construction
two ship's propellers was held by the House of Lords to be a contract of sale of good;
so too was a contract for the making of a fur coat from selected skins.
SALE AND LABOUR AND MATERIALS
A contract for the supply of goods to be installed or fitted into a building or
construction is normally regarded as a contract for labour and materials and not a contract
for thc sale of goods—in particular with respect to the time when the property in the
materials passes to the buyer or client. Here again, much will depend upon the intention
of the parties. For instance, the contract may clearly be intended to he for the sale of the
materials to be installed afterwards, even by the seller. If the contract is for labour and
materials the properly will pass when the materials have been installed. If it is a sale, the
property passes at the tune of the contract. However, too much stress on the distinction
should not be laid as in both cases implied conditions apply (Young & Marten Lid. v.
McManus Childs Lid. (1969) 1 A.C. 454).
WHAT IS A SALE_–ESSENTIAL ELEMENTS OF A SALE3
We are now in a better position to lay down the essential elements of a sale. To
constitute a sale the following elements must be present:-
1. There must be some goods, the general property in which is transferred from
the seller to the buyer.
quid pro quo on a
2. A price in money must he paid or promised to be a paid as a
transfer of property on a sale.
a
3. The contract of sale is consensual, bilateral and cumulative. There must be
seller and a buyer. Two persons are necessary to complete a sale, as the same person
cannot be both seller and buyer. A person cannot buy his own goods, as there is nothing
to buy. But, where in law, one personhas a right to sell another's goods. the owner may
himself buy such goods. This may happen where goods are sold under a distress or
execution or by a pledgee as, in fact, the buyer and seller are different persons. But the
seller in such cases cannot buy, though he is selling the goods of which he is not the
owner because of his fiduciary position. A part-owner may, however, sell his share to
the part-owner so that a partner can always sell to the other partners. Similarly, a partner
can sell goods to his firm. But a club consisting of several members does not sell, when
it supplies liquor or meals to a member who pays for them though the transaction
resembles a sale. The transaction is a release of the joint interest of the members, and
the mner'nber is in substance consuming his own property, and the mode of payment is a
matter of internal arrangement regulated by the rules of the club and agreed to by the
member on his admission.
4. There must he a transfer of ownership from the seller to the buyer. The transfer
must be of the absolute or general properly in the goods sold. In law, a thing may in some
cases be said to have in a certain sense two owners, one of whom has the general property
and the other a special property in it and the transfer of the special property is not a sale
of the thing. For example where goods are delivered on pawn or pledge, only the special
property is transferred to the pawnee, and the general property remains with the pawnor,

2. Cammell Laird & Co. Lid. v. Manganese l3ronz & Brass Co. Lid. (1934) A.C. 402; State of
Madras v. Gannoii Dunkerly & Co. (Madras) Lid.. 1958 S.C. 560.
3. State of Bombay v. United Motors (India) Ltd. 1953 S.CJ. 373.
 THE SALE OF GOODS 201

which he may transfer to a third person subject to the rights of the pawnee. The wme
rule applies to the case of a bailee.
5. All the essential elements of a valid contract must also be present.

PART 6-B

FORMATION OF A CONTRACT OF SALE

FORMALITIES OF THE CONTRACT (Section 5)

A contract of sale is regulated by the general law of contract, namely, there must
be an offer to buy or sell goods and an acceptance of that offer, parties competent to
contract, genuine mutual assent, a thing the property in which is transferred or is to be
transferred for a money consideration called the price paid or promised to be paid. A
contract of sale may be made in any of the following modes: (1) there may be immediate
delivery of the goods; (2) there may be immediate payment of price but the delivery to
be made at some future date; (3) there may be immediate delivery of goods and also
immediate payment of price; (4) it may be agreed that the delivery or payment or both
are to be made in particular instalments; or (5) the delivery or payment or both may be
given at some future date.
In law, except where specially provided by some law for the time being in force,
no formalities are required to constitute a valid contract of sale of goods. A contract of
sale may be express or implied from the conduct of the parties, and-in case of express
contract, it may he oral or in writing or partly in writing and partly by word of mouth.
A written offer to sell goods may be accepted verbally or a verbal offer may be accepted
in writing. So also goods may be ordered bya letter and may be supplied without further
communication.

SUBJECT-MATTER OF CONTRACT OF SALE

GOODS
The subject-matter of the contract of sale is essentially the goods. Section 2(7) in
defining goods lays down that "Goods" means every kind of movable property other
than actionable claims and money' stocks and shares, growing crops, grass,
and things attached to or forming part of the land which are agreed to be severed before
sale or under the contract of sale. According to this definition money and actionable
claims are not goods and cannot be bought and sold. Money here means current money,
i.e., the recognised currency in circulation in the country, but not old and rare coins which
may be treated as goods and bought and sold as such. An actionable claim is a thing
which a person cannot make use of or enjoy, but which can be recovered by him by
means of a suit or an action. Thus a debt, due to a mn from another is an actionable
claim and cannot he sold as good, although it can he assigned. Since stocks and shares.
according to English law, are things in action and not goods, they have been expressly
included by the Indian Act in the definition as goods. Goodwill, trade marks, copyrights.
patents are all considered goods. Similarly, water, gas, electricity, ships are regarded as
goods and can be bought and sold as such.
Goods may be (1) Existing, (2) Future, or (3) Contingent. The Existing Goods may
be (i) Specific, or (ii) Generic, (iii) Ascertained or (iv) Unascertained.
EXISTING GOODS
Existing goods may be either owned or possessed by the seller at the time of the
202 MERCANTILE LAW

contract. Instances of sale of goods possessed but not owned by the sellers are sales by
agents and pledgees. Where the existing goods are the subject-matter of a contract, it is
essential that they must be in actual or possible existence, for a present sale can be made
only of a subject-matter having actual or possible existence. If, therefore, A sells his
horse, ship or merchandise to B. believing that they exist, when in fact the horse is dead
and the ship is actually lost on the high seas and the merchandise is utterly destroyed by
fire, no contract will arise. If, however, the things sold be only partially destroyed at the
time of the sale, the buyer may ejilici aLuidon the contract or he may take the thing at a
proportional reduction of the price according to the terms of the original bargain. The
existing goods may be either specific goods or ascertained goods, or they may be generic
goods or unascertained goods. Specific Goods means goods identified and agreed upon
at the time a contract of sale is made. To be specific, goods must be actually identified
or individualised, and not merely identifiable. Ascertained Goods, though sometimes
used as specific goods, are not always identical with specific goods. The former term is
really of wider import. As contrasted with specific goods, "Ascertained Goods" may
be intended to cover the case of goods which have become ascertained subsequently to
the formation of the contract, although they would not be specific goods as defined by
Section 2(4) of the Act. An examination of goods by the buyer does not make them
"ascertained."
GENERIC OR UNASCERTAINED GOODS
These are goods which are not specifically identified but are defined only by
description. A has ten cows. He promises to sell one of them to B, pointing it out to B
at the time of the sale, The contract in this case is a sale of the specific cow. If, on the
other hand, A merely promises to sell any one of the cows, the contract is for unascer-
tamed goods. The cow will become ascertained when A makes up his mind as to which
one of the ten cows he will sell and B consents to buy that cow.
FUTURE GOODS
Sec. 6(1) makes it possible for a person to sell or offer to sell future goods, i.e.,
goods which he does not own or possess at the time of the contract, but which he will
manufacture or produce or acquire after the making of the contract. Future goods are not
the same as unascertained goods which form a class of existing goods. A contracts on
August I. 1977 to sell B 25 bales of Broach cotton to be delivered and paid for on October
1, 1977. This is a valid contract even though A has no cotton bales with him and can
acquire them only by purchase in the market. Similarly, a person can make a contract of
sale even though the subject-matter of sale is not in existence at all at the time of the
contract, provided that it be the natural product, or expected increase of something, to
which the seller has a present right. For example, a valid contract of sale may be made
of the wine that the vineyard is expected to yield during the coming year. or the wool
that may grow oil sheep, or the fruit that may grow on the trees, or the young that
may be born of the sheep. So also an expectation depending upon chance may be sold,
as where a fisherman agrees to sell the casting of his net, before casting it. But a mere
possibility or contingency not dependent on any present right nor resulting from any
present property or interest, cannot be made the subject-matter of a present sale, though
it may be valid as an executory agreement to sell. It must be remembered, however, that
the present sale of future goods dues not amount to sale proper but an agreement
to sell the goods. Though the seller may purport to effect a present sale of future goods,
the transaction is only an agreement to sell, for a man cannot assign what has no
existence, although he can agree to assign property which is to come into existence in
the future. Again, only those goods which can be the subject-matter of ownership, i.e.,
tamed animals, birds in a cage, fish in a pond, or fish caught by the fisherman, can be
 'IIEE SALE OFGOODS 203

sold; but wild animals in the jungle, birds in the air, fish in the sea or river, being free
and not owned by anyone, cannot be the subject-matter of sale.
CONTINGENT GOODS
Sec. 6(2) is merely a particular instance of sale of future goods and categorically
states that there may be contract for the sale of goods the acquisition of which by the
seller depends upon a contingency which may or may not happen. As a contract.of sale
may be either absolute or conditional, a seller may contract unconditionally to sell goods
to be afterwards acquired, or he may contract to sell goods 'to arrive', or to ag ree to sell
a crop which is to be sown. The parties are left free to make what bargain tIp please.
They may stipulate (1) that the contract shall be conditional on the part of the seiler only,
the price being payable in any event; or (2) that the contract shall be absolute on the part
of the seller, despite the uncertainty of his being able to acquire the goods, and in such
case he will be liable to pay damages if he fails to perform his contract; or (3) that the
contract shall be conditional on both sides, and, if the event does not happen, both parties
shall be freed from their obligations or (4) the buyer may have to pay in any event, for
"a man may buy the chance of obtaining goods."
PERISHING OF GOODS -
Where specific goods are the subject-matter of a contract of sale (both actual sale
and agreement to sell) and they, without the knowledge of the seller, perish at or before
the time of the contract, the contract is void. This is based on the rule that mutual mistake
of a fact essential to the contract renders the contract void. The parties are contracting
about something which unknown to them has no existence and, therefore, the intention
of both 91 them is compLtely frustrated. A sold to B a specific cargo of goods which he
honestly believed was on its way from England to India. It turned out, however, that
before the day of the bargain, the ship conveying the cargo had foundered and the goods
were lost. Neither party was aware of the fact. The agreement was held to be void. Under
Sec.7, a contract for the sale of specific goods will also be void if such goods without
the knowledge of the seller have become so damaged as no longer to answer to their
description in the contract. This is so because the goods have ceased to exist in the
commercial sense, i.e., their merchantable character as such has been lost, although they
are not physically destroyed. Where cement was spoiled by water and converted
practically into stone, or where sugar became slierbat and were, thus unsaleable as
cement or sugar, they were deemed to have been destroyed in the commercial sense and
the-contracts were held void. But if the goods, though damaged, still answer to the
description, the contract is not void, and the buyer must take the risk as to their quality
and condition and pay the price. The section applies also to cases where the seller is
irretrievably deprived of the goods as when they have been stolen, or lawfully requisi-
tioned by the Government or have in some other way been lost and cannot be traced.
DESTRUCTION OF PART OF GOODS SOLD
A difficulty is likely to arise where in a contract for the sale of specific goods, only
part of the goods is destroyed or damaged. The solution will depend upon whether the
contract is entire or divisible. If it is one and indivisible and part only of the goods has
perished or damaged, the contract is void, lithe contract is divisible, it will not be void,
and the part available or in good condition must be accepted by the buyer. In Borrow v.
Phillips (1929)1 K.B. 574, where a contract was made for a parcel containing 700 bags
of groundnuts, and 591 bags could be delivered, the remainder having perished for the
purpose of the contract (the 109 bags having been stolen), the contract was held to be
void, and the buyer could not be compelled to take delivery of the 591 bags.
 MEI.t(ANI1LE LAW

(;OOl)S PERISHIN(; BEFORE SALE BUT AF-TER AGREEMENT TO

SELL (SECTiON 8)
Where the contract does not amount to sale, but is only agreement to sell, and the
goods without any fault of either the seller or the buyerperish or are damaged subsequent
to the agreement, but before the risk passes to the buyer by the agreement to sell ripening
into sale, the agreement becomes void. This is based on the rule that impossibility of
performance, arising after the contract is made, absolves the parties from their obliga-
tions. Sec. 7 lays down the rule as to goods perishing before the making of the contract;
Sec. 8 lays down the rule as to goods perishing after the agreement to sell but before the
sale is effected. Also, under Sec. 7 the contract is void ab inillo, but under Sec. 8 it is
not so, the performance on ither side as excused as from the time of the perishing of the
goods. Four conditions under Sec. 8 must be fulfilled before the agreement can be
avoided, viz.,—(]) the contract must not be an agreement to sell and not an actual sale;
(ii) the loss must be specific; (iii) the loss in not be caused by the wrongful act or
default of either party, and if either party is at fault, the party in default will be liable;
(iv) the goods must J)erish before the iisk passes to the buyer, for if the risk has passed
to the buyer. he must pay for the goods, though undelivered. A had contracted to erect
machinery on B's premises for -.I price to be paid on completion. During the progress of
the work the premises and machinery were consumed by an accidental fire. It was held
that both parties were excused from further performance. and A, having contracted fo
an entire work for a specific sum could not recover the price of the work actually done.
In cases, where the agreement is avoided, it becomes void at the time of the
perishing of the goods, and not before. Consequently, the right of either party previously
vested will not be affected. For example, where the price is payable by the buyer at a
date prior to the destruction of goods, the seller can sue for the price, if unpaid and, if
paid, the buyer cannot recover it.5
On a bargain for the purchase of a horse, the horse was delivered to the buyer upon
trial for 8 days, the agreed price being £ 40. If found suitable for the intending buyer's
purpose, the bargain was then to he absolute. The horse died without fault in eitherparty,
within 8 days; it was held in Elphic V. Barense(188O) 5 C.P.D. 321 that the intending
buyer was not liable for the price. The provisions of this Section, like any other
implication of law, may he negative or varied by express agreement, or by the usage of
a particular trade, as permitted by Sec. 62 of the Act. Thus, by virtue of Sec. 62, a C.1-F.
contract is saved from the operation of Sees 7 and 8, inasmuch as such a contract being
a contract for the sale of goods, cost, insurance and freight; is in fact 'a contract for the
sale of goods, lost or not lost', the performance of which is satisfied by the tenderof
documents, and is not affected by flic loss or damage to the goods sold. It is a sale of
documents and not of good. But if before the delivery of documents, war breaks out and
such delivery becomes impossible of performance, the contr.ict becomes void under
these sections, hut under Sec. .56 of the Indian Contract Act, which contains a general
provision applying to all the circumstances constituting impossibilities and supervening
illegalities avoiding contracts. As regards perishing of part only of Uie goods a9reed to
be sold, the same rules as under Sec. 7 will apply.

THE PRICE

PRICE
In respect of sales, the first rule is that no sale can take place without a price. If

4. Appleby v. Myers (1867) L.R.C- 651.

5. Blakely v. Muller (1930)2 K.B. 769
 THE SALE OF GOODS 205

there be no valuable consideration to support a voluntary surrender of goods by the real

owner to another person, the transaction is a gift, and is not governed by the rules relating
to sales (Story on Sales). Sec. 4(1) lays down that to constitute a contract of s.1e, the
transferor agreement to transfer properly in goods must be for a price. Therefore price,
which is defined by Sec. 2(10) as the money consideration for asale of goods, constitutes
the essence of a contract of sale. It may he money actually paid or promised to be paid
according as the agreement is for a cash or a credit sale; but if other consideration than
money be given, it is not a sale. Moreover, the money must be given as the price, i.e., as
a quid pro quo on a transfer of property on a sale.
MODES OF FIXING PRICE
The price must either be certain and definite, or must be determinable by some
method of calculation or some criterion prescribed by the contract. Sec. 9 suggests five
methods of fixing the price, which are given below:
1. The price may be expressly stated in the contract. This is primarily what is
intended to be done. The parties are free to fix any price they like, and the Court will not
embark on an investigation as to the adequacy of the price. Thus a man may sell at any
price he likes, and to undersell his trade rivals he may offer goods at a loss, or a
manufacturer may sell goods to a wholesaler on the condition that they shall not be sold
at less than a certain price. But that condition does not bind a subsequent buyer even
with notice for there is no privity between him and the original seller. In the case,
however, of patented goods the sub-buyer may be bound by such acoridition, if he has
notice of it.
2. The contract may provide for the manner in which the price is to be fixed. 6 The
agreement may be to pay as much for the goods as others pay. In such a case, notice
must be given to the buyer as to how much others pay. No sale will be made if the price
is agreed to be whatever sum the seller be offered by any third party, nor if it is left to
be fixed only by one of the contracting parties.
3. Where the price is not expressed in the contract nor is any provision made for
its determination, it may be determined by the course of dealing between the parties.
Thus, in Browne v. Byrine (1854) 118 E.R. 1304, a usage to deduct discount in
determining the price was implied from the course of dealings.
4. Where nothing is said by the parties regarding price, the law implies, in case the
contract is executed and the goods sold are accepted that the buyer agrees to phy a
reasonable price; and where there is a market price for the goods, that may be a reasomible
price.
5. l'he price may also be left to be fixed by the valuation of a third party, provided
he accepts the duty and performs it. But if the third party fails to make the valuation the
agreement becomes void. If, in pursuance of the contract, goods have been delivered by
the seller and accepted by the buyer, then the buyer is bound to pay a reasonable price.
If, however, one of the parties prevents the third party from making the valuation, he
would be liable to pay damages to the other contracting party.
MODE OF PAYMENT
The seller is not bound to accept any kind of payment except in the currency unless
there is an agreement express or implied to the contrary or unless the seller is estopped
from disputing the mode of payment. He is not bound to accept payment by cheque.
Also, the price should be in legal tender money.

6. 'See Venkata Maliayya v. Ramaswami & Co. 1964 S.C. 818

206 MERCANTILE LAW

EARNEST OR DEPOSIT
Sometimes it happens that the buyer pays part of the price in advance as security
for the due performance of his part ofthe contract, and not as part-payment of purcha.sc
money? The money so paid as security is called Earnest or Deposit. If the purchase is
carried out., the deposit goes against the purchase-money, and only the balance of the
price is required to be paid. But if the sale goes off through buyer's fault, the deposit
unless otherwise agreed is forfeited to the seller, and where it goes off by the seller's
default he must return the earnest money. lion the breach of the agreement by the buyer
the seller resells the goods, and sues to recover the loss arising on such resale, the deposit,
although forfeited, is to be taken into account as diminishingthe deficiency.
ADDITION TO OR DEDUCTION FROM PRICE OF TAX
Sec.64-A, which was added to the Act in 1940 and was amended in 1963, makes
provision for the addition to or deduction from a contract price of any increase or decrease
or remission in customs, or excise duty, or any tax on the sale or purchase of goods
imposed or increased or decreased or remitted after the contract for the sale of goods
was made.

PART 6-C
CONDITIONS AND WARRANTIES

CAVEAT EMPTOR
The parties are at liberty to enter into contract with any terms they please. In the
case of a sale of goods, the ordinary common law maxim is Caveat Enp:or—let the
buyer beware. That is to say, the buyer gets the goods as they come and takes the risk
of their suitability for the purpose. It is no part of the seller's duty to point out the defects
in the goods he is selling. By this is not meant that the buyer must 'take chance'; it means
that he must 'take care.' If the buyer depends upon his own skill and integrity and the
goods turn out to be defective, it is his own fault and he cannot hold the seller responsible.
But the buyer may want to be sure of the quality of the goods and may make known to
the seller the purpose for which he intends to buy the goods so as to show that he relies
on the seller's skill orjudgement, and buys them depending on the representations made
by the seller. Such representations may rank either as conditions or warranties, and in
that case the principle of Caveat Emplor will not apply, and the contract will be subject
to the condition or wairanty.
As the contract of sale is consensual. it may be either absolute or conditional, as
the parties please. As a rule, before a contract of sale is concluded, certain statements
are made by the parties to each other; it always depends upon the construction of the
contract whether any statement made with reference to the goods is a stipulation forming
part of the contract or a mere expression of opinion which is no part of the contract. A
representation or statement will amount to a stipulation or a promise. if the seller assumes
to assert a fact of which the buyer is ignorant; and will be a mere opinion not amounting
to a stipulation where the seller merely states an opinion orjudgement upon a matter on
which he has no special knowledge and on which the buyer may be expected to have an
opinion. A mere commendation by the seller of goods or his wares does not amount to
a stipulation and does not give right of action.

7. Amamath Nikkuram v. Mohan Singh, 1954 M.B, 134; Thota Sombayya v. Ramananda. 1960
A.P. 5; but see Mauls Bux v. Union of India. 1970 S.C. 1955.
 THE SALE OF GOODS 201

A stipulation in a contract of sale made with reference to goods which are the
subject-matter thereof may be either a condition or a warranty. Sec. 12 draws a clear
distinction between a condition and a warranty. If stipulation forms the very basis of the
contract, or in the words of the Section is essential to the main purpose of the contract
it is a Condition. If, however, the stipulation though not essential to the main purpose of
the contract is collateral to i/re main purpose of the contract, i.e., is a subsidiary promise,
it is known as a Warranty. The effect of a breach of a condition is to give the aggrieved
party a right to treat the contract as repudiated; while in the case of a breach of warranty
he cannot repudiate the contract but can only claim damages. Thus if the condition is
not fulfilled the buyer has a right to repudiate the contract to refuse the goods, and, if he
has already paid for them, to recover the price. 8 In the case of a breach of warranty,
however, the buyer must accept the goods and claim damages for the breach of warranty.
A man buys a particular horse, which is warranted quiet to ride and drive. If the horse
turns out to be vicious, the buyer's only remedy is to claim damages. But if instead of
buying a particular horse, a man asks a dealer to supply him with a quiet horse and the
horse turns out to be vicious, the stipulation is a condition and the buyer can reject the
horse, or keep the horse and claim damages. He can also get damages for injury, if any,
even when he rejects the horse. Of course, the right of rejection must be exercised within
a reasonable time.9

EXPRESS AND IMPLIED CONDITIONS AND WARRANTIES

Conditions and warranties may be express or implied. An express condition or
warranty is one stated definitely in so many words as the basis of the contract. Implied
conditions or warranties are those which attach to the contract by operation of law or
custom.The law incorporates them into the contract unless the parties agree to the
contrary. Implied conditions and warranties are enforced on the ground that the law
infers from all the circumstances of the case that the parties intended to add such a
stipulation to their contract, but did not put into express words. The existence of an
implied condition or warranty may, however, be rebutted by proof of facts which show
a contrary intention. The contract of sale being consensual, bilateral and cumulative, and
the parties may alter at will the obligation which the law implies from the general nature
of the contract. Sec. 62 of the Act recognises the maxims: Expressum facu ce.rsare
taciturn : What is expressed makes what is implied to cease; and Modus et convenhio
vincent Iegem: custom and agreement over-rule law.
A sold pigs to B and it was mentioned that B was to take the pigs sold "with all
faults." The pigs were diseased and B suffered a heavy loss. Held, as it was expressly
agreed that the seller was giving, no warranty and as he had done nothing to conceal the
defect he was relieved from all liability in respect of any defect in the goods [Ward v.
Hobbs (1878)4 App. Cas. 13].
WAIVER OF CONDITION
Sec. 13, as amended, mentions three cases in which waiver of a condition, or its
sinking or descending to the level of a warranty, operates. The first two cases are given.
in sub-section (1) and are voluntary, depending on the volition of the buyer namely—(l)
where he may waive the condition, or (2) he may treat the breach of condition as a breach
of warranty. The third case which is given in sub-section (2) does not depend on the will
of the buyer, but creates an estoppel against him by his conduct and where waiver is
comprehensively presumed by law. It arises when the contract is indivisible and the
buyer has accepted the goods or part thereof. In these cases the breach of a condition can

8. Antony v. Arupponni Mani. 1960 Ker. 176; Wallis v. Pratt, (1910)2 K.B. 1003.
9. Hartley v. Hymans (1920)3 K.B. 475.
20* MERCANTILE LAW

be treated only as a breach of a warranty; and the buyer can claim compensation for the
loss suffered by him by breach of the condition in respect of the goods accepted by him,
as he $tould have a right to in the case of a breach of warranty. The parties are, however,
at liberty to contract themselves out of this rule by including a stipulation to that effect
in which case the terms of the contract must be strictly adhered to, and will not be affected
by these provisions.
THF. ,TrME FACTOR IN BUYING AND SELLING
In general law of contract, where no time is fixed for performance, the contract is
required to be performed within a reasonable time. As regards contracts for the sate of
goods, stipulations as to time, except as regards lime ofpayment, are usually held to be
of the essence of the contract. Therefore, if time is specified for delivery of goods or for
doing any other act, delivery must be nade or act done at the specified time; and if not
done, the other party can repudiate the contract. Thus, if A agrees to sell and deliver
goods to B on a certain day, he must deliver them on that day. If he fails to do so, B is
entitled to put an end to the contract. With regard to the time fixed for payment, Sec. 11
lays down that it is not deemed to be of the essence of the contract, unless it appears
from the contract that parties intended that it should be so. Thus, the failure by the buyer
to pay on the appointed day does not, as a rule, entitle the seller to treat the contract as
repudiated, though he may be entitled to withhold delivery until the price is paid and
resell the goods if the buyer does not pay or tender the price within a reasonable timç.
Consequently, if beforb such resale the buyer tenders the price, even though it be on a
date after the date named in the contract, the seller cannot, in the absence of stipulation
to the contrary. treat the contract as at an.end and refuse to allow the buyer to have the
goods.

IMPLIED CONDITIONS AND WARRANTIES

We have seen before that even though in a contract of sale definite representations
might not have been made, the law implies certain representations as having been made,
and those are dealt with in Sees. 14 to 17 of the Act. Such implied representations may
amount to conditions or warranties with the effects already noted.
IMPLIED WARRANTIES
As said before, a condition may sink to the level of a warranty in cases in which
the buyer is content with his right of damages or is not in a position to reject the goods.
The Act also provides for two more implied warranties, namely, (1) implied warranty
of quiet possession, and (2) implied warranty against encumbrances.
1. Implied warranty of quiet possession in a contract of sale, unless the
circumstances of the contract are such as to show a different intention, there is an implied
warranty that the buyer shall have and enjoy quiet possession of the goods. This means
that where the buyer has obtained possession of the goods, he has a right to enjoy them,
and if the right of possession and enjoyment is in any way disturbed, he is entitled to sue
the seller fordaznages. It is a warranty that the seller shall not, nor shall anybody cldimthg
under a superior title, or under his authority, interfere with the quiet enjoyment of the
buyer.
2. Implied warranty against encumbrances—The buyer is also entitled to a
further warranty that the goods are not subject to any right in favour of a third party, or
the buyer's possession shd[Inot be disturbed by reason of the existence of encumbrances.
In other words, if the buyer is required to, and does in fact. discharge the amount of the
encumbrance, there is a breach of warranty, and he is entitled to damages. This clause
will not apply if such encumbrances are declared to the buyer when the contract is made
 THE SALE OF GOODS

or he has notice of them. It should be noted that the breach This warranty occurs only
when the buyer discharges the amount of the encumbrance. 1
IMPLIED CONDITIONS: CONDITION AS TO TITLE TO GOODS
The first implied condition in EVERY contract for the sale of goods is that the
seller, in an actual sale, has the right to sell the goods and, in an agreement to sell he will
have it when property is to pass. As a result of this, if the title turns out to be defective,
the buyer is entitled to reject the goods, In Rowland v. Divall (1923)2 K.B. 500, it was
held that a buyer of a motor car who was deprived of the same owing to the seller's want
of title was entitled to recover the full price from the seller even though he had used the
car for some months, as the consideration had totally failed. But this implied condition
as to title may be negatived by an express term, as in Court sales, where only such rights
as the judgement-debtor has are sold. Court officer selling in execution debtor's goods
gives no implied undertaking as to title.
SALE BY DESCRIPTION
(i) Goods must correspond with their description In a contract of sale by
description, there is an implied condition that the goods shall correspond with their
description. A sac is essentially by description where the purchaser has not seen the
goods but is relying oil description alone, e.g., a sale of furniture or unascertained
goods. But in addition a sale in many cases may still be by description even where the
buyer has seen the goods, e.g., ordinary sale in a shop. In Grant v. Australian Knitting
Mills Lid. (1936) A.C. 85, it was remarked " ....thcre is a sale by description even
though the buyer is buying something displayed before him on the counter: a thing is
sold by description, though it is specific, so long as it is sold not merely as the sfiecific
thing, but as a thing corresponding to a description, e.g.. woollen undergarments, a
hot-water bottle, a second hand reaping machine, to select a few obvious illustrations".
The term "sale by description" is wide enough to cover a sale even where no words are
spqken a all, as, for example, in a self-service store, at least if there is some label or
other description attached to or otherwise indicating the nature of the goods being sold.
In fact it is probably true to say that the only case of a sale not being by description occurs
where the bu y er makes it clear that he is buying a particular thing because of its unique
qualities, and that no other will do.
In Beak' v. Taylor (1967)1 W.L.R. 1193, T advertised his car for sale as a Herald,
convertible, white, 1961" and the car was bought by B after examination. In fact the car
was made of two parts which had been welded together, only one of which was from a
1961 model. The court held that the words "1961 Herald" were part of the contractual
description and even itough the car was fully examined by the buyer, the sale was by
description because the buyer h.d relied in part on a newspaper advertisement isued by
the seller. As the car did not correspond with the description, there was a breach of
implied condition and B could reject the car. In Varley v. Whipp (1900) 1 Q.B. 513; the
defendant agreed to buy from the plaintiff a second-hand reaping machine, which was
stated to have been new the previous year and hardly used at all. This was a grosS
mnisdescription as the machine was old and repaired, and defendant declined to accept it
or pay for it. The det.ndant succeeded because there was a breach of the implied
condition, as the machine did not correspond with the description. Now, the defendant
could not have relied on the breach of the implied condition of merchantability under
Sec. 16(2) as the plaintiff was not a dealer in reaping machines.
It follows that this condition applies both to private sales and sales by dealers of
goods sold, whereas the conditions relating to quality or fitness for a particular purpose

20. Colhnge v. Heywood (1939)9 A.& E. 633.

210 MERCANTILE LAW

and merchantable quality apply only to sales made by dealers in goods sold by them and
not tq private sales. Moreover, if there is a breach of condition as to description, the
buyer is entitled to reject the goods even though he suffers no damage therefrom. Also,
the duty of the seller is very strict and the goods supplied must strictly conform to the
description.
(ii) Condition as to quality or fitness—This condition and those in respect of
merchantable quality and wholesomeness discussed below are Exceptions to the rule of
Caveat Emptor. Ordinarily, there is no implied warranty oz coiiditiwi as to the quality
or fitness for any particular purpose of goods supplied under a contract of sale. But where
the buyer, expressly or by implication, makes known to the seller the particular purpose
for which the goods are required, so as to show that the buyer relies on the seller's skill
and judgement, and the goods are of the.description which is in the course of the seller's
business to supply (whether he is the manufacturer or producer or not), there is an implied
condition that the goods shall be reasonably fit for such purpose. The rule of Caveat
Empior will not apply.
There is no need for the buyer to specify the part icularpurpose for which the goods
are required when they have in the ordinary way only one purpose. Reliance on the
seller's skill and judgement will be readily implied even to the extent of saying that the
buyer has gone to the seller because he relies on the seller's having selected his stock
with skill and judgement In Priest v. Least (1903)2 K.B. 148 C.A., a hot water bottle
was bought by the plaintiff, a draper, from a chemist who sold such articles. While being
used by his wife, the bottle burst and injured her. held, the seller was responsible for
damages. The implied condition as to fitpess for the purpose also applies to containers
in which the goods are packed [Geddhing v. Marsh, (1920) 1 K.B. 6681. The defendant
was manufacturer of mineral waters and he supplied the same to the plaintiff who kept
a small general store. The bottles were returnable when empty. One of the bQttics was
defective, and whilst the plaintiff was putting it back carefully into a crate, it,broke and
injured her. Field, even though the bottles were returnable, they were supplied under a
contract of sale. There was an implied condition of fitness for the purpose for which they
were supplied, and the defendant was liable in damages. But where there are special
circumstances of which the seller is unaware, the implied condition as to fitness does
not apply. In Griffith v. Peter Conway Ltd. (1939) 1 All. E.R. 685, a woman with
abnormally sensitive skin, bought a Harris tweed coat, and got rashes through wearing.
She sued the supplier for damages, because the coat was not fit for the purpose for which
it was bought. Field, she failed because the defendant did not know of plaintiffs
abnormality and should not be expected to assume that it existed. Similarly, in Ingham
v. Enies (1955) 2 All. E.R. 740, it was held that where a hair-dye is sold to a customer
who is allergic to a particular dye, there is a duty on the part of the customer to disclose
known peculiarities.
Where, however, the goods supplied are purchased under a patent or other trade
name, there is no implied condition as to their fitness for any particular purpose. So where
the buyer wrote and said, "send me your patent smoke-consuming furnace for fitting up
my brewery" and it was found that furnace supplied was not fit for the purpose,i5 was
held that the purchase was of a defined and well-known type of furnace and so the sellers
were not liable. If, when buying the article under its patent or other trade name, the buyer
makes it clear to the seller that he is relying on the seller's skill and judgement to
recommend an article, it must be reasonably fit for the purpose. In Baldry Y. Marshall
(1925)1 K.B. 260, the plaintiff informed the defendants that he wanted a comfortable
car suitable for touring. The defendants sold him a Bugati 8-Cylinder model, which did
not suit the plaintiff's purpose at all. Field, the defendants were liable. Again, if the
seller supplies an article of the description in which he usually deals under its patent or
other trade name there is an implied condition that it is fit far the purpose. In the sale of
 TIIESALEOF000DS 211

a Refrigerator the name of the article itself implies that the seller warrants that the
machine is fit for the particular purpose."t
It may be noted that even if the proviso does not apply, the seller will frequently
be caught by the implied condition of merchantability.
(iii) Implied Condition as to Merchantability—Where goods are bought by
description from a seller who deals in goods of that description (whether he is a
manufacturer, producer or not), there is an implied condition that the goods shall be of
merchantable quality. But, if the buyer has examined the goods, there is no implied
condition as regards defects which such examination ought to have revealed. If. however,
examination by the buyer does not reveal the defect, and he approves and accepts the
goods, but when put to work, the goods are found to be defective, there is a breach of
condition of merchantable quality. P bought black yarn from D and found it to be
damaged by white ants. Held, condition as to merchantability was broken. Similarly.
where hemp was damaged by sea water, cement turned into stone by sea water, or beer
was contaminated with arsenic and dates contaminated with sewage, the condition of
merchantability was held to have been broken. But where in a sale of vegetable glue
packed in casks, the buyer who came to examine them simply looked at the outside of
the casks, and therefore the defect which could have been discovered by examination,
was overlooked, it was held that there is no implied condition and the buyer was not
entitled to any relief (Thornen and Fehr v. Beers & Son (1919)1 K.B.486).
The next problem is the meaning of the term merchantable. The House of Lords
in Henry Kendall & Sons v. William Lillico & Sons Ltd.(1969) 2 A.C31, stated: "The
goods should be in such a state that a buyer, fully acquainted with the facts, and therefore,
knowing what hidden defects exist and being limited to their apparent condition would
buy them without abatement of the price obtainable for such goods if in reasonable sound
order and condition and without special terms". Lord Reid added: "What is now meant
by 'merchantable quality' is that the goods in the form they were tendered would not
have been used by a reasonable man for any purpose for which goods which complied
with the description under which these goods were sold would normally be used, and
hence were not saleable under that description". Merchantability is a somewhat flexible
concept and the buyer is the best judge of what he wants. If the buyer gets exactly what
he has ordered it hardly lies in his mouth to say that the goods are unmerchantable. If a
new car was sold with a defective clutch the car would be properly said to be unmer-
chantable. But if a second-hand ear is sold with a defective clutch and the defect.pbves
more serious than anticipated the car will not said to be unmerchantable.
(iv) Condition as to wholesomeness—The condition of merchantability includes
another condition, namely, that of wholesomeness in the case of sale of provisions or
foodstuff. The provisions or food supplied must not only answer the description, but
must also be merchantable AND wholesome or sound. In Frost v.A vlesbury Dairy Co.
Ltd. (1905) 1 K.B. 608, F bought milk from A. Dairy, and the milk contained typhoid
germs. F's wife became infected and died. A was liable for damages, because the milk
was not lit for human consumption. C bought a bun at M's bakery, and broke one of
the teeth by biting on a stone present in the bun, M was held liable.
It may be reiterated that she rules as Iofi:nessfor purpose and 'nerchaniable quality
do not apply to private sales and there is still a fairly wide application of the maxim
caveat emptor. They apply only to sales made by dealers who normally deal in goods of
the type in question. Hence if the seller does not normally deal in goods of the type in
question, there is no condition as to fitness nor as to merchantability unless there is a
sale by sample which is dealt with below. The only condition in a private sale is that the
goods must correspond with the description.
11. E.V. Evans v.Stella Benjannne 1951 Cal. 740.
212 MERCANTILE LAW

SALE BY SAMPLE
Sec. 17(1) states that a contract of sale is contract for sale by sample where there
is a term in the contract, express or implied, to that effect. It is clear from the definition
that the mere fact that the seller provides a sample for the buyer's inspection is not
enough; to be such a sale there must be either an express provision in the contract to that
effect, or there must be evidence that the parties intended the sale to be by sample. But
there may be a custom or usage in respect of certain commodities that sale would be by
sample, even though the written contract is silent on the point. A sale of tobacco is always
considered to be a sale by sample by custom of trade.
IMPLIED CONDITIONS IN SALE BY SAMPLE
There are three implied conditions in a sale by sample-
(i) Bulk should correspond with sample—In a sale by sample, the bulk shall
correspond with the sample in quality.
(ii) Buyer to have reasonable opportunity to compare—In a sale by sample,
the buyer shall have a reasonable opportunity of comparing the bulk with the sample.
The buyer will not be deemed to have accepted the goods until he had an opportunity to
compare the bulk with the sample, and will be able, therefore, to reject the goods, even
though they have been delivered, if the bulk does not correspond with the sample.
(iii) Condition of merchantability as regards latent defects—The goods must
be free from any defects, rendering them unmerchantable, which would be apparent on
reasonable examination of the sample. Thus, in regard to the implied condition of
merchantability, a right of repudiation exists in the case of defects not discernible by
ordinary inspection of a prudent buyer. "Worsted Coating" quality equal to sample was
sold to tailors. The cloth was found to have a defect in the texture rendering the same
unfit for stitching into coats. The seller was held liable, even though the same defect
existed in the sample, which was examined and the defect could not be discovered.
In Godley v. Perry (1960) 1 All E.R. 36, (3 (aged 6) bought a catapult from P. a
dealer in toys, and was injured by its defective condition. held, U could recover damages
from P for breach of the conditions as to fitness for purpose and merchantable quality.
Also, P could recover damages from his supplier under sale by sample, since he had
bought by sample and the defect was not apparent on reasonable examination of the
sample.
SALE BY SAMPLE AS WELL AS BY DESCRIPTION

In a sale by sample as well as by description, the goods supplied must correspond

both with the sample as well as with the description, and be merchantable. Correspon-
dence with sample alone is not enough. In Nichol v. Godis (1845) E.R. 426, there was
a sale of "foreign refined rape-oil" warranted only equal to sample. The oil tendered
was the same as the sample, but it was not "foreign refined rape-oil'', being a mixture
of it and other oil. It was held that the seller was liable, and the buyer could refuse to
accept
Liability of Manufacturer in Negligence—Where the goods are purchased from
a retailer, no action can be brought under the Sale of Goods Act by the purchaser against
the manufacturer because there is no contract between them into which the warranties
and conditions set out in the Act can be implied. However, the buyer may have an action
in negligence (under the law of torts) against the manufacturer in respect of physical
injuries caused by defects in the goods [Donoghue v. Stevenson (1932) A.C. 562]. The
appellant's friend bought a bottle of ginger beer from a retailer and gave it to her. The
respondents were the manufacturers of the ginger beer. The appellant consumed some
 TIlE SALE Ol(OODs 213

of the ginger beer and her friend was replenishing the glass when the decomposed
remains of a snail came- out of the bottle. The bottle was made of dark opaque glass so
thu the snail could not he seen until most of the contents had been consumed. The
appellant became ill and claimed damages from the manufacturers. The House of Lords
held that there was negligence oil part of the manufacturers and they were liable in
damages.
It is interesting to note that the appellant had no cause of action against the retailer
in contract because her friend bought the bottle, so that there was no privity of contract
between the retailer and the appellant. Therefore, terms relating to fitness for purpose
and merchantable quality, implied into such contracts, did not apply here.
The rule enunciated in the above case has been widened and applies to defective
goods generally which cause injur/ to purchasers. Iii Grant v. Australian Knitting Mills
Ltd. (1936) A.C. 85, Dr. Grant bought a pair of long woollen underpants from a retailer,
the respondents being the manufacturers. The underpants contained an excess of sulphite
which was a chemical usej in their manufacture. The chemical should have been
eliminated before the product was finished, but a quantity was left in the underpants
purchased by Dr. Grant. After wearing the pants for a couple of days he developed a rash
which turned out to be dermatitis compelling him to spend many months in hospital. He
ued the retailers and manufacturers for damages. held, the retailers were liable for
breach of implied conditions of fitness for a purpose and merchantable quality. The
manufacturers were liable in negligence. This was a latent defect which could not have
been discovered by reasonable examination, It should also be noted that the plaintiff has
a perfectly normal skin.
Exceptions to Caveat Ernptor
Although the exceptions to maxim Caveat Eniplor have been discussed in connec-
tion with implied conditions, they are stated here at one place for the convenience of the
reader. Those exceptions are:-
1. Where the buyer makes known to the seller the purpose for which he requires the
goods and relics on the representation or Skill and judgement of the seller, there
is an implied condition that the goods will be suitable for the said purpose.
2. In a sale by description by a dealer in the goods there is an implied condition that
the goods are of merchantable quality.
3. Proof of reasonable usage or custom of trade may also establish an implied
condition as to quality or fitness of the goods for a particular purpose.
4. Where the consent of the buyer, in a contract of sale, is obtained by the seller by
fraud or where the seller knowingly conceals a defect which could not be dis-
covered on a reasonable examination, the doctrine of Caveat Emptor does not
apply.

PART 6-D
PASSING OF PROPERTY OR TRANSFER OF OWNERSHIP

The main purpose of sale is the transfer of ownership from the seller to the buyer.
It is important to know the precise moment of time at which the property in goods passes
from the seller to the buyer, because:-
1. the general rule is that risk follows the property or ownership whether delivery
has been made or not. If the goods are damaged or lost by accident or otherwise, then,
subject to certain exceptions, the loss will fall on the owner of the goods at the time they
are lost or damaged;
214 MERCANTILE LAW

2. when there is a danger of the goods being damaged by the action of third parties,
it is the owner who can take action; and
or buyer, it is necessary to know whether
3. in case of the insolvency of either seller,
the goods c an be taken over by the Official Assignee or the Official Receiver. The answer
will depend upon whether the properly in the goods was with the party who has become
insolvent. " The property" in the goods means ownership of the goods, as distinguished
from their possession.
PASSING OF PROPERTY IN SPECIFIC OR ASCERTAINED GOODS
In a sale of specific of ascertained goods the property passes to the buyer at the
time when the parties intend it to pass. The intention must be gathered from the terms
of the contract, the conduct of the parties, and the circumstances of the case (Sec. 19).
Specific goods, as already explained, are goods identified and agreed upon at the time
the contract is made. Unless a contrary intention appears the following rules are
applicable for ascertaining the intention of the parties:-
- Where there is an unconditional contract for the sale of specific goods in a
deliverable state the property passes to the buyer when the contract is made. Deliverable
slate means such a state that the buyer would be hound to take delivery of them. The fact
that the tiffic of delivery or the Lime of payment is postponed does not prevent the property
from passing at once. For example. if A goes into a shop and buys a radio set, asking the
shopkeeper to send it to his house and put it down to his account, and the shopkeeper
agrees to do so, the radio set immediately becomes the property of A.
2. When there is a contract for the sale of specific goods not in a deliverable state,
i.e., the seller has to do something to the goods to put them in a deliverable state, the
property does not pass until that thing is done and the buyer has notice of it. The plaintiffs
sold carpeting to the defendants which they were required to lay. The carpet was
delivered to the defendant's premises but was stolen before it could be laid. It was held
that the carpet was not in a deliverable state, as it had not been laid which was part of
the con:ract and hence the property had not passed to the buyer. (Phillip Head & Sons
Lid. v. Showfrorus Lid. 970) I Lloyd's Rep.140).
3. Where there is a sale of specific goods in a deliverable state, but the seller is
bound to weigh, measure, test or do something with reference to the goods for the purpose
of ascertaining the price, the property does not pass until that thing is done and the buyer
12
has notice of it.
4. In a self-service supermarket where goods are picked up by the customers from
the shelves and their prices are paid at the harrier, no contract of sale is made until the
price is actually paid and so property in the goods passes only after the price is paid at
the barrier (Lacis v. Ca.v/wiarls (1969) 2 W.L.R. 329).
5. When goods are delivered to the buyer on approval or "on sale or return," the
property therein lasses to the buyer—
(a) when he signifies his approval or acceptance to the seller, or does any other act
adopting the transaction;
(b) if he retains the goods, without giving notice of rejection, beyond the time fixed
for the return of goods or, if no time is fixed, beyond a reasonable time.
In Kirkham v. Azienborougli (1997) 1 Q.13.201, K delivered jewellery to Won sale
or return. W pledged it with A. held, the pledge was an act by W adopting the transaction,
and, therefore, the property in the jewellery passed to him, so that K could not rcovcr
it from A.

12. Union of India v. Dwarkadas, 1959 Pat. 59.

 THE SALE OFGOODS 215

"Sale or return' must bedistinguished from 'sale for cash only or return', for in the
latter ease, the property does not pass to the buyer until paid for.
In Weiner v. Gill (1906) 2 K.B. 574. A delievered goods to B on the terms that
they were to remain his property until settled for or charged (a sale for cash or return
basis) the property did not pass to B until either of those events had happened. Where B
pawned the goods with D, A could recover from D, the pawnee.
OWNERSHIP IN UNASCERTAINED GOODS
Scc.18 provides that where goods contracted to be sold are not ascertained or
where they are future goods, ownership will not pass to the buyer, unless and until the
goods are ascertained. "A contract to sell unascertained goods," says Lord Loreburn,
"is not a complete sale but a promise to sell." As to when the goods get ascertained Sec.
23 provides:
"(1) Where there is a contract for the sale of uiiascertained or future goods by
description and goods of that description and in a deliverable state are unconditionally
appropriated to the contract either by the seller with the assent of the buyer or by the
buyer with-the assent of the seller, the property in the goods thereupon passes to the
buyer. Such assent may be expressed or implied, and may be given either before or after
the appropriation is made.
(2) Where, in pursuance of the contract, the seller delivers the goods to the buyer
or to a carrier or other bailee (whether named by the buyer or not) for the purjose of
transmission to the buyer, and does not reserve the right of disposal; he is deemed to
have unconditionally appropriated the goods to the contract".
The appropriation of goods may be made (1) by the buyer with the assent of the
seller, or (2) by the seller with the assent of the buyer, (a) by putting the goods in suitable
receptacles, or (b) by separating the articles contracted for from the others, or (c) by their
delivery by the seller to a carrier without reserving rights of disposal.
APPROPRIATION

The ascertainment of the goods or their appropriation may be made-

(i) by the buyer wit Ii the seller's assent—Where the goods are in the possession
of the buyer, as for example, where the buyer is a warehouseman for the seller in respect
of 60 bales of cotton and agrees to buy 25 bales out of them, the buyer, i.e., the
wrehouseman may. with the seller's assent, select 25 out of 60 bales, and when he has
done so, the goods (25 hales) become appropriated and the ownership in them passes to
the buyer.
(ii) by the seller with the bu y er's assent—.The more common thing is for the
seller to appropriate the goods, but such appropriation must be with the buyer's consent.
In the above example, if the hales were lying with the seller and he selected 25 bales out
of the lot with the buyer's assent, the ownership of those 25 bales would pass to the buyer
as soon as this is done. Therefore, we may say that the selection of goods by
the one
party and the adoption of that act by the UI/icr converts that which before was a mere
agreement to sell info an actual sale. The assent may be given subsequent to the
appropriation or even prior to it.
The seller may appropriate the goods—
(a) by putting the quantity contracted for in suitable receptacles, as for
example, filling hogsheads with sugar and then getting the buyer's assent thereto; or
putting the oil into bottles or grain in bags, supplied by the buyer;
(b) by separating the articles contracted for from the others,
as for instance,
in a We of jute, the marking by the seller of the quality of the goods required by the
216 MERCANTILL LAW

buyer, or in a sale of oil, setting apart the numb-,r of tins contracted for as those meant
for the buyer, will transfer property;
(c) by delivery to the carrier or other bailee for transmission to the buyer,
without reserving the right of disposal; for example, handing over the goods to the
railway administration or a shipping company or a motor transport agency. Where the
buyer asks to send the goods by a carrier, the buyer's assent to the appropriation is taken
to have been given, and the carrier carries the goods as the buyer's agent. But mere
delivery to the carrier for transmission does not necessarily pass properly to the buyer,
for it is quite possible that the seller may deliver the goods to the carrier without intending
to part with the ownership of the goods. So, until the railway receipt or bill of lading is
made out, it is not possible to say on whose account the goods have been shipped. Where
the goods are delivered to the carrier and the R/R or the bill of lading is taken ill name
of the seller or his agent, and so the goods arc deliverable to the seller or his agent, it is
presumed that the seller has reserved the right of disposal; and in such a case the property
in goods will not pass to the buyer. But where the documents oil of goods to
the carriers are made out in the name of the buyer, the presumption is that the seller has
made the appropriation and ownership passes to the buyer. But these are only presump-
tions, for it is open to the seller, having taken R/R or B/L in the buyer's name to send to
his own agent with instructions to part with it only on payment of the çrice, or having
taken it in his own name, send it endorsed unconditionally to the buyer.' Thus, delivery
where no right or control is reserved
to the carrier may be absolutely for i/ic buyer, i.e.,
by the seller. Or, the delivery to the carrier may be absolutely for time seller, so that where
the B/L is taken in the seller's own name or to his order or in the name of a fictitious
person, ownership does not pass to the buyer.
Where the seller of good.s draws oil buyer for the price and transmits to the
buyer the bill of exchange together with the bill of lading or the railway receipt to secure
acceptance or payment of the bill of exchange, the buyer is bound to return the bill of
lading or the railway receipt if he does not honour the bill of exchange; and, if he
wrongfully retains the hill of lading or the railway receipt, the property in the goods does
not pass to burnt4
the buyer had agreed to pay
In Mo/ui. S/uarmfv. Off. Liquidator, 1964 Ker. 135,
65% of the price on arrival of the goods and a bill was drawn for that purpose and though
the railway receipt was taken in the name of the consignee it was not sent to him but was
sent to a hank alongwith the bill for the 65% of the price and the railway receipt was to
be received by the consignee after retiring the bill. The consignee obtained delivery of
the goods from the railway not by retiring the bill and producing the railway receipt but
by giving a letter of indemnity to the railway. It was held that the property had not passed
to the buyer and it was really by a tortious act that he came into possession of the goods.
The fact that the railway receipt was taken in the name of the consignee did not show
that the property in the goods passed soon as the goods were appropriated and handed
over to the railway.
Before concluding the subject of appropriation, two more essentials may be noted
here. The first point is that the appropriation must be of goods answering the description,
both as to quality and quantity. Secondly, the appropriation must be intentional, i.e., it
must be made with intent to appropriate goods to the specific contract; and it must not
be due to mere accident or mistake.

See also State of Madras v. V.P.V. and

13. See Sheo Prasad v. Dominion of India, 1954 All. 747;
Sons. 1959 A.P. 23, M. tlalkrishna Rao v. M.D.O. and Sons, 1959 A.P. 30.
14. Sec. 25 (3), amended by the sale of Goods (Amendment) Act. 1963.
 TIIE SALE OFGOODS 217

F,O:B. CONTRACTS
In the case of a contract for the sale of goods which are to be shipped to a foreign
port, a number of conditions are attached by the parties or by custom and practice of
merchants. The most usual of such contracts are F.O.B. contracts i.e., ''FREE ON
BOARD". This means that the property in goods passes to the buyer only after the goods
have been loaded on board the ship, and accordingly the risk attaches to the buyer only
on shipment of goods which may at that time be specified or unascertained. Therefore,
the seller or shipper has to bear all the expenses up to and including shipment of goods
on behalf of the buyer.
C.I.F. OR C.F.I. CONTRACTS

In foreign transactions, two things are guarded against, namely: (i) the insolv, ncy
of the parties, and (ii) the perishing of the goods through no fault of either party. In order
to protect the interests of both the parties, it is usual to enter into a contract known as the
C.I.F. or C.F.I. contract. The throe letters C, I, and F. stand for COST, INSURANCE
and FREIGI-IT. Where the buyer orders goods from a mnerch:mt abroad, tire seller will
insure the goods, deliver them to the shipping company and send the B/L and insurance
policy together with the invoice and a cerlilrcate of origin to a hank and the buyer has
to pay the price (which includes cost of goods, premium of insurance and freight), and
receive the above documents frgm the hank. This method protects the seller for the goods
continue to he in his ownership until the buyer pays for them and gets the documents
and the Uuyer is equally protected, as he is only called upon to pay against the documents,
and the moment he pays he obtains the documents which would enable him to get
delivery of the goods, as soon as they arrive. If, in the meantime, the goods are lost at
sea neither will be put to loss, for either the seller or the buyer, whoever is the owner at
the time of the loss, can make a claim against the insurer for such loss. The buyer is
bound to accept the documents which represent the goods and honour the draft. If after
taking delivery he finds that the oods are not according to the contract he may reject
the goods and sue for damnages.t
The incidents of a C.1.F contract have been authoritatively explained in several
decisions, notably Johnson v. Taylor & C., 1920 AC. 144 and Biddcll Bros. v. Clemens
Horst Co., (1911)1 K.B. 934. In the latter case Hamilton J., as he then was, observed;
"A seller under a contract of sale containing the C.I.F. tenns has firstly to ship at the
port of shipment goods of the description contained in the contract; secondly to procure
contract of affrem gilt mctit, under which the goods will be delivered at the destination
contemplated by the contract; thirdly to arrange for an insurance upon the terms current
in the trade which will be available for the benefit of the buyer;fourthiy to make out an
invoice; and finally to tender these documents to the buyer so that he may know what
freight he has to pay and obtain delivery of the goods, if they arrive, or recover for their
loss if they are lost on the voyage. Such terms constitute an agreement that the delivery
of the goods, provided they are in conibonily with the contract, shall be delivery on
board a ship at the port of shipment. It follows that against tender of these documents—
the bill of lading, invoice, and policy of insurance—which completes delivery
accordance wit1that agreement, the buyer must be ready and willing to pay time price."
"It will thus appear'", observed Chakravarti Cl.. in Joseph Pyke & Son V.
Kedarrmat/i, 1959 Cal. 328, ''that although the seller is taken to have performed the
contract by delivering the shipping documents, it is not delivery of any shipping

15. M. Guhmnrali & Co. v. P.M.S. Md. Yosuf. 1954 Mad. 268; Narayan Swami Chetty v.
Sondaranjan & Co.. 1958 Md. 43.
16. See Raj Spmrmmiiig Mills v. G. King Ltd., 1959 Punj. 45.
215 MERCANTILE LAW

documents which suffice. The documents must show that the seller has shipped the goods
and that the goods he has shipped are of the contract quantity and description. The seller
thus does not discharge his obligation by merely presenting to the buyer or making
available to him certain pieces of paper with writings as to a contract of a affreightment
inscribed on them, but must also deliver the goods covered by the contract, although the
delivery is to be to the ship. It is true that alter the seller has shipped the goods he is no
longer responsible for their safe landing at the port of destination, but he is not
responsible, because he has taken out a policy of insurance for the benefit of the buyer
and thus made it possible for the buyer to look to the insurer for compensation or
reimbursement if the goods failed to be delivered. The fact, however, remains that
although a C.I.F. contract is not a contract by the seller that the goods shall arrive at the
port of destination, it is nevertheless a contract to ship goods complying with the contract
of sale. Indeed, as observed in Chalmers, such a contract is not a contract for the sale of
documents but a contract for the sale of insured goods, to be implemented by the delivery
of proper documents) After all it is but plain common sense that a person, who
purchases goods under a C.I.F contract, does not intend to purchase mere paper and does
not expect to get merely some documents, but he intends to purchase and get goods
which he may either utilise himself or in which he may trade by disposing of them at a
profit. It is a total misconception to think that C.I.F. contracts are altogether divorced
from delivery of the goods by them.
"To say that a seller under a C.I.F. contract performs the contract wholly by
delivering the shipping documents to the buyer is to state half the truth. The liabilities
of the seller do not altegrther end with the shipping of the goods and the despatch or
delivery of the shipping documents relating to them. If, after the goods have been landed,
the buyer Iind • them not to conform to the contract, either in regard to quantity or in
quality, he is entitled to reject them and repudiate the contract, although he may have
previously paid the price. Indeed as has been well explained in the very instructive
j udgment of Devlin J. in Kwei Tek Chao. v. British Traders & Shippers Ltd.. (1954) 2
Q.B. 459, a buyer under a C.I.F. contract has two rights, one to reject the documents and
the other to reject the goods. The two rights are distinct and, corresponding to them, there
are two distinct obligations of the seller, as the learned Judge also points out:
"In aC.l .F. contract the goods are delivered, so far as they are physically delivered,
when they are put on hoard a ship at the port of shipment. The documents are delivered
when they are tendered. A buyer who takes delivery from the ship at the port of
destination is not taking delivery of the goods under the contract of sale, but merely
taking delivery out of his own warehouse, as it were, by the presentation of the document
of title to the goods, the Master of the ship having been his bailee ever since he became
entitled to the bill of lading."
It is true that it has sometimes been said that a C.I.F. contract is a contract for the
sale of documents rather than a sale of gocis. That view owes its origin to the
observations which Scrutton .1., as he then was, made in the case of Arnhold Karbrg &
Co. v. Blythe. Green Jourdain & Co. (1916) 1 K.B. 495, when dealing with it as a Court
of first instance. "The key to many of the difficulties arising in C.I.F. contracts," said
the learned Judge. "is to keep firmly in mind the cardinal distinction that a C.I.F. sale is
not a sale of goods, but a sale of documents relating to goods." That view was dissented
from by the Court of Appeal which clarified what the true position in law was. Bankes,
L.J., for example, observed that he could not agree with Scrutton 1, in the view taken
by him, but would himself prefer to look upon C.I.F. contracts as contracts icr the sale
of goods to be performed by the delivery of documents. Warrington L.J. expressing
disagreement with the statement of Scrutton J., observed: "The contracts (C.I.F.) are

17. Sec Chalmers oil of Goods, 13th Edition. pp. 112-113.

 TIIESALEOFGOODS 219

contracts for the sale and purchase of goods, but they are contracts which may be
performed in the particular manner, viz., the delivery of the goods may be cffectedfirs:
by placing them, on board a ship, and secondly by transferring to the purchaser the
shipping documents". !n conclusion, Chakravaxii CJ. in Joseph Pyke and Son v.
Kedarnath, 1959 Cal. 328, observed: "The delivery of goods is not unnecessary under
C.I.F. contracts but the obligation as to delivery is discharged by the delivery of the
goods on board a ship instead of directly and at once to the buyer. It cannot be said that
a C.I.F. contract is not a contract for the delivery of any article. I have already pointed
out that even after the shipping documents have been presented to the buyer and even
after he has paid out the invoice price, he still retains the right to examine the goods
shipped to him and to reject them, if he finds any deficiency in regard to either quantity
or quality. It is thus impossible to see how it can be said that under a CIF. contract
delivery of the goods to the buyer is not material or is not contemplated." It is, therefore,
not correct to say that a C.I.F. sale is not a sale of goods, but a sale of documents relating
to goods. It is more correct to say that it is a contract for the sale of insured goods, lost
or not lost, to be implemented by the transfer of proper documents. 18
C.LF.CJ. CONTRACTS

Where the order for the supply of goods is placed with a commission agent, he is
entitled to charge his commission for the work done and interest for the time during
which the price of the goods remains unpaid. Such a contract is known as C.LF.C.I.-
COST, INSURANCE, FREIGHT, COMMISSION, INTEREST.
EX-SHIP CONTRACTS

In the case of contracts where delivery has to be made "Ex-Ship", the ownership
in the goods will not pass until actual delivery. It will, therefore, be for the seller to insure
the goods to protect his interests. Even if the buyer has paid the price against the
documents, the buyer does not thereby acquire an interest in the goods or oven an
insurable interest therein.

RISK prima facie PASSES WITH OWNERSHIP

As already observed, the question whether property has passed is important,firs:ly,
in considering upon whom loss will pass in the event of the destruction of the subject-
matter and, secondly, in determining their rights of disposal of the goods although the
price remains unpaid. The rule in the first case is res peril doniino—the loss falls on the
owner. But it is open to the parties to enter any contract they please so that the risk can
be separated from ownership. A buys goods of B and property has passed to him; but
the goods remain in B's warehouse and the price is unpaid. Before delivery a fire burns
down the warehouse destroying the goods. A must pay B the price of the goods, as A
was the owner. Furs are ordered "on approval''with invoice. They are stolen by burglars.
By the custom of the fur trade the goods are at the risk of the person ordering them on
approval. The buyer must pay the invoice price. A motor car is deposited for sale with
a garage keeper ''at owner's risk." It is damaged by the negligence of the garage keeper's
servant. The garage keeper is not liable. Under Sec.26 of the present Act the parties are
allowed to provide by their agreement that iheTi.sk shall pass at some time or on some
condition not necessarily simultaneous with the passing of the property.
The proviso to Sec.26 lays down that where delivery of the goods has been delayed
through the fault of either buyer or seller, the goods are at the risk of the party in fault
as regards any loss which might not have occurred but for such fault.

18. Haskellv. Continental Express (1950)'I All. E.R. 1033.

220 MERCANTILE LAW

PART 6-E
TRANSFER OF TITLE BY NON-OWNERS

GENERAL RULE AS TO TITLE

The geiier.d rule is that only the owner of goods can sell the goods. No one can
convey a better title than he himself has. If a person transfers articles not belonging to
him, the transferee gets no title. This rule is expressed by the maxim, "Nerno doi quod
non Iwbel" (no one gives that he has not). This rule protects the true owner, as the buyer
from the non-owner does nt acquire a better title than what the seller had; and the mere
fact of an innocent and bonafide purchase from the non-owner is no answer to the claim
of the true owner. For example. A, the hirer of goods under a hire-purchase agreement.,
sells them to B. B. though, acting in good faith, does not acquire the property in the goods
as against the owner but, at the most, such interest as the hirer had. There is a sale of
horse at a public auction. Unknown to the auctioneer and the buyer, the horse has been
stolen. The buyer obtains no title against the true owner.
EXCEPTIONS TO THE GENERAL RULE AS TO TITLE
Sec. 27, while recognising the general rule that the buyer acquires no better title
than the seller had, provides for a number of exceptions to it. Under the exceptions to
the general role, therefore, the buyer gets ,I title to the goods than the seller himself
has. The exceptions are discussed below.
SALE BY MERCANTILE AGENT
The first and most important exception in the general rule is in the case of a bona
fide buyer of goods with no notice that the seller had an imperfect title to sell the goods,
provided that the seller is a "mercantile agent" in possession of either the goods or
documents of title to goods, with the consent of the owner and sells the goods in the
ordinary course of business as a mercantile agent. Thus, a person who in good faith buys
goods of a factor, broker or auctioneer, will get good title to them, even though the seller
has exceeded his authority, or authority has been revoked by the true owner before the
sale, provided (the buyer) did not have notice of the authority being exceeded or its
revocation.
SALE BY A CO-OWNER
A buyer in good faith of one of the several joint owners who is in sole possession
Of the goods with the permission of his co-owners will get good title to the goods,
provided that he had no notice of want of authority to sell. One of several co-owners
iolding a jewel in his safe custody is a person in such possession as is contemplated in
his rule, and a buyer in good faith and with no notice of defective title will get good title
the jewel. (Sec. 28).
ALE BY A PERSON IN POSSESSION UNDER
VOIDABLE CONTRACT
The next.exception relates to a person who is in possession of the goods under a
contract which is voidable, and who, before the contract is rescinded, sells the same to
a buyer who boys in good faith and without notice of the seller's defective title. The
buyer in such a ease will get good title to the goods. The rule pre-supposes a contract,
and does not apply unless . there is a contract. Thus it does- not apply to a contract
originally void, or where goods are obtained by theft (Sec. 29).
 TI EE SALE OF GOODS 221

SALE BY SELLER IN POSSESSION AFTER SALE

Where a seller, after having sold the goods, continues to he in possession of the
goods, or a document of title to the goods, and again sells them or pledges the same either
by himself or through a mercantile agent to a person who acts in good faith and without
notice of the previous sale, such a person gets a good title to the goods. It is to be noted
that the possession of the seller must be as seller and not as hirer or bailee. (Sec.30).
SALE BY BUYER IN POSSESSION

Where a buyer who having bought or agreed to buy the goods being in possession
of the same or of a document of title to the same, with consent of the seller, sells or
pledges them either by himself or through a mercantile agent, the buyer who acts in good
faith and without notice of lien or of any other right of the owner gets a good title. B
agreed to buy a car and pay for it, if his solicitor approved, and, having obtained
possession of the car, sold it to C, but the solicitor subsequently disapproved of the
transaction. C, the bonafide, buyer, got good title, for B "agreed to buy it". It is to be
noted that the consent of the seller for possession of goods by the buyer must be free and
real to enable the buyer to give good title to a sub-buyer or a pledgee. If the consent of
the seller or his agent is absent, then an innocent buyer or pledgee cannot get any title
to the goods. 19 Also, a person who has got ;erely an option to buy as in hire-purchase
agreement cannot transfer title to sub-buyer however bonafidc, for option to buy is not
agreement to buy. Thus, where H entered into a hire-purchase agreement with B in
relation to a piano on the condition that on paying 12 instalments of Rs.lOO each the
piano should be his property, and after 6 instalments, B awned the piano with M, who
took it in good faith; H can take hack the piano from M.' ° (Sec.30).
In addition to the above expressly provided exceptions, the Indian Sale of Goods
Act recognises three more exceptions, as Sec. 27 commences with the words "Subject
to the provisions of this Act and of any other law for the time being in force." The three
exceptions are as given below.

SUBJECT TO THE PROVISIONS OF SECTION 54(3) OF THE ACT

An unpaid seller can stop the goods in transit or exercise his right of lien; and
where such unpaid seller has exercised his right and is in possession of goods (of which
ownership has passed to the buyer) he can re-sell these goods. The buyer on such resale
gets an absolute title to the goods, even though the re-sale may not be justified in the
circumstances.

SUBJECT TO THE PROVISIONS OF ANY OTHER LAW

Under Sec.176 of the Indian Contract Act, a Pawnee or pledgee has a right to sell
the goods pledged with him, and the buyer gets a better title than what the seller has.
Further, Sec. 169 of the same Act provides power for sale to the finder of lost goods.
Again, under the Negotiable Instruments Act, a holder in due course may get a better
title than what his endorser had. Similarly, under Order 40, Rule 1 of the Civil Procedure
Code, Receivers appointed by Cowl have authority to sell properties. Also, Official
Assignees under the Presidency-towns Insolvency Act, Official Receivers under Provin-
cial Insolvency Act, Liquidators under Indian Companies Act and Officers of Court
selling goods in execution under Order 21, Civil Procedure Code, and Executors and
Admiiiistrators, all these persons are not owners, yet they sell properties belonging to
others and convey title to the buyers than they themselves possess.

19. Central National Bank v. United Industrial Bank, 1954 s.C. 181.
20. B. Motor Supply Co. v. Cox. (1914) 1 K.B. 244.
222 MERCANTILE LAW

SALE UNDER THE IMPLIED AUTHORITY OF OWNER, OR

TITLE BY ESTOPPEL
The words in the last part of Sec.27 are "unless the owner of the goods is by his
conduct precluded from denying the seller's authority to sell:' This is really the
application of the doctrine of estoppel, as the sale may be made in circumstances which
may preclude the owner from disputing the authority of the person who sells. In acontract
of sale, estoppel may arise where the ewner by any act or omission leads the buyer to
believe that the seller has the right to sell. In a sale by an agent within the scope of his
apparent authority the buyer gets abetter title than what the seller has. The lesee of a
public house who allows another to sell the fixtures and fittings as if they are his Own,
whereby a thud person is induced to purchase them bonifide, cannot recover them from
the purchaser. This is so because, as pointed out by Lord Denman. if "a party who
negligently or culpably stands by and allows another to contract on the faith and
understanding of a fact which he can contradict, cannot afterwards dispute that fact in
an action against the person whom he has himself assisted in deceiving." An owner may
also be estopped if he received the sale proceeds with the knowledge that the sale is
without authority.

MARKET OVERT
There is another very important exception in English law which has not been
recognised in India. According to English law, where a purchase is made in what is called
"Market Overt", the buyer is absolutely protected and the ownership passes to him so
that the true owner cannot recover from the buyer. A market overt is understood as a sale
at certain prescribed places and times in which cases a good title is passed to the buyer
in good faith a.id without notice of the defective title of the seller. The rule of market
overt is omitted in India, probably because it is likely to be an incentive to theft, and
because "it would be difficult to specify places to which it should be applied."

PART 6-F

PERFORMANCE OF THE CONTRACT OF SALE

DUTIES OF THE SELLER AND BUYER

It is the duty of the seller to deliver the goods and of the buyer to accept and pay
for them, in accordance with the terms of the contract of sale (Sec.31). Unless otherwise
agreed, payment anddelivery are concurrent conditions, that is, they both take place at
the same time as in a cash sale over a shop counter (Sec. 32). The seller has the duty of
giving delivery according to the contract and according to the rules contained in the Sale
of Goods Act, as stated below.
The buyer has the duty to pay for the goods and accept delivery. If he wrongfully
refuses to accept delivery, he must pay compensation to the seller.

DELIVERY
Delivery is the voluntary transfer of possession from one person to another.
Delivery may be made by doing anything which the parties agree shall be treated as
delivery. Delivery to a wharfinger or a carrier is generally regarded as delivery to the
buyer.
Delivery may be actual, constrUct j vr or symbolic.Actualor physical delivery takes
place where the goods are handed over by the seller to the buyer or his agent authorised
to take possession of the goods. Constructive delivery or delivery by attornment takes
 THE SALE OF GOODS 223

place when the person in possession of the goods acknowledges that he holds the goods
on behalf of and at the disposal of the buyer. For instance, where the seller agrees to hold
the goods as bailee for the buyer there is a constructive delivery. Also, where a
warehouseman or a carrier who holds the goods as bailee for the seller agrees and
acknowledges to hold them for the buyer there is a constructive delivery. Symbolic
delivery is made by indicating or giving a symbol. Here the goods themselves are not
delivered (probably because they are ponderous or bulky), but the "means of obtaining
possession" of goods is delivered, e.g., by delivering the key to the warehouse where
the goods are stored or the bill of lading which will entitle the holder to receive the goods
on the arrival of the ship.
RULES REGARDING DELIVERY
1.Delivery should have the effect of putting the buyer in possession. Thus, where
the wood of fallen tress is sold the mere fact of the buyer cutting them will not amount
to taking possession of them until he carts them away. In order to constitute delivery the
buyer or his authorised agent must have possession of the goods, i.e., the buyer should
be in a position to exercise some degree of control over the goods either directly or
through an agent.
2. The seller must deliver the goods according to the contract, and where there is
a condition precedent to the performance of the contract., the seller is not bound to deliver,
unless the condition precedent is satisfied. Again, unless otherwise agreed, delivery of
the goods and payment of the price are concurrent conditions. A contract of sale always
involves reciprocal promises, the seller promising to deliver the goods sold and the buyer
to accept and pay for him. In the absence of contract to the contrary, they are to be
performed simultaneously and each party should be ready and willing to perform his
promise before he can call upon the other to perform his. Therefore, unless the sale is
on credit, the seller need not be ready and willing to deliver the goods before the price
is paid. If the buyer is insolvent or states that he will not accept delivery, this is a strong
evidence that he is not ready and willing to pay.
3. Though the seller is bound to deliver the goods according to the contract, yet he
need not deliver them unless the buyer applies for delivery (Sec. 35). The rule is not
affected by the fact that the goods are to be acquired by the seller and when they are
acquired, the seller notifies to the buyer that they are in his possession, it is still the duty
of the buyer to apply for delivery. Thus, when the seller gives notice of arrival of the
goods, it is the buyer's duty to apply for delivery. The demand by the buyer for delivery
of the goods must be made at reasonable hour. On the other hand, it is the duty of the
seller to deliver the goods when the buyer applies for delivery, and if the seller fails to
do so, he is guilty of a breach of contract.
4. The condition precedent imported in all contracts by this provision of Sec.35,
apart form special agreement, to the buyer's duty to claim delivery, may, however, be
waived by the seller and is waived by him impliedly where he so incapacitates himself
from complying with the demand, by consuming, reselling or otherwise disposing of the
goods, as to render the demand idle and useless. Whether it is for the buyer to take
possession of the goods or for the seller to send them to the buyer is a question depending
in each case on the contract express or implied between the parties tSec.36( 1)1.
5. Where the goods at the time of the sale are in the possession of a third person,
there is no delivery by the seller to the buyer unless and until such third person
acknowledges to the buyer that he holds the goods on his behalf (Sec.36(3)J.
6. Time otDelivery—As said above, the goods must be delivered as per the terms
of the contract. Where the contract uses words like "directly", "immediately".
"forthwith". "without loss of time", it has been held that quick delivery is con-
224 MERCANTILE LAW

templatcd. Where, however, no time is fixed for delivery of the goods, the seller is bound
to deliver them within a reasonable time. Delivery must be at a reasonable hour. A
contnict by a manufacturer to supply some specified goods 'as soon as possible", means
within a reasonable lime.
7. Tender 01 Delivery—It is not, however, the duty of the seller to send or carry
the goods to the buyer unless the contract so provides. His only duty is to place the goods
at the buyer's disposal so that the buyer may remove them. He is to tender the delivery
of goods, and if thç buyer is not willing to take them, he is excused from performance
and can maintain a suit against the buyer. But it is essential that the goods must-be in a
deliverable state at the time of delivery or tender thereof.
8. Place of Delivery—The jlace of delivery may be stated in the contract, and
where it is so stated, the goods must be 'delivered at the place during business hours on
a working day. Where no place is mentioned, the goods are to be delivered at a place at
which they happen to be at the time of the contract of sale, or if the contract is with
respect to future goods, at the place at which the goods are manufactured or produced.
The buyer in these cases can ask to have the goods made over to him at the seller's place
of business and not at his own.
If the seller agrees to deliver t! goods to the buyer at a place other than that where
they are when sold, the buyer must, iii the absence of agreement to the contrary, take the
risk oldeterioration. necessarily incident to the course of transit.
9. Cost of Delivery—The seller has to hear the cost of delivery unless the contract
otherwise provides. While the cost of obtaining delivery is said to be the buyer's, th
cost of putting the goods into deliverable state must be borne by the seller. In other words,
in the al?sence of an agreement to the contrary, the expenses of and incidental to making
delivery of the goods must be borne by the seller, the expenses of and incidental to
receiving delivery must be borne by the buyer. Thus, when Ile contract is fr delivery
"ex-ship", the seller must do all that is necessary to release the shipowner's lien, and if
"frwthe deck" pay all charges to be paid, such as harbour dues, to enable the goods
to be ri'moved from the deck. Where goods are sold "F.O.B.", the seller must bear the
expenses of, and up to shipment. In a 'C.I.F." contract, the seller is, as between himself
and the buyer, chargeable with the amount of the freight and the insurance charges, and
the buyer, if he pays any such charges, can claim credit for them. Wharfage charges
incurred after shipment and delivery of the shipping documents fall on the buyer.
10. Duty to Insure Goods Where Goods Delivered to a Carrier—Where goods
are delivered to a carrier or wharfinger, the seller is bound to enter into a reasonable
contract on behalf of the buyer with the carrier for the safe transmission of the goods;
and if he fails to do so and the goods are destroyed, thebuyermay decline to treat derivery
to the carrier as delivery to him or claim damages. If the transit be by sea, the seller must
inform the buyer in time, so that he may have the goods insured. If the seller fails to do
so, the goods would be at seller's risk during transit. This clearly applies to F.O.B.
contracts. Rut, it is open to the parties to contract to the contrary and by usage .a term
may be inferred authorising the seller to send goods at buyer's risk uninsured. If the
contract is a C.I.F. contract, the buyer is not bound to take delivery if the seller fails to
insure, e\'en though the goods arrive safe (Sec. 39).
11. When the seller is ready and willing to deliver the goods and requests the buyer
to take delivery and the buyer is liable to the seller for (I) any loss occasioned by his
neglect or refusal to lakp delivery; and (ii) 3 reasonable charge for the care and custody
of the goods.
 THE SALE OF GOODS 225

ACCEPTANCE OF GOODS BY BUYER

The buyer has a right to have delivery as per contract, and accept them when they
are according to the contract.
Acceptance of goods by buyer takes place when the buyer-
1. intimates to the seller that he has accepted the goods; or
2. retains the goods after the lapse of a reasonable time, without intimating to the
seller that he has rejected them; or •' I

3. does any act to the goods which is inconsistent with the ownership of the seller,
e.g., a pledge or resale (Sec. 42).
In Ruben v. Faire (1949) 1 All. E.R. 215, the plaintiff contracted to sell to the
defendant by sample a quantity of "Linatex in 41 ft. rolls, 5 ft. wide." The defendant
asked the plaintiff to send half of this material to X to whom he had resold it. The plaintiff
did so. and X rejected it on the ground that it did not correspond. The plaintiff now sued
the defendant for the price, and the defendant pleaded that the plaintiff's breach of
condition entitled them to rescind the contract and repudiate all liability under it. It was
held that there had been a delivery and the buyer was deemed to have accepted half of
the goods and must treat the seller's breach of condition as a breach of warranty. In a
suit for price by the seller, he could only counter-claim for damages. By Sec. 42, if the
goods are delivered to a sub-purchaser at the request of the buyer, there is a constructive
delivery to the buyer, and he has 'accepted' the goods, as he had done an act 'inconsistent
with' the seller's ownership of the goods.
When goods are delivered to the buyer which he has not previously examined he
is not deemed to have accepted them unless and until he had had reasonable opportunity
of examining them. He is entitled to demand of the seller a reasonable opportuhity of
examining them in order to ascertain whether they are in conformity with The contract
(Sec. 41). The buyer may, however, accept them at once, although a reasonable time for
making an examination has not elapsed Illardy & Co. v. if illerus & Fowler (1923) 2
K.B .490J.
If the seller sends the buyer a larger or smaller quantity of goods than ordered, the
buyer may (Sec. 37 )-
1. reject the whole;
2. accept the whole;
3. accept the quantity he ordered and reject the rest.
The contract was for the sale of 4,000 tons of meal, 2 per cent more or less. The
sellers delivered meal greatly in excess of the permitted variation. held, the buyer could
reject the whole [Payne and Routh v. Lillico & Sons (1920) 36 T.L.R. 5691.
- What the buyer accepts he must pay for at the contract rate. Where the cdntract is
for the sale of "about" so many kilos or tonnes, or so many kilos or tons "more or less'',
the seller is allowed a reasonable margin. If, however, he exceeds that margin the buyer
cannot be compelled to accept the goods.
If the seller delivers, with the goods ordered, goods of a wrong description,thè
buyer may accept the goods ordered and reject the rest, or reject the whole,
If a buyer has a right under his contract to reject goods, he is not bound to return
the rejected goods to the seller, but it is sufficient if he intimates to the seller (hat he
refuses to accept them (Sec. 43). A buyer cannot be compelled to take delivery by
instalments.

INSTALMENT DELIVERIES
When there is a contract for the sale of goods to be delivered by stated instalments
226 MERCANTILE LAW

which axe to be separately paid for: and either buyer or seller commits a breach of
contraot, it is a question depending on the terms of the contract and the circumstances
of the case whether the breach is a repudiation of the whole contract or a severable breach
merely giving a right to claim for damages (Sec.38).
If the breach is of such a kind as to lead to the inference that similar breaches will
take place with regard to future deliveries, the contract can he at once repudiated by the
injured party. For example., if the buyer fails to pay for one instalment undr such
circumstances as to suggest that he will not pay for future instalments, or the seller fails
to deliver goods of the contract description under similar circumstances the contr.ct can
be repudiated.
A sold to B 1,500 tons of meat and bone meal of a specified quality, to be shipped
125 tons monthly in equal weekly instalments. After about half the meal was delivered
and paid for. B discovered that it was not of the contract quality and could have been
rejected, and he refused to take further deliveries. held, B was entitled to do so, as he
was not bound to take the risk of having put upon him further deliveries of goods which
did not conform to the contract. [Robert A. Munro & Co. v. Me yer (1930) 2 K.B. 3121.
The tests to be applied are:first, the ratio quantitatively which the breach bears to
the contract and secondl y , the degree of probability that such a breach will be repeated.
A bought from B Co. 5.000 tons of steel to be delivered 1,()00 tons monthly. After
the delivery of two instalments, but before payment was due, a petition was presented
to wind up B. Co.. and A refused to pay unless the sanction of the Court was obtained,
being under the erroneous impression that this was necessary. Held, the conduct of A in
so refusing payment did not show an intention 10 repudiate the contract so as to excuse
the liquidator oUR. Co. from making further deliveries ]MerseySieel & IronCo. v.Naylor.
(1884)9 A.C. 4341.

REMEDIAL MEASURES

RIGHTS OF THE UNPAID SELLER

WHO IS AN UNPAID SELLER?

The seller of goods is deemed to be an unpaid seller (a) when the whole of the
price has not been paid or tendered; or (b) when a conditional payment was made by a
bill of exchange or other negotiable instrument, and the instrument has been dishonoured
(Sec. 45). In simple words, an unpaid seller is one who has sold goods on cash terms and
does not include a seller who has sold goods on credit.
An unpaid seller has a two-fold right: One against the goods, and the other against
the buyer personally. The unpaid seller's right can be exercised by any 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.
RIGHTS OF UNPAID SELLER AGAINST THE GOODS
An unpaid seller of goods, even though the property in the goods has passed to the
buyer, has (1) a lien on the goods remaining in his possession; (ii) if the buyer is insolvent,
a right of-stoppage in transit after he has parted with possessioi of the goods; (iii) a
limited right of resale (Sec. 46).

LIEN
An unpaid seller in possession of goods sold may exercise his lien on the goods,
i.e.. keep the goods in his possession. and refuse to deliver them to the buyer until the
full payment or tender of the price in cases where (Sec. 47)......
 THE SALE OF GOODS 227

(a) the goods have been sold without any stipulation as to credit;
(b) the goods have been sold on credit, but the term of credit has expired;
(c) the buyer becomes insolvent.
The seller's lien is apossess&ry lien, i.e.. the lien can be exercised only so long as
the seller is in possession of the goods. Lien can be exercised for the non-payment of
price, not for any other charges. For example, the seller cannot claim lien for godown
charges which he had to incur for storing the goods in exercise of his lien for the price.
When an unpaid seller has made part delivery of the goods he can exercise lien on the
balance of the goods not delivered unless the part of delivery was made in circumstances
to show an intention to waive the lien. The lien can be exercised even though the seller
has obtained a decree for the price.
TERMINATION OF LIEN
Lien depends on physical possession. Therefore, the unpaid seller loses his lien on
the goods—
(a) when he delivers them to a carrier or other bailee for the purpose of transmission
to the buyer, without reserving the right of disposal of the goods;
(b) when the buyer or his agent lawfully obtains possession of the goods;
(c) by waiver of his lien (Sec.49).

STOPPAGE IN TRANSIT
The right of stoppage in transit is a right of stopping the goods while they are in
transit, resunung possession of them and retaining possession until payment of the price.
It is available when (Sec. 50)-
(a) the buyer becomes insolvent; and
(h) the goods are in transit.
The buyer is insolvent if he has ceased to pay his debts in the ordinary course of
business, or cannot pay his debts as they become due, whether he has committed an act
of insolvency or not [Sec.2(8)].
LIEN AND STOPPAGE IN TRANSIT DISTINGUISHED
The points of difference between an unpaid seller's right of lien and stoppage in
transit are: (1) the right to stop goods arises only when the buyer is insolvent, but the
right to lien can be exercised even when the buyer is able to pay, t; does not pay; (2)
lien is available only when the goods are in actual or constructive possession of the seller,
but the goods can be stopped in transit when the seller has parted with possession, and
the buyer or his agent has not obtained possession, i.e.. the goods are in the custody of
a "middleman" between the two; (3) when possession is surrendered by the seller, his
lien is gone, but his right to stop commences and remains as long as the goods are in
transit and before they pass into the possession of the buyer; (4) the right of lien is to
retain possession, the right of stoppage is to regain possession. The right of stoppage in
transit is, in fact, an extension of the right of lien.
DURATION OF TRANSIT (S.5I)
Goods are in transit from the time they are delivered to a carrier or other bailec for
the purpose of transmission to the buyer until the buyertakes delivery of them. The goods
are still in transit if they are rejected by the buyer. The transit continues so long as the
goods are not delivered to the buyer or his agent in this behalf no matter whether they
are lying with the carrier or a forwarding agent, awaiting transmission, or are in actual
transit. or are lying at the destination.
If goods are ordered to be sent to an intennediate place from '::hich they are to be
228 tEKCANTILE LAW

forwarded to their ultimate destination the transit is at an end if fresh instructions have
to be sent to the intermediate place before the goods can be forwarded, but otherwise the
goods are still in transit. The transit is at an end in the following cases:—
(a) If the buyer obtains delivery before the arrival of the goods at their destination.
(b) If, after the arrival of the goods at their destination, the carrier acknowledges to
the buyer that he holds the goods on his behalf, even if a further destination of the
goods is indicated by the buyer.
(c) If the carrier wrongfully refuses to deliver the goods to the buyer.
Wheii goods are delivered to a ship chartered by the buyer, whether they are in
possession of the master of the ship as carrier or as agent for the buyer is a question
depending on the circumstance of the case.
Where part delivery of the goods has been made to the buyer or his agent in that
behalf, the remainder of the goods may be stopped in transit, unless such part delivery
has been given in such circumstances as to show an agreement to give up possession of
the whole of the goods.
HOW STOPPAGE IN TRANSIT EFFECTED
The right to stop in transit may be exercised either by taking actual possession of
the goods or by giving notice of the seller's claim to the carrier or other person having
control of the goods (Sec. 52). The notice may be given either to the principal, whose
servant has the custody at such a time as and under such circumstances as he may, by
the exercise of reasonable diligence, communicate it to his servant in time to prevent the
delivery to the consignee. The notice to the principal will take effect only after the lapse
of a time reasonably sufficient for him to communicate with his agent. The notice need
not be a written notice, and no particular form is necessary: all that is required is to ask
the carrier before the goods have been delivered by him to the buyer or his agent, so that
he may prevent delivery. A mere notice to the buyer before the goods come to his
possession that the seller wished to exercise the right will not be sufficient. If the carrier,
after receiving notice, wrongfully delivers the goods to the buyer, he does so at his own
peril. His duty is to re-deliver the goods to the unpaid vendor, though, of course, at the
vendor's expense. The seller's right is so strongly maintained that while the goods are
in transit and the insolvency of the buyer occurs, the seller may take them by all means
not criminal.
EFFECT OF SUB-SALE OR PLEDGE BY BUYER
This right of lien or stoppage in transit is not affected by the buyer selling or
pledging the goods or making any disposition of them unless the seller has, by his own
conduct, precluded himself from exercising the lien or stoppage in transit by recognising
the title of the sub-buyer or the pledgee. This is on the principle that a second buyer
cannot stand in a better position than hisseller (i.e., the first buyer). W sold 80 maunds
of barley out of a granary to A who sold 60 maunds to K before the goods had been
ascertained by W. K paid A. obtained a delivery order and presented it to W, who
expressed willingness to forward the barley on being requested to do so. Held, W, the
unpaid seller, has recognised the title of K, the sub-buyer, and therefore was estopped
from exercising the lien which he has waived. 21 Similarly, where the sub-buyer produced
delivery orders to the seller who endorsed on them that he was willing to give delivery,
but after delivery of part of the goods, refused to deliver the rest on the ground that the
first buyer had not paid the price: it was held that the seller was estopped. 22 But it must
he noted that consent of the seller to the sub-sale is essential; it is not sufficient that (he

21. Knights v. Wiffen (1870)5Q.l3. 660.

22. Ganges Mfg. Co. v. Sourajmul (1880)3 Cal. 669.
 TIlE SALE OF GOODS 229

seller simply has notice of the fact of sub-sale. There must be a recognition of the
sub-buyer's right to the goods free of the seller's lien so as to evince an intention to
renounce the seller's right on the goods.
While the goods are in transit, if the buyer transfers the document of title or pledges
the same to a person in good faith and for consideration, then, if the transaction is sale,
the right of stoppage is defeated. But, if the transaction is a pledge, the seller's right to
stop will be subject to the pledge. But where the pledgee has two securities, the unpaid
seller can compel Inc pledgee to marshal his securities and to resort first to the other
security, i.e., he may require the pledgee to satisfy his claim against the buyer first out
of any goods or securities in the hands of the pledgee, and if still anything is l eft unpaid
turn to the document of title so pledged ISec.53(2)I.
It should be noted that the exercise by the unpaid seller of his rights of Lien or
stoppage in transit does not amount to rescission of the contract. He may retain or regain
the possession of the goods. but he does not regain the property in them, nor does he
thereby cancel the sale. In no proper sense, does he by the stoppage become the owner
of the goods. What is then a seller, having retained or regained possession of the goods
to do with them if the buyer, after notice to take the goods and pay the price, remains
in default ' Must he keep them until he can obtain Judgement against the buyer and sell
them on execution ? What if the goods are perishable, e.g., fruit, or expejasivc to keep,
as cattle or horses. Sec. 54 gives him a limited right to re-sell the good.
RIGHT OF RE-SALE
The unpaid seller may re-sell--
(i) where the goods are perishable;
(ii) where the right is expressly reserved in the contract;
(iii) where in exercise of right of lien or stoppage in transit seller gives notice to buyer
of his intention to re-sell, and the buyer does not pay or tender the price within a
reasonable time.
The right of re-sale is the third right of dii unpaid seller, the other two being the
rights of lien and stoppage in transit. The transaction under the present right is called
re-sale, because there has been already a sale by which the ownership has passed to the
buyer.
A further valuable right is given to the unpaid seller, namely. Right to Surplus or
Prolit. If on a re-sale there is a defieiency between the price due and the amount realised,
tm will be able to recover this from the buyer. The profit arising on a re-sale belongs to
the seller because the re-sale is the result of a breach of contract on the part of the buyer,
and such a buyer cannot take advantage of his own wrong and claim the profits.
NOTICE

The seller is bound to give reasonable notice to the buyer that he is going to-re-sell
the goods unless the goods are of perishable nature. \Vhat is reasonable notice is a
question of fact dependingupon the nature of the goods, the distance at which the parties
are situated and other circOrnst:inces of the case. The notice has been made compulsory
for two reasons. First, that the buyer may have an opportunity of fulfilling the contract
by paying the price even at the last moment before such re-sale. Secondly, if the buyer
is still unable to pay, he may at least see that on such re-sale the goods fetch a proper
price. Therefore, if the re-sale is improperly conducted, although the subsequent buyer
will get good title to the goods sold to him, the seller cannot keep the surplus, if there is
any; and if there is a deficiency he cannot sue the buyer for it. Where perishable goods
were sold after a delay of eight months, the re-sale was held to be improper.


230 MERCANtiLE LAW

This right of re-sale is, however, optional and the buyer cannot demand re-sale.
Thus, where the goods were in the possession of the seller and were destroyed by fire,
it was held that the seller was entitled to the price and the buyer could not plead that the
loss would not have happened if the seller had re-sold the goods, since the seller was not
bound to re-sell. Where the right of ownership should have nassed to the buyer, but the
goods should have been ascertained or appropriated to the contract before the right of
re-sale is exercised. But the parties may provide for re-sale even without appropriation
of goods.
RIGHT OF WITHHOLDING DELIVERY
If the property in the goods has passed to the buyer, the unpaid seller has a right
of lien as described above. If, however, the property has not passed, the unpaid seller
has a right of withholding delivery similar to and co-extensive with his right of lien [Sec.
46(2)1.
SUITS FOR BREACH OF CONTRACT
The Seller. to addition to his rights against the goods set out above, has two rights
of action against the buyer personally.
Suit for price-1. Where the property in the goods has passed to the buyer, the
seller is entitled to sue for price, whether the possession is with the buyer or the seller.
2. Where the price is payable on a certain day irrespective of delivery, the seller
may sue for the price, ii it is not paid on that day, although the property in the go9ds has
not passed.
SUIT FOR DAMAGES FOR NON-ACCEPTANCE
Where the buyer wrongfully neglects or refuses to accept the goods and pay for
them, the seller has a right to sue the buyer for damages for non-acceptance. The measte
of damages of the loss resulting from the buyer's breach of contract which is, where
there is an available market for the goods prima fade, the difference between the contract
price and the market price. An available market means that the goods can be sold freely
because there is an existing demand.
R contracted to buy a ''Vanguard'' motor-car from T Ltd., who were car dealers.
I
R refused to accept delivery. held. Ltd. were entitled to damages for the loss of their
bargain, viz., the profit they would have made, as they had sold one car less than they
otherwise would have sold [TIionspon Lid. v. Robinson (1955)2 W.L.R. 1851.
When the seller is ready and willing to deliver the goods and requests the buyer to
take delivery, which the buyer does not do within a reasonable time, the seller may
recover from the buyer—
1. any loss occasioned by the buyer's refusal or neglect to take delivery; 23 and
2. a reasonable charge for the care and custody of the goods.
The Buyer has the following rights to sue the seller for breach of contract
SUIT FOR NON-DELIVERY
Where the seller wrongfully neglects or refuses to deliver the goods to the buyer,
the buyer may sue him for damages for non-delivery (Sec. 57). The measure ofdarnagcs
is, as in the case of a suit for non-acceptance, the estimated loss naturally resulting from
the breach of contract which is prima facie, when there is an available market for the
goods, the difference between the contract price and the market price at the time when

23. Ramanaihazi Chettiar v. National Textile Corpn. Ud 1985 Ker. 262.

 TILE SALEOFGOODS 231

the goods ought to have been delivered or. if no time for delivery was fixed, from the
time of the refusal to deliver.
lithe buyer purchased the goods for re-sale and the seller knew of this, the measure
of damages will be the difference between the contract price and the re-sale price, if the
goods cannot be obtained in the market. If they can be obtained in the market the buyer
ought to obtain them there and so fulfil his contract of re-sale, with the result that the
damages will he the difference between the market price and the contract price.
Where delivery is delayed, but the goods are ultimately accepted notwithstanding
the delay, the measure of damages is the difference between the value of the goods at
the time when they ought to have been and the time when they actually were delivered
(Elbinger Acticri Gesellscliaft v. Armstrong (1874) L.R.9 Q.B. at p. 4771.
SUIT FOR RECOVERY OF THE PRICE
lithe buyer has paid the price and the goods are not delivered, he can sue the seller
for the recovery of the amount paid.
SPECIFIC PERFORMANCE
A buyer can only get his contract specifically performed, i.e., obtain an order of
the Court compelling the seller to deliver the goods he has sold, when the goods are
specific or ascertained. The remedy is discretionary and will only be granted when
damages would not be an adequate remedy. Specific performance will be granted if the
goods arc olspccial value or are unique, e.g.. a rare book, a picture or apiece of jewellery.
SUIT FOR BREACH OF CONDITION
On breach of condition the buyer is entitled to reject the goods. But he cannot reject
the goods, if-
1. he waives the breach of condition, and elects to treat it as a breach of warranty;
or
2. the contract is not severable and he has accepted the goods or part of them;
3. the contract is for specific goods, and the property has passed to the buyer.
In all these cases, as provided in Sec. 13, the condition sinks or descends to, or is
treated as warranty, and the goods cannot be rejected but only a suit for damages can be
filed.
L, in 1944, bought from (3 a picture of Salisbury Cathedral said by (3 to be by
Constable. In 1949 L found it was not by Constable and claimed to rescind the contract
and recover the purchase price. Held, as the picture had been accepted it could not later
be rejected [Leaf V. Inlernational Galleries (1950) 2 K.B. 86.
SUIT FOR BREACH OF WARRANTY
On breach of warranty, the buyer can either:—
(a) set upagainst the seller the breach of warranty in diminution or extinction of the
price; or
(b) sue the seller for damages for breach of warranty (Sec. 59).
The measure of damages for breach of warranty is the estimated loss arising
directly and naturally from the breach, which is prima facie the difference between the
value of the goods as delivered and the value they would have had if the goods had
answered to the warranty.
INTEREST
The seller or the buyer may recover interest or special damages in any case where
232 MERCANTILE LAW

by law ifltCiCSt or special damages may be recoverable. He may also recover the money
paid where the consideration for the payment of it has failed.
In thc absence of a contract to the contrary, the Court may award interest at such
rate as it thinks lit oil amount of the price—
(a) to the seller in a suit by him for the amount of the price—from the date of the tender
of the goods or from the date on which the price was payable;
(h) to the buyer in a suit by him for 1h' amount of the price in case of a breach of the
contract on the part of the seller—from the date on which the payment was made.

AUCTION SALES

A sale by auction is a public sale, where goods are offered to betaken by the highest
bidder. It is a proceeding at which people are invited to compete for the purchase of
properly by successive offers of advancing sums.
The rules regulating sales by auction are contained in Sec. 64 which reads: "64."
III
case of a sale by auction:-
(i) Where goods are put for sale in lots, each lot isprirnafaciedeemed to be the subject
of separate contract of sale;
(ii) the sale is complete when auctioneer announces its completion by the fall of the
hammer or in other customary manner; and, until such announcement is made, any
bidder may retract this bid;
(iii) a right to hid may he reserved expressly by or on behalf of the seller and, where
such right is expressly so reserved, but not otherwise, the seller or any one person
on his behalf may, subject to the provision hereinafter contained, hid at the auction;
(iv) where,he sale is not notified to be subject to a right to bid on behalf of the seller,
it shall not he lawful for the seller to hid himself or to employ any person to bid at
such sale, or the auctioneer knowingly to take any hid from the seller or any such
person; and any sale contravening this rule may he treated as fraudulent by the
buyer;
(v) the sale n l ay be notified to be subject to a reserved price;
(vi) if the seller makes use of pretended bidding to raise the price, the sale is voidable
at the option of the buyer."
This section only deals with the rights and liabilities of the parties to the contract
of sale. It has nothing to do with the rights and liabilities of the auctioneer either in
relation to his principal or to the buyer.
According to Benjamin sales by auction are of three kinds:-
1. Sale without reserve where the employment of a puffer renders the sale voidable.
2. Sale with a condition that the highest bidder shall be the purchasers, nothing being
said about reserve.
3. Sale with a right expressly reserved to bid by or on behalf of the seller.
A sale subject to a reserve price and the reservation of a right to hid are distinct
matters.
According to the usual practice a proposed auction is duly advertised and a printed
catalogue in the case of goods with conditions of sale is circulated. At the appointed time
and place the auctioneer, standing at a desk or rostrum, 'puts up" the several in turn
by inviting bidding from the persons present. He announces the acceptance of the last
bid by a tap with his hzonmner or by any other approved or customary method, e.g., by
shouting one, two, three or by saying going, going ,gone, and so ''knocks down" the
lot to the person who has made the bid.
An auction ''with reserves" is one where an up-set price is fixed below which the
 TIrE SALE OF GOODS 233

auctioneer refuses to scil or reserves to himself the option of buying. An auction is said
to be 'without reserve" when the goods are to be sold to the highest bidder whether the
sum bid be equivalent to the real value or not. It is not necessary that these particular
words should be used; that the seller reserves the right. The auctioneer can refuse to
deliver the goods to the highest bidder, if he by mistake knocks down the lot for less
than the reserve price.
In Rainbow v. Ilowki,is (1904) 2 K.B.322, the auctioneer by mistake knocked
down a lot for less than the reserve. Oil this out he refused to complete the sale
or sign the necessary memorandum. It was held that the buyer had no remedy against
the auctioneer; amid that it was immaterial that he did not know what the actual reserve
was.
It may be observed that clauses 3 and 4 of the section prohibit secret bidding or
the use of pretended bids, or the employment of 'pullers on behalf of time seller to raise
the price at auction. Even when the sale is with reserve or subject to an upset price only,
the seller or in his absence only one person acting oil behalf may hid. If more persons
than one hid to the knowledge of the seller with a view to enhancing the price the buyer
can avoid the contract treating the sale as fraudulent. On the other hand, an agreement
among intending bidders not to complete against each other with a view to knocking off
the article at a low price (usually called a 'knock out" agreement) has been held to be
not illegal. The seller can protect himself against too low a hid by fixing a reserve price,
below which he will not sell. Puffers, by-bidders, white bonnets, or decoy ducks are the
various technical names of the persons who, without having any intention to buy, are
employed by the seller to raise the price by fictitious bids, thereby increasing competition
among the bidders, while they themselves are secured from risk by a secret understanding
with the seller, that they shall not he bound by their bids.
A' "knock out" is a combination of persons to prevent competition between
themselves at an auction by all that only one of their number shall hid and
that anything obtained by him shall be afterwards disposed of privately among
themselves. Such a combination is nut illegal.
"Damping" is the illicit or overt act of dissuading the would-be purchaser from
bidding or from raising the price by pointing out defects or by doing some other acts
which prevent persons from forming a proper estimate of the price of the goods or by
scaring them away by some other device. Damping is illegal and entitles the auctioneer
to withdraw the property from the auction.

SUMMARY

A contract of sale of goods is a contract whereby the seller transfers or agrees to

trnsfer the property in goods to the buyer for a price. It includes actual sale and an
agreement to sell. In an agreement to sell, the ownership does not pass to the buyer, while
in a sale the ownership passes as soon as the contract is made. The essentials of a sale
are: (i) there must be some goods, (ii) they must be exchanged for a money consideration
called the price, (iii) the buyer and the seller must be two different persons, and (iv)
properly in the goods must pass from the seller to the buyer.
A contract of sale is regulated by the general law of contract, i.e., offer and
acceptance, parties competent to contract, mutual assent, subject-matter and money
consideration. Goods are of two types, viz., existing goods or future goods. Existing
goods are those which are owned and possesses by the seller at the time of contract.
Future goods are goods to be nianuf:icltired or acquired or produced by the seller after
making the contract of sale. Existing goods are either specific or ascertained goods or
generic or unascertained goods. Specific goods are goods identified and agreed upon at
the time the contract of sale is made. Gdneric goods are those which are not specifically
identified but are defined by description only.
234 MERCANTtLE LAW

Caveat Emptor—Let the buyer beware. The buyer gets the goods as they come
and takes the risk of their suitability for his purpose. It is not the duty of the seller to
point out the defects in the goods. lithe buyer depends upon his own skill and integrity
and the goods turn out to be defective, it is his own fault and he cannot hold the seller
responsible.
Conditions and Warranlies—But the purchaser may make known to the seller
the particular purpose for which he intends to buy the goods so as to show that he relics
on the seller's skill and judgement and the seller makes certain representations with
regard to the goods, which representations may rank either as conditions or warranties.
Where a condition or warranty appears in a contract of sale, the principle of caveat
emptor does not apply.
A condition is a stipulation essential to the main purpose of the contract the breach
of which gives rise to aright to treat the contract as repudiated. A warranty is a stipulation
collateral to the main purpose of the contract, the breach of which gives rise to claim
for damages but not to a right to reject the goods and treat the contract as repudiated.
Conditions and warranties may be express or implied-They are express where they
aie agreed upon between the buyer and the seller at a time of the contract. The conditions
or warranties which are not expressed but are recognised by law are implied conditions
and warranties.
Implied warranties are two in number, namely. (i) warranty for quiet possession,
and (ii) warraty against encumbrances.
Implied conditions are 8 in number, the first applies to all kinds of sale and 2nd to
5th to sale by description and 6th to 8th apply to sales by sample. General Implied
Condition is that the seller has got a title to the goods.
Sale by Description—(i) Goods sold should correspond to description (ii) Goods
bought for a particular purpose must be fit and suitable for that purpose. (iii) The goods
must be merchantable. (iv) The goods in the nature of provisions must be merchantable
and wholesome.
Sale by Sample—(i) Bulk should correspond to sample. (ii) The buyer should
have reasonable opportunity of comparing the bulk with sample. (iii) As regards defects
which are not apparent oil examination of sample goods must be merchant-
able.
Passing of Property—Ascertained Goods. In an unconditional contract for sale
of specific goods which are in deliverable state, the property in the goods passeslo the
buyer as soon as the contract is entered into, even though the payment of the price or the
delivery of the goods or both are to take place at a later date. In the case of specific goods
vhich are not in a deliverable state and the seller is hound to do something to the goods
to put them into a deliverable slate the ownership will not pass to the buyer until The
goods are so put and the buyer has notice thereof.
In the case of sale on approval the ownership of the goods passes to the buyer (a)
when he signifies his approval or acceptance to the seller or does another act adopting
the transaction; (b) if he does not signify his approval or acceptance to the seller, but
retains the goods without giving notice of rejection then, if a time has been fixed for the
return of the goods, on the expiration of such time and if no time has been fixed, on the
expiry of a reasonable time. If buyer rejects the goods he should give notice of rejection
to the seller.
Ownership in Unascertained Goods,—Where the goods contracted to be sold are
not ascertained or where they are future goods. ownership will not pass to the buyer
unit.ss and until goods are ascertained.
 THE SALE OF GOODS 235

The ascertainment of goods or their appropriation may be made (i) by the buyer
witE the seller's assent, (ii) by the seller with the buyer's assent.
The seller may appropriate the goods (a) by putting the quantity contracted for in
suitable receptacles, (b) by separating articles contracted for from others. (c) by delivery
to carrier or other bailee for transmission to buyer, without reserving right of disposal.
Risk follows Ownership—The general rule is that the loss falls on the owner.
When the property in the goods is transferred by the seller to the buyer, the risk, in
general, will fall upon the buyer. But the general rule may be qualified by express
contract between the parties in which case the risk may he separated from ov ,rship.
Transfer of Title by Non-Owners—The general rule of law is that a seller cannot
pass a better title to the buyer than he has. To this rule the Sale of Goods Act provides
some exceptions, under which buyer gets better title than the seller's. They are:
(i) Sale by a mercantile agent, (ii) sale by a co-owner, (iii) sale by persons in
possession under voidable contract. (iv) sale by seller in possession after sale, (v) sale
by buyer in possession. (vi) re-sale by an unpaid seller where he exercises his right of
lien orstoppage in transit, (vii) sale by a pawnee or pledgee where the loan is not repaid
on a stipulated date, (viii) sale by certain persons under special rules of law, such as
Receivers, Official Assignees or Receivers, Liquidators, Officials of Court, Executors
and Administrators. (ix) under the implied authority of the owner.
D uties of Seller—The first duty of the seller is to deliver the goods. Delivery may
he actual, symbolic, or constructive. Where goods are handed over by the seller to the
buyer it is an actual delivery. Where goods are incapable of being handed over by one
person to another a symbol indicating the title to the goods, e.g.. the key of a warehouse
containing the goods, may be given, and it will he symbolic delivery. Where delivery is
given by attornment, i.e., a formal acknowledgment of the person who is in actual
physical possession of the goods that he holds them on behalf and at the disposal of the
buyer there is a constructive delivery.
The seller must deliver the goods according to the contract and where there is a
condition precedent to the performance of the contract the seller need not deliver unless
the condition is satisfied.
Unless otherwise aeed, delivery of the goods and payment of the price are on
current conditions. The seller must be ready and willing to deliver the goods to the buyer
and the buyer must be ready and willing to pay the price to the seller.
It is not the duty of the seller to send or carry the goods to the buyer unless the
contract so provides; his only duty is to place the goods at the buyer's disposal. It is the
buyer's duty to demand the delivery and accept it when tendered. But the goods must
be in a deliverable state at the time of delivery or tender thereof.
Subject to the contract to the contrary, the goods must be delivered at the place at
which they happen to be at the time of the contract of sale, or if the contract is with
respect to future goods, at the place at which the goods are manufactured or produced.
The seller bears the cost of deliv.ry unless the contract otherwise provides.'
Where the goods are delivered to a carrier the seller is hound to enter into a
reasonable contract on behalf of the buyer with the earner for sate transmission of the
goods. In a transit by sea the seller must inform the buyer in time so that he may insure
the goods.
Rights of Buyer—To have delivery as per contract. To get delivery of the goods
of actual quantity contracted for. If the goods offered are in quantity more or less than
that contracted for, or if, what is offered is mixed with goods of different description,
thehuyer has aright, subject to the usage of trade (i) to reject the goods. if less is delivered,
236 MERCANTH.E LAW

(ii) to rejct the excess or even the whole, if more is offered, and (iii) if the goods are
mixed with others not ordered, to reject the whole or those not according to the contract.
If the contract is an instalment contract, and the terms of the contract permit, the
buyer has a right to repudiate the whole contract, for any defect or non-delivery of any
instalment and where he has accepted goods, to claim compensation.
Where the buyer has no opportunity to examine the goods beforehand, he has a
right to a reasniiahlc'opportUflitY of examination of the goods for 1clivery.
The buyer has a right to sue for damages for breach of warranty or for non-delivery
of the goods, or for interest. He may also sue for specific performance.
l)ulies of Buyer—To take delivery of the goods and pay for them. Also to pay
any incidental charges for the care and custody by the seller if the goods are kept by
him oil behalf of the buyer.
Duties of Seller--Where the buyer wrongfully neglects or refuses to accept and
IY for the goods, tile seller lia.s a rielit to sue [or damages for non-acceptance of the
goods.
Where properly in goods has passed to the buyer, the seller has a right to sue for
the price of the goods whether the possession is with the buyer or the seller. Even where
ownership has not passed but the buyer has agreed to pay the price on a certain day fixed
irrespective of his obtaining delivery of goods the seller may claim the price.
Rights of Unpaid Seller—The unpaid seller has a lien on the goods or any part
of them remaining in his possession or a right of stoppage in transit when the buyer
becomes insolvent and the seller has parted with possession to the carrier and in certain
circumsnulces he has the right to resell the goods. An unpaid seller in possession of goods
may exercise his lien oil goods and refuse to deliver them to the buyer until the full
payment or tender of the price, in case where (i) the goods have been sold without any
stipulation as to credit, (ii) the goods have been sold on credit but tenn of credit has
expired, (iii) the buyer becomes insolvent. The unpaid seller may exercise lien even when
in possession as bailee for buyer.
The right of stoppage in transit is an extension of the right of lien, but it arises only
on the insolvency of the buyer.
The right of stoppage in transit is a right possessed by an unpaid seller who has
parted with the goods but the goods have not yet come into the possession of the buyer,
to stop the goods in transit with a view to exercising his lien, if the buyer has become
insolvent. The unpaid seller may re-sell the goods, (i) where the goods are perishable;
(ii) where the right is expressly reserved iii the contract; (in) where in exercise of right
of lien or stoppage in transit seller gives notice to the buyer of his intention to re-sell,
the buyer does not pay or tender the price within a reasonable time.

CASES FOR RECAPITULATION

I. L was shopping in a self-service super market. He picked up a bottle of soft
drinks from a shelf. While he was examining it, the bottle exploded in his hand and
njtired hut'.. He ucd t!c Acracd Drink s Co.. which has bottled the drink, to recover
damages for breach of condition arising from the sale of food. Held, L would not succeed.
A warranty or condition does not arise unless there is a sale. No sale occurs when a
customer in a self-service super market takes an article from a shelf since he may decide
not to buy and pay for it and return it to the shelf. As there was not sale, there was no
implied condition (Lock v. Confair's Beverage Co., 366 Pa. 158).
2. The plaintiff, a housewife, ordered from the defendants, coal merchants, 'a ton
of coalite' and it was duly delivered to her. When part of the consignment was put on
 TIlE SALE OF GOODS 237

fire in an open grate in the plaintiff's house an explosion occurred which caused damage.
The plaintiff sued the defendants for damages. Held, the defendants were liable to pay
damages; for there was a breach of the condition of merchantable quality. The goods
were bought by description and defendants dealt in them, and there was an implied
condition that 'coalite' was of merchantable quality. The explosion proved the breach
of that condition [Wilson v. Rickeit, Cockerell & Co. (1954)1 All. E.R. 8681.
3. On 61h May, A entered into a contract for the sale of 814 tins of Kerosene oil
to B, and received Rs. 1.000 in part payment of the price. The goods were not with the
seller at that time but had been dispatched from Calcutta on 25th April. A had received
the RIR which he endorsed in favour of B. The goods never reached the destination, as
they were burnt on or about 12th May while in transit. Held, the buyer has to bear the
loss, as the property in the goods had passed to him and the seller could not be called
Upon to refund the price (Shanker Doss v. Bhana Rain, 1926 Lah. 406).
4. P sold barley to B by sample, delivery to be made at T railway station. B sold
the barley to X. The barley was delivered at T railway station and B, after inspecting a
sample of it, sent it on to X. X rejected it as not being according to sample. B seeks to
reject the goods. Held, B cannot reject the barley. B's action in inspecting a sample and
then ordering the barley to be sent to X was an acceptance of the goods by him, and he
could not afterwards reject the goods [Perkins v. Bell (1893)1 Q.B. 193].
5. B bought a motor car at an auction sale conducted by C, an auctioneer. The car
was sold on behalf of A who had no title to it, and the owner subsequently recovered it
from B. B sues C for the return of the price. Held. B cannot recover, as he knew that C
was an agent and the sale was of specific goods. It was stated that where an auctioneer,
disclosing the fact that he is acting as an agent but not disclosing the name of the principal,
sells specific goods, he dues not warrant the goods or his principal's title to the goods
lBenion v. Cam bell, Parker & Co. Ltd. (1925) 2 K.B .41 QI.
6. A bought from B a shipment of nuts, and B sent to A the bill of lading. A handed
the bill of lading to C in return for a loan and then became insolvent. B attempted to stop
the goods in transit, but C claimed them. Held, C had a good title to the goods, which
defeated B's right to stop the goods in transit [Leask v. Scan. Bros. (1877)2 Q.B.D.3761.
7. A manufacturer contracted to supply 30 tons of apple-juice in accordance with
sample to a wine merchant, to be delivered in weekly truck-loads. He crushed the apples.
put the juice in casks and kept it pending delivery. After 20 tons had been delivered, no
further deliveries were made through the delay of the buyer in breach of the contract
notwithstanding requests for delivery instructions from the seller, and ultimately the
undelivered juice went putrid and had to be thrown away. Held, the juice was assembled
by the seller for the purpose of fulfilling the contract and kept ready for delivery as and
when the buyer proposed to take; after the delay, therefore, the juice was at the risk of
buyer, who must suffer the loss [De,nhy !iani,lton Co. Lid. v. Borden (1949) 1 All.
ER .4 35]
8. A agreed to buy front B a car and pay Rs. 8.000 for it, if his solicitor approved.
A took possession of the car and sold it to C. The solicitor subsequently disapproved of
the transaction. H sued C for the recovery of Rs. 8000. Held. B cannot recover the price
of the car. C, the honafide buyer, got good title, for A "agreed to buy it". It was a sale
by buyer in possession [Martin v. Whale (1917) 2 K.R. 480 C.A.I.
9. A, a jeweller, was entrusted with a diamond by P with the instructions that A
should obtain offers for it, and if any such offer was approved by P, A should sell it to
the offeror, Acting contrary to P's instructions. A sold the diamond to S who bought it
in good faith. Thereafter A absconded with the price money. P sued to recover the
diamond. Held. P cannot recover the diamond from S as the sale was made by A. the
238 MERCANTILE LAW

jeweller, as a mercantile agent in the ordinary course of his business, though contrary to
P's instructions 1(1929)3 Born. L.R.J.
10. A bought from B a second-hand refrigerator for Rs. 450 and it was agreed
between A and B that the refrigerator should be put in order at a cost of Rs. 320. A took
delivery and admitted that its condition was satisfactory. Later, A reported to B that the
refrigerator was not in working order and Ft took away two parts of it for repairs. The
full bill for repairs had not however, been paid and B claimed a lien on the two parts for
the balance of the original cost of repairs and refused to return the same until he was paid
the balance due for the repairs. Held. B's refusal to return the two parts until payment
of the balance for the repairs is not justified. He has no right of lien. The contract had
been fully performed and the refrigerator was handed over once and the lien had ended.
It did not revive when the seller undertook the work of repairing the two parts (Edaijee
v. Cafe Johan Bros. 1943 Nag. 249).
11. A ordered a certain quantity of new red chilies and B sold to him goods said
to answer to those described while they were in transit from Calcutta to Cuddalore. The
Contract was c.i.f. and A paid for the goods on presentation of shipping documents. The
goods were cleared at Cuddalore port by A's clearing agents and railed to him to Alandur
where he had his place of business. On inspection, the goods were found to be greatly
deteriorated, white in colour and the seeds falling out. A rejected the goods but retained
them as security for the price already paid. Held, the contract was for the delivery of new
chilliës and the buyer could properly reject them as there was a breach of condition on
the part of the sellers Muzhu Kishan v. Madhavji Devi Clzand, 1953 Mad. 817). But
after rejection the buyer cannot retain the goods as security for the price already paid or
otherwise in satisfaction of his claim for . damages arising out of non-delivery. Hç can
only charge the seller, in whom the goods revested after rejection for keeping the goods
safely JLyton & Baker Lid. (1923) 1 K.B.6851.
12. The plaintiff, who wished to buy a motor car, approached the defefidants, a
firm of motor car dealers, and told them that he wished to bu a car suitable for touring
purposes. The defendants recommended a Bugatti Car and so he ordered an eight cylinder
Bugatli car. The car was supplied with a guarantee which expressly excluded 'any other
guarantee or warranty, statutory or otherwise.' The car was unsuitable for touring
purposes and the plaintiff repudiated the contract and sued the defendants for recovery
of the price. The defendants raised the defence of the exemption clause in the contract.
llc'ld, the plaintiff was entitled to reject the car and recover the 1)11cc, as the car was not
fit for the purpose for which it was bought; the exemption clause did not apply 1BaldrY
v. Marshall Ltd (1925) 1 K.B.260J.
13. A contract was made for the sale of some china clay f.o.b. at Fowey. The buyer
chartered a ship and gave notice to the sellers who delivered the clay on board at Fowey.
The destination of the clay had never been communicated by the buyer to the sellers, but
in fact it was carried to Glasgow. No bill of lading was signed and before the ship left
the port the sellers heard of the insolvency of the buyer and gave notice stopping the
goods. held, the clay being in the possession of the master of the ship only as a earner
the transit was not at an end, and the notice to stop was given in time. It was observed
by the Appeal Court that delivery of goods by the seller to the carrier, even though the
carrier be nominated and hired by the buyer, its only constructive, not actual delivery to
the buyer, inasmuch as the contract with acarrier to carry goods does not make the carrier
the agent or servant of the person with whom he contracts. Till the goods are in actual
possession of the buyer the transit is not at an end, and it makes no difference that their
ultinTate destination has not been communicated by the buyer to seller [In Es.p Rosevear
China Clay Co., Re Cock (1879). 11 Ch D.5601.
14. X sold copper to Y and sent him a bill of lading, endorsed in blank together
 THE SALE OF GOODS 239

with a draft for the price. Y was insolvent and did not accept the draft but handed the
bill of lading to Z, in fulfilment of a contract for the . sale of copper to him. Z paid for the
copper and took the bill of lading without notice of X's right as unpaid seller. X stopped
the copper in transit. held, Z can sue the carrier for non-delivery, as the seller had lost
his right of stopping the goods in4ransit. An unpaid seller's right of stoppage in transit
Is defeated against a transferee who takes in good faith and for consideration [Cahn v.
Pockeit's. etc.. Co. (1899) 1 Q.B.6431.
15. X, a dealer in cattle food, sold to Y, another such dealer, 15,000 tons of meat
and bone meal of a specified quality to be shipped 1,250 tons monthly in equal
instalments. After about half the meal was delivered and paid for, it was found that it
was not of the contract quality, and Y refused to take further delivery. Held, Y was
entitled to refuse to take further delivery, as he was not bound to take the risk of having
put upon him further deliveries of goods which did not conform to the contract [Robert
A. Munro & Co. v. Meyer (1903)2 K.B. 3121.
16. A sells and consigns to 13 goods of the value of Rs. 12,000. B assigns therailway
receipt to C to secure a specific advance of Rs.5.000 on the railway receipt. Before the
goods reach the destination B becomes insolvent being indebted to C for Rs. 9,000. A
gives notice to stop the goods in transit A can stop the goods in transit but subject to the
pledge of C. Since the pledge was to secure a specific advance of Rs. 5,000, C can recover
that amount from the goods or from A. A will have to pay Rs. 5,000 to C and can rank
as creditor of B in insolvency, C will rank as creditor as to Rs. 4,000.
17. There was a sale by sample of mixed worsted coatings to be in quality and
weight equal to the samples. It is found that the goods owing to a latent defect will not
stand ordinary wear when made up into coats. The same defect appeared in the sample
but could not be detected. held, the buyer can reject the goods as the defects in the cloth
were not discoverable by the ordinary inspection [Drurninond v. Van Ingen (1877) 2
App. Ces.2481.
18. A firm of confectioners' materials agreed to sell condensed milk in tins of a
certain standard to N who received the shipping documents and paid the price. The goods
arrived bearing a brand which was an infringement of a registered trade mark of another
manufacturer and were, therefore, detained by the customs authorities. Held, the sellers
had broken the implied condition relating to title to the goods. As the sellers had no right
to sell these goods, the buyer could get back the price and sue for damages [Niblet! V.
Confectioners Material Co. Lid. (1921)3 K.B. 3 87 1.
19. M made a hire-purchase agreement with N for a motor-car of which N was
described as the owner. M paid four of the twelve monthly instalments and then learnt
that X claimed to be the owner of the car. He nevertheless paid the balance of instalment
and exercised his option to purchase. X then demanded the car and M gave it up to him.
M then sued N to recover the full price and N-counter claimed for a reasonable sum as
hiring charges for the car during the period it was with M. Held, M was entitled to recover
the full price paid by him to N, but N could not get anything. There was a breach of
condition of title treated as a breach of warranty and so M could get back the amount
paid by him. But N could not get anything because there was a total failure of
consideration for which, had he been so minded. M could have sued in quasi-contract
and which prevented N from recovering any sum of money whether under the hire-pur-
chase contract or by way of quaniurn meruit IWarman v. Southern Countries Car
Finance Corp. Ltd. (1949) 2 K.B. 576].
20- R bought a radio set rorn B, the local distributor of HGE Ltd., for Rs. 675 with
a one-year guarantee of satisfactory service. The radio set proved defective from the very
beginning and had to be repaired by the local distributor twice and once by the
manufacturers. But it was not found satisfactory. R claims refund of its price. Held, R's
240 MERC'ANTILF. LAW

claim came under the purview of exception (1) and (2) of Sec 16 of the Sale of Goods
Act, and he is entitled to refund of the price. The radio was not of merchantable quality
nor was it fit for the purpose, i.e., as a radio set (Ranbir Singh v. Hindustan General
Electric Corp. Lid. 1971 Born. 97).
2l. H let a piano on hire to B on the following terms: B was to pay 10 S. 16 d. every
month; on payment promptly of 36 monthly instalments the piano should become his
properly. B had the right to terminate thc hire any time by returning the piano to H. held
by the House of Lords, that B was in possession undem a hire-purchase agreement and
not under an agreement to buy (Helhv v. Mathews (1993) A.C. 471).
22. M entered into a contract for supply of tents to Director General of Supplies
and Disposals. The goods were to be inspected at premises of the supplier and the same
being passed by the Inspector, the goods were to be despatched by railway to the
consignee. The term of delivery was F.O.R. place of despatch. One of the consignments
of 1500 tents was despatched to the consignee under Railway Receipt. The consignee
reported that 224 tents out of the said consignment had not been received at the
destination. The consignee deducted the price of 224 tents from the other bills of the
consignor. It was held by the Supreme Court that the consignee had no right to deduct
the price because as soon as the goods were loaded in the railway wagons at the place
of despatch as per the terms of delivery, the property in goods together with risk passed
from the seller to the buyer. The consignee was liable to bear the loss and not the
seller.(M/s Alarwar Ten: Factory v. Union of India, 1990 S.C. 1808).
 Chapter VII

Insurance
PART 7-A
In business, as in private lifç, there are dangers and risks of every kind. The aim
of all insurance is to make provision against such dangers which beset human life and
dealing. He who seeks safety, called the insured or assured, pays a certain sum, called
the premium, to the insurer or underwriter who, in consideration of this premiuiis, takes
upon himself the risk insured against and undertakes to make good to the assured any
loss which he may sustain by reason of the named peril.
The risks which may be insured against include fire, the perils of the sea (marine
insurance), death (life insurance) and accidents and burglary. In fact, nowadays the
happening of practically any event may be insured against at a premium commensurate
with the risk involved.
NATURE OF THE CONTRACT OF INSURANCE
The contract of insurance is called an aleatory contract because it depends upon
an uncertain event. If such a thing happens, e.g., if the house is burnt down or the ship
is stranded, the insurer will pay the value of it. At first sight this would seem to be a
wagering transaction, the insurer betting with the assured that his house will not be burnt
or his ship will not sink and giving him the odds of its value against the premium. It is
because of this uncertainty that Lj. 1aosfield t described insurance as "a contract on
speculation." But the modern view is that insurance contracts are not speculative or
wagering contracts. Insurance is not merely a gamble on an uncertain future. In reality,
a contract of insurance is a perfectly valid contract; for the assured is only indemnified
for his loss, and he does not gain by the happening of the event insured against; he does
not make a profit of his loss. Moreover, the assured must have an insurable interest in
the subject-matter insured; while in a wager no insurable interest is present. Therefpre,
although it is an aleatory contract, depending upon an uncertain event, it is not a wagering
or a speculative contract nor is it merely a gamble on an uncertain event. -

FUNDAMENTAL PRINCIPLES OF INSURANCE

Insurance transactions are conducted upon principles which on examination prove

simple and almost self-evident, yet they are constantly being invoked, and we must,
never lose sight of them. These principles are common to all types of insurance including
life assurance, excepting the principle of indemnity which does not apply to life
assurance. These principles are (i) good faith, (ii) insurable interest, (iii) indemnity, (iv)
mitigation of loss, (v) attachment of risk. (vi) causaprox&na.
GOOD FAITH
A contract of insurance is a contract, uberrimaefidei, a contract based on utmost
good faith and if the utmost good faith is not observed by either party th.e contract may
1. Caiierv. Etochrn (1765) Sm. L.C. 546.
241
242 ERCAfl1LIt LAW

be avoided by the other. Since insurance shifts risks from one party to another, it is
essential that there must be the utmost good faith and frankness between the insured and
insurer; the whole truth must be told about the subject-matter of insurance and all circum-
stances surrounding it, in order that the underwriter may know the extent of his risk and
how much he must charge for the insurance of it. The wilful or innocent withholding of
any relevant information is a most serious matter, and the underwriter can declare the
contract void on discovering it. The obligation to make a full and true disclosure applies
to all types of insurance. The duty to disclose continues up to the conclusion of the
contract and covers any material alteration in the character of the risk which may take
place between proposal and acceptance.2 Fraud invalidates the insurance, and deprives
the party committing it of all his rights arising ouçof the contract. Concealment or
misrepresentation of material facts is fatal to the contract; but in the case of innocent
misrepresentation the premium is returnable on the avoidance of the policy. Non-
disclosure of a fact of which the assured was ignorant is not fatal to the contract. He need
not mention what the insurers know. In India, the doctrine of utmost good faith is subject
to the provisions of Sec. 45 of the Insurance Act, 193.
INSURABLE INTEREST
The second principle is that the assured must have an actual interest called the
insurable interest, in the subject-matter of the insurance; either he must own part or whole
of it, or he must be in such a position that injury to it would affect him adversely. He
must be "so situated with regard to the thing insured that he would have benefit by its
existence, loss from its destruction. -3Any person may be said to have an interest in the
subject-matter of insurance who may be injured by the risks to which the subject-matter
is exposed, or would but for those risks have a certainty of advantage. To illustrate this
point we may take an example from marine insurance. The owner of a ship runs a risk
of losing his ship, the charterer of the ship runs a risk of losing his freight, and the owner
of the cargo of losing his goods and profit. All these persons are interested because they
all run a risk, have something at stake, something to lose by the happening of the peril
insured against. It is the existence of insurable interest in a contract of insurance that
differentiates and distinguishes it from a mere wager or a gaming contract. But it is
essential that the insurable interest must be actual and real and not a mere expectation
or an anxiety. It must be pecuniary interest; a purely sentimental interest would not be
enough. A contract of insurance effected without insurable interest is void.
INDEMNITY
The third fundamental principle is that excepting life assurance and personal
accident and sickness insurance, a contract of insurance contained in a lire, marine,
burglary or any other policy is a contract of indemnity. This means that the assured in
the case of loss against which the policy has been made shall be fully indemnified but
never more than fully indemnified. Thus, the insurer does not agree to pay a specific sum
on a certain contingency but undertakes to indemnify the insured what he actually loses
by the happening of the event upon which the insurer's liability is to arise, and in no case
is the insured entitled to make a profit of his loss. If the house is burnt down, the insurer
will pay the value of it. At first sight this might appear to be a wagering transaction, the
insurer betting with the insured that his house will not be burnt down and giving him the

2. See Vijayakumar v. New Zealand Ins. Co. 1954 Boni.347; Seethamma v. Bombay Life Ass.
Co., 1954 Mys. 134; Kothatkarv. WIt..!. Co.. 1954 Nag. 325; V.K.S. Selly v. P.L. & G. Ins.
Co. 1958 Mys. 53; Rattan La) v. Metropolitan Ins. Co. 1959 Pat. 413; Looker v. Law Union
and Lock Ins. Co. (1928) 1, K.B. 554; Rohni Goswami v. Ocean Accident & Guarantee
Co.poration Ltd. (1961)31 Camp. Cas. 17.
3. Lucena v. Crawford (1806) 1 Taunt. 325, per Lawrence J.
 INSURANCE 243

odds of its value against the premium. But so long as the insured is only indemnified for
the loss and does not make any gain by the happening of the event insured against, the
contract is valid. A contract of insurance, however, ceases to he a contract of indemnity
f she insurer promises to pa y a fixed sum on Site happening of the event insured against
whether the assured has suffered any loss or not. From their very nature contracts of life
and accident insurance belong to this class and in their case indemnity is not the
governing principle. In these cases, the value of the peril insured against cannot be
appraised in money, and therefore, the injury or death cannot really be indemnified. Even
contracts of fire or burglary insurance need not necessarily be contracts of indemnity. If
the insurer agrees to pay a certain fixed sum irrespective of loss, the contract is not one
of indemnity. An insurance was against loss of certain speci- fied articles including a
pearl necklace, and the necklace disappeared. The insurer under agreement with the
insured gave him some other articles to take its place. The necklace was later found. The
Court held that the insured could retain the articles supplied by the insurance company.
MITIGATION OF LOSS
The next essential principle is that, in the event of some mishap to the insured
property, the owner (the insured) must act as though he were uninsured, and make every
effort to preserve his property. He must take such steps to this end as he considers prudent,
and should his property be touched by peril he must do everything in his power to
minimise the loss and to save what is left. In a word, he must act as a prudent uninsured
person would do in similar circumstances. But it must be remembered in this connection
that though a man is bound to do his best for his insurer, he is not bound to do it at his
own peril. So, if reasonable effort was made and precaution taken to save the property,
the insurer will be liable for all loss resulting from the peril insured against-
RISK MUST ATTACH
The next principle is that a contract of insurance can be enforced only if the risk
has attached. If the risk is not run the consideration fails, and therefore the premium
received by the insurer must be returned. It is so even where the cause of the risk being
not run is the fault, will or pleasure of the assured. The underwriter receives a premium
for running the risk of indemnifying the assured, and if he does not run the risk, the
consideration for which the premium was put into his hands fails and therefore he must
return it.4 While a policy does not attach till the risk begins, it can equally not attach after
the risk is determined one way or other, except in those special insurances where both
parties being ignorant of the position of the thing insured, contract to insure it lost or not
lost:
CAUSA PROXIMA
The Iastprinçjplc is that in order to make the insurer liable for loss, such loss just
have been proximately caused by the peril insured against. "Every loss that clearly and
proximately results, whether directly or indirectly, from the -e - vent insured against is
within the policy." The maxim in causa proxhuion reita .specta!ur, i.e., the
proximate and not the remote cause is to be looked to, and if the cause of the loss is a
peril insured against the assured can recover. "The question, which is the causaproxirna
of a loss, can only arise where there has been a succession of causes. When a result has -
been brought about by two causes, you must in.... insurance law, look to the nearest
cause, although the result would, no doubt, not have happened without the remote

4. Tyne v. Fletcher (1777)99 E.R. J997.

5. Picard, Elements of insurance Law, p. 3.
6. Stanley v. Western Ins. Co. (1886).3 RX. at 74, per Kelly, C.B.
244 MERCANI1LE LAW

cause. -7 In this case the peril insured against was collision with another ship, resulting
in delay and mishandling of cargo of oranges whkh detcnorãied. The Master of the Rolls
held that the damage to oranges was not direct result of collision, but of delay and
mishandling and as these causes were not insured against the insured could not recover.
"The law will not allow the assured to go back in the sllccession of causes to find out
what is the original cause oflos." 5 The last ortlse effective of the causes is to be looked
into and others rejected. -
CON'I'RAcT OF INSURANCE ONE FROM YEAR TO YEAR
The general rule is that except in the case of life assurance a contract of ins'urance
is a contract from year to year only, and the insurance automatically comes to an end
after the expiry of the year; but it can be continued for a further period, if before the
expiry of the year, the insured expresses-his intention to continue and pays the premium.
A contract of life assurance is not a contract for a year only, but is a continuing contract
with a provision that if prernium is not paid every year at or about the specified time the
contract would lapse. This distinction is of great Importance with regard to the duty of
disclosure and the operation of conditions subsequent to the assignment of the policy or
its proceeds, and days of grace.
PREMIUM
The premium is the price for the risk undertaken by the insurer. It is the considera
tion for the insurance. The premium need not always be a money payment, although in
majority of cases it is so. Any consideration sufficient for a simple contract may become
the premium in a contract of insurance. For example, in the case of mutual insurance, it
consists of a liability to contribute to the losses of other members of the mutual society.
The rate of premium is based upon the average of losses as compared with profits.
All circumstances affecting the risk like locality, the construction and use of the property,
are taken into consideration. In life assurance, the premium iscalculated on the average
rate of mortality and a premium which on that ordinary average will prevent the insurance
company from being the loser is charged. Over and above estimates and averages the
premium includes an additional sum for office expenses and other charges. The amount
of the premium may not always be a fixed sum, for it may be arranged to vary according
to the changes in the risk at any time. We have observed before that payment of the
premium constitutes, in most cases, a condition precedent to the creation of a binding
contract of insurance. Though pre-payment of the premium is not a condition implied in
law a precedent to the liability of the insurer, it is the general practice of the insurance
companies. In such cases unless the premium has been paid, the contract will not be
effective even after an agreement to issue and accept a policy.
DAYS OF GRACE
The days of grace are the days allowed by the insurance company after the expiry
of the stipulated period of insurance during which the assured can pay the premium in
order to continue or to renew the policy of insurance. If the contract of insurance is only
for a year, the days of race are meant to afford to the assured an additional oppom'tnnity
of renewing the contract and not of continuing it. So, if the insured has not agreed before
the year is over to renew the contract, and the loss happens during the days of grace, the
company is not liable. Also in insurances where the insurer reserves the option to renew
the risk, the insured is not covered during the days of grace if the renewal premiums
remain unpaid, i.e. beforeit is tendered and accepted. If therefore before the expiration

7. Pink v. Fleming (1899)25 Q.B.D.396. per Lord Hier, M.R.

8. Ibid.
 INSURANCE 24

of the year the company gives notice to the insured that unless an increased premium is
paid the insurance would not be renewed and if the insurer refuses to pay, the company
is not liable on the destruction by fire of the premises of the assured after the expiration
of the year but within the days of grace. In the case of contract of life insurance, on the
other hand, the insurers have no option but to continue the policy on the payment of the
premium every year, as the policy creates a continuing risk. On the non-payment of the
premium the policy merely lapses. If, therefore, death occurs during the days of grace
without the payment of the premium, the money due under the policy becomes payable.
RURN OF PREMIUM
We have seen above that premium is the consideration for the risk run by the
insurers, and if the risk insured against is not run, then the consideration fails, the policy
does not attach, and as a consequence the premium paid can be recovered from the insur-
ers. The general principle applicable to the claim for the return of premium is that if the
insurers have never been on the risk, they cannot be said to have carved the premium.
The risk is never run where before the policy comes into force the subject-matter of
insurance ceases to exish or where it is wrongly described, or where the assured had
never any insurable interest in the subject-matter, or where the policy issued is ultra vires
the company, or where the policy is void on account of some illegality, or where the
policy is void on account of some breach of a condition precedent. But where the
insurance is avoided by the insurers on the ground of breach of warranty the premium
can only be recovered if it is shdwn that there was breach ab inilio. Where, however, the
risk has begun to run no matter for how short a period, the premium cannorbe recovered;
and so a breach of condition subsequent is no ground for ordering the return of the
premium, as the risk has once attached. Where the value of the interest insured turns out
in fact to be less than the amount insured, a proportionate part of the premium must be
returned, for the insurers have only been liable to indemnify the assured and in the event
of a loss would only have paid the actual value of the subject-matter destroyed. Therefore,
the insurance has not really attached in respect of the amount over-insured and a
proportionate part of the premium has never been earned by the insurers. The over-in-
surance must be ma in good faith otherwise no portion of the premium would be
returned. This does not, however, mean that the risk which has begun to run can be
apportioned and a proportionate'premniumn returned unless the risk is'divisible, and has
attached only to some separable part of the subject-matter.
POLICY
The policy is a formal and enforceable stamped document signed and issued by
the insurance company embodying the terms of the contract between the parties.
Although it is a universal practice of insurance companies to issue policies, yet, except
in marine insurance, there is no rule of law requiring the issuing of a policy or its being
in any particular form. A policy is only a documentary evidenceof a contract of insurance
between the parties, and neither law nor custom disfavours oral evidence to prove the
terms of the contract of insurance. The existence of a policy, therefore, is not necessary
for the validity of a contract of insurance, other than marine insurance. A contract of
marine insurance shall not be valid unless it is expressed, in a Sea or Marine Policy.
The articles of association of every insurance company usually provide the mode
in which the company is to be bound, and policies must be issued in accordance with
the provisions contained therein, before the assured can sue on the insurance. But where
there is a clear proof of agreement to insure, the Court will order the company to issue
a policy in accordance with such agreement No coany;whse business is confined
to certain classes of risk, can issue a valid policy hot cdvcntmg such ri.skt"AII insurance
policies must be stamped. A policy is a' gnilateral document-and the asaureti is no party
246 MERCANTWE LAW

to it. It is issued by the insurers and bears the seal of the company, and is signed by
certain responsible officers of the company. It does not purport to be signed by or on
behalf of the insured. But the assured can enforce his right under it, if he has done
everything required of him, and he is also bound by it. If a condition appears for the first
time in the policy which was neither contemplated nor agreed upon between the parties,
the assured is not bound by the contract., unless he accepts this condition. Delivery of
the policy to the assured is not essential to make a binding contract; and the risk will
attach where no policy is delivered, if the contract is otherwise complete and the first
premium has been paid. When the policy is under the seal of the company, it becomes
operative from the time it is formally 'signed', sealed and delivered to the assured or his
agent. The policy when issued is the property of the assured even though it may be
retained by the in s urers for convenience only, for "there is no duty on the part of an
insurer to get the policy of insurance into the physical possession of the assured." And
mere delivery to the assured does not amount to an acceptance by him of the terms of
the contract. Further, as the delivery of the policy is not a necessary condition to the
httaching of the nsk, similarly, its production is not a condition precedent to the payment
Pf the money due under it. Its non-production may be explained by showing that the
policy is lost or it is in the hands of a person who does not part with it.
INTERIM REcEwr, CERTIFICATE OR COVER NOTE
A cover note or interim certificate is a document which the insurance company,
on receiving the proposal, may issue pending the execution of a policy or the final
decision of the directors as to acceptance or rejection of the proposal. It acknowledges
receipt of premium and forms a binding contract of insurance during the interval between
the proposal and the final acceptance or rejection by the insurers. The practice of issuing
cover notes is very common in tire, burglary or accident insurance business.
RE-INSURANCE
Every insurance company has a limit to the risk it is willing to undertake in respect
of an individual policy. Thus, if an insurance company finds that it has entered into an
insurance contract which is an expensive proposition for it or if it wishes to minimise
the chances of any possible loss, without, at the same time, giving up the contract, it will
re-insure a portion of the risk with some other insurance company or companies. This
device is known as re-insurance. Suppose a man wishing to insure his house for Rs.
50,000 goes to an insurance coMpany, which will accept the risk if it is satisfied as to
the condition of the property. But if its own limit is probably Rs. 25.000, it will arrange
with another company to re-insure or take up so much of the risk as exceeds its limit,
i.e ,Rs. 25,000, so that if the house is burnt down the original insurers would pay the
ow ner Rs. 50,000, but they would be recouped Rs. 25.000 by the re-insurance office.
Re-insurance can be resorted to in all kinds of insurance. Re-insurance is a contract which
insures the thing originally insured, and by which an insurer is to be indemnified against
any loss which he may sustain by reason of being himself compelled to pay the assured
under the original contract of insurance. A contract of insurance creates in the insurers
an insurable interest sufficient to support a re-insurance to the full amount of their liability
on the original policy. But a contract of re-insurance is always a contract of indemnity.
Hence the re-insurers before paying money must be satisfied that the sum originally
insured has been paid by the re-insuretL,.-
The re-insurance is subject to the clauses and conditions in the original policy, and
is also entitled to any benefits which the original insurance policy is entitled to. If the
original contract is altered without the consent or knowledge of the re-insurers, the
re-insurers are discharged. As a policy of re-insurance is co-extensive with the original
policy, the former cannot remain in force for a period exceeding the duration of the
original policy. If, therefore, the original policy lapses or the insurance comes to an end
 INSURANCE 247

for any other reason the re-insurance policy also ceases to exist automatically from that
date. Just as an the case of an insurance so in a re-insurance the parties must show the
utmost good faith. If information possessed by re-insured and material to the risk be not
communicated to the re-insurer the policy of re-insurance will be void. The re-insured
must inform the re-insurer not only all the facts disclosed to him by his assured, but also
such facts as he learned subsequent to the original contract. A re-insured being himself
an assured, is required not only before, but after the contract comes into force, to act with
the greatest good faith. Though misrepresentation or non-disclosure of a material fact
by the re-insured will avoid the policy, yet representation as to the nature of the risk will
not help the re-insurer who has formed his own judgment of the nature of the risk.
Re-insurers are entitled to be subrogated to all the rights of the onginalJns,urers including
the right of the insured to which the original insurers are subrogated. -
DOUBLE INSURANCE
When the same subject-matter is insured with two or more insurers and the total
sum insured exceeds the actual value of the subject-matter, it is known as double
insurance and it amounts to over-insurance. As stated in Sec. 34 of the Marine Insurance
Act, over-insurance and double insurance are valid unless the policy otherwise provides.
For example, if A insures his factory worth Rs. I lakh with three insurers as: with X for
Rs. 40,000, with Y for Rs. 35,000 and with Z for Rs. 50,000, there is double insurance
because the aggregate of all the policies exceeds the total value of A's factory. If A
insures with X for Rs 40,000, with Y for Rs. 30,000 and with Z for Rs. 30,000 there is
no double insurance.
In case of loss, the assured may claim payment from the insurers in such order as
he thinks lit, but he will not get more than his actual loss, as each contract of insurance
is a contract of indemnity The advantage of double insurance is that it protects him
against loss in the event of one or more of the insurers becoming insolvent, he can recover
up to the value of the policy from the solvent insurer. The insurers as between themselves
are liable to contribute to the loss in proportion to the amount for which each one is
liable. Note, there is no double insurance in case of life insurance. Human life is priceless
and a person can get his life insured with as many insurers as he likes; life insurance is
not a contract of indemnity. In India, Life Insurance Corporation of India being the only
insurer of life there is no question of double insurance of life.

PART 7-B
SUBROGATION AND CONTRIBUTION
IN FIRE AND MARINE INSURANCE

SUBROGATION
As observed before, the essence of lire and marine insurance is indemnity, which
means that the assured shall be fully indemnified. He is not to make a "profit of his loss"
and it is this rule that gives rise to the doctrine of subrogation. The right of subrogation
is a necessary corollary or the principle of indemnity and is essential for its
preservation. It is inherent in and springs from the principle of indemnity and the basis
of the right is justice, equity and god conscience so that the insurer may reduce the
extent of his liability within limits.' If the assured recovers the full extent of the loss
from the insurer and then he gets comnensation from third parties in respect of the same
9. Assicurasioin, etc. v. Empress Ass. Corp. (1907)2 K.B. 814.
10. Vaaudeva v. Caledonian Ins. Co., 1965 Mad. 159.
24* MERCANTILE lAW

loss, the assured would be more than fully indemnified and the whole doctrine of
indemnity would be done away with. 1t Subrogation is the substitution of one person in
place of another in relation to the claim, its rights, remedies or securities. The doctrine
is applicable to both lire and marine insurance, by which, on indemnifying the insured
for his loss, "the underwriter is entitled to the advantage of every right of the assured,
whether such right Consists in contract or in remedy for tort or in any other right." Having
satisfied the claim of the assured, the insurers stand in his place; they are subrogated to
all his rights, and if he also receives compensation from some other person in respect of
the same ioo& it: iliust pay over that aniurt In the insurers. He cannot take with both
hands. To illustrate the doctrine, we may give the facts of the case Casiellain v.
Preston. 12
A vendor contracted with a purchaser tor the sale of a house which had been insured
against fire by the vendor. There was no mention of the insurance in the contract of sale.
A fortnight later the house was damaged by fire and the vendor received £330 under his
policy. Subsequently the purchase was completed and the purchase money agreed upon
paid without any deduction of the sum received by the vendor from the insurers. Field,
in an action by the insurance company against the vendor that the insurers were entitled
to recover a sum equal to the insurance money.
In another case, a ship is posted at Lloyd's as "missing" and the underwriter on
her hull pays a total loss. If the vessel should subsequently arrive, she is then the property
of the underwriter. 13 Or, where goods are jettisoned for the general safety, the under-
writeron payment for a total loss of the jettisoned goods, stands in the place of the assured
and is entitled to general average compensation for the jettison.' The insurers, however,
have only the rights which the insured himself has; for, in the words of Lord Cairns, "the
right of the underwriters is merely to make such claim for damages as the assured himself
could have made and ...it cannot of course be made against the assured himself"
In Simpson v. Thompson, ' 5 two ships A and B belonging to the same owner came
into collision. The insurers of the ship A indemnified the owner and then sued Win
owner of the ship B for negligence, claiming the amount they had paid in respect of ship
A. Field, they could not recover, as both vessels were owned by one and the same person,
no remedy had been transferred to the underwriter, inasmuch as a person cannot sue
himself.
The insurers having contracted to indemnify, they cannot insist on others being
sued first, though after having indemnified the assured, the underwriters stand in his
place and can enforce whatever rights to contribution or damages the assured was enti
tied to.' The result is that the dwner has two remedies and he may avail himself of which
he pleases, though he cannot retain the proceeds of both, so as to be repaid the value of
his loss twice over.
CONTRIBUTION
Contribution is the right of the insurers to claim from others some payment towards
the loss, and arises only where there is double insurance, i.e., where two or more policies
have been taken out the total amount whereof exceeds the total value of the loss suffered.
Remember, it takes place where different insurers insure the same interest in respect of
the same property and the same perils. It resembles the remedies between co-sureties
whereby the liability of each may be made proportionate. As the contract of insurance

11. North England lion Steamship Ins. Arson. v. Armstrong (1879)3011. Q.B. 81; John Edward
& Co. v. Motor Union Ins. Co. (1922)2 K.. B. 249.
12. Caitdllain v. Preston (1883) H.QB.D. 38 as p. 38. per Brett Li.
13. Houslrnan v. Thornton (1810) Holt N. 242.
14. Dickinson v. Jardine (1866) Lit. 3 CP. 639.
15. (1877)3A.C.279.
16. Dickinson v. Jardine. Ibid.
 INSURANCE 249

is a contract of indemnity, the assured cannot get more than the actual value of the
property or the amount of the loss. The insurer is only entitled to contribution where he
has paid the assured. The assured may sue all insurers together, or provided the policy
is not subject to average, he may recover the whole amount of damages from one and
let that one seek contribution of the amount paid by him in excess of ratable proportion
of loss. Ratable proportion is such a proportion of the loss as the amount of (he policy
or item under which loss occurs bears to the total insurance under the same heading.
Thus, if A insured his house with B company for Rs. 20.000, and with C company for
Rs. 10,000 and the house is damaged to the extent of Rs. 6,000, A may sue B company
and recover the entire sum of Rs. 6,000 from it. B company can then sue C company for
contribution. The loss will be divided ratably as follows:-
20 , 000
B Company of 6,000 = Rs. 4,0(X)

C Company. 101000
30,000 of 6,000 = Rs. 2,000

But the interest insured must be the same: if not, the insurers of the person who
would ha've been liable if no insurance whatsoever had been effected will have to bear
the loss. Thus in-
North Rriiis/z and Mercantile Co. v. London, Liverpool and Globe Ins. Co. (1877)
5 Ch. D. 569, goods were burnt whilst in a warehouse. The merchant had insured the
goods and the wharlinger had also done so to cover his common Law liability. The
merchant's insurers having paid the loss sued the wharfiner's insurers. Held, that the
merchant's insurers could recover the whole amount of the loss as this was a case of
subrogation and not contribution, since each insurer represents his assured and the right
of the bailor against the bailee is not to contribution merely, but to complete indemnity.
DISTINCTION BETWEEN SUBROGATION AND CONTRIBUTION
1. Contribution implies more than one contract of insurance each of which under-
takes a similar, if not identical, liability in respect of the same subject-matter and
the same interest therein. Subrogation does not imply more than one insurance.
2. The object of contribution is to distribute the actual loss in such a way that each
bears his proper share. No one insurer is more liable than any other, no more than
the whole loss can be recovered. In case of subrogation, the object is substitution
of one person in place of another so that the one who is substituted succeeds to the
rights and remedies of another person.
3. In contribution, the insurer, after making payment to the assured, recovers the
amount that he has paid in excess of his share from other insurers. In subrogation,
after satisfying the claim, the insurer stands in the place of the assured. He may
recover from a third party who would have been liable to pay had there been no
insurance,
'For subrogation to arise, the assured must have concurrent remedies against the
person causing the loss and against the insurer. There need not be more than one policy
nor need that offer complete indemnity. All that is necessary is that there should be,
besides the insurer, another person liable to the insured, or other means of indemnity
open to the assured other than and besides recourse to the insured.. In subrogation the
aim is to shift the loss on him who would have been liable if there had been no insurance;
in contribution the aim is to spread the Loss equitably amongst the different underwriters
who have insured the same interest."

17. Porter's Laws of Insurance, 8th ed., p.251.

 Chapter Viii

Marine Insurance
PART 8-A
MARINE INSURANCE
The law relating to marine insurance is now found in the Marine Insurance Act,
1963, and references in this section are to that Act, unless the contrary is expressed.
A contract of marine insurance is an agreement whereby the insurer undertakes to
indemnify the assured, in the manner and to the extent thereby agreed, against marine
losses, that is to say, the losses incidental to marine adventure (Sec. 3). There is a marine
adventure when (I) any insurable properly is exposed to maritime perils; (2) the earnings
or acquisition of any freight, passage money, commission, profit or other pecuniary
benefit, or the security for any advances, loans, or disbursements is endangered by the
exposure of insurable property to maritime perils; (3) any liability to a third party may
be insured by the owner of, or other person interested in or responsible for, insurable
property by reason of maritime perils [Sec. 2(d)].
Maritime Perils (sometimes called Perils of the Seas) means the perils consequent
on, or incidental to, the navigation of the sea, that is to say, perils of the seas, fire, war
perils, pirates, rovers, thieves, captures, seizures, restraints and detainments of princes
and peoples, jettisons, barratry and any other perils which are either of the like kind or
may be designed by the policy tSec. 2(e)J. The term "perils of the seas" refers only to
fortuitous accidents or casualties of the sea, and does not include the ordinary action of
the winds and waves.
THE POLICY
A contract of marine insurance must be embodied in a marine policy which may
be executed and issued either at the time of the conclusion of the contract or, as is
generally the case, afterwards by initialling of the slip by the insurer or underwriter.(Sec.
24). According to Sec. 15, a marine policy must specify-
1. the name of the assured or of some person who effects the insurance on his behalf;
2. the subject-matter insured and the risk insured against;
3. the voyage, or period of lime, or both, as the case may be, covered by the insurance;
4. the sum or sums insured;
5. the name or names of the insurer or insurers.
A marine policy must be signed by or on behalf of the insurer; and where a policy
is subscribed by or on behalf of the two or more insurers, each subscription, unless the
contrary be expressed, constitutes a distinct contract with the assured. The subject-matter
insured must be designated in a marine policy with reasonable certainty.
TYPES OF POLICIES
Marine policies are of different kinds and are known by different names according
to the manner of their execution or the risk they cover.

250
 MAKtN1 INSURANCE 251

VOYAGE POLICY

Where the contract is to insure the subject-matter "at and from" or from one place
to another or others, the policy is called a voyage policy. Where the subject-matter is
insured "from" a particular place, the risk attaches only when the ship starts on the voyage
insured (i.e., as soon as it leaves the port of commencement) and ends as soon as the ship
enters the port of destination. Where the ship is insured "at and from" a particular place,
and she is at that place in good safety when the contract is concluded, the risk attaches
immediately; and if she be not at that place when the contract is concluded, the risk
attaches as soon she arrives there in good safety.
TIME POLICY
Where the contract is to insure the subject-matter for adefinite period of time, the
policy is called a time policy, e.g., from noon January 1, 1976 to noon January 1, 1977.
No time policy can be made for a period exceeding twelve months, and if it is so made,
it shall be invalid (Sec. 27). In a time policy the subject-matter is covered during the
period of insurance no matter where the ship is and how many voyages it makes. A
contract for both voyage and time may be included in the same policy.
VALUED POLICY

A valued policy is a policy which specifies the agreed value of the subject-matter
insured. In the absence of fraud, this value is conclusive as between the insurer and the
assured, whether the loss be partial or total; but it is not conclusive iii determining
whether there has been a constructive total loss (Sec. 29).
UNVALUED POLICY

An unvalued policy is a policy which does not specify the value of the matter
insured, but subject to the limit of the sum insured, leaves the insurable value to be
subsequently ascertained (Sec. 30). The insurable value is ascertained as follows:—
I. In insurance on ship, the insurable value is the value, at the commencement of
the risk, of the ship, including her outfit, provisions and stores for the officers and crew,
money advanced for seamen's wages, and other disbursements incurred to make the ship
fit for the voyage or adventure contemplated by the policy, plus the charges of insurance
upon the whole. In the case of a steamship, the insurable value includes also the
machinery, boilers, and coals and engine stores owned by the assured.
2. In insurance on freight, the insurable value is the gross amount of the freight at
the risk of the assured, plus the charges of insurance.
3. In insurance on goods or merchandise, the insurable value is the prime cost of
the property insured, plus the expenses of and incidental to shipping and the charges of
insurance upon the whole.
4. In insurance on any other subject-matter, the insurable value is the amount at
the risk of the assured when the policy attahes, plus the charges of insurance (Sec. 18).
FLOATING POLICY

A floating policy is a policy which describes the insurance in general terms, and
leaves the name or names of the ship or ships and other particulars to be defined by
subsequent declaration. The subsequent declarations may be made by endorsement on
the policy, or in any other customary manner, and must be in in order of shipment.
They must, in the caseofgoods, comprise all consignments within the terms of the policy,
and.the vilue of the goods, or other property must be honestly stated. If the value is not
252 - MERCAN11U LAW

stated until after notice of loss or arrival, the policy must be treated as an unvalued policy
as regards the subject-matter of that declaration (Sec. 31).

WAGER OR HONOUR POLICY

It is a policy in which the assured has no insurable interest or the insurer or
underwriter is willing to dispense with the proof of interest. If the property contains such
words as 'Policy Proof of Interest". —"PP.I.", or Interest or No Interest" or Interest
Admitted" or "Without Benefit of Salvage to the Insurer" or any other words to that
effect, it is unenforceable at law, being a "Wagering Contract". Although valueless in a
Court of law, such policies continue to be common, the assured trusting in the honour
of the insurer that payment will be made and indeed these policies enjoy great respect
as they are invariably honoured by the underwriters (Sec. 6).

INSURABLE INTEREST
The person who effects an insurance, or issues instructions for effecting it, must
have an insurable interest in the subject -matter. It is not, however, the owner alone who
may insure but every person having an insurable interest in the marine adventure. By
Sec. 7, a per-Non has an insurable interest if he is interested in a marine adventure in
consequence of which he may benefit by the safe arrival of insurable property or be
prejudiced by its loss, damage or detention. Thus the owners, shippers, agents and others
have insurable interest in respect of money advanced. A mortgagee of a vessel has
insurable interest to the extent of his mortgage, a bailee in respect of property left in
custody and care, and charterers of vessels. An underwriter has an insurable interest in
respect of risk underwritten by him, which he may re-insure. The lender of money on
bottomry or respondeutia in respect of the loan. The mna.ster or any member of the crew
of a ship has an insurable interest of his wages. The assured has it in the charges of any
insurance which he may effect. All persons irrespective of nationality have the right to
protect their property by insurance, excepting alien enemies.
The assured must have insurable interest at the time of the loss though he may
not have been interested when the insurance was actually effected.
Where a shipper of cargo, having insured it, assigns the policy to a purchaser of
the cargo while the ship is at sea, and after this assignment the ship is lost, the assignee
will be entitled to recover under the policy, as he has acquired an interest at the time of
the loss, though he had no interest in the cargo at the time it was originally shipped and
insured. It sometimes happens that the goods of a merchant are exposed to the perils of
the sea before he has news of their shipment, or an opportunity of protecting them by
insurance. In such a case the subject-matter is insured "lost or not lost" when the assured
may recover under the policy although he may have acquired interest subsequent to the
loss. But if at the time of effecting the insurance the assured knew of the loss and the
underwriter did not know, it would amount to concealment and breach of good faith,
and the contract would become void. Where neither the underwriter nor the assured has
knowledge of the loss, the assured will be entitled to recover for such loss.

INSURABLE VALUE
The Marine Insurance Act, 1963 makes a distinction between Insurable Interest
and Insurable value. An insurable interest, as we have seen, is that interest which the law
requires a person to have to enable him to effect a valid insurance. Insurable value is the
amount of the valuation of the insurable interest for the purpose of insurance. If there
is no express valuation in the policy, then, by virtue of Sec. l, the insurable value of
the subject-matter insured is to be ascertained as follows:
 MARINE INSURANCE 253

1. In an insurance on the ship, the insurable value is the value of the ship at the
commencement of the risk. The ship includes her outfit, provisions and stores for the
officers and crew, money advanced for seamen 's wages, and other disbursements, if any,
made to make the ship seaworthy for the voyage or adventure, plus the insurance charges
on the whole. A steamship includes its machinery, boilers and coal and engine stores.
2. In an insurance oil freight, whether paid in advance or not, the insurable
value is the gross amount of the freight at the risk of the assured, plus the charges of
insurance.
3. In an insurance on the goods and merchandise, the insurable value is the prime
cost of the cargo insured, plus the expenses of and incidental to shipping and the charges
of insurance upon the whole.
4. In an insurance on any other subject-matter, the insurable value is the amount
at the risk of the assured when the policy attaches, plus the charges of insurance.
DISCLOSURE AND REPRESENTATION

A contract of marine insurance, like any other contract of insurance, is one in which
the utmost good faith (uberrintaeJ7dei) must be observed, and if it is not, the contract is
voidable by the insurer. The assured must disclose to the insurer every material
circumstance which is known to him, and he is deemed to know everything which he
ought to know in the ordinary course of business. A circumstance is material if it would
influence the judgment of a prudent insurer in fixing or determining whether to take the
risk (Secs. 19 and 20). The following are examples of the concealment of facts, which
have been held to be material, entitling the insurer to avoid the contract;—
The fact that the ship had grounded and sprung a leak before the insurance was
effected) A merchant, on hearing that a vessal similar to his own was captured, effected
an insurance without disclosing this information. 2 The nationality of the assured con-
cealed at a time when his nationality was important. 3 In an insurance on a ship, the fact
that.the goods carried were insured at a value greatly exceeding their real value.4
In every case, however, whether a circumstance is material or not depends on the
particular facts. In the absence of inquiry by the insurer, the following circumstances
need not be disclosed:—
(a) those which diminish the risk;
(h) those which it is superfluous to disclose by reason of any insurer in the ordinary
course of his business;
(c) those as to which the information is waived by the insurer;
(d) those which it is superfluous to disclosed by reason of any express or implied
Warranty.
If the insurance is effected by an agent, the agent must disclose to the insurer every
fact which the assured himself ought to disclose and also every material circumstance
known to the agent. The agent is deemed to know every fact which he ought to know in
the ordinary way of business or which ought to have been communicated to him
(Sec. 21).

In addition to his duty to nake a full disclosure, the assured is under a duty to see
that every material representation ma e during the negotiations for the contract is true.
If any material representation be unt'Je the insurer may avoid the contract (See. 22).

I. Russell v. Thornton (1859), 20 lJ E. 9.

2. Dc Costa v. Scandert (1817)2 K.B. 184.
3. Associated Oil Carriers Lid. v. Union Ins. Socy. of Canton Lid.
4. Ionidcsv. Pcnder(1874) L. R.9 013 531 (1917)2 K.R. 184.
254 MERCANTILE LAW

The method followed in effecting a contract of marine insurance differs from that
adopted in other forms of insurance. In a contract of insurance, other than marine
insurance, a proposal form is filled in by the assured and forwarded to' the insurance
company for its acceptance. Marine business is often done through an insurance broker,
who, on receipt of instructions from his principal, prepares a brief memorandum of the
risk, called the "SLIP". This slip is shown by him to an Underwriter at Lloyd's or to an
"Insurance Company" underwriter, If the risk is accepted the underwriter quotçs a rate
of premium and if accepted by the broker, it is entered on the slip. The underwriter then
"writes his line" (i.e. the amount he is willing to underwrite), initials this figure and dates
it. Should the underwriter accept only a portion of the value of the slip, the broker takes
his sup round to several underwriters until the full value is covered. The slip has no legal
value as it is not stamped and also the Marine Insurance Act provides that a contract of
Marine Insurance can only he entered ibto by means of a duly-stamped policy. But at
Lloyd's, the slip initiated by a member of the organisation will be binding on him under
the rules of the Lloyd's. Where a policy has been issued after the slip, the slip may be
referred to as regards the date of the contract and the intention of the parties.
Frequently, a cover note or an insurance note is issued instead of the slip, as
preliminary step to the final preparation of the policy. These documents also do not
constitute a contract. But all of these have moral worth, as the code of honour by which
the underwriter is bound is very strong, and he would invariably issue a policy or pay
the loss occasioned by the peril before the issue of the policy.
A contract of marine insurance is deemed to be concluded when the proposal of
the assured is accepted by the insurer, whether the policy be then issued or not; and for
the purpose of showing when the proposal was accepted, reference may be made to the,
slip, covering note or other customary metnbrandum of the contract, although it be
unstamped (Sec. 23)
DOUBLE INSURANCE
Double insurance is where two or more policies are effected by or on behalf of the
assured on the same adventure and interest or any part thereof and the sums insured
exceed the indemnity allowed by the Act, e.g., if A insured property worth Rs. 10,000
with X for Rs. 7,500 and with Y for Rs. 5,000. there is a double insurance, because the
measure of A's indemnity. viz., Rs. 10,000, has been exceeded. If A had insured with X
, 5()o there would he no double insurance [Sec. 34(1)].
for Rs. 4,500 and with Y for Rs. 5
Where the assured is over-insured by double insurancehe may, unless the policy
otherwise provides, claim payment from the insurers in such order as he may think fit,
provided he does not recover more than his indemnity. If the policy is a valued policy
the assured must give credit as against the valuation for any sum received by him under
any other policy without regard to the actual value of the subject-matter insured. If the
policy is unvalued, the assured must give credit, as against the full insurable value, for
any sum received under any other policy, lithe assured receives any sum in excess of
the indemnity, he is deemed to hold such sum I1 trust for the insurers, according to their.
right of contribution among themselves tSec. 34(2)1. As between insurers, each is-liable
to contribute to the loss in proportion to the amount for which he is liable. If any insurer
pays more than his proportion he can sue the others for contribution (Sec. 80).

WARRANTIES

In a contract of marine insurance, there are two kinds of conditions known as

"warranties." A warraniy, according to Sec. 35 of the Act, is an undertaking by the
assured that some condition shall he fulfilled, or that a certain thing shall be or shall hot
be done, or whereby he confirms or negatives the existence of a particular state of facts.
 MARINE INSURANCE 255

A warranty may be express or implied. An express warranty is a condition which is set

forth in the policy or attached thereto. and an implied warranty is an essential condition
implied by law, though not written in the policy. Strict compliance with these warranties
is absolutely essential, for non-compliance with any one of them is fatal to the contract
and absolves the underwriter from all liability. But non-compliance with an express
warranty is excused when, by reason of a change of circumstances, the warranty ceases
to be applicable to the circumstances of the contract, or when complianx with the
warranty is rendered unlawful by any subsequent law.
EXPRESS WARRANTY
There can be and, in practice, are express warranties of endless variety, but space
will not permit reference to them all. We may consider here, as illustration, the most
commonly met with express warranties. One of them is a warranty that the ship will sail
on or before a certain date. If the ship had started on her voyage even though it has not
as yet quitted the port, the warranty is satisfied, provided she moved with everything
ready and with the intention and ability to leave port. The "Free of Capture and Seizure"
(F.C. & S.) clause and the "Memorandum" are two of the best known express warranties.
F. C. & S. clause reads:
"Warranted fiee of capture, seizure, arrest, restraint or detainment, and the conse-
quences thereof or of any attempt thereat (piracy excepted), and also from all conse-
quence of hostilities or war-time operations whether before or after declaration of war."
When this clause remains in the policy it overrides all the perils stated in the policy to
which its terms are opposed. Gold bullion having been "commandeered" by the
Transvaal Government whilst in transit front mine, in anticipation of the outbreak
of war which occurred some days subsequently, the old was held to have been "seized"
and underwriter was declared exempt from liability:
The ordinary marine policy contains certain provisions in regard to particular
average which are embodied in what is called a "Memorandum." The memorandum
reads:' N.B. Corn, fish, salt, fruit, flour, and seed are warranted free from average, unless
general, or the ship be stranded—sugar, tobacco, hemp, flex, hides and skins are
warranted free from average, under five pounds per cent, and all other goods, also the
ship and freight, are warranted free from average, under three pounds per cent unless
general, or the ship be stranded." The memorandum provides minimum limit to the
underwriters' liability in respect of claims for particular average by exempting him from
such claims either absolutely or under certain percentages, unless the ship be stranded.
It is important, in this connection, to remember that if the ship strands, the underwriter
will be liable for all damages to the ship or cargo caused previous to stranding or
subsequent to it, even where the stranding is not the direct cause of the damage.
The Marine Insurance Act mentions two forms of express warranties namely, (i)
a warrantyof neutrality, and (ii) a warranty of good safety. Sections 35 and40 specifically
deal with these. Where the subject-matter is expressly warranted neutral, it must be so
at the commencement of the risk and, so far as the assured can control the matter, the
neutral character preserved during the risk. Where the subject-matter insured is war-
ranted "well" or "in good safetj' on a particular day, it is sufficient if it be safe at any
time during that day.
IMPLIED WARRANTIES
These warranties are in the nature of preliminary essential conditions which must
be complied with in order to render a contract of marine insurance valid, and their

5. Robinson Gold Mining Co. v. Alliance Marine & General Insurance Co. Ltd., (1910) 2 K.B.
919.
N
256 MERCANTILE LAW

non-compliance is fatal to the contract. These warranties are: (i) sea-worthiness, (ii)
legality of voyage.
SEA-WORTHINESS
In every "voyage" policy the ship must be sea-worthy at the commencement of
the voyage, or if the voyage is divisible into distinct stages, at the commencement of
each stage. To be sea-worthy a ship must be reasonably fit in all respects to encounter
the perils of the voyage she is about to undertake. She in be sound as regards her hull;
she must not be overloaded, her cargo must be properly stowed. She must be fully
maimed and her officers and crew must be efficient. She must be lit to carry the cargo
to the destination contemplated by the policy, i.e., "she must be cargo-worthy". It is to
be noted that there is no hard and fast standard of sea-worthiness, for it varies with
circumstances of each particular case, and each venture must 'be considered on its own
merits. Thus a ship which is reasonably fit for a voyage from London to Bombay may
be totally unfit for a trip to the coast of Labrador unless she has fitting peculiar to a Semi-
Arctic voyage. Further, where a voyage is made in distinct stages the ship must be
sea-worthy at the commencement of each stage.
In Boulilin v. Lupton 6 three steamers which were trading on the River Rhone
had been sold for service on the Danube, and were insured for the voyage from Lyons
to Gallatz. In order to pass under a number of low bridges on the Rhone, the steamers
left Lyons without masts and continued their journey as far as Marseilles, where they
were fitted with masts and generally prepared for the voyage to Gallatz. When the
vessels entered the Black Sea storm arose, and they all foundered. The underwriter
declined to pay on the ground that the steamers were not sea-worthy for the whole voyage
when they left Lyons—the place of commencement of the voyage. But the Court held
that the warranty had been complied with, for different stages of sea-worthiness were
necessary for the different stages of voyage and at the commencement of each stage the
ships were properly equipped. In descending the Rhone they were "sea-worthy" for the
Rhone; and from Marseilles to Gallatz they were ready for the sea.
This warranty is required to be literally complied with; strictly speaking, even
ignorance or innocence will not be an excuse. Where a ship-owner has done everything
in his power to make his ship fit for the voyage, and in spite of all care, has failed to
discover some latent defect such defect would defeat his object and deprive him of his
right to recover for a loss.
In Quebec Marine Ins. Co. v. Conini. Bank of Canada,7 where a ship had been
insured for the voyage from Montreal to Halifax, when she sailed there was an
undiscovered defect in her boiler, which became visible after some time and became so
serious as to necessitate her return to Montreal for repairs. After the repairs she resumed
her voyage, but was lost in had weather, It was held the assured could not recover as
ship was not sea-worthy when she originally started on the voyage.
In Time Policies there is no implied warranty of sea-worthiness.
LEGALITY
The second implied warranty is that the venture insured is a lawful one, and that,
so far as the assured can control the matter, the adventure shall be carried out in a lawful
manner. Therefore, an insurance of an adventure which is illegal according to law, e.g.,
smuggling, is void. If the adventure is legal one, but the master or crew, without the
knowledge of the owner, indulge in smuggling on their own account, there would be no
breach of the implied warranty, and the contact will not become void so as to absolve
6. (1863)33 IJ.C.P. 37.
7. (170) L.R. 3 P.C. 234.
 MARINE INSURANCE 251

the underwriter of liability. A policy of insurance effected for the purpose of insuring an
alien enemy is void, because it is illegal.
However, there is no implied warranty as to the nationality of a ship, or that her
nationality shall not be changed during the risk (Sec. 39). In a policy on goods or other
movables there is no implied warranty that the goods or movables are sea-worthy
(Sec. 42).
THE VOYAGE
The subject-matter may be insured by a voyage policy "from a port " or "at and
from" a port. The policy "from" a port only protects the subject-matter of the insurance
from the time of sailing from the port, e.g., an insurance "from Bombay to London" only
attaches when the ship has actually left the precincts of the port of Bombay, and is on
her voyage to London. But an insurance "at and from" a port protects the subject-matter
insured whilst at the port of departure previous to the ship's sailing and also (mm the
time of leaving it. and on her voyage, if the ship is at a port and is insured "at and from"
the port, the insurance attaches immediately it is effected and continues to protect her
whilst she is making the necessary preparations for the voyage. If a ship is insured for
a voyage "at and from" a port which she has not then reached, the insurance commences
immediately on her arrival at the port in a reasonably good physical safety. Should the
ship arrive at the pirt so damaged that she cannot lie there in safety until repaired, the
policy does not attach.
DEVIATION AND CHANGE OF VOYAGE
The voyage must be accurately described in the policy, and properly performed.
The ship must follow the course specified in the policy, or if not specified therein, the
usual and customary course. If the ports of call are named, she must take them in order
named or, if not named, in the order customary to the voyage, but she can miss out any
or all of them. When a ship starts from her port of departure for her port of destination,
but proceeds by an unusual or by an improper course, or takes the ports of call by an
order different from the one specified or customamy, there is a deviation; and if the
deviation takes place without any lawful excuse, the insurer is dischargedfro,n liability
as from the time of deviation, even though the ship may have regained her route before
any loss occurs. On the other hand, the underwriter is liable for any loss from perils
insured against which occurs previous to the deviation. Furthermore, the voyage must
be commenced and proceeded with or without its unreasonable delay. If the adventure
insured is not prosecuted throughout its course with reasonable dispatch, there will'be a
variation in the risk, and the underwriter will be discharged of liability, as from the time
when delay became unreasonable. It should be noted that variation in the risk does not
necessarily mean increase in the risk. The only question is whether the risk has been
varied.
In African Merchants Co. v. British and Foreign Marine Ins. Co. a ship W4S
insured "at and from Liverpool to the West and/or South-West coast of Africa, during
her stay and trade there, and back to port of discharge in the United Kingdom." The ship
arrived at the African coast, discharged her outward cargo there and then loaded her
homeward cargo. Instead of sailing on the homeward voyage, which would have been
the reasonable thing to do, she stayed a month in Canada Hay, by instructions of the
owners, in order that her master and crew could help salving of the cal-go of another
vessel which had been wrecked there. Whilst there she was driven from her moorings
by a heavy storm and became a total loss. This delay was held to be a deviation which
had discharged the underwriter from liability.

8. Palmer v. Marshall (1831)8 Ring. 76

255 MERCANTILE LAW

CHANGE OF VOYAGE
Where the destination is specified in the policy and the ship, after the commence-
ment of risk, sails for another destination, no risk attaches to the policy from the time
when the determination to change the voyage became manifest Where, before the
commencement of the voyage the destination is altered, no risk attaches to the policy at
any time. Change of voyage differs from deviation in that the policy is void from the
moment a change of voyage was coniernplaied, whereas a deviation must become a fact
before the validity of the policy is brought into question. Thus, if a vessel originally
intended to sail on a voyage from Liverpool to Karachi via the Suez Canal proceeds on
a voyage to Calcutta via Cape Town and is lost on the Portuguese Coast, the underwriter
is relieved from any liability for the loss, although the vessel, at the time of loss, was on
that part of the course common to both voyages. According to the law she was on an
entirely different voyage.
Justifiable Deviation— There are certain circumstances in which deviation or
delay would be excused, and these are s et forth in the Marine Insurance Act. Deviation
or delay, is excused-
1. where authorised by any special term in policy;
2. where caused by circumstances beyond the control of the master and his
employer;
3. deviation by the vessat being blown out of her course by violent gales or being
ordered during war by the Naval Authorities to deviate from her ordinary course in order
to avoid the danger of submarines;
4. where reasonably necessary in order to comply with an express or implied
warranty, e... delay in making the ship sea-worthy at the commencement of a stage of
e voyage;
5. where reasonably necessary for the safety of the ship or subject-matter insured,
e.g., putting into port for repair a ship which has been severely damaged by violent
weather;
6., for the purpose of saving human life, or aiding a ship in distress where human
life be in danger;
7. where reasonably necessary for the purpose of obtaining medical or surgical
aid for any person on board the ship. The excuses under clauses 5 and 6 are based on
the ground of humanity. In the case of (5) it is essential that the danger must be to human
life and not to property;
8. where caused by the harratrous conduct of the master or crew, if barratry be
one of the perils insured against.
When the cause which excuse deviation or delay cease to be operative, the ship
must resume her course with reasonable despatch.
With regard to "Tune Policies", the exact date and hour of the commencement
and termination should always be inserted in the policy, but in the absence of hour, the
day will be deemed to begin from and end at midnight.
Name of Vessel—The name of the vessel should be inserted in the policy when
once an insurance on cargo has been effected, the vessel cannot be changed without the
sanction of the underwriter. But iftheoriginal ship meets with disaster during the voyage,
the cargo may be transhipped to another vessel for safe conveyance to destination.

9. Bouillin v. Lupton (1863)33 Li. C.P. 37.

 MARINE INSURANCE 259

Commencement or Risk. On Ship— This has already been dealt with, while
discussing an insurance "from" and "at and from" a port
On Goods or Freight— In the absence of any special clause, the risk on goods
and freight commences immediately, and not until, the goods are on board the vessel.
Termination of Risks. On Ship— In the case of insurance on hull, for voyage,
the risk continues, after the vessel has arrived at her port of destination, "until she has
moored at anchor twenty-four hours in good safety"; for when the ship arrives with
cargo the twenty-four hours will begin to run alter the ship has been moored at the usual
place for the discharge of cargo.
On Goods and Freight— In the absence of any stipulation to the contrary, the
risk on goods and freight terminates as soon as the goods are safely "discharged and
landed".
Perils--Perils are the risks which the underwriter agrees to take upon himself, and
are inserted in the policy. Perils of the Sea are all perils, losses, misfortunes of a marine
character or a character incident to a ship as such. The following casualties come within
the definition of perils of sea, namely. "those happening during the voyage which
reasonable skill, diligence and care cannot guard against and those which cannot be
foreseen as the necessary or ordinary incidents of voyage." e.g., when a vessel strikes
upon a sunken rock in fair weather and sinks; a loss by foundering, owing to a vessel
coming into collision with another vessel, even when the collision results from the
negligence of the other vessel. They do not protect ordinary "wear and tear" which
result from the inevitable action of the winds and waves. The test is that there must be
some casualty, something which could not be foreseen as one of the necessary incidents
of the adventure. The purpose of the policy is to secure an indemnity against
accidents which may happen, not against events which must happen.10
s
"Fire" is the next peril, and the underwriter is liable for the loss cau ed by it.
"Men of War, enemies" include all damage or loss sustained owing to the hostile acts
of an enemy. "Pirates, Rovers" cover tosses caused by marauders plundering indis-
crirninately for their own ends. The terms include passengers who mutiny, and rioters
who attack the ship from the shore. "Thieves are robbers using force or violence not
clandestine thieves or pilferers or pickpockets, from amongst the passengers or crew."
"Jettison" is the throwing (overboard) ofcargo. or the cutting and casting away of masts,
spars, rigging or sails to lighten the ship in an emergency. Losses by jettison are
recoverable under the policy. But no jetlision of cargo owing to its inherent vice is
covered by the policy. For example, the jettison of fruit which has become rotten on
account of delay, or of hemp shipped in an improper condition which as a result becomes
dangerously heated is not covered.
"Arresls"—This clause refers to political or executive acts and does not-cover a
loss caused by riots or by ordinary judicial process. Seizure in time of war by enemies
or stoppage of vessels belonging to neutral powers suspected of carrying enemy goods,
are examples of political, etc., acts.
"F.C. and S." Clause—Free of Capture and Seizure clause is specially inserted
under which the underwriter absolves himself from any loss caused by capture or seizure
of the vessel.
"Barratry"—lncludes every wrongful act wilfully committed by the master or
crew in contravention of their duties, thereby causing prejudice to the owner or charterer,
and is covered by the policy. Examples of barratry are: wrongfully scuttling a ship,
intentionally running her on shore, or setting fire to her.

tO. Xantho'scasc (1887) VI Asp. M.I..C. 207:12 A.C. 503: ttulleranti others v. Fishtra and others.
3, ESP.67.
260 MERCANFILE LAW

"All other Perils"—At first sight these words would seem to cover losses from
whatever source arising. But it is not so These words include only those perils which
are sijnilar to those which have been enumerated in the policy, i.e., penis or losses
ejusdem generis with those which have been previously specified.
"Sue and Labour" Clause—This well-known clause is supplemental to, and
distinct from the contract of insurance, and enables the .underwriter and the assured to
work together with a view to preserving the property, after accident, covered by the
policy and to make the best of the had bargain. Under this clause all expenses iheurred
by the assured or his agents or servants in mitigation of losses after the casualty has
occurred are payable by the underwriter. No expenses incurred for averting the' occur-
rence of peril would be paid under this clause.
"Waiver" Clause—This is really supplementary to the "Sue and Labour"
Clause, provided simply to assure that', in the even, of a casually, either party to the
contract may take such steps, or incur such expenses, as are contemplated under the Sue
and Labour Clause, to minimise a loss, without prejudice to the rights of the assured on
the one hand and the underwriter on the other.
"Memorandum" or "N.B." Clause—For its meaning and discussion see page
324 ef. seq. supra.
"F.P.A." Clause—The Free from Particular Average Clause is, in effect, an
extended implication of the memorandum. It prevents the assured from recovering in
respect of .iy losses other than the loss incurred by a general average sacrifice. But
claims under Sue and Labour Clause will be nsa,tua,nable.
"The Collision- or "Running Down" Clause—This clause really amounts to
n additional contract to the contract of insurance itself, whereby the underwriter agrees
to pay up to the amount of his policy, three-fourths of any sum which the owner of the
up insured may have to pay to the owner of another ship for damage caused as the
suit of the collision.
"Inchmaree" Clause'—This clause derives its name from a steamer Inc hmaree,
a case in respect of which went up to the House of Lords, whose decision necessitated
its insertion in the policy. The said vessel was insured under a time policy in the ordinary
form. When the donkey engine was set to work for navigation purposes in order to pump
water into the main boiler, a valve, which ought to have been kept open, had been, either
accidentally or negligently, closed with result that the water, instead of passing into the
boiler, was forced into the air chamber of the donkey-pump and split it. The House of
Lords held that this was not a loss covered by an ordinary marine policy, being neither
a peril of the sea nor Corning within the general words ''all oilier perils, losses, etc."
Among other tIur s, this clause covers certain losses caused by (i) the negligence of
master, mariners, engineers, pilots, crew; (ii) explosives; (iii) a latent defect in any
machinery. But the clause is not to be taken to include any other risk except those
mentioned therein.
Continuation Clause—This is very common clause in time policies, the effect of
which is to place the shipowner, when the ship is at sea, on the expiration of the policy
(which we know cannot be issued for more than a year), and in consideration ofapro
rota additional premium, in the same position as if he had insured his vessel for the
particular voyage in the course of which the policy expired, instead of for a portion only
of the time occupied in the prosecution of that voyage.
Re-Insurance Clause—This clause is used in cases of re-insurance, i.e., where
an underwriter, who has accepted a risk, re-insures the whole or part of that risk with
another underwriter, either because he deems the risk undesirable, or because he has

Thames and M. M. Insurance Co.v. Ilamiliomi Frascr& Co. (1887) 12 A.C. 484.
 MARINE INSURANCE

acccpted a greater responsibility in respect of a particular risk than he thinks it prudent

to retain. The clause reads: "Being a re-insurance subtcct to the same clauses and
conditions as the original policy or policies, and to pay as may be paid thereon' '—i.e.,
on the original policy. In order to be paid on the reinsurance under this clause two
conditions must have been complied with, namely. (i) the loss which has been paid must
have been a loss for which the re-insuring underwriter is legally liable; and (ii) it must
have been a loss for which the re-insuring underwriter is under the particular terms of
the re-insurance policy, also liable.
ASSIGNMENT OF POLICY
A marine policy is assignable by indorsement or in any other custormary manner,
and the assignee can sue on it in his own name subject to any defence which would have
been available against the person who effected the policy. The assignment may be made
either before or after loss, but an assured who has parted with or lost his interest in the
subject-matter insured cannot assign.

PART 8-B
- LOSSIS

CSA PROXIMA
Proximate Cause—Before dealing with the kinds of losses and their adjustment,'
the fundamental principle underlaying the contract of marine insurance may be re-stated
and explained for clear understanding.lThis principle is that the loss for which the
underwriter is to be made liable must have been proximately and directly caused by the
peril insured against. The principle is most rigorously applied to the contract of marine
insuranccAn underwriter is not liable for damage to cargo directly caused by rats or
vermin; but if it is destroyed by sea water flowing through a hole gnawed by rats in a
bathroom pipe, the underwriter will he liable-as the proximate cause of damage is the
seawater, and the rats' partiality for lead pipe being the remote cause. In another case,
where hides and tobacco were shipped in the same vessel, and the hides became putrid
by reason of sea water during a storm, and the stench from them spoiled the tobacco, th
damage thus caused was held as having been proximately caused by perils of the sea-1
It must be noted that an underwriter is not liable for any loss if it be caused by the wilful
• act or default of the assured himself. But if loss was occasioned by negligent navigation
of the master or carelessness of a seaman, the underwriter would be liable. Furthermore,
in the case of goods, the damage must he actual damage to the goods themselves, and
not suspicion of, or what is called sentimental damage.
• The question, which is the cauxa proxirna of a loss, can only arise where there has
been a succession of causes. When a result has been brought about by two causes, we
must, in marine insurance law, look only to the effective or predominant cause alThough
the result would, no doubt, not lizive happened without the remote cause. 'Proximate'
does not mean "the nearest in time". The cause which is truly proximate is that which
is proximate in efficiency, which is the effective cause.
K\, SOF LOSsES
T
A loss may be either Total or Partial. Total loss may be subdivided into two classes:
(i) Actual Total Loss, and (ii) Constructive- Total Loss. The case of partial loss arises

12.. Hamilton v. Pandorf (1887) VI Aps. M.L.C. 212.

262 MERCANTILE LAW

when the subject-matter of the insurance is partially lost. Partial loss is also of two classes;
(i) Particular Average, and (ii) General Average.
ACTUAL TOTAL LOSS
Aim actual total loss occurs when the subject-matter insured is destroyed or so
damaged as to cease to be the thing of the kind insured, or where the assured is
irretrievably deprived of the subject-matter. From this definition it is clear that besides
actual or absolute destruction by a peril insured against, goods are deemed to be totally
lost where they are so damaged as to cease to exist in specie, i.e., when they no longer
answer to the denomination under which they were insured, or cannot be utilised as the
13
thing insured. The well-known case of Roux v. Salvador illustrates this
A ship with a cargo of hides started on its voyage from Valparaiso to Bordequx.
During the voyage it sprang a leak and put into Rio de Janeiro, where it was found that
the hides were in a state of incipient putridity as a result of mnflowing sea water. If they
had been carried to the destination they would have become entirely putrid and valueless
as hides, and they were consequently sold at Rio de taneiro. This was held to be total
loss. -
In Dilip Kumar Gitosh v. Nw India Ass. Co. Lid., 1990 Cal. 303, goods were
handed over to the shipping company for carriage to a foreign country. The Consignor
(Shipper) had done all that he could do regarding the shipment of goods. There,was no
delay on his par t and the cargo had no "inherent vice." The cargo never reached the
destination because the ship was abandoned by the crew in sea/The Insurance Company
was held liable to pay the amount of insurance covered by the policy)
A ship is posued at Lloyd's as "missing" or is captured and seized by the enemy,
it is an actual total loss as it is deemed to be irretrievably lost to the owner even though
it is still in existence. So also where the subject-matter is lost to the owner by any decree
of the court, foundering at sea in a gale, or sinking after collision, or a vessel which is
missing' are simple instances of actual loss of ship, cargo, and freight.
COrTRUCT1VE TOTAL LOSS
A constructive total loss occurs (to use the words of the Marine Insurance Act)
where the subject-matter insured is reasonably abandoned on account of its actual total
loss appearing to be unavoidable, or because it could not be preserved from actual total
loss without an expenditure which would exceed its value when the expenditure had
been incurred. In particular there is a constructive total loss:-
- when the assured is deprived of the possession of his ship or goods by a peril
insured against, and (a) it is unlikely that le can recover the ship or goods as the case
may be, or (h) the cost of recovering the ship or goods, as the case may be, would exceed
their value when recovered; or
2. in the case of a damage to the ship. where she is damaged by a peril insured
against that the cost of repairing the damage would exceed the value of the ship when
repaired; or
3. in the case of damage to goods, where the cost of repairing the damage and
forwarding the goods to their destination would exceed their value on arrival (Sec. 60).
In Moss v. Sniizh. 14 Maul, J. explained the doctrine of constructive total loss in
these wo' TAinaii litay be said to have lost a shilling when he had dropped it into
deep water, though it might be possible by some very expensive contrivance, to recover
it .he shilling exists, and it could he recovered at a price, but what man would be foolish

13. (1836)3 Bing. N.C. 266.

14. (1845)2C'.Et.94 alp. 103.
 MARtNE INSURANCE 263

enough to spend, say two shillings in order to recover one ?" The safer course would be
to abandon the shilling in the deep water, in which case that shilling would be a
coflStflJCtivc total loss.
In Roux v. Salvador , Lord Abigoe observed: "The underwriter engages that the
object of the insurance shall arrive in safety at its destined termination. If. in theprogress
of the voyage, it becomes totally destroyed or annihilated or if it be placed by reason of
the perils insured against in such a position that it is wholly out of the power of the
assured or of the underwriter to procure its arrival, he is bound by the letter of his contract,
to pay the sum insured. But there are intermediate cases, (i.e., there may be frustration
of adventure), there may be a fOrcible detention which may last so long as to end in the
impossibility of bringing the ship or the goods to their destination. There may be some
other peril which renders the ship unnavigable without any reasonable hope of repair,
or by which the goods are partly lost, or so damaged, that they are not worth the expense
of bringing them, or what remains of them, to their destination. III these cases or in
similar cases if a prudent man. not insured, would decline any further expenses in
prosecuting an adventure the tt,riiitnatioil of which will probably never be successfully
accomplished, a party insured nay, for his own benefit as well as that of the underwriter,
treat the ease as one of a total loss, and demand the full sum insured. But if he elects to
do this, and the thing insured, or a portion of it still exists and is vested in him, the very
principle of indemnity requires that he should make a cession of all his right to the
recovery of it, and that, too within a reasonable time after he receives the intelligence
of the accident, that the underwriter may he entitled to all the benefits of what may still
be of any value and that he may, if lie pleases, take measure at his own cost forrealising
or increasing the value". The last portion of the above statement refers to
"Abandonment" and Notice of Abandonment."
Ahandoment and Notice of Ahandument— Where there is a constructive total
loss, the assured may either treat the loss as partial loss or abandon the subject-matter
insured to the insurer isd treat the loss as if it were an actual total loss; hut in the latter
case it is essential for hiin to give with reasonable diligence after the receipt of
information about the casualty, notice of abandonment to the insurer, otherwise the loss
will be treated only as partial loss. A bandoment is the surrendering of the interest of the
assured in whatever may remain 01 the subject-matter insured and all proprietary rights
incidental thereto, to the underwriter, and claiming from him a total loss. This cession
of right is necessary in order to entitle the underwriter to whatever remains of the
property, and enable him, if he so wishes, to take means for the protection of his own
interest. There is no special form of notice of abandonment but it must be worded as to
give expliet intimation to the underwriter that the assured abandons unconditionally to
the underwriter his whole interest in the subject-matter insured. It is usual for the word
"abandon" to be used in the notice.
If the underwriter accepts the abandonment, he pays the total loss, and realises
what he can with the property which has been abandoned to him. But if he declines to
accept the abandonment it is then necessary for the assured to issue a writ against the
underwriter to recover the loss. The Court will look at the state of facts existing at the
time of the writ to determine whether or not a constructive total loss has occurred.

\.J'f%RTlALlA)SSES

PARTICULAR AVERAGE
I. A particular average loss is a partial loss of the subject-matter insured caused
by a peril insured against, and which is not a general loss.

15. (1836)3 Bing N.C. 266

264
MI 1W ANTII.E LAW -.

2. Expenses incurred by or oil of the assured for the safety or preservation

of the subject-matter insured, other than general average and salvage charges are called
particular charges. Particular charges are not included in particular average (Sec. 64).
The damage. in order to be a particular average, must be accidentally and
fortuitously caused by a peril insured against and it concerns solely the person interested
in the subject-matter insured and the underwriter, and no question of contribution by
various parties in the adventure arises, as it is in the case of a General Average loss.
These two points are of particular importance, as they are the distinguishing features
between particular average and general average. In order to get a clear idea of particular
average some imaginary cases may be given as illustration. A ship meets with foul
weather, as a result of wbich she sustains serious damages such as wreckage of her
propeller, a severe strain to the hull, the damages so occasioned is a particular average
on ship. And if during violence of the weather, sea water gets into the hold and damages
the cargo, the damage so occasioned to the cargo is particular average on cargo. Again,
if the cargo is, for example, sugar, and half of it becomes sherhai by getting dissolved
in the sea water, that damage is a particular average oil This is so because half
of the sugar cannot be delivered at the destination, involving a loss of freight on that
half, for the sugar is no more there to be carried to and delivered at the destination.

PARTIcULAR AVERAGE ON Still'

'Suppose a ship has suffered a considerable damage in heavy weather. Ordinarily,
the owner will repair the ship, and the measure of the underwriter's liability will be the
actual cost of repairing the ship, prudently and reasonably incurred, less the deductions
'neW for old'', (i.e., less the improvement resulting from the repair) unless, as is now
usual, the policy provides for the full payment of costs. In settling the claim of particular
average on ship no regard is paid to insured value of the ship as agreed between the
assured and the underwriter. It is i/se reasonable actual outlay for repairs which form
the basis of the claim.
When the total amount of the particular average has been determined, the next
question is to ascertain the amount recoverable under the various policies. This is done
by apportioning the particular average in the proportion which each underwriter's policy,
or subscription bears to the total insured value. The liability of the underwriter on ship
is ordinarily limited to the amount of his policy so far as any one accident is concerned.
But it may, and often does, happen that a vessel meets with several accidents, in which
case the underwriter is liable to pay successive losses, even though the total amqunt of
such successive losses may far exceed the amount of his policy unless there is a contract
to the contrary. For example where a ship during the currency of the policy has been
damaged, and has been repaired, and is subsequently totally lost, the underwriter will
have to pay the total plus the particular average loss. And if the repairs are not made,
and the ship is totally lost before the expiration of the risk, then the owner can recover
only for a total loss, and not for a particular average damage, since the repairs have
never been effected and he has suffered no loss so fat as they are concerned. And if in
such a case the total loss was not caused by the peril insured against, then the underwriter
will notbe liable for anything at all.
Where particular average repairs have not been effected and the vessel is not totally
lost before the expiry of the policy, the underwriter's liability in respect of the particular
average would be ascertained by estimating the cost of repairs. The point may be
illustrated by means of an example. A ship insured with underwriter X for a voyage
sustained particular average damage, and the damage was unrepaired when the policy
expired. Immediately oil expiry of X's policy the ship was covered by Y's policy.
and before the paicular average damage attaching to X's policy had been repaired, the
ship was iotliy lost. 11 was held that X would pay the estim'atcd cost of repairing the
 MARINE INSURANCE

particular average damag1e which would be a clear profit to the owner of the ship, whilst
Y would pay a total loss.
PARTICULAR AVERAGE ON FREIGhT
Freight is money payahre either for the hire of a vessel or for (he conveyance of
cargo from one port to another. Freight, therefore, suffers any physical damage by perils
insured against in the same way as a vessel or goods. To constitute a particular average
on freight there must be partial loss in respect of it. Suppose a cargo of sugar is shipped
from Bombay to London, freight not being prepaid, and during the voyage, and owing
to the peril insured against, one half of the sugar is dissolved in sea water. There is loss
of one half of the freight, and the underwriter would he liable to one half of the amount
for which the freight was insured.
PARTICULAR AVERAGE ON CARGO
A claitn for particular average on cargo arises when the cargo has been either
partially damaged by the peril.insurcd against, or a portion of the cargo is totally lost. If,
for example, out of a shipment of one hundred hales of Cotton, twenty arrive at their
destination depreciated by sea water to the extent of twenty-five per cent; or 5 bales
arrive totally worthless; or all lire hundred bales arrive depreciated to the extent of
seventy-five percent or even inure, in all these cases theclaim is one of particular average
on cargo. To arrive at the depreciation ot damaged cargo, the sound value of the cargo
has first to be found out and then the gross sound value and the gross proceeds are to be
compared. This shows the amount of the loss which is usually worked out at so much
per cent on the sound value. It is to he noted that the comparison is made between gross
values and not between net values. The reason for doing this is to avoid marked
fluctuation becoming a factor its the loss and also because by comparing net proceeds,
although the actual loss would remain LmnalIL'rcd, the ratio of depreciation would be
increased, to the prejudice of the underwriter, because of deduction ofordinaiy charges
from the sound value. An example will make this clear.
Sound Value Rs, 1,000
Less Charges Rs. 100

Net Sound Value Rs. 900

Gross Sound Value Rs. 1,0(7K) Net Sound Value Rs. 900
p
roceeds (at auction) Rs. 500
Gross Proceeds Rs. 500 Less Charges Rs. 100

Loss Rs. 500 Net proceeds Rs. 400

Depreciation 50 per cent. But depreciation on sound value of

Rs. 900 is .55 1 per cent
It is to be observed that there is a fuimdamuienial difference between the adjustment
of claims for particular average on cargo. In rime case of a ship, the reasonable cost of
repairs is paid for by the underwriter without regard to lIre insured value. But in the case
of cargo the percentage ul depreciation is always applied to the insured value to arrive
at the liability of the underwriter. If the insured value is less than the gross sound value,
then time underwriter pays lir ox r1iommatel less of the toss, and if the insured value is more
than the gross sound value, the underwriter pays proportionately more.

16. Lidgeit v. Secrctaiu (1871)1 Asp M.I,C. 95.

66 MERCANTILE LAW

Suppose of sea-damaged bale of cotton

Gross sound value Rs. 100
Gross proceeds Rs. 50

Loss Rs. 50
or a depreciation of 50 per cent.
If the insured value is Rs. 80 the underwriter is liable for 50 per cent of it. or Rs.
40; or if the insured value Rs. 120, the underwriter is liable for 50 per cent of it, or Rs.
60,
GENERAL AVERAGE
The Marine Insurance Act (Sec. 66) provides:
1. A general average loss is a loss caused by or directly consequential on a general
average act. It includes a general average expendittire as well as general average sacrifice.
2. There is a general average act where any extraordinary sacrifice or expenditure
is voluntarily and reasonably made or incurred in time of peril for the purpose of
preserving the property imperilled in the common adventure.
3. Where there is gen,cral average loss, the party on whom it falls is entitled, subject
to the conditions imposed by maritime law, to ratable contribution from the other parties
interested, and such contribution is called a general average contribution.
On analysing the section we get the following essentials of a general average
contribution, namely:
1. The common adventure must be in peril.
2. The sacrifice must be voluntary, i.e.. it must be the intentional act on the part of
man as opposed to an accidental loss by maritime peril.
3. The sacrifice or expenditure must he prudently or reasonably made.
4. The sacrifice or expenditure must be extraordinary in nature.
5. The object of the sacrifice or expenditure must be nothing other or less, than the
preservation of the property imperilled in the common adventure. In other words,
it must not be for the safety of the ship alone, or of the cargo alone, nor merely for
the completion of the adventure.
6. The loss must he direct result of a general average act.
The following sacrifices or expenses may give rise to General Average, Con-
tribution:—
SAC RIFICE
Sacrifices of ship—li in time of peril, the master voluntarily destroys any part of
the ship, or puts any of her appurtenances or appliances to use for which they were not
intended, at the risk of destroying or injuring them, any toss or damages thus caLised for
the common safety is to he made good by general contribution. The cutting away of
masts, spars and sails, the scuttling of a vessel in order to admit water to extinguish a
fire are xainples of voluntary sacrifices of a ship. The using of a sail in connection with
stopping a leak or to cover up hatches broken by shipping on sea during a storm are
examples of using the appurtenances for purposes other than those for which they are
originally intended. The amount to be made good in general average in respect of
sacrifice of any past of the vessel, or her machinery, is measured by the reasonable costs
of repairs, less the usual deductions "new for old". Sometimes it may happen that a
general average sacrifice follows a particular average damage resulting conjointly in the
condemnation of the ship. Suppose, for example, a vessel is very seriously damaged in
violent weather, subsequently she gets into another storm, andwhilst on her beam ends,
the master cuts away her masts and gear in order to right her. On her arrival at a port of
 MARINE INSURANCE 267

refuge, she is condemned and sold. Insuch circumstances in order to arrive at the amount
to be allowed in general average, the method to be adopted is to deduct from the value-
of the vessel the estimated cost of repairing the particular average damage. This would
give the value of the vessel immediately preceding the general average sacrifice, and
the difference between thq value and the sum realised by the sale, is the amount of the
general average sacrifice) An example will make this point more clear:

Suppose the sound value of the ship to be Rs. 1,00,000

Deduct estimated cost of repairing particular
average sacrifice
Rs. 75,000
Value of ship immediately preceding general
average sacrifice
Rs. 25,000
Amount realised by sale of ship Rs. 2,000
Amount to be made good in general average
in respect of sacrifice
Rs. 23,000
Sacrifice or Cargo and Freight— Sacrifice of cargo for the common good by
jettison, i.e.. throwing overboard of cargo, or damage to cargo by pouring water on it to
extinguish a fire or the hurnin of cargo as fuel for the engines to avert loss of ship and
cargo gives rise to a claiin for general average contribution. When a sacrifice of cargo
also involves a loss of freight, it follows that the freight so sacrificed is also made good
in general average. In the event of goods having been jettisoned, or otherwise sacrificed,
the amount to be allowed in general average is the net value which they would have had
on. the day of discharge at the port of destination, less the charges which would have
been incurred had the goods arrived instead of having been sacrificed, e.g., freight if not
prepaid, discount, duty, landing and sale charges.
EXPENDITURE

All extraordinary expenditure properly incurred in time of peril for joint preserva-
tion of the common adventure is the subject of general average contribution. Thus, if a
ship puts into a port of refuge to repair a general average sacrifice, the cost of entering
the port of refuge, the cost of discharging, warehousing, and reloading the cargo, and
the cost of leaving the port of refuge, are the subjects of general average, because all the
expenditure so incurred is the consequence of a general average act. Where there is a
general average ioss the party oil the loss falls is entitled to a ratable contribution
from all the other parties who are interested in the adventure. Whatever comes under the
head of general average loss must be shared by those who have benefited by the
sacrifice or adventure, and the contribution that they make is called a general average
contribution.
RAISIN; FUNDS

The incurring of expenditure at a port of refuge entails the advancing of funds to

meet it, and the.actual out-of-pocket expenses which have been reasonably incurred for
interest and for commission for advancing funds are allowable in average. In the older
days forced sale of cargo or loans oil or responik'nima
in order to provide funds
were fairly common b ut one seldom hears nowadays of such instances as the cable and
the wireless usually enable such provisions to be arranged. For the sake of completeness,
however, we may briefly refer to these subjects.

17. Hendcrson v. Shan kland(1896)(' Coifl. ('as. 333.

268 MERCANTILE LAW

FORCED SALE OF CARGO

The sale of cargo in order to raise funds can be resorted to by the master only when
he has failed to obtain money by other means. Where the cargo has been properly and
rightly sold at a port of refuge. and it realises more than the net value which it would
have realised had it been brought on to the destination instead of being sold, the owner
of the goods is entitled to the actual proceeds at the port of refuge. But conversely, if
the goods realise less than they would have fetched at the destination, then the owner of
goods is entitled to their net values as if they had arrived at destination. He is entitled to
any piofit and is not to suffer any loss.
BOTTOMRY AND 'RESPONUENTIA'
Bouornry is a monetary loan obtained in cases of urgent necessity oil security
of the ship and cargo jointly; and Resporiden!ui is a loan similarly obtained on the
security of the cargo alone, the sum so advanced being repayable to the lender a certain
agreed number of days after arrival of the vessel as specified in the document called
Hottomry or Rcspondentia Bond. It the vessel is lost before arrival at destiflation, the
lender loses his money. as it is only payable oil that the ship and /01 cargo
arrive.
SAL Y AGE

Salvage is the reward under maritime law to a salvor for saving, or helping to save,
property, at st-a, or property and life conjointly. The salvor who saved the property has
a possessory lien on it for the reward of his services. But if the property is not in his
possession he has what is callea a maritime lien, i.e., a claim which he call by
legal process in the Court of Admiralty. When he goes to this Court, the remuneration
awarded to him is called a Salvage Award. It is to be noted that no salvage will be awarded
if the services of the salvor were of no material assistance in salving the vessel.
Moreover, the services must have been rendered by third parties, i.e. who are strangers
to the adventure. These salvage charges are recoverable from the underwriter as partial
loss. Salvage, recoverable under maritime law by a salvor independent of contract,
should be apportioned over the values on which it was assessed. In recovering from
underwriters, where the insured value is less than the contributory value, the amount
recoverable is reduced in proportion, in exactly the same manner as in dealing with
general average contribution. In Ralnioral Steamship Co. v. Marten 20 a vessel was
valued in the policy at and was insured fore 13,000. Salvage services were rendered to
her, and a salvage award was made by the Admiralty Court. the amount being based on
a valuation of 10.000. Ii wa.s held that the underwriters were only liable for 30/40ths
of the amount so awarded.
If the salvage services were rendered necessary as a consequence of unseaworthi-
ness of the ship. the underwriter on the hull would not be liable for any portion of the
remuneration awarded to the salvor.

IS. Richardson v. Nourse (1819)3 H. & AId. 237.

19. ibid.
20. (1902) VII Corn. Cas. 292.
 N
Chapter IX

Fire Insurance
PART 9-A

A fire insurance is a contract to indemnify the insured for destruction of or damage

to property caused by tire. The insurer undertakes to pay the amount of the assured's
loss not in excess of the maximum amount stated in the policy. It will be noticed that a
contract of fire insurance is essentially a contract of indemnity, and not against accident
but against loss caused by accident. If a person has insured his house for Rs. 50,000, the
insurer is not necessarily liable to pay that amount, although the house may have been
totally destroyed by fire; but he will pay the actual loss within the maximum limit of Rs.
50,000. So if the properly was over-insured and the actual loss to the insured does not
exceed Rs. 40,000, he will get only that amount. Or. if he had under-insured it, he will
get the actual loss not exceeding Rs. 50,00), even if the property is totally lost and was
worth more than the sum insured. It is because of this rule that a number of insured have
complained, though mistakenly, that they were not "put in the same position as they
were before the fire."
AVERAGE CLAUSE
It is becoming very common in policies of tire insurance to insert a condition called
the average clause, by which the insured is called upon to bear a portion of the loss
himself. This condition is called the pro roia condition of average. The main object of
this clause is to check under-insurance and to encourage full insurance, and above all,
to impress on the property-owner the necessity of having his property accurately valued
before insurance. Under the average clause, the insurer and insured share the loss in
proportion to the risk that each is carrying. The proportion of the loss is ascertained by
a rule of three as under, namely, real value of property covered: insured amounts: damage
done: damage payable. Thus, if a policy containing average clause is for Rs. 40,000 upon
a subject-matter whose value is Rs. 50,000 and the actual loss is Rs. 10,000 the insured
will only get 40.000/50,000ths of Rs. 10,0(X), i.e., Rs.9,000 and the balance of Rs. 2,000
the insured will bear himself, for he is considered to be his own insurer for Rs. 10,000
the difference between the actual value and insured amount, and bears the.. ratable
proportion of loss, vii., Rs. 2,000. This condition comes into operation if the assured is
under-insured and in the case of partial loss he would be paid in the ratio above
mentioned; but if there is a total loss, he is entitled to he paid the full sum insured.
Insurable interest. In the case of fire insurance, the insured must have
insurable interest in the subject-matter both at the time of effecting the policy and
at the time of the loss)
Insurable Interest in Property—In the case of goods, insurable interest arises
on account of (a) ownership, (h) possession, and (c) contract. Ownership may be absolute
or limited. It may he legal or equitable. As an example of the latter, a purchaser of

1. Sadler's Co. v. Radcock (1743) 215 E. R. 733: See also See. 30 Indian Contract Act.
269
 270 MERCAI"ffILE LAW

property after the contract of sale but before the payment of purchase price has an
equitable interest in the property. Persons with a limited interest in the goods may insure
not only to the extent of their own interest but also to cover the interest of others in the
goods. The most common examples are carriers, wharfingers, mercantile agents, etc. If
the party insuring intends to cover the interests of all concerned in the property and not
merely his own interest, he may, in the event of a loss, recover the whole amount of such
loss, and not only the value of his limited interest. He will, however, hold the amount
s
above the value of his loss, in trust for the person entitled thereto. A per on in lawful
possession of goods ma insure them without instruction from the owners, and even
without their knowledge . A commission agent who purchased gold in order to send it
to various dealers at different places was held to have insurable interest in the gold. 3 A
shareholder has no insurable interest in the property of the company of which he holds
shares,4 nor has a simple creditor of the' company 5 . As regards contract, typical instance
is provided by the case olbailee and bailor. Bailees have insurable interest in the goods
entrusted to them, and can insure the goods to their full value. In case of loss by fire,
they will get the amount and after satisfying their own claim, keep the balance in trust
for the real owner. An insolvent debtor who is in possession of goods which have vested
in the Official Receiver has an insurable interest in the goods found.
Immovable Properly—The insurance of buildings may be effected by any one
interested in them. The owner can always insure. So may a tenant whether for life, or
from year to year, in virtue of his interest in the property. A purchaser of immovable
property acquires inte'rest from the date of the execution of the contract of sale but if the
policy is effected by the vendor, the purchaser cannot claim any benefit of it. The seller
continues to possess interest as long as the price is not paid to him, and can recover
under a fire policy if loss accrues before the payment of price. A mortgagor may insure
and recover the whole amount of the loss, for he is liable personally for the amount of
the mortgage debt, and the loss of the property means a reduction of his total assets.
to
Mortgages, on the other hand, have insurable interest only the extent of the mortgage
debt. A creditor has no insurable interest in the property of the debtor, unless the creditor
has a right to proceed against the property of the debtor before he effects an insurance 6.
THE RISK
The risk in fire policy commences from the moment the cover note, 7 or the deposit
receipt, or the interim protection is issued and continues for the term covered by the
contract of insurance. It may even date back, if the parties so intend.
In Indian Trade and Germ, ins. Co. v. BIrailaI, 1954 Born. 148, a cover note was
- - issued on 18th June which assured the risk from 15th June and it appeared that, unknown
to both parties, the goods had been destroyed by fire on the 16th June, held the insurance
company was liable and that no question of mistake under Sec.20 of the Contract Act
arose.
A contract of tire insurance is a contract of one year only with option to the parties
to continue it for a further period on the payment of the stipulated premium. It is
customary to allow certain days of grace in which to renew the policy, and if fire-should
occur during these days of grace, the insurer would be liable. As has been said before.
the days of grace can give protection only if the assured intended to renew the policy.

2. Waters v. Monarch Life Ass. Co. (1856)25 LJ.Q.B. 102.

3. Commercial Union Ass. Co. V. Binjraj Johumiult 1931 Cal. 285; Williams v. Baltic Ins. Asso.
Co. of London l.td.(1924) 2 K. B.282.
4. Macaura v. No,themins.Co. 1925 A.C. 619.
5. Moran, Galloway & Co. v. Uiidlli (1905)2 K.B. 555.
6. Siainbank v. Forming (1851)11 C. B.1 SI.
7. Indian Trade and General Ins. Co. v. Bhailal, 1954 Born. 148.
 FIRE INSURANCE Vt

In case no days of grace are allowed, the insured will not be entitled to get anything, if
fire occurs after the expiration of the term of poliry and before its renewal.
WHAT IS FIRE
The word lire as used in the expression "loss by fire" is to be construed in its
popular and literal sense, and means a fire which has broken bounds. Therefore, fire
which is used for ordinary domestic purposes, or even for manufacturing, is not fire, as
long as it is confined within the usual or proper limits. Fire means the production of light
and heat by combustion; and unless there is actual ignition there is no fire within the
meaning of the term in an ordinary policy8, heating, unaccompanied by ignition is not
fire. 'Loss or damage" occasioned by fire means loss or damage either by ignition of
the articles consumed, or by ignition of that part of the premises, where the article is. In
one case there is loss, in the other case, a damage occasioned by lire. 9 If an actual fire
or burning is the proximate cause of the loss, and that fire is accidental or fortOitous in
its origin so far as the insured is concerned, then such loss is covered by the policy. The
cause of the lire is immaterial, unless it was the deliberate act of the insured. Fire risks
do not include damage by explosion, unless the explosion causes actual ignition which
spreads into fire.
Fire by spontaneous combustion is usually excepted in lire policies, but in the
absence of such exception, it is submitted that it would be covered. Damage from
lightning is not included in the lire risk but if lightning causes ignition, the loss would
be covered. The same rule applies to loss or damage caused by electricity. Damage which
occurs as a result of smoke or of putting out the fire would also be covered by the fire
risks. ......Any loss resulting from apparently necessary and bonafide efforts to put out
a fire, whether it be by spoiling goods by water, or by throwing articles of furniture out
of the window, or even by destroying a neighbouring house by explosion for the purpose
of arresting lire; in fact, every loss direct V, or if not directly at least consequently
resultN from the fire is within the policy) Loss by theft during a lire is covered as a
fire risk . Almost every fire policy excludes certain articles, either on account 9f their
special value, or on account of their being liable to danger and destruction. The
exceptions may also relate to certain causes for which the insurers are not prepared to
accept liability, for example loss or damage caused by earthquake, not, military power,
or civil commotion 12 . Even loss by lire caused by the insured's negligence is covered.
In Harris v. Poland (1941)1 K.B. 462. H hid jewellery in her grate under the coal. Later,
having forgotten this, she lit the fire and jewellery was damaged. Held, H could recover
under a fire policy.
The rate of premium varies according to the degree of hazard or risk involved.
Where more than one rate would apply to a risk the figure to be charged is that which
will produce the highest net premium. If a godown contains twenty bales of cotton and
ten bales of cloth, the rate charged will be the one payable on cotton, which is higher
than the one for cloth.
ASSIGNMENT
In English law policy of fire insurance can be assigned only with the consent of
the insurer. It is said that a contract of property insurance, whether the event insured
against is lire or theft or burglary or accident, is a personal contract, entirely distinct from
the subject-matter of insurance, and, therefore, the assignment of the subject-matter does
8. Everett v. London Ass. Co. (1865) LJ.C.P.299.
9. Ibid.
10. Stanley v.Westeni Ins. Co. (1868)37 U. Es. 73, at p.75 per, Kelly, C.B.
11, Levy v. Bailey (1831)131 E.R. 135; Marsden v.City&CouniyAss. Co. (l865)35L.J.C.F.60.
12. Curtiss & Sons v. Mathews (1918)2 K.B. 825.
272 MERCANTILE LAW

not mean the assignment of the policy of the insurance. Thus, if property insured against
fire is assigned, the assignor of the property, in the event of loss, cannot recover under
his policy, because his interest in the property will have ceased; and the assignee of the
property will not recover, in case of loss, for he has not acquired any interest in the fire
policy. In order that the assignee of the property may take the benefit of the policy of
lire insurance, it is essential that the policy should be duly assigned to him at the time
of the assignment of property, and the consent of the insurer to hold the assignee assured
must be obtained.
Under Indian law the position is the same, but consent of the insurer is not
necessary to make a valid assignment of policy; only notice is sufficient. Thus, in India,
under Sees. 130 A and 135 A of the Transfer of Property Act, in the absence of any
express provision prohibiting assignment, a fire insurance policy may be assigned by
writing either by endorsement in the policy or in any other customary manner. But the
assured must have insurable interest at the time of assignment and if he parts with or
loses his interest in the property insured, an assignment of the policy thereafter by him
will be of no effect. Before loss the policy can only be assigned to a person who has
acquired some interest in the property, e.g., the purchaser or a mortgagee, or a bailee, or
a pledgee; for otherwise the assignee will have no insurable interest in the subject-matter
at the date of the loss. Therefore, in India, the law is more clear and simple. By Sec. 135
A of the Transfer of Property Act, all that is required for a valid assignment of a lire
policy is that it must be an endorsement or any other writing. Notice to the insurer of the
assignment is necessary only to make him liable to the assignee if he pays the money to
the assured even after such notice. On a valid assignment the assignee becomes entitled
to all the benefits under the contract and can sue the insurer on the contract in his own
namet 3 Under Sec. 49 of the Transfer of Property Act, a transferee for consideration of
an immovable property insured against fire, is entitled to call upon the transferor to apply
any money received by him under a fire policy, to reinstate the property.

PART 9-B
SPECIAL FIRE POLICIES

VALUED POLICY
Under an ordinary fire policy the insurer merely indemnifies the assured. But even
contracts of fire insurance need not always be contracts of indemnity. If the insurers
agree to pay a certain fixed sum on a lire policy irrespective of the loss, the contract is
not one of indemnity. A departure in this direction has been made in the "valued pblicy"
under which the insured can recover a fixed amount, agreed at the issue of the policy
without the necessity for any further proof of value at the time of the lire.
RE-INSTATEMENT OR REPLACEMENT POLICY
Lately, insurers have gone a step further to complete the breach of the principle
of indemnity in the shape of "replacement" or "reinstatement" policies. A clause is
inserted in the policy under which the insured can recover not the value of buildings or
plant as depreciated, but the cost of replacement of the property destroyed by new
property of the same kind, or the insurers may themselves reinstate the property instead
of paying in cash. In both cases we have the example of "new lamps for old."

13. See Gyarsilal v. Sitacharan, 1963 M.P. 164.

 FIRE INSURANCE 273

CONSEQUENTIAL LOSS POLICY

This type of policy is again of recent origin and is also known as Loss of Profits
Insurance. Under this type the insured is indemnified for the loss of profits which he
sustains through interruption or cessation of his business as a result of rife. The usual
policy covers loss of net profit, payment of standing charges, i.e., debenture, interest,
salaries, rites, taxes, etc., and increase in the cost of working, e.g., caking up of temporary
premises, having orders completed by other firms at extra cost, extra advertising, etc.
Although apparently such compensation appears to go beyond indemnity, yet actually
under a properly drafted policy there is hardly any chance of the insured gaining an
advantage by the occurrence of a fire. The worst that can happen is that the complete
security may tend to make the insured less careful in guarding his property against life.
CLAIMS
On the happenings of any destruction or damage the insured or any other person
on his behalf must forthwith give notice of life to the insurance company so that they
may take prompt steps to safeguard their interests, e.g., in dealing with the salvage, and
also judge for themselves the cause and nature of life and the extent of the loss. This
duty on the part of the insured is incorporated in the policy and is usually a condition
precedent. In that case failure to give notice may avoid the policy altogether. The assured
is further required by the ter-is of the policy to furnish the insurers within a specified
time full particulars of the loss and damage and the proof of the value of the property,
and if it is fully destroyed, of its existence. Failure to do so may prove fatal to the claims
of the assured, as the delivery of the particulars is a condition precedent to his right to
recover the loss. 14 But where the insurers repudiate their liability on the policy before
the particulars are due, the assured need not submit any particulars If If the assured
prefers a fraudulent claim, he would forfeit all benefits under the policy, whether there
is condition to that effect in the plicy or not and whether the fraudulent claim is in
respect of all or part of the policy' . Generally the fraud consists in over-valuation. If
over-valuation is due to mistake it is not fraudulent, for valuation is generally a matter
of opinion 17. But in the great majority of cases, the expert assessors retained by the
offices are in a position to arrive at a fair valuation satisfactory to both the insured and
insurers.

14. Mason v. Harvey (1853)22 U. Ex. 336.

15. Re Coleman's Depositories Lid, and We & Health Ass. Assoc. (1907)2. K.B. 798
16. Britton v. Royal Ins. Co. (1866)4 F.F. 905.
17. Dalby v. Indian & Lixid. Life Ass. Co. (1954) 15 C. 365.
 Chapter X

Life Insurance
PART 10-A

DEFINITION

Life assurance may be defined as a contract in which the insurer, in considpration

of a certain premium, either in a lump sum or by other periodical payments, agrees to
pay to the assured, or to the person for whose benefit the policy is taken, a stated sum of
money on the happening of a particular event contingent on the duration of human life.
Thus, under a Whole-Life Assurance, the policy money is payable at the death of the
assured, and under an Endowment Policy, the money is payable on the assured's
surviving a stated period of years, e.g.. on his attaining the age of 55, or at his death
should that occur previously.
LIFE ASSURANCE AND OTHER FORMS
OF INSURANCE DISTINGUISHED
The distinction between life assurance and marine and fire insurance is based on
the principle that the risk insured against in respect of life policies is a certain event and
in the case of the other two it is an uncertain event. The distinction is based on the
principle that the risk insured against in respect of life policies is a certain event.
Life Assurance differs from the other forms of insurance in the following respects,
namely:-
I. In life assurance the event is bound to happen sooner or later, the only
uncertainty being the actual time of its occurrence, but in the case of fire, marine or
accident, it is not certain that the event insured against will happen at all.
2. Fire, marine and accident insurance are contracts of indemnity. The assured
cannot recover the whole of the amount insured if the loss be less than that and in no
case can h6 recover more than the loss suffered by him. The amount recoverable is
measured by the extent of the assured's pecuniary loss. In life assurance and personal
accident insurance, the sum insured is payable irrespective of any proof of loss and to
the full extent of the amount insured. Life assurance is not a contract of indemnity, but
in a way it constitutes a form of investment.
3. In a marine or fire policy, the assured is required to have an insurable interest
in terms of the policy and such interest should be capable of valuation in terms of money.
But in a life policy, the insurable interest is one required by law and such interest cannot
be measured in terms of money.
4. In a contract of life assurance insurable interest has only to be proved at the date
of the contract and it is not necessary that the assured should have insurable interest at
the time when the policy falls due. In marine insurance, the assured must have insurable
interest at the time of the loss though he may not have been interested when the

274
 LIFE INSURANCE 275

insurance was actually effected. In fire insurance, he should have it both at the time of
loss and when the policy was effected.
5. A contract of fire or marine insurance is a contract from year to year only, and
the insurance automatically comes to an end after the expiry of the year, though it can
be renewed for a further period of one year if the assured expresses his intention to
continue the policy and pays the premium. A contract of life assurance is not a contract
for a year but is a continuing contract with a provision that if the premium is not paid
every year at or about the specified time the contract would lapse.
LIFE INSURANCE IS NOT A CONTRACT OF INDEMNITY
As we have already seen, life insurance is not a contract of indemnity. It stands
on a totally different footing from fire and marine insurance. In the leading case Dalbey
v. The India and London Life Assurance Co. (1854) 15 C.B. 365, Parke, B. observed:
"The contract commonly called life assurance when properly considered is a mere
contract to pay a certain sum of money on the death of a person, in consideration of the
due payment of a certain annuity for his life This species of insurance in no way
resembles a contract of indemnity."
In this case, the Aiichor Co. had issued policies on a life to a total of 3,000. They
had reinsured £ 1,000 with the India Co. Subsequently the policies for £ 3,000 were
surrendered, but the Anchor C. kept up to £ 1,000 policy with the India Co. On the death
of the life assured, it was held that the Anchor Co. could recover.
In Law v. London Ind. Life Polkv Co. (1855) 1 K. & J. 223, L insured the life of
his debtor for Rs. 5,000, the amount of the debt. The debtor paid back the debt in due
course. It was held L could recover the amount of the policy on the death of the debtor.
It may be further emphasised that, although life insurance may be said to partake
of indemnity in the sense that one dependent on the insured may be protected to some
extent against loss of that support, yet the policy calls for a specified amount which may
be more or less than the value of the anticipated benefits of the continuation of the life.
Th6 interest which one has in his own life, or in the life of another, is difficult to estimate
in rupees and poise; hence it is said that indemnity finds no place in life insurance.
Another feature of life insurance precludes it from being a contract of indemnity.
Life insurance policies (except term policies) increase in value yearly-,and therefore life
insurance is usually considered as an investment device.
INSURABLE INTEREST
A contract of life assurance requires that the assured must have at the time of the
contract an insurable interest in the life upon which the insurance is effected. In a contract
of life assurance, unlike other insurance, interest has only to be proved at the dare of the
contract and it is not necessary that the assured should have insurable interest at the time
when policy falls due. The reason for this rule is that contract of life assurance is not a
contract of indemnity.
In the following three cases insurable interest is presumed and no proof is
necessary, viz., (i) own life, (ii) husband in the life of wife, and (iii) wife in the life of
husband.
PERSON IN HIS OWN LIFE
A person is presumed to have an interest in his own life and every part of it, and
can insure for any sum whatsoever, and as often as he pleases. Such interest in a person's
own life is incapable of pecuniary valuation, hence there is nothing to prevent him basso
fide insuring his own life as many times as he likes for his own benefit, even though
when insuring he intends to assign the policy to another person. But if ab initio the
276 MERCANTILE LAW

insurance is intended for the benefit of another person only and that fact is concealed,
that insurance is void for the lack of insurable interest.

RELATIVES
A wife has an insurable interest in the life of her husband, and a husband has an
insurable interest in the life of his wife. These three cases in which insurable interest is
not required to be proved but is presumed, form an exception to the general rule that
insurable interest in life assurance means pecuniary interest. The interest in these three
cases is much higher than the pecuniary interest and is incapable of valuation. Therefore
no other relationship, as such, gives rise to an insurable interest. It must be shown that
(a) the person effecting an insurance on the life of another is so related to that other
person as to have upon him a claim for support by the person whose life is assured. Mere
natural love and affection is not sufficient to constitute an insurable interest. Thus, a
father has not necessarily an insurable interest in the life of his child, nor a child in the
life of his father. In these cases pecuniary interest must be proved. So, a son has an
insurable interest in the life of father who supports him but not in the life of the father
dependent on him for support, nor in the life of mothet whose funeral expenses he may
be called upon to pay. A sister has an insurable interest in the life of a brother who
supports her. The fact that a child or other relative was rendering valuable domestic
service to the assured and that the loss of service would entail the employment of hired
laboàr does not create an insurable interest.
PERSONS NOl' RELATED
A creditor has an insurable intcrestin the life of his debtor to the extent of the debt;
and although the debt may have been repaid since the date of the insurance the creditor
can on the dropping of the life of the debtor recover from the insurer the policy money,
thus making a profit out of the debt. A creditor can insure the life of his debtor up to the
amount of the debt at the time of issue of the policy. The creditor can recovct the policy
money even though the debt becomes time-barred before the life drops. It is to be noted
that although the creditor has insurable interest in the debtor's life he has no insurable
interest in the debtor's property. A creditor has also an insurable interest in the life of a
surety and the surety has an insurable interest in the life of the principal debtor. Similarly,
a joint debtor or joint surety has an insurable interest in the life of another joint debtor
or joint surety to the extent of his proportion of the debt. But a promise by the creditor
to a debtor with consideration not to require payment of the debt during his life does not
give the debtor an insurable interest in the life of the creditor.
An employee has an insurable interest in the life of the employer arising out of
contractual obligations to employ him for a stipulated period at fixed salary. An employer
may also have an insurable interest in the life of the employee who is bound by the
contract to serve for a certain time. A partner has an insurable interest in the life of a
copartner to the extent of the capital invested by the latter.

POLICIES
Life assurance, in an attempt to meet the varying wants of the community, has
taken on many forms. First of all we have Whole Life Policy, which matures only at
the death, whenever it may occur. Secondly, we have Endowment Policy, in which the
sum insured is payable after the expiration of a certain term of years if the policy-holder
is alive, or at his death if he dies previously. This policy combines the essential feature
of life assurance (payable on death) with the advantages of a savings bank (as amount
is payable after certain period and can be used by the policy-holder himself). Thirdly,
Joint Lire Policies are issued under which the sum assured is payable at the death of the
first of the two lives. Lastly, Survivorship Policy is also granted under which the sum
 LIFE DSURANcE m

assured is payable at the death of the last or survivor of two lives. Similar policies may
be issued for three or more lives, and are occasionally of value in business transactions.
A Survivorship Policy is one under which the sum assured is payable if one person dies
before another and in that event only: Term Assurance provides for payment only in
the event of the life dropping before a certain date or age. This type is frequently adopted
as collateral security for a loan. Such a policy provides for a low premium at the outset
with a gradual increase, and is thus known as Ascending Scale Policy, or with large
subsequent interest when it may be converted to whole life or endowment policy and is
known as Convertible Terms AsSw-nc.. These policies are usually for a short period
and are also called Short Term Policies. There are ai Fund Policies, which
are effected by payment of yearly premiums in order to secure a funu ts. of a
certain period for the payment of debts in connection with joint stock companies with a
redeemable debenture debt. A life policy may be with profit or without profit. A person
who holds with-profit policy shares in the profits of the office, but pays a higher rate of
premium. A holder of policy without profit does not share in the company, and pays a
lower rate of premium.
SURRENDER VALUE
The sw-render value of a life policy is the amount which the insurers are prepared
to pay in total discharge of the contract, in case the assured wishes to surrender his policy
and extinguish his claim upon it. The surrender values are based on the actual premiums
paid, and usually the policy is required to have run for two or three years befcnv the
surrender value will be allowed. Surrender values increase with each .payment of
premium. Some companies guarantee a minimum surrender value of 40 per cent of the
total premium paid.
LOANS ON POLICIES
Where a policy has a surrender value, it also has a loan value, and assurance
companies usually lend 95 per cent of the surrender value, keeping the balance of 5 per
.cent as margin for a year's arrears of interest. The loan may be repaid at the convenience
of the borrower, and in case it is not repaid it keeps alive with interest accumulation, to
be deducted from the policy money becoming payable by the insurers either on its final
surrender or on its maturity. This is the best investment that an insurance company can
make, as there is never any danger of the money being lost
PAID-UP POLICY VALUE
he paid-up value of a policy is the amount to which the sum assured would be
reduced at any time if the assured requested a rearrangement of his contract so that no
further premium should be payable. The amount on the paid-up policy is payable on the
happening of the event assured against.
PRINCIPLE OF GOOD FAITH AND SEC. 45 OF INSURANCE ACT
The general rule is that in all kinds of insurance the assured must disclose
everything which is likely to affect the judgement of the insurer and what is stated must
be truthful. Misrepresentation of a material fact or its concealment will entitle the insurer
to avoid payment of the claim. In India, Sec. 45 of the Insurance Act, 1938, expressly
lays down an exception to the rule of utmost good faith, and provides for certain
limitations on the power of the insurer to refuse to pay the claim. It states that, after the
expiry of two years from the date on which the policy was effected, the insurer cannot
challenge iton the ground of misstatement unless he can prove that the misrepresentation,
concealment or suppression of facts was fraudulently made by the policy holder and he
knew that the statement was false and made it with knowledgt and understanding of its
 MERCANTILE LAW
vs

falsity. The burden 3 f proof is on the insurer, who must positively prove that the
misstatement or concealment was deliberate and made with intent to deceive. Proof of
mere constructive fraud is not enough. Mere inaccuracies, or even false statements that
are not material cannot be regarded as sufficient to enable the life insurer to avoid his
liability under the policy that is of two-year duration (LJC. v. ParvathavardbinAinmal.
(1965)35 Comp. Car. 23: L.I.C. v. BibiPadniavati(l967)2 Corn. U. 292 (S.C.);LJ.C.
JanakiAmma!(1968)38 Comp. Cas. 278. Sec. 45 is applicable even if the assured had
died within two years of the making of the policy kq aid Mahesh Chandra Shastri v.
LJ.C. (1968)38 Comp. Cas. 767 (All.)
ASSlGNMEt T )I LIFE INSURANCE POLICY
Life insurance policies are freely assignable as actionable claims. They may be
sold, mortgaged, or settled, provided the procedure laid down in Sec. 38 of the Insurance
Act. 1938 is followed. Sec.38 lays down as follows:
1. A transfer or assignment of a policy of insurance, whether with or without
consideration, may be made by an endorsement upon the policy itself, or by a separate
instrument, setting forth the fact of transferor assignment signed by the transferor or his
agent and attested by at least one witness.
2. The transfer or assignment shall be complete and effectual upon the execution
of such endorsement duly attested. Except where the transfer or assignment is in favour
of the insurer, it shall not be operative as against the insurer and shall not confer upon
the transferee or assignee any right to sue for the amount of such policy or the moneys
secured thereby, until a notice in writing of the transfer or assignment together with the
said endorsement or instrument itself, or a policy of the same certified to be correct, by
both the transferor and the transferee, has been delivered to the insurer at his principal
place of business.
3.The dale on which the notice is delivered to the insurer shall regulate the priority
of all claims under a transferor assignment as between persons interested in the policy.
Where there are more instruments than one, transferring or assigning the policy, the
priority of the claims under such instruments shall be governed by the order in which
the said notices are delivered-
4. On receipt of the notice, the insurer shall record the fact of such transfer or
assignment together with the date thereof, and also the name olthe transferee or assignee.
The insurer shall, on the request of the person who gave the notice or of the transferee
or assignee, grant a written acknowledgment of the receipt of such notice on payment
of a fee not exceeding one rupee.
5. Subject to the terms and conditions of the transfer or assignment, the insurer
shall from the date of the receipt of the notite, recognise the transferee or assignee named
in the notice as the only person entitled to the benefit under the policy. The transferee
or assignee shall be subject to all liabilities and equitiesto which the transferoror assignor
was subject at te date of the transfer or assignment- The assignee may also institute any
proceedings in relation to the policy without the consent of the transferot or assignor, or
without making him a party to such proceedings.
6. An assignment in favour of a person made with the condition that it shall be
inoperative or that the interest shall pass to some other person on the happening of a
specified event during the lifetime of the person whose life is insured, and an assignment
in favour of survivor or survivors of a number of persons, shall be valid.
NOMINATION BY THE POLICY-HOLDER
-
Section 39 makes the following provisions regaiding nomination by a policy
holder.
 LIFE USURANCE 219

1.The holder of a policy of life insurance on his own life may. when effecting the
policy or at any time before the policy matures for payment, nominate a person to whom'
the amount due thereunder shall be paid after his death.
2. The nomination, in order to be effectual, shall be either incorporated in the text
of the policy or endorsed thereon and communicated to the insurer who shall register it.
3. The nomination can be changed or cancelled by the assured any time before the
policy matures for payment, and notice thereof given to the insurer. Unless a written
notice of such change or cancellation of the nomination is delivered to the insurer, he
shall not be liable for any claim under the policy made bonafide by him to a nominee
registered in the records, or mentioned in the text of the policy.
4. The policy-holder is enliiled to receive from the insurer, and the insurer shall
furnish, a written acknowledgment of having registered a nomination or a cancellation
or change thereof on payment of a fee of one rupee.
5. A transfer or assignment made in accordance with Sec. 38 shall automatically
cancel a nomination. But the assignment of a policy to the insurer in consideration of a
loan granted by him within the surrender value of the policy, or its re-assignment on
repayment of the loan shall not cancel a nomination but shall affect the rights of the
nominee only to the extent of the insurer's interest in the policy.
6. Where the policy matures for payment during the lifetime of the person whose
life is insured, or where the nominee dies before the policy matures for payment, the
policy money shall be payable to the policy-holder or his heirs or legal representatives,
as the case may be.
7. Where the nominee survives the policy-holder, the policy money shall be
payable to the nominee, and where there is no dispute as to who the heirs are and legal
representatives of policy-holder, the production of succession certificate cannot be
insisted upon by the Life Insurance Corporation of India (Aruinugam ChellioJ Paul
(Since deceased by LegaiRepresenlalives v. Life Insurance Corporation ofIndia, 1990
Bom. 255).
CLAIMS

A person, claiming on the maturity of the policy, must Satisfy the insurance
company that he is entitled to receive the money on account of his being the owner of
such policy, or because the actionable claim is vested in him as legal representative, or
as nominee, or as assignee. Primarily, the assured is entitled to get payment but after his
death his legal representatives acquire this right.
PROOF OF AGE AND DEATH
On the ripening of a life policy, insurance company requires a satisfactory and
reasonable proof of age, if not already given and admitted, and of death of the assured.
Death may be proved by direct evidence or by death certificate or by evidence of
prolonged absence or other facts from which the fact of death may be properly inferred.
The company will, as said above, require a strict proof of age of the assured before
satisfying any claim under a life policy. Age can be proved by a certified copy of an
entry in the register of births; in the absence of this, an entry in the horoscope, or family
Bible, or in any family pedigree, or upon any tombstone or family portrait, etc.' The
evidence of a person who is older in age than the assured is also considered sufficient
It is incumbent on the assured to give proof of his age during his life-time, and if he does
so, the insurance company either writes across the policy the words "age admitted" or

1. Sec 32, lndiin Evidence Act

280 MERCANtiLE LAW

issues a certificate staling that the age has been admitted as correct. When this has been
done, the legal representatives are not required to give any proof of the age. Once the
company has admitted the age, it is precluded from disproving the age as admitted unless
it can show that the admission was obtained by fraud . Hence again, the company cannot
refuse to pay the claim, if the age turns out to be more than what was given, but it must
pay the claim after deducting the amount of the difference of premium between the two
ages.
When the money under the policy becomes payable, the company is in the position
of a debtor and the nominee, assignee or legal representative is in the position of a
creditor. The company does not hold the money on any trust 4 . lithe assured prefers a
fraudulent claim, he would forfeit all benefits under the policy, whether there is a
condition to that effect in the policy or nor 5 . In joint insurance, fraudulent claim of one
of the joint assured would equally hit the claim of the other assured,
SUICIDE
Suicide implies a wilful and intentional taking of one's own life. Policies of life
assurance usually contain a condition by which the liability of the insurer is modified
and limited in case of suicide by the assured; and if the condition is broken (i.e., the
assured commits suicide) the insurers cease lobe liable. But where there is no condition
in respect of suicide the liability of the insurer differs in English law from that under the
Indian law. Under English law, in the absence of any express condition to that effect, a
policy of life assurance will be avoided when the assured commits suicide while of a
sound mind, for his act amounts to a crime, and it would be contrary to public policy to
let any one make capital out of his own crimes. 7 But if the assured commits suicide while
of unsound mind the policy cannot be avoided. Under the Indian law, a policy cannot
be upset on the ground of public policy in case of suicide even of a sane assured.8

ACCIDENT INSURANCE

The term "accident" is not easy to define so far as to determine accurately the
distinction between an injury or death by accident and an injury or death by natural
causes. To understand the meaning of the term, recourse may be had to the decided cases.
Lord Macnaughten defines 9 an accident as "an unlooked-for mishap, or an
untoward event which is not expected or designed." In the term accident some
"violence, casualty or vis major is necessarily involved."10
It is something unexpected
as opposed to something proceeding from natural causes. An injury is accidental where
it is the natural consequence of an unexpected cause, or the unexpected consequence of
a natural cause. Running over of the assured by a tram is an instance of the former, and

2. Sec. 58, Indian Evidence Act.

3. Oriental Govt Security Uk Ass. Co. v. Narasimhachari (1901)25 Mad. 183,
4. Mathews v. Northern Ins. Co. (1879)9 Ch. 80.
S. Britton v. Royl In,. Co. (1866)4F. & F. 905.
6. Guardian Ins Co. v. Rustofnji (1936)162 I.C. 443.
7. Reresford v. Royal Ins. Co. (1936)54 TI-K. 789 H.L
8. Northern India Ins. Co y . Kanys Lal 1938 Lah .561.
9. Fenton v. Thorley (1903) A.C. at 448.
10. Sinclair v. Maritime Passengers Ass. Co. (1861)30 LJ.Q.B. 77.
 LIFE INSURANCE 281

injuring his spine by lifting a heavy burden in the ordinary course of business is an
instance of the latter. Ifa man stumbles and sprains his ankle, he meets with an accident
because he did not intend to stumble, but a man with a weak heart who while running
to catch a train, injures it, does not meet with an ''accident" 2. If the cause and the result
are both natural, injury cannot be called accidental. 13Death by sunstroke is not accidental
but death by drowning is.
Accident may also happen by the acts of third persons. For the purpose of the
accidental policy, it is immaterial whether the acts of the third party are innocent,
negligent or even criminal. k is accidental so far as the assured is concerned. 14
Accident insurance consists of three branches:—
(a) Personal accident insurance. including insurance against sickness;
(b) Property insurance, including burglary, fidelity, insolvency, etc.
(c) Liability insurance, including motor insurance, workmen's compensation in-
surance, etc.
Personal Accident Insurance—A contract of personal accident insurance is a
contract whereby a sum of money is secured to (lie assured or his legal representative in
the event of his disablement or death by accident. It is a contract against injury or death
resulting from accident. Personal accident insurance is akin to life assurance and is not
a contract of indemnity. The insurer usually undertakes to pay specified sums in theevent
of temporary or pcnnancnt disability, whether partial or total. Oilier sums are agreed to
be payable in the event of death, or loss of limb, etc., as the result of an accident. For
example, the insurer may agree to pay Rs. 10.000 fortheloss of both eyes, and Rs. 5,000
for the loss of one eye; or Rs. 50,000 for permanent disablement and Rs. 1,000 for
temporary disability plus Rs. 10 per week during the period of disability and so on.
A policy of personal accident insurance generally provides for insurance against
the event of bodily injury or death "caused by violent, accidental, external and visible
means," Therefore, the injury or death must not only be accidental but also be caused
by accidental means. The assured or his legal representative, as the case may be, must
show that an accident occurred within the meaning of the policy, and that the injury or
death was caused by such accident. As this is not a contract of indemnity, the insurer
cannot deduct from the amount payable to the assured any surn received by him from a
person responsible for the accident. Neither is the insurer subrogated to the rights of
damages that the assured may have against a third party. The existence of the insurance
does not affect the amount recoverable from the third parties. 15
The contract of personal accident insurance is made in the same manner as in the
case of life and the lire insurance. The fundamental principles of insurance, such as
insurable interest, good faith, apply to this insurance just as they do to any other form of
insurance. The doctrine of proximate cause is of particular importance in this contract
of insurance. If the accident is the director immediate cause of injury or death the insurer
is liable. He is also liable if the immediate cause of death or disablement is a part of time
train of events set in motion by the accident. But if there are other intervening causes

11. Re Etherington & Lancashire & Yorkshire Accident Ins,. Co. (1909) 1 K.B. 591; Theobald V.
Rly. Passengers Ass. Co. (1854) tO Exch. 45.
12. Scarrv. General Accident Ass. Co. Corp. (1905) I K.B. 387.
13. Ibid.
14. Trim Joint District School Board Management v. Kelly (1914) A.C. 667: Letts v. Excess Ins.
Co. (1916) 32 T.L.R. 361.
15. Bradbum v, Great Western RIy. (1874)44 Li. Ex. 9.
282 MERCANTILE LAW

like disease, or physical infirmity, and such other causes have some connection with the
accident or injury, the doctrine of proximate cause must be resorted to for determining
the liability of the insurer. If the disease is already in existence at the time the accident
takes place, and the effect of each is indcndent of the other, death or disablement by
6 on the other hand, accident is merely
such accident is covered by the policy.
responsible for the exaggeration of the effects of the disease, death or disablement caused
under these circumstances is not covered. t If. however, the accident brings out a disease
which was merely latent in the system, the insurer is responsible.' If the accident
happens first and the disease follows, death or disablement will be taken to have been
caused by accident, as the disease is only a link in the chain of causation.19
As is common in all kinds of insurance policies, certain causes are excepted from
the operation of the peril. 1n personal accident policies the most important exceptions
relate to the conduct or the physical condition of the assured. The policy may provide
that if at the time of the accident the assured is occupied or engaged in any occupation,
trade or business, involving more danger to his safety of life, the company will not be
liable. There may be a clause that if at the time of the accident the assured is under the
influence ofliquor so much as to upset the workingof his intellectual facilities, the insurer
will not be liable.
Coupon insurance is almost unknown in India, but in the Western countries,
insurance against railway accident is often effected by means of a ticket purchased like
a railway ticket at a station. These insurance tickets enable passengers to protect
themselves against accident by the payment of a very small sum.
Property Insurance—Contract of properly insurance is a contract of indemnit?',
and the principle of subrogation is applicable to it. Proof by the assured of loss is an
essential element of property insurance. The policies of insurance against burgla%
house-breaking or theft usually provide their own definition of the risk insured against
but in the absence of such definitions, resort must be had to criminal law for the definition.
To constitute a loss within the meaning of the policy, it is necessary that a criminal
offence falling within the scope of the policy, must have been committed. 23 Further, it
must be shown that the properly insured has been carried away permanently from the
premises. Policies against loss by theft generally cover "theft following upon actual,
forcible and violent entry upon the premises."
Articles of special value, or those held in trust, are usually excluded. Also, loss or
damage capable of being covered by a different kind of insurance is excluded, e.g.. loss
by theft following a fire.
A description of the premises containing the property insured is an essential pt
of the contract, for the risk varies according to the characterand locality of the premises
and the risk attaches only whilst the property is in the premises defined in the policy. If
the assured parts with the insured property or removes it from the specified locality, the
insurance ceases to be effective. The assured is usually required to take all reasonable
precautions to protect the insured property. After the loss has taken place, the assured is
usually required to notify the police as to the loss.

16. Smith v. Accident Ins. Co. (1870) L.R. 5 Ex. 302

17. Fitton v. Accident Death Ins. Co. (1864) 17 C.B. 122.
18. Fidelity & Casualty Co. of New York V. Michell (1917)A.C. 592.
19. Mardford v.Accident Ins, Co.(1903) IK.I1. 584.
20. Cox v.Ernployers Liability Ass. Corpo. (1916)2 K.B. 629.
21. Dane v. Mortgage Ins. Corp.(1894)I Q.B.54. Corn. Cu. 48.
22. Wasserman v. Blackburn (1927) T.LR. 99; Leizard Bros. v. Brookes (1932)38
23. Re. George & Goldsmiths etc.. (1899) 1 Q.B. 595.
489.
24. Person v. Commercial Union Ass. Co. (1876) I.A.C.
 LIEE INSURANCE 223

Fidelity Insurance—In this insurance the insurer undertakes to indemnify the

assured (employer), in consideration of certain payments, up to a certain specified
mount insured against for loss arising through the fraud, or embezzlement on the part
of the employees. This kind of insurance, which is also known as "fidelity guarantee"
insurance, is frequently adopted as a precautionary measure in cases where new and
untried employees are given positions of trust. The "collective" policy embracing all
employees falling within certain categories, or alternatively, the whole staff, has become
very common.
Motor Car Insurance—.The owner of a motor vehicle may, and usually does,
insure his vehicle against any damage that it may suffer. He may also insure against
personal accident to himself and other occupants of the car. He may insure his car or
may not do so. but lie MUST now insure in respect of the liability which he may incur
to others in consequence of the use of his vehicle. This is known as "Compulsory
Insurance of Motor Vehicles against Third Party Risks" which has been provided for in
Chapter VIII of the Motor Vehicles Act, 1939.
A policy of motor vehicle insurance, therefore, serves three purposes, in as much
as it is an insurance (m) on property—the motor vehicle, (ii) against personal accident,
and (iii) against liability for accidents. The policy covers loss or damage due to accident,
theft, fire or self-ignition and wilful damage. The personal accident insurance in a motor
accident policy covers two classes of accidents, namely, (a) if the accident happens, in
connection with the insured vehicle the insured is protected along with the other
ocupants of the car, (h) if the akident happens in connection with other vehicles the
assured is covered to the extent of all accidents happening while he was travelling in
such other vehicles.2
The delivery of a certificate of insurance to the assured imposes Ufl the insurers
the duty of satisfying by payment to the third party any judgment subsequently obtained
by him against the assured. The effect of this and other provisions in the Act is to compel
the insurer to satisfy those claims, notwithstanding that he may be entitled to avoid or
cancel the policy.

SUMMARY

A contract of insurance is a contract by which one party, called the insurer or

underwriter, undertakes, in consideration of a certain sum, called the premium, to make
good to the other party, called the assured, any loss which he may sustain by reason of
the, peril insured against.
The risks which may be insured against include fire, accident, burglary, the
insolvency of a debtor, the perils of the sea (marine insurance) and death (Life assurance).
Fundamental Principles of Insurance
1. A contract of insurance is a contract uherrwezefidei-_-contract based on utmost
good faith.
2. The assured must have insurable interest in the subject-matter of the insurance,
i.e., either he must own part or whole of it or he must he in such a position that injury
to it would affect him adversely. By insurable interest is meant pecuniary interest in the
subject-matter.
3. Excepting life a s surance and personal accident and sickness insurance, a
contract of insurance is a contract of indemnity and indemnity only.

25. Smgh, B.N.: /Iuronce Law and pruegjce p. 466.

254 MERCANTILE LAW

4. In the event of some mishap to the insured property, the insured must act as
though he were uninsured, and make every effort to preserve the property.
5. A contract of insurance can be enforced only lithe risk has attached. If the risk
is not run the consideration fails, and, therefore, the premium received by insurer must
be returned.
6. The loss must he proximately caused by the peril insured against.
7. Except life assurance, a contract of insurance is a contract from year to year,
although it can be renewed if the assured so desires.
s
Life Assurance—In Life Assurance, the insurer agrees to pay to the a sured or to
the person for whose benefit the policy is taken a stated sum of money on the happening
of a particular event contingent oil duration of human life.
Under a Whole life Assurance, the policy money is payable at the death of the
assured; while under an Endowment Policy money is payable on the assured's surviving
a stated period of years, e.g.. oil attaining the age of 55, or at his death should that
occur previously.
Insurance Interest-1. A person has insurable interest in his life and can insure
it for any sum whatsoever, and as often as he likes.
2. A wife has an insurable interest in the life of her husband, husband in the life
of his wife.
3. A creditor has a ll interest in the life of his debtor to the extent of the
debt.
4. A person has an insurable interest in his relat i ve if (a) he has by such relation
an enforceable claim on bins, or (1)) the relative is supported by the assured.
Mere love and affection is not sufficient to constitute insurable interest. Thus, a
parent as such has no insurable interest in his child and eke versa.
5. An employee has an insurable interest in the life of his employer and vice versa.
6. A partner has an insurable interest in the life of a cu-partner to the extent of the
capital invested by by the latter.
Surrender Value—Surrender value of a life policy is the amount which the insurer
s prepared Lu pay iii total disehargeof the contract, in case the assured wishes to surrender
his policy and extinguish his claim on it. The surrender value is based on the actual
prCilliLlIn paid, and policy is required to have run for 2 or 3 years before surrender value
will be allowed.
Paid-up Policy Value is the amount to which the sum assured would be reduced
at any time if the assured requested a re-arrangement of his contract so that no further
premium should be payable. The amount on the paid-up policy is payable on the
happening of the event assured against.
Life Policies are freely assignable as actionable claims. They may be sold,
mortgaged or settled, provided that a written notice to the insurer is given of such
assignment. so as to make the assignee's title effective against the insurer. Assignment
may be made by the execution of an instrument in writing or by a mere endorsement on
the policy.
Claim—A person claiming money on the maturity of the policy must satisfy the
insurer that he is entitled to receive the money either (a) as the owner of the policy, or
(b) because the actual claim is vested in him as legal representative or as nominee, or as
assignee.
 LIFE INSURANCE 285

On the maturity of the life policy the insurer requires a satisfactory and reasonable
proof of age and death of the assured. Death may be proved by direct or indirect
evidence.
In the absence of any conditions to the contrary, suicide does not avoid the policy
in India.
Fire Insurance—A contract of fire insurance is essentially a contract of indem-
nity. Subject to the maximum of the amount of the policy the insurer indemnifies the
assured for any loss caused by fire within a specified period.
Average Clause—A condition, called the average clause, is usually incorporated
in fire policy, by which the insured is called upon to bear a portion of the loss himself,
in the case of under- insurance. If property worth Rs. 5,000 is insured for Rs. 4,000 and
suffers a loss of Rs. l.000ihe insured will get4/Sthsofl,000 i.e., Rs. 800, and the balance
of Rs.200 will be borne by the assured,
Insurable Interest—In fire insurance, the assured must have insurable ihtcrest
both at the time of effecting the policy and at the time of the loss. In consequence of this
fact a fire policy is not assignable. In the case of goods, insurable interest arises, on
account of ownership, possession and contraci The insurance of a building may be
effected by anyone interested in it, e.g., owner, tenant, purchaser, mortgagee.
The risk on fire policy commences from the moment the cover note, or the deposit
receipt or the interim protection note is issued.
The word 'Fire' is to be construed in its popular and liberal sense, and means a
fire which has broken bounds: Actual ignition is essential.
Subrogation Tileessence of fire insurance is indemnity, and therefore the
assured cannot make a profit of his loss. The rule gives rise to the doctrine ofsubrogation,
which means that on indemnifying the assured, the insurer is entitled to the advantage
Of every right of the assured. Having satisfied the claim of the assured the insurer stands
in his place; he is subrogated to all the rights of the assured.
Contribution—Where a person effects two or more insurances in respect of the
same subject-matter and the same perils, he will recover only the actual loss, even though
the total amount with different insurers far exceeds the loss. If any insurer pays more
than his share of the liability, he can claim contributions from others, so that the liability
of each is made proportionate to the risk covered.
Claims—Bcforc his claim will be met the assured is required to cause a notice of
fire to be given to the insurer, and also furnish full particulars of the loss and damage
and the proof of the value of the property, and if it is totally destroyed, even of its
existence at the time of the fire.
Marine Insurance—Marine insurance is a contract of indemnity in which the
underwriter agrees to indemnify the assured for loss or damage caused to the subject-
matter insured by the perils of the sea.
A contact of marine insurance must he embodied in a marine policy, otherwise
the insurance contract will he void. The marine policy must specify (i) the name of the
assured, (ii) the subject-matter insured and the risk insured against, the voyage, or period
of time, or both, (iii) the sum insured, and (iv) the name or names of the insurers.
Implied Warranties—There .re two implied warranties, namely, seaworthiness
and legality of voyage, which mus be complied with to render the contract of marine
insurance valid.
In every voyage policy tle ship must be seaworthy at the commencement of the
voyage, or if the voyage is divisible into distinct stages, at the commencement of each
236 MERCANTILE LAW

stage. To be seaworthy a ship must be reasonably fit in all respects to encounter the perils
of the voyage she is about to undertake.
The adventure insured must be a lawful one, and so far as the assured can control
the matter, it shall be carried out in a lawful manner.
The ship must follow the course specified in the policy, or if not specified therein,
the usual and customary course. It must not deviate from the voyage without any lawful
excuse, and the voyage must commence without unreasonable delay.
Where the destination is specified in the policy, and the ship, after the cothmen-
cement of the risk, sails for another destination, no risk attaches to the policy from the
time when change of voyage is contemplated.
Losses--A loss may be either Total or Partial. Total loss may be actual or
constructive, and partial loss may be particular average or general average.
An Actual Total Loss occurs where the subject-matter insured is destroyed, or so
damaged as to cease to be a thing of the kind insured or the assured is irretrievably
deprived of the subject -matter.
A Constructive Total Loss occurs where the subject-matter insured is reasonably
abandoned on account of its actual total loss appearing to be unavoidable, or because it
could be preserved from actual total loss without an expenditure which would exceed
its value when the expenditure has been incurred. Notice of abandonment must be given
to the insurer within a reasonable time.
A Particular Average Loss is a partial loss accidentally and fortuitously caused to
the subject-matter by the peril insured against. Particular average loss becomes payable
by the underwriter only when it has been actually incurred.
A General Average Loss is a partial loss which occurs when any extraordinary
sacrifice or expenditure is voluntarily and reasonably made or incurred in time of peril
for the purpose of preserving the property imperilled in the common adventure.
A sacrifice may be made by destroying any part of the ship, or by throwing
overboard any part of the cargo.
Botlomry and Respondentia are monetary loans obtained in cases of urgent
necessity and are covered by General Average Loss. Bottomry is a loan obtained on the
security of the ship, or ship and cargo jointly, and respundentia is a loan taken on the
security of the cargo alone.
Accident Insurance consists of three branches, namely.
(a) Personal Accident Insurance whereby a sum of money is secured to assured or
his legal representative in the event of his disablement or death by accident.
(b) Properly Insurance, including burglary, fidelity and insolvency. Property
insurance covers all loss of property by burglary, theft or house-breaking, or by any other
act which is a criminal offence.
In Fidelity-Insurance the insurer undertakes to indemnify the assured (employer)
against any loss arising through the fraud or embezzlement on the part of the employees.
(c) Liability Insurance, including motor insurance. Workmen's Compensation
Insurance, etc., under which the insurer agrees to compensate the assured for his liability
which he may incur to others in consequence of the use of his motor vehicle or to his
einployeunder Workmen's Compensation Act.

CASES FOR RECAPITULATION

1. W insured his house against fire. Later, while insane, W killed his wife, severely
injured his only son, set fire to the house and died in the fire. The son survived and sued
 UFE INSURANCE 287

the insurers for the loss. Held, the son could recover on the fire policy, as the insurer is
not reUevcd of his liability on the lire policy for the insured caused the fire when he was
insane (Karow v. The Continental ins. Co. 57 Wis. 6).
2. M insured against fire his shop containing stock of merchandise worth Rs.
75,000 for Rs. 20,000 only in order to pay a smaller amount of premium. The policy
contained a condition that if the pràperty insured should at the breaking out of any fire
be of greater value than the sun'i insured thereon, the insured should be considered as
being his own insurer for the difference and should bear a ratable proportion of the loss
accordingly. In a fire the entire stock and furniture worth Rs. 70,000 were burnt to ashes.
M claimed the whole insured amount. The insurer pleaded the average clause. Held, M
can recover the whole amount of Rs.70.000. The average clause comes into play only if
it is proved that the loss sustained by the assured is less than the sum insured. When the
loss is much more than the sum insured, the insured can recover the whole amount in
spite of the average clause. (General Ass. Society Ltd. v. MohdSalirn, 1965 All 561).
3. M was the owner of nearly all the shares and the only substantial creditor of
company carrying on timber business. He insured the timber against fire in his own name.
A fire occurred and all the timber was destroyed. He put in a claim under the policy and
t' .urer refused to pay. It was held that M could not recover the loss as he had no
iiurahle interest. Lord Wrenbury said "... the corporator, even if he holds all the shares,
is not the corporation, and neither he nor any creditor of the company has any property,
legal or equitable, in the assets of the Corporation." IMacaura v. No r thern Assurance
Co. (1925) A.0 6191.
4.A effected aim insurance on iis goods against loss or damage by fire. Afterwards
A and his wife quarrelled and she set fire to and destroyed the goods. Held, A was entitled
to recover under the fire policy as the wife had set fire to the goods without his
connivance. The illegal act was not his but of his wife, and he was covered under the
policy against loss caused by an illegal act of another [Midland Ins. Co. v. Smith (1881)
6 Q.B.D.561].
5. In a case of lire insurance contract the insurer, on receiving information of the
insured property having been lost by fire, repudiated his liability in zoro on the ground
that it was a case of intentional arson. The assured brought an action against the insurer
for the recovery of his loss. The insurance policy contained a clause to the effect that in
case of any difference between the insurer and the assured as to the amount of damage
suffered by the loss of property, the same should be referred to arbitration. The insurer
pleaded that the suit was prematurely filed, as the dispute had ,not been referrcd'to
arbitration and should be dismissed. held, that the suit was maintainable, as the
repudiation of the claim on a ground going to the roct f the contract precluded the insurer
from pleading the arbitration clause. A party cannot approbate and reprobate at the same
time. He cannot claim that the policy is void and yet seek benefit of a condition in that
policy by insisting upon arbitration 1.1ureidini v. National Br. & Irish Millers Ins. Co.
(1915) A.C. 499].
In Heyman v. Dar-wins (1941) A.C., the House of Lords seems to have doubted
the principle laid down by the I'ouse of Lords in Jureidini's case. It is therefore safest
for the assured to go to arbitration and sue on the amount awarded by arbitration.
6. Property worth Rs.5,000 is in .ured up to Rs.1,000. There is an 'average clause'
in the policy. Property worth Rs. I.000 is destroyed by fire. The insured can recover the
full amount of Rs. 1,000 on the same principle as explained in case No.2.
7. A's goods in a warehouse are insured. B is the insurer. The goods are burnL A
recovers their full value of Rs.1.000 from B. Then A sues the warehouse-keeper and
recovers Rs.1,000 from him. B claims this amount from A. It was held that B could
recover this amount of Rs. 1,000 from A. as this amount makes his receipt in excess of
288 MERCANTILE LAW

the loss actually sustained by him. He cannot be allowed to make a profit of his loss. As
B had made good his loss, A must refund to H the amount of Rs,1,000 which he
recovered from thew archouse- keeper. This problem is based on the case Darellv. Tibhits
(1880) 5 Q.B.D. 560.
8. A ship insured against the perils of the sea was lying at anchor off the shore
about to proceed on her voyage. While the boilers were being filled, a valve remained
closed, due to the fault of somebody on board whose duty it was to sec that it remained
open. Consequently in the operation of pumping, water was forced back, split the
air-chamber and disabled the pump. The House of Lords, reversing the judgments of
the Courts below, held that this was not a loss covered by an ordinary marine policy,
being neither a peril of the sea nor coming within the general words all other perils.
losses. etc." The underwriters were held not liable to pay. [Thames and Mersey Marine
Insurance Co. Ltd. v. Hamilton, Fraser & Co. (1887) 12 A.C. 4841. As a result of this
ease, the inchamaree clause, named after the Steamer incliarnaree of this case was
brought into general use, extending the liabilities of the underwriter.
9. A ship was valued at, and insured for £6,000, though her real value was £ 9.000.
Owing to a collision she was sunk, and the underwriters paid a total loss of 6.000. In
due course, the assured recovered [ruin the owners of the wrongdoing vessel a sum of
£5,700. The assured contended that they were entitled to retain one-third of this sum
(the ship's actual value being £ 9,000, and the insured value being £6,000), but it
was held that the underwriters were entitled to the whole of this £5700, £6,000 being
the value admitted in the policy. (North of England ins. Association v. Armstrong).
10. A ship, which was insured under a time policy, was sent to sea unseaworthy
in two respects: her hull was in an unfit state for the voyage anti her crew was insufficient.
The assured knew of the insufficiency of the crew but not of the unfitness of the hull.
The ship was lost because of the unfitness of the hull. held, the insurers were liable. In
a time policy there is no implied warranty that the ship shall be seaworthy at any stage
of the adventure provided the loss is not attributable to the unseawurthiness to which
the assured was privy 117ionias v. Tyne and Wear SS. Freight Ins. Assn. (1917) I
K.B. 938].
11.On 151h January, 1968, A assigned his life nsurnce policy to B for valuable
consideration by a separate deed of assignment. On 15th February, 1968 A transferred
the same policy by endorsement thereon to C as a gift, and on the same day gave notice
of the transfer in favour of C to the Life Insurance Corporation in the prescribed manner
enclosing therewith the original deed of assignment. Both B and C claim the amount of
the polidy on maturi ,ty. The Life Insurance Corporation will recognise the claim of and
pay him the policy money. Under Sec. 38 (3) the assignment is complete and effectual
but does not confer upon the assignee any right to sue on such policy until notice in
writing of the assignment has been given to the corporation and either the endorsement
or the instrument has becu given to the corporation and either the endorsement or the
instrument itself or a copy ccitt lied to be correct by both the transferor and the transferee
have been delivered to the corporation. The date on which the notice in writing is
delivered to the corporation shall regulate the priority of all claims under a transfer or
assignment as between persons interested in the policy. As noticeof assignment in favour
of C was given. C would get the policy money. It makes no difference even if both
assignments have been code for valuable consideration.
12.A. the holder of a policy of life insurance on his own life, nominates B as the
person to whom the policy money is to be paid in the event of his death. Thereafter A
secures a l9an from the insurer and assigns his policy to the insurer in consideration of
the loan. In due course, the loan is repaid and the policy is re-assigned to A. A thereafter
dies. Both B and the legal representatives of claim the amount of the policy. B's claim
 LIFE INSURANCE 289

will succeed as the nomination in his favour was not affected by the assignment to the
insurer. Although Sec.39 (4) of the Insurance Act. 1938 provides that a transfer or
assignment of a policy made in accordance with the provisions of Sec. 38 of the Act
shall automatically cancel a nomination, the proviso to it makes an exception to this rule.
An assignment of a policy to the insurer, who bears the risk on the policy at the time of
assignment, in consideration of a loan granted by that insurer on the security of the policy
within its surrender value or its assignment on repayment of the loan shall not cancel the
nomination, but shall affect the rights of the nominee only to the extent of the insurer's
interest in the policy.
13. X, a policy-holder in an insurance company nominates Y as his nominee.
Before the maturity of the policy Y dies. On the maturity of the policy. Y's heirs claim
the policy money from the insurance company. By virtue of Sec. 39(5) of the Insurance
Act, 1938 where the nominee dies before the policy matures for payment the amount
secured by the policy shall be payable to the policy-holder or his heirs or legal
representatives or the holder of a succession certificate, as the case may be. In view of
the express provisions of law, the heirs of the nominee will not be entitled to the sum
payable under the policy in this case.
14. A holder of a marine insurance policy obtains a decree against the insurer in
respect of a claim arising out of his policy. Prior to the date of this decree another decree
had been passed against the insurer in a suit for arrears of rent filed by the landlord of
the premises rented by the insurer. Upon the failure of the insurer to satisfy the decrees,
the decree-holders seek to execute their respective decrees by attaching the amount of
the statutory deposit made by the insurer with the Reserve Bank under Sec.7 of the
Insurance Act. The policy holder's decretal amount can only be paid out of this deposit
and the landlord cannot get anything: for the statutory deposit can be utilised only for
the payment of policy money due from the insurer and no other claim can be met out of
it.
15. M is the holder of a policy of life insurance on his own life, and Mrs. M is
mentioned in the text of the policy as the person who should be paid the amount of the
policy in the event of his death. Afterwards M nominates by will his brother, R, in place
of Mrs. M. and sends a notice of the change by post to the L.I.C. The letter is lost in
transit. Upon the death of M, the corporation pays the policy money to Mrs. M. R
contends the payment. R's contention cannot hold good, as the written notice of change
in nomination was not 'delivered' to insurer, as required by the Act, as it was lost in
transit. The payment by L.I.C. to Mrs. M was bonafide.
16. A. the holder of policy of life insurance on his own life, assigned it to his wife
B, on the condition that the benefits under the policy are to revert to him should B die
during his lifetime. A year later A revoked the assignment on the ground that it was
conditional. Thereafter A died during the lifetime of B. Both B and A's legal repre-
sentatives claimed the policy money. Held, that the claim of B prevailed. Although under
Sec. 38 (7) of the Insurance Act it is permissible to make a conditional assignment of
life policy, yet the assignor cannot revoke or cancel an assignment once validly made.
The policy remained assigned to B, and on A's death B was entitled to get the policy
money (J3ai Lakshrni v. Jaswantlal T. bar 1947 Bom369).
17. A took a loan from the A. Bank Limited, and assigned his life policy in its
favour. A died and the bank claimed the policy money, but the insurer declined to pay.
In the meantime. R, the legal representative of A, redeemed the policy by satisfying the
bank's debt, and put in a claim with the insurer for the policy money. The insurer refused
to pay R on the plea that only the bank, as assignee, was entitled to receive payment-
Held, the insurer must pay R the policy money. The assignment of the policy in favour
of the bank was merely by way of security for the loan made by the bank. On the
290 MERCANTILE LAW

satisfaction of the debt, the assignment terminated, the policy was redeemed and its
benefits reverted to the estate of the deceased. These facts entitled R. as the legal
representative of A. to sue the insurer and recover the policy money (Scouish Union and
National ins. Co. Ltd. v. Roushan Jahan Begun, 1945 Oudh, 152).
18. A made a proposal to an insurance company for an insurance on his life for
Rs. 50,000. On the proposal form he answered various questions truthfully and disclosed
all relevant facts. A few days later, but before the proposal was definitely accepted, A
was taken ill with pneumonia. Later the company accepted the proposal and the first
premium was paid. Two days later A died of pneumonia and the company then learned
for the first time of his illness. The company was held not liable to pay Rs.50.000. A
contract of insurance is a contract of utmost good faith, and it is the duty of the proposer
to disclose all material facts. Also, where a material alteration of the risk arises between
the date of the proposal and the issue of the policy, notice must be given to the insurer,
otherwise he will be entitled to avoid the contract (Looker v. Law Union and Rock
Insurance Co. Lid.). Since A's illness is clearly a material fact within the above
definition, and substantially alters the risk, and since no notice of illness was given to
the insurance co. before it accepted the proposal, the company can rescind the rn policy
and thereby avoid the liability to pay the Rs.50,000.
19.The insurers paid the assured the full value of a ship at the time of the loss and
subsequentl y the assured received on agreement from the Canadian Government a
certain agreed sum which exceeded that paid by the insurers owing to the devaluation
of the pound against the dollar, field, the insurer could not recover from the assured
anything more than they had paid under the doctrine of subrogation [Yorkshire ins. Co.
I d. v. Nisbet Shipping Co. Ltd. (1961)2 All. E.R.4871.
 Chapter XI

The Law of Negotiable Instruments

PART 11-A
INTRODUCTION

The law relating to negotiable instruments is to be found in the Negotiable

Instruments Act. 18I, which came into force on 1st March, 1882 The Act operates
subject to the provisions of Sections 31 and 32 of the Reserve Bank of India Act, 1934.
Section 31 provides that no person in India other than the Reserve Bank of India or the
Central Government shall draw, accept, make or issue any bill of exchange, hundi,
promissory note or engagement for the payment of money payable to bearer on
demand. Section 31 further provides that no one except the Reserve Bank or the Central
Government can make or issue a promissory note expressed to be payable to the hearer
of the instrument, whet her payable on demand or after a certain time. Section 32 makes
the issuing of such bills or notes punishable with fine which may extend to the amount
of the instrument, and the instrument will be illegal and unenforceable.
The effect of these provisions is that -
(a) a bill of exchange cannot be made payable to the bearer on demand, although it
can subsequently become payable to bearer on demand on being indorsed in blank;
(b) a promissory note cannot be made payable to the bearer, no matter whether it is
payable on demand or after a certain time.
() But a cheque (though a bill of exchange) payable to bearer on demand can be drawn
on a person's account with a banker.
MEANING OF NEGOTIABLE INSTRUMENT
By virtue of Sec.13(a) "Negotiable Instrument" means a promissory note, bill of
exchange or cheque payable either to order or to bearer, whether the words "order" or
IA-
"bearer" appear on the instrument or not 1thougli the Act mentions only theie three
instruments, it does not exclude thepossibility of adding any other instrument to the list
ifjts.aiisfiesjhe following two conditions of negotiability, viz—
(i) that it is by custom of trade transferable by delivery or by indorsement andieivciy;
and
(ii) that it is capable of being sired upon by the person holding it pro lempore (for the
time being) in his own nam'Thus, documents such as share wan-ants payable to
bearer, debentures payable iearer, and Dividend Warrants are negotiable. But
postal orders, money orders, deposit receipts, share certificates, bills of lading,
dock warrants, are not negotiable instrurnen1
In simple terms, a negotiable instrument is an instrumen ch entitles a person
holding it to a sum of money and which is transferable from person to person by me
delivery like cask The transferee becomes entitled to the money and also to the right to
further transfe!:

291
 MERCANTILE LAW

It is pertinent to note that negotiable instruments constitute an exception to the

one can transfer a better title than
general principle of law riemo dat quod non-habel (no
he himself has). Consequently, a person who takes a negotiable instrument in good faith
and for value acquires good title to it, (i.e. becomes its owner) even if he takes it from a
person who has no title to it (i.e. he is a thief or finder). In the words of Willis J., "A
negotiable instrument is one the properly in which is acquired by every person who takes
it bonafide and for value, notwithstanding any defect of title in the person from whom
he took iL"
It follows from this definition that a person taking the instrument bonafide and
for value gets a good title, and is not affected by defects in the title of his predecessor,
and takes it free from any equities, which could be enforced against the original or any
intermediate holder. It is essential, for this principle to apply that the instrument must be
such that it can be transferred like cash by simple delivery, which is possible only when
it is payable to bearer. If it requires something more than mere delivery, e.g., indorsement
(being payable to order), it is not negotiable till it is properly indorsed. Thus, in the case
of an instrument made payable to order, it is imperative that the indorsement is valid,
proper or genuine before the instrument is delivered. 11 it is delivered without indorse-
ment or the indorsement is forged, no title passes to the receiver of the instrument even
though he took it bonafide and for value, as the instrument is not negotiable.
143 E R 441, G, by means of a fraud, obtained a cheque
1j5/his.1ler v. Forster
from F. Th 'cheque was made payable to G or order. G gave the cheque to in payment
of his own debt, but forgot to indorse it. W had no notice of the fraud then, but, before
he could get G's indorsement, he was given notice of the fraud. Accordingly, W could
not get a good title. It was pointed out by ErIe Ci. that "the title to a negotiable instrument
payab,Je to order passes by valid indorsement and dclivery.j
Requirements of Negotiability or Essential Elements of a Negotiable Instru-
ent—To be negotiable an instrument must have the following elements:
1. It must be in writing, which includes typing, printing, -engraving.
2. The instrument must be signed by the maker or drawer.
3. There must be an unconditional promise or order to pay. If the instrument is a
promissory note, it must contain an unconditional promise to pay. If the instrument is a
bill or cheque, it must contain an unconditional order or command to pay money. If the
promise or order is conditional, the instrument is non-negotiable.
4. The instrument must call for payment of a certain sum of money only, and
nothing ebte.
5. The instrument must be payable at a time which is certain to arrive. If it is payable
"when convenient", the instrument is not negotiable.
6. In case of a bill or cheque, the drawee must be named or described with
reasonable certainty.
7. The instrument must be such or in such a state that it can be transferred like cash
by simple delivery. This is possible when it is payable to bearer- If it is payable to order,
it becomes negotiable and makes the transferee its owner only when it is properly
indorsed before it is delivered.
A negotiable instrument, therefore, possesses the following special characteristics
which disrmguish it from an ordinary chattel or chose-in-action:-
(a) The property in it passes by mere delivery (when payable to bearer) or by valid
indorsement and deliy cry (when made payable to order.)
The holder in due course is not in any way affected by any defect of title of his
or any party.
 ThE LAW OF NEGOTIABU INSTRLJMEI'41S 293

(c) The holder in due course can sue on it in his own name without giving notice to
the debtor of the fact that he has become holder.
(d) Consideration is presumed to have passed, and this presumption cannot be rebutted
when the instrument has passed into the hands of a holder in due course.
Our Act provides that an instrument to be negotiable must be payable in any one
of the following forms:
(i) Pay A; (ii) Pay A or order; (iii) Pay to the order of A; (iv) Pay A and B; (v) Pay
A or B; (Vi) Pay A or bear; (vii) Pay bearer.
An instrument made payable in any one of the following forms is not negotiable:
(i) Pay A only; (ii) Pay to A and none else; (iii) Pay Dhani (owner) or Shah (any
respectable bearer of Worth and substance in the market). This last is, however,
recognised by custom as negotiable being a Shalijog Jiundi; (iv) Promise to pay A or
bearer; (v) Promise to pay bearer. These instruments, though not negotiable, are assig-
nable, but the transferee takes them subject to all equities and liabilities of the transferor.
PRESUMPTIONS AS 10 NEGOTIABLE INSTRUMENTS
Since the philosophy underlying the law of negotiable instruments is that business
transactions should be facilitated by making available evidences of rights to money that
will pass freely from hand to hand, Sec. 118 of the Act provides that until the contrary
is proved, the following presumptions shall be made:-
1. that every negotiable instrument was made or drawn, accepted, endorsed and
negotiated or transferred for consideration;'
2. that it bears the date on which it was made or drawn;
3. that every accepted bill was accepted within a reasonable lime
after its date and
before its maturity.
4. that every lran.fcr of a negotiable instrument was made
before maturity;
5. that the endorsements appearing on it were made in the order in which they appear
thereon;
6. where an instrument has been lost or destroyed, that it was duly stamped and the
stamp was duly cancelled;
7. that the holder of the instrument is a holder in due course,
But the presumPtions are rebuttable. lnfldikandaBejier (, v.
Daini KrislmnaMur:Jzy
Patra, 1983 Orissa 238, a pronote was executed by the defendant and registered. By
a
subsequent document the plaintiff admitted that the pronote was obtained from the
defendant by way of additional security for a loan advanced to certain society. 11cM,
there was no independent liability to pay under the pronote.

PART 11-B
PROMISSORY NOTES AND BILLS OF EXC}1ANG!

PRO MISSORY NOTES

A promissory note isan instrument in writing (note being a bank-

"Ole oracurrency
note) containing an unconditional undertaking, signed by the maker, to pay a certain sum
of in to, or to the order of, a certain person (Sec. 4). It will be noted that all the
requisites of a negotiable instrument are present in this definition, which are reiterated

I. Pardhan Pumushoitam v. Shaffi ilal Pui-ushoti am, 1954 Sau. 42;

1958 All. 54; State of M.P. v. Jauhrjlal Abdul Shakur v. Kwaleshar,
1962 M.P. 348.
 MERCANTILE LAW
294

in the following paragraphs. An instrument to be a promissory note must possess the

following elements:-
must be in writing—Mere verbal promise to pay will not do. The method of
It
writing1.is unimportant, but it must be in a medium that cannot be altered easily.
must contain an express promise or clear undertaking t0 pay—A promise
It
to pay2.cannot be inferred; it must be express! A mere acknowledgement is not enough.
The following are not promissory notes, as there is no promise to pay:
Rs. M)0. '
(a) "Mr. B.LO.U. (1 owe you)
(b) "I'I have
am liable to pay you Rs. 500."
taken from you Rs. 100; whenever you ask for it, I have to pay. "3
(c) Although the promise to pay may be opposed to public policy and unenforceable,
once a promissorY note is executed the promise to pay is performed because a promissory
note amounts in law to payment and what vitiates a promise does not vitiate a payment.
her v. A. Krisluia, 1954
T.C.231. A, the father of a bride, executed a
In C. note
promissory in favour of her father- in-law in connection with the marriage and in
respect of jewels agreed to be paid thereon, it was held that, notwithstanding the original
promise being opposed to public policy and so unenforceable, A was liable on the
pronote. Once a pronote is executed the promise to pay is performed because a
prorniSSO1) note amounts in law to payment and what vitiates a promise does not vitiate
a payment o pay must be unconditional--We have seen before that an
3. The promise t
instrument, to be negotiable. must contain an unconditional promise or order. So a
promise to pay contained in a note must be unconditional. A conditional undertaking
destroys the negotiable character of an otherwise negotiable instrument. Therefore, the
promise to pay must not depend upon the happening of some outside event It must be
payable absolutely. Although the event upon which the note is payable happens, this
fact does not remove the objection; the happening of the event does not cure the defect.
on-negotiable, always non-negoliable.'
The rule is 'once n
A promise to pay 'when able,' or 'when convenient,' or 'as soon as I can,' or 'after
my marriage with C,' or 'out of money due to me from B as soon as B pays it,' or 'on
A's death provided he leaves me sufficient funds to pay.' is conditional and not binding
as a pronote. But a promise to pay at a particular place or alter a specified time or
on the happening of an event which must happen is not conditional. For example. '1
promise to pay B Rs. 500 seven days after C's death' is not conditional, for C is certain
to die some time or the other.
maker must sign the promissOrY note—The person who draws the
4. The
instrument and signs it is known as the maker and the person to whom the promise is
made
makeriseven
called theitpayee
when is written by him and his name appears in the body of the instrument
Signature may be in any part of the instillment, and may be expressed by thumb-mark
or any other mark, if the execUtaflt is il1iterte. The impression of a printed mark is
sufficient signature. The signature may be indicated by a facsimile or by stamping the
name. maker must be a certain person_—The note itself must show clearly who
5. The engaging himself to pay. Where the promisors are more than one they may
he person
is t themselves jointly or jointly and severally but not in the alternative.
bind

2. KeshaVji Thackenhi v. Narshi Ramji. 1954 San. 52

3. Sec also K.v. lyer
Laxniibai Ganesh Raghunath (1901)25 Born. 373.
v. Animal. 1950 T.C.73; Bhctulal v. Ghisl*l. 1957 Raj 3V.
4.


THE LAW OF NEGOTIABLE INSMUNGWIS 295

6. The payee must be certain —A promissory note must contain a promise to pay
to some person or persons ascertained by name or designation or to their order. A'
promissory note made payable to the maker himself is nullity, but if such a note is
endorsed by him, it becomes payable to bearer, and is valid.
7. The sum payable must be certain, and the amount must not be capable of
contingent additions or subtractions. Thus, if A promises to pay Rs. 500 and all other
sums which shall become due to him, or to pay £ 130 and all fines according to rules,
the instrument is not a promissory note. But the payment of interest does not make the
sum indefinite, if the rate of interest is stated. If the rate is not stated the instrument is
not a promissory note. In Raghunaih Prasad Y. Mangi La!, 1960 Raj. 20, and entry in
the bahi of the plaintiff and signed by the defendant was as follows: "Balance due after
understanding the account Rs. 30.167. Whenever Mangi Lai 1i demands the same I shall
pay with interest. Raghunath Prasâd." held, that the document was not a promissory
note, as the sum payable was not certain as no rate of interest was stated. Moreover, a
writing on a ba/il was not intended to be negotiable, and it was not a pronote.
8. Payment must be in legal money of the country—Thus, an agreement to pay
money or grain or to deliver 100 tons of iron is not a promissory note.
9. A bank note or a currency note is not a promissory note within the meaning
of the section—They are expressly excluded from the definition, as they are treated as
money and not merely securities for money. A promissory note or a draft cannot be
made payable to bearer, no matter whether it is payable on demand or after a
certain time.
10.Other matters of form like number, place, date, etc., are usually found given
in notes, but they are not essential in law.
The date of a note is not material unless the amount is made payable at a certain
time After date- But even in this case the absence of date does not invalidate the note and
the date of execution can be independently proved. A stamp is, however, necessary under
the Indian Stamp Act.
The following two examples satisfy all the above conditions:—
(a) I promise to Pay B or order Rs. 500.
(b) I acknowledge myself to be indebted to B in Rs. 1.000 to be paid on demand, for
value received.
SPECIMEN OF A PROMISSORY NOTE

Rs. 500 Delhi
January 4, 1990

On demand [or six months after date] I promise to pay Ram or order the sum of
five hundred rupees with interest at 6 per cent per annum until payment.

Stamp
Sdl-
Gopal is the maker and Ram is the payee. Gopal
296 MERCANTILE LAW

DILL OF EXCHANGE

A bill of exchange is an instrument in writing containing an unconditional order,

signed by the maker, directing a certain person to pay a certain surn of money only to,
or to the order of, a certain person or to the bearer of the instrument (Sec. 5). The
definition of a bill is very similar to that of a note, and for most purposes the rules which
apply to notes are in general applicable to bills. Time fundamental requirements and
ingredients are the same. But a bill differs from a note in some particulars, it being an
order to pay.
DISTINCTION BETWEEN DILL AND NOTE

1. In a note there arc only two part ies—the maker (debtor) and the payee (creditor).
lit a bill there are three parties. namely, drawer, drawee and payee; though any two out
of the three capacities may be filled by one and the same person. In abill the drawer is
the maker who orders the drawee to pay the bill to a person called the payee or to his
order. When the drawee accepts the bill he is called the acceptor.
2. A note cannot be made payable to the maker himself, while in a bill the drawer
and payee or drawee and payee may be same person.
3. A note contains an unconditional pranise by the maker to pay to the payee or
his order, in a bill there is an unconditional oror to the drawee to pay according to the
drawer's directions.
4. A note is presented for payment without any prior acceptance by the maker. A
bill payable after sight irnist be accepted by the drawee or some one else on his behalf
before it can be presented for payment.
5. The liability of the maker of a note is primary and absolute, but the liability of
the drawer of a bill is secondary and conditional.
6. The maker of the note stands in immediate relation with the payee, while the
maker or drawer of an accepted bill stands in immediate relation with the acceptor and
not the payee.
7. Foreign hills must be protested for dishonour when such protest is requir.cd to
be made by the law of the country where they are drawn but no such protest is necessary
in the case of a note.
8. When a bill is dishonoured. due notice of dishonour is to be given by the holder
to the drawer and the imiterm tied iate indorsers, but no such notice need be given in the case
of a note.
DESCRIPTION AND 1()RMS OF BILLS OF EXCHANGE
A bill of exchange may be all Bill or a Foreign Bill. It was originally a
means by which a trader in one country paid a debt in another country without the
transmission of coin If A in Bombay owed money to C in Aden but himself was owed
an equal surn of money by B in Aden. A would order B to pay C, the two debts would
he cancelled and the same effect would have been produced as if A had sent money to
C and B had sent money to A. A's written order to B. sent to C and acceded to (accepted)
by B. was the first form of a bill of exchange. A is the drawer, B the drawee who, upon
consenting to the anangemcnt. becomes the acceptor and C is thc payee.
 'tilE LAW OF NEGOTIABLE INSTRUMENTS 297

INLAND BILLS
The following is a specimen inland trade bill of the simplest type:-
Rs.l,000.00. Delhi,
January 5, 1990.

H Three months after date pay R. Patel or order the sum of one thousand rupees
only for value received.
To
Seth B. Mehta,
101-AD.. Naoroji Road,
Bombay. Shiv Ram

Here Shiv Ram is the drawer, R Patel is the payee, and B. Mehia the drawee who, on
testifying his willingness to pay by "accepting" the bill, becomes acceptor.
The acceptance by B Mehta will be made across the face of the Bill as under:-
-

•'
,. o

ACCOMMODATION BILL
All hills are not genuine trade bills, as they are often drawn as aconvcnienl mode
ofaccornmodating a friend. Thus Patel may be in want of money and approach his friends
Shiv Ram and Mehta who, instead of lending the money directly, propose to draw an
"Accommodation Bill" in his favour. Patel promises to rcimbu;e Mehta before the
period of three months is up. If the credit of Shiv Ram and Mehia is good, this device
enables Patel to get an advance of Rs. 1,000 from his hanker at the commercial 'ale of
discount. The real debtor in this case is not Mchta, the acceptor, but Patel the payee who
has engaged to find the money for its ultimate payment, and Patel is here the principal
debtor and the others merely sureties. This inversion of liability affords a convenient
definition of an accommodation bill: 'if, as between the original parties to the bill the
one who would priroafacie be principal is it) fact, the surety, whether he be drawer,
acceptor, or indorser, that bill is an accommodation bill." (Lloyds, p. 27).
FOREIGN BILLS

London,

Stamp 71h January, 1990

Sixty days after sight of the first of Exchange (second and third of same tenor and
date unpaid) pay to the order of Messrs. Bird & Co., Bombay, the sum of Rupees Ten
Thousand only. Value received.
R s. 10,000.
Messrs Henry Brown,
Lamington Road,
Bombay. Bird & Co.
298 MERCANTILE LAW

BILLS IN SETS
The foreign bills are generally drawn in sets of three, each of which is called a
"Via" and as soon as any one of them is paid the others become inoperative. These bills
are drawn in different parts. They are drawn in order to avoid their loss or miscarriage
during transit. Each part is sent separately. To minimise the delay the holder can send
all the parts on the same day, each part by separate means of coveyance. All these parts
form one bill and the drawer must sign and deliver all of them to the payee. The .tamp
is affixed oil part only and only one part of the whole set is required to be accepted,
and when this is done and the accepted part is paid all the other parts are extinguished.
Where, however, a person accepts or indorses different parts of the bill in favour of
different persons, he and the subsequent indorsers of each part are liable on such part
as if it were a separate bill (Sec. 132). But as between the holders in due course of different
parts of the same set, he who first acquired title to his part is entitled to the other parts
and money represented by the bill (Sec. 133).
RIGHT TO DUPLICATE BILL
Where a bill of exchange has been lost before it was overdue, the person who was
the holder of it may apply to the drawer, to give him another bill of the same tenor, giving
security to the drawer if required, to indemnify him against all persons whatever iii case
the bill alleged to have been losi shall be found again. If the drawer refuses to give such
duplicate bill he may he compelled to do so by means of a suit (Sec. 45A). It is only the
holder who can ask for a duplicate, and the right is given to the holder also of notes and
cheques. A duplicate bill may he required even in the case oldestroyed bilk, and without
any indemnity if destruction is proved.
BANK I)RAVI'
A demand draft is a bill ut exchange drawn by a hank on another bank, or by itself
on it-, own branch, and is a negotiable instrument. It is very nearly allied to a cheque, the
difference between it amid a cheque consisting largely in three facts. Firstly, it can be
drawn only by a bank on another bank, and not by a private individual as in the case of
cheques. Second/v, it cannot so easily be countermanded as a cheque, either by the
person purchasinç it, or by the hank to which it is presented. Thirdly, it cannot be made
payable to bearer. Also, when a bank issues a draft on its own branch for the sole object
of transmitting the money, a fiduciary relationship may arise between the hank and the
purchaser of a demand draft from the bank, cfukur(lni fiapuji Nikarn v. The BeiRaum
Bank Lid; 1976 Botn. 185).
Thus, a document staling ''pay cash or order" is not a cheque, for although drawn
on a hanker, it is not a bill of exchange within the meaning of Sec. 5 of the Negotiable
Instruments Act, 1881. This instrument is not to or to the order of a certain person and
it is not "to bearer" (Orhil Mining & Trading Co. Lid v. Westminster Bank Lid. (1962)
3 All. ER. 565).

PART 11-C
CHEQUES

In the words of Sec. 6 of the Act, a cheque is a bill of exchange drawn on a specified
banker, and not expressed to be payable otherwise than on demand. In simple language
a cheque is a bill of exchange drawn on a hank payable on demand. Thus, a cheque is a

5. Suganchand v. Brahniayya, (1951) 64 M.L.W. 842 (D.13.), sec also 1944 P.C. 58.
 THE LAW OF NEGO11ABLE INSTRUME'(FS 299

a cheque is a bill of exchange drawn on a bank payable on demand. Thus, a cheque is a

bill of exchange with two additional qualifications, namely, (i) it is always drawn on a
bank,' and (ii) it is always payable on demand. Consequently, all cheques are bills of
exchange, but all bills are not cheques. A cheque, being a species of a bill of exchange,
must satisfy all the requirements of a' bill—it must be signed by the drawer, and must
contain an unconditional order on a specified banker to pay a certain sum of money to
or to the order of a certain person or to the bearer of the cheque. It does not, however,
require acceptance. A cheque is a payment, unless dishonoured the payment becomes
effective from the delivery of the cheque and does 'not wait till it is honoured and money
paid.6
DISTINCTION BETWEEN BILLS AND CHEQUES
As a general rule, the provisions applicable to bills payable on demand apply to
cheques, yet there are a few points of difference between the two, namely-
1. A cheque is always drawn on a banker, while a bill may be drawn on any one,
including a banker.
2. A cheque can only be drawn payable on demand, a bill may be drawn payable
on demand, or on the expify of a certain period after date or sight.
3. A bill must be accepted before payment can be demanded, a cheque does not
require acceptance and is intended for immediate payment.
4. A grace of 3 days is allowed in the case of time bills, while no grace is given in
the case of a cheque.
5. The drawer of a bill is discharged, if it is not presented for payment, but the
drawer of a cheque is discharged only if he suffers any damage by delay in presentment
for payment.
6. Notice of dishonour of a bill is necessary, but not in the case of a cheque.
7. A cheque hcing.a revocable mandate, the authority may be revoked by counter-
manding payment, and is determined by notice of the customer's death or insolvency.
This is not so in the case of a bill,
8. A cheque may be crossed, but not a bill.
BANKER AND CUSTOMER
The relationship between a banker and a customer is fundamentally that of debtor
(banker) and creditor (customer) and is not fiduciary. When a customer deposits money
ina bank, this money is under the control of the banker and he can deal with it as he
pleases, but he has obligations in connection with it. The foremost obligation of the
banker is to repay the whole or part of the money so deposited upon presentation o f the
customer's written authority (i.e., the cheque) during banking hours at the branch where
the account is kept. The banker is under obligation to honour a customer's cheques up
to the amount of the customer's deposit or alternatively up to the amount of an agreed
overdraft. Wrongful dishonour of a customer's che .iue will make the banker liable to
compensate him for any loss or dinage. But the payee or holder of the cheque has no
cause of action against the banker, even if the cheque has been marked good for payment
by the drawee banker. This was laid down by the Privy Council in Bank of Baroda v.
Punjab National Bank 1944 P.C.58.
In this case, G was indebted to M. On June, 13.0 gave Ma cheque for Rs. 2,75,000
on the Bank of Baroda post-dated to 20th June. The cheque was certified by the Manager

6. Comn. of Income Tax v. Ogalay Glass Works, 1954 S.C. 429 Damadila. i.Parasuram • 1976
S.C. 2229.
300 MERCAt'fl1LE LAW

of the Bank as 'marked good for payment on 20-6-39". M discounted this cheque with
the Punjab National Rank and received Rs. 2.40.000 immediately. On 20.639, the
Punjab National Bank, as holder in due course, presented the cheque for payment, but
the Baroda Bank refused payment as there were annas 7 and pies 3 only in the account
of G, the drawer of the cheque. The PN Hank sued the Baroda Bank on the plea that by
marking the cheque as good for payment the Baroda Bank had accepted the cheque
within the meaning of Scc.7 of the Act, and should, therefore, he held liable as acceptor.
It was held that the Baroda Bank was not liable, as the certification was not an acceptance
of the cheque and the manager had no authority to certify a post-dated cheque.
However, the hanker is under no obligalion to pay cheques in parts, and if a
customer with a deposit of Rs. 4,000 draws against it a cheque for Rs, 5,(X)0, the bank
is not empowered to pay it as to Rs. 4,000, but should either pay it is full (thus granting
an overdraft of Rs. 1,000) or refuse payment altogether.
Again, the relationship between the banker and customer being confidential, the
banker must not divulge information concerning the account and affairs of the customer,
except where required to do so by law or permitted by the customer himself.
PROTECTION OF PAYING BANKER
Section 85 lays down that whcn a cheque payable to order purports to be endorsed
by or on behalf of the payee, the banker is discharged by/iayrnent in due course. He can
debit the account of the customer with the amount even though the endorsement of the
payee turns out subsequently to have been forged, or the agent of the payee without
it
authority endorsed oil of the payee. It would be seen that the payee includes
endorsees. This protection is granted because a hanker cannot be expected to know the
signatures of all the persons in the world, lie is only hound to know the signatures of his
own customers.
With regard to bearer cheques, the rule is Once a bearer cheque always a bearer
cheque. Therefore, where a cheque is originally expressed by the drawer himself to be
payable to bearer, the hanker may Ignore any endorsements on the cheque. He will be
discharged by payment in due course. But a cheque which becomes hearer by a
subsequent endorsement iii blank is not covered by this section.
The hanker is also protected against forged or unauthorised endorsements on
demand drafts drawn by one branch of a hank upon another branch of the same bank
(Sec. 85A). A banker is also discharged from liability oil crossed cheque, if he makes
payment in due course, that is to say, the paying hanker pays (i)tO a hanker, in accordance
with the crossing. (ii) in good faith, and (iii) without negligence-
LIABILITY OF PAYING BANKER
No statutory protection is available to the paying hanker where he pays—
(a) a cheque bearing a forged signature of the drawer; or
(b) a cheque bearing a non-apparent altemation; or
(c) a countermanded cheque.
(a) Payment of forged cheque—A payment of a cheque bearing forged signature
of the customer is clearly contrary to thecustomer's mandate, and the hanker must suffer.
A forged cheque is a nullity and the amount of any such cheque debited to the customer's
account will have to be refunded. The hanker has with hmn the specimen signatures of
the customer and the signature oil cheque can be compared with them.
(i) In Prm'th/ut Daval v. Jw Ia Bank (1938) All. 634, one of the rules of the bank
required customers to keep the cheque book under lock and key, otherwise the bank will
not be liable in this connection. The customer left his cheque book in an unlocked box.
A cheque was stolen from the cheque book, the customer's signature was forged and the
 TIlE LAW OF NEGOTIABLE INSTRUMENTS - 301

cheque was presented and duly paid by the bank. The hanker was held liable for the loss.
No doubt the customer was negligent, but his negligence was not the proximate cause
of the loss.
(ii) In Brewer v. Westminster Bank Ltd. (1952)2 All. E.R. 650, the managing clerk
forged the signature of the customer to a series of cheques and over a period of years
drew £ 3.000 from the account, and used it for his own purposes. The forgeries were so
skillful that no negligence could be imputed to bank officials. It was held that the bank
was liable to pay to the customer the amount, because it paid the cheques without the
authority or mandate of the customer.
(iii) In Babu Lal Agarwala v. Stale Bank of Bikaner and Jaipur 1989 Cal. 92, the
cheque was forged. Even if the hanker officer is duped by the mechanisation of the forger,
the bank cannot debit the account of the customer, as the signatures on the cheque are
forged.
However, the banker can recover the whole amount from the forger as money paid
under a mistake of fact. (imperial Bank of Canada v. Bank of llamihon (1903) A.0 49).
It is therefore the duty of the customer, when he t e am s of the forgery of his
signature to inform the hanker so that the banker may take action against the forger. If
the customer fails to inform the banker and the banker loses his remedy against the forger,
the customer will be estopped from relying upon the forgery of his signature.
In Greewood v. Martins' Bank Ltd. (1933) A.C. 51(HL.), G's wife forged his
signature on 40 cheques. Upon his discovery of the forgeries. C did not innn the bank,
being persuaded by the wife to say nothing about it. However, later on, when he stated
his intention to notify the hank, the wife shot herself. G now claimed that thebank should
credit his account with the amounts of the forged cheques. Field, the action could not be
sustained as his continued silence operated to prevent the bank from taking remedies
against the wife. C was estopped from asserting that the signatures to the cheques were
forgeries.
The hanker is also tinder a corresponding duty to inform his customer if he
ascertains that his signature is being forged.
Again, when a customer has drawn his cheque with reasonable care but even so
some dishonest person by using some technique has altered and raised the amount so
that the banker, not knowing the forgery, has paid the increased amount, the hanker must
bear the loss. He cannot charge the customer with the excess amount, as there was no
negligence on the part of the customer. This' is an ordinary risk of the banking profession
and the banker must put up with it. (Flail v. Fuller (1826)5 B & C 750).
(b) Payment of cheque hearing a non-apparent alteration—But where the
customer has been negligent in drawing the cheque and has left unusual spacs which
facilitate interpolation of figures and words and that becomes the cause of forgery, the
loss falls on the customer.
In London Joint Stock Bank Jld. v. Macmillan and Arthur, (1918) A.C. 777,M
and A, partners, were customers of the bank and entrusted their clerk with the duty of
filling in cheques for signature. The clerk presented a cheque to a partner for signature,
drawn in favour of the firm or bearer, and made out for £2 Os Od in figures with no sum
written in words. The clerk then easily altered the figures to £120 Os. Od. and wrote
"one hundred and twenty pounds" in words, presenting the cheque to the bank and
obtaining £120 in cash. The banker was held by the House of Lords entitled to debit the
account of the customer, with the full amount. Lord Finlay. L.C. stated: "The relationship
of banker and customer imposes a special duty of care on the customer in drawing
cheques. A cheque is a mandate to the banker to pay according to the tenor. The
customer must exercise reasonable care to prevent the banker being misled. If he draws
302 MERCANTILE LAW

a cheque in a manner which facilitates fraud, he is guilty of breach of duty as between

himself and the banker.......If the cheque is drawn in such a way as to facilitate or almost
to invite an increase in the amount by forgery if the cheque should get into the hands of
a dishonest person, forgery is not a remote but a very natural consequence of such
negligence. The bank could, therefore, debit Macmillan and Arthur with the full
£120 Os Od.
(c) Payment of Countermanded Cheque—The authority of a banker to pay a
cheque drawn on him by his customer is determined by countermanding of payment.
Thus, where a customer issues instructions in writing not to honour a cheque, the banker
after having received them must not pay it. Payment made after the countermand is not
good against the drawer.
However, where the payment of a countermanded cheque actually satisfies a debt
due from a customer to his creditor, the customer would make a profit by reason of the
restoration rule. For example, if the bank paid a countermanded, cheque which A. a
customer, had drawn in favour of B, to whom A owed money, the result of restoration
rule would be that A's debt to B would be satisfied and A's balance at the hank would
have to be restored. To prevent this prof-it being made the bank, on restoring A's account,
is subrogazed to B's rights against A. and can recover from A by this means.
WHEN BANKER MUST REFUSE PAYMENT
In the following cases the authority of the banker is determined and he must refuse
to honüur his customer's cheques-
1. When customer countermands payment—Where a customer issues instruc-
tions not to honour a cheque, the banker must not pay it. The effect of a notice
countermanding payment of a cheque is the same as if the cheque had never been drawn.
A stopped cheque is a piece of waste paper in the hands of payee. Payment made after
the countermand is not good against the drawer. The notice to the drawee banker must
however, be given in sufficient time.
2. When banker receives notice of customer's deatl—Notice of customer's
death determines the authority of banker to honour cheques, but a payment made before
the 'receipt of notice is valid.
3 When customer has become insolvent—When a customer has been adjudged
an insolvent, the hanker must refuse to pay his cheques.
4. When banker receives notice of customer's insanity—On receipt of a notice
that a customer of his has become insane, the banker must not pay the cheque drawn by
that customer until the customer recovers from his malady, or an order is made by the
Court for payment of the money.
5. When an order of Court prohibits payment—After receiving a Garnishee
order or other legal orders attaching or otherwise dealing with customer's money in his
custody, the banker should not honour the cheques drawn against customer's account.
6. On notice or assignment—The banker should not honour his customer's
cheques after the customer has given notice of assignment of the credit balance of his
account,
7. When holder's title is detective—If the banker comes to know of any defect
in the title of the party presenting the cheque. he must not pay it.
8. áosing or account—The hanker should not, after receiving notice from the
customer closing the account, pay any cheque of the customer.
 'fllE LAW OF NEGOTIABLE INSTRUMENT'S 303

In the following cases the duty of the banker is determined and he hemay dishonour
a customer's cheque:-
1. Where the cheque is post-dated and is presented before the ostensible date. The
mandate of.the customelto the banker is to pay the -cheque on the date it bears and not
before, and the refusal bef6re that date does not amount to dishonour. Indeed, a banker
honouring a post-dated cheque bfore due date runs the risk of the cheque being
countermanded before date, or another cheque bearing earlier date being presented for
payment when funds have dwindled on account of the payment of the post-dated cheque.
2. Where the banker has not sufficient funds of the drawer with him.
3. Where the cheque is of doubtful legality.
4. Where the funds in the hands of the banker are not properly applicable to the
payment of the customer's cheques, e.g., funds are subject to lien, or are held in trust
and the cheque is drawn in breach of trust.
5. Where a cheque is not duly presented, e.g., presented after banking hours.
6. Where the cheque is irregular, ambiguous or otherwise materially altcre.
7. When the cheque is presented at a branch where the customer has no accounL
8. Where some persons have joint account and the cheque is not signed by all
jointly or by the survivors of them.
9. Where the cheque has been allowed to become stale, i.e., it has not been
presented within a reasonable time after the date mentioned in it. In India six months are
reasonable.
PAYMENT IN DUE COURSE
Section 10 provides that in order to constitute a payment of a negotiable instrument
as a payment in due course, the following conditions must be fulfilled, viz.,
1. Payment must he In accordance with the apparent tenor of the instrument,
i.e., according to what appears on the face of the instrument to be the intention of the
parties. It is necessary that payment should be made at or after maturity. A payment
before maturity is not payment in due course so as to dis :harge the instrument. For
example, a bill payable after sight must not be paid before the lastday of grace.
2. Payment must be made in good faith and without negligence, and under
circumstances which do not afford a reasonable ground for believing that the
person to whom it is made is not entitled to receive the amouht—When there are
suspicious circumstances and the payer fails to make any-enquiry which may bring houne
the defects, the payment is not in due course. Payment of a cheque bearing forged
signature of customer as drawer without the banker exercising due care is not payment
in due course, 7 nor is it so where payment is made to a person who the person paying
knows is not entitled to receive payment, although the instrument is payable to bearer.
Payment of a Shalmjog hunch without inquiry about the shah is not payment in due course.
3. Payment must he made to the person in possession of the instrument—A
payment cannot be a payment in due course if it is made to a person not entitled to receive
it. A thief is not said to be in possession of the instrument, as he cannot give a valid
discharge.
4. Payment must be made under circumstances which do not, afford a
reasonable ground for believing that he is not entitled to receive payment of the
amount mentioned therein—Before making a payment on a negotiable instrument, the
person making such payment should make sure that the person presenting it is the person
entitled to receive payment thereon. There must be no suspicion either about the payee

7. Abbu Chettiar v. Hyderabad State Bank (1954) Mad. 1001.

 MERCANI1LE LAW

or the amount to be paid. Thus, if the drawee of hundi ncggentFy makes payment to
a wrong person, such payment is not payment in due course.
5. Payment must be made in money only—Money includes Bank or currency
notes. The holder is entitled to be paid in money only, and he cannot be compelled to
accept payment in goods or by cheque. He may, however, agree to accept p4ylncnt b'
cheque or another bill, in which case this mode will amount to payment in due course.
COLLECTING BANKER
Sec.131 affords protection to the collecting hanker who in good faith and without
negligence receives payment of a crossed cheque for a customer, even though the
customer's title to the cheque proves defective. In order to obtain protection, the banker
must prove that (i) the cheque was crossed before it reached his hands, (ii) the cheque
was presented by or on behalf of the customer and thai he received payment for the
customer, (iii) he acted in good faith and without negligence in collecting the money due
on the cheque. Therefore, if he collects an uncrossed cheque or a crossed cheque for a
non-customer, he gets no protection in the event of the cheque having a forged
indrsement, and is liable to the true owner for wrongful conversion of the funds. The
explanation to Sec.131 extends protection to a collecting hanker where lie credits his
customer's account with the amount of the cheque before receiving payment thereof-
OVER-DUE, STALE, OR OUT-OF-DATE CHEQUES
A cheque becomes statut . harred after three years from its due date of issue. A
holder cannot sue on the cheque after that lime. Apart from this provision the holder of
a cheque is required to present it for payment within a reasonable time, as a cheque is
not meant- for indefinite circulation. A cheque which has been in circulation for an
unreasonably long time, becomes stale and the hanker can refuse to pay it The period
for this purpose differs with particular hankers and may vary with special agreement
with any particular customer. As a rule, in India and in the Provincial towns in England,
the bankers regard a cheque which has been in circulation for more than 6 months as
stale. In London, a cheque may remain in circulation for 12 months without becoming
stale. Also, if as a result of any delay in presenting a cheque the drawer suffers any loss,
as by the failure of the hank, the drawer is discharged from liability to the holder to the
extent of the damage. In the case of dividend warrants, the issuing companies usually
do not honour them if they are presented more than three months after issue, unless they
are subsequently rvalidaLed by the companies concerned. Similarly, the drawee banker
may, after getting the stale cheque confirmed by the drawer, honour it.
LIABILITY OF INDORSER
In order to charge an indorser. it is necessary to present the cheque for payment
within a reasonable time of its delivery by such indorser A indorses and delivers a
cheque to B. and B keeps it for an unreasonable length of time, and then indorses and
delivers it to C. C presents it for payment within a reasonable time after its receipt by
him, and it is dishonoured. C can enforce payment against B but not against A, as qua
A the cheque has become stale. -
RIGHTS OF HOLDER AGAINST BANKER
We have observed that a banker is liable to his customer for wrongful dishonour
of his cheque and not to the payee or holder of the cheque. The holder has no right to
enforce payment from the hanker, except in two cases, namely, (i) where the holder does
not present the cheque within a reasonable time after issue, and as a result the drawer

8. Lalta Prasad v. Charles Campbell, 9 C.W.N. 841.

 ThE LAW OF NEGOTIABLE INSTRtJIffNTS

not present the cheque within a reasonable time after issue, and as a 6esult the drawer
suffers damage by the failure of the bank, and is therefore discharged then, the holder
can prove his debt against the banker in insolvency proceedings. The holder in such case
becomes the creditor of the banker in lieu of the drawer and can recover the amount from
him ISec.84 (3)1; and (ii) where a banker pays a crossed cheque by mistake over the
counter, he is liable to the true owner for any loss occasioned by it (Scc.129). If the
holder has, through banker's mistake, received payment in respect of a cheque counter-
manded by the drawer, the banker is not entitled to a refund of the amount from the
payee, nor can he debit the customer's account.
CROSSING OF CHEQUES
So far we have dealt with "open cheques" which can be presented by the payee
to banker on whom they are drawn and are paid over the counter. A hanker, who pays
in due course such cheques whether they are payable to bearer or to order, is discharged
provided that in the case of an order cheque it purports to be indorsed by or on behalf of
the payee. It is obvious that an open cheque is liable to great risk in the course of
circulation. It may be stolen or lost and the finder can get it cashed, unless the drawer
has already countermanded payment. In order to avoid the losses incurred by open
cheques getting into the hands of wrong parties the custom of crossing was introduced.
A crossing is a direction to the paying hanker to pay the money generally to a
banker or a particular banker, as the case may be, and not to pay to holder across the
counter. A banker paying a crossed cheque over the counter does so at his own peril if
the party receiving the payment turns out to be not entitled to get payment. The object
of crossing is to secure payment to a banker so that it could be traced to the person
receiving the amount of the cheque. The crossing is made to warn the banker, but not
to stop negotiability of the cheque. To restrain negotiability addition of words "Not
Negotiable" or "Account payee only" is necessary. A crossed bearer cheque can be
negotiated by delivery and crossed order cheque by indorsement and delivery.
MODES OF CROSSING
There are two types of crossing which may be used on a cheque, namely, (i) General
and (ii) Special. To those two statutory types may be added another mode, i.e., the
Restrictive crossing.
Specimen of General Crossing-

I$II

7/
A General Crossing is defined in Sec. 123 thus: where a cheque bears across its
face an addition of
(a) the words "and Company", or any abbreviation thereof between two parallel
transverse lines, or
(b) two parallel transverse lines simply, either with or without the words "Not
Negotiable";
that addition constitutes a crossing and the cheque is crossed generally.
9. Abdul Majd v. Ws. G. Kaloorani, 1954, Orissa 124.

306 MERCANIUE LAW

Two transverse lines on the face of the cheque are essential for general crossing,
though not for special crossing. If a cheque is crossed generally, the paying banker shall
pay only to a banker.
A Special Crossing is defined in Sec.124 thus:
Where a cheque bears across its face an addition of the name of a banker, either
with or without the words "not negotiable" that addition constitutes a Crossing and the
cheque is crossed specially and to that banker Thus, a special crossing requires the name
of the banker to whom or to whose collecting agent payment of the cheque should be
made to be written on the face of the cheque. Transverse lines are not compulsory.
Specimens or special Crossing-

LI UI I.l4I I
I'l II I
II

ii
c
'.at1
iI-
'3.I

lI.iiI lm1
1=1
I

HZI

H
01 1=1 I

Double Crossing—Section 127 states that if a paying banker receives a cheque

crossed specially to two bankers he must not pay it; however, if one of the bankers
named is acting as an agent for collection for the other, the cheque may be paid to the
agent bank. Collection through an agent may be resorted to where the banker in whose
favour the cheque is specially crossed, is not a member of the clearing house or does not
have a branch where the cheque is to be paid. Such crossing may be in the following
form:

.' '9
0

? '

Restrictive Crossing—Some more forms have been adgpted by commercial and

banking usage in order to obviate the risk of a thief obtaining payment. These forms
consist in adding to the general or special crossings, the words "Account payee,"
"Account payee only" or "Account John Smith only".
Specimens or Restrictive Crossing—
I I Li I I
L>J iI I I
ii..cJ
1
I ' 0 Iri ifil i:i
4)1
1 I:i I°'l 1.lml
I:Id•I

CQ . .
C 4
1 ''I
P.

01 I
I'
I'
lv°I
I
IoI
-i

ii'i
IiuI

rI i 1 I' I I I I
 ThE LAW OF NEGOTIABLE INSThUM(FS 307

Such crossings warn the collecting banker that the proceeds are to be credited only
to the account of the payee, or the party named, or his agent. If the collecting banker
allows the proceeds of a cheque so crossed to be credited to any other account he may
be held guilty of negligence in the event of an action for wrongful conversion of the
funds. These words are not addition to the crossing and do not prevent a cheque from
being negotiated, but a mere direction to the receiving or collecting banker. They do not
affect the paying banker, who is under no duty to ascertain that the cheque is in fact
co1kted for the ctt f ;i ç.isuii named as payee. In the case of a cheque bearing
restrictive crossing but not specially crossed to another the paying banker need only see
that the cheque bears no other endorsement but that of the payee or the party named in
the crossing, and that it is otherwise in order But where the cheque is also crossed
specially, the paying banker must pay only to the bank named in the crossing or to an
ageit bank, and should also see that no other endorsement appears, and that no
misapplication of the funds is apparently taking place.
WHO MAY CROSS A CHEQUE
Sec. 125 provides that—
(a) A cheque may be crossed generally or specially by the drawer.
(b) Where a cheque is uncrossed, the holder may cross it generally or specially.
(c) Where a cheque is crossed generally, the holder may cross it specially.
(d) Where a cheque is crossed generally or specially, the holder may add the words
"not negotiable."
(e) Where a cheque is crossed specially, the banker to whom it is crossed may again
cross it specially to another banker for collection.
(f) Where an uncrossed cheque or a cheque crossed generally is sent to a banker for
collection, he may cross it specially, to himself. But such crossing does not enable
the collecting banker to enjoy statutory protection against being sued for conver-
sion.
"NOT NEGOTIABLE" CROSSING
If a cheque is made payable to a payee and to him only, it becomes non-transferable
in the strict sense. No one but the payee can give a good discharge for its payment, and
no one but the payee can bring an action an the instrument. Where a cheque bears the
"Not Negotiable" crossing, it is transferable, but it loses its special feature of nego-
tiability. Such a cheque is like any goods--a stolen pen or a waich—the transferee of
which does not get a better title than that of a thief. A cheque crossed with the words
"Not Negotiable" is deprived of both the characteristics of negotiability, namely,
transferability free from defects, and transferability by endorsement. The transferee gets
no better title than that of his transferor. The object of "not negotiable" crossing is to
afford protection to the drawer or holder against miscarriage or dishonesty in the course
of transit by making it difficult to get the cheque cashed until it reaches its destination.
While the words "not negotiable" do not stop transferability of cheque, they perpetuate
the defect in iL When the words "Not-Negotiable" appear on a bill of exchange or a
document other than a cheque, their effect is altogether different; they make the bill or
the document not only not negotiable but also not transferable.
MARKING OF CHEQUES
Cheques being intended fbr immediate payment are not in the ordinary course
accepted. But in some countries there is a usage to so accept, by marking or certifying
cheques as good for payment by the paying banker. In fact, in the U.S.A., Certified or
marked cheques are in common use and the practice of certifying has received statutory
 MERCANTtLE LAW

recognition. Accordingly, the certification of a cheque by the banker is equilvent to

acceptance, and the hanker is bound to pay and the drawer and indorsers arc discharged
from liability.
In India also bankers often marked cheques as good at the request of the holder,
but now the banks in our country have, by agreement, stopped this practice. However,
since marking is still done in some countries a brief account of the practice is ih point.
The marking is generally done by the hanker writing the words "good for payment"
across one corner of the cheque, adding the bank's stamp and initials of the banker's
cashier. Marking may be done by the paying banker at the request of (a) the drawer, (b)
the holder, or (c) the collecting hanker.
Marking at drawer's instance—Where the cheque is marked at the request of
the customer (drawer), the banker - asswnes responsibility for payment of the cheque
when presented and usually "earmarks" or sets apart suffic ! ent funds from the
customer's account IC) meet the cheque. The customer cannot countermand or stop
payment and the banker is entitled to dishonour cheques presented subsequently, should
the remainder of the funds be insufficient to meet them.
Marking at holder's instance—Marking of a cheque at the request of the holder
does not amount to acceptance of liability on the cheque by the hanker. It merely indicates
that at the time of marking the hanker had sufficient funds of the drawer in his hands.
The banker may represent to pay the cheque when eventually presented by reason of
insufficiency of funds or payment being stopped by the drawer. Again, a post dated
10
cheque cannot be rnarkcd as g.0.
Marking at Collecting Bankers' instance—Where a cheque is received by a
collecting hank too late for inclusion in the clearing, it may, to safeguard the interests of
its customer, may present the cheque for marking by the drawee banker. If the paying
banker would have honoured the cheque had it been presented for payment through the
clearingon that day, an official of the hank would mark it good. Banking customn demands
that such a cheque shall be honoured when presented through the next clearingThe legal
position also seems to be the same, as such a marking is treated as constructive payment.

ISSUING A CHEQUE'l'HAT ItOUNClS IS AN OFFENCE

A new chapter XVII has been inserted by the 19 Amendment Act. It is now
provided that where any cheque drawn by a person for the discharge of any liability is
returned by the hank unpaid because of insufficiency of the amount of money standing
to the credit of the account on which the cheque was drawn or by reason that exceeds
the arrangements by drawer of the cheque with the bankers for that account, the drawer
of that cheque shall be deemed to have committed an offence, and shall be punishable
with imprisonment up to one year, or with fire upto twice the amount of the cheque, or
with both.
However, to constitute the said offence, (a) such cheque should have been
presented to the hank within a period of 6 months of the date of drawal or within the
period of its validity, whichever is earlier; (h) the payee or holder in due course of such
cheque had made ademand in writing for the payment of the said amount of money from.
the drawer within 15 days of the receipt of information by him from the bank regarding
the return of the cheque unpaid; and (c) the drawer of the cheque had failed to pay the
money to the payee or holder iii due course of the cheque within 15 days of the written
demand lbr payment. Thereafter, the payee or the holder in due course of the cheque
may make a complaint within one month of the date on which the cause of action arises
to the court of a Metropolitan Magistrate or a Judicial Magistrate of the First Class.
It should he noted that the offence will be deemed to have been committed if the
bounced cheque was drawn for the discharge of an y liability and not for any other

10. Bank of Baroda v. Punjab National Rank (1944) P.C. 53.

 tE LAW OF NEGOTIABLE INSTRUMENTS 309

purpose. For example, if a cheque was drawn in favour of the payee as a gift, no offence
will hb deemed to have been committed, if the said cheque is returned by the bank unpaid.

PART 11 -D

INLAND AND FOREIGN INSTRUMENTS

Instruments may be inland or foreign. A promissory note, bill of exchange or
cheque drawn or made in India, and made payable in or drawn upon any person resident
in India, is an inland instrument (Sec.!!). Thus, an inland instrument is one which is (i)
drawn and payable in India, or (ii) drawn in India upon some person resident therein,
even though it is made payable in a foreign country. But a promissory note to be inland
must be drawn and payable in India, as it has no drawee. All instruments which are not
inland are deemed to be foreign (Sec.12); and an instrument is presumed to be inland
unless the contrary appears on the face of it. The distinction between the two is important
inasmuch as foreign instruments (bills) must be protested for dishonour, if the law of the
place of making or drawing them requires such protest; which inland instruments need
not be so protested.
Examples of inland bills—The following are inland hills:—
I. A bill drawn in Kanpur on a merchant in Delhi payable in Delhi or in London.
2i A bill drawn in Delhi on a merchant in Paris but made payable or accepted payable
in Bombay.
3. A bill drawn in Delhi on a merchant in Bombay and accepted pa.yabrc in London.
4. The above bills endorsed in Paris.
5. Where a pro-note recited that both parties belonged to India and were temporarily
in Singapore, the note was held to be an inland instrument, as it was an instrument
drawn on person resident in India (C.Sornayya V. E.V. C/zinnia!, Konar, 1976
Mad.254).
Examples of foreign bilLs—The following are foreign hills:-
1. A bill drawn in India, on a person resident outside India and made payable outside
India, e.g., a bill drawn in Delhi on London payable or accepted. payable in Paris.
2. A bill drawn outside India on a person resident outside India.
3. A bill drawn outside India and made payable in India.
4. • A bill drawn outside India and made payable outside India.
Foreign Bills are usually drawn in acts' to avoid danger of loss. Each , part is
separately numbered and sent separately, but all the parts constitute one bill.
USANCES
Continental 1)1115 are sometimes drawn at usances—me, two, or more usances. A
usance is the time which is fixed by the custom of countries, for payment of bills drawn
in one country and made payable .'n another. The length of a usancc varies in different
countries. When usance is a month, half usance is always 15 days. The usance has to be
proved by the person who pleads it. In India, according to custom, usance Hundis are
drawn.
AMBIGUOUS INSTRUMENTS
An instrument, which in form is such that it may either be treated by the holder as
a bill or as a note, is an ambiguous instrument (Sec. 17). According to Sec. 5 (2) of the
English Bills of Exchange Act, "where in a bill the drawer and the drawee are the same
person, or where the drawee is a fictitious person or a person-not having the capacity to


MERCANTiLE LAW
310

contract, the holder may treat the instrument, at his option, either as a bill of exchange
or as a promissory note. Bills drawn to or to the order of the drawee or by an agent on
his principal, or by one branch of a bank on another or by the directors of a company on
their cashier, are also ambiguous instruments. A promissory note addressed to a third
person may be treated as a bill by such person by accepting it, while a bill not addressed
to anyone may be treated as a note. But where the drawer and payee are the same, e.g..
where A draws a bill payable to A's order, it is not an ambiguous instrument and cannot
be treated as a promissory note. Once an instrument has been treated either as a bill or
as a note, it cannot be treated differently afterwards. Insufficiency of stamp on such an
instrument will not interfere in its being treated as admitted.
INChOATE INSTRUMENTS
When one person signs and delivers to another a paper stamped in accordance with
the law relating to negotiable instruments, then in force in India, and either wholly blank
or having written thereon an incomplete negotiable instrument, he thereby gives prima
fade authority to the holder thereof to make or complete, as the case may be, upon it a
negotiable instrument, for any amount specified therein, and not exceeding the amount
covered by the stamp. Such an instrument is called an Inchoate Instrument. The person
so signing shall be liable upon such instrument, in the capacity in which he signed the
same, to any holder in due course for such amount, provided that no person other than
a holder in due course shall recover from the person delivering the instrument anything
in excess of the amount intended by him to be paid thereon (Sec.20).
The principle of the rule stated in this section is one of estoppel, enabling persons
to lend their mercantile credit to others by signing their names on stamped but blank or
incomplete papers to be afterwards filled up as completed instruments. By such signa-
tures they bind themselves, as drawers, makers, acceptors, or indorsers. The instrument
may be wholly blank or incomplete in any particular, e.g.. without any mention of the.
sum or the name of the payee, the holder may make or complete the instrument as a
negotiable instrument. The authority to fill up a blank or incomplete instrument may be
exercised by any "holder." and not only the first holder to whom the paper is delivered.
Delivery of such paper is essential for the operation of estoppel: for instance where an
instrument was placed by the Bank Manager in his drawer, and some one stole it and
filled it up for Rs-500, no estoppel would arise against him as he never issued the
instrument intending it to be used as a negotiable instrument. The section in terms applies
to stamped instruments only, but its principle would apply even to cheques which do not
require stamp in India, if estoppel is pleaded and proved.
The person signing and delivering the paper is liable both to a "holder" and a
"holder in due course." But there is a diffVence in their respective rights. A holder can
recover only what the signer intended to bcpaid under the instrument, while a holder in
due course can recover the whole amount made payable by the instrument provided that
it is covered by the stamp, even though the amount authorised was smaller. The power
of completing the instrument must be exeicised within a reasonable time, even though
it may be exercised after the death of the acceptor. But where once the payment is made
so as to discharge the instrument, a holder cannot claim on it.1
INSTRUMENTS PAYABLE ON DEMAND
The following instruments are payable on demand:-
1. A cheque is always payable on demand (Sees. 6,19).
2
(Sec. 21).

11. A. tbiahun v. D. Ramadas, 1954 Mad. 532.

 THE LAW OFNEGOTIABLE INSTRUMENTS 311

3. A note or bill in which no time for payment is specified (Sec. I9)

Although the expressions"at sight" and "on presentment" mean "on demand",
yet they are distinguishable from the expression "on demand." Instruments payable on4
demand need not be presented before payment can he demanded, while instruments
payable "at sight" or "on presentment" must be presented before payment can be
demanded on them. Moreover, in the case of instruments payable on demand or without
specification of time of payment the period of limitation (3 years) begins to nan from
the date of the execution, while in the case of instruments payable at sight the time of
3 years commences from the date of presentment. But where simultaneously with the
note payable on demand a period for payment is fixed in a separate written agreement
time begins to run from the expiry of the fixed period. The words "on demand" simply
mean that note is payable immediately or at sight and do not imply that a demand must
be made. Where a note is made at a certain place and is payable on demand but no place
of payment is mentioned therein, it can be sued upon at any place.
Instrument which are not payable on demand are e'prcssed to be payable at a
certain period "after sight," or "after happening of an event" which is certain to happen,
though the time of its happening may be uncertain. Thus a bill or note may be made
payable, say, 30 days after sight, or 60 days after date, or 90 days after the death of X.
and payment can be demanded on presenting it on its maturity. There is, however, one
difference in bills and notes payable "at sight." The note has simply to be exhibited to
the marker before payment is demanded, while a bill has to be presented for acceptance
to the drawee. If the drawee accep:s the bill, payment can be demanded after the expiry
of the specified period on the maturity of the bill. But if the drawee refuses to accept the
bill, payment cannot be demanded until the bill has 'been noted or protested for
non-acceptance.
MATURITY
Maturity is the date on which the payment of an instrument falls due. Every
instrument payable at a specified period after date or after sight or after the happening
of a certain event is entitled to three days of grace. Such a bill or note matures or falls
due on the last day-of grace, and must be presented for payment' on that day, and if
dishonoured, the suit can be filed on the r,cx t day after maturity (Sec. 22). If an iratrument
is payable by instalments each is entitled to 3 days of grace. Instruments payable on
demand become payable at once, and no days of grace are allowed for them. Therefore
no days of grace arc allowed for cheques, which are always payable on demand. The
calculation of time should always be made according to the British calendar, and the
term month means a calendar month and not a lunar month.
Where a note or bill is expressed to be payable a stared number of months after
sight, or after date, or after certain event, the period of payment terminates on the day of
the month which corresponds with the date of the instrument, or with the date of
acceptance if the bill be accepted, or presented for sight, or noted or protested for
non-acceptance. Where an after-sight bill is accepted f'r honour the period is to be
reckoned from the date of such acceptance, and not from the date of noting for non-
acceptance, as is the case in England. If the month in which the period would tej'minate
has no corresponding day, the period shall be held to terminate on the last day of such
month (Sec. 23). In all the above cases the day or the date of the instrument or of
presentment for acceptance or sight, or on which the event happens, is to be excluded
(Sec. 24).

Illustraijons:
(a) A negotiable instrument dated 29th January, 1985, is made payable at one
month after date. The instrument is at mjmturity on the third day after 281h February, 1990
(i.e., on 3rd March, 1990).
312 MIiRCAWI1LE LAW

(b) A negotiable instrument, dated 30th August. 1990, is made payable three
monih.s after date. The instrument is at maturity on 3rd December. 1990.
(c) A promissory note or bill of exchange, dated 31st August. 1990, is made
payable three months after date. The instrument is at maturity on 3rd December, 1990.
If the day of maturity falls on a public holiday, the instrument is payable the next
preceding business day (Sec. 25). Thus, if a bill is at maturity on a Sunday, it will be
deemed due on Saturday and not on Monday. In England. a distinction is made between
public holidays and Bank holidays If, therefore. the last day of grace is a public holiday,
the bill is payable oil preceding business day, as in India; but when the last day of
grace is a Bank holiday, the bili is payable on the succeeding business day.

PARTIES-TO NEGOTIABLE INSTRUMENTS

PARTIES 10 HILL OF EXChANGE

1. The Drawer: the person who draws the bill.
2. The Drawee: the person on whom the bill is drawn.
3. The Acceptor: one who accepts the bill. Generally, the drawee is also the
acceptor, but as we have seen, a stranger may accept on behalf of the drawee.
4. The Payee: one to whom the sum stated in the bill is payable. Either the drawer
or any other person may be payee.
5. The Holder: is either the original payee or any other person to whom the payee
has endorsed the bill. In case of the bearer bill the bearer is the holder.
6. The Indorser: when the holder indorses the bill to any one else lie becomes the
indorser.
7. The Indorsee: is the person to whom the bill is indorsed.
8. I)rawee in case of need—Besides the above parties, another person called the
"drawee in case of need." may be introduced at the option of the drawer. In English
law, he is called " reference in case of need." The name of such a person may be inserted
cith by the drawer or by any indorser in order that resort may be had to him in case of
need, i.e., when the bill is dishonoured by either non-acceplance or non-payment. For
example, in the case of hills drawn by English firms on their Indian importers the agent
of the drawer's firm in India is often named in the bill as a drawee in case of need. In
India a bill must be presented to the drawee in case of need, before it will be dcernd to
be dishonoured. Under the English law, the holder need not resort to the referee in case
of need, if the bill is dishonoured by the drawee. The following is a specimen bill with
a drawee in ease of need;—
Rs.l,000.00 London, 10th January, 1990.
Three months after date pay to the order of Shiv Lall the sum of one thousand
rupees, value received.
To Henry Smith.
Cannaught Place,
New Delhi. John Jones
In case of need with
The Lloyds Bank Ltd., New 1) Ihi.
9. Acce tor for I lonour—Further. any person may voluntarily become a party to
a bill as an acceptor. A person who, on the refusal by the original drawee to accept the
bill or to furnish better security when demanded by the notary, accepts the bill in order
to safeguard the honour of the drawer or any indorser, is called the acceptor for honour.
 TIM LAW OF MGOT1AI3Ui INSTRIJMLNTS 313

PARTIES TO A PROMISSORY NOTE

I. The Maker: the person who makes or executes the note promising to pay the
amount stated therein.
2. The Payee: one to whom the note is payable.
3. The Holder: is either the payee or some one to whom he may have indorsed the
note.
4. & 5. The indorser, and
Indorsec: same as in the case of a bill.
PARTIES TO A ChEQUE
1. The Drawer: the person who draws the cheque.
2. The Drawee: is always the drawer's hanker on whom the cheque is drawn.
3. 4. 5. & 6. The Payee, Holder. Indorser and !ndorsec: same as in the case of a
bill or flOtt'
HOLDER

The word holder is used to respect of negotiable instruments in three grades of

meaning—' 'holder," ''holder for value." and ''holder in due course." There is a slight
difference between the English and lie Indian law on the subject.
In English Law, holder" means a person in whose legal possession the instru-
ment is, or the bearer. If the instrument is a bearer instrument or is indorsed in blank,
any pe'son who is in possession of it even though by theft is a holder. A ''holder for
value" is the holder of a bill for which value has at any time been given, but it is not
essential that he should have himself given value. His title depends upon the same
grounds as those of a simple holder except that lack of consideration cannot be set up
against him save by his immediate transferor, if in fact he did not give value. A ''holder
in due course" is a 'holder who has taken a bill complete and regular oil face of it,
before it was overdue and without notice of its having been previously dishonoured, and
in good faith and for value, and without notice at the time of negotiation to him of any
defect jtitle of the person who negotiated it.
-ctt Indian Law, it is not every person in possession of an instrument who is called
a hider. Sec. S provides that a person, who is entitled in his own name to the
possession of the instrument, andii) to recover or receive its amount from the parties
thereto, is a holder. The persoti may or may not be in possession of the instrument. He
is required to be a holder in law (dejure) andnot necessarily in fact (defacto). In ordem
to be entitled to the instrument in his own name, the person must be named therein as
the payee, or the indorsee, or he must be the hearer thereof. He must also he entitled to
recover its amount from the parties thereto. In Indian law, therefore, a person who has
obtained possession of an instrument by theft, or under a forged indorsement, is not a
holder, as he is not entitled to recover the amount of the instrument. The heir of deceased
holder or any otherprson becoming entitled by operation of law is a holder, but'not a
transferee, under a sak deed. A joint Hindu firm may become the holder of a note if it
is made in the firm's collective or business name, and all the adults of the family may
join in a suit to recover the debt. But a coparcener who becomes entitled by survivorship
to the property cannot sue oil instrument payable to the deceased or his order, as he
cannot 'ive a valid and proper discharge to lie maker. A beneficiary of a note is not a
holdert

12. Bacha Prasad v. Janaki Rai & others. 1957 Pat. 380.
314 MERCM'flILE LAW

IIOLI)IR IN DUE COURSE

In Indian law, a "holder in due course" is pa person who for c9nsideratiOfl
obtains possession of a negotiable instrument if p6yahle to bearer, or the payee or
indorsee thereof, if payable to order, before its maturity, and withourhaving sufficient
cause to beli.eve that any defect existed in the title of the person from whom he derived
his tLj-4 c.9 ) . Before a person can claim to be a "holder in due course" he must show
tha j.t1 is a holder, i.e., hc is in possession of the instriirnc'nt, if it is payable to bea&c1,
o is the payee or its see, if it is payable to, or in the order of the payeeE
became the holder he re the amount mentioned in the instrument
, Iè became
before matur ,(ii se 'came the holder or valuable consideration. anâ{i)
the hold9vcs'ith having sufficient cause to believe that any defect exicd in the title
of tile rson from whom he received it, though not f any prior party. Provision in
(iv 1'nakcs a little departure from the English law. Under the latter ''a holder for value
in good faith without notice" is a holder in good faith, i.e., holder honestly, whether
negligently or not. He may take it even 'blunderingly or stupidly.' But in India a person
who takes these instruments should not only do so honestly but should take them with
reasonable caution and should use reasonable diligence to satisfy himself that they were
fie [ruin defects of title ]it to constitute himself a holder in doe course. But this
does not mean that he niust make full inquiries in every case. If, however, there is
anything which xcitcs suspicioti that there is something wrong in the transaction, then
omission to make inquiries will anioont to had faith.
Negotiable instruments in the course of their currency pass freely from hand to
hand according to their face value like current coins. A holder in due course is not only
himself protected against all defects of title of the person from whom lie received the
instrument as utirteilt coin. but also serves as a channel to protect all subsequent holders.
A holder in doe course can recover the amount of the instrument from all previous parties.
although, as a matter of fact, no consideration was paid by some of the previous parties
to the instrument or there was a defect of title in the party front he took it. Once
On j!tStrmifl 1cn$ /)i1SSCS ilirsiimi,Ii the Ii(ithIS of ci iuililc y in dill' (OiYSC, it is
purged of all
defecis. It is like current coin. Whosoever takes it can recover the amount from all parties
previous to such holder.
SPECIAL PRIVILEGES OF A Il(}LI)ER IN DUE COURSE
A holder itt due course enjoys the following privileges under the Act:—
I. A person, who signed and delivered to another a stamped but otherwise inchoate
instrument, is estopped from asserting, as against a holder in due course, that the
instrument has been filled in accordaticc with the authority given by him, the stamp being
sufficient to cover the amount (Sec. 20).
2. Every prior party to a negotiable instrument, i.e.. time maker, or the drawer, the
acceptor, and all the intervening indorsers, continue to remain liable to the holders in
due course until the instrument is duly satisfied i.e., the payment is made by the maker
or acceptor at or after maturity (Sec. 36).
3. Where a bill is drawn payable to drawer's order in fictitious name and indorsed
by the same hand as drawer's signature, the acceptor cannot allege as against a holder
in due course, that such name was fictitious (Sec. 42).
4. Where an instrument is negotiated to a holder in due course, the other parties to
the instntrnenl cannot escape liability on the ground that the delivery of the instrument
was conditional or for a special purpose only (Sees 46 & 47).
5. Even thou g h as between the immediate parties to an instrument it was aused
by fraud, etc., once the instrument passes through the hands of a holder in due course, it

13. Braja Kisture l)ikshit v. Purami ('haridra Panda, 1957 Orissa 153.
 TIlE LAW OF 1JEOOTLMtLE INSTRUMENTS 315

is purged of all defects, and any person acquiring it takes it free of all defects, unless he
was himself a party to the fraud (Sec.53).
6. The defences on the part of a person liable on a negotiable instrument that it has
been lost, or obtained from him by means of an offence or fraud or unlawful considera-
tion, cannot be set up against a holder in due coin-sc (Sec. 58).
7. The law presumes that every holder is a holder-in–clue course, although the
presumption is rebuttable (Sec. 118).
8. No maker of a note and no drawer of a bill or cheque and the acceptor of a bill
for the honour of the drawer is, in a suit thereon by a holder in due course, permitted to
deny the validity of the instrument as originally made or drawn (Sec. 120).
9. No maker of a note and no acceptor of a bill payable to order is, in a suit thereon
by a holder in due course, permitted to deny the payee's capacity at time date of the note
or the bill to indorse it (Sec. 121).
Capacity of Parties

Capacity to incur liability as a party to a negotiable instrument is co-extensive with

capacity to contract. Sec. 26 provides that every person capable ofcontracting, according
to the law to which he is subject, inay hind himsell and be bound by making, drawing,
acceptance, iisdorsemnent, delivery and negotiation of a note, bill or cheque. Negatively
minors, lunatics, idiots, drunken persons and persons otherwise disqualified by their
personal law, do not incur any. liability as parties to negotiable instruments. But the
incapacity of one or more of the parties to a negotiable instrument in no way diminishes
the liabilities of the competent parties thereto.
Minors—A minor is not liable in any way under contracts on negotiable instru-
ments, although the other adult parties are liable. Thus, if a minor makes, draws or
indorses a bill, note or cheque, the holder would be entitled to enforce the instrument
and receive payment oil a g ainst all parties except the minor. Also, where instrument
is executed by a minor and an adult, the adult cannot escape liability, not even where the
adult is only a surety, for it is only as against the. minor that the contract is void. A minor
serves as a channel or conduit pipe to pass title or liability, though he cannot originate
it. A minor is not hound by a bill or note given by him even for necessaries supplied to
him, although the supplier may sue on the original consideration to ho reimbursed from
minor's property for necessaries supplied. A minor can be a holder though he cannot
negotiate. A minor cannot incur liability under a negotiable instrument, but he can
acquire rights under it. He can he proinsee and, therefore, an instrument can be drawn
o(made in his favour as payee. He can also become a payee by process of law and enforce
payment of the amount of the instrument.
Lunatics, idiots and drunken persons—Bills or notes drawn or made by such
persons or any others who for the time being are incapableof forming a rational judgmcnt
as to the effects of such bills or notes-are not binding on them. Their position is the same
as that of minor. A lunatic or a drunken person may, however, bind himself by a
negotiable instrument executed h' him during a lucid interval or when he 's sober. The
English law is different, and accoidmiig to it, unsoundness of mind will not render a
contract void, if it was not known to the other party. In order to invalidate a negotiable
instrument, it must be shown that the other party was aware of the insanity or the state
of drunkenness of the first party.
Insolvents—An insolvent during insolvency cannot accept or indorse a bill,
though if he indorses an instrument of which he is payee to a holder in due course the
latter can recover from all parties except the insolvent. An insolvent cannot sue on a
negotiable instrument, as his property vests in the Official Receiver or Assignee; but if
316 MERCANTHE LAW

the instrument is executed in his favour after adjudication, he can sue on it unless the
Official Receiver intervenes.
Corporations—The rule that capacity to incur liability on negotiable instruments
is co-extensive with capacity to contract does not apply to corporations, for part three of
Sec.26 reads: "Nothing herein contained shall be deemed to empower a corporation to
make, indorse or accept such instrument except in cases cases in which, under the law for the
time being in force, they are so empowered." A corporation being an artificial creation
of law, possesses only those rights which the charter of its creation, the Memorandum
of Association confers upon it, either expressly or as incidental to its very existence. A
non-trading company cannot bind itself by negotiable instruments unless expressly
authorised to do so by its memorandum. But a trading company has implied power to
bind itself by negotiable instruments.
Agents—A person who is competent Co contract may sign a negotiable instrument
either himself or through a duly authorised agent. This may be done in one of the two
ways: (1) The agent may put his principal's name to the instrument, for it is immaterial
as to whose hand holds the pen to put the signature so long as the agent has authority,
or (2) the agent may put his own signature by procuration making it clear on the face of
the instrument that lie signs as an agent for a stated principal. The principal's name must
he so disclosed oil instruineFit that his responsibility is made plain and can be instantly
recognised as the document passes from hand to hand. Where an agent simply puts his
own signature to an itistruinent without signifying clearly the capacity in which he signs
it, he renders himself personally liable. An agent will also be personally liable LI he
executes an instrLment without or in excess of authority. He call sued for damages
for breach of warranty of authority. In law every partner is an agent of a fellow-partner
and of the partnership. Therefore, in a trading firm each partner has prima facie authority
to hind his co-partners by drawing, accepting or indorsing negotiable instrument
him III name of the firm.
provided that it is signed by
II indu Joint Family—The Karta or Manager of a Hindu Joint Family represents
the family in all dealings with the outside world, and hasimplied authority to borrow
money for the family business on a note or bill, and such note or bill will bind all the
members of the joint family. The minor members are equally liable with adult members
to the extent of their shares. They are no!, however, personally liable.
Legal Representative—A person who represents the estate of the deceased or
intenneddles therewith is the legal representative of the deceased. A person's heir or
body of heirs, executors and administrators are his legalrepresentatives. The legal
representative is entitled to the instruments after the death of the holder. An heir of a
deceased holder can sue on a pro-note to recover the amount of it to the deceased, as he
14 A legal representative of a deceased person who signs his
can give a valid discharge.
name to a negotiable instrument is liable personally thereon unless he expressly limits
his liability to the extent of the assets received by him as such (Sec. 29). For example,
an executor can escape personal liability only by 'Sans Recourse" indorsement. The
legal represent at ive of deceased person cannot negotiate by mere delivery an instrument
payable to order and endorsed by the deceased but not delivered. He must re-indorse and
deliver it, taking care to exclude his personal liability thereon.

Liabilities of Par-lies
I. The drawer of a bill or a cheque is hound in case of dishonour by the drawee or
acceptor thereof, to compensate the holder, provided due notice of dishonour has been
given to, or received by. the drawer (Sec. 30).

14. Padarn Prasad v. Lok Nath, 1964 Punj.497. (P.13.)

 THE LAW OF NEGOTIABLE INSTRUMENTS 317

2. The maker ofa note, the drawer ofa cheque, the drawer of a bill until acceptance,
and the acceptor are, in the absence of contract to the contrary, respectively liable on the
instrument as principal debtors (Sec. 37).
3. The other parties, i.e.. the intermediate indorsers, and the drawer of a bill after
acceptance, are liable thereon as sureties for the maker, drawer or acceptor (Sec. 37).
4. As between parties so liable as sureties, each prior party is, in the abs' ..e of a
contract to the contrary, also liable thereon as a principal debtor in respect o each
subsequent party (Sec. 38).
llluslration—A draws a bill payable to his own order on B, who accepts it. A
afterwards indorses the bill to C, C to D, D to E. As between E and B, B is the principal
debtor, and A, C and D are his sureties. As between E and A, A is the principal debtor
and C and D are his sureties. As between P and A. A is the principal debtor and C and
D are his sureties. As between E and C. C is the principal debtor and D is his surety.
5. In the absence of a contract to the contrary, the maker of a note and the acceptor
before maturity ufabi II arc bound to pay the amount at maturity according to the apparent
tenor of the note or acceptance respectively, i.e., the payment must be to the holder, as
payment to any other person is not according to tenor (Sec. 32).i
6. The acceptor of a bill at or after maturity must pay the amount thereof to the
holder on demand.
7. The drawee of a cheque (paying hanker) must pay it when presented for payment.
provided the drawer has sufficient funds to his credit with the banker. Refusal to pay
without justification will render the hanker liable to pay exemplary damages to the
drawer (Sec. 31).
8. The engagement of the indorsers is similar to that of the drawer. A person who
indorses and delivers a negotiable instrument before maturity without excluding or
making conditional his liability, is bound to every subsequent holder, in case of
dishonour by the drawee, maker or acceptor, to compensate. such holder for any loss or
d&mage caused to him by such dishonour, provided due notice of dishonour has been
given to, or received by such indorser (Sec. 35).
9. Every indorser after dishonour is liable as upon an instrument payable on
demand (Sec. 35).
10. The liability of each party to a subsequent holder in due course continues until
the instrument is duly satisfied. Therefore,-each prior party is liable to each subsequent
party until the liability is extinguished by final payment (Sec. 36).
11. An agent who signs or indorses a negotiable instrument without clearly
signifying on it that he is signing only on behalf of his principal is personally liable on
the instrument (Sec. 28).
12. A legal representative of a deceased person who signs a negotiable instrument
is personally liable thereon unless he expressly limits his liability to the extent of the
assets by him as such (Sec. 29).

PART 11 - E

NEGOTIATION

A negotiable instrument may he transferred by negotiation or assignment. Negotia-

tion is the transferring of an instrument (a note, bill or cheque) from one person to another

15. See Jagjivan Mavji v. R. Meghji, 1954. S.C. 554.

318 MERCANTILE LAW

in such a manner as to convey title and to constitute the transferee the holder thereof16.
When a negotiable instrument is transferred by a negotiation, the rights of the transferee
may rise higher than those of the transferor, depending upon the circumstances attending
the negotiation. When the transfer is made by assignment, the assignee has only those
rights which the assignor possessed and the assignee is subject to all defences existing
against the assignor prior to notice of the assignment. Therefore, a person who receives
a negotiable instrument either by negotiation or assignment is a holder and is entitled to
recover the amount due thereon from parties thereon.
In Narsingh Panda v. N. Narsinha Murly, 1966 Orissa 194. on March 14.. 1959.
M executed a promissory note for Rs. 1,000 in favour of R. who in turn sold the pro-note
to N under a separate sale deed dated December 12. 1960. N sued M for the recovery of
the amount of the note. M pleaded that N could not recover as he was not a holder . in due
course of the note and that the suit was iot maintainable. field, it is true that N is not a
holder in due course, but he is a holder under Sec. 11 as he is in possession of the note
and as an assignee entitled to recover in his own name. A transfer of a pro-note by means
of a registered instrument is valid; it is an assignment.
It is clear that, while the Act does not prohibit transfer of negotiable instruments
otherwise than by negotiation, transfer by negotiation has manifest advantages, as will
be seen from the following:
TRANSFER BY NEGOTIATIONS AND TRANSFER BY
ASSIGNMENT DISTINGUISHED
1. "Negotiation" requires mere delivery-of a bearer instrument and endorsement
and delivery of an order instrument to effectuate a transfer; "assignment" requires
written document signed by the transferor.
2. Notice of assignment of debt (actionable claim) must be given by the assignee
to the debtor in order to coInDlete his title; no such notice is reccssary in a transfer by
negotiation.
3. On 'assignment" the transferee of a. actionable claim takes it subject to all the
defects in the title of, and subject to all the equities and defences available against the
assignor, even though he took the assignment for value and in good faith. In case of
"negotiation." the transferee, as holder in due course, takes the instrument free from
any defects in the title of ille transferor. This feature is the very essence of negotiability.
Negotiability eliminates all personal defences between the original parties, thus making
negotiable instrument free to pass from person to person as tnony, fulfilling the purpose
for which it was created.
4. Consideration is always presumed in case of negotiable instruments; in case of
'assignment," the transferee must prove consideration for the transfer.
IMPORTANCE OF DELIVERY IN NEGOTIATION
'Negotiation" is effected either by mere delivery or by endorsement and delivery.
This means that "delivery" is a very important point relating to negotiable instruments,
and Sec. 46 emphasises it. It says that the making, acceptance or indorsement of a
negotiable instrument is not complete until delivery, actual or constructive, of the
instniinet. Delivery of the instrument is essential not only for negotiation, but also to
create rights under it. Mere execution (by writing and signing) of an instrument does not

16. Sec. 14 reads: "When allote. bill or cheque is transferred to any persm, so as to constitute
that person the holder tjsereol, the instrument is said to be negotiated."
 TilE LAW OF I5'EGOTIABLE INSTRUMLNTS 319

17
makeit operative. Delivery made vo1mt;u ily with the intention of passing the property
in instrument to the person to whom it is given is essential. 1
In Bank of Van Dicnicn'sLand v. Bank of Victoria (1871) L.R. 3 P.C. 526, D drew
a bill on A and transferred it to B. B sent the bill to A who writes his acceptance on it.
Afterwards A hears that D, the drawer, has become bankrupt. A cancels his acceptance
and returns the dishonoured bill to B. This is no acceptance, as A never delivered the
accepted bill so as to make himself liable on it.
Delivery may be actual or constructive. It may be conditional or for a special
purpose. Actual delivery means change of actual possession. A person is in constructive
possession when the instrument is in the actual possession of his agent, clerk or servant
on his behalf. Where an instrument is delivered conditionally for a special purpose only,
the property in it does not pass to the transferee, even though it is indorsed to him. The
plea of conditional delivery or for special purpose is available only against parties who
take the instrument with notice of the condition or special purpose, but not ajainst a
holder in due course who can hold all prior parties liable on it.
A is the holder of a cheque payable to bearer, He hands it over to his banker for
collection. The cheque is delivered for a special purpose and not to entitle the banker to
further negotiate it.
NEGOTIATION BY MERE DELIVERY
Sec. 47 provides that a bill or cheque payable to bearer is negotiated by mere
delivery of the instrument. An insizuinent is payable to bearer (i) where it is made so
payable, or (ii) where it is originally made payable to bearer or to order, but the only or
the last indorsement is in blank. A cheque, if originally drawn payable to bearer remains
bearer, even though it is subsequently indorsed in full. The rule is once a bearer cheque
always a bearer cheque; or (iii) where the payee is fictitious or a non-existing person.
These instruments do not require signature of the transferor. The person who takes them
is a holder, and can sue in his own ii ainc on them. Where a bearer negotiates art instrument
by mere delivery, and does not put his signature thereon, he is not liable to any party to
the instrument in case the instrument is dishonoured, as he has not lent his credit to it.
The transaction is mere sale of the instrument and, therefore, the transferee cannot
recover against the transferor upon the instrument, nor can he get hack the amount paid
by him to the transferor on the failure of consideration, if the transferor delivered in good
faith.
The transferor by mere delivery onl y makes all sale of the instrument to his
transferee, and his obligations are those of a seller of any goods to the buyer only, i.e.,
towards his immediate transferee and to no other holders. Like a seller of goods, he
warrants by implication to his iiiimediate transferee for consideration tliat—(i) the
instrument is genuine, unaltered and is what it purports to be on its face. If any signature
tunis out to he it or the amount is altered, the transferee can recover his loss from
the transferor; (ii) the part es to the instrument were competent to contract. If any party
turns Out to be incompetent the transferor is liable to the transferee on a breach of
warranty; (iii) lie is entitled to transfer -the instrument; (iv) he is not aware of any facts
which make the instrument valueless, .g., insolvency of a party, or discharge of the
instrument or its being void. Thu, the .ransferor by delivery can be compelled to return
the purchase money to his immedia t e transferee if the instrument turnsout lobe worthless
and the consideration wholly fails, but Incurs no liability on the instrument.

17. Thrappa v. Umedmatji, 1924 Brun. 205.

18. Bhogi Ram v. Kidiorilal, 1928. All. 289.
320 MERCANTILE LAW

NEGOTIATION BY INDORSEMENT AND DELIVERY

Instruments payable to a specified person or to the order of a specified person or
to a specified person or order are instruments payable to order. Such instruments can be
negotiated only by indorsement AND delivery. Unless the holder signs his indorsement
on the instrument, the transferee does not become a holder. If there are more payees than
one, all must indorse it. Where an instrument payable to order is delivered without
indorsement it is merely assigned and not negotiated, and the holder thereof is not entitled
to the rights of a holder in due course, and he cannot negotiate it to a third person. If an
indorsement is declared invalid, the properly in the instrument again vests in the payee
and he can sue on it without reindorsenient from such indorsee. An unconditional
indorsement followed by an unconditional delivery transfers immediately to the indorsec
the property in the instrument with the right of further negotiation.
INDORS EM ENT
When the maker or holder of a negotiable instrument signs the same otherwise
than as such maker, for the purpose of negotiation, on the back or face thereof or on a
slip of paper annexed thereto, or signs for the same purpose a stamped paper intended
to he completed as a negotiable instrument, he is said to indorse the same, and is called
the indorser (Sec. 15). The person to whom the instrument is indorsed is called the
indorsee. An indorseinent is the signature by the maker or holder of a negotiable
instrument for the purpose of negotiation. It is usually on the hack of the instrument,
although it may he even on the face thereof, or if no space is left on the instrument, on
a slip of piper attached to it. called ALLONGE."
An indorsemnent can he made by-
1. the holder of the instrument.
2. the maker signing it otherwise than as such maker,
3. every maker, drawer or indorscc or all of several joint makers, drawers, payees or
indorsees of the instrument,
4. the payee of an instrument
A stranger cannot indorse an instrument, and if he does indorse it, no suit can be
brought against him. But he may make himself liable as a surety, if he guarantees
payment. When a stranger indorses an instrument he is called the BACKER and although
such an indorsement is void in India and the indorscc cannot sue on the instrument, under
Sec. 56 of the English Bills of Exchange Act, a Backer is liable as an indorser to the
holder in due course.
CLASSES OF INDORSEMENT
An indorsement may be (a) Blank or General. (b) Special or Full, (c) Restrictive,
(d) Partial, or (e) Conditional or Qualified.
BLANK OR GENERAL
An indorsement is said to be blank or general where the indorser merely writes his
signature on the hack of the instrument, and the instrument so indorsed becomes payable
to bearer, even though originally it was payable to order. Thus where a bill is payable to
"James Brown or order." and he writes on its back "James Brown", it is an indorsement
in blank by James Brown, and the property in the bill can pass by mere delivery, as tong
as indorsement continues to he in blank. But a holder of an instrument in full, by writing
above the indorser's signature a direction to pay the instrument to another person or his
order (Sec. 49). The advantage of such a course is that the holder, though he transfers
the instrument, does not incur the responsibility of an indorser. A is the holder of a bill
 TilE LAW OF NLCOTIABLE INSTRUMENTS

indorsed by B. in blank. A writes over B's signature the words "Pay to C or order." A
is not liable as an ijidorser, but the writing operates as an indorsement in full from B to
C. (illustration to Sec.49).
An instrument indorsed in blaflk in the first instance may be followed by an
indorsement in full, in which case it continues to be payable to bearer and negotiable by
mere delivery in connection with all parties prior to the indorsement in full, and the
indorser in full is only liable to the person to whom he indorses it in full or who derives
title through indorsement by such persons. 19 In this case, the holder of a bill originally
indorsed in blank indorsed it specially to Barber, Walker & Co, who carried on business
both as "Barber, Walker & Co.", and "Eastwood & Co." and who indorsed the bill as
" Eastwood & Co." The bill was dishonoured on presentation on the ground that it was
not indorsed by Barber. Walker & Co. " 2 The Court held that, as the bill was initially
indorsed in blank, its negotiability could not be restrained by a special indorsement and
the presentment was such as to render the defendant liable to the plaintiff. In another
case, A. the payee-holder of a bill, indorsed it in blank and delivered it to B. It also
indorsed it in blank and delivered it to C. C indorsed it in lull to D or order. D without
indorsement delivered the bill to E. E as the bearer against A. B. the drawer, and acceptor,
was entitled to receive payment from them, but he could not proceed against C or D. D
could sue C as he received the bill from C by indorsement in lull. If. however. D instead
of passing the bill to E had passed it by a regular indorsement, E could claim against all
prior parties.
SPECIAL OR FULL
If the indorser signs his name and adds a direction to pay the amount mentioned
in the instrument to, or to the order of a specified person, the indorsement is said to be
special or in full. A special indorsement specifics the person to whom or to whose order
the bill is to be payable. A bill made payable to James Brown, or James Brown or order,
and indorsed "Pay to the order of Henry Smith" would be specially indorsed and Henry
Smith may indorse it. A blank indorsement can be turned into a special indorsement by
the addition of an order making the bill payable to the transferee.

RESTRICTIVE
An indorsement is restrictive which prohibits or restricts the further negotiatin of
an instrument, which expresses that it is a mere authority to deal with the instrument as
thereby directed and not a complete and unconditional transfer of the ownership thereof.
If a bill is indorsed "Pay C only" or "Pay C for my sue" or "Pay Con account ofB"
or "Pay C or order for collection" or "The within must be credited to C," it is
restrictively indorsed, and cannot be negotiated.

PARTIAL
An indorsement is partial which purports to transfer to the indorsee a part only of
the amount payable on the instrument. A partial indorsement does not operate as a
negotiation of the instrument. Sec. 56 prohibits an instrument being negotiated for a
portion only of the sum at the time due upon it, for a partial indorsement would cause
"inconvenience to prior parties, subject thein to a plurality of action, and interfere with
the free circulation of these in5LiflCitS"To be valid for the purpose of negotiation, an
indorsement must be of the entire instrument, because a personal contract cannot be
apportioned. A holds a bill for Rs. 1,000and indorses it thus: "Pay B or order Rs-500"
or "Pay Rs.500 to B or order, and Rs.500 to C or order," the indorsement in either case

19. Walker v. Maudald (t 848)2 Ex. 527.

20. Smith v. Clarke (t794) 1 Pcake29S.
 MERCANI1LE LAW

is partial and invalid. But where an instrument has been paid in part, the fact of the
pail-payment may be indorsed on the instrument, and it may then be negotiated for the
residue. For example, a bill may be indorsed thus: "Pay A or order Rs500 being the
unpaid residue of the bill." Such an indorsement would be valid.
CONDITIONAL OR QUALIFIED
An indorsement is conditional or qualified which limits or negatives the liability
of the indorser. It differs from arestrictive indorsement in that the latter places restrictions
on the negotiability of an instrument, while conditional indorsement limits or negatives
the liability of the indorser. A drawer of a bill cannot draw it conditionally and a maker
of a note cannot make his liability conditional or exclude it. The acceptor of a bill can
accept it conditionally but cannot exclude his liability by acceptance. An indorser is
entitled to insert by express words in the indorsement a stipulation negativing or limiting
his own liability to the holder This may be done in any of the following ways:—
(a) By 'Sans Recourse' Indorsement—Where the indorser makes it clear that he
does not incur the liability of an indorser to the indorsee or subsequent holders and they
should not look to him in case of dishonour of the instrument, it is a Sans Recourse
indorsement. Here the indorser expressly excludes his liability by adding the words
"Sans Recourse" or "Without recourse." He may indorse thus:—' 'Pay A or order
Sans Recour'-" or "Pay A without recourse to me" or "Pay A or order at his own
risk."
(h) By making his liability depend upon the happening of a specified event which
m v never happen, e.g.. the holder of a bill may indorse it thus: "Pay A or order on the
.val ofS.S. Ravens/raw at Bombay" or "Pay A or order on his marrying 8." In such
ca s the indorser will not he liable until the happening of the events, and if the events
bei me impossible and do not happen, his liability is extinguished. The indorsee gets
noiLle to the bill nor can he sue the indorser But he can sue the prior parties before the
happ':nwg of the event.
(c) By making the right of an indorsec to receive the amount of the instrument
depend upon the specified event, which may never happen. In this case, the indorsee's
dependent upon the happening of an event, he cannot recover the amount
right being dependent
either from the indorser or from any prior party until the event has happened.
(d) By Facultative Indorsemeni—Where the indorser extends his own liability
by stipulating in the indorsement that he waives presentment or notice of dishonour by
the holder. An indorsement "Pay A or order. Notice of dishonour waived" is facultative,
and the person who has signed remains liable to A even though no notice of dishonour
has been given to hii
(e) By "Sans Frais" Indorsement—Where the indorser does not want the
indorsee or any other holder to incur any expense on his account on the bill, the
indorsement is sans frais.
The insertion of a condition in the indorsement does not in any way affect the
negotiability of the instrument.
NEGOTIATION BACK
Where an indorser negotiates an instrument and again becomes its holder, the
instrument is said to be "negotiated hack" to that indorser, and none of the intermediate
indorsers are then liable to hint The rule, the object of which is to prevent a circuity of
action, is an exception to the general rule that the holder in due course of a negotiable
instrument may sue all prior parties to the instrument. Therefore, when a instrument is
"negotiated back" to a prior party, that party is remitted to his former position and comes
definition of a holder." A. the holder of bill indorses it to B. B indorses it
!) to E and E indorses it again to A. A. being a holder in due course of the
 TIlE 1AW OF NEGOTIABLE INSTRUMENTS 323

bill by second indorsement by E. can recover the amount thereof from B. C, D or F, and
himself being a prior party is liable to all of them. Therefore, A having been relegated
by the second indorsement to his original position, cannot sue B, C. D and E. for if A
were allowed to sue F. E could sue I) and D could sue C. and C could sue B, and B could
sue A, and this circuity of action the law prohibits. A can, however, further negotiate the
bill if he cancels or strikes off the indorsement of B. C. D and E. Such a transaction is
called Taking up of a Bill. When the indorsements are struck off without the consent
of the indorsers, the right of the subsequent indorsee to recover indemnity from them is
destroyed and they are discharged. But clause 2 of Sec. 52 provides that where an indorser
excludes his liability and afterwards becomes the holder of the instrument, all inter-
mediate indorsers are liable to him. So, if A has at the time of first indorsement excluded
his liability by the use of the words "without recourse" he is not liable to B, C, D or F.,
and if the bill is negotiated back to A. then B. C. I) and E are all liable to him and he can
recover the amount from all or any of them.
EFFECT OF INDORSEMENT
The effect of indorsement, when Sec. 50 is read subject to Secs. 46 and 52, may
be stated thus: An unconditional indorsement of a negotiable instrument followed by its
unconditional delivery transfers to the indorsee the property therein, vesting in him the
title to the instrument. The indorsee acquires a right to negotiate the instrument to any
one he likes and to sue all parties whose names appear on it.
He cannot sue third parties on the original considcraiion The nature of the contract
which the indorser enters into with his indorsee is very much the same as that of the
drawer of the bill. Every indorsement is in the nature of a new bill issued by the indorser
in favour of his indorsee. By indorsement the indorser impliedly represents to his
immediate indorsee that the in s trument will, when presented in due course, be accepted
and subsequently paid when ii falls due, and if it is not paid at maturity, the indorser will
indemnify the indorsee. provided that due notice has been given or received, by him
The indorser cannot deny the signature or capacity to contract of any prior party. But
where the holder, without the consent of the indorser. destroys or impairs the indorscr's
remedy against a prior party. the indorser is discharged from liability to the holder as if
the instrument had been paid at maturity (Sec. 40). The effect of an indorsement in blank
and delivery of an instrument originally made drawn payable to order is to convert it into
one payable to bearer and transferable by mere delivery. The effect of restrictive
indorsement is (i) to prohibit or exclude further negotiation. (ii) to constitute the indorsee
an agent of indorser to indorse the instrument, or to receive its contents for him or (iii)
to constitute the indorsee as agent to receive its contents for.some other specified person.
Joint payees or indorsees must all indorse to complete the negotiation of the
instrument (Sec. Si). Thus, an indorsement made by only one of the two payees is invalid,
even if it is made in favour of the other payee. But this does not deprive th creditor
(holder of the instrument) of the right to a decree for the amount. He can get the money
on the ground that the indorsement amounted to an assignment of a chose-in-action
(Srinivasulu v Kondappa. 1960 A.P. 174). A non-negotiable promissory note may be
assigned by indorsement so as to enable the assignee to sue upon the note in his own
name.21
NEGOTIATION OF LOST INSTRUMENT OBTAINED BY UNLAWFUL
MEANS OR OF UNLAWFUL CONSIDERATION
When a negotiable instrument has been lost or has been obtained from any maker,
acceptor or holder thereof by means of an offence or fraud, or for an unlawful eonsidei-a-

21. Mohd. Kjiumarali v. Ranga Rao (1901)24 Mad. 654; Muthar Sahib v. Kadir Sahib (1905)2*
Mad. 544.
34 MERCANTILE LAW

(ion, no possessor or indorser, who claims through the person who found or obtained the
instrument is entitled to receive the amount due thereon from such maker, acceptor, or
holder pr from any party prior to such holder unless such possessor or indorsee is, or
some person through whom he claims was, a holder thereof in due course (Sec. 58). The
general rule of law is that a person cannot pass better title then he himself possesses.
This section embodies the chief difference between the transfer olordinary goods and
negotiation of negotiable instruments. Two sets of circumstances are dealt with here.
Firstly, the legal position of a possessor or an indorsee of a negotiable instrument .which
has been lost, or which has been obtained from any maker, acceptor or holder by means
of an offence, or fraud, or unlawful consideration. Secondly, the position of a holAier in
due course under similar circumstances. We shall deal with these conditions separately.
LOST INSTRUMENTS
1. The under of a lost instrument does not acquire any title to it as against the rightful
owner, nor can he claim payment from the acceptor of a bill or maker of note or
cheque- The rightful owner has a right to recover the instrument from the finder.
2. An acceptor or maker who makes payment in due course on lost bill or note to a
finder thereof is discharged from all liability to the rightful owner. But the true
owner can recover the money from the finder.
3. Where a bill or note payable to bearer or indorsed in blank is lost and the finder
negotiates it to a bonafide transferee for value the latter acquires a valid title to iL
He can retain the instrument as against the true owner, and also claim payment
from parties liable thereon.
Where the finder of a lost bill or note payable to order negotiates it by forging the
indorsement of the loser to a bonezfide transferee for value, the latter acquires no
title to it for the indorser himself had no title which he could transfer, forger can
22
confer no title, and this holder is not a holder in due course.
5. Where a holder has lost a bill, he should give notice of life loss to all parties liable
on it, and also a public notice by an advertisement.
6. The holder of a bill, who has lost it, must apply to the drawee for payment at
maturity, and if the payment is refused, he must give notice ofdishonourto all the
parties liable on it. If he fails to give notice of dishonour, he will lose his remedy
against the drawer and indorsers.
STOLEN INS'TR UM ENT
A person, who has stolen a negotiable instrument from the true owner, cannot claim
payment against any party liable thereon,and the true owner can get back the instrument
or the money if he has realised ii from the drawee. But if a stolen instrument is negotiated
by delivery to a transferee for value without notice of the theft the transferee gets a good
title to it. not only against the thief but also against all the 'arties prior to him.
INSTRUMENTS OBTAINED BY FRAUD
Fraud vitiates all transactions. Where an instrument is obtained by fraud -of is
obtained for the purpose of defrauding any third person, the person defrauding is not
entitled torecover anything, as his title is defective; but if such an instrument passes into
the hands of a holder in due course, he will acquire good title to the instrument and the
pica of fraud will not avail against him. The position is the same where an instrument
has been obtained by undue influence or coercion.

22. Mercantile Bank of India Mascarenhas, 1932 P.C.22

 litE LAW OF NEGOTIABLE INSTRUMEIfl'S 325

INSTRUMENT OBTAINED FOR AN UNLAWFUL CONSIDERATION

The general rule of contracts that every agreement of wliicn the object or con-
sideration is unlawful or immoral is void applies to a negotiable instrument for unlawful
consideration. e.g., a note in favour of a witness for giving false evidence, or in part
consideration for giving one's daughter in marriage creates no obligation between the
parties thereto: But a holder in due course, or a person deriving title through him gets a
good title to the instrument.
FORGED INSTRUMENTS
Forgery is the fraudulent making of alteration of a writing to the prejudice of
another's right. Forgery with the intent lou of obtaining title to instrument would include
(i) fraudulently writing the name of an existing person; (ii) signing the name of fictitious
person with the intention that it may pass that of a real person. or (iii) signing one's
own name with the intention that the signature may pass as the signature of some other
person of the same name. The forged or uiiauthormsed signature is inoperative, and the
properly in the instrument remains in the person who was the holder at the time when
the forged or unauthorised signature was placed on it. Therefore, the holder of a forged
instrument cannot enforce payment thereon, nor can he give a valid discharge thercfor,
and even if he has obtained the payment of the bill, he cannot retain the money. The
forged signature does not give to the forger any title whatever. It is not a case of defect
of title. There is from the very beginning a complete absence of title and a forged
signature is altogether inoperative. A forged instrument has in law noexistcnce whatever.
It is a nullity no matter in svlui)se hands it may be. Even if it has during the course of
circulatiomi passed through the hands ofa holder in doe course it is not cured of its defects,
because there is no defect of title to cure; there is a complete absence of title.
FORGED INDORSEMENTS
The case of a forged indorsement is slightly different. If an instrument is indorsed
in full, it cannot be negotiated except by an indorseincnt signed by the person to whom
or to whose order the instrument is payable, for the indorsee obtains title only through
his indorsement. Thus, if an instrument be negotiated by iiieans of a forged indorsement
the indorsee acquires no title even though he he a purchaser for value and in good faith,
for the indorsenient is a nullity. But where the instrument is a bearer instrument or has
been indorsed in blank, it can he negotiated by mere delivery, and the holder derives his
title independent of the forged indorsement and can claim the amount from any of the
parties to the instrument. A bill isindorsed: 'Pay A or order." A indorses it in blank,
and it comes into the hands of B. who simply delivers it to C. C forges B's indorsement
and transfers it to D. Here, D. as the holder, does not derives his title through the forged
indorsement of B. but through he genuine indorsemnent of A, and can claim payment
from any of the parties to the instrument in spite of the intervening forged indorsement.
NEGOTIATION OF DISHONOURED AND OVERDUE INSTRUMENT

We have seen b e fore that the holder for value of a negotiable instrument is not
affected by any defect in the title of the transferor. But this general rule is subject to two
exceptions with respect to instrthnent acquired with notice of dishonour and after
maturity. Sec. 59 lays down that where a negotiable instrument has been dishonoured
or has become overdue by the expiry of the day of payment, any person who takes it
with notice of dishonour or after maturity, takes it subject to any defect of title attaching
to it at the time of dishonour or maturity. The transferee is not a holder in due course,
and gets no better title than his transferor.
326 MERCANTILE LAW

The case of notes and accommodation hills is different. The proviso to Sec. 59 lays
down that a holder for consideration and in good faith of a note or an accommodation
bill after maturity is a holder in due course in the same way as a hdldcr before maturity,
and can recover the amount from any prior party.
A bill is payable 90 days after date. It is accepted for the accommodation of the
drawer After maturity. (i.e.. after expiry of 93 days from the date of the bill) the drawer
indorses it to A for value. A can recover the amount of the bill from the acceptor.
DURATION OF NEGOTIABILITY
A bill or note is negotiable ad infinitum and can circulate by negotiation until it
has been finally discharged by payment or satisfaction by, or on behalf of the acceptor
or maker at or after maturity. A payment before maturity is not a payment in due course,
and does not stop negotiability.
A bill is said to be Retired when it is paid before maturity. The acceptor or maker
who receives the instrument after payment but before maturity may re-issue it. Nego-
tiability of the instrument stops only when the party ultimately liable thereon pays it.
SURRENDER TO THE DRAWEE NOT NEGOTIATION
It is customary for a holder, when presenting a cheque to the drawee banker or
other bill of exchange to the drawee for payment, to write his name across the back of
the instrument. Such writing is not all and the transfer of the instrument
from the holder in ihe drawee for payment and discharge is not a negotiation. A
negotiable instrument, when transferred from one person to another by delivery or
indorsement and delivery, is a sale of the instrument, thus enabling it to pass as money.
The passing of all from the holder to the drawee, on the other hand, is a
surrender of the instrument for discharge. and is not a negotiation. Therefore, no
indorsement is necessary to entitle the holder to receive payment. A person signing his
name on all before surrender to the drawee has no liability as an indorser,
because the drawee does not occupy the position of a holder. The drawee, however,
becomes a holder if he purchases the bill before maturity with intention further to
negotiate it. In the absence of this situation, the signature upon a bill or cheque before
surrender to the drawee for payment merely acts as a receipt for money so far as the
drawee is concerned.

PART 11 - F
ACCEPTANCE

The drawee, as such, has no liability oil bill addressed to him for acceptance
or payment. A refusal to accept or to pay such bill gives the holder no right against him.
A bill of exchange of itself does not operate as an assignment of the funds in the hands
of the drawee available for tIme payment thereof, and the drawee is not liable on the bill
unless and until he accepts the same. The liability of the acceptor is primary.
The acceptance of a bill is the indication by the drawee of his assent to the order
of the drawer. Thus, when the drawee writes on the bill, generally, across the face of the
bill the word "accepted" and signs his name underneath he becomes the acceptor of the
bill. The acceptance may, however, be made by mere signature of the drawee ithout
the addition of the word "accepted." But an oral acceptance, or the writing ofqie worn
"accepted" without the drawee's signature, is not an acceptance. The drawe is not
liable on the bill unless the bill is presented to him for acceptance and he actually accepts
it and then delivers it over to the holder or gives notice of acceptance to the holder or
someone on his behalf. And, where a drawee. having signed his acceptance. change his
 filE LAW OF NEGOTIABLE INSTRUMENTS 327

mind and before delivering it to the holder, obliterates his acceptance, he will not be
Liable as an acceptor. Where there are more parts of a bill than one the drawee should
sign his acceptance only on one part. for if he signs on more than one part and they get
into the hands of the several holders in due coin-se, he would be liable to all of them. It
is possible to accept an overdue or a dishonoured bill, an incomplete or blank bill, and
even before the drawer has signed it or after notice of drawer's death. An acceptance to
be valid must be (i) written. (ii) signed by the drawee or his agent, (iii) on the bill, and
(iv) completed by delivery to the holder or by notice of acceptance to him or some person
on his behalf.
An acceptance may be either general or qualified.
General acceptance—A general acceptance is absolute and assents without any
qualification to the order of the drawer. It is according to the apparent tenor of the bill.
A general acceptance is signified by the drawee by signing his name on the bill with or
without the word "accepted", without adding any condition regarding payment. As a
rule, an acceptance must be general.
Qualified acceptance—Where an acceptance is made subject to some condition
or qualification, thereby varying in express terms the effect of the bill as drawn, it is a
qualified acceptance. The holder of a bill may either refuse to take a qualified acceptance
or acquiesce in it. Where he refuses to take it, he can treat the bill as dishonoured by
non-acceptance, and sue the drawer accordingly. But if he accepts the qualified accep-
tance, it binds him and the acceptor, but not the other parties not consenting thereto.
Sec. 86 gives instances of qualified acceptance which are stated below with a few
more which may also be regarded as such. An acceptance is qualified ' 1hen it is-
1. Conditional—An acceptance which makes the payment dependent on the
happening of an event therein stated is conditional. Thus, bills "accepted payable when
infunds" or "accepted payable on giving hills of lading for Clover per S.S. Amazon"
or "accepted when a cargo consigned to InC is sold," are all conditional acceptances.
2. Partial—An acceptance which undertakes to pay only a part of the amount of
the bill is a partial acceptance, e.g., a bill drawn for Rs. 1,000 is – accepted for Rs. 500
only." In English law, partial acceptance is good to that part.
3. Qualified as to place—An acceptance, which undertakes to pay only at a
specified place and not elsewhere, or to pay at a place different from the one mentioned
in the bill, and not elsewhere, is qualified as to the place of payment. "Accepted payable
at the Central Bank only" or "accepted payable at the Central Bank and not elsewhere"
,,is qualified acceptance. But ifa bill is accepted payable at Central Bank" it is general
acceptance, for it is payable at a particular place without stating that it is payable only
there or is not payable elsewhere.
4. Qualified as to time—An acceptance which makes the payment of the amount
of the bill payable at a time different from that mentioned in the order of the drawer.
Where a bill is drawn payable 3 months after date and is "accepted, payable six months
after date" or where a bill in which no time is fixed is accepted payable on a particular
date is qualified as to time.
5. Acceptance for payment in instalments—In this case a bill is accepted as
payable in instalments, e.g., a bill for Rs. 1,000 is "accepted payable in monthly
instalments of Rs. 100."
6. Acceptance by some of the drawees only—Where the drawees are not partners
and only one or some of them accept, the acceptance is qualified. But if the drawees; are
partners one or more can accept on behalf of all the partners and the acceptance will be
general.
328 MER('ArT1I1i LAW

Who may accept—A bill of exchange can be accepted only by the following
persons, and no other:-
1. The drawee of the bill; i.e.. the person directed to pay.
2. All or some of the several drawees, where the bill is addressed to more than one
drawee. In order that all the drawees be liable on the bill it must be accepted by
them all. A bill accepted by some of the several drawees binds only those who
accept it. and not the non-accepting drawees, and the acceptance is a qualified
n. it maybe accepted in the firm
acceptance. If the bill is di awn on a partnership firm,
name or by one partner oil of himself, and the other partners provided he
has authority to accept.
3. A drawee in case of need, i.e., a person whose name is mentioned in the bill as one
whom the payee should resort to in case the real drawee refuses to accept-
4. The agent of any of the persons mooed above.
5. If no drawee is named in a bill and a person accepts it, he will become acceptor by
estoppel.
6. An acceptor for honour, i.e.. any person who accepts the bill for the honour of any
party already liable on it.
7. The agent of the acceptor for honour.
ACCEPTANCE FOR HONOUR
When a bill of exchange has been noted or protested for non-acceptance or for
better security, any person not bci'g a party already liable thereon may, with the consent
of the holder, by writing on the bill, accept the same for the honour of any party thereto
(Sec. 108). This section provides for acceptance by a stranger to the bill for the honour
of any party to it and such acceptance is called 'acceptance for honour" or "acceptance
supra protest." The acceptance is allowed when the original drawee refuses to accept,
or declines to give better security when demanded by the notary. Acceptance for honour
is made with the consent of the holder who is not bound to accept the acceptance. If the
bill is noted or protested, the holder may treat it as dishonoured. There may be several
acceptors for the honour of different parties. but there cannot be acceptors one after
another for the honour of the same person, unless the first acceptor for honour has died
or become insolvent. This acceptance must be for the whole amount of the bill and must
be made before the bill is overdue.
A person desiring to accept for honour must, by writing oil bill under his hand
declare that he accepts under protest the protested b i ll for the honour of the drawer or of
a particular indorser whom he names, or generally for whose honour (Sec. 109). Where
the acceptance does not express for whose honour it is made it shall be deemed to be
made for the honour of the drawer (Sec. 110).
RIGHTS AND uArnLrrIEs OFACCEI9'OR FOR HONOUR
An acceptor for honour enjoys a slightly better position than an ordinary acceptor.
His liability is conditional. as an acceptance for honour is in the nature of a qualified
acceptance and amounts to a collateral engagement. He undertakes to pay only when the
bill has been duly presented at maturity to the drawee for payment and the drawee has
refused to pay and the bill has been noted or protested for non-payment. On acceptance
the acceptor for honour takes exactly the same position as the party for whose honour
he accepts. His rights and liabilities are time same. Thus he is liable to all parties
subsequent to the party for whose honour he accepts to pay in case the drawee fails to
pay (Sec. Ill).
 Tt(E LAW OF N1c;O11A8LE INSTRUMENTS 329

PAYMENT FOR HONOUR

The general rule of law is that no person by voluntarily paying the debt of another
can make himself his creditor. Sec. 113 makes an exception in the case of negotiable
instruments. The Section reads: ''When a bill of exchange has been noted or protested
for non-payment, any person may pay the same for the honour of any party liable to pay
the same, provided that the person so paying or his agent in that behalf has previously
declared before a notary public the party for whose honour he pays, and that such
declaration has been recorded by the notary public." Thus, any person may intervene
when a bill has been protested for non-payment after having been duly accepted, and
pay supra protest for the honour of any party liable on the bill. When a bill has been
paid supra protest it ceases to be negotiable.
A payer for honour, on paying the bill for honour, acquires all the rights ofa holder
to whom he pays, and is entitled In all the remediesof the holderon the instrument. These
remedies are available only against the party for whose honour he pays and all parties
prior to such Jx'rsoi; and all parties subsequent to such Fiersomi are discharged.

PRESEN1'M EN'l'

Prescntnicnt or presentation means presenting a negotiable instnmment to the

drawee, maker or acceptor thereof for the purjxsc of getting payment. Presentment is
made for two purposes: (i) Presentment for acceptance, and (ii) Presentment for payment.
PRESENTMENT FOR ACCEPTANCE,
It is only bills of exchange that require presentment for acceptance, and even these
of certain kinds only. Bills payable on dem:irid or on a fixed date need not be prccnted.
For example, a bill payable 60 days after date or on the happening of certain event may
or may not be presented for acceptance. But the following bills must be presented for
acceptance otherwise the parties to the bil l will not be liable on it:
1. A bill payable after si/zi. Presentment for acceptance is necessary in order to fix
maturity of the bill.
2. A bill in which there is all express stipulation that it should he presented for
acceptance before it is presented for payment.
But even in cases where presntrnent is optional, it is always desirable to get a bill
accepted as soon as possible, in order to obtain (i) the additional security of the acceptor's
name on the bill, or (Li) an iniinediate ri g ht of recourse against the drawer and the other
parties if the bill is dmshonoured by non-acceptance. Presentment for acceptance also
helps the drawer, for if acceptance is iefiiscd, lie may on receiving early notice of
dishonour, be able to get his effects out of die hands of the drawee.
Presentment for acceptance to whom—The presentment for acceptance must be
made—
I. To the drawee or his duly atithorised agent.
2. To ill the drawees where there are several drawees, unless they are partners and
one has exprc's or implied authority to accept OIL behalf of all.
3. If the dr:iwcc is dead, to his legal representative. A legal representative acceptiiig
the bill should expressly limit his liability to the extent the assets come to his hands,
otherwise lie will be personally liable.
4. If the drawee has been declared an insolvent, to the Official Receiver or Assignee.
Time and Place for Presentment—The following rules may he stated with regard
to time and place of preSC11tmnemt:-
I. All bills must be presented before maturity.
330 M1RCANTtIE LAW

2. Where presentment is ohligatozy, it must be made within reasonable time or

without unreasonable delay.
3. A bill the presentment of which is not necessary may be presented at any time
before payment.
4. Where a period for a presentment is specified in a bill, it must be presented within
that period.
5. A bill payable after sight must, if no time is specified therein for presentation, be
presented within a "reasonable time" after it is drawn.
6. This presentment must be made on a business day within business hours.
7. It should be made at the place of business or residence of the drawee and where a
place for presentment is mentioned in the bill, the presentment must be made at
that place. A bill which requires presentment at a particular place is called a
Domiciled Bill. If the drawee cannot, after reasonable search, be found, the bill is
deemed to be dishonoured.
PROOF OF PRESENTMENT
Presentment is deemed to have been made only when the bill is exhibited to the
drawee so that he may see the same and judge whether he will accept it or not. Mere
notice of its existence in the possession of the holder is not sufficient. The drawee can
insist on the production of the bill and is entitled to 48 hours' time for considering whether
or not to accept it (Sec. 63). The holder must prove that the bill was properly presented
or a real attempt to present it to the drawee or his agent was made.
EFFECT OF NON-PRESENTMENT
Where presentment for acceptance is compulsory and the holder fails to do so, the
drawer, and all the indorsers are discharged from liability to him. He is not entitled to a
decree, no: can he base his claini even on the original consideration.
PRESENTMENT WHEN EXCUSED
Where presentment for acceptance is necessary, it is excused and the bill may be
treated as dishonoured in the following cases:-
1. Where the drawee cannot after reasonable search be found (Sec. 61).
2. In English Law, where the drawee becomes insolvent, or is dead. But in -Indian
Law, the bill must be presented to the legal representative of the deceased drawee
or to the Official Receiver of the insolvent drawee (Sec. 75).
3. Where the drawee is a fictitious person or one incapable of contracting (See. 91).
4. Where although the presentment is irregular, acceptance has been refused on some
other ground.
The fact that the holder has reason to believe that the bill on presentment will be
dishonoured, does not excuse presentment.
PRESENTMENT FOR PAYMENT
All notes. bills and cheques must be presented for payment to the maker, acceptor,
or drawee thereof respectively by on behalf of the holder during the usual hours of
business, and if at banker's within banking hours. Where the maker, acceptor or drawee
has died, presentment may be made to his legal representative or where he has become
insolvent to the Official Receiver or Assignee. On behalf of presentment for payment
the panics, other than the maker, acceptor or drawee thereon are not liable to the holder
(Sec. 64).
 TILE LAW OF NEGOTIABLE INSTRUMENTS 331

A promissory note, payable at a certain period after sight, must be presented to the
maker thereof for sight (if he can, after reasonable search, be found) by a person entitled
to demand payment, within a reasonable time after it is made and in business hours on
a business day. On default of such presentment no party thereto is liable thereon to the
person making such default (Sec. 62).
Where a promissory note is payable on demand and is not payable at a specified
place, no presentment is necessary to charge the maker thereof (Exception to Sec. 64).
A note or lull made payable at a specified period after date or sight thereof, must
be presented for payment at maturity (Sec. 66). Thus bills and notes must be presented
for payment on the day they fall due, and where days of grace are allowed, they must be
presented on the last day of grace. An earlier presentment is premature and ineffective.
A note or bill, made, drawn or accepted payable at a specified place must, in order
to charge the maker or drawer thereof, be presented for payment at that place (Sec. 69).
But a note made payable at any particular town, such as 'Poona, Bombay or elsewhere,"
is not made payable at a specified place, and, therefore, need not be presented for
payment.
A note, bill or cheque made, accepted or drawn payable at "specified place and
not elsewhere" imist, in order to charge any party thereto, be presented for payment at
that place (Sec. 68). But an instrument made payable at either of two places may be
presented at any one place.
A promissory note payable by instalments must be presented for payment on the
3rd day after the date fixed for payment of each instalment and the note will be deemed
to be dishonoured on the non-payment of any instalment (Sec. 67).
A note or bill, not made payable at a specified place must be presented for payment
at the place of business, if any. oral the usual residence, of the maker, drawee or acceptor
thereof, as the case may be (Sec. 70). But where the maker, drawee or acceptor has no
known place of business or fixed residence and no place is specified in the instrument
for presentment for acceptance or payment, such presentment may be made to him in
person wherever he can be found (Sec. 71). The holder must exercise due diligence in
finding the place of business or residence, and he can make personal presentment only
if he fails to find the place after due diligence. Mere inquiry at the house is not sufficient.
In order to charge the drawer, a cheque must be presented at the bank upon which
it is drawn before the relation between the drawer and his banker has been altered to the
prejudice of the drawer (Sec. 72). Where the holder does not present the cheque within
a reasonable time, and in the meantime the relation between the drawer and the banker
is altered and the drawer suffers a damage due to delay, the drawer will not be liable if
the bank fails to cash the cheque (Sec. 84).
In order to charge any person except the drawer, (i.e., indorsers), a cheque must
be presented within a reasonable time after delivery thereof by such person (Sec. 73).
Delay in presentment for acceptance or payment is excused, if it is caused by
circumstances beyond the control of the holder, and not imputable to his default,
misconduct or negligence. When the cause of delay ceases to operate, presentment must
be made within a reasonable time (Sec. 75A). Delay may arise because of imprac-
ticability of transmitting the bill to the place of payment or declaration of statutory
moratorium. Also where a hundi is lost and the drawer on demand refuses to supply a
duplicate non-presentment is excused.
Presentment for payment excused—Sec. 75 provides that no presentment is
necessary and the instrument may be treated as dishonoured in the following cases:-
1. Where the maker, drawer or acceptor actively does something so as to'inten-
tionally prevent the presentment of the instrument, e.g., deprives the holder of the
332 MERCANTIlE LW

instrument and keeps it till after maturity, or misleads the holder, or the drawer refuses
to give a duplicate of hundi which is lost.
2. Where his business place is closed during the usual business hours on the due
date.
3. Where there is no person to make payment at the place specified for payment.
4. Where he cannot after due search he found.
5. Where there is a promise 10 pay notwithstanding non-presentment, e.g.. where
the indorsement of the notary public oil instruments was "endorsers state if drawer
does not pay we will pay at request of the manager." it was a sufficient promise to pay
by the indorsers.
6. Where the presentment is expressly or mmnpliedly waived by the party entitled to
presentment. An express waiver may be made in the imistrumneflt, by such words as
presentment waived," or 'notwithstanding non-presentnicnt'', or other words to the
effect. An implied waiver will be inferred from the conduct of the drawee or indorsee.
The waiver may he made at any time before maturity. An implied waiver may be inferred
when offer niofority of the instrument any party. (i) makes a part-payment on account of
the amount due thereon, or (ii) promises to pay the amount due thereon in whole or part,
or (iii) waives his right to take advantage of any default in presentment for payment.
7. Where the drawer could not possibly have suffered any damage by non-present-
ment.
8. Where the drawee is a fictitious person, or one incompetent to Contract.
9. Where the drawer and the drawee are the aamne person.
10. Where the bill is dishonoured by non-acceptance.
11. Where presentment has become impossible, for instance, by the declaration of
war between the countries of the holder and the drawee or by the country where
presentment is to be made being overrun by the enemy.
DISHONOUR
A bill or hundi may be dishonoured either by non-acceptance or by non-payment.
Where an instrument is dishonoured, the holder must give notice of dishonour to the
drawer or his previous holders if he wants to make them liable. But in certain cases, as
stated below, notice need not be given.
DISHONOUR BY NON-ACCEPTANCE
1. When the drawee does not accept it within 48 hours from the time of presentment
for acceptance.
2. When presentment for acceptance is excused and the bill remains unaccepted.
3. When the drawee is incompetent to contract.
4. When the drawee is a fictitious person or after reasonable search cannot be found.
5. Where the acceptance is a qualified one or where one or some of several drawees
not being partners make default in acceptance, oil duly required to accept.
In this case, the holder may at his own risk treat the bill as accepted.
DISHONOUR BY NON-I'AYMEN'r
A promissory note, a bill of exchange or cheque is said to be dishonoured by
on-payment when the maker of the note, acceptor of the bill or drawee 6f the cheque
tnakes default in payment upon being duly required to pay the same (Sec.92). Also, a
negotiable instrument is dishonoured by non-payment when presentment for payment
is excused and the instrument when overdue remains unpaid (Sec. 76).
 T1 H: LAW OF NE60-I1AIILE INSTRUMENTS 333

A drawee in case of need must accept, or pay a bill when presentment is made.
A bill will be dishonoured if (lie drawee in case of need also refuses to accept or pay
after acceptance.
EFFECT OF DISHONOUR
The drawer and all the iiidorsers of the bill are liable to the holder if the bill is
dishonoured, either by nun-acceptance or by non-payment, provided that he gives them
notice of such dishonour. The drawer is liahlc only when there is dishonour by
non-payment.
NOTICE OF DISHONOUR
When a negotiable instrument is dishonoured either by non-acceptance or by
non-payment the holder or sonic party liable thereon must give notice of dishonour to
all other parties whom lie seeks to make liable (Sec. 93). Each party receiving notice of
dishonour must, in order to render any prior party liable to himself, give notice of
dishonour to such party within a reasonable time after lie has received it (Sec. 95). Notice
of dishonour is so necessary that all to give notice discharges all parties other
than the inaker or acceptor. These pal ties are discharged not only on the bill or note but
also in respect of the original consideration.
Notice of dishonour must be given by the holder, or by a person liable on the
instrument. When the holder has given notice of dishonour to any party liable on the bill,
and that party has in turn given due notice of dishonour to all prior parties, the holder
may in a suit against the drawer take advantage of notice given by that party and treat it
as a notice by himself. The agent of any of the above parties may give notice. But a notice
by a stranger is a niere nullity for a valid notice can be given only by a person who is
liable oil inst riiiiicnt at the tune of the notice or by his agent.
Notice of dishonour to (lie acceptor of a bill or to the maker of a note or the drawee
of a cheque is not necessary as they are the principal debtors and primarily liable on the
instrument, and they must pay on thedue date at the proper place. It is they who dishonour
the instrument by non-acceptance or non-payment. and to give them notice is to tell them
something which they already know. Notice of dishonour must be given to all parties
other than the maker or acceptor or drawee whom the holder wants to be made liable.
Notice may also he given to the duly authorised agent of the party. Where the drawee or
indorser is dead, the notice may be given to the legal representative of the deceased.
Likewise, the notice may be given to the Official Receiver or Assignee where the party
has been declared all In case of two or more joint drawers or indorsers, notice
to one of them will bind all.
Notice may be oral or in writing, but it must be an actual, formal notification. A
letter merely demanding payment is not sufficient. It may be given in person, or through
a messenger, or by post. Notice by post is more expedient, for if the letter is properly
addressed and miscarries or is delayed in transit, the sender is not responsible once he
has posted it into the post box.
Notice must be given within a reasonable time of dishonour. As to what is a
reasonable time will depend upon (lie nature of the instrument and the usage of trade in
regard to similar instruments (Sec. 105). Where the holder of the instrument and the party
to whom notice is given carry on business or live in different places, the notice of
dishonour must be posted by the next post if there be one oil day, or on the next day
of dishonour. Where the said parties carry on business or live mn.the same place, it is
sufficient if the notice is dispatched so that it reaches its destination on the day next after
the day of dishonour (Sec. 106). Any party receiving notice of dishonour, who seeks to
enforce his right against a prior party, transmits the notice within a reasonable time if he
334 MIRCANTILE LAW

transmits it within the same time after its receipt as he would have had to give notice if
he had been the holder (Sec. 107). Thus, each party is entitled to a clear day for giving
notice and one clear day is to he allowed for each step in the communication between
parties who are liable on the instrument. But a holder or iridorser, who wanui to give
notice to all parties, cannot claim as many days as there are indorsers. He must give
notice to all whom lie wants to hold liable within the time in which he is to give notice
to his immediate indorser.
NOTICE OF DISHONOUR UNNECESSARY
We have seen above that in a suit against the drawer or indorser on a dishonoured
instrument notice of dishonour is a material part of the cause of action. But Sec. 98
enumerates cases in which notice of dishonour can be dispensed with.
No notice of dishonour is necessary—
(a) When it is dispensed with or waived by the party entitled thereto, e.g.:where
an indorser writes on the instrument such words as "notice of dishonour waived" or
where the drawer of the bill informs the holder that the bill will be dishonoured on
presentment, or where he tells the holder before maturity that lie has no fixed residente.
and that lie will call in a few days to see if the bill has been paid by the acceptor.
(b) When the drawer has countermanded payment. This is so because he has made
it impossible for the holder to obtain payment.
(c) When the party charged could not suffer damage for want of notice, e.g.. if at
the time when the instrument is drawn there were no funds belonging to the drawer in
the hands of the drawee, the drawer suffers no damage, and is not entitled to notice of
dishonour. But the burden of proving that the drawer could not suffer damage for want
of notice is on the person seeking to excuse himself.
(d) When the party entitled to notice cannot after due search be found.
(e) Wlieme the omission to give notice is caused by unavoidable circumstances,
e.g., death or dangerous illness of the holder or his agent, or any other accident.
(1) When the acceptor is also a drawer, e.g.. where a firm draws on its branch, or
a partner on the partnership. No notice is necessary where the acceptor is one of the
drawers.
(g) Where the promissory note is not negotiable. Such a note cannot be indorsed;
and if it is indorsed, the indorsee cannot have any claim against the maker or indorser.
Therefore, no one is prejudiced for want of notice.
(h) Where the party entitled to notice promises to pay unconditionally the amount
due under an instrument after dishonour and with full knowledge of facts.

NOTING
Where a note or bill is dishonoured, the holder is entitled, after giving due notice
of dishonour, to sue the drawer and the indorsers. Sec. 99 provides a convenient method
of authenticating the fact of the dishonour by means of' 'Noting." Where a note or bill
is dishortoured, the holder may, if he so desires, cause such dishonour to be noted by a
notary public on the instrument, or on a paper attached thereto or partly on each. The
"Noting" or minute must be recorded by the notary within a reasonable time after
dishonour and must contain the fact of dishonour, the date of dishonour, the reason, if
any, assigned for such dishonour, or, if the instrument has not been expressly
dishonoured, the reason why the holder treats it as dishonoured and the notary's charges
 THE LAW OF NEGOTIABLE INSTRUMENTS 335

(Sec. 99). Noting is not compulsory in the case of an inland bill or note, but foreign bills
must be protested, if so required by the law of the place where drawn.
PROTESTING
The protest is the formal notarial certificate attesting the dishonour of the bill, and
based upon the noting which has been effected on the dishonour of the bill. After the
noting has been made within the specified or reasonable time, the formal protest may be
drawn up by the notary at his leisure; and when the protest is drawn up it relates back to
the date of noting.
Where the acceptor of a bill has become insolvent, or has suspended payment, or
his credit has been publicly impeached. before the maturity of the bill, the holder may
have the bill protested for better security. For this purpose, the notary public is employed
to demand better security and on its refusal protest may be made within a reasonable
(me. This is called a "Protest for Better Security." It may be observed that the acceptor
is not bound to give such security, nor can the holder sue the drawer, and the indorsers
before maturity of the bill in spite of the protest. The advantage of protest for better
security, in addition to the fact being placed on record for the information of the drawer
and the indorsers, is that it enables the bill to be accepted for honour.
Foreign bills must be protested for dishonour when such protest is required by the
law of the place where they are drawn. Foreign promissory notes need not be so protested.
Where a bill is required by law to be protested, then instead of a notice of dishonour.
notice of protest must be given by the notary public.
CONTENTS OF PROTEST
A protest to be valid, must contain the particulars given below, and the omission
of one or more of them will render the protest invalid. The particulars that a protest must
contain are:—
I. . The instrument itself, or a literal transcript thereof.
2. The names of the parties for and against whom the instrument has been protested.
3. The fact and reasons for dishonour.
4. Place and time of dishonour or refusal to give better security.
5. The signature of the notary public.
6. In the event of an acceptance for honour or of payment for honour, the name of
the person by whom, or the person for whom, and the manner in which, such
acceptance or payment was offered or effected.

PART 11 - G
DISCHARGE OF PARTIES AND INSTRUMENT

The tcnn discharge in relation to negotiable instruments has two meanings,

namely. (i) the discharge of the instrument, and (ii) discharge of one or more parties from
liability on the instrument.
DISCHARGE OF THE INSTRUMENT
An instrument is said to be discharged when all rights under it are extinguished, it
ceases to be negotiable and even a holder in due course does not acquire any rights under
it. Such a discharge of the negotiable instrument would take place when the party who
is primarily and ultimately liable on the instrument is discharged from liability. A
negotiable instrument may be discharged:-
1. By payment in due course;
336 MLRCAN11IJ JAW

2. When the principal debtor becomes the holder;

3. By an act that would discharge a simple contract;
4. By renunciation; and
5. By cancellation.
I. By Payment—A negotiable instrument is discharged by payment made in due
course by or for the primary party or by a person who is accommodated, in case the
instrument was made or accepted for accommodation. Payment in due coure means that
it must be made at or after the MATURITY of the instrument to the I (older in good faith
or his agent as agent. A payment by one secondarily liable does not discharge the
instrument. The payer holds it to enforce it against prior indorsers and the principal
debtor. He may also strike out his . nd subsequent indorseinents and further negotiate
the instrument. The right of further negotiation is denied (a) when the drawer pays an
instrument which is payable to the order of a third person, or (h) when an instrument
executed or accepted for accommodation is paid by the party for whose accommodation
the instrument was executed. This denial is based on the theory that further negotiation
would unfairly continue the liability of the payee indorser or of the person who executed
or accepted the instrument for the accommodation of the person making the payment.
To complete payment, the principal and interest, if any, must be paid. The person
paying the instrument should demand the surrender of the instrument when paid.
Payment is a personal defence and is not valid against a holder in due course. Thus, if a
maker of a pro-note pays the original payee after the note has been transferred to a holder
in due course, the maker is liable for payment to such a holdcr.The possession by the
payer of a receipt for payment is no. substitute for the surrender of the instrument.
2. Debtor as Holder—When the primary party lawfully becomes the holder of
the instrument in his own right at or after maturity, the instrument is discharged. The
instrument will not be discharged, (i) if the debtor acquires the instrument before
maturity, in which case he may negotiate it further in the same way as any other holder
could; or (ii) if the holder did not acquire it lawfully or in his own right, as when he
acquired it by fraud or as an agent for another person.
3. Discharge as Simple Contract—A negotiable instrument in some instances
may be discharged in the same way as a simple contract for the payment of money. Like
an ordinary contract, the instrument may be discharged by agreement of the parties in
the form of a novation, a covenant riot to sue, or by rescission or substitution of another
instrument or obligation. For example, where the holder of a note agreed to accept a
conveyance of a house and certain acts by the maker in payment of the note, the
instrument was discharged. The instrument may be discharged by operation of law in
the case of insolvency, in the case of lapse of time under the Statute of Limitations. This
provision regarding discharge of an instrument in the same way as a simple contract
applies only to immediate parties. It cannot be raised as a defence against a holder in due
course. In result it will discharge certain parties to the instrument and not the instrument
itself, unless expressly agreed.
4. By Renunciation—A negotiable instrument is discharged wher the holder
enounces or gives up his right against all the parties to the instrument. The renunciation
must c in writin g unless the instrument is also surrendered to the party primarily liable.
By Cancellation—The party who is entitled to enforce payment of an instru-
amcnt may surrender it to the party liable thereon with an intent to release him from the
obligation. This operates as a discharge of the instrument and , is known as cancellation.
Cancellation r'av also take place by physical destruction of the instrument itself made
with the ntetio' 'rminatc liability, or by crossing out signatures on the instrumeni
 THE LAW OF NEG(YflABLE INSTRUMENTS 337

DISCHARGE OF A PARTY OR PARTIES

When any particular party or parties are discharged, the instrument continues to
be negotiable and the undischarged parties remain liable on it. For example, the
non-presentment of a bill on the due date discharges the indorsers from their liability,
but the acceptor remains liable on it.
A party may be discharged from liability in the following ways:—
I. By cancel Iation—Where the holder of a negotiable instrument cancels the name
of any party to it with the intention of discharging him from liability, such party and all
other persons between the holder and such party are discharged from liability. But a
cancellation made unintentionally or by mistake will not discharge any party. The proper
and safe mode of cancellation is to draw a line through the name so as to leave it legible.
In an accommodation bill, where it is drawn for the accommodation of the drawer
the cancellation of the name of the acceptor who is the accommodating party discharges
the indorser, but not the drawer, and where it is drawn for the accommodation of the
payee, the cancellation of drawer's name does not discharge the payee [Sec. 82(a)].
2. By Release—Where the holder releases any party to the instrument by any
method other than cancellation, the party so released is discharged from liability. Sec.
63 of the Contract Act permits a promisee to remit wholly or in part the performance of
the contract [Sec. 82 (b)].
3. Discharge of Secondary Parties (i.e., indorsers)--A person secondarily liable
on the instrument is discharged also by the discharge of a prior party and by a valid tender
of payment made by a prior party.
4. By Operation of Law—Discharge from liability takes place by operation of
law, e.g., by insolvency of the debtor, or by loss of remedy on expiry of the limitation
or by merger of note into the judgement debt or of a lesser security into a higher security.
5. By allowing drawee more than 48 hours—If the holder of a bill allows the
drawee more than 48 hours, exclusive of public holidays, to consider whether he will
accept the same, all previous parties not consenting to such allowance are discharged
from liability to the holder (Sec. 83).
6. By non-presentment of cheque—Where a cheque is not presented for payment
within a reasonable time of us issue, and the bank fails and the drawer suffers actual
damage through the delay, he is discharged from liability to the holder to the extent to
which such drawer is a creditor of the banker, hut.no more (Sec. g4)•23
7 Cheque payable to order—Where a cheque payable to order purports to be
indorsed by or on behalf of the payee, the banker is discharged by payment in due course,
even though the indorsement might turn out to be a forgery. In the case of a cheque
originally drawn payable to bearer, the banker is discharged by paying in due course to
the bearer thereof, even if any indorsement restricts or excludes further negotiation
(Sec. 85).
8. Drafts by one branch on another—Where a draft, i.e., an order to pay money.
drawn by one office of a bank upon another office of the same hank for a sum of money
payable to order on demand, purports to be indorsed by or on behalf of the payee, the
bank is discharged by payment in due course (Sec. 85-A).
9. By taking qualified acceptance—If the holder of a bill takes a q'iafied
acceptance all the previous parties whose consent is not obtained to such acceptance are
discharged from liability, unless on notice being given, they assent to such acceptance
(Sec. 86).

23. Abdul Majid v. Ws. G. Kalooram 1954 Orissa 124.

338 MERCANI1LE LAW

10. By Material Alteration—Any material alteration of a negotiable instrument

renders the same void as against any one who is a party thereto at the time of the alteration
and does not consent thereto, unless it was made in order to carry out the common
inteition of the original parties. Any alteration made by an indorsec discharges his
indorser from all liability to him in respect of the consideration thereof (Sec. 87). The
section, however, reognises certain cases in which alteration may be allowed. They are:
(i) the filling in of the blanks in an inchoate instrument -(Sec. 20), (ii) the conversion of
an indorsernent in blank into an indorsement in full (Sec. 49), (iii), the qualifying or
limiting of an acceptance (Sec. 86), and (iv) the crossing of a cheque after it has been
issued. These are not material alterations and do not render the instrument void.
The rule as to alteration in this section is based upon two grounds, namely, (a) that
no man is permitted to take chance of committing a fraud without running any risk on
its detection, and (b) that by the alteration the identity of the instrument is destroyed. In
these cases it is immaterial whether thealteration is beneficial or detrimental to the party
charged on the contract, or whether the alteration ultimately involves any change in the
rights and liabilities of the parties or not 2 What is necessary to make the instrument
void is that the alteration must be material. A material alteration in the pronote debars
the person from recovering the amount of the pronote on the basis of original contract
(Suresh Chandra v. Satish Chandra, 1983 All. 81).
WHAT IS MATERIAL ALTERATION?
An alteration is material which in any way alters the operation of the instrument
and the liabilities of the parties thereto, whether the change be beneficial or detrimental.
An alteration is material which alters the business effect of the instrument if used for any
business. Therefore, any change in an instrument which causes it to speak a different
language in legal effect from that which it originally spoke, or which changes the legal
identity or character of the instrument either in its terms or the relation of the parties to
it is a material alteration.
There is a material alteration where it is an alteration (1) of the date of the
instrument, (2) of the sum payable, (3) in the timeof payment, (4) of the place ofpayment,
(5) of the rate of interest, (6) by addition of a new party, (7) by tearing an instrument in
a material part, (8) in the dates of indorsements, and so on
There is no material alteration so as to vitiate the instrument in the following
cases, namely, (1) correction of a mistake, (2) to carry out the common intention of the
parties, (3) an alteration made before the instrument is issued, and (4) made with the
consent of the parties.
The alteration affects only those persons who have already become parties at the
date of the alteration. Those who take an altered instrument cannot complain. Sec. 88
lays down that an acceptor or indorser of a negotiable instrument is bound by his
acceptance or indorsement notwithstanding any previous alteration of the instrument.
Further, the holder is not affected by a material alteration made by a stranger without the
consent of the holder, and without any fraud or laches on his part. The fact that the change
is accidental negatives the possibility of assenL
11. Dheharge by payment of altered instrument—Where an instrument has
been materially altered but does not appear to have been so altered, or where a cheque
is presented for payment which does not at the time of presentation appear to be crossed
or to have had a crossing which has been obliterated, payment of the amount due on the
instrument according to the apparent tenor thereof and in due course discharges the
person making the payment (Sec. 89).

24. Ranipadazath v. Han Nazain, 1965, Pat. 224.

 THE LAW 01 NtCOT1ABLE lNSTRUM1tNS 339

12. Bill In acceptor's hand—if a bill which has been negotiated is, at or after
maturity, held by the acceptor in his own right, all rights of action thereon are extin-
guished (Sec. 90). This is the final discharge of the bill, and the principle applies to notes
as well.
RETIREMENT OF BILLS AND REBATE
An acceptor may make payment of a bill before maturity, and the bill is then said
to be retired, but it is not discharged and must not be cancelled except by the acceptor
when it comes into his hands. A bill accompanied by shipping documents which are to
be delivered to the acceptor only on payment of the bill is frequently retired by the
acceptor before its maturity in order to be able to get possession of the goods. It is
customary in such a case to make an allowance of interest on the money to the acceptor
for the remainder of the time which the bill has to run, e.g.. where a bill due on 15th May
is retired on 5th May, interest for 10 days on the amount of the bill will be allowed. The
interest allowance is known as rebate.

COMPENSATION

Sec. 117 lays down rules for determining the amount of compensation to the holder
or an indorser in case the instrument is dishonoured.
Compensation to holder—The holder is entitled to the amount due on the
instrument, together with the expenses properly incurred in presenting, noting and
protesting it.
Compensation to indorser—The indorser who has paid the amount due on the
instrument is entitled to the amount so paid with interest at 6 per cent per annum from
the date of payment until tender or realisation thereof together with all expenses caused
by the dishonour and payment.
Re-exchange—When the holder or the indorser entitled to claim the amount
resides in a country different from that in which the bill was drawn or indorsed, the holder
or indorsee is entitled to receive from the drawer or prior indorsers the sum at the current
rate of exchange between countries on the date ofdishonour. Re-exchange is the measure
of damages occasioned by the dishonour of a bill in a country different to that in which
it was drawn or indorsed.
Re-draft—The party entitled to compensation may draw a bill payable at siht or
on demand upon the party liable o compensate him for the amount due to him together
with all expenses properly incurred by him. Such a bill is called a "Re-draft": This
re-draft must he accompanied by the instrument dishonoured and the protest, if any. The
party who makes payment of a re-draft may draw a similar re-draft on the parties prior
to him. If the re-draft is dishonoured, the party on whom it is drawn will have to
compensate the drawer, as if the re-draft were an original bill.
Compensation against banker—There is no provision in this Act for determining
the compensation payable by a banker who wrongfully dishonours his customer's
cheque. In English law, such compensation will include damages to credit and reputation
of the drawer, and the court would ordinarily award exemplary damages. The same rule
would, however, seem to apply in India.

INTERNATIONAL LAW

In the absence of a contract to the contrary, the liability of the maker, or drawer of
a foreign note, bill or cheque is regulated in all essential matters by the law of the place
where he made the instrument, and the respective liabilities of the acceptor and indorser
340 MERCANTILE LAW

by the Faw of the place where the instrument is made payable (Sec. 134). Where an
instrument is made payable in a different place from that in which it is made or indorsed.
the law of the place where it is made payable determines what constitutes dishonour and
what notice of dishonour is sufficient (Sec. 135). If a negotiable instrument is made,
drawn, accepted or indorsed out of India, but in accordance with the law of India, the
circumstance that any agreement evidenced by such instrument is invalid according to
the law of the country wherein it was entered into does not invalidate any subsequent
acceptance or indorsement made thereon in India (Sec. 136). The section provides an
exception to the general rule laid above that the lex kwi coniractas (law of the place
where the contract is made) determines the form and essential validity of the contract.
Therefore, where the first contract of making or drawing is invalidated by want of stamp
or some other similar circumstance, the subsequent contracts created by acceptance and
indorsement being independent contracts will be valid even though the prior contract
was invalid according to the law of the place where it was made provided that it is valid
according to the law of India. Where foreign law is different from Indian law and a party
to a suit relies on foreign law that party must specifically allege and prove this fact like
any other fact; for the court will not take notice of foreign law excepting the English Hilt
of Exchange Act. Sec. 137 provides that the law of any foreign country regarding
negotiable instruments shall be presumed to be the same as that of India unless and until
the contrary is proved.
HUNDIS

Hundis are negotiable instruments written in an oriental language. They are

sometimes promissory notes, but more often hills of exchange, and subject to local
usages. The hundis were in circulation in India long before the Negotiable Instruments
Act, 1881. Traditions as to their use in the court date as far back as 5000 B.C. The word
hundi is derived from the Sanskri word hund—to collect. It appears that hundis were
originally used for the purpose of collecting debts. Even now they are often employed
for the same purpose, although now hundis are used more and more as internal bills of
exchange. Hundis are negotiable instruments under the Act, although they are so
independently of the provisions of the Act. They are recognised by custom as negotiable,
and the Act recognises the custom pertaining to hundis.
There are several varieties of hundis current in the country, but only the more
important among them are given below:
Darshni hundi—A darshni hundi is a hundi which is payable at sight. A darshni
hundi payable on demand must he presented for payment within a reasonable time after
its receipt by the holder. Any loss caused to the drawer by delay in presentment falls on
the party at fault.
Muddati or Miyadi hundi—A hundi payable after a specified period of time is
called a Muddati or Miyadi hundi—the time bill of exchange.
Shah Jog hundi—A shah means a respectable and responsible person, a man of
worth, and known in the bazar. A shah jog hundi is payable to or through a shah. A hundi
payable to shah is payable on the responsibility of the shah, and if he or the parties through
whom he claims became the holder of the hundi through offence or fraud, the drawee
can proceed against him for the re-imbursement of the amount. Thus if the hundi turns
out to be false, stolen or forged, the shah is bound to refund the amount of the hundi with
interest unless he produces the actual drawer or the person who committed the fraud.
The drawee to recover money should file a separate suit against the shah.
The words shah jog in ahundi lend to it additional credit and make it of the nature
of a cheque generally crossed. But it is payable only to a respectable bearer and only
 TILE LAW OF NEGOTIABLE INSTRUMENTS 341

when it is indorsed to the last indorsce—on the shah presenting the hundi. It is neither
a bill nor a note; but if attested, it can be sued on either as a bond or a promissory note.
A shah jog hundi differs from a bill in two respects, namely, (i) the acceptance of the
drawee is not generally Written across it but the particulars are entered in the drawer's
book, and (ii) it is 1101 usually presented for acceptance before due date. The shah jog
hundi in its inception is a hundi which passes from hand to hand by delivery and requires
no indorsement, until it reaches the shah who after making inquiries to secure himself
should present it to the drawee for acceptance or payment. Although itpasses by delivery,
it is not similar to the bearer bill. The Shah'slsarne must always be indorsed on the hundi
at the time of the presentment. It can any time be restricted by being specially indorsed
and when so restricted, the hundi ceases to be a hundi. If it is dishonoured, notice of
dishonour must be given as in the case of a bill. 25
The shah does not guarantee the solvency of the drawer, although he guarantees
the genuineness of the hundi. A drawee' will not pay the hundi unless he has funds in his
hands belonging to the drawer, or he is willing to give credit. And he is not bound to pay
unless he is satisfied as to the respectability of the shah presenting the hundi, as he has
to look to the shah in the event of the hundi turning out to be a forged one.
A shah jog hundi may be darshni or muddati. It may mention the name of the
depositor or not, but it is payable only to a shah. It differs from an ordinary hundi
inasmuch as (i) it need not be presented for acceptance and the acceptance of the drawee
is not necessary and need not be written across the huiidi. and (ii) the holder is relieved
from liability if he produces the forger.
Nam Jog hundi—A nam jog hundi, in contradistinction to shah jog hundi, is
payable to the person whose namc is specified in the body of the hundi. In form both are
similar except with the difference that the" nam jog has the name of the payee, while the
shah jog has th name of the shah inserted therein. The narn jog hundi is payable to the
order of the payee and can be indorsed like a bill of exchange payable to order.
Dhani Jog hundi—. In the case of a dhani jog hundi, the amount is payable to a
dhani, owner, and the words 'dhani jog" are inserted in the hundi. The amount of the
hundi is, therefore, payable to the owner or holder or bearer. It is indeed a negotiable
instrument payable to bearer; where it is indorsed in full, it ceases to be a bearer hundi.
Jokhaml hundi—A jokhami hundi is drawn by the consignor of goods on the
consignee against the goods shipped on the ship mentioned in the hundi. According to
the custom of Hindu merchants the money of the hundi is payable only when and if the
goods arrive. The hundi is in the nature of a policy of insurance, but with this difference
that the money is paid beforehand, and is to be recovered if the ship arrives safely. The
jokhami hundt is drawn with two-fold object, namely, to put the drawer of the hundi in
funds, and at the same time to effect an insurance on the goods themselves. The hundi
is drawn by the consignor on the consignee and negotiated with the insurer at a price
which is less than the amount of the hundi by the amount of the premium of insurance.
If the goods arrive safely the insurer may obtain them or theii value as stated in the hundi.
The hunii is an authority to the consignee to pay for the goods or deliver them up
to the holder, but the holder has no right of action against the consignee and holds the
hundi on the credit of the drawer or indorser. As the holder is an insurer, he cannot claim
payment if the goods are totally lost, although he is entitled to be paid in full in case of
partial loss or damage (particular average loss). If the loss is a general average loss then
a rebate is made to the extent of the loss.
Jawabi hundi—Jawabi hundi is used as a means of remittance of money from
one place to another via a banker. The nature of the transaction known asjawabi hundi

25. Central Bank of India v. Khub Ram, 1960 Punj. 157.

 MERCANTILE LAW
342

is as follows: A person desirous of making a remittance writes to the payee and delivers
the letter to a hanker, who either indorses it on to any of the correspondents near the
payee's place of residence or negotiates its transfer. On its arrival the letter is forwarded
to the payee who attends and gives his receipt in the form of an answer to the letter which
is forwarded by the same channel to the drawer of the order.
Zikri Chit—The zikri chit is a letter of protection given to the holder of a hundi
by the drawer or any other prior party when the hundi is dishonoured by non-acceptance
or even when the dishonour is feared. It is addressed to some person residing in the town
where the hundi is payable, asking him to take up the hundi in case of its dishonour. The
addressee of the letter there accepts the hundi for honour and pays it at maturity.
According to the custom prevalent among the Marwari shroffs, the zikri chit enables the
person to accept for hondur the hundi without being noted or protested. Zikri chits are
used throughout the country in connection with Marwari hundis.
Purja—.It is a request in writing by the borrower to the lender to pay the amount
mentioned therein. It bears a ten paise stamp. The purja is not a bill of exchange, and is
not negotiable. Purjas are commonly used for temporary loans.
Firman Jog hundi—It is a hundi which is payable to order, and Dekhanhar is
payable to bearer. When a hundi is lost the holder may Jemand from the drawer a
duplicate, which is called a Peth. If the duplicate is lost the h lder may ask for a triplicate
and soon. Each of these subsequent hundis is called a Per Peth. When a hundi has been
paid and cancelled it is called a Khokha.

SUMMARY

/knegoIiahle instrument is one the property in which is acquired acquired by every person
who ta it bona fide and for value notwithstanding any defect of title in the person
from whom he took it. Thus a person taking the instrument honafide and for value gets
a good title irrespective of previous defects.
The Negotiable Instruments Act defines the term thus: "A negotiable instrument
means a, romissory note, bill of exchange or cheque payable either to orderor to bearer."
promissory note is an instrument in writing containing an unconditional
undertaking, signed by the maker, to pay a certain sum of money only to, or the order
of, a certain person.
bill or exchange is an instrument in writing containing an unconditional order,
signed by the maker, directing a certain person to pay a certain sum of money only to,
or to the order of, a certain person or to the bearer of the instrument.
-cheque is a bill of exchange drawn on a specified banker and payable only on
deind.
Essentials or notes, hills and cheques—Each of these instruments must be in
writing. It must contain a clear and definite promise to pay, if it is a note; and imperative
and rightful order for payment, if it is a bill or cheque. The promise or order must be
unconditional, and must be for the payment of money only, and the sum payable must
be certain. It must be signed by the maker or drawer.
The chief parts of these instruments are the amount, date, stamp, time for payment,
place of payment, designation of payee, signature of maker or drawer and name of
drawee.
The dale, though a usual and convenient part of every bill and note, is not, in
general, essential, and if it is omitted the instrument dates from the day on which it was
made. The date of making or drawing is a material part of the instrument where the
amount is payable a certain time after date or is an essential factor in the calculation of
 THE LAW OF NFAJOTIABLE INSTRUMENT'S 343

interest, and an unauthorised alteration of it will make the instrument void. Mere
correction of the date or insertion of date in an inchoate instrument is allowed. A cheque
may be drawn on a holiday, or may be ante-dated, post-dated or even undated, although
payment can be refused, if it is stale, or until the date mentioned therein has arrived or
does not bear a date.
The amount in words and figures must tally and if they differ the amount stated in
words shall be taken to be correct.
Stamp—Bills and notes executed in India must be stamped with revenue stamps
of adequate amount before or at the time they are signed. Cheques do not require any
stamp duty in India.
The time for payment may be either—
(1) On demand; or (2) at sight or on presentation; or (3) a certain time after sight;
or (4) a certain time after date; or (5) a certain time after some specified certain event
A cheque is always payable on demand.
An instrument expressed to be payable "at sight" or "on presentment" means
on demand." If no time is specified then also the bill or note is payable on demand.
A noteor bill expressed to be payable "after sight" must be presented to the maker
for sight or to the drawee for acceptance respectively within a reasonable time of its
making or drawing.
A note or bill is at Maturity on the day on which it falls due. It matures or falls
due on the third day after the expiry of the period after it is made payable. These three
days are called days of Grace. In computing such periods public holidays are excluded,
the months and days are reckoned according to British calendar, and if the month in
which the period would terminate has no corresponding date the period shall be taken
to terminate on the last date of such month.
The place of payment is not ordinarily specified but a drawer may, if he so desires.
fix one and if he does so, payment must be made at the place specified. The maker is
liable to pay a promissory note at the place specified therein. Presentment for acceptance
of a bill is necessary when it is made payable at a place other than the place of the drawee.
Presentment for payment of a bill or note payable at a specified place is necessary at that
place in orderto charge the maker, drawer or indorser. Bills and notes made payable at
a specified place and not elsewhere must be presented at that place to charge any party
thereto.
Instruments which are (i) drawn or made in India, and (ii) made payable in or drawn
upon any person resident in India are inland instruments, while others not so drawn or
made so payable are foreign instruments. An instrument which in form is such that it
may either be treated by the holder as a bill or as a note, is an ambiguous instrument.
Once the instrument has been treated either as a bill or as a note it cannot be treated
differently afterwards.
An inchoate instrument is one where one person signs and delivers to another a
paper stamped according to law of negotiable instruments and either wholly blank or
having written thereon an incomplete negotiable instrument, he thereby gives prima
fade authority to the holder thereof to make or complete upon it a negotiable instrument
for any amount covered by the stamp. The signor of such an instrument is liable both to
the holder and holder in due course.
Parties—Every person competent to contract may bind himself and be bound by
making, drawing, acceptance, indorsement and delivery, and negotiation of a note, bill
or cheque. Negatively, persons incompetent to contract do not incur any liability as
parties to a negotiable instrument. Thus a minor is not liable, but he can be a holder or
payee and can act as a good channel for passing title fromnorie person to another.
344 MERCAN11LE LAW

The maker and payee are two necessary parties to a note, while there must be at
least three parties on the face of a bill or cheque—the drawer, the drawee and the
payee—although the same person may fill any two of the positions.
Signature of the maker or drawer is essential to the making or drawing of the
instrument. The name may be subscribed by himself or by his agent. The maker of a note
and the drawer of a bill until acceptance are principally liable on the note or bill. They
must pay the amount on maturity according to the apparent tenor of the instrument or in
default they must compensate any party for any loss and damage sustained by such
default.
Where a bill is accepted before maturity the acceptor takes the place of the drawee
and the drawer becomes surety for the acceptor. Other parties are liable as sureties for
the maker, drawer or acceptor, as the case may be, and each party stands as surety to
each subsequent party.
The drawee must be named or otherwise indicated in the bill with certainty for the
holder has to present the bill for acceptance to the drawee.
A bill may he drawn on one or several drawees or on a company, association or
body of individuals. It may be addressed to the drawer himself though in legal operation
it will be a note rather than a bill.
A bill drawn on a fictitious person or one incompetent to contract may be treated
as dishonoured and the drawer most compensate the holder. The holder has no claim
upon the drawee until the latter has accepted the bill.
If the drawee refuses to accept, the contract is broken. The drawee after acceptance
is called the acceptor and is then the principal debtor.
The drawee of a cheque is always a banker and he must pay if he has sufficient
funds of the drawer in hand proj crly applicable to the payment of such cheque.
Foreign bills are usually drawn in sets of three, each part containing a condition
that it shall continue payable only so long as the others remain unpaid. The method
reduces chances of losing. All the parts constitute one bill. Only one part is to be accepted.
The payee must be a certain person. A bill, or a cheque is generally made payable
to-
(I) Certain person or persons. (2) the order of a certain person, (3) a certain person
or order, (4) a certain person or bearer or (5) bearer. A note cannot be made payable to
a person or bearer, or to a bearer.
\J - awee in case of need—Where in a bill oi in any indorsement thereon the name
of any person is given to be resorted to in case of need, such a person is called a drawee
in case of need. He may accept the bill and pay without previous presentment. The bill
is not dishonoured unless it is also dishonoured by a drawee in case of need.
eIivery—The delivery of the note, bill or cheque is necessary in order to complete
the making, acceptance or indorsement thereof and to transfer the right of suing thereon.
Delivery may be actual or constructive. But it must be made with the intention to pass
the property in the instrument. It may be conditional or for a specified purpose only and
not absolute. Such a delivery makes the holder a mere bailee, trustee or agent.
Negotiation is such transfer as constitutes the transferee a holder with rights of
further negotiation. An instrument is negotiated by mere delivery when it is payable to
bearer, and by indorsement and delivery when it is payable to order.
An indorsement may be Blank, Full, Restrictive. Partial or Qualified. An indor-
sement in blank is one where the inderser merely writes his signature on the instrumenL
and the instrument becomes payable to bearer, even though it was originally payable to
order.
 THE LAW OF NEGOTIABLE INSTRUMENTS 345

A full indorsement is one in which the indorser signs his name and adds the name
of the party to whom or to whose order the instrument is to be payable.
A restrictive indorsement prohibits or restricts the further negotiability of an
instrument.
An indorsement is partial which purports to transfer to the indorsee a part only
of the amount of the instrument. A partial indorsement does not operate as a negotiation
of the instrument.
An indorsement is conditional or qualified which limits or negatives the liability
of the indorser.
Signature by way of indorsement must be on the instrument (generally, on th
back) or on a slip of paper attached to it—Allonge.
It must be by maker or holder or drawer or payee or indorsee, but not by a straz gcr.
It must be made for the purpose of negotiation and must he completed by delivery.
The effect of indorsement is that the indorsee acquires the title to the instrument,
and can negotiate it to any party he likes, and may, as holder of the instrument, sue any
or all of the prior parties. Every party is liable to all parties subsequent to him. Each prior
party is liable as surety to each subsequent. party.
The indorser's engagement is like that of a maker that the instrument will be paid
when it falls due, and if it is dishonoured he will compensate the holder provided due
notice of the dishonour is received by him. He guarantees to all holders in due course
the genuineness of the drawer's signature and all previous indorseFnenfs.
3tfloIder—A person entitled in his own name to the possession of an instrument
(though not necessarily in actual possession of it) and to receive or recover the amount
due thereon is a holder.
No person can sue on a negotiable instrument in his own name unless his name
appears thereon as payee or indorsec or unless the instrument is made payable to bearer
and he is the possessor thereof.
But when an instrument is lost, or destroyed, its holder is the person entitled to the
possession of the instrument at the time of such loss or destruction.
..,J(older 1D due course—A holder in due course is holder who became such for
csideration without having sufficient cause to believe that any defect existed in the
title of the person from whom he derived his title before maturity. Thus a donee of an
.instrument may be a holder but cannot be a holder in due course. But unless the contrary
is proved a holder is presumed to he a holder in due course.
The title of holder in due course is free from the equities and other defences which
could have been raised by prior parties. Once an instrument passes through the hands of
a holder in due course it is purged of all defects. It is like current coin.
Consideration is presumed in respect of the making, drawing, acceptance or
indorsement of a negotiable instrument. But this presUmption is rebuttable and it can be
shown that as between immediate parties to an instrument no consideration ever passed.
This plea cannot he set up between prior parties against a holder in due course or any
subsequent ho}der deriving title from him.
Acceptance of bill is the indication by the drawee of his consent to the order of
the drawer. This is done by writing his name generally accompanied by the word
• 'accepted," across the face of the bill. The acceptance is complete and hinds the drawee
only when he delivers the accepted bill to the holder, or gives him notice of such
acceptance.
Only the person to whom the bill is addressed can accept it unless he accepts it
supra protest for the honour of a party liable on the bill.
 MIRcA.TIU LAW

An acceptance may be either general or qualified. A general acceptance is

absolute and assents without any qualification to the order of the drawer but where, an
acceptance is made subject to some condition or qualification, thereby varying in express
terms the effect of the bill as drawn, it is a qualified acceptance.
The holder of a bill may refuse to take a qualified acceptance or he may acquiesce
in it. Where he refuses to take it, the bill is dishonoured by non-acceptance. If he accepts
the qualified acceptance, it binds him and the acceptor, but not other parties not
consenting thereto.
It is always advisable to present a bill for acceptance, for if acceptance is refused.
the parties other than the drawee become immediately liable though the bill has not yet
matured.
Presentment must be made:-
(i) where a bill or note is payable after sight, or
(ii) where a bill is payable at a place other than the place of the drawee.
(iii) when it is expressly stipulated that presentment shall be made.
The holder must present a bill payable after sight for acceptance or negotiate it
within reasonable time. The penalty for non-presentment is the discharge of the drawer
and prior indorsers. The drawee is entitled to 48 hours for decidir.g whether he will accept
or not.
Presentment is excused in the following cases:—
I. Where the drawee is dead or is insolvent or is a fictitious person or a person
incompetent to eomtiact.
2. Where after reasonable search the drawee cannot be found.
3. When although presentment nas been irregular, acceptance has been refused on
some other ground.
Payment at maturity of the amount due on the note, bill or cheque by oron behalf
of the principal party liable to the holder is a discharge of the liability of each and every
party to pay the amount. Payment may he made to the holder or his representative.
An instrument payable to bearer whether originally or by indorsement is dis-
charged by payment in due course.
Any person liable to pay and called upon by the holder to pay is, before payment,
entitled to have the instrument shown to him and is, on payment, entitled to have it
delivered to him and if the instrument is lost or cannot be produced, to be indemnified
against any further claims thereon against him.
Presentment for paynwnt is not necessary to charge the principal debtor, but it is
essential to charge other parties. But where a place for payment is specified in a note
payable on demand and where an instrument is made payable at a specified place and
not elsewhere, presentment at that place is necessary to charge even ti.e principal debtor.
Only the holder or his duly authorised agent, or in case of death or insolvency, the
legal representative or assignee of the holder can make presentment.
Where a bill has been lost before it is overdue, the holder thereof can compel the
drawer to give him a duplicate of the lost bill on his undertaking to furnish security for
indemnifying him against all persons in case the bill alleged to have been lost is found
again.
Dishonour—A note, bill or cheque is dishonoured by non-payment when the
maker of the note, acceptor of the bill or drawee of the cheque makes default in payment
on being duly required to pay the same.
Where presentment for payment is excused the instrument is deemed to be
dishonoured on the due date for presentment if it remains unpaid.
 THE LAW OF NEGOTIABLE INSTRUMENTS

Where a drawee in case of need is named in the bill, the bill is not dishonoured
until such drawee has also refused payment on proper presentment.
In case of dishonour by nun-payment the holder has a right of action against (a)
the maker of the note, (b) the acceptor of the bill, c) the drawer of the bill or cheque if
due notice of dishonour has been given, and (d) each of the indorsers of a note, bill or
cheque, if due notice has been given.
In case of dishonour by non-acceptance of a bill the holder has a right of action
against the drawer and indorsers, if due notice of dishonour has been given.
Notice ofdishonour by non-payment or by non-acceptance must be given by the
holder or by some party to the instrument who remains liable thereon to all parties to
whom he seeks to make severally liable and some of several parties whom he seeks to
make jointly liable, except the maker of the note or acceptor of the bill.
Any party receiving notice of dishonour must in order to make any prior party
liable to himself transmit the notice to such party. Notice must he given within reasonable
time after dishonour and transmitted within reasonable time after its receipt. The notice
may be given in writing or it may be oral.
Notice is dispensed with-
1. Where after reasonable search a party cannot be found or notice is impossible.
2. Where it is waived by the party entitled to it.
3. As regards drawer, where the drawer and the drawee are the same person; the
drawer is fictitious or incapable of contracting; the drawer himself is the person to
whom the bill is presented for payment; or where the drawer has countermanded
payment.
Noting and Protest—In addition to giving notice of dishonour, the holder of a
dishonoured inland bill, if he so desires, may cause the bill to be noted or protested.
Foreign bills must be protested when such protest is required by the law of the
place where they are drawn.
Noting is the minute recorded by the notary public on a dishonoured bill at the
time of dishonour. Noting is a convenient method of authenticating the act of dishonour.
Notaries Public are appointed by the State Governments and are officers who take
note of anything which may concern the public, attest deeds or writing to make them
authentic in another country and so on.
A bill may be protested not only for non-payment or non-acceptance but also for
better security. When the acceptor of a bill has become insolvent, or has suspended
payment, or his credit has been publicly impeached, before the maturity of the bill, the
holder may within reasonable time cause a notary public to demand better security from
the acceptor. If the acceptor refuses to furnish better security the notary shall note the
facts or certify them as above. This certificate is called protest for better security.
The acceptor is not bound to give such security, hut the bill can he accepted for
honour.
Acceptance for honour may be made voluntarily by any person to save the credit
of some or all the parties to a bill. It must be made after noting or protest and must be
made with the consent of the holder by a person not liable on the bill, by a writing on
the bill and for the whole amount, for which the bill is drawn and must be made before
the bill is overdue.
Payment ror honour may be made by anyone for the honour of any party liable
on the bill when it has been protested for non-payment.
Cheques—A cheque is a bill of exchange drawn on a banker and payable only on
demand.
348 MERCANT]I.} LAW

The hanker who is the drawee must pay the cheque of his customer as long as he
holds sufficient funds to his credit, and if he wrongfully refuses to pay the cheque, he
shall have to compensate the drawer for any loss or damage to his credit But the payee
or holder of the cheque has no cause of action against the hanker.
The paying hanker is in a privileged position a: regards the payment of the
customer's cheque. Where a cheque payable to order purports to be indorsed by or on
behalf of the payee, the banker is discharged by payment in due course. He is discharged
in respect of a bearer cheque by payment to the bearer or holder without indorsement.
He can even ignore any indorsement if the cheque is originally made payable to bearer.
The rule is ''Once a hearer cheque always a bearer cheque."
The collecting banker is protected if he receives payment in good faith and
without negligence of a crossed cheque for a customer, even though the customer's title
In the cheque proves defective. The protection is given because a crossed cheque can be
cashed only through a hanker and a hanker collecting his customer's crossed cheque acts
as his agent.
A cheque may be 'open'' or "crossed. An open cheque can be presented by the
payee to the hanker across the counter for payment.
A crossed cheque can he cashed only through a hanker, and not across the counter.
The object of crossing is to secure payment to a hanker so that it may be possible to trace
the person receiving payment of the cheque.
The crossing is made to warn the hanker and not to stop negotiability of the cheque.
To restrain negotiability addition of words 'Not negotiable" or ''Account payee only"
is made.
A cheque may he crossed generally or specially.
Payment of cheques generally crossed may he made through any hanker while of
one specially crossed only to the hanker to whom the cheque is crossed or his agent for
collection.
CASES FOR RECAPITULATION

I. A lost money playing cards with B. A gave B a promissory note for the amount
of the gambling debt. B negotiated the note to W Bank Ltd., which received it in good
faith and for value. A refused to pay the note, and the Rank sued B as indorser. B defended
on the ground that the note was given to pay a wagering debt and was thereforevoid. It
was held that the hank was entitled to recover from B, the indorser of the note, because
the indorser warrants that the instrument is a valid obligation.
of F. M
2. A bill drawn on M in favour of A is accepted by M through the fraud
is not liable on the bill to A.
If the acceptance of the bill is procured by fraud the acceptor
is only liable to a holder in clue course and not to other holders [Ayers v. Moore (1940)
I K.R. 2791.
3. A. the payee-holder of a bill, endorsed it in blank and delivered it to B, B also
endorsed it in blank and delivered it to C. C endorsed it in full to D or order. D without
endorsement delivered the bill to E. It was held, in a suit by E, that B. as the bearer against
the drawer. acceptor, and the indorsers A and B is entitled to receive payment from them,
but he cannot proceed against Cur D, as he received an order instrument from D without
endorsement. If. however, D, instead of merely handing over the bill to E. had passed
on to him by regular endorsement. B could have claimed payment from all prior parties
]Smith v. Clarke (1794) I Peake 295].
4. A draws on B a bill payable three months after sight. It passes through several
hands before X becomes its holder. On presentation by X. B refuses to accept. X can
 THE LAW OF NEGOTIABLE INSTRUMENTs 349

recover from all the prior parties except B. The drawee is not liable oil bill unless he
accepts it and then delivers it over to the holder. The other parties are liable because they
guarantee payment.
5. A bill is drawn payable to • A or order.' A loses the bill and X, who finds it,
forges A's signature and indorses it to B who takes it for value and in good faith. B
acquires no title to the bill, because there was no indorsement in favour of the finder, X,
he had no title to convey. The forged indorsement being a nullity can convey no title,
and the subsequent holder cannot claim to be a holder in due course [Mercantile Bank
of India v. Mascaranha.c, 1932 P.C. 221.
6. M draws a cheque in favour of N, a minor. N endorses it in favour of P, who in
turn endorses it in favour ofQ. The cheque is dishonoured by the bank. N, being a minor,
is not liable on the cheque, so that P and Q cannot claim from N. P can claim payment
from M, the drawer and Q can claim against P. the indorser and M, the drawer (Sec. 26).
7. Aexecutes apromissory note in favour of B forRs.2,S00. B receives the amount
from C and makes an indorsement thus: Received amount due under this promissory
note from C", and signs it and hands over the note to C. C cannot maintain a suit on the
promissory note as the writing is not an endorsement and so the instrument is not
negotiated to him and he is not a holder in due course. He cannot sue even under Sec.8,
as there is p o assIgnment of the instrument either (Sees. 8 and 16).
8. A owes B Rs.1,000. A makes a promissory note for the amount payable to B
A dies and the note is afterwards found among his papers and delivered to B. B sued on
the bill. Held, B's suit does not lie, as the pronote was never delivered by A to B. Until
the Instrument is delivered after execution it is incomplete and there is no cause of action
on it. [Rroozage v. Lloyd(1847) I Exch. 321.
9. A cheque is drawn 'payable to 13 or order.' It is stolen and B's indorsement is
forged. The banker pays the cheque in due course. The banker is discharged and he can
debit the account of the customer with the amount of the cheque even though the payee's
endorsement is forged. This is so because cheques are a special exception to the general
rule that a forged endorsement is no endorsement. f Charles v. Blackwell (1877) 2 C.P.D.
151]. But if the drawer's signature is forged the hanker is liable for the amount of the
forged cheque, unless the banker call he took due care to compare the signature
with the specimens or unless he can show that the conduct of the customer was
immediately connected with the forgery. [Orr v. Union Bank (1854)1 Macq. H.L. 5131.
10. A is the holder of a bill of exchange made payable to the order of B,.whjch
contains the following endorsements in blank:—
First endorsement 'B'.
Second endorsement 'Peter Williams,'
Third endorsement 'Wright & Co.'
Fourth endorsement 'John Rozario.'
This bill A puts in suit against John Roi.ario and strikes out, without John Rozasjo's
consent, the endorsements by Peter Williams and Wright & Co. Held, A's suit against
John Roaario is not maintainable. By striking out endorsements by Peter Williams and
Wright & Co., A has impaired the remedy of John Roiario against them and so John
Rozarin is discharged from liability on the bill EMavar v. Judis (1833) IM & Rob 247).
11. A bill of exchange is accepted payable at B & Co., but is subsequently altered
by the holder by erasing the name of B & Co. and substituting the name of E & Co. The
way the problem is worded shows that the endorsement was forged after acceptance and
without the knowledge and consent of the acceptor. As such the acceptor is not liable on
the bill and can plead that endorsement is a forgery. But if the endorsement had been
350 MERCANTILE LAW

forged before he accepted the bill, he would be liable under Sec. 41 if he knew or had
reason to believe the indorsement to be forged when he accepted it.
12. A draws a cheque on the Imperial Rank for Rs.5,000 in favour of B. C steals
the cheque and forges B's signature on it and makes it payable to D who pays
puts the cheque crossed generally
consideration for the same and obtains it bonafide. D
into his account with the National Bank who obtains payment of it from the Imperial
Bank and credits D's account with the amount. A claims to recovel the amount of the
cheque from F), or the Impecial Bank. or the National Bank. C. as a thief acquired no
title to the cheque, nor could he give any. D did not acquire good title as he received it
from a thief. Therefore, A can recover the amount from D. but not from the Imperial
Bank or the National Bank. The National Bank, as a collector of the crossed cheque for
a customer and without negligence is protected under Sec. 131 of the Act. The Imperial
Bank is not liable as it has simply made payment to the other banker and at its credit.
But if the cheque were uncrossed, then both D and the National Bank would be liable to
A. The National Rank would not get the protection of Sec. 131, as it had collected an
uncrossed cheque.
13. A draws a bill of exchange payable to the order of B only and C accepts it
payable at D Bank. The bill bears the words 'not negotiable.' B indorses the bill to E.
The bill being dishonoured on presentation E sues C thereon. The words 'not negotiable'
make the instrument not negotiable. B could not endorse the bill to E and E could not as
such derive a good title to the bill. E cannot sue C. The bill was valid between the parties
thereto, i.e., A and B only and could not be valid between E and C. E's suit will be
(1938) 1 K.B. 4831.
dismissed [Hibernian Rank v. Gysin & Hanson
14. A gave R. Co. a promissory note payable "forty-five .... after date." Ten
months later the holder of the note filled in the blank space to read ''days". The holder
then sued A who pleaded that the note was not binding because when delivered it was
not complete in that it did not specify whether a payment was to be made forty-five days,
weeks, months or years after date. Field, R. Co. as original holders had authority to
complete the instrument by filling in the blanks so as to make it conform to the true
intention of the parties. Although this must be done within a reasonable time, a ten
months delay is not unreasonable between the original parties [Allen v. Rouseville
Cooperage Co.. 157 Va. 3551.
15. X and Y, husband and wife, have a joint account in a hank. The account can
be operated upon by either of them. The deposits in the account are usually made by X,
the husband and withdrawals are usually made by Y. the wife. The banker comes to
know that a garnishee order attaching X's money in the hank has been issued by the
court. X and Y order the banker to transfer the amount standing in their joint account to
current account of Y, the wife, in the same hank. The hank may transfer the amount to
the current account of Y, the wife. Joint account moneys cannot be attached under a
garnishee order, if the order is in the sole name, and here the order relates only to the
sole name of X (Hirschorn v. Evans (1938).
16. A by mistake draws a cheque payable to B. Who (toes not exist. The cheque is
negotiated by C by forged endorsement to D, who takes it in good faith and for value.
D can enforce payment of the cheque, as he is a bearer of the cheque, and his title does
not depend upon the forged endorsement, under which he would have been unable to
acquire any right to the cheque. When a cheque is drawn payable to a non-existing person,
the cheque may be treated as payable to bearer. The holder of a bearer cheque acquires
his title merely from possession of the cheque (Sec Bank of England v. Vagliano Bros.
1891-4 All. E.R.93).
A endorses the
17. A sells a radio set to M, a minor who pays for it by his cheque.
cheque to B, who takes it in good faith and for value. The cheque is d ishonoured on
 THE LAW OF NEGOTIABLE INSTRUMENTS 351

presentation. B can enforce payment of the cheque against A, but not against M who is
a minor, nor can A take any action against M. A minor incurs no liability by drawing,
indorsing or accepting a bill of exchange (a cheque is a bill of exchange), even if the bill
is given for necessaries. But the holder in due course can enforce it against other parties.
18. Rider signed a document in these tenns "In consideration of the loan offlOO
from Williamson, 1, Rider, agree to repay Williamson the sum oflOO on, or before.
31st December, 1956". held, this was not a promissory note because the option to pay
at an earlier date created an uncertainty or contingency in the time of payment (William-
son v. Rider 1962) 2 All. E.R.269).
19. B executed a pro-note in favour of A in 1967 in consideration of the price of
a buffalo purchased in 1966. Held, money due prior to the execution of the pro-note was
good consideration (Joseph: Mariano Santos Pirflo v. Aires Concocao Rodrignes, 1976
Goa 86
20. An instrument drawn in the form of a cheque but made payable to ''cash or
order" is not a cheque or a bull of exchange as the payee is not certain. (Cole v. Milsome
(1951)1 All ER 311.

26. See also Ram Nandan v. Kapil Dco Ramjce, 1951 Sc 455; Sluriniv.is Pansari v. Prasad Mehra,
1983 Pat. 321.
 Chapter XII

Law of Insolvency
PART 12-A

The Indian insolvency law, like the English law of bankruptcy, is purely the
creation of statutes. At present two statutes simultaneously cover the law of insolvency
in India, namely. (1) The Presidency Towns Insolvency Act, 1909, which applies to the
Presidency Towns of Bombay, Calcutta and Madras, (2) The Provincial Insolvency Act,
the two Acts are similar,
1920, which applies to the rest of India. Most of the provisions of
and therefore, the principles stated below are applicable both to the Presidency and
mofussil towns. Wherever there is a difference on any point it has been separately dealt
with.
In essence, there are five points of difference between the two Acts, namely, (1)
the constitution of courts, (2) the procedure to be followed from the date of the
presentation of the petition to the date of the order of adjudication. (3) the person in
whom the debtor's property is to be vested, (4) the doctrine of relation hack, and (5)he
machinery for investigating the debtor's conduct-
.Before dealing with the rules of the law of insolvency in India, it may be observed
that the tenos ''bankruptcy" and "bankrupt" as used in EngLish law, are synonymous
with the terms "insolvency" and "insolvent" as they are employed in India. In English
law, a bankrupt is a person who has committed an act of bankruptcy and who has been
adjudged a bankrupt. Such a person in India would be said to have committed an act of
insolvency and to have been adjudged an insolvent-

DEFINITION
The Indian Acts do not define the terns insolvency and insolvent. "Bankruptcy,"
says Blackstone, "is a proceeding by which, when a debtor cannot pay his debts or
discharge his liabilities or the persons to whom he owes money or has incurred Liabilities
cannot obtain satisfaction of their claims, the State, in certain circumstances, takes
possession of his property by an officer appointed for the purpose, and such property is
realised and distributed in equal prort ions among the persons to whom the debtor owes
money or has incurred pecuniary liabilities." An "insolvent" may he defined as a person
against whom an order of ad j udication has been passed.
OBJECTS OF INSOLVENCY LEGISLATION
Under the survival-of-the-fittest system society could ignore those who became
insolvent. However, or society is not willing to do so. It has accordingly provided a
system by which the honest debtor can, in substance, pay into court what he has, be
relieved of all unpaid debts, and start economic life anew. This system comprises
insolvensy laws. Thus, when a person is adjudicated insolvent his assets are taken over

I. Mulla on lnsolency, p. iii.

352
 LAW OF INSOLVENCY 353

by an officer of the court and distributed ratably among his creditors. After the distribu-
tion is complete, the unpaid debts (except certain specified debts) are cancelled and the
insolvent is allowed to engage in trade or service without any of his former obligations.
The creditors lose apart of their claims, the debtor gets fresh start in life. Says Blackstone
in this regard: "The laws of insolvency are made for the benefit of trade and are founded
on the principles of humanity as well as justice; and to that end they confer some
privileges both on the creditors and the insolvent or debtor.
It follows from the above that the objects of modern insolvency legislation are:
(a) To secure fair and equal distribution of available property among the creditors;
(b) To free the debtor from his debts, so that he can make a fresh start as soon as he
is discharged by the court;
(c) To enquire into the reasons for his insolvency, and so to deter people from rashly
incurring debts they cannot pay.
From the point of view of the society, the insolvent suffers from certain dir-
,qualifica:ions. The insolvent is disqualified from being (i) appointed a Magistrate, (ii)
elected to any office of a local authority, (in) elected for silting or voting as member of
any local authority. These disqualifications are removed only (a) if the order ofadjudica-
lion is annulled, or (b) if he obtains from the Court an order of discharge. In addition to
these disqualifications the Companies Act, 1956 provides that an insolvent cannot be
director or manager of a company.
WHO MAY BE ADJUDGED INSOLVENT
In genera], any person capable of entering into a contract may be adjudged an
insolvent. But before he can be adjudge4n insolvent, two conditions must be satisfied:
(1) he must be a debtor, and (2) he must have committed an "Act of Insolvency", as
defined in the Acts.
The term debtor, as used in the Insolvency Acts, has a limited meaning and
includes persons who are subject to the laws of India. It does not mean the debtor all the
world-over. Debtor means a person who has made himself amenable to adjudication but
who has not yet been adjudicated.
FOREIGNERS
A foreigner cannot be adjudged insolvent in India unless he commits an act of
insolvency in India during his personal residence here. But if he commits an act of
insolvency during his residence in India, he can be adjudged insolvent, even though he
may absent himself at the time of the petition.
MINORS
In India, a minor, being absolutely incompetent to contract, is not 'debtor' within
the meaning of the Acts. Therefore, a minor can never be adjudged insolvent either on
his own petition or on the petition of a creditor, even though the debt was contracted in
the course of a trade carried on by him, or arose in connection with necessaries supplied
to him, as minor is never personally liable in India. If a minor is adjudged insolvent the
adjudication must be annulled.
LUNATICS
A lunatic cannot commit an act of insolvency involving intention, e.g., transfer his
property with intent to defeat his creditors, and cannot, therefore, be adjudged insolvent-
But he ma, it seems, be adjudged insolvent if he contracted the debt and committed the
act of insolvency whilst sane. The question is, however, not yet decided in India and
must be regarded as open.
354 MERCAN1IIE LAW

PARTNERS: FIRM
A creditor may present a petition of insolvency against any one partner of the firm
without joining the others, or he may present ajoint petition against two or more of them
A joint petition can be presented only if each of the partners has jointly or severally
committed an act of insolvency. Under Sec. 99 of Pre-Ll. Act an adjudication order can
be made against firms in the lirm name, and such an order operates as if it were an order
made against each of the partners. The Supreme Court has held in Mukan4 La! v.
P. Singh. 1968 S.C. 1182 that similar power exists under the Pro. I. Act also as regards
adjudication of firms, as Sec. 79 (2) (c) of that Act provides for rules being madq by the
High Court ''for the procedure to be followed where the debtor is a firm".

JOINT HINDU FAMILY

The members of a joint Hindu family may be adjudged insolvent on a single
petition by a creditor, if they are personally liable on ajoint debt and have committed a
joint act of insolvency, such as a joint transfer of family property in favour of a creditor
by way of fraudulent preference. Where the business of the family is carried on by the
Karla or manager and debts are contracted by him in the course of the business, the other
members are not personally liable for the debts and cannot be adjudged insolvent, nor
can they be adjudged insolvent on a decree obtained against them by a creditor for their
father's debts. A minor member of a joint Hindu family can in no case be adjudged an
insolvent even if he has taken active part in the business.
JOINT DEBTOR
Where ajoint debt by two or more persons is not satisfied, the creditor may present
a single petition against the joint debtors, provided that some act of insolvency has been
committed by each of them, or jointly by all.

COMPANIES
No insolvency petition can be presented against any corporation or association or
company registered under any enactment. Thus, a company registered under the Com-
panies Act. 1956, cannot be made insolvent; it must be wound up under that Act.

.CONVICTS
A convicted felon can be adjudged bankrupt.
DECEASED PERSONS
A deceased person cannot be made insolvent on proceedings instituted after his
death. His estate may, however, be administered in insolvency. When a debtor dies after
the presentation of the petition the proceedings will, unless the Court otherwise orders,
be construed as if he were alive.

ACTS OF INSOLVENCY

We have seen that a person cannot be adjudged insolvent unless he is a "debtor"

within the meaning of the inslovency law AND has committed an act of insolvency. An
act of insolvency is something done or suffered by a debtor which gives the Court
jurisdiction to make .m order of adjudication.
A debtor commitsan act of insolvency in each of the following cases, namely:
(a) if, in India or elsewhere, he makes a transfer of allor subs: antially all his property
to a third person for time benefit of his creditors generally.
 LAW OF INSOLVENCY 355

The question under this clause is not that of intention but of the transfer of the bulk
of the property; and where the whole or substantially the whole of the debtor's property
has been transferred, even though honestly as for the benefit of creditors, it will amount
to an act of insolvency. The transfer becomes void if the debtor is adjudged insolvent
within 3 months of transfer.
(b) If, in India or elsewhere, he makes a transfer of his properly, or any part thereof
with the intent to defraud or delay his creditors.
This clause relates to transfer of whole or 'any part' of debtor's property made
with the intention of defeating or delaying creditors, and the intention is to be inferred
from surrounding circumstances. The transfer becomes void upon the passing of the
order of adjudication.
(c) If, in India or elsewhere, he makes any transfer of his properly, or any part thereof,
which would, under this or any oilier enactment for the time being in force, be
void as afraudulent preference if lie were adjudged an insolvent. -
The word preference means favouring one creditor to the detriment of others. If
the transfer is made voluntarily in order to prefer one creditor it is fraudulent preference.
(d) If with intent to defeat or delay his creditors-
(i) he departs front or remains out of India;
(ii) he departs from his dwelling house or usual place of business or otherwise
absents himself,
(iii) he secludes It so as to deprive his creditors ofthe means of cornmunical-
ing with lung.
Under this clause it is an essential feature of an act of insolvency that the act should
be done with the intent to defeat or delay the creditors generally, and not only a particular
creditor. The debtor's intention can be inferred from surrounding circumstances.
(e) Pro. I. Act: If, any of his property has been sold in execution of the decree of any
court for the payment of money.
Pre-t. I. Act: If. any of his property has been sold or attached for a period of not
less than 21 days in execution oft/ic decree of any Court for the payment of money.
(1) If he petitions to be adjudged an insolvent.
(g) If he gives notice to any of his creditors that he has suspended, or that he is about
to suspend, payment of/us debt.
The notice conveying a clear impression that the debtor has no intention to pay his
debts may be oral or in writing. Mere service of notice by the Insolvency Court informing
the creditors of the date of hearing of debtor's petition cannot amount to notice of
suspension ofpayrnent.
(h) If he is imprisoned in execution of the decree of any Court for the payment of
money.
Explanation —The act of an agent may be the act of the principal (even though
the agent has no special authority to commit the act).

(i) In Maharash(ra State only: If, after a creditor has served an "insolvency notice"
on him in respect of any decree or order for payment of money, he does not, within
the period specified in the notice, pay the decretal amount or give sufficient
security for the payinentof the same.

PROCEDURE

There are four stages in the process by which a debtor becomes insolvent and
ultimately obtains his discharge, namely-
1. presentation of a petition either by the debtor or by the creditor;
356 MERCANTILE LAW

2. appointment of an Inierirn Receiver (at the Court's discretion) for the purpose of
protecting the property while the debtor's affairs are inquired into and the creditors
as a body are given opportunity of expressing their wishes;
3. adjudication, when the debtor is declared insolvent and he is divested of his
property which is realised for distribution among his creditors; and
4. discharge when the insolvent is released from all liabilities which could rank
against his estate in the insolvency.

PETITION
To proceed against a person in insolvency it is essential that an application by way
of petition must be presented to the Insolvency Court. To avoid frivolous petitions which
could not but prejudice the mercantile community, it has been provided that the debtor
or creditor can present a petition subject only to specified conditions in respect of
jurisdiction of the Court and qualifications of the petitioner.2

WHO MAY PRESENT PETITION

An insolvency petition may be presented either by the debtor himself or by a
creditor. The petitioning debtor is the person who can be adjudged an insolvent.
PETITIONING CREDITOR
A creditor is one who can compel the performance of an obligation by another
person called the debtor. Therefore, any person who has a right to take legal proceedings
for the recovery of a debt may present an insolvency petition against the debtor.

SECURED CREDITOR
A secured creditor does not fall within the meaning of the word creditor as used
in the Acts, and as such cannot petitlJn for insolvency. He stands outside the insolvency.
But if he intends to present an insolvency petition he must place himself in the position
of an unsecured creditor either by giving up his security for the benefit of the general
body of creditors, or valuing it and deducting its value from his total dues claiming for
the balance as an insecured creditor.
Jurisdiction—The insolvency petition can be presented only in an Insolvency
Court within the jurisdiction of which the debtor originally resident carries on business
personally or through an agent or personally works for gain or if he is arrested or
imprisoned in execution of a decree of Court for non-payment of money where he is in
custody. In the case of a petition by or against a partnership firm, the firms should have
carried on business within a year prior to the date of petition within those limits (Sec. II).
In the Presidency Towns the insolvency jurisdiction is conferred on the High Courts of
Bombay, Calcutta and Madras. In the rest of India governed by the Provincial Insol-
vency Act the insolvency jurisdiction is primarily conferred on the District Courts,
but the State Government may by notification in Official Gazette invest any Court
subordinate to a District Court, and such Court including Small Cases Court will have
insolvency jurisdiction concurrent with its ordinary jurisdiction. The Court having
insolvency jurisdiction shall have full powers to decide all questions of title and priority
of any nature whatsoever. The jurisdiction of the Insolvency Court is sufficiently wide
to decide all questions that may come before it, and in fact, it is co-extensive with the
Civil Court so that it may make a complete distribution of the property. But the
Insolvency Court has no jurisdiction of realising debts due to the insolvency. The Court
is managing the estate of the insolvent. It has power to inquire into claims against the

2. Added by Bombay Act XV of 1939.

 LAW OF INSOLVENCY 357

estate, and not into claims by the estate. Thus an Insolvency Court cannot pass a money
decree against a third person.
CONDITIONS OF CREDITORS' PETITION
The conditions which must be fulfilled before a creditor can present an insolvency
petition against a debtor are:
1. the debt owing by the debtor to the creditor, or if two or inure creditors join in the
petition, the aggregate amount of debts owing to such creditors, amounts to Rs.
500 or more, and
2. the debt is a liquidated sum payable either immediately or at some certain future
time, and
3. an act of insolvency has bcercornmitted by the debtor, and
4. the act of insolvency on which, the petition is grounded has occurred within three
months before the presentation of the petition.
A creditor can present a petition only if his debt was in existence at the time of the
alleged act of insolvency, and also at the time of the presentation of the petition The debt
must continue to exist throughout the hearing of the petition and down to the order of
adjudication. The debt most he owing by the debtor personally in his own tight and not
in any other capacity, e.g.. as an executor. The debt must not be less than Rs. 500 at the
date of the act of insolvency, but this amount may be due to one or more petitioning
creditors. The debt must be a liquidated sum, i.e., a certain and ascertained sum
admittedly due, and certainly payable to the person who presents the petition. For
example Rs. 500 with or without interest at a certain rate for a certain time is a definite
sum and is a liquidated sum. But a claim for mesmie profits or for damages based on tort
or breach of contract, is not a liquidated soot.
A creditor's petition must allege the specific act of insolvency oil it is based,
and that act of insolvency must have occurred within three calendar months before the
presentation of time petition. The three months' period is a condition precedent to the
filing of a petition and will not be extended in any case. (Harnarn Singh v. Balai Kurnar
Sin/ia, 1975 Pat, 259).
A secured creditor cannot present a petition unless he places iiiinselfin the position
of an unsecured creditor, either by giving up his security for the benefit of his fellow
creditors, or by giving an estimate of the value of his security which may be deducted
from his dues and then claiming for the balance as an unsecured creditor.
CONI)IFIONS OF DEBTOR'S PETITION
A debtor can present an insolvency petition only if he is unable 10 pay his debts,
AND an y of the three conditions given below is fulfilled—
(a) his debt amounts to Rs. 5(X);
(b) he is under arrest or is in prison in execution of a money decree;
(c) there is subsisting an order of attachment against his property in execution of such
a decree.
Inability to pay his debt is a condition precedent to the presentation of a debtor's
petition. The debtor's petition must allege that he is unable to pay his debts and he must
furnish a priniafacie grounds for his inability to pay. The expression "unable to pay
hisdebt" means that the market value of the realizable assets is less than the total amount
of the debts.
An insolvency petition, whether presented by the debtor or by a creditor, cannot
be withdrawn without the leave of the Court; and the Court should not allow a withdrawal
without giving notice to other parties and unless it is satisfied that it will not be
358 MERCANTILE LAW

detrimental to other parties. The Court cannot allow withdrawal of the petition after the
order of adjudication has been made. When two or more insolvency petitions are
presented against the same debtor, or where separate petitions are presented against joint
debtors, the Court may consolidate them, on such terms as it thinks fit.
EFFECT OF DEBTOR'S DEATH ON INSOLVENCY PROCEEDINGS
If a debtor by or against whom an insolvency petition has been presented dies, the
proceedings in the matter shall, unless the Court otherwise ordeis, be continued as if he
were alive, so far as it may be necessary for the realisation and distribution of the properly
of the debtor. As a result the death of the debtor does not interfere with the insolvency
proceedings; and where the property has vested in the Official Receiver or Assignee
after adjudication, the death of the insolvent does not divest the Receiver or Assignee
of the property. But if an insolvent dies before obtaining a discharge, he is automatically
discharged.
PROCEDURE ON ADMISSION OF PETITION
An insolvency petition on its presentation is treated in the same manner as an
ordinary plaint in a civil suit. Where the petition is admitted the Court shall fix a date
for its hearing, notice whereof must be given to the other party. There is some difference
in the procedure on admission of the petition between the law tinder the two Indian Acts.
Under the Pre-t. Act, where the Court is satisfied with the proofs furnished by the
creditors as to the acts of insolvency or as to the debts due to the petitioning creditors,
or as to the instability of the debtor to pay his debts, it will puss an order adjudging the
debtor an insolvent. The Court may appoint all Receiver of the property of the
debtor to take possession of it pending the petition and before an order of adjudication,
if it is satisfied that such an appointment is necessary for the protection of the estate.
Under the Pro. I. Act, the Court, when making an order admitting a creditor's
petition may and where the debtor is the petitioner ordinarily must, appoint an inierim
Receiver of time property of the debtor or any part thereof. The interim Receiver will
take immediate possession of the property of the debtor and exercise such powers as
conferred by the Court. An Interim Receiver does not enjoy all the powers of an Official
Receiver appointed after adjudication. The property does not vest in him unless the
Court expressly makes an order to that effect. The Official Receiver or Assignee is
appointed for the purpose of realisation of the estate, while an Interim Receiver is
appointed for the pmotection of the estate for the general body of creditors. The Interim
Receiver may be appointed by the Court any time before adjudication.
INTERIM ORDER AGAINST DEBTOR
At the tunic of making an order admitting the petition or at any subsequent time
before adjudication the Court may either of its own motion or on the application of any
creditor make one or more of the following orders, namely-
1. order the debtor to give reasonable security for his appearance until final orders
are made upon the petition and direct that, in default of giving such security, he shall he
detained in the civil prison;
2. order the attachment by actual seizure of the whole or any part of the property
in the possession or under the control of the debtor, other than such particulars (not being
his books of account) as are exempted by the Civil Procedure Code or by any other
enactment from liability to attachment and sale in execution of a decree;
3. order a warrant to issue with or without bail for thç arrest of the debtor, and
direct either that he is detained its civil prison until the disposal of the petition, or that he
he released on such terms as to security as may be reasonable and necessary:
 LAW OF INSOLVENCY 359

• Provided that an order under ci. (2) or ci. (3) shall not be made unless the Court is
satisfied that the debtor with intent to defeat or delay his creditors or to avoid any process
of the court:
(I) has absconded or has departed from the local limits of the jurisdiction of the Court,
or is about to abscond or to depart from such limits or is remaining outside them,
or
(ii) has failed to disclose or has concealed, destroyed, transferred or removed from
such limits, or is about to conceal, destroy, transfer or remove from such 1imiIs,
any documents likely to be of use to his creditors in the course of the hearing or
any part of his property other than such particulars as aforesaid.
DUTIES OF DEBTOR UNDER P.I. ACT
Sec. 22 of the Act lays down certain duties which the debtor must perform before
the order of adjudication, and provides that failure on his part to do so will render him
liable to imprisonment which may extend to one year. The debtor must—
(a) as soon as the insolvency petition is admitted produce all his books of account;
(b) at any time thereafter give inventories of his properly, lists of his creditors and
debtors and of the debts due to and from him respectively;
(c) submit to such examination in respect of his property or creditors as may be
required by the Court.
(d) attend before the Court or Receiver as and when required;
(e) execute such instruments and do all such acts and things in rclatiomi to his property
as may be requfrcd,y the Court or Receiver.
These duties are cast upon the debtor when his petition is admitted. Where a
creditor is the petitioner, the Court must not ask the debtor to perform these duties until
the petitioning creditor or creditQrs have established their right to present the petition,
as the debtor cannot possibly be aware of the admission of a creditor's petition until
notice thereof has been served on him. Where the debtor is under arrest or detention in
execution of a money decree, the Court may, either at the time of admitting the petition
or at any subsequent time before adjudication, order his release.
HEARING OF THE PETITION
At the hearing of the petition the Court shall require proof (a) that the creditor is
entitled to present the petition, and (b) that the debtor has been served with notice of
'order admitting the petition. In order to be able to present the petition the creditor must
prove that (i) there subsists a relationship of creditor and debtor, (ii) the debtor is unable
to pay the debt, (iii) the debt is a liquidated sum and amounts to Rs. 500 or more, and
(iv) the debtor has committed an act of insolvency within three months of the presenta-
tion of the petition. The Court shall also examine the debtor, if he is present, as to his
conduct, dealings and property iii the presence of such creditors as appear at the-hearing.
If the Court is not satisfied with any of the above it shall dismiss the petition, and may
award compensation up to Rs. 1,000 to the debtor, if the creditor's petition was
frivolous or vexatious. The Court may also dismiss, the petition if the debtor satisfies it
that he is able to pay his debts. Similar examination of the debtor, called the Public
Examination, is held by the Court after the order of adjudicaton but before discharge
under the Pre-t. Act.
In the case of a petition by a debtor, he has to furnish apri'nafacie proof that he
is entitled to present the petition. For this purpose the debtor must show that he is un,ihl
to pay his debts, and either (i) his debts amount to Rs. 500 or (ii) he is under arrest or iii
prison mnexecution of money decree, or (iii) an order of aUachment is subsisting against
his property. If the debtor has no right to present the petition it shall be dismissed.
360 MERCANTILE LAW

ORDER OF ADJUDICATION AND ITS EFFECTS

If the Court is satisfied with the proofs and does not dismiss the petition, it shall
make an order of adjudication and shall specify in such order that period within which
the debtor must apply for his discharge. The Court may, however, on sufficient cause
being shown, extend the period of the application for discharge. The Orderof Adjudica-
tion is an order whereby the debtor by or against whom an insolvency petition was
presented has been legally found by the Court to be unable to pay his debts. The Effect
of this order is that (i) the whole of the insolvent's property vests in the Court or a
Receiver appointed by the Court, or the Official Assignee (under the Presidency- Towns
Act), and becomes divisible among the creditors; (ii) the insolvent is deprived of all
power to enter into transactions which will hind his creditors in respect of his property.
After adjudication only the Receiver or Assignee can deal with the property, and every
transaction by the insolvent is void against the Receiver or Assignee; (iii) the insolvent
is disqualified from being appointed IC) or holding certain offices; (IV) the dchkr is
released from his liabilities so that no creditor of his can, pending the insolvency
proceedings, have any remedy against the property in respect of any debt provable in
insolvency or commence any suit or oilier legal proceedings, except with leare of the
Court unless the creditor is a secured creditor who intends to realise his security; (v) the
insolvent must help the Receiver or Assignee in the realisation of his property and the
distribution of the proceeds amongst his creditors; (vi) any suit pending before a Court
may, on proof that an order of adjudication has been made, be stayed by the Court (not
the Insolvency Court); (vii) the order will relate hack to, and take effect from, the
commencement of insolvency. The right of a secured creditor to realise or otherwise to
deal with his security is unaffected by the order of adjudication; and he can commence
a suit to realise his security without the leave of the Insolvency Court. The Order of
Adjudication operates as a statutory Liinsfer to the Official Assignee of all the property
of the insolvent in India, whether movable or immovable (Official Assignee, Bombay v.
Registrar. Small Causes 37 I.A. 86). As regards foreign property, the better opinion is
that movables will vest in the officer; but immovable property will not so vest, unless
foreign law pennils it (Yokohama Specie flank v.Curlender.s & Co. 43 Cal. L. J. 436).
DOCTRINE OF RELATION BACK
From the above it is clear that until an order of adjudication is made there is no
insolvency, and the debtor retains the property. In other words, no vesting takes place
until this order; but once the order is made the property vests in the Receiver or
Assignee from the date of the commencement of the insolvency and not the order of
adjudication. The title of the Receiver or Assignee is by a legal fiction taken to relate
back to the commencement of the insolvency which is always some anterior date. The
dates of commencement of insolvency, however, differ under the two Acts. Under the
Provincial Insolvency Act, an order of adjudication relates back to the dote of the
presentation of the petition oil it is made, i.e., the insolvency commences with the
presentation of the petition, if the order is made :Sec. 28 (7) of the Act reads ; 'An
order of adjudication shall relate hack to, and take effect from, the date of the presenta-
tion of the petition on which it is made," The effect of sub-sections (2) and (7) is that
the properties of the insolvents wherever they may have been and whoever may have
been in possession of them, automatically vest in the Court or the Receiver, if one is
appointed by the Court. Under the Presidency-Towns Act, which follows the English
Bankruptcy Act, the order of adjudication relates back to the first available act of
insolvency and it is from that date the insolvency is deemed to commence. Thus, the title
of the Receiver relates hack to and commences at the date of the presentation of the
insolvency petition, and that of the Assignee at the time of the first available act of
 LAW OF INSOLVENCY 361

insolvency committed within three months before the presentation of the insolvency
petition. The effect of the doctrine of relation hack is that any charge created by a
decree or otherwise or any other transaction in relation to the property after the date of
the commencement of the insolvency is not binding on the Receiver or Assignee.
PROTECTION ORDER
A Protection Order means an order by the Court prohibiting the arrest of an
insolvent debtor in execution of a decree for the payment of money. A debtor on being
adjudged an insolvent may apply to the Court for protection and the Court may in its
discretion, make an order for protection of the insolvent from arrest or detention. If he
is in prison or under arrest, his release may be ordered. The protection which the Acts
extend to an insolvent against arrest or attachment or sale of his property can be enjoyed
by him only in respect of provable debts. No protection with regard to debts due to the
Union of India can be granted. The Court may order the arrest of an insolvent, if it is
satisfied that he has deliberately absconded with intent to avoid any obligations imposed
on him.
SPECIAL MANAGER
Sec. 19 of the Presidency-Towns Act provides that if in any case the Court, having
regard to the nature of the debtor's estate or business or to the interest of the creditors
generally, is of the opinion that a special manager of the estate or business ought to be
appointed to assist the Official Assignee, it may appoint a manager thereof accordingly
to act for such time as the Court may authorise, and to have such powers bf the Official
Assignee as may be entrusted to him by the Official Assignee or as the Court may direct.
The special manager must furnish security and keep and tender accounts in such manner
as the Court may direct, and will receive such remuneration as the Court may determine.

EFFECT OF INSOLVENCY ON ANTECEDENT TRANSACTIONS

EXECUTION CREDITOR
Where execution of a decree has been issued against the property of a debtor, no
person shall be entitled to the benefit of the execution against the Official Receiver or
Assignee except in respect of assets realised in the course of execution by sale or
otherwise, under the Provincial Insolvency Act, before the (late of the admission of the
petition, and under the Presidency-Towns Insolvency Act, before the date of the order
of adjudication and before he had notice of the presentation of an insolvency petition.
Any creditor or anyone interested may give notice to the executing Court of the admission
of the insolvency petition or of the order of adjudication, as the case may be, whereupon
the Court must, on application, direct the property, if in the possession of the Court, to
be delivered to the Official Receicr or Assignee, but the costs of the execution will be
a first charge on the property so delivered. The Provincial Insolvency Act also pfovides
that the costs of the suit in which the decree was made are a first charge on the property
so delivered. If, however, the property has been sold in execution of the decree any person
who in good faith purchased the property would acquire a good title against the
Official Receiver or Assignee. Nothing stated above affects the rights of secured
creditors.
AVOIDANCE OF VOLUNTARY TRANSFER
Every transfer of property which is not made, (i) before and in consideration of a
marriage, or (ii) to a purchaser or incumbrancer in good faith and for valuable considera-
tion, shall be void against the Official Receiver or Assignee 9 if the transferor is adjudged
insolvent on a petition presented within two years of the date of the transfer, and under
362 MERCANTILE LAW

Presidency-Towns Act, within two years after the date of the transfer. The effect of this
difference in lime in the two Acts is that under the Presidency-Towns Act the transfer
must have been made within two years next before the date of the commission of the
first available act of insolvency, and under Provincial Insolvency AcL it must have been
made within two years next before the presentation of the insolvency petition. In the
latter case, a voluntary transfer, if made within two years before the date of the
presentatOfl of the insolvency petition, may he avoided, even if the transfer was made
more than two years before the date of the order of adjudication. The onus of proving
that a particular transaction was not entered into in good faith and for valuable considera-
tion is on the Official Receiver, unless the transferee knew that the transferor was in
insolvent circumstances at the lime of the transfer.
AVOIDANCE OF I'RAUD(;LENT PREFERENCE
In order to protect the interests of the whole body of creditors, the Acts provide
for the avoidance of fraudulent preference by the debtor of some creditors over others.
The Acts provide that every transfer by a debtor of his property, every payment made,
every obligation incurred and every judicial proceeding affecting his property taken or
suffered by him, isfraudulenl and void as against the Official Receiver or Assignee and
shall be annulled by the Court, provided that the following five conditions are fulfilled.
namely :-
I. the debtor was at the time of the transfer or payment unable to pay from his own
money his debts as they became due:
2. the transfer or payment was made in favour of creditor;
1. the transfer or payment in fact prefers one creditor to another;
4. the transfer or payment was made with a view to giving such creditor a preference
over other creditors; and
5. the debtor has been adjudged insolvent on apetition presented within three months
after the date of the transfer of payment.
This rule as to fraudulent preference will not affect the rights of any person who
in good faith and for valuable consideration has acquired a title through or under a
creditor of the insolvent.
PROTECTED TRANSACTIONS
Subject to the provisions of the Insolvency Acts as to executions., voluntary
transfers, and fraudulent preferences, discussed above, nothing in the Acts invalidates
in the case of an insolvency:
(a) any payment of money by an insolvent to a creditor;
(h) any payment of money or delivery of property to the insolvent;
(c) any transfer by the insolvent for valuable consideration; or
(d) any contract or dealing by or with the insolvent for valuable consideration;
Provided that (i) any such transaction takes place before the date of the order of
adjudication. and (ii) the person who deals with the debtor has not at the time of any
such transaction notice of the presentation of any insolvency petition by or against the
debtor. It is to be noted that the protection accorded by the Acts extends only to bona
fide transactions—transactions which are fair and honest.
INSOLVENT'S SCHEDULE
Under Sec. 24 of the Prsidency-Towns Act an insolvent is required to prepare and
submit to the Court a schedule verified by affidavit in prescribed form within 30 days

3. Snkantiah Setty v. A. Basha Sibeb& Co. 1958 Mys. 35.

 LAW OF INSOLVENCY

of the order on the petition of the debtor or within 30 days of the service of the order
passed on the petition of a creditor. If the insolvent fails to prepare the schedule on the
prescribed form the Official Assignee may prepare it and the insolvent maybe committed
to civil prison.
According to Sec. 33 of the Provincial Insolvency Act the Schedule of Creditors
is to be framed by the Court on its satisfying itself as to the validity of the claim.
DUTIES OF INSOLVENT
Sec. 3 of the Presidency-Towns Insolvency Act enumerates the du'es of the
insolvent as follows :
1. The insolvent must, unless prevented by sickness or other sufficient cause, attend
any meeting of his creditors which the Official Assignee may require him to attend
and must submit to such exantinatton and give such information as the meeting
may require.
2. The insolvent must
(a) give such inventory of his property, such lists of his creditors and debtors,
and of the debts to and from them respecttvely
(b)- submit to such examination in respect of his property or his creditors
(c) wait at such times and places on the Official Assignee or special manager,
(d) execute such powers-of-attorney, transfers and instruments; and
(e) generally, do all such acts and things in relation to his property and the
distribution of the proceeds amongst his creditors, as maybe required by the
Official Assignee, special manager or the Court
3. The insolvent must aid, to the iitmnostof his power, in the realisationof his property,
and the distribution of the proceeds among his creditors.
4. If the insolvent wilfully fails to perform any of the duties mentioned above, he is
guilty of Contempt of the Court and liable to be punished for it.
5. He will be guilty of Contempt of the Court if he fails to deliver possession to the
Official Assignee of any part of his property which is divisible among his creditors,
even after discharge.
Under the Provincial Insolvency Act these duties are provided in two sections. The
duties before adjudication are given in Sec. 22 (discussed on page 355), and those after
adjudication in Sec. 28, as given below :-
I. The prime duty of the insolvent is to aid the Receiver in the realisation of his
property and the distribution of the proceeds among the creditors.
2. He must appear for examination though he may reside more than 20() miles away
front the Court-house.
3. He must give all information he can to the Official Receiver and supply him with
lists of his properties and liabilities, his creditors and debtors.
4. He must do everything that the Official Receiver may reasonably require of him
or the Court may order hint to do in relation to his property.
5. If he wilfully fails to perform any of the duties or fails to deliver up possession of
any part of his property which is divisible among his creditors, he shall be
punishable with imprisonment extending to one year.
PUBLIC EXAMINATION
Under the Presidency-Towns Insolvency Act, the Court fixes a date for holding a
public examination of the insolvent. The insolvent must, on the appointed date, attend
court and answer all questions put to him by the Court. the Official Assignee and any
creditor. The object of the examination is to determine the causes which led to insolven-

564 MERCANI11E LAW

cy. The Court may dispense with the holding of the public examination if the insolvent
is a lunatic or a parthuiochin woman or if he or she is suffering from some disease or
disablement.
Under the Provincial Insolvency Act the Court must examine the debtor while the
petition for adjudication is being heard by the Court. During such examination the
creditors present may put questions In the debtor.

ANNULMENT OF Al)j('nl(:ATION

There are four cases in which an adjudication may be annulled by the Court,
namely
A. (i) where in the opinion of the Court a debtor ought not to have been adjudged
insolvent, or
(ii) where it is proved to the satisfaction of the Court that the debts have been
paid in lull, or
(iii) where an adjudication is made on a debtor's petition, who did not owe
Rs. 500 or more, or
(iv) where an adjudication is made without leave of the Court, when such leave
Wa-s flCCCS5iry.
Thus, an adjudication order in ad e against a i nun r, or against a debtor who was
deceased at the time of the petition, may he annulled. IL maybe annulled where 100 paise
in the rupee, together with interest UI) to the date of payment, have been paid.
B. Where concurrent proceedings are pending in another Court.
A debtor can be adjudged insolvent by two or more Courts, e.g., by the Court of
the place where he resides and by the Court of the place where he carries on business.
The power to annul is discretionary and if a debtor is adjudged insolvent by two Courts.
either Court may annul its OWN order of adjudication or stay its proceedings, if the
assets can he more conveniently administered by the other Court.
C. Where the Court approves the proposal ni the insolvent for a compromise or a
scheme of arrangement.
D. Where the insolvent absents himself on the dale of the hearing of his application
for discharge. or does not apply for his discharge within the period specified by
the Cow t.
Notice ni every order annulling adjudication must be published in the Official
Gazette and in such other manner as may he prescribed.
EFFI'CJ' 0l ANN ULMFN'r
The effect oi annulment depends on the terms of the order made by the Court while
annulling the adjudication. The order vanes according to the nature of the case. Where
an adjudication is annulled, all sales and dispositions of property and payments duly
made, and all acts theretofore done, by the Court or Receiver or Assignee shall be valid;
but subject as aforesaid, the property of the insolvent shall vest in such persons as the
Court may appoint, or in default of such appointment, shall revert to the debtor to the
extent of his right or interest therein on such conditions (if any) as the Court may by an
order in writing declare.
In the case of annulment for default to apply for discharge or appear at the hearing
of the application for discharge, the Court may recommit the insolvent to custody where
he has been released by the order of the Court, and all processes against his person in
force at the time of his release shall be deemed to be in force against him.
 LAW OF INSOLVENCY 365

COMPOSITION AND SCHEME OF ARRANGEMENT

A debtor who is unable to pay his debts in full may arrange his affairs with his
creditors without filing a petition for his own adjudication. Arrangements between
debtors and creditors are known as composition agreements. A composition has been
defined as an agreement between compounding debtor and all or some of the creditors
by which the compounding creditors agree with the debtor and (expressly or impliedly)
with each other to accept from the debtor payment of less than the amounts due to them
in full satisfaction of their claims. But a debtor cannot settle with his creditors out of
Court after he has been adjudged an insolvent. That can be done only by a composition
or scheme as provided by the two Acts. Therefore, an insolvent may at any time after
the making of an order of adjudication submit proposal for a composition in
satisfaction of his debts or a proposal for a scheme of arrangement of his affairs
whereupon the Court will fix a date for the consideration of the proposal and issue
notice to all his creditors to attend the meeting on the date so fixed. If, the proposl being
placed before the meeting of creditors, a majority in number and three-fourths in value
of the creditors whose debt.s are proved and who are present in person, or by pleader
under the Provincial Insolvency Act, or by proxy or a letter addressed to the Official
Assignee under the Presidency-Towns Act, resolve to accept the proposal and the Court
approves it, the satoe is deemed to have been duly accepted by all the creditors. The
proposal for composition is not absolutely final. It is really a basis of negotiation with
the creditors, and may be amended at the meeting of the creditors at which it is
considered, but it must satisfy cisc Court as calculated to benefit the general body of
creditors.
If, in the opinion of the Court, the tenns of the proposal are not reasonable or are
not calculated to benefit the general body of creditors, the Court must refuse to accept
the proposal. The Court in deciding one way or the other will consider the report of the
Official Receiver or Assignee and hear any objections which may be made by or on
behalf of any creditor. The Court must also refuse to accept the proposal, if the
circumstances surrounding the debtor's insolvency are such that it would have no power
to grant an unconditional discharge, unless it provides reasonable security for payment
of not less than 40 paise in the rupee on all the unsecured deh.s against the debtor's
estate. Where the Court approves the proposal, the terms must be embodied in the order;
and the order of adjudication must be annulled. Thereafter, the debtor will have power
to deal with his estate by realising it in ordinary course of business for the purpose of
enabling himself to pay the composition.
ANNULMENT OF COMPOSITION
If default is made in the payment of any instalment due in pursuance of the
composition or scheme, or it appears to the Court that the composition or scheme cannot
proceed without injustice or undue delay, or that the approval of the Court was obtained
by fraud, the Court may, if it thinks lit, re-adjudge the debtor insolvent and annul the
composition or scheme but without prejudice to the validity of any transfer or
payment duly made or of any thing duly done under or in pursuance of the composition
or scheme. After such annulment, the creditors can prove for their original debts and not
simply what would have been-due under the composition. The annulment will also
discharge a surety for composition for liability.
DEBTS PROVABLE IN INSOLVENCY
Under both Acts: All debts and liabilities, present or future, certaift or contingent,
to which the debtor is subject when he is adjudged an insolvent, or to which he may
become subject before his discharge by reason of any obligation incurred before the date
366 MERCAtffELE LAW

of such adjudication, are deemed to be debts provable in insolvency. Under the wide
words of the Acts all kinds of debts or liabilities of the insolvent can be proved, except
those enumerated below.
Examples of provable debts—The following have been held as debts provable
in insolvency; (a) damages for breach of contract; (h) damages for breach of trust; (c)
annuities for life; (d) a lessor can prove for loss of rent or any other liability in respect
of a subsisting lease; (e) an uncalled amount on shares held by the insolvent; (f) the
liability of a member of a Co-operative Society in the event of its being dissolved is a
debt provable in insolvency; (g) a contingent liability on a contract to indemnify; (h) the
balance of a loan under the decree of the court; (i) on the insolvency of a surety, the
creditor can prove for the whole amount due, even if since that date he has received sums
on account from the principal debtor, or co-surety provided the creditor does not receive
in all more than 100 paise in the rupee.
DEBTS NOT PROVABLE
The following debts are not provable under both Acts: (i) debts incapable of being
fairly estimated; (ii) demands in the nature of unliquidated damages arising otherwise
than by reason of a contract or breach of trust.
In addition to these two debts, according to Sec. 46 (I) of Pre-t. Act, debts or
liabilities contracted by an insolvent from a person having notice of the presentation of
an insolvent petition by or against a debtor are not provable.
Examples of not provable debts—(a) Claims for damages for a tort; (b) claims
for damages in respect of fraud; (c) a debt contracted after presentation of petition but
before order of adjudication or after this order: (d) illegal debts and debts against the
policy of insolvency law (e.g., agreement to pay for not opposing discharge); (e) debts
barred at the commencement of insolvency.
PROOF OF DEBTS
The method of proof, as laid down in Sec. 49 of the Provincial Insolvency Act, is
that the creditor must deliver, or send by a registered letter, to the Court, an affidavit
verifying the debt. The affidavit must contain particulars of the debt and specify the
vouchers, if any, by which they can he substantiated. The Court, after hearing the parties
and after considering the report of the Official Receiver, may admit the proof or reject
it. The Court will then frame a schedule of creditors containing the names of all those
creditors who have proved their debts, and the amount of the respective debts. Any
creditor may challenge the validity of a debt set up by another creditor and the Court
must decide the question. It cannot delegate to the Official Receiver the power to frame
the Schedule, unless the High Court has especially empowered it so to do under Sec. 80.
A creditor who has not proved his debt when the schedule was framed may tender proof
at any time before the discharge of the insolvent. Also, where a creditor is placed on the
schedule in respect of a debt he may prove further debt which he had omitted to prove.
A creditor who has failed to prove a provable debt cannot enforce his claim against the
insolvent after his discharge. Debts and liabilities not provable in insolvency are not
affected by the discharge, and the creditor can sue the discharged insolvent in respeciof
them.
Under the Presidency-Towns Insolvency Act, the proof in the manner stated above
is to be submitted to the Official Assignee, and not to the CourL The Official Assignee
is given the powers to admit or reject in writing any proof and claim.
PROOF BY SECURED CREDITORS
A secured creditor has his remedy independently of the Insolvency Court to realise
his security, but he can, if he so desires, come in the insolvency proceedings as an
 LAW UI INSOLVENCY 367

unsecured creditor by relinquishing his security or by deducting the value of the security.
If he wishes to participate in the benefits of insolvency proceedings he must comply with
the requirements of the Acts.
Three courses are open to a secured creditor who wishes to take advantage of the
insolvency proceeding, namely
(i) he may enforce and realise his security and then prove for the balance that may
still remain due to him; or
(ii) he may relinquish or surrender the security for the general body of creditors and
prove for the whole debt that may be due to him; or
(iii) he may value his security, state the particulars of his security in his proof and then
receive a dividend for the balance that may remain due to him after the value so
assessed has been deducted subject to the right of the Court or Official Assignee
to redeem the security on payment to the creditor of the assessed value.
Where a creditor, after having valued his security, subsequently realises it, i.e.,
sells the property in order to appropriate the sale proceeds towards the payment of his
principal, interest and casts, the net amount realised must be substituted for the amount
of any valuation previously made by the creditor, and must be treated as an amended
valuation made by the creditor. Where a secured creditor does not comply with the above
provisions, he shall be excluded from all shares in any dividend, and in that case, he shall
have to be content with his security whether or not it is sufficient for the payment of his
debt.
PROOF FOR INTEREST
The general rule in insolvency is that the interest ceases from the date of the order
of adjudication, and no proof for interest after that date is admitted, unless the estate is
more than sufficient to pay 100 paise in the rupee. In the latter case, the creditors can get
interest up-to-date and if there is still any surplus, that goes to the insolvent, 'Theory in
bankruptcy." says James, L. J. in Re Sas'ia, "is to stop all things at the date of
banuuptcy, and to divide the wreck of the man's property as it stood at that date." It is
provided that :-
(I) in case of debts where no interest is agreed upon. but there is a due date, interest
not exceeding 6 per cent per annum may be proved from the due date to the date
of adjudication;
(ii) in case of debts where no interest is agreed upon and there is no due date, interest
not exceeding 6 per cent per annum may be proved from the date of the demand
notice to the date of adjudication;
(iii) in case of debts where no interest is agreed upon, interest not exceeding 5 percent
per annum may be proved without prejudice to the right of receiving a higher rate
from surplus, if any.
Where the rate of interest agreed upon is excessive, the Court has the power under
the Usurious Loans Act. 1918, to reduce it. An insolvent's solvent debtors are not
absolved from the liability to pay interest on the ground that the insolvent has filed his
petition in insolvency. The interest when collected is distributed among the creditors.

PART 12-B
INSOLVENT'S PROPERTY

The Insolvency Acts define' Property" as including property over which, or over
the profits of which, any person has a disposing power which he may exercise for his
4. (1872) L. R. 7 CE. A.P.P. 760.
368 MEkCAN11LE LAW

own benefit. When the Acts refer to property of insolvent., they always mean such of
his property as is divisible amongst his creditors. The property inclbs not only material
objects but also rights over material objects. Thus, in the case of a Hindu father it includes
his disposing power over his son's undivided interest. All valuable rights which may be
turned into money or whose worth can be assessed in money are property. The word
property incluues immovable properly, movable property, and actionable claims.
Though the definition of property is not exhaustive, yet it is comprehensive enough to
include money, goods, things in action, land and every description of property 'hcther
real or personal, movable or immovable obligations, casements and eveiy description of
estate, interest and profits, or contingent, present or future, arising out of or inidental
to property and includes any property over which or over the profits of which the
insolvent has a disposing power which he may exercise for his benefit. This property
vests in the Official Receiveror Assignee and is divisible among the insolvent'screditors.
PROPERTY DIVISIBLE AMONGST CREDITORS
p roperly of the insolvent which can be divided among his creditors comprises the
following particulars, namely :
1. property which may belong to him at the commencement of the insolvency:
2. property which may be acquired by or devolve on him after the date of the order
of adjudication and before his discharge. (i.e.. after-acquired property);
3. the capacity to exercise all such powers in respect of property as might have been
exercised by him for his own benefit at the commencement of the insolvency or
before his discharge:
4. goods in the possession, order ordtsposiion of the insolvent in his trade orbusine.s
Si) that he is the reputed owner thereof.
The following is an enumeration of some of the properties which consiitute the
properties of ilie insolvent and vest in the Official Receiver or Assignee: Money in the
hands or at the disposal of the insolvent, his personal earnings, and salary, except the
amount sufficient for the maintenance, according to his station in life, of the insolvent
and his family, secret formulas invented by him, life insurance policies, copy-right,
partnership assets in case of firm's insolvency, goodwill. Hindu joint family property,
interest, statutory tenancy, occupancy rights, actionable claims, equity of redemption,
movable and immovable property of the insolvent, goods in the possession, order or
disposition of the insolvent in his trade or business, goods held by commission agent.
properly under bailment, and a right to sue in respect of a tort or a breach of contract
resulting in injury to the estate of the insolvent.
PROPERTY NOT DIVISIBLE AMONG CREDITORS
Properly which is not divisible among the creditors of the insolvent falls into two
classes, namely:-
1, Property held by the insolvent on trust for any other person or in fiduciary capacity:
and
2, Tools of trade, necessary wearing apparel and other similar property.
PROPF.RTY HELD BY INSOLVENT IN FIDUCIARY CAPACITY
Property held by the insolvent as a trustee under a trust does not pass to the Official
Receiver or Assignee and is not divisible among his creditors. Similarly, property held
by him as executor or administrator, or in any fiduciary capacity is not divisible. Thus,
property in the hands of an insolvent as a bailee, factor, solicitor, broker, auctioneer or
cashier is property held by him in fiduciary capacity, and on his being adjudged insolvent,
 LAW OF INSOLVENCY 369

it will belong to the principal, and will not pass to the Official Receiver or Assignee. The
position is the same in respect of money held by an agent to collect and remit or by a
secretary or treasurer of a Society. Also, property in the possession of an insolvent at the
time of his insolvency for a specific purpose, for paying his pressing creditors does not
belong to the debtor, and does not vest in the Official Receiver or Assignee on the debtor
being adjudged an insolvent.
TOOLS OF TRADE, WEARING APPAREL, ETC.
Roth the Acts provide that the insolvent is entitled to retain certain property which
cannot be divided amongst his creditors. Such property, under the Presidency-Towns
Insolvency Act, consists of the tools of trade and the necessary wearing apparel, bedding,
cooking vessels, and furniture of himself, his wife and children, to a value, inclusive of
tools and apparel and other necessaries as aforesaid, not exceeding Rs. 300 in the whole.
The Provincial Insolvency Act makes a general provision that property (not being
books of account) which is exetupted by the Code of Civil Procedure, 1908 or by any
other enactment for the time lt'ing in force from liability to attachment and sale in
execuion of a decree, is not dM ible among the creditors of the insolvent.
Property exempted from attachment and sale under Sec. 60 of the Code includes
(i) the necessary wearing apparel, cooking vessels, beds, and bedding of the judgement-
debtor, his wife and children, and such personal ornaments as, in accordance with the
religious usage, cannot he parted with by a woman: (it) tools of artisans and, where the
judgment-debtor is an agriculturist, his implements of husbandry, etc; (iii) houses and
other buildings belonging to an agriculturist and occupied by him as such and for the
purpose of agriculture, that is, in order to enable him to cultivate the land. An agriculturist
here means a person whose sole means of living is gained by cultivating a small holding.
In addition to the properties specified in the two Acts as stated above, there are
some other properties which are not divisible among the insolvent's creditors, namely:-
1. Pension: 2. Provident Fund mooney: 3. Gratuity payable to a railway servant,
4. yl)es suCcexxionis, i.e.. a bare possibility of succession, such as the chance of an
he succeeding to ail or the chance of a person obtaining a legacy on
the death of a relative; and 5. Right of action in respect of a tort or a breach of contract
resulting in injuries wholly to the person or feelings of the insolvent.

REPUTED OWNERSHIP

The doctrine of reputed ownership apples only in the case of traders. The provision
is made for the protection of the general creditors of trader against the false credit which
might he acquired by his being suffered to have the possession and power of disposition
of property as his own, which does not really belong to him. This prevents traders from
gaining a delusive credit by a false appearance of substance to mislead those who deal
with them. This provision which isknowrm as the Reputed Ownership Clause as contained
in the two Acts is similar in effect except as to the time when the clause takes effect.
Under the Presidency-Towns Act it is provided that goods which are at the commence-
ment or the insolvency in the possession, order or disposition of the insolvent, in his
trade or business by the consent and permission of the true owner, under such circum-
stances that he is the reputed owner thereof, are divisible among his creditors. The
Provincial Insolvency Act lays down that the goods which are, at the date of the
presentation or the petition on which the order or adjudication is made, in the
possession, order or disposition of the insolvent in his trade or business, by the consent
and permission of the true owner thereof, are divisible among his creditors. It is clear
from these provisions that it is not only the goods of which the insolvent is the true owner
which vest in the Official Assignee or Receiver, but also the goods which belong to other
people of which the insolvent is the apparent or reputed owner. Thus, if a person buys
370 MI-RcANTILE LAW

goods from a trader and pays for them, but leaves the goods in the possession of the
seller, and the seller becomes insolvent, the goods will, as a general rule, pass to the
Official Assignee or Receiver and will be divisible among his creditors, The buyer is
the true owner of the goods, and the insolvent is the apparent or reputed owner thereof.
The goods are said to be in the reputed ownership of the insolvent, or in his possession,
order or disposition. This is so because the property is held out to the world as that of
the trade and will be treated as his own in his insolvency and be divisible among his
creditois. By far the largest number of cases of reputed ownership arise in connection
with mortgages of goods. The effect of the reputed ownership clause is to transfer to
Official Assignee property that does not belong to the insolvent. It is to take one man's
property to pay another man's debt. Under the Provincial Insolvency Act, the doctrine
of reputed ownership does not apply to goods which have been mortgaged or hypothe-
cated by the insolvent and this is the substantial point of difference between the two Acts.
Where goods are mortgaged or hypothecated, the Receiver takes the goods subject to
the mortgage or hypothecation.
The doctrine of reputed ownership, as stated above, applies only to goods and
chosen-in-action are not "goods" in this connection. And it does not extend to all kinds
of goods. It extends only to such goods as are in the possession, order or disposition of
the insolvent in his trade or business. Goods not used for purposes of the insolvent's
trade or business do not pass to the Official Assignee or Receiver. Further, to bring goods
within the reputed ownership clause, they must be in the Sole possession and Sole reputed
ownership of the insolvent. The clause does not extend to cases in which the insolvent
and other persons who are not insolvent are jointly in possession of goods and of which
he and those persons are jointly reputed owners.
AFTER-ACQUIRED PROPERTY
It may happen at times that an insolvent acquires property after adjudication and
before discharge. He may carry on business after insolvency, and, in the course of
business, he may acquire rights and property. He may also acquire property by in-
heritance or by way of gifts or under a settlement or a will. He may have personal earning,
salary and income from other sources. There is a slight difference in law under the two
Acts, and we shall, therefore, deal with it separately.
Under the Presidency-Towns Insolvency Act, the property acquired by the insol-
vent after adjudication and before discharge vests in the Official Assignee only when he
intervenes on behalf of the insolvent's estate. If the Official Assignee does not intervene,
and the insolvent transfers the property to another who takes it in good faith and for
value, the transferee acquires a good title to it. Further, unless the Official Assignee has
intervened, it is competent for the insolvent, his legal representatives and his assigns, to
maintain a suit for the recovery of after-acquired property or for any other relief in respect
thereof against a stranger, and that the Official Assignee is not a necessary part to such
suit. The provision in this Act is based on the English rule of law stated in Cohen v.
Mitchell (1890), Q.B.D. 262 that "until the trustee intervenes, all transactions by a
bankrupt after his bankruptcy with any person dealing with him bona fide and for.value,
in respect of his after-acquired properly, whether with or without the knowledge of the
bankrttcy, are valid against the trustee."
The Legislature in drafting Sec. 28(4) of the Provincial Insolvency Act has
departed from the above rule probably because in places outside Presidency -Towns fraud
was more rampant and that, under the guise of bona fide transfer for value, after-
acquired property would be transferred benami to the prejudice of insolvent's creditors.
The section, therefore, provides that all property acquired by the insolvent after adjudica-
tion and before discharge shall forthwith vest in the Receiver. The effect of this provision
 LAW OF INSOLVENCY 371

is that all property, whether it is owned by the insolvent at the time of the order of
adjudication or it is acquired after such order but before discharge, vests in the Official
Receiver as soon as the adjudication order is made. Unlike the Official Assignee, the
Receiver is not required to necessarily intervene before the after-acquired property will
vest in him.
PERSONAL EARNINGS
Wages and other money earned by the insolvent by his personal labour and
exertions constitute his "personal earnings." The personal earnings of an insolvent vest
in the Official Assignee or Receiver like any other property except such part of them as
is necessary for the maintenance of the insolvent and his family. Thus, the Assignee or
Receiver can intervene only if they are more than sufficient for the maintenance of the
insolvent and his family. Similarly, as soon a.s the amount of a provident fund reaches
the hands of an undischarged insolvent depositor it becomes the insolvcnt'sproperty
and vests in the Receiver, or the Assignee can intervene with respect to it. The pension
of a retired insolvent is also properly for the benefit of his creditors as it becomes payable
each month.
DISCLAIMER OF ONEROUS PROPERTY BY OFFICIAL ASSIGNEE
Sees. 62-67 of the Presidency -Towns Insolvency Act provide for a disclaimer of
onerous property by the Official Assignee. This is necessary to protect him from personal
liability in respect of onerous property. Land burdened with onerous covenants, shares
or stocks in companies, unprofitable contracts, or any other property, which is unsale-
able, or not readily saleable, by reason of its binding the possessor thereof to the
performance of any onerous act or to the payment of any sum of money, are different
forms of onerous property, and the Official Assignee may disclaim them. He cannot,
however, disclaim a contract entered into by the insolvent for the sale of a lease unless
he also disclaims the lease itself. The period for disclaiming is twelve months from the
date of adjudication or the time when the Official Assignee came to know of such
property after adjudication.
EFFECT .OF [IISULAIMER
As regards the insolvent and his property, the disclaimer operates to determine, as
from the date thereof, his rights, interests and liabilities in oi in respect of the property
disclaimed. As regards the Official Assignee personally, his liability in respect of the
property is determined by the disclaimer as from the date when the properly is vested in
him. Disclaimer does not affect the rights or liabilities of third parties except so far as is
necessary for the purpose of releasing the insolvent and his property and the Official
Assignee from liability.
TITLE OF OFFICIAL ASSIGNEE OR RECEIVER
The combined effect of the doctrine of reputed ownership and of the effect of
insolvency on antecedent transactions is that the title of the Official Assignee or Official
Receiver is superior to that of the insolvent. According to the doctrine of reputed
ownership, the Official Assignee or Receiver may claim the goods belonging to persons
other than the insolvent lying in the possession of the latter. The result is that as against
the Official Assignee or Receiver even the true owner of the goods cannot claim them.
But the insolvent could not claim such goods as his own. Sees. 53 and 54 of Pro. I. Act
and Sees. 55 and 56 of the Pres-t Act are also illustrations of the superior title of these
officials in respect of the insolvent's property. All property belonging to the insolvent
vests in them and they alone can deal with it, and not the insolvent. Further, every
voluntary transfer not being a transfer made before and in consideration of marriage or
made in favour of a purchaser in good faith and for valuable consideration is void
372 MEkCANTIU LAW

against these officials if made within 2 years next before the presentation of the petition.
Similarly, a fraudulent preference is void against them. Moreover, an Official Assignee
can disclaim onerous properly, but the insolvent could not disclaim it.
REALISATION OF PROPERTY
As to the mode of realisation there is some difference under the two Acts.
Therefore, cacti set of provisions will be dealt with separately. The powers and duties of
realisation, however, of the Official Assignee and of the Receiver are the same, and they
will he treated together.
POSSESSION OF PROPERTY BY OFFICIAL ASSIGNEE
It is the duty of the Official Assignee to take possession as soon as possible of the
deeds, books and documents of the insolvent and of all other parts of his property capable
of manual delivery. If the insolvent is in possession of any such property, the Official
Assignee alone is entitled to possession thereof. If the insolvent has sold his book debts
and delivered his books of account to the purchaser. the Official Assignee cannot claim
the books. The Official Assignee is the owner of the property which vests in him, and
he has all the remedies which are available to an owner. Besides these, he has certain
special remedies open to him.
POSSESSION OF PROPERTIES BY OFFICIAL RECEIVER
Sec. 56(3) of the Provincial Insolvency Act provides that where the Court appoints
a Receiver, it inay remove any person in whose possession or custody any property of
the insolvent is from the possession or custody thereof, but this does not authorise the
Court to remove from the possession or custody of property any person whom the
insolvent has not a present right so to remove. It is to be noted that undt.r this Act the
Court alone has the power to remove; the Receiver has no such power, although he can
make an application for possession.
Sec. 60 provides that in any area in which a declaration has been made under Sec.
68 of the Civil Procedure Code, no sale ofthe immovable property of the insolvent paying
revenue to the Government or held or let for agricultural purposes can be made. In Punjab
even temporary alienation of agricultural land cannot be made, whether the alienee is an
agricilturist or otherwise.
POWER OF OFFICIAL ASSIGNEE AND RECEIVER TO REALISE
The Acts lay down that the Official Assignee and Receiver must with all con-
venient speed realise the property of the insolvent and distribute dividends among the
creditors, and for that purpose may, without the leave of the Court—
(a) sell all or any of the property of the insolvent;
(b) give receipts for any money received by him;
He may also, with the leave of the Court, do any of the following things, namely:—
carry on the business of the insolvent so far as may be necessary for beneficial
winding oil the same;
2. institute, defend or continue any suit or other legal proceedings relating to the
property of the insolvent;
3. employ a legal practitioner or other agent to take any proceedings or do any
business which may be sanctioned by the Court.
accept as the consideration for the sale of any property of the insolvent a sum of
money payable at a future time subject to such stipulations as to security and
otherwise as the Court thinks fit;
 LAW OF INSOLVENCY

5. mortgage or pledge any part of the property of the insolvent for the purpose of
raising money for the payment of his debts.
6. refer any dispute to arbiirat ion and compromise all debts, claims and liabilities on
such terms as may be agreed upon. -
7. divide ilrexisting form amongst the creditors, according to its estimated value,
any property which, from its peculiar nature or other special circumstances cannot
readily or advantageously be sold.
DISTRIBUTION OF PROPERTY
Both the Acts provide that the Official Assignee or Receiver, as the case may be,
must begin the distribution of dividends with all convenient speed. Under the Presiden-
cy-Towns Insolvency Act the first dividend must be distributed within one year after
adjudication unless the Official Assignee satisfies the Court that there is sufficient reason
for postponing the declaration to a later date, and the subsequent dividends must be
declared and paid at intervals of not more than six months unless there is sufficient reason
for further delay. The Official Assignee is also required to publish a notice of his
intention to declare a dividend and to notify each creditor mentioned in the insolvent's
schedule who has not proved his debt, and when he has declared a dividend, to send to
each creditor who has proved, a notice showing the amount of the dividend and the time
and manner of its payment. No such period is fixed and no such declaration and notice
are required under the Provincial Insolvency Act. In the calculation of dividends and
their distribution the Official Receiver or Assignee must retain in his hands sufficient
assets to meet the claims of creditors residing in places so distant that they have not had
sufficient time to tender their proofs and also for claims not yet determined. He must
also make provision for any disputed proofs and claims and for the expenses necessary
for the administration of the estate. He is not, however, required to hold any money in
his hands to meet the possible claim of a secured creditor who has neither realised nor
valued his security, though he may have notice of the date. A creditor who has not proved
his debt before the declaration of particular dividend does not thereby lose his right in
respect thereof. If there are assets available for distribution of that dividend he is entitled
to be paid what he may have failed to receive out of those assets before they are applied
to the payment of any future dividend, but he cannot disturb the distribution of any
dividend already declared before his debt was proved. The Court is not to interfere in
case where the creditor comes in late.
F1IAL DIVIDEND
Under the Presidency-Towns Insolvency Act the final dividend is to be declared
when the Official Assignee has realised all the property of the insolvent or so much
thereof as can, in his opinion be realised without needlessly protracting the proceeding
in intolvency. Under the Provincial Insolvency Act it is to be declared when the Receiver
has realised all the property of the insolvent or so much thereof as can, in the opinion of
the Court, be realised without needlessly protracting the receivership. The Official
Assignee cannot declare a final dividend without the leave of the Court but the Receiver
can do so without leave of Court except in Madras. Before declaring final dividend the
Assignee or Receiver must give notice to persons whose claims have not been proved
that, if they do not prove their claims to the satisfaction of the Court within the time
limited by the notice, he will proceed to make a final dividend without regard to their
claims.
The insolvent is entitled to any surplus remaining after payment in full to his
creditors with interest. The insolvent may assign the surplus or dispose of it by will to
any person even before it is known whether there will be a surplus. Such an assignment
314 MERCANTILE LAW

is valid against the Official Assignee or Receiver in a second insolvency. But the
insolvent or his assignee cannot interfere in the administration of the estate.
COMMITTEE OF INSPECTION
A Committee of Inspection may be appointed from among the creditors who have
proved or persons holding general powers-of-attorney from such creditors for the
purpose of superintendence and administration of the insolvent 'a property by the Official
Assignee or Receiver.
PRIORITY OF DEBTS
In the distribution of the property of the insolvent, the following debts must be
paid in priority to all other debts, namely:-
1. all debts to the Government or any local authority;
2. the salary or wages of any clerk, servant or labourer in respect of the services
rendered to the insolvent during four months before the date of the presentation of
petition under the Presidency-Town Insolvency Act not exceeding Rs. 300 for each
such clerk, and Rs. 100 for each such servant or labourer; and under the Provincial
Insolvency Act, the salary or wages not exceeding Rs. 20 in all, of any clerk, servant
or labourer. Under the Presidency-Town Insolvency Act, rent due to a landlord
from the insolvcnt, not exceeding one month's rent, is also among the preferential
debts. It is not so under the Provincial Insolvency Act.
The debts mentioned above rank equally between themselves and are to be paid
in full unless the assets are insufficient to meet them in which case they abate in equal
proportions between themselves. They must be paid at once, subject only to the retention
by the Assignee or Receiver of such sums as may be necessary for the expelses of
administration or otherwise.
After the preferential debts have been paid in full, all debts entered in the schedule
are to be paid rateably according to the amount of such debts respectively and without
any prejudice. If there is any surplus after payment of all debts mentioned above it must
be applied in payment of interest from the date of the order of adjudication at the rate of
6 per cent per annum on the debts. Any surplus after all such payments must be paid to
the insolvent.
ADMINISTRATION OF PARTNERSHIP PROPERTY
In the insolvency of partners, partnership property is applicable in the first instance
to the payment of the partnership debts, and the separate estate of each partner is
applicable in the first instance to the payment of his separate debts. if there is a surplus
from the separate estates of the partners, it is to be dealt with as part of the partnership
property; and if there is a surplus of the partnership property, it is to be dealt with as a
part of the respective separate estates in proportion to the interest of each partner in the
partnership property.
The above rule as to priorities in the case of joint and separate debts is subject to
the following exceptions:--
1. Joint creditors may prove against the separate estates of the partners in am-
petition with the separate creditors if there is joint account and no solvent partner.
2. Where a joint creditor is the petitioning creditor in respect of ajoint debt against
one partner, he may prove in competition with the separate creditors of that partner, and
this is-m, even where that partner owes him a separate debt which was sufficient to have
supported the petition.
 LAW OF INSOLVENCY 375

3. Where the separate property of a partner has been fraudulently converted by

his co-partners to the use of the partnership, the separate estate may prove against the
joint estate in competition with the joint creditors; and where property belonging to the
partnership has been fraudulently converted by a partner to his own use, the creditors of
the firm are entitled to prove against the separate estate in competition with the sepate
creditors.
4. Where a member of a firm carries on a distinct and separate trade, and a debt
becomes due to the firn., in the ordinary course of business between the member and the
firm, the firm may prove against the estate of such member in competition with the
separate creditors, he may prove against the Joint estate in competition with joint
creditors.
As regards proof by a partner against a partner, the general rule is that neither a
partner, nor a retired partner, nor the representative of a deceased partner, can prove in
the insolvency of the continuing or surviving partner in competition with the joint
creditors of the firm of which the partner, or retired or deceased partner was a member.
This rule applies only if there is actually proved in the insolvency some debt in respect
of which the insolvent and the retired or deceased partner were jointly liable.

PART 12-C

OFFICIAL ASSIGNEE, RECEIVER AND OFFICIAL RECEIVER

OFFICIAL ASSIGNEE: HIS APPOINTMENT AND REMOVAL

The Chief Justice of the High Courts of Judicature at Calcutta, Madras and
Bombay, may appoint any person as an Official Assignee of insolvent's estates, and may
with the concurrence of a majority of the other Judges of the Court, remove him for any
sufficient cause, Every Official Assignee must give such security as may be prescribed
by the rules. He can administer oaths for the purpose of affidavits, verify proofs, petitions
or other proceedings in insolvency. His duties have relation to the conduct of the
insolvent as well as to the administration of his estate. In particular it is his duty :-
(a) to investigate the conduct of the insolvent and to report to the Court upon any
application for discharge, stating whether there is reason to believe that the
• insolvent has committed any act which constitutes an offence under the Act or
under Sees, 421 to 424 of the Indian Penal Code in connection with his insolvency
or which would justify the Court in refusing, suspending or qualifying an order
for his discharge;
(b) to make such other report concerning the conduct of the insolvent as the Court
may direct or as may be prescribed; and
(c) to take such part and give such assistance in relation to the prosecution-of any
fraudulent insolvent as the Court may direct or as may be prescribed.
The Official Assignee may S ue and be sued by the name of "the Official Assignee
of the property of an insolvent," inserting the name of the insolvent. He may by that
name hold property of every description, make contracts, enter into any engagements
binding on himself and his successors in office, and do all other acts necessary or
expedient to be done in the execution of his office. If an Official Assignee is adjudged
an insolvent, he thereby vacates his office as such.
In the administration of the property and its distribution, he must have regard to
any resolution that may be passed by the creditors at a meeting. This is to be done subject
to the directions of the Court. He may summon meetings tf the creditors to ascertain
376 MERCANTILE LAW

their wishes; and it is his duty to summon meetings at such times as the creditors by
resolution at any meeting, or the Court, may direct or whenever requested in writing to
do so by one-fourth in value of creditors who have proved their claims.
COMMrrrEE OF INSPECTION
The Court may, if it thinks fit, authorise the creditors who have proved their claims
to appoint from among themselves a committee of inspection for the purpose of
superintending the administration of the insolvent's property by the Official Assignee.
The committee may meet as often as necessary but must meet at least once in a month.
The Official Assignee shall in the administration and distribution of the property of the
insolvent have regard to any direction of the committee. He must also consult the
committee, if there is one, before applying to the Court for leave to perform his duties
and to exercise his powers in which leave is necessary.
If any Official Assignee does not faithfully perform his duties, or if any complaint
is made to the Court by any creditor in regard thereto, the Court must enquire into the
matter and take such action thereon as may be deemed expedient. He must account to
the Court and pay over all monies and deal with all securities in such manner as may be
prescribed by the Rules or as the Court directs.
REMUNERATION OF OFFICIAL ASSIGNEE
The Official Assignee is to be paid such remuneration as may be prescribed by
rules, and never more than prescribed. The remuneration is in the nature of a commission
or percentage on the amount realised by him after payment to secured creditors, or on
the amount distributed in dividends, or partly on one and partly on the other, as may be
provided by Rules.
OFFICIAL RECEIVER *HIS APPOINTMENT, REMUNERATION, ETC.
Under Sec. 28 (2) of the Provincial Insolvency Act, the property of the insolvent
vests, on the making of an order of adjudication. in the Court or in a Receiver appointed
by the Court. A receiver may be appointed at the time of the order of adjudication or at
any time afterwards. Whatever may be the date of appointment all property acquired by
and devolving on the insolvent after adjudication vests in him as from the date of acquisi-
tion or devolution. The Receiver may be required to give such security as the Court may
think lit to account for what he shall receive in respect of property. Subject to such
conditions as may be prescribed by the Rules, the Court may by general or special order
fix the amount to be paid as remuneration for the services of the Receiver out of the
assets of the insolvent. The payment is made in the same manner as to the Official
Assignee.
The primary duties of the Receiver are to take the necessary steps for the discovery
of the insolvent's property, to realise the property and to distribute it amongst the
creditors. The Receiver may also make a report on the conduct of the insolvent. Where
he fails to submit his accounts at such periods and in such form as the Court directs, or
fails to pay the balance due from him thereon as the Court directs, or occasions loss to
the property by his wilful default or gross negligence, the Court may direct his property
to be attached and sold and may apply the proceeds to make good any balance found to
be due from him or any loss so occasioned by him. The Receiver may be removed for
just cause.
The State Government may appoint the Official Receiver to be the Receiver under
the Provincial Insolvency Act with such local limits as it may prescribe. In the absence
of any exceptional reasons such as personal disqualifications affecting the Official
Receiver he alone shall be appointed Receiver. The Official Receiver has on his
 LAW OF INSOLVENCY 377

appointznent as Receiver all the powers of an ordinary Receiver. The Insolvency Court
cannot delegate any of its powers to an ordinary Receiver. But to an Official Receiver
the Court if so directed by the HighCourt under See. 80 may delegate all or any of the
following powers namely
(i) 10 frame schedules and to admit or reject proofs of creditors.
(ii) to make interim orders in any case of urgency, and
(iii) to hear and determine any unopposed or exparte application.

Subject to the appeal to the Court, any order made or act done by the Official Receiver
in the exercise of the said powers will be deemed to be the order or the act of the Court.
The Official Receiver has no power to adjudicate upon a claim by a third person to
property alleged to belong to the insolvent and claimed by such person as his own. Such
a claim can only be tried by the Court under Sec. 4 of the Act.
Where no Receiver is appointed, the Court has all the rights of, and may exercise
all the powers conferred, on a Receiver under the Provincial Insolvency Act.

PART 12-D
DISCHARGE OF INSOLVENT

"The intention of the Legislature is that the debtor, on giving up the whole of the
property, shall be a free man again, able to earn is livelihood and having the ordinary
inducement to industry." An insolvent who has obtained his discharge is prima facie
freed from the statutory restriction peculiar to undischarged insolvents .However, an
insolvent does not stand automatically discharged. He must apply to the Court and obtain
an order of discharge. The Acts provide that a debtor may at any time after the order of
adjudication apply to the Court for an order of discharge and the Court is required to
appoint a day for the hearing of the application. Such a day, under the Presidency-Towns
Insolvency Act, must not be before the public examination of the debtor has been
concluded. Under the Provincial Insolvency Act the Court is required to specify the time
within which the debtor must apply for his discharge. If the insolvent does not apply
within the requisite time the adjudication will be annulled by the Court..
Before the application for discharge is heard on the date fixed for this purpose the
Official Assignee or Receiver is required to submit his report as to the insolvent's conduct
and affairs. This repo pt is, for the purposes of an application for discharge, prima facie
evidence of the statements therein contained, but it is not conclusive and the Court can
look into evidence on which the findings of the report are based. On the day fixed for
the hearing, the Court hears the debtor as well as the creditors, and may also hear the
Official Assignee or Receiver. The Court will, after hearing the parties, in its discretion
grant or refuse to grant conditionally the discharge. The court has almost full discretion
to grant or refuse an order of discharge, except insofar as such discretion is limited by
the Act. In the exercise of that discretion the Court may either :-
(a) grant an absolute omder of discharge; or
(b) refuse an prder of discharge; or
(c) suspend the operation of the order of discharge for a specified period; or
(d) grant an order of discharge subject to any conditions with respect to any earnings
or income-which may afterwards become due to the insolvent or with respect to
his after-acquired properly; or
(e) exercise the above powers of suspending and attaching conditions to an insolvent's
discharge under heads (c)an d (d) concurrently, that isjt may suspend the operation
I

378 MERCM'JTII.E LAW

of the order for a specified period and at the same time attach conditions to the
order for payment out of the future earnings or property of the insolvent.
The benefit of freedom from restrictions by means of a discharge is intended for
an honest debtor who by reason of misfortune incurs loss. The benefit must not be
extended to those traders who fail to keep proper accounts or who deal extravagantly
and contract debts recklessly without any reasonable prospect of being able to pay them.
The limitations placed on the discretion of the Court are two under the Presidency-Towns
Insolvency Act and one under the Provincial Insolvency Act.
LIMITATIONS UNDER PRESIDENCY-TOWNS ACT—ABSOLUTE
REFUSAL OF DISCHARGE
Under Sec. 39 of this Act the Court MUST absolutely refuse to discharge an
insolvent in the following cases, namely
I. fraudulent concealment of the insolvent's state of affairs by destruction of docu-
inents, keeping false books or making false entries;
2 fraudulently giving undue preference or discharging or concealing debts or making
away with property.
3. fraudulent concealment of property to prevent its distribution amongst creditors;
4. fraudulently preventing debts from being available for creditors;
5. fraudulent transfers containing false statements relating to the consideration for
the transfers;
6. dishonest or fraudulent removal or concealment of property.
REFUSAL OF IMMEDIATE UNCONDITIONAL DISCHARGE
The Court MUST, under both the Acts, refuse to grant an absolute discharge to
take effect iinniediately on proof of any of the facts, namely-
1. that the insolvent's assets are not, under the Presidency-Towns Insolvency Act, of
a value equal to 25 paise in the rupee, and under the Provincial Insolvency Act, of
a value equal to 50 paise in the rupee, on the amount of his unsecured liabilities.
But if ha shows to the Court that such fact is not due to his misconduct, but has
arisen froin circumstances for which he cannot justly be held responsible, the Court
may grant an absolute discharge;
2. that the insolvent has omitted to keep such books of account as are usual and
proper in the business carried on by him and as sufficiently disclo'se his business
transactions and financial position within three years immediately preceding his
insolvency;
3. that the insolvent has continued to trade after knowing himself to be insolvent, i.e.
unable to pay his debts in the ordinary course;
4. that the insolvent has contracted any debt without having at that time any
reasonable or provable ground for expecting to be able to repay it. It is for the
insolvent to show that when he contracted the debt he had reasonable or provable
ground for expecting to be able to pay it. It is the contracting of debts which is an
offence, and not the obtaining of goods;
5. that the insolvent has failed to account satisfactorily for any loss of assets or for
any deficiency of assets to meet his liabilities;
6. that the insolvent has brought on, or contributed to, his insolvency by rash or
hazardous speculation, or by unjustifiable extravagance in living, orb)' gambling,
or by culpable neglect of his business affairs;
 LAW OF INSOLVENCY 379

7. that the insolvent has, within three months preceding the date of the presentation
of the petition, when unable to pay his debts as they became due, given an undue
preference to any of his creditors;
8. that the insolvent has on any previous occasion been adjudged an insolvent or
made a composition or arrangement with his creditors;
9. that the insolvent has concealed or removed his property or any part thereof, or is
guilty of any other fraud or fraudulent breach of trust;
Under the Presidency-Town Insolvency Act, also
10. that the insolvent has put any of his creditors to unnecessary expense by a frivolous
or vexatious defence to any suit properly brought against him;
11. that the insolvent has within three months preceding the time of presentation of
the petition incurred unjustifiable expense by bringing frivolous or vexatious suit.
FAILURE TO APPLY FOR DISCHARGE
An insolvent must apply for the discharge within the prescribed time. If an
insolvent does not appear on the day fixed for hearing of his application for discharge
or if an insolvent does not apply to the Court for an order of discharge within such time
as may be prescribed or fixed under the Presidency-Towns Insolvency Act, the Court
may annul the adjudication or make such other order as it may think fit, and under the
Provincial Insolvency Act, the Court must annul the order of adjudiction. The debtor
where he was released from custody on adjudication may be re-committed to custody
and all process against him at the time of release will recommence as if no release was
made. In order to protect the creditors the Court will order that the property shall vest
in a certain person. The creditors cannot pursue their money under the ordinary civil
law. They must recover their dues by dividends to be paid by the person in whom the
Court has vested the assets of the debtor.
EFFECT OF ORDER OF DISCHARGE
An order discharging an insolvent releases him from all debts provable in insol-
vency except those mentioned below, namely—
(a) any debt due to the Government;
(b) any debt or liability incurred by means of any fraud or fraudulent breach of trust
to which he was a party;
(c) any debt or liability in respect of which he has obtained forbearance by any fraud
to which he was a party;
(d) any liability under an order for maintenance of his wife made under Sec. 488 of
the Code of Criminal Procedure, 1898.
An order of discharge does not affect the rights of a secured creditor against the
insolvent, It does not put an end to the insolvency proceedings, and the Court has power
to give directions as to the distribution of the assets amongst the creditors. It releases
the insolvent from all the debts due from him at the time of adjudication and which were
provable in his insolvency. It was held in New Citizen Bank of India Lid. v. K. B. Burnel
& Co. (1954) 24 Comp. Cas. 233, a decretal amount is provable debt. The petitioner
bank had obtained a decree to recover a loan against the security of goods. The goods
were sold and part only of the amount of the loan was recovered. The respondent was
adjudicated insolvent. The bank ought to have ranked and proved in insolvency of the
respondent; but the bank did not do so. After the discharge of the insolvent, the bank
applied for the execution of the decree. Held, as the bank did not prove in the insolvency,
the respondent was freed from peponal liability. The powers of the Official Assignee or
Receiver to deal with the property which vests in him at the time of the order of discharge
380 MERCANTILE LAW

do not cease with the passing of the order of discharge. The discharge protects the
insolvent and not the assets in the hands of the Official Assignee or Receiver. It does not
release a co-debtor, nor does it release the surety. If the surety pays the creditor he cannot
sue the debtor after the debtor ha obtained his discharge, but he is entitled to prove for
the amount paid. An order of discharge does not exempt the insolvent from being
proceeded against for any criminal offence, whether connected with insolvency or not.
An order of discharge does not operate outside India so as to prevent recovery of the
debt there out of the property which has not been taken by the Official Assignee or
Receiver.
DUTIES OF INSOLVENT AFTER DISCHARGE UNDER PRESIDENCY
TOWNS ACT (SEC. 431
Under the Presidency-Towns Insolvency Act, a discharged insolvent must,
notwithstanding his discharge, give such assistance as the Official Assignee may require
in the realisation and distribution of such of his property as is vested in the Official
Assignee, and if he fails to do so, he will be guilty of 'Contempt of €ourt'; and the Court
may also, if it thinks fit, revoke his discharge but without prejudice to the validity of any
sale, disposition or payment duly made or thing duly done subsequently to the discharge,
but before its revocation.
lithe order of discharge is revoked the result would be the same as if there had
been no discharge and the debtor had continued-insolvent throughout; but sales and other
disposition of property made by the insolvent subsequent to the discharge would remain
valid. There is no corresponding section in the Provincial Insolvency Act-
REVOCATION OF ORDER OF DISCHARGE UNDER PRESIDENCY
TOWNS INSPLVENCY AT
In the following three cases under the Presidency-Towns Insolvency Act an order
of discharge may be revoked, namely :-
1. where the insolvent fails to assist the Official Assignee in the realisation and
distribution of his property under Sec. 47 of the Act,
2. where the insolvent fails to file the statement showing particulars of his after-ac-
quired property in cases in which he is bound to do so;
3. where an order of discharge is made conditional upon the insolvent consenting to
a judgment being entered up against him in favour of the Official Assignqe, and
he fails to give his consent within the time prescribed.

SMALL INSOLVENCIES

Summary Administration—When a petition is presented by or against a debtor,

if the Court is satisfied by affidavit or otherwise that the property is not likely to exceed
in value, under the Presidency -Towns Insolvency Act, Rs. 3,000 or such other less
amount as may be prescribed, and under the Provincial Insolvency Act, Rs. 500, the
Court may make an order that the insolvent's estate be administered in a summary
manner.
Upon such order being made:-
1. In cases governed by the Provincial Insolvency Act, the provisions of the
Act will apply subject to the following modifications, namely :-
(a) unless the Court otherwise directs, no notice required by this Act shall be published
in the Official Gazette;
(b) on the admission of a petition by a debtor, the property of the debtor shall vest in
the Court as a Receiver,
 LAW OF INSOLVENCY 381

(c) at the hearing of the petition, the Court shall inquire into the debts and assets of
the debtor and determine the same by an order in writing, and it hall not be
necessary to frame a schedule of creditors;
(d) the property of the debtor shall be realised with all reasonable despatch and
thereafter, when practicable, distributed in a single dividend;
(e) the debtor shall apply for his discharge within six months from the date of
adjudication; and
(1) such other modifications as may be prescribed with the view of saving expense
and simplifying procedure, provided that the court may at any time direct that the
ordinary procedure provided for in this Act shall be followed in regard to the
debtor's estate and thereafter the Act shall have effect accordingly.
2. In cases governed by the Presidency-Towns Insolvency Act, the provisions
of that Act will apply subject to the following modifications, namely -
(a) no appeal shall lie from any order of the Court, except by leave of the Court
(b) no examination of the insolvent shall be held except on the application of a creditor
or the Official Assignee;
(c) the estate shall, where practicable, be distributed in a single dividend;
(d) such other modification as may be prescribed with the view of saving expense and
simplifying procedure;
Provided that nothing in this section shall permit the modification of the provisions
of this Act relating to the discharge of the insolvent. The Court may at any time, if it
thinks fit, revoke an order for the summary administration of an insolvent's estate.
PENALTIES
The Acts prescribe penalties for certain offences committed by an insolvent as
under:—
I. An undischarged insolvent obtaining credit to the extent of Rs. 50 or upwards
from any person without informing such person that he is an undischarged insolvent
shall on conviction by a Magistrate be punished with imprisonment for a term which
may extend to six months or with fine, or with both.
2. If a debtor, who is adjudged an insolvent—
(a) fraudulently with intent to conceal the state of his affairs or to defeat the objects
of the Acts,-
(i) has destroyed or otherwise wilfully prevented or purposely withheld the
production of any books, papers or writing (documents) relating to such of
his affairs as are subject to investigation under the Acts, or
(ii) has kept or caused to be kept false books, or
(iii) has made false entries in or withheld entries from or wilfully altered or
falsified any document relating to such of his affairs as are subject to
investigation under the Acts, or
(b) if he fraudulently with intent to diminish the sum to be divided among his creditors
or to give an undue preference to any of the said creditors-
(i) has discharged or concealed any debt due to or from him, or
(ii) las made away with, charged, mortgaged or concealed any part of his property
of any kind whatsoever,

32 MERCANTILE LAW

he shall be punishable on conviction with imprisonment which may extend, under the
Presidency-Towns Insolvency Act, to two years, and under the Provincial Insolvency
Act, to one year.
3. If the debtor or insolvent wilfully fails to perform the duties imposed upon him
by the respective Acts, or to deliver up possession to the Official Assignee or Receiver
of any part of his property which is divisible among his creditors under the Acts, and
which is for the time being in his possession or under his control, he shall, under the
Pi esidency-Town Inlovency Act, be, in addition to any other punishment to which he
may be subject, guilty of Contempt of Court and maybe punished accordingly, and under
the Provincial Insolvency Act, be punishable on conviction with imprisonment which
may extend to one year.

SUMMARY

Insolvency is a proceeding by which, when a debtor cannot pay his debts or

his liabilities or the persons to whom he owes money or has incurred liabilities
discbarge
cannot obtain satisfaction of their claims, the State, in certain circumstances takes posses-
sion of his property by an officer appointed for the purpose, and such property is realised
and distributed in equal proportions amongst the persons to whom the debtor owes
money or has incurred pecuniary liabilities.
The consequences of insolvency are
1. the debtor gets protection against legal proceedings by his creditors (Protection
Order),
2. his properties vest in the Court or an Official of the Court on Adjudication order,
3. on the completion of the proceedings the insolvent is discharged and is then free
to have fresh start in life.
4. on adjudication he loses his civil rights so that he cannot be appointed a magistrate,
or elected a member of any body, nor can he vote.
Generally any person capable of contracting may be adjudged an insolvent,
provided that he is a "debtor" and has committed an act of insolvency.
For Acts of insolvency see ante.
A person is adjudged an insolvent on the presentation of a petition which may be
filed either by the debtor or creditor. A secured creditor cannot present a petition.
The petition may be either dismissed or admitted and in the latter case the debtor
may be adjudged an insolvent by an Adjudication Order. The Adjudication Order relates
back, under the Presidency-Towns Act, to the date of the first available act of insolvency
and under the Provincial Insolvency Act to the date of the presentation of the insolvency
petition. This is called the Doctrine of Relation Rack.
An adjudication may be annulled by the Court:-

1. where the debtor ought not to have been adjudged insolvent,

2. where debts have been paid in full.
3. where debtor had presented a petition without leave and leave was necessary.
An insolvent may submit a composition in satisfaction of his debts or a scheme of
arrangement of his affairs and if it is accepted by a majority in number and 3141hs in
value of the creditors, the Court will sanction it. The debtor will have right to deal with
his estate as if he had not been adjudged an insolvent.
If default is made in the fulfilment of any term of the scheme, the debtor will be
re-adjudged insolvent and the composition or scheme annulled.
 LAW OF INSOLVENCY 383

When a person is adjudged insolvent his properly vests in the Official Assignee
or Receiver who will realize it anti distribute it among the creditors paripassu on proof
of the debt.
The insolvent may at any time after the order of adjudication and must where time
for application for discharge is fixed, apply to the Court for his discharge. The Court
may, after hearing the parties, either—
grant an absolute order of discharge, or
refuse an order of discharge, or
suspend operation of order of discharge, or
grant an order of discharge subject to any conditions.
The Acts provide for certain restrictions on the powers of the Court to grant an
absolute discharge.

CASES FOR RECAPITULATION

1. A buys cotton from B and pays the price to B. The goods are left with B who
pledges them with C. C sells the goods as pawnee and there remains a surplus in his
hands after he has paid himself the amount of the loan made by him to B. Afterwards B
is adjudged insolvent and the surplus is claimed both by A, the buyer of the goods, and
the Official Assignee. Held, A, the buyer of the goods, and not the Official Assignee, is
entitled to receive the surplus. The doctrine of reputed ownership does not apply, as the
goods were not in possession, order or disposition of the insolvent [Greenling v. Clark
(1825)4B & C 3161.
2. W was adjudicated insolvent. He later earned a salary, out of which he had saved
Rs. 8,525 at the date of his death. He had also incurred debts for Rs. 3,525 in the course
of his employment. The supplier of goods claims payment of the full amount of Rs. 3,525
out of the Savings, but the Official Assignee denies the supplier's right to recover his
debt. Held, the debts were payable in full out of Rs. 8,525. The Official Assignee, if the
insolvent were alive, could not claim anything more than that which was over after the
insolvent had provided for what was reasonably necessary having regard to his occupa-
tion and station 1/n re Walter (1929) 1 Ch. 4671.
3. An insolvent was granted a conditional discharge. A, a judgment creditor, filed
a petition for the execution of a decree which he had obtained prior to adjudication, by
attachment and sale of a house belonging to the insolvent's wife. Held, A is not entitled
to sue. The wife is under no obligation to pay. By Sec. 44(2) of the Provincial Insolvency
Act, on discharge the debts which the insolvent owed his creditors become unenforce-
able. Hence the creditors of an insolvent who has been released from all liability.are not
entitled to enforce payment by sale of a previous attached house belonging to the
insolvent's wife when she herself is under no personal obligation or liability to pay the
debi She does not come within any of the categories mentioned in Sec. 44(3) of the Act
(the categories are Partners, Co-Sureties, Surety). Persons jointly bound, [Abdul
Kuthus v. Jnayathula, 1941 Mad. 6201.
4. A and B enter into a partnership for five years on the terms of A paying a
premium of Rs. 1,000 to B. out of which Rs. 500 were to be paid immediately and the
rest by instalments. In the second year of the term and before the whole of the premium
was paid, A was adjudicated insolvent on the petition of B and a Receiver of his estate
was appointed by Court. B claimed from the Receiver in insolvency Rs. 500, the amount
unpaid, standing as one of A's creditors, whereas the Receiver in a counter-action
claimed from B a sum of Rs. 300 as money belonging to the insolvent's aa.0 nd
unjustly held by B Held, the Receiver's claim is tenable and not that of B. Wh1a
384 MERCANTILE LAW

partner has paid a premium on entering into partnership for a fixed term, and the firm is
dissolved before the expiration of that term otherwise than by the death of a partner, he
shalibe entitled to return part of the premium in proportion to the unexpired term. In this
case the term was 5 years and two years have passed so that Rs. 300 for the unexpired
period of 3 years in the hands of B will be payable by him to the Receiver in insolvency
(Sec. 51; Akiuursl v. Jackson (1818) 1 Wils. Ch. 471.
5. A sells a patent to B in consideration of B paying royalties to A. At the same
time B advances to A a sum of Rs. 1,25,000 as a loan. It is agreed that B should retain
one-half of the royalties as they become payable to A. from time to time, towards the
satisfaction of the debt, provided that if A should become insolvent B shall have the right
to retain the whole of the royalties in satisfaction of the debt. A becomes insolvent before
the debt is fully paid. B cannot retain the full royalties as per stipulation; but he is entitled
to one-half of the royalties as he has tharge only on one-half and that transaction is
protected under the Insolvency Acts.
6, A creditor takes an assignment from the debtor for the purpose of paying himself
and other creditors named in the list in full, believing that they are all the creditors. But
the list turns out to be incomplete. The transaction has, however, been entered into
honestly by the creditor concerned. The transaction constitutes an act of insolvency and
the debtor may he adjudged an insolvent. The assignment is for the benefit of the debtor's
creditors generally and amounts to an act of insolvency, if any creditor whose name did
not appear on the list applies within 3 months of the assignment for his insolvency [Re
Phillips (1900) 2 Q.B. 3291.
7. X, a Frenchman, residing in France, had a place of business in Bombay. He.,
acquired property and also incurred debts. Later on, he executed in France a deçd
transferring the whole of his property for the benefit of his creditors. The Bombay High
Court adjudicated him insolvent. The adjudication order is not valid, for an Indian Court
can pass order of adjudication on a foreigner only if he commits an act of insdlvency in
India and within the jurisdiction of the Court.
8. A trader in embarrassed circumstances of his business, which is his only asset,
converts it into a one-man company consisting really of himself, the consideration being
shares which are practically worthless and an undertaking by the company to pay his
debt. The act of converting his business into a company is an act of insolvency. A transfer
by a debtor of whole of his property is an act of insolvency, if the necessary consequence
of the transfer will be to defeat or delay his creditors. The substitution in place of all the
assets by worthless shares in a company which has taken over the debtor's assets and
liabilities amounts to an act of insolvency [In re Simms, (1930) 2 Ch.22].
9. An insolvent purchased a house and on the same day he mortgaged the property
to pay the purchase money. The mortgage is binding on the Official Assignee, assuming
that the transactions took place before the commencement of insolvency. The mortgage
was made to pay the purchase price of the house, and there is nothing to suggest in the
case that the mortgage was without consideration and taken in good faith. There is no
question of fraudulent preference or delaying or defeating creditors (Sec. 55 Pres-i Act).
10. An insolvent had before adjudication assigned chattels to be acquired'by him
in future as security for debt. After the discharge of the insolvent, the creditor claimed
the chattels acquired by him after discharge. Held, he had no right to the chattels
acquired by the insolvent after his discharge. The rule is that where the order of discharge
is passed before the chattels come into existence, all liability of the insolvent under the
contract to assign after-acquired property is extinguished and the insolvent is released
from such liability (Collyer v. Isaccs (1881) 19 Ch. D. 3431.
it. A has properties, movable and immovable, in Madras, Lahore, London and
New York. In case of A's insolvency, movable property in all the four places will vest
 LAW OF INSOLVENCY

in the Official Receiver or Official Assignee. But immovable property situated only in
Madras will vest, not in all other three cities situated in foreign countries [Sec. 2(1) (d)
of Prov. Ins Act.J
12. On 1st October solicitors prepared and P executed a deed of assignment of all
his property for the benefit of his creditors. He paid the solicitors Rs. 1,000, of which
Rs. 400 was as fees for the work done that day and the balance as fees in advance for
work which they actually did in the course of the following week. On 1st December a
petition was presented against P and on 5th December he was adjudicated insolvent. One
act of insolvency proved against him was the execution by him of the aforesaid
assignment deed. The Official Assignee asks for a refund of the amount of Rs. 1,000
paid to the solicitors. Held, the solicitors were entitled to retain Rs. 400 which was paid
as fees for the work done in connection with the execution of the assignment deed, as it
was protected transaction. The Official Assignee was entitled to get the balance of Rs.
600 which amount was paid in advance for work done after the execution of the
assignment deed, This could not be treated as a protected transaction as the payment
related to work done or costs incurred after the act of insolvency had been committed,
namely, the execution of the assignment deed which was proved to be an act of
insolvency tR'PolliI (1893) 1 Q.B. 455].
13. X had two loan-accounts with a bank—Account No. 1 secured by title deeds
of property and Account No. 2 not so secured. During the pendency of an insolvency
petition against X, X had obtained a loan from Y, paid off Account No. 1 and handed
over to the hank the released title deeds as security for Account No. 2. The bank had
no knowledge of the insolvency petition. The Official Assignee claimed the securities.
Held, the bank was protected under Sec. 55 which provides that any payment by the
insolvent to any of his creditors or any transfer by the insolvent for valuable considera-
tion is protected provided it was made bonafide before the order of adjudication was
passed and the third party had no notice of the presentation of the insolvency petition.
Hence, the Official Assignee will not get the securities [Re Seymour (1937) 1 Ch. 688].
14. An undischarged insolvent obtained a money decree against X for personal
services rendered by him after the adjudication and he assigned the decree to K. In a
claim by both K and the Official Assignee, X should pay the decretal amount to K, the
assignee of the money decree and not to the Official Assignee. Under Presidency-Towns
Insolvency Act, the after-acquired property vests in the Official Assignee only when he
intervenes on behalf of the insolvent's estate. Since the Official Assignee had not
intervened when the insolvent had sued X aix] obtained the decree, K, the assignee of
the decree, is entitled to get payment. Under Provincial Insolvency Act, however, all
property acquired by the insolvent after adjudication and before discharge shall forthwith
vest in the Official Receiver. Therefore, if the present case were governed by the
Provincial Insolvency Act, X would have been required to pay the declared amount to
the Official Receiver.
15. A brother and a sister carry on business in partnership in the brother's name.
The sister is a dormant partner, and the business is carried on by the brother ostensibly
as his own. The Official Assignee wishes to take possession of the sister's share in the
partnership stock on the ground that the insolvent brother was the reputed owner of the
stock. Held, the Official Assignee is not entitled to take possession of the sister's share
in the partnership stock. The brother was not the apparent or reputed owner of the
partnership stock. He was as much the true owner of the stock as the sister was. Also,
he was not in sole possession of the partnership stock. He was in possession jointly with
his sister [Reynolds v. Bowley (1867) L.R.Q.B. 4741.
 Chapter XIII

Arbitration

PART 13-A

What is Arbitration—Arbitration is a method of settling disputes and differences

between two or more parties by referring them to a nominated person or persons who
decide the issues after hearing both sides in a quasi-judicial manner. An arbitration is an
alternative to a legal action. Reference to Panch or the Panchayat is one of the natural
ways of deciding many a dispute in India'. The law relating to arbitration in India is
contained in the Arbitration Act, 1940.
Arbitration Agreement—An arbitration agreement is also known as
'submission' or 'reference'. An arbitration agreement means an agreement in writing to
submit a present dispute or a future difference to arbitration, whether an arbitrator is
named or not. Though an arbitration agreement must be in writing, a formal documeit
signed by the parties is not essential (Union of India v. Ralüa Rain, 1963 S.C. 1685). so
long as it s clear from the document that they agreed to the settlement of dispute by
arbitration . The agreement may be a clause in a contract, or in bought or sold notes, or
in correspondence between parties.
Where there is an arbitration clause in a contract and the contract comes to an end
owing to frustration or is avoided on the gound of fraud or misrepresentation, the
arbitration clause may continue to be binding . But if the parties were not ad ideni, i.e.,
there was not a contract at all the arbitration clause is not binding. 4 Also)f the arbitration
agreement is illegal, and therefore legally non-existent, the arbitration clause which
forms part of the contract is also illegal and unenforceable. Any award in such a case
shall be invalid)
Where all the persons interested in the matter of dispute were not parties to the
arbitration agreement, and when an dgreement is not consented to by all, such an
agreement is invalid and cannot give arbitrator jurisdiction to decide the dispulp, and the
award given on the strength of such void reference is not valid and will not bind even
the consenting parties.
Advantages of Arbitration—A decision by arbitration has the following ad-
vantages as compared to a law suit:-
1. Chambasappa v. Balingayya. 1927 Born. 565 (F.R.).
2. Government of India v. Janiunadhar. 1960 Pat. 19.
3. Stat of Bombay v. Adarnjee,1951 Cal. 147.
4. Tota Ram v. Itirla Jute Mills Co. (1948) 2 Cal. 171; Goolbai v. Jugal Kishore, 1952 Born.
,fl,
5. Suwalal Jain v. Clive Mills Co., 1960 Cal. 90. P.C. 72,
6. Deep Narain Singh v. Dhaneshwari, 1960 Pat. 201; Chhabba La! v. Kailu Lal. 1946
Draupadabai v. Narayan Masanu Sutar, 1985 Kant 258.
386
 ARBFRATION

1. Arbitration is less costly than a suit in a court of law.

2. It is much more expeditious, and saves the parties unnecessary waste of time and
irritation arising from delays in court proceedings.
3. There is hardly any publicity, which cannot be avoided in a law suit. --
4. It is much more simple as regards procedure.
5. The award is usually final and no appeals lie from it.
The above advantages accrue on the assumption that the arbitrator has acted
impartially and has performed his duties with competence.
EFFECT OF ARBITRATION AGREEMENT OR SUBMISSION
When some persons have entered into an agreement to refer all disputes between
them, either existing or future, to arbitration, they cannot institute any suit in a Court of
Law relating to those matters; otherwise the very purpose of arbitration will be frustrated.
It was held inAbhiman Singh v. Ram Singh, 1958 All. 437, that a party to an arbitration
agreement cannot later withdraw from that agreement and reconfer jurisdiction on the
court to hear the suit. Therefore, if any of the parties disregards the agreement and
institutes a suit, the other party to the agreement may apply to the court for staying the
suit. The court will stay the suit or proceeding, provided the following conditions are
satisfied (S. 34):
I. The suit or proceeding relates to the same matter as that covered by the
arbitration agreement. No stay will be granted if the suit relates to matters outside the
scope of the arbitration agreement. If the suit relates partially to matters covered by the
submission, the Court may or may not, at its discretion, stay the proceeding or suit In
such a case, it is not right to cut up the litigation into two actions, one to be tried by the
Court and the other by arbitration.
2. It must be shown that the applicant for stay was and is still ready and willing
to proceed with the arbitration and do everything necessary for the purpose.
3. It must also be shown that there is not sufficient reason why the matter should
not be referred in accordance with the arbitration agreement.
4. The party asking for stay must not have filed his written statement by way of
defence in the suit, sought to be stayed, or taken any other steps in the proceedings (e.g.,
an application for extension of time to file the written statement).
5. The arbitration agreement must not have been the result of fraud.
If the Court is satisfied that the matter should be decided by arbitration and that
there is a valid arbitration agreement, it will stay the suit or proceeding. The party
opposing the stay shall have to convince the Court that there are strong reasons for
continuing the suit or proceeding and not granting the stay. The principles as contained
in Sec. 34 and as stated above were reiterated by the Supreme Court in Anderson Wrighi
Ltd. v. Morgan & Co. 1955 S.C. 53, where the Court stays the suit, it does not dismiss
it, for in case the award is remitted or set aside the stayed suit can be heard without the
necessity of filing it all over again.
Who may Refer to Arbitration—An arbitration agreement is a contract. There-
fore, the parties to an arbitration agreement or submission to arbitration must have
capacity to enter into a contract. Capacity to make a submission is co-elensive with
capacity to contract He who cannot contract, cannot make a submission . and he who
is competent to make a contract, can submit a dispute to arbitration by agreement with
the other party to the dispute.
1. The Karla or Manager of a joint Hindu family acting bonafide for the benefit of
the family may make a submission.
7. Per Mookerjee I. in Soudamini Ghose v. Gopal C. Ghose. 281. C <'
38$ WRCANTUE LAW

2. An agent duly authorised may enter into an arbitration agreement and bind his
principal.
3. An attorney or counsel has implied authority to refer to arbitration a case of his
client, unless restricted by express directions to the contrary.
4. A trustee may, subject to the instrument of trust, refer to arbitration thy debt,
account, or claim relating to the trust
5. The Official Assignee or Receiver may, by leave of the Cowl, refer any dispute to
arbitration, and compromise all debts, claims and liabilities.
6. A natural aardian of a minor or Committee of a lunatic can submit a dispute to
arbitration. A certified guardian can do so only with leave of the Court-9
7. A minor or a lunatic cannot refer disputes to arbitration.
8. An insolvent cannot refer to arbitration so as to bind his estate.
9. A partner in a firm cannot submit a dispute to arbitration without special authority
of all the other partners, or unless there is a custom or usage of trade.
10. An executor or administrator cannot refer the question of genuineness or otherwise
of a will to arbitration; but an arbitrator can be asked to construe a will.
What may be referred-As a rule, disputes of civil nature and quasi-civil nature
or those which can be decided by a civil suit can also be decided by arbitration. The
following matters may be submitted to arbitration:
1. Any matter affecting the private rights of the parties, which can be subject-matter
of a civil suit may be referred to arbitration; e.g., right to hold the office of a pujari
in a temple.
2. Matters relating to personal rights between the parties; e.g., a question of marriage
or maintenance which is cognizable by a Civil Court. 10
3. Matters like the terms on which husband and wife will separate can be the
subject-matter of a valid reference.
4. Disputes regarding compliment and dignity.
5. The parties may refer to arbitration the question whether judgment has been
properly obtained or it is erroneous or void.
6. A time-barred claim may be referred.
7. Both questions of fact and law can be referred.
8. Disputes between an insolvent and his creditors can be referred to arbitration by
the Official Assignee or Receiver, even though insolvency proceedings cannot be
so referred.
What cannot be referred-The following matters cannot be referred to arbitra-
tion, namely:-
1. A suit for divorce or a suit for conjugal right.11
2. A dispute arising from and founded on an illegal transaction.
3. Insolvency proceedings, which are matters for the Court only. '2
4. Questions relating to Public Charities and Charitable Trusts.1 3

8. Har Narayan v. Saban Pal. 67 I.A. 3*6 (P.C.).

9. Samad Khan v. Ramzan Khan, 1938 Lam. 582.
lO. Iscnbaiv. Pavribai, 1930 Sind 1951.
11. Mac. Kalabati v. Prahh Dayal, 45 I.C. 163; Malkav. Sardar, 1929 Lam. 394.
12. llaji Habib v. Rhikam Chand, 1954 Nag. 306.
13. Mohd. v. Ahmed (1910) 32 All. 593.
 ARBifRATION 389

5. Lunacy proceedings in the nature of inquisition are a proper subject-matter only

for a Court of law.
6. Proceedings relating to the appointment of a guardian to a minor.
7. Testamentary matters relating to the validity of a will or the issue of a probate of
a will can be decided only by the Probate Court and not by an arbitrator.
8. Execution proceedings.
9. Matters of criminal nature are the concern of the community and must be decided
by a Court of law.
ARBITRATION AND VALUATION
These two terms are often coifused, as they resemble each other. An arbitration
agreement is not the same as a valuation. In fact, there are important differences between
the two:
(a) Where parties agree to appoint a valuer and to accept his valuation, the
purpose is to avoid a dispute, to forestall a disagreement. When the valuer makes his
valuation, there is no question of dispute between the parties. On the other hand, an
arbitration is always concerned with a dispute between the parties; it presupposes a
dispute.
(b) An agreement for valuation cannot be enforced in the same way as a
submission. A valuation has to be enforced by legal action; an award is already a legal
value.
(c) A valuer merely declares the value of the subject, a commodity or land, and
does not give any judgment; but an arbitrator gives his judgment in form of an award,
which can be enforced at law.
(d) A valuer may act on his own knowledge and experience; as a rule, an arbitrator
must hear evidence.
(e) A valuer is liable for his own negligence, an arbitrator is not.
(f) The Court cannot set aside a valuation; it may set aside an award.
(g) A submission to arbitration requires a stamped paper; an agreement for
valuation does not.
Modes of Submission— A submission to arbitration may be made in any one of
the following ways:—
I. By an arbitration agreement without the intervention of the Court. The Court is,
however, approached at the time of filing the award in order that the Court may
pass judgment and give a decree in terms of the award.
2. With the intervention of the Court where there is no suit pending.
3. Through the Court where a suit is pending in the Courj.

PART 13-B
ARBITRATION WITHOUT INTERVENTION OF A COURT

PROVISIONS IMPLIED IN ARBITRATION AGREEMENT

Sec. 3 provides that unless a different intention is expressed in an arbitration
agreement, it shall be deemed to include the provisions set out in the first schedule in so
far as they are applicable to the reference. The rules, as provided in the first schedule,
are as follows:-
1. Unless otherwise expressly provided, the reference shall be to a sole arbitrator.
390 MERCANTI1E LAW

2. If the reference is to an even number of arbitrators, the arbitrators shall appoint

an umpire not later than one month from the latest date of their respective appointments.
3. The arbitrators shall make their award within four months, after entering on the
reference or after having been called upon to act by noti'c in writing from any party to
the arbitration agreement or within such ext'ended time as the Court may allow.
4. If the arbitrators have allowed their time to expire without making all or
have delivered to any party to the arbitration agreement or the umpire a notice in writing
stating that they cannot agree, the umpire shall forthwith enter on the reference in lieu
of the arbitrators.
5. The umpire shall make his award within two months of entering on the reference
or within such extended time as the Court may allow.
6. The parties to thi reference and all persons claiming under them shall, subject
to the provisions of any law for the time being in force, submit to he examined by the
arbitrators or umpires on oath or affirmation in relation to the matters in difference and
shall subject as aforesaid, produce before the arbitrators or umpire all books, deeds,
papers, accounts, writings and documents within their possession or power respectively,
which may be required or called for, and do all other things which, during the proceedings
on the reference, the arbitrators or umpire may require.
7. The award shall be final and binding on the parties and persons claiming under
them respectively.
8. The costs of the reference and award shall be in the discretion of the arbitrators
or umpire who may direct to, and by whom, and in what manner, such costs or any parts
thereof shall be paid, and may tax or settle the amount of cost to be so paid or any part
thereof and may award costs to be paid as between legal practitioner and client.
THE ARBITRATOR
An arbitrator is the person appointed by mutual consent of the contending parties
for the purpose of investigation and settlement of a difference or dispute submitted to
him. Where two or any even number of arbitrators are appointed, the matter in dispute
must be referred to the decision of another person called the umpire. The arbitrator is an
extra-judicial Court of the parties' own choice. They may, therefore, appoint whom-
soever they please, however incompetent or unfit, to arbitrate on their dispute. An infant
or a lunatic may he appointed an arbitrator or an umpire, so may an unincorporated and
14
fluctuating body he validly appointed arbitrators. The judge in the cause may be the
arbitrator, but in such a case the award is not open to appeal. is Even a party'to the
16
cYitract may be appointed an arbitrator. The authority of the arbitrator commences
from the moment he begins with the business of reference and not from the time of
appointment.
DISQUALIFICATIONS
Personal interest of Arbitrator—Where the interest of the arbitrator in the
subject-matter is known to the parties at or before the time of appointment, no complaint
can be made by a party who has agreed to appoint him with full knowledge of such
interest. Thus, a reference to one of the parties to the suit would be valid. Where secret
interest or bias of the arbitrator is alleged, the Court would consider all the material facts
of the situation, the position and character of the arbitrator and the possibility of his being
influenced by reason of his concealed interest as well as the nature and quantum of the

14. Ruthven Parish v. Elgin Parish (1875)1-R.2 ILL Sec. 535.

15. Sayan Rain v. Kalabhi (1899)23 Bom.752.
16. Secretary of State v. Saran Bros. 8 Luck. 98.
 ARBITRATION 391

interest. No hard and fast rule can be laid down for the qualification of an arbitrator; but
in csses of arbitration when a person is appointed by the parties to exercise judicial duties
there should be uberrirnaefidei on he part of all concerned in relation to the selection
and appointment of the arbitrator; 17 and every disclosure which might in the least affect
the minds of those who are proposing to submit their disputes to the arbitrament of any
particular individual, as regards his selection and fitness for the post, ought to he made,
so that each party may have opportunity of considering whether the reference to
arbitration to that particular individual should or should not be made) A fraudulent
concealment of interest invalidates the award of the arbitrator. A person is disqualified
from acting as an arbitrator in a dispute in relation to which he is a necessary witness.
REVOCATION OF AUTHORITY
The authority of an appointed arbitrator or umpire is irrevocable except with the
leave of the Court, unless the contrary intention is expressed in the arbitration agreement.
The Court has the discretion to grant or refuse leave, but this power is to be exercised in
very exceptional circumstances and very cautiously. For example, the Court will grant
leave for such revocation if the arbitrator is not acting according to the rules of natural
justice, or if he acts in collusion with apaily.Jhere is no revocation of authority of an
arbitrator by the death of the appointer. Deathof a party does not discharge the arbitration
agreement which shall be enforceable by or against the legal representatives of the
deceased unless it was intimately connected with the individuality of the deceased, e.g..
personal office, right to sue in respect of tons not relating to or affecting property of the
deceased.
Where, however, one of the parties to an arbitration agreement becomes insolvent
and it is provided in such an agreement that any difference arising shall be referred to
arbitration AND if the Receiver in insolvency or Official Assignee adopts the agreement,
the agreement shall be enforceable by or against him so far as it relates to any such
differences. But where a person who has been adjudged an insolvent had, before the
commencement of the insolvency proceedings, become a party to an arbitration agree-
ment and any matter to which the agreement applies is required to be determined in
connection with, or for the purpose of, the insolvency proceedings, then if the Receiver
does not adopt the contract containing a term to refer to arbitration, any other party to
the agreement or the Receiver or Assignee, may apply to the Insolvency Court for an
order directing that the matter in question shall be referred to arbitration in accordance
with the agreement and the Court may, if it is of the opinion that, having regard to all
the circumstances of the case, the matter ought to be determined by arbitration, make an
order accordingly (Sec. 7).
POWERS OF A PARTY TO APPOINT A NEW OR SOLE ARBITRATOR
Sec.9 empowers a party to appoint a new or sole arbitrator in certain circumstances,
namely where an arbitration agreement provides that a reference shall be to two ar-
bitrators, one to be appointed by each party, unless a different intention is expressed in
the agreement—
(a) if either of the appointed arbitrators neglects or refuses to act, or is incapable of
acting, or'dies, the party who appointed him may appoint a new arbitrator in his
Place, or
(b) if one party fails to appoint an arbitrator, either originally or by way of substitution
as aforesaid, for 15 clear days after the service by the other party of a notice in
writing to make the appointment, such other party having appointed his arbitrator
17. Per Maclean, C.J. in Kali v. Rajni (1905)27 Cal. 141.
18. Ghulam Mohd. v. Gopal Das (1933) Sind 68.
392 MERCANTRE LAW

before giving the notice, the party who has appointed an arbitrator may appoint
that arbitrator to act as sole arbitrator in the reference and his award shall be
binding on both parties as if he has been appointed by consent. The Court may,
however, set aside any appointment as sole arbitrator and either, on sufficient cause
being shown, allow further time to the defaulting party to appoint an arbitrator or
pass such orders as it thinks fit.
Where an arbitration agreement provides that a reference shall be to three ar-
bitrators, one to be appointed by each party and the third by the two appointed arbitrators,
the agreement shall have effect as if it provided for the appointment of an umpire, and
not for the appointment of a third arbitrator, by the two arbitrators appointed by the
parties. Where an arbitration agreement provides that a reference shall be to three
arbitrators to be appointed otherwise than as mentioned above, the award of the majority
shall, unless the arbitration agreement otherwise provides, prevail. Where an arbitration
agreement provides for the appointment of more arbitrators than three, the award of the
majority or if the arbitrators are equally divided in their decisions the award of the umpire
shall, unless the arbitration agreement otherwise provides, prevail (Sec. 10).
POWER OF COURT TO APPOINT ARBITRATOR OR UMPIRE
Sec. 8 lays down the procedure for appointment by Court of arbitrators or umpire
as follows:—
"8 (1). In any one of the following cases:
(a) Where an arbitration agreement provides that the reference shall be to one or more
arbitrators lobe appointed by consent of the parties, and all the parties do not, after
differences have arisen, concur in the appointment or appointments; or
(b) if any appointed arbitrator or umpire neglects or refuses to act or is incapable of
acting, or dies, and arbitration agreement does show that it was intended that the
vacancy should not be supplied and the parties or the arbitrator, as the ease may
be, do not supply the vacancy; or
(c) where the parties or the arbitrators are required to appoint an umpire and do not
appoint him;
any party may serve the other parties or the arbitrator, as the case may he, with a written
notice to concur in the appointment or in supplying the vacancy.
2. If the appointment is not made within 15 clear days after the service of the notice,
the Court may. on the application of the party who gave the notice and after giving the
other parties an opportunity of being heard, appoint an arbitrator or arbitrators or umpire,
as the case may be, who shall have like powers to act in the reference and to make an
award as if he or they had been appointed by consent of all parties."
REMOVAL OF ARBITRATOR OR UMPIRE BY COURT
The Court may, on the application of any party to a reference, remove an arbitrator
or umpire who fails to use all reasonable despatch in entering on and proceeding with
the reference and making an award, or where the arbitrator or umpire has misconducted
himself or the proceedings. The arbitrator or umpire so removed shall not be entitled to
receive any remuneration for service (Sec. II).
POWERS AND DUTIES OF ARBITRATORS
POWERS
Sec. 13 dealing with arbitrators' powers provides as follows:
''13. The arbitrators or umpire shall, unless a different intention is expressed in
the agreement, have power to-
 ARBTTRATION 393

(a) administer oath to the pates and witness appearing;

(b) state a special case for the opinion of the Court on any question of law invoked,
or state the award, wholly or in part, in the form of a special ce of such question
for the opinion of the Court;
(c) make the award conditional or in the alteznatiw,
(d) correct in an award any clerical mistake or enm arising from an accidental slip or
omission;
(e) administer to any party to the arbitration interrogatories as may, in the opinion of
the arbitrators or umpire, be necessary."
The arbitrator can also award costs of the reference and award. The costs of
reference include costs incurred in connection with the inquiry before the arbitrators and
costs incurred by the arbitrators with the consent of the parties, like fees paid to
accountants for examining accounts, as well as costs of, and incidental to, any special
case submitted by the arbitrators. 'Cost of the award' covers reasonable costs of counsel
or solicitor employed by the arbitrators in connection with the drawing up of the award.
DUTIES
I. To act judicially—Arbitration being a method of settling a dispute between
the parties, in a quasi-judicial manner, the arbitrator must act judicially and proceed by
appointing a time and place for hearing of the reference of which the parties should have
due notice. An arbitrator must fix a reasonable time and place for the hearing and grant
such adjournments as may be necessary so that justice may be done. Oiiission to give
notice to the parties to appear and to represent their case is legal misconduct and vitiates
the award.
2. Duty to observe rust principle of justice—The arbitrators have judicial
functions to perform and, therefore, they must observe the fundamental rules of justice,
which govern legal proceedings although they are not bound by mere rules of practice
which Courts have adopted for general convenience. An arbitrator is given the latitude
to deviate from technical rules of procedure at.a hearing in Court, provided he does not
disregard the substance of justice. For example. an arbitrator must not receive informa-
tion from one side which is not disclosed to the other, or he must not deliberately refuse
a hearing or take evidence from one side behind the back of the other. He should decide
according to legal rights of parties and, it is judicial misconduct to intentionally disregard
the law applicable.
• 3. Duty to act fairly to both parties—The arbitrator must act fairly to both parties
and in the proceedings throughout the reference, he must be impartial in all respects.
Since he occupies ajudicial position, an arbitrator should scrupulously avoid any course
of action which even remotely casts a suspicion of partiality. He must not do anything
for one party which he does not do for the other. Practical application of this rule lies in
the proposition that the arbitrator is not to hear one party in the absence of the other, or
to take evidence from one side without communicating it to the other party and giving
them an opportunity to meet the same.
4. Duty not to act as an advocate or agent of a party—An arbitrator is not to
act as an advocate or agent of a party which appoints him. He must conduct himself
impartially as ajudge and refrain from identifying himself with the party appointing him.
It is no part of his duty as an arbitrator to further the interests of the person nominating
him.
5. Duty to decide all matters referred—A part of an award cannot be made a
rule of Court therefore, the award should be a final decision on all matters referred to
the arbitrator, unless he is empowered to make several awards. An arbitrator who does
394 MERCANTILE LAW

not give a party an opportunity to put his case before him, and who does not decide all
matters in dispute between the parties, acts improperly and his conduct amounts to legal
misconduct.
6. Duty to discharge functions personally—As a general rule an arbitrator has
no power to delegate to another, not even to a co-arbitrator, the duties which he has been
appointed to discharge. Delegation is permissible only in the case of ministerial acts.
Judicial acts must be performed by the arbitrator, or if there are more than one arbitrator,
then jointly by all the arbitrators. Ministerial acts may, however, he done singly by the
arbitrators. What is ministerial act as opposed to judicial act is not always easy to
ascertain, but some illustrations may be given for guidance. The ministerial acts are:
mere receipt of a written statement from a party, taking assistance in technical matters,
seeking legal advice, delegation of the checking of measurements to an engineer, taxation
of cost by taxing officer. It is to be noted that although an arbitrator is permitted to take
assistance of experts, yet the decision must ultimately be his own judgment in the matter.
7. Not to exceed his authority—An arbitrator must not exceed the terms of
reference and an award in excess of jurisdiction and determining matters outside the
scope of the arbitration agreement is liable to be set aside. The arbitrator is inflexibly
limited to a decision of the particular matters admitted; he cannot take upon himself an
authority which the arbitration agreement does not confer.
It was held by the Supreme Court in Harikrishan Wajial V. Vaikunih Nash Pandya
(1973) 2 S.C. 510 that the agreement between the parties is the foundation of the
jurisdiction of the arbitrator. Although the power to enlarge time is vested in the Court
and not in the arbitrator, the agreement may give him the power to extend the time. Again,
like any other contract, the arbitration agreement may be modified by mutual consent of
the parties to it. So even after the arbitrator enters on the reference, the parties can agree
to enlarge the time, even if no power to enlarge is contained in the original agreement.
The duties of an umpire are identical with the duties of an arbitrator.
THE AWARD
An award is the final judgment or decision in writing by an arbitrator or arbitrators
or an umpire on all matters referred to arbitration and as between the parties and the
privies, it is entitled to that respect which is due to the judgment of a Court of last resort.
The award must, therefore, be as final and certain as the matters in difference could bear.
If it is vague and indefinite, it will be bad for uncertainty and if it leaves undecided any
cardinal point, it is bad for want of finality. An award given under the Arbitration Act
on a private reference requires registration under Sec. 17(1 )(b) of the Registration Act,
if the award affects partition of immovable property exceeding the value of Rs. 100. The
matter of making and filing of an award is dealt with in Sec. 14, which provides that
where an award has been made by arbitrators or umpire, they shall sign it and give notice
in writing of that fact to the parties, as also of the amount of fees and charges payable
in respect of the arbitration and award. If requested by a party or one claiming through
him, or if so directed by the Court, they shall cause the award or a signed copy of it
together with any depositions and documents which may have been taken or proved
before them to be filed in Court. But before doing this they have the right to be paid the
fees and charges due in respect of the arbitration and award, as well as costs and charges
for filing the award. If the arbitrators or umpire choose to state a special case under Sec.
13(b), the Court, after notifying the parties and hearing them, shall pronounce its opinion,
which shall be added to and form part of the award.

19. Rhoja Han Saha v. Beharilil Bakos (1911)33 Cal. 83; Satish Kumar v. Sunnder Kumar, 1970
S.C. 833.
 ARBrrRA110N 395

MODIFICATION AND CORRECTION OF AWARD

The Court may by order modify or correct an award—
(a) where it appears that a part of the award is upon a matter not referred to arbitration
and such part can be separated from the other part and does not affect the decision
on the matter referred; or
(b) when the award is imperfect in form, or contains any obvious error which can be
amended without affecting such decision; or
(c) where the award contains a clerical mistake or an error arising from an accidental
slip or omission (Sec. 15).
The powers of the Court to modify and correct awards extend to awards in all types
of arbitrations.
REMITTANCE OF AWARD
Sec. 16 empowers the Court to remit the award or any matter referred to arbitration
to the arbitrators or umpire for reconsideration on the following grounds:-
1. where the award has left undetermined any of the matters referred to arbitration
and such matter cannot be separated without affecting the determination of the
matters referred; or
2. where the award is so indefinite as to be incapable of execution; or
3. where an objection to the legality of ther award i,a apparent upon the face of it
When remitting the award the Court shall fix the time within which the arbitrator
or umpire shall submit his decision to the Court. The time may be extended by the Court
if necessary. If the arbitrator or umpire fails to submit the award after reconsideration
within the fixed time it shall become void and ineffective. It may be noted in this
connection that the award becomes void on the failure by the arbitrator or umpire to
reconsider and submit it within the time fixed only if the whole award is remitted for
reconsideration. But where instead of the award, "any matter referred to arbitration is
remitted," the failure on the part of the arbitrator or umpire will not render the award
void. Thus, if only one matter out of several left undecided was remitted, the award
remains "in a manner suspended" pending the second reference.
INTERIM AWARD
Sec. 27 of the Act permits arbitrators to make an interim award, if they think fit,
subject to a contrary intention expressed in the arbitration agreement. Everything relating
to an award will also apply to an interim award.
SE11'ING ASIDE AN AWARD
Sec. 30 provides for the setting aside of the award and lays down the grounds on
which it can be set aside by the Court. The grounds are:-
1. that an arbitrator or umpire has misconducted himself or the proceedings; 20
2. that an award has been made after the issue of an order by the Court superseding
the arbitration or after arbitration proceedings have become invalid by reason of
the commencement of legal proceedings upon the whole of the subject-matter of
the reference between all the parties to the reference;

20. See C3ihaganlal Asaram v. Jevenlal Gangabison. 1954 Nag. 263; big See A.P. Singh v. Brij
Narain, 1954 AIL 244.
396 MERCANTILE LAW

21
3. that an award has been improperly procured or is otherwise invalid.
Failure to perform the essential duties cast upon the arbitrator constitutes miscon-
duct of arbitrator and of the proceedings, and is a good ground for setting aside the award.
Failure to receive evidence properly tendered amounts to misconduct. The other
ground is "that the award has been improperly procured." A few examples of improper
procuring of an award may be given: where an arbitrator has been bribed, or has without
the knowledge of a party become personally interested in the subject-matter of the
reference. Also where matters, of which the arbitrator ought to have been informed, are
fraudulently concealed by a party, or he is guilty of misleading or deceiving the arbitrator.
The other ground for setting aside the award is that it "is otherwise invalid." Where a
part of the award covered matters which were the subject of a pending suit, it was set
aside on this ground.23 It has been held by the Supreme Court in the Union of Indiav.
Shri Om Prakash, 1976 S.0 1745, that the words "or is otherwise invalid" in clause
(c) of Sec. 30 are wide enough to cover all forms of invalidity including invalidity of the
reference. In cases of arbitration without the intervention of the Court, a Court has no
jurisdiction after appointing an arbitrator under Sec. 8(2) to proceed further to make an
order referring the dispute to the arbitrator. Where such reference has been made and
award is passed in pursuance of such reference, such award can be set aside as invalid
on the ground that the reference was incompetent.
It may be repeated that the award is final and conclusive, and is not ordinarily liable
to be set aside on the ground that either on facts or in law, it is erroneous (Ved Praka.sh
v. Ram Narain Goel, 1977 Delhi 47). Even amistake of law cannot vitiate the award
unless the mistake is apparent on the face of the award. Again, if the error in the award
relates to a matter which is distinct and separate from the rest of the award, and the invalid
part is reversible from the valid part, the entire award cannot be set aside. (The Upper
Ganges Valley Electricity Supply Co. Ltd. v. The U.P. Electricity Board (1973) IS.C.
254). But the Court may make enquiry into the allegation that the arbitrator bad
misconducted himself and allow the party to produce evidence (Sa:fud-din v. Executive
Engineer, 1977 J & K. 19).
PROCEDURE TO SET ASIDE AWARD
The procedure for setting aside the award is that any party to an arbitration
agreement or any person claiming under him should apply to the Court in which the
award has been filed, for all matters relating to the arbitration can be heard and decided
by that Court, and no other Court. The award is filed in any Court, except a Small Causes
Court, having jurisdiction to decide the question forming the subject-matter of the
reference if the same had been subject-mailer of a suit. The first application, therefore,
fixes the venue for all future proceedings. The application for setting aside the award
may be resisted on the following grounds:
1. Acquiescence in Irregularities—The principle underlying this has been
entciated by the Privy Council in Chaudhri Murtaza Hussain v. Us(. Bibi Bechwiis-
sa. The applicant, having a clear knowledge of the circumstances on which he might
have founded an objection to the arbitrators' proceedings to make their award, did submit
to the arbitration going on; that he allowed the arbitrakm to deal with the case as it stood
before them ........; and it is too late for him, after the award has been made and filed, 10
insist on this objection to the filing of the award." So where a party having full chance
to object, does not do so at the right moment he is said to have waived his right to object

21. Shah & Co. v. I.S.K. Singh & Co. 1954 C41.164.
22. Comm. Bangalore Area v. Amiu, Nags & Co. 1954 Mys. 46,
23. Ram Pratap v. Durga Prasad, 1925 P.C. 239 (Cal.)
24. 3I.A.9at200.
 ARBITRATION 397

and to have acquiesced to the irregularities and thus not allowed to move for setting aside
the award.
2. Taking benefit under the Award and performance of the Award—Motion
for setting aside an award may be met by showing that the pasty moving has accepted
benefit undçr the award with full knowledge of all relevant circumstances. Where the
parties to an award in a boundary asked the Settlement Officer to lay pillars alongghe
lines settled by the arbitrators, it was held that the parties had accepted the award. A
party having accepted costs given to him by award was not permitted to have the
award set aside by reason of his acquiescence.
3. That the irregularity complained of has resulted In benefit to party moving
to set aside the Award—The law relating to the point t,s been stated by Mukeijee. I.
in Narsingh Narayan Singh v. Ajodhya Prasad Singh, thus,--if the arbitrator has
exceeded his authority, he has done so for the benefit of the defendants and they are not
entitled to assail the award which is really in their favour ........It is an elementary
principle that only the party prejudiced by the act of the arbitrator is entitled to object
to the award by reason of it; the party in whose favour erroneous action of the arbitrator
operates cannot be heard to impeach the validity of the award on this ground."
4. Limitation—That the application to set aside the award has not been filed
within 30 days from the date of service of the notice of the filing of the award.
JUDGMENT ON AWARD
Where the Court sees no cause to remit the award or any of the matters referred
to arbitration ft for reconsideration or to set aside the award, it shall, after the time for
making application to set aside the award has expired, or such application having been
made, after refusing it proceed to announce judgment according to the award, and give
a decree in terms of the award, which will be final and no appeal shall lie from such
decree (Sec. 17). The judgment and decree on award import the final stage, but the
Arbitration Act, 1940, now provides that the Court may pass Interim orders, if a pasty
to the award has taken or is about to take steps to defeat, delay or obstruct the execution
of any decree that may be passed upon the award, or where such order becomes necessary
for speedy execution of the award (Sec. 18).
Court may Supersede Arbitration—Sec. 19 empowers the Court to make an
order superseding arbitration in two cases; (i) when an award has become void because
the arbitratorF did not reconsider it within the time fixed by the Court after the award
was remitted to them for reconsideration, or (ii) when the award is set aside under Sec.
30 of the Act.
Enforcement of Foreign Awards—Under the Arbitration Protocol and Conven-
tion Act of 1937, (Sec. 2): "a foreign award means an award on differences relating to
matters considered as commercial under the law in force in India made after 28th July.
1924:-
(a) in pursuance of an agreement for arbitration, and
(b) between parties of whom one is subject to the jurisdiction of some one of such
powers as the Central Government may declare to be parties to the Convention,
and
(c) in one of such territories as the Central Government being satisfied that reciprocal
provisions have been made may declare to be the territory to which the Convention
applies."

25. Ramsinjan v. Ram Prasad, 13 C.LR. 26.

26. Kennard v. Harris (1824)2 B.&C. 801,
27. (1912) IC. 118: l6C.W.N. 256.
399 MERCAt'ITtLE LAW

Section 4 states that a foreign award is enforceable in India as if it were an award

on a reference made in India.
ARBITRATION WITH INTERVENTION OF COURT
WHERE NO SUIT IS PENDING

Sec. 20 provides for arbitration with the intervention of a Court s'here there is no
suit pending. The Section reads:
"20. (1) Where any persons have entered into an arbitration agreement before
the institution of any suit with respect to the subject-matter of the agreement or any part
of it, and where a difference has arisen to which agreement applies, they or any of them
instead of proceeding under Chapter II" [arbitration without intervention of a Court,
which has been discussed in preceding pages) "may apply to a Court having jurisdiction
in the matter to which the agreement relates, that the agreement be filed in Court.
2. The application shall be in writing and shall be numbered and registered as a
suit between one or more of the parties interested or claiming to be interested as plaintiffs
and the remainder as defendant or defendants.
3. On such application being made, the Court shall direct notice thereof to be given
to all parties to the agreement other than the applicant, requiring them to show cause
within the time specified in the notice why the agreement should not be filed.
4. Where no sufficient cause is shown the Court shall order the agreement to be
filed, and shall make an order of reference to the arbitrator appointed by the parties,
whether in the agreement or otherwise, or where the parties cannot agree upon an arbitra
tor, to an arbitrator appointed by the Court.
5. Therefore the arbitration shall proceed in accordance with, and shall be
governed by the other provisions of this Act [already discussed] so far as they can be
made applicable."
ARBITRATION IN SUITS
Sees. 21 to 25 of the Act provide for decision by arbitration of any suit which is
pending in a Civil Court. The parties to a suit may by mutual consent apply in writing
at any time before judgment to the Court for an order of reference, whereupon the Court
shall appoint an arbitrator in such manner as may be agreed upon between the parties.
Then the Court shall, by order, refer to the arbitrator the matter in difference for
determination specifying the time for making the award. After referring the matter to
arbitration the Court shall not deal with such matter, save as allowed by the Arbitration
Act. The Act makes express provision by Sec. 24 for reference to arbitration by some of
the parties to the suit on the condition only that the matter in difference between the
parties applying for reference can be separated from the rest of the subject-matter of the
suit. On such a reference the suit shall continue so far as it relates to the parties who have
not joined in the said application and to matters not contained in the said reference.
STATUTORY ARBITRATION
Some statutes provide for arbitration in disputes arising out of matters covered by
them. For example, the Co-operative Societies Act lays down that certain disputes
between a member and a co-operative society must be settled by arbitration and not by
suit. The Industrial Disputes Act, 1947, also permits the parties to an industrial dispute
to refer it to arbitration. This type of arbitration is known as Statutory Arbitration. The
statute concerned generally provides for the procedure according to which the arbitration
will be conducted.
 ARBTrRATION 399

APPEALS

Sec. 39, by specifying the appealable orders, has simplified the matter of appeal.
The Section reads:—
'39(l) An appeal shall lie from the following orders passed under this Act (AND
FROM NO OTHERS) to the Court authorised by law to hear appeals from original
decrees of the Court passing the order:—
An order-
(i) superseding an arbitration;
(ii) on an award stated in the form of a special case;
(iii) modifying and correcting an award;
(iv) filing or refusing to file an arbitration agreement;
(v) staying or refusing to stay proceedings where there is arbitration agreement;
(vi) staying or refusing to set aside an award;
provided that the provisions of this Section shall not apply to any order passed by a Small
Causes Court."
2. No second appeal shall lie from an order passed in appeal under this Section,
but nothing in this Section shall affect or take away any right to appeal to the Supreme
Court."
CASES FOR RECAPITULATION

1. A party to an arbitration agreement challenges the award alleging that a question

of law was wrongly referred to the arbitrator and further that the arbitrator wrongly
decided the same thereby vitiating the award. Held, a mistake of law in making the
reference to arbitration may be invoked to obtain the intervention of the Court, if it is a
mistake with regard to a party's right. A mistake with regard to the terms of a general
statute, e.g., Hindu Women's Right to Property Act cannot be invoked to obtain
intervention of the Court (Kalepalli Venkala Rao v. Kalepalli Padniavaili Tayaramma,
1941 Mad. 324). Thus if a question of general law was wrongly referred to the arbitrator,
the award cannot be set aside; but if it was a mistake of law with regard to party's private
right, it may be made a ground for setting aside the award.
An arbitrator's award will only be set aside on the ground of error of law if the
mistake appears on the face of the award. If the arbitrator has acted within his authority
the award will be upheld. An arbitrator is a judge of both the question of fact and law,
and the parties cannot be allowed to show that his decision was wrong on merits. So long
as the arbitrator is within the scope of his authority, his decision will be accepted as valid
and binding (Gobardhan Das v. Lachhmi Ram, 1954 S.C. 689). Courts of law cannot
sit in appeal on an award either with regard to error of law or error on question of fact..
2. The heirs referred to arbitration a dispute regarding the distribution of property
of the deceased. One of the heirs, Mr. M refused to join in the reference. Despite this,
the awards allotted him a share of the property. A decree in terms of the award was passed
wit1.M's consent. As M was not a party to the arbitration agreement, he was not bound
by the award. A cannot get the benefit of the decree based on the award, if passed. The
decree cannot be made effective in his favour.
It is important to note that the agreement itself was invalid and so was the award.
For where all the persons interested in the dispute were not party to arbitration agreement,
and when an agreement was not assented to by all, such an agreement would be invalid
and would not give the arbitrator any jurisdiction to decide the dispute. Any award given
on the strength of such void reference is not valid. The award passed on such invalid
reference does not bind even the consenting parties. If follows that a decree cannot be
given on such an invalid award (Deep Narain Singh v. Dhaneshwari, 1960 Pat. 201).
 Chapter XIV

Carriers and Carriage of Goods

PART 14-A
CONTRACT OF CARRIAGE
The law relating to carriage forms part of the law of bailment and falls - tinder the
head bailment for reward. A bailment, we know, is the delivery of goods by one person
to another for some purpose, upon the contract that they shall, when the purpose is
accomplished, be returned or otherwise disposed of according to the direction of the
person delivering them.
..'4 hen the goods are handed over to a bailee for conveyance from one place to
another for a remuneration, there is aContract of Carriage and the person who undertakes
to convey the goods is called the carrier.The person who delivers the goods is the
consignor or shipper. The person to whom the goods are addressed and to whom the
carrier should deliver the consignment is called the consignee.
CLASSIFICATION OF CARRIERS
A carrier of goods is either a common carrier or private carrier. Some carrierscary
both goods and passengers, and some carry only goods, and others only passengers.
Private Carriers—A private carrier is one who casually or occasionally carries
goods for others on special terms mutually agreed upon between him and the shipper,
and who reserves to himself the right to reject the goods offered to him for carriage,
which a common carrier cannot do. He has the responsibility of a bailee, and negligence
must be proved to make him liable for loss or damage, although loss or non-delivery is
prima fade evidence of negligence and must be rebutted. Where a private carrier carries
goods or passengers under individual contracts, he is called contract carrier. There is a
common practice in Delhi for bus owners to engage themselves on contract basis to carry
students to and from schools. Where passengers are carried, either gratuitously or for
payment, the earner is liable for both his own negligence and that of his servants.
Common Carriers—In English law, a common carrier is one who holds himself
out as being ready to carry for reward either any person, or the goods of any person, no
mattter who that person may be, either by land, air or water. If he reserves the right to
choose as among persons or goods, he is not a common carrier.
In Indian law, the term common carrier is used in a restricted sense. The Common
Carrier Act, 1865, defines a common carrier as any individual, firm, or companuy (other
than the Government) who transports goods, as a business, for money over land or inland
waterways, without discrimination between different consignors. According to this
definition, the characteristics of a common carrier in India are as follows:
1. The common carrier may be an individual, a firm or company. But the Government
is not included in the category. Thus, the post office is not acommon carrier, though
it may carry goods.
2. Only carriers of goods are common carriers. Carriers of passengers are not common
carriers.
400
 CARRIERS AND CARRIAGE OF GOODS 401

3. To be a common carrier, he may carry goods as a business for money. One who
carries goods free or only occasionally and carrying of goods is not his regular
business is not a common carrier.
4. A common carrier is one who is bound to carry goods of any person without
discrimination, provided there is room in his vehicle, the goods are of the type he
carries and meant for his accustomed destination. If he reserves the right to refuse
to carry goods of some person or persons, he is not a common carrier.
5. The term common carrier is applied to the carriage of goods by land and inland
waterways. It does not apply to carriage by sea or air.
Duties of Common Carrier— The Common Carriers Act, 1865 lays down the
duties of a common carrier, although rules of English law also apply to matters not
covered by the Act. The duties of a common carrier are listed below.
1. To receive and carry goods from all corners, indiscriminately—that is the force
of the term common;
2. To carry the goods safely;
3. To carry by his customary route or by a reasonable route, and not to deviate from
it unnecessarily;
4. To obey instructions of the consignor, e.g., where the consignor is an unpaid seller
and asks the carrier to hold the goods for him, the carrier must do so;
5. To deliver the goods within the agreed time or, if no time has been agreed upon,
within a reasonable time, and at the stipulated place.
The common carrier may, however, refuse to carry goods under the following
circumstances:
(a) If he has insufficient or no room in his vehicle.
(b) If the goods are not of the type that he professes to carry.
(c) If the goods are not meant to be carried on his customary route, or to his accustomed
destination.
(d) If the goods are dangerous to carry or they would otherwise expose him to
extraordinary risk;
(e) If the goods are not offered at a reasonable time or a reasonable manner.
(t) if the consignor is not prepared to pay a reasonable amount in advance.
If a common carrier, without any of the reasons mentioned above, refuses to
carry the goods of a person, he can be sued for damages. If the consignee refuses to take
delivery of the goods, when tendered, the carrier may deal with the goods as he may
think reasonable and prudent under the circumstances. He may even recover reasonable
expensesntcurred by him as a result of the consignee's refusal to take delivery.
4Iabilities of a Common Carrier—Under Common Law, a common carrier is
an insurer of goods handed over to him. But there are some exceptions to this general
rule:
1. He is not liable for any loss or damage arising from an act of God, which means
an unforeseen accident occasioned by the elementary forces of nature beyond the
control of man. If the vehicle is struck by lightning, it is an act of God, but ordinity
rain does not rank as such. The carrier can and should provide a rain-proof covet.
2. He is not liable for any injury caused by the –enemies of the State," i.e., foreign
enemies with whom India is at war, but not rioters or strikers.
402 i u L.P,,,

3. He is not liable for loss arising from inherent vice or natural deterioration of the
goods. Examples of this are: fright in nervous animals, deterioration of fruit,
evaporation of liquids and spontaneous combustion.
4. He is not liable for loss of goods through neglect on the part of the consignor, e.g..
defective packing. Glassware or chinaware needs special care, and if the consignor
. fails to disclose the fact, the carrier is not liable.
Dangerous Goods—Where dangerous goods, such as explosives, acids or
poisons, are consigned, it is the duty of the consignor to warn the carrier; otherwise he
will be answerable for the probable consequences of his omission.
In Bamfield v. Goole and Sheffield Transport Co. Ltd (1922) 2 K. B. 742, the
consignor delivered ferm-silicon" in casks, to a common carrier, without informing
the carrier that the casks contained the poisonous article. During transit the fetro-silicon
gave off poison gases which caused the death of the carrier. held, the consignor was
liable in damages for causing the death of the carrier.
In India the liabilities of common carriers of goods are laid down in the Common
Carriers Act of 1865. This Act divides goods into two categories: Scheduled and
Non-Scheduled. Scheduled goods are goods of great value, such as gold and silver coins,
bullion, ornaments, precious stones and pearls, time-pieces of all descriptions, trinkets,
bills and hundies, currency and bank notes, stamps and stamp papers, maps, prints and
works of art, writings, title-deeds, gold or silver plate or plated articles, glass, china, silk,
shawls, lace, cloth and tissue embroidered with precious metals or of which such metals
form part, articles of ivory, ebony or sandalwood and musical and scientific instruments.
For scheduled andes exceeding Rs. 100 in value, the carrier is liable for loss or'
damage only-
(i) if the value and the description of the goods are disclosed by the consignor to the
carrier; or
(ii) if the loss or damage is due to a criminal act of the carrier, his agent or servant.
The carrier can charge extra for carrying scheduled articles, but he cannot limit his
statutory liability by any special agreement.
As regards non-scheduled articles, a common carrier can limit his liability by
special agreement with the consignor. But even in this case he will be liable for loss or
damage caused by negligence or criminal acts done by himself, his agents or servants.

PART 14-I
RAILWAYS AS CARRIERS

The duties and liabilities of the Railway Administration in India are laid down in
the Indian Railways Act, 1890.
Duties—By virtue of Sec. 42A, the railway administration is bound (like a
common carrier discussed above) to carry goods of every person who is ready and willing
to pay the freight and observes the regulations regarding packing, etc. Similarly, railways
are bound to carry every passenger who pays the necessary fare. Hence, the railways, as
regards ,duties, are common carriers.
Liabilities—As regards liabilities, railways were before 1961, ordinary bailees.
But since the amendment of the Act in 1961, the railways have become common carriers
as regards liabilities, too7. Consequenily, railways in India, both as regards duties and
liabilities, are now common carriers.
 CARRIERS AND CARRIAGE OF 0000s

While delivering goods or animals to the railway for carriage, the consignor is
required to execute a forwarding note in the prescribed form indicating the rfature of the
goods and condition of packing and whether the goods are to be earnest at railway risk
or owner's risk.
Sec. 73 provides that the railways shall be liable for loss, destruction or non-
delivery in transit of animals or goods entrusted to it for carriage arising from any cause
except the following:—
(a) an act of God;
(b) act of war;
(c) act of public enemies;
(d) arrest, restraint or seizure under legal process;
(e) orders or restrictions imposed by the Central or a State Government;
(f) act or omission or negligence of the consignor or the agent or servant of çither,
(g) natural deterioration or wastage due to inherent defect, quality or vice of the goods;
(h) latent defects;
(i) fire, explosion, or any unforeseen risk.
Even where such loss, destruction, damage, deterioration or non-delivery has
arisen from any one or more of the aforesaid causes, the railway administration shall be
liable unless the administration further proves that it has used reasonable foresight
and care in the carnage of the animals or goods.
Note, this section makes the Indian Railways as common carriers.
Railway risk or owner's risk rates—Animals or goods may be carried by the
railway either at railway risk rate (ordinary rate) or owner's risk rate (reduced rate). The
animals and goods will be deemed to be carried at owner's risk rate unless the consignor
elects in writing to pay the railway risk (i.e., higher) rate, in which case he will be given
a certificate to that effect.
Where the consignment is carried at owner's risk rate the railway administration
will be liable only if the loss, destruction, damage, deterioration or non-delivery was due
to the negligence or misconduct on the part of the railway administration or any of its
servants.
The difference between the two rates is only in relation to burden of proof. Thus,
where animals or goods are carried at railway risk rate, the railway administration is
responsible for any loss, etc., unless it positively proves that it has taken due care and
that it or any of its servants has not been negligent or guilty of misconduct. Where, on
the other hand, animals or goods are carried at owner's risk rate, the onus is on the
consignor to prove that the loss, etc., was due to the negligence or misconduct of the
railway administration or its servants (Sec. 74).
In Juggal Kisho.'-e v. Union of India, 1965 Pat. 196, goods were consigned at
owner's risk rate. Part of the consignment was lost in a running train theft. Though the
train was running in the night no proper watch and ward were provided, and the guard
did not check the wagon at the scheduled stoppages nor did he check the seal at the real
checking stations. Held, the railway administration was liable on the grounds of
negligence and misconduct on the part of its servants.
Passenger's Personal Luggage—The railway is not responsible for a
passenger's personal luggage, unless a railway servant has booked it and given a receipt
therefor. Where the luggage is carried by the passenger in his own compartment, the
railway will be liable only if the loss etc. was due to the negligence or misconduct on
the part of the railway administration or any of its servants (Sec. 75).
404 MERCAWIILE LAW

Delay or detention In transit—A railway administration shall be responsible for

loss etc. of animals or goods if the owner proves that such loss, destruction, damage or
deterioration was caused by delay or detention in transit. It can, however, escape liability
by proving that the delay or detention arose without negligence or misconduct qn its part
or on the part of its servants (Sec. 76).
Deviation of route—Sec. 76A provides that where, due to a cause beyond the
control of a railway administration or due to congestion in the yard or other operational
reasons, animals or goods are carried over a route other than the route by which they are
booked or the usual or customary route, the railway administration shall not be deemed
to have committed a breach of contract of carriage.
Wrong delivery—Where a railway administration delivers the animals or goods
in good faith to a person who produces the original railway receipt, it shall not be
responsible on the ground that such person is not legally entitled thereto or the indorse-
ment on the railway receipt is forged or otherwise defective. But if the animals or goods
are delivered to a wrong person without the production of a railway receipt the railway
administration shall be responsible to the rightful person.
In Union of India v. RainjiLal. 1965 All. 184, R Sent 10 harmoniums from Aligrah
to Howrah for A. The railway receipt was consigned to 'Self but bore an endorsement
by R the consignor, in favour of A. The harmoniums were delivered at Howrah to one
J without any endorsement by A in favour of J or any one else. I wrote on the back of
the RIR the following words: 'A & Co. I proprietor.' A denied taking delivery of the
consignment either himself or through an agent. R sued for damages. Held, he was
entitled to recover the loss, as the railway had not acted in good faith.
Exoneration rrom responsibility—By virtue of Sec. 78, a railway administration
is not responsible for any indirect or consequential damage, or for loss of particular
market. It shall not be responsible for any loss, destruction, damage, deterioration or
non-delivery of—
(a) any goods in respect of which false description was given;
(b) animals or goods if a fraud has been perpetrated by the consignor or the consigne
or an agent of either,
(c) animals or goods proved by the railway administration to have been caused by or
to have arisen from-
(i) improper loading and unloading by the consignor or the consignee or an
agent of either, or
(ii) riot, civil ommotion, strike, lock-out, stoppage or restraint of labour from
whatever cause, whether partial or general.
Railways are liable to pay damages for injury to passengers or death when it is due
to the negligence of the railway servants. The liability for the death of a passenger would
not exceed Rs. one lakh per passenger. There is no liability if the passenger is guilty of
contributory negligence.
Sec.76C says that in the case of goods to be delivered by a railway administration
at a siding not belonging to the administration, the railway administration shall not be
responsible for loss, destruction, damage, deterioration or non-delivery of such goods,
from whatever cause arising alter the wagon containing the goods has been placed at
the point of interchange of wagons between the railway administration and the owner of
the siding has been informed in writing that the wagon has been so placed.
Carriage over two more railway systems—Sec. 76D provides that where any
animals or goods delivered to a railway administration to be carried by railway have
been booked through over the railways of two or more railway administrations or over
 CARRIERS AND CARRIAGE OF GOODS 405

one or more railway administration, the person tendering the animals or goods to the
railway administration shall be deemed to have contracted with each one of the railway
administrations or the owners of the transport systems concerned, as the case may be,
and each one of the railway administrations or the transport systems shall be liable in
the same manner as provided for the single railway administration.
Sec. 76E provides that in the case of through booking of consignments over an
Indian Railway and a Foreign Railway, the , responsibility of the Indian Railway as a
common carrier would extend only over that portion of the carriage which is over the
Indian Railway.
Sec. 76F lays down that notwithstanding anything contained in Sec. 74—(a) where
the whole of a consignment of goods, or the whole of any package forming part of a
consignment, carried at owners risk is not delivered to the consignee and such
non-delivery is not proved by the railway administration to have been due to fire or to
any accident to the train, or (b) where in respect of any consignment of goods or of any
package which had been so covered or protected that the covering or protection was not
readily removable by hand, it is pointed to the railway administration on or before
delivery that any part of such consignment or package had been pilfered in transit, the
railway administration shall be bound to disclose to the consignor how the consignment
or the package was dealt with throughout the time it was in its possession or control; but
if negligence or misconduct on the part ofthc railway administration or any of its servants
cannot be fairly inferred from such disclosure the burden of providing such negligence
or misconduct shall be on the consignor.
S.c. 77 says that the railway administration shallbe responsible as a bailee under
Sees. 151, 152 and 161 of the Indian Contract Act for the loss, destruction, damage,
deterioration or non-delivery of goods carried by railway within a period of 30 days after
termination of transit; provided that where the goods are carried at owner's risk rate, the
railway administraton shall not be responsible except on proof of negligence or miscon-
duct on the part of the railway administration or of any any of its servants. But after the
expiry of the 30 days, the railway administration is not responsible in any case. Transit
terminates on the expiry of the &ce time allowed (after the arrival of the consignment)
for its unloading from the railway wagon without payment of demurrage.
Sec. hA lays down the amounts beyond which the railways will not be liable for
loss or damage to animals as follows:
Elephants—Rs. 1,500 per head; horses—Rs. 750 per head, mules, horned cattle,
and camels–.-Rs. 200 per head; and in all other cases, including birds–.-Rs. 30 per head.
The railway may, however, accept a higher liability if the consignor pays a higher
charge and declares the higher value in the forwarding note. The railway is not at all
responsible if the loss or damage arises from the restiveness or fright of the animal.
By virtue of Sec. 77B parcels or packages containing articles of special value will
be carried at railway risk rate without payment of any additional charge when the value
of such articles does not exceed Rs. 500.
Sec. 77C provides that when any goods tendered to a railway administration to be
carried by railway (a) are in defective condition as a consequence of which they are liable
to damage, deterioration, leakage or wastage, or (b) are either defectively packed or
packed in a manner no; in accordance with the general or special order, if any, issued
under Sec. 14, and the defect has been recorded by the sender or his agent in the
forwarding note, then the railway administration shall not be responsible for damage,
deterioration, leakage or wastage except on proof of negligence or misconduct of the
railway administration or any of its servants.
406 MERCANTILE LAW

PART 14-C
CARRIAGE OF GOODS BY SEA

Contract orAfireightment—The common law took substantially the same view

of sea carriage as of land carriage, that is to say, the shipowner has to carry the goods
safely, wider the contract of carriage. The contract of carriage of goods by sea is called
a contract of Affreightinent. it maybe defined as a con tL act by which the shipowner
undertakes té , carry the goods of another (called the shipper) by water, or to furnish a
ship for the purpose of so carrying the goods to the destination in return for a price called
"freight." A contract of affrcightrnent may take either of the two forms, namely-
(i) A contract by charter-party, or
(ii) A contract for the carriage of goods in a General Ship when the contract is
evidenced by a Bill of Lading.
CHARTER-PARTY
When goods are consigned in large quantities it is usual for the consignor to hire
or charter the whole of a vessel or a substantial part of it, and the document by which
he does this is known as a Charter-Party. The term is also used to denote the contract
by which an agreement is made. A charter-party may be defined as a contract in
writing under which the shipowner agrees to place an entire ship, or a part of it, at the
disposal of a shipper for the conveyance of goods oil particular voyage to a specified
place or places, or for a specified time, in consideration of sum of money called the
freight. The charter-party may be under seal but must be stamped.
A charter-party may operate as a demise or Lease of the ship. This form amounts
to a letting of the ship by the shipowner so as to put the vessel and its crew out of his
control. The charterer becomes temporary owner of the ship and is resopnsible to third
parties for the acts of the master and crew, e.g, in tort for damage done to other ships
by negligent navigation, or in contract on hills of exchange signed by the master. The
charterer's responsibility for the act of the master and the crew arises from the fact that
for all intents and purposes the master and crew become his servants during the time the
charter lasts. This kind of charter-party does not really involve a contract of carriage, but
rather a hiring of the means of carriage.
If, however, the charterer only requires the use of the full carrying capacity of the
ship. as is usually the case these days, he can obtain this in another way without taking
possession of the ship and control of the master and crew, and without incurring the
above .mentioned liabilities.. Thus, under this form the ship remains in the possession
and under the control of the shipowimer, and charterer merely acquires the right to put his
goods on the vessel, and to have them carried to the agreed destination. The charterer
can fill the entire ship with his own goods, or he may use the ship as a general ship,
carrying goods of third parties under bills of lading. A charter-party is either a Time
charter-party, where it is entered into for a definite period of time, or a Voyage
charter-party, where it is only for a definite voyage.
When the goods are delivered oil the ship, a bill of lading signed by thc
owner or master of the ship is given to the shipper as an acknowledgement of the receipt
of the good-s. it is to be noted that the bill of lading issued in the ease of charter-party is
only a receipt of the goods, and is quite distinct from the bill of lading issued in Ole case
of a general ship. The contract of affreightinent is made up of the two documents—the
charter-party containing the terms and conditions on which the goods are to be carried,
and the bill of lading acknowledging the receipt of goods on board ship.
 CARRIERS AND CARRIAGE OF GOODS

IMPLIED WARRANTIES
In all contracts of carriage by sea the following terms are implied:—
Seaworthiness of the ship—already discussed in Connection with Marine In-
surance.
The ship shall be ready to commence the voyage and shall carry out the same with
all reasonable dispatch or diligence.
The ship shall not deviate—dealt with in Marine Insurance.
The shipper shall not ship dangerous goods.
FORM OF CHARTER-PARTY
The forms of charter-parties vary considerably according to the customs of the
trades, but the main stipulations are now almost uniform in all charter-parties by the
custom of the shipping trade. The following is the most commonly used form:—
"It is this day mutually agreed between Messrs. King & Co., owners of the good
ship called S.S. Peerless, A 1 and newly coppered of etc. of the burden of 2.000 Ions
registered measurement or thereabouts whereby Jo/in Illonden is Master now at Port
Said and Messrs. Blank & Co. of London merchants, that the said ship being tight,
staunch and strong, and in every way fitted for the voyage, shall with all convenient
speed proceed to Liverpool and there load in the usual and customary manner a full and
complete cargo of lawful merchandise say 500 tons in weight and therewith proceed
to Bomba y as ordered before sailing, or so near thereunto as she may safely get and
there deliver the same in the usual manner agreeably to hills of lading; after which she
shall load there, or if required proceed to one other safe port in India and there load
always afloat in the usual and customary manner from the agents of the said charterers
a full and complete cargo of j ute or other lawful merchandise, not exceeding what she
can reasonably slow and carry over and above her tackle, apparel, provisions and
furniture, the cargoes being brought to and taken from alongside the vessel at the
charterer's risk and expense, which the said merchants hind themselves to ship, and being
so loaded shall therewith proceed toGlasgow as ordered on signing hills of lading abroad,
or so near thereto as she may safely get, and there deliver the same in the usual and
customary manner to the said charterers or their assigns, they paying freight for same
at the rate of £ 5 per ton of 50 c. feet for jute delivered for the round out and home; a
deduction of 3s. per ton to be made if ship be discharged and loaded at Colombo, other
goods, if shipped, to pay in customary proportion; in consideration whereof the outward
cargo to be carried freight free; payment thereof to become due and be made as follows;
then follow the terms... Ship is to have liberty to put on board 100 tons of hides, or other
dead weights and to retain it on board during the voyage. Thirty running days (Sundays
and holidays excepted) are to be allowed to the said merchant if the ship is not sooner
despatched for loading in Glasgow, and 45 like days for all purposes abroad, and ten
days oil over and above the said lay days and the time therein stated at £6
perdav, paying day by day as the sanie shall become doe. The time occupied in changing
party not to count as lay days. Charterers' liability under this charter-party to cease on
the cargo being loaded, the master and owner having a lien oil for freight and
demurrage. The-master to sign bills of lading at rates of freight as may he required by
the agents of the charterers without prejudice to charter-party.
'The Act of God, King's enemies, restraint of Princes and Rulers, fire and all and
every other dangers and accidents of the seas, rivers, and navigation, of what nature and
kind soever, throughout the voyage, being excepted.
'The vessel to be consigned to charterers' agent abroad free of commissions. On
the return of the ship to London, she shall be addressed to White & Co., brokers or their
408 MERCAJSTILE LAW

agents at any other port of discharge. Penalty for non-performance of tills agreement,
the estimated amount of freight.'
Clauses of Charter-Party—The following are the clauses of the Charter-
Party:-
1. The names and descriptions of the owner and charterer, and the fact of their
agreement.
2. The name of the ship and its rating in Lloyd's register. e.g., Al. The correctness
of its rating is a condition precedent to the charterer's liability.
3. The measurement of the ship as indicated by its registered tonnage. A registered
ton equals 100 cubic feet of space, and has no reference to weight. It is a conventional
way of indicating the cubic measurement of the ship.
4. The position of the ship at the date of the signing of the charter-paaty, e.g., now
at Port Said, or that she will be in a particular port by a stated date. The truth of this
statement is another condition prccedcnL
5. The shipowners' obligation to provide a ship which is seawothy and lit for the
contemplated voyage (the said ship being tight, staunch and strong). This only extends
to seaworthiness and fitness at the commencement of the voyage. This obligation will
be implied, if it is not stated, as will the other two similar matters. viz., (a) that the voyage
will be commenced and carried without delay, and (b) that there shall be no unnecessary
deviation.
6. The Port of loading—The shipowner must bring the ship to the agreed or usual
place of loading at the port, and give notice to the charterer that the ship is ready to load.
The charterer must then bring his goods alongside the ship, and deliver them to the
servants of the shipowner, who is in general responsible for proper stowage.
7. The duty of the charterer to furnish a full and complete cargo—This is an
absolute duty. which in practice means that the charterer must pay freight on the full
carrying capacity of the ship whether he utilises it or not. The custom of the port of
loading determines the "full and complete cargo." Sometimes some guidance is given
as to what a full and complete cargo is. Where a charterer undertakes to load a "full and
complete cargo" on a ship which is chartered as of a certain capacity, he is bound to
load as much cargo as the ship will safely carry. t But where the clause as to cargo
provides that a certain number of tons is to be lodged, the charterers's liability will be
to load that number and not the actual of the vessel.2
8. Delivery at the goods in the manner—At the port of discharge it is the duty
of the master to proceed to the place of discharge mentioned in the contract, and get the
goods out of the ship's hold and put them on the ships deck or alongside. But the
consignee or charterer must provide proper appliances for taking delivery after the
shipowner has put the cargo on the rail of the ship, or in such a positiun that the consignee
can take it.
9. The obligation of the charterer or consignee to pay freight—This is
generally expressed at so much per ton. It is not payable until the voyage has been
completed and the goods delivered, unless non-delivery is due to the consignor's fault,
or to the excepted perils. By express agreement freight may be payable in advance.
10. Lay days and demurrage—Lay days are certain number of days allowed by
the charter-party to the charterer for the purpose of loading and unloading the cargo. The
lay days begin to run from the time that the charterer has received notice of the ship's
arrival at the stated port and her readiness to load and unload. These days may be either

I. Cuttsbri v. Cumming (1856) II E. 405.

2. Morris v. Levi son (1876) I.C. UO. 155.
 CARRIERS AND CARRIAGE OF GOODS 19

Running Days" in which case they are counted from midnight to midnight including
any intervening holidays, or "Working Days" which are the days on which the work is
normally done, i.e., excluding holidays. It is essential that the work of loading and
unloading must be completed within the stipulated lay days, and where no time is fixed
then work must he completed within a reasonable time, regard being had to the existing
circumstances and the custom of the port. This condition fixes the maximum period,
and if the ship is loaded in a shorter time, the charterer must allow the ship to depart, an
cannot insist on her laying idle at the port of loading until all the lay days have run out.
Positively stalçd, a charterer may detain a ship for extra days beyond the agreed
lay days on payment of a stated sum, known as "Demurrage." Negatively, where the
charterer detains a ship for a period longer than what he is allowed as lay days. I
becomes liable to pay to the owner damages called 'Demurrage." That is the s
meaning of the term, which may be defined thus : Demurrage is a charge agreed be
paid by the charterer to the shipowner as liquidated damages for detaining the ship
beyond a stipulated or a reasonable time for loading or unloading. But the term is
sometimes loosely used to cover " unliquidateil damages for undue detention not
specially provided for in the charter-party." No demurrage is payable if the ship has
been detained through the owner's fault.
11. The duration of charterers' liability—For the recovery of freight and
expenses the shipowner has a lien on the goods, but for other claims, such as demurrage
and "dead freight" for not loading a full and complete cargo, he has no such lien, unless
an express agreement is made. It is usual to insert a clause called the ''Cesser Clause"
in the charter-party, under which the charterers' liability ceases on the cargo being
loaded, and in return the shipowner receives a lien on the cargo for freight, demurrage,
including dead weight. The charterers' exemption from liability is co-extensive with the
lien conferred on the shipowner. So that where no lien nn the cargo has been granted, to
the shipowner, the Courts refuse to relieve the charterer from liability arising either
before or after shipment of cargo. 5
12. The right of the charterer to take other peoples' goods on hoard under
bills of lading—This may be a desirable right for the chartere . , and there will be no
hardship on the shipowner, so long as the hills of lading are without prejudice to the
charter-party.
13. Excepted perils and negligence clause—Charter-parties contain a clause
exonerating the shipowner from liability for loss caused by certain perils such as "Act
of God, the King's enemies, restraints of princes and rulers, fire and all and every other
dangers and accidents of the seas, rivers, and navigation, of what nature and kind
soever," This clause will protect the shipowner only if the said peril could not have been
avoided by the exercise of reasonable care and diligence on the part of the shipowner or
his servants If the ship is unseaworthy at the commencement of the voyage and
'damage results, this clause will not exonerate the shipowner from responsibilities for
damage6 . Deviation without excuse cancels the excepted perils clause.

BILL OF LADLNG

Particular goods or isolated parcels are despatched from one port to another in a
General Ship and the document used for their consignment is called a Bill f Lading. A
general ship is a ship which is owned by a person or body of persons who ply it oil

3. Posiewaite v. Freeland (1880)5 AC. 599.

4. Notsmentv. Bunge (19 17) 1 K.B. 160.
5. Clink v. Rattford (1891)1 Q.B. 625.
6. Gilroy v. Price (1893) A.C. 56.
7. Morrison v. Shak (1916) 2 K.B. 783.
410 MERCANTILE LAW

particular 'line' and offer to carry the goods of all corners to places where she will call.
The owner of a general ship acts as a common carrier.
A bill or lading has been judicially described as a document by the shipowner or
by the master or other agent on his behalf which states that certain goods have been
shipped on a particular ship and which purports to set out the terms on which such goods
have been delivered to, and received by, the ship. 8 A bill of lading is in the first instance
an acknowledgment of the receipt of I/it' goods cjo'cijied therein. It is also a symbol of
the right of property in the goods: and its transfer being a symbolic delivery of the goods
has by mercantile usage the same effect as actual delivery. Thirdly, it is the record of the
terms of the contract on which the goods are carried. Therefore where goods are sent in
a general ship the bill of lading operates at once as a receipt of goods, a document of
title, and contract of carriage.
FORM OF BILL OF LADING
"Shipped in good order and condition by William Blake in and upon the good
ship called the Daukii-i . Sagar where of Ran. Naih is master for this present voyage,
and now in part otColcrata,arid bound for Hong Kong, with liberty to call at any ports
on the way for coaling or other necessary purposes. 500 (five hundred) hales of raw
cotton being marked and numbered as per margin and to be delivered in the like good
order and condition at the aforesaid port of Hong Kong. the Act of God, the Union's
enemies, fire, barratry of the roaster and crew, and all and every other dangers and
accidents of the seas, rivers and navigation of whatever kind and nature soever excepted,
unto Metro & Co., or to his assign, he or they paying freight for the said goods Rs... per
ton delivered with priinage AND average accustomed. IN WITNESS WHEREOF, the
master of the said ship bath affirmed to (three) hills of lading all of his tenor and date,
one of which bills being accomplished, the oth rs to stand void.
Dated .....
Weight, value and contents unknown,"
CLEAN BILL OF LADING
It will he noted that the bill of lading begins with the words "shipped in good order
and conditior)" and the last words are "weight, value and contents unknown." Either
of these sta1 inents are retained by the master according to the circumstances of each
case. Wh^e the master states that the good.s are ''shipped in good order and condition,"
he is bdnd to deliver the goods in the same good condition as they were at the time of
loading, ordinary depreciation on the voyage being excepted. The document in this case
is called a Clean Bill of Lading. In the case of a clean bill of lading the shipowner will
be estopped from proving that the goods were not in good order and condition at the
time they were delivered on board. The retention of the expression "weight, value and
contents unknown" qualifies the liability of the shipowner, as there is no admission that
the goods have been "delivered in good order and condition."
THROUGH BILL OF LADING
A through bill of lading is for the carriage of goods partly in the ship of the
shipowner and by land or in the ship of another shipowner for an inclusive freight. Unless
the bill states contrary, the contract is regarded as made with the shipowner who issues
it.
RECEIVED FOR SHIPMENT BILL OF LADING
This is not a proper bill of lading and operates only as receipt of goods received
for shipment. We have seen above that it is only after the goods are loaded that the proper
8. Sewell v. Burdick (1884-85)10 A.C. 74(105).
 CARRIERS AND CARRIAGE OF GOODS 411

bill of lading, sometimes called "shipped bill of lading," is issued, and if — received for
shipment bill" is held by the shipper, he must surrender it and obtain the ''shipd bill
of lading," or if he likes have the name of the ship and the date of shipment of goods
noted on it, when it will become a ''shipped bill of lading."
MATE'S RECEIPT
A mate's receipt is arm acknowledgment of receipt of goods given for goods
delivered on board a ship, by the person in charge at the time and is taken back when
the bill of lading is given. Possession of the mate's receipt isprinmafacie evidence of
ownership and entitles the holder to receive a bill of lading.
PRIMAGE
Primnage means a small payment of the nature of a tip made to the ship's master.
It is not usual now, as the freight Will cover all services, and the master will prefer an
inclusive salary.
AVERAGE
Average in this context mnearm.s certain dues paid by the ship for heaconage,etc.,
and shared rateably by ship and cargo, and must be distinguished from general and
particular average dealt with in connection with marine insurance.
MASTER'S AUTHORITY TO SIGN BILL OF LADING
A bill of lading is usually made out i113 set of three pars arid signed by the master
on behalf of the shipowner. One is retained by the master of the ship and the other two
are given to the shipper in exchange for the mate's receipt, or without one if the goods
are on board the ship. The shipper retains one with himself and despatches the other to
the consignee of the goods. Where the goods are carrd in a gereral ship the master
acting as the agent of the ship owner, has power to sign the bills of lading on such terms
as he may think lit. Where the ship is under charter, but it is used as a gereral ship by
the charterer, the master can issue bills of lading to the various shippers as the agent of
the charterer. Neither the shipowner nor the charterer for whom the master may be
signing the bill of lading is responsible for the shipment of goods which were never
received on board the ship. The bill of lading, however, creates a presumption in favour
of the holder that the goods therein mentioned are pro9perly shipped and whoever pleads
that the goods were not shipped must prove the fact.
The Bill of Lading Act, 1856, Sec. 3, however, provides that every bill of lading
in the hands of a consignee or indursec for valuable consideration representing goods to
have been shipped oil a vessel shall be conclusive evidence of such shipment as
against the master or other person signing the same, even though the goods or some part
of them may not have been so shipped, unless the holder of the bill of lading at Use time
of receiving it had acimlal notice of non-shipment, the misrepresentation was wholly due
to the fraud of the shipper, or the holder, or some person under whom the holder claims.
TRANSFER OF BILL OF LADING
7 Bill of Lading a Document of Title—As observed before, the peculiarity of the
bi.0 of lading is that it is (i) a document containing the terms of the contract of carriage,
and (ii) a document of title to the goods themselves, and remains so till the goods have
come into the hands of a person entitled wider the bill of lading to the possession of
them. The consignee of the goods may sell them while they are still at sea but he cannot

9. G rant v. Norway (185l)lOC.13. tis.

10. Barber v. Meyerstein (1870) L.R., 411.1. 317.
412 MERCANTILE LAW

obviously give physical delivery of the same. In such a case the endorsement and delivery
of the bill of lading operates as delivery of the cargo, for during the period of transit the
bill of lading by the law merchant is universally recognised as its symbol. It has been
observed in Henderson v Cornpioir de Esconipte de Paris, tt that a bill of lading is a key
which in the hands of the rightful owner is intended to unlock the door of the warehouse,
floating or fixed, in which the goods may chance to be.
BILL OF LADING NOT A NEGOTIABLE INSTRUMENT
Goods shipped under a bill of Jading may he made deliverable to a particular person
"or to order s ' or "assigns," in which cases he may transfer such goods to any one he
pleases by indorsement and dilivery of the bill of lading. Again, the goods shipped under
a bill of lading may be made deliverable to a name left blank or "to bearer" in which
case the holder is at liberty to fill in the blank and then the bill of lading can change hands
by mere delivery. This similarity of the bill of lading to a negotiable instrument has led
to the confusion of treating it as a negotiable instrument, which it is not at all. On account
of some points of resemblance between the two kinds of instruments a bill of lading is
also described as "quasi negotiable" or "as good as negotiable." But in the strict sense
of the term a bill of lading is not a negotiable instrument. Unlike the holder ofanegotiable
instrument the transferee of a bill of lading takes it subject to any defects-of the
transferor's title. In other words, the transferee of a bill of lading even though bonafide
and for value does not get a better title than his transferor, while the holder in due course
of a negotiable instrument does get a better title than that of his transferor. A bill of lading
is negotiable in the sense that it is transferable, but it is not a negotiable instrument.
Where, therefore, a bill of lading has been transferred by indorsenment and delivery or
by delivery, the transferee acquires by the transfer all the rights to the goods shipped,
12
and is subject to all the liabilities in respect of them. Sometimes, a bill of lading is said
to be negotiable in the technical sense, and not in the real sense. At any rate, it is not a
negotiable instrument at all.
Sec. 1 of the Bill of Lading Act, 1856, provides:
"Every consignee of goods named in a bill of lading and every indorsee of bill of
lading to whom the property in the goods therein mentioned shall pass upon or by reason
of such consignment or indorseinent shall have transferred to and vested in him all rights
of and be subject to the same liabilities in respect of such goods as if the contract
contained in the bill of lading had been made with himself."
THE RIGHT OF STOPPAGE IN TRANSIT
The right of stoppage in transit and a right to claim freight against the original
shipper is not affected by the Bill of Lading Act, 1856, and Sec. 53 of the Indian Sale of
Goods Act is applicable. Accordingly, if a bill of lading has been lawfully transferred to
any person as buyer or owner of the goods, and that person transfers the document by
way of sale to one who takes it in good faith and for valuable consideration the right of
lien and stoppage in transit is defeated. But if the transfer be merely by way of pledge,
the consigrur has a right to stop the goods in transit, suhiect to the payment or tender to
the pledgee of the amount of the advance.
DELIVERY OF GOODS
Upon payment of the proper freight, the master is under an obligation to deliver
the goods to the holder of the bill of lading. Where bills of lading are drawn in a set, and
different parts are handed over to different persons, the first transferee for value is entitled

11. (1873) LR. 5 P.c. 253.

12. Scwdll v. Bardick (1885) tO Ac. 74.
 CARRIERS AND CARRIAGE OF GOODS 413

to the goods. But if the master acting bonafide delivers the goods to the person first
presenting the bill of lading forming the set, he will not be liable if it should subsequently
transpire that such person was not the first transferee.
DIFFERENCE BETWEEN CHARTER-PARTY AND BILL OF LADING
(1) A bill of lading is an acknowledgment of the receipt of goods on board the
ship; a charter-party is not. (2) A bill of lading is a document 'ftitic to the goods specified
therein; a charter-party is not such a document. (3) A charter-party may amount to a
demise, i.e., a lease of the ship or a part thereof; a bill of lading conveys no such
implication. The documents, however, resemble each other as they both contain the
terms and conditions of the contract of affreightment.
SHIPOWNER'S LIEN
As a carrier, the shipowner has lien on the goods carried for the freight and-other
charges. The lien can be enforced by not parting with the goods until his dues are paid.
There is no lien when the freight has been paid in advance or when freight has been
agreed to be paid after delivery of the goods. This is a possesory lien.
MARITIME LIEN
A maritime lien is a right which specifically hinds a ship, including its machinery,
furniture, cargo and freight, for the payment of a claim based upon maritime law. It is
possessed by the following persons: seamen for their wages; the holder of bottomry
bond for his dues; claimants for damages in cases of collision with the ship concerned;
persons who rescue ships or property from the sea. It is not a possessory lien. In cases
of maritime lien the rule is that last in time ranks first in payment.

PART 14D---
CARJ.MTEBY AIR

The law relating to the ca?'E ge by air is contained in the Carriage by Air Act, 1972,
which replaced the Carnage by Air Act, 1934 which in turn gave effect in India to the
rules contained in the Warsaw Convention signed on 12th October, 1929. The i972.cL
makes applicable to India Jjç rules contained in the First . chedule and the Second
Schedule of the Warsaw Convention as amended by the Hague Protocol. Originally the
provisions of the Act applied onl)ho the international carriage of goods and passengers
b3Lai Rut as per notification No. S. O.-1l6(E) issUed by the Ministry of Tourism and
Civil Aviation, the provisions of the 1972 Act, also apply to internal or domestic flights
as they apply to international flights. Accordingly, the law laid down in Indian Airlines
Corporation V. Madhury Chaudliary, 1965 Ca) 252 is nullified by tTlis riUtihicti&i
and is no more the law in India.
The term 'High Contracting Party" means all the parties originally signatorsto.
the Convention' together with those who adhere thereto subsequently as and when they
adher
The expression "International Carnage" means a carriage in which the place o
deaarmre and the place of destination are situated within the territories of two High
Contracting Parties1 or within the Territories oTiSiie High Contracting Party if there
is an agreed stopping place within a territory subject to the sovereignty, suzerainty,
mandate or authority of another power even when that power is not aparty to the
Covention. The prima fcicie meaning of the expression appears to be the place at which
the contractual carriage begins (place of departure) and the place at which the Contrac-
tual carnage ends (place ofdestination). An intermediate place at which the carriage may
414 N(FRCANTILF LAW

be broken is not a "place of destination". A carriage to be performed by several

successive carriers is deemed to he undivided , vfage if it has been regarded by the
parties as a single operation.

1)oCUMKNT,*6 CARRIAGE BY AIR

PASSENOE4t TICKET
For the carriage of passengers a carrier must deliver a passenger ticket which
must contain the following particulars : (I) the place and date of issue; (2) the place of
departure and of desitnation. (3) the agreed stopping places; (4) the name and address
of the carrier or carriers; (5) the statement that the carriage is subject to the liability
mentioned hereinafter. The carrier may reserve the right to alter the stopping place in
cane of necessity.)
The absence, irregularity or loss of the passenger ticket does not affect the existence
or validity of the contract of cainge. But if the carrier accepts a passenger without a
passenger ticket, he cannot ç4y the benefit of limiting his liability granted under the
Convention.
BAGGAGE CHECK
For the carriage of baggage thr than small personal objects of which a passenger
takes charge himself, the carrier must deliver a baggage check. The baggage check must
be madeout in duplicate, one part IDUS1 contain the following particulars : (I) the place
and date of issue; (2) the place of departure, and of destination; (3)the name and address
of the carrier or carriers; (4) the number of the passenger ticket; (5) a statement that
delivery of the baggage will be made to the bearer of the baggage check; (6) the number
and weight of the packages; (7) the amount of the value declared in accordance with
Rule 22(2) of the Warsaw Convention: (X) a statement that the carnage is subject to the
rules relating to liability stated hereinafter._,.-
The absence, irregularity or loss of the baggage check does not affect the existence
or the validity of the contract of carriage; but if the baggage check does not contain the
particulars set out at (4), (6) and (S) above, the carrier shall not he entitled to the benefit
of rules limiting liability.
13
AIR WAY BILL
The carrier of goods has the right to demand from the consignor a document called
the "Air Way Bill" ,and the consignor is entitled to require the carrier to accept his
document. Nevertheless, the absence, irregularity or loss of this document does not
affect the existence or the validity of the contract of carriage. The air way bill to be
handed over with the goods must he made out by the consignor in three original parts.
The first part must be marked for the "carrier", and must be signed by the consignor.
The second part must be marked "for the consignee." and msut be signed by the
consignor and by the carrier and must accompany the goods. The third part must be
signed by the carrier and handed by him to the consignor after the goods have been
accepted. The carrier must sign an acceptance of the goods: his signature may be stamped
and that of the consignor may he printed or stamped. If, at the request of the consignor,
the carrier makes out the air way bill he shall be deemed, subject to proof to the contrary,
to have done soon behalf of the consignor. The carrier of goods has the right to require
the consignor to make out separate waybills when there are more than one packages.

13. In the original rules it was known is 'Air Consignment Note'.


CARRIERS AND CARRIAGE OF GOODS 415

The air way bills must contain the following particulars (1) the place and date
of its execution; (2) the place of departure and of destination; (3) the agreed stopping
places; (4) the name and address of the consignor; (5) the name and address of the first
carrier; (6) the name and address of the consignee; (7) the nature of the goods; (8) the
number of the packages; the method of packing, and the particular marks or numbers
on the packages ; (9) the weight, the quantity and the volume or dimensions of the
goods; (10) the apparent condition of the goods and of the packing; (11) the freight, if
it has been agreed upon, the date and place of payment, and the person who is to pay it;
(12) if the goods are sent for payment on delivery, the price of the goods; (13) the amount
of the value declared; (14) the number of parts of the consignment note; (15) the
documents handed to the carrier to accompany the note; (16) the time fixed for the
completion of the carriage, and a brief note of the route to be followed; (17) a statement
that the carriage is subject to the rules regarding liability.
If the carrier accepts goods without an air way bill having been made out, or if the
air way bill does not contain the particulars set in (1) to (8) inclusive and (17), the carrier
shall not be entitled to the benefit of limiting his liability. The consignor is responsible
for the correctness of the particulars and statemnent.s relating to the goods which he inserts
in the air waybill. The consignor will be liable for all damage suffered by the incom-
pleteness of the said particulars and statements. The air way bill isprimafacie evidence
of the conclusion of the iaLmtriEt, of the receipt of the goods and of the conditions of
carriage, as wellstatements relating to the weight, dimensions, packing of the
goods, and nur of packages.
LIM1TA3thN OF LIABILITY OF THE CARRIER
I
The carrier is liable for damage sustained in the event of the death or wounding
of passenger or any other bodily injury suffered by a passenger,
aircraft if the accident which
udthe damage so sustained took place on board the or in course of any of
the operations of embarking or discmbarkirig. He is also liable for loss of or damage to
any registered luggage or any goods. In the carriage of passengers, the liability of the
carrier for each passenger is, in the absence of a contract for higher amount, limited to
225,000 francs. As regards the articles of which the passenger takes charge himself, the
liability of the carrier is limited to 5,000 francs_per passenger. Any provision in any
contract seeking to relieve the carrier from liability or to furfher limit liability is void and
of no effect. Rule 22(2) provides that in the carriage of luggage and goods, the liability
of the carrier shall be limited to a sum of 250 francs per kilogram, unless the consignor
has made, when the package was delivered to the carrier, a special declaration of the
place and time of delivery and has also paid a supplementary or further sum if the case
so required. In that case, the carrier is liable to pay a sum not exceeding the declared
sum, unless that sum is proved by the carrier to be of higher value than the real br aefflal
value at the time and place of delivery./,
In the case of damage, the person entitled to delivery must complain to the carrier
forthwith after the discovery of the damage, and, at the latest, within three days from
date of the receipt of the luggage or within seven days from the receipt of the goods. In
the case of delay in delivery of the goods the complaint must be made within 14 days
from the date on which the luggage or the goods have beenatua1ly delivered or placed
at the disposal of the consignee.
Rule 33 permits the carrier either to refuse to enter into any contract of carriage or
to make any regulations which do not conflict with the provisions of the Convention. In
Luddiih v. Ginger Come Airways Lid. 1947 P. C. 151, Lord Wright held that a carrier
by air of passengers may refuse to carry anyone save at the passenger's own risk. He can
by a special contract exempt himself from liability even for negligence of his servants
416 MERCANTILE LAW

jxovided that there are no statutory conditions limiting his right, and such a contract
cannot be pronounced unreasonable, invalid or illegal by a Court of Justice.
In India, the liability of internal or domestic carriers (e.g., Indian Airlines) for
passengers and their baggage has been fixed as follows:
(a) death or permanent disability by accident Rs. 2 lacs per adult passenger;
(b) death or permanent disability by accident - Rs. 1 lac for a passenger below 12
years of age;
(c) temporary disablement preventing the injured person from attending his usual
business - Rs. 200 per day or Rs. 4,000 whichever is less;
(d) for registered baggage and cargo— Rs. 160 per kilogram;
(e) for articles in the charge of the passenger himself Rs 1,000 per passenger.
A carrier cannot reduce his liability but may undertake a higher liability by a special
agreement.

CASES FOR RECAPITULATION

I. A reputed race-horse was entrusted by B to the railway for carriage from

Bombay to Calcutta. As the result of loose-shunting in transit, the horse fell and broke
one of his legs, and it became necessry to shoot hiia. B claims Rs. 3,000 as damages
for the loss of his horse. The railway administration is liable to pay damage as the loss
of the horse resulted from the negligence and misconduct of the railway servants in
loseshunting. But the amount will depend upon whether the consignor had declared
the value of the horse at the time of booking andpaid the higher charge. If he had done
so, he will be entitled to get Rs. 3,000, and if not, then only Rs. 750, which is the amount
provided in the Act for the loss of a horse.
2. A railway company accepts goods to be carried to a place on the system of
another company. The receiving company makes a contract with the consignor to carry
the goods all the way to the destination. The goods are lost while in transit on the line
of the second company. The receiving company is liable to pay for the loss. Under Sec.
76 1) of the Railways Act, the second company (administration) will be liable to pay
damages if it is an Indian company or railway administration. If the second railway were
a foreign railway, then the responsibility of the Indian railway as common carrier
would extend over the portion of the carriage which is over the Indian railway.
3. The risk note of a railway company provides that in consideration of the
company carrying the goods at a specially reduced rate, the sender shall be precluded
from holding the railway liable for loss or damages to the goods from any cause whatever.
Due to the negligence of the railway servants the goods are damaged. Under Sec. 74 the
railway administration shall be liable to pay damages as the damage was caused to the
goods through the negligence of the railway servants, the exemption clause will be
ineffective.
4. A tiger is entrusted by X to the railway for carriage. The cage breaks hy,the
jolts received during the journey and the tiger escapes. It kills a bullock belonging tO'Y
but is almost immediately crushed by the engine. Under Sec. 73 the consignor is bound
to supply astrong cage; and in the instant case, the cage evidently is not strong enough
to bear the jolts which are a normal accompaniment of motion of a train. X would be
liable to Y on the basis of tort. If the tiger had escaped because of the wilful neglect of
the railway, it would be responsible to X and also to Y in tort.
5. A ship was chartered for a voyage between A port and B port. The ship was
not seaworthy and did not sail on the date specified in the charter-party. The charterer
or shipper may avoid the contract if he finds the ship unseawothy before the commen-
 CARRIERS AND CARRIAGE OF GOODS 417

cement of the voyage and the defect cannot be set right within a reasonable time. If the
voyage has started and he suffers any loss, he can recover it from the shipowner. If the
ship does not sail on the stipulated date and the delay is such as to go to the root of the
contract and makes the marine adventure different from what it originally was, the
charterer can avoid the contract, or treat the contract as broken and claim damages.
6. Cement was shipped under a bill of lading which stipulated for payment of
freight within three days after the ships arrival. On arrival a fire broke out on board and
the ship had to be scuttled. When the ship was raised it was found that the cement was
useless. The shipowner was not guilty of any negligence, the fire being accidental and
falls within the excepted perils. Consequently, he is entitled to receive the freight
although goods could not be delivered. The charterer can, of course, recover the loss
from the underwriters under marine insurance.
7. A ship on which dates had been loaded was sunk during the voyage and
subsequently raised. The dates still retained their appearance and were of value for
distillation into spirits but were no longer merchantable as dates. The policy-holder can
recover for the total loss of dates, as they are so damaged as to cease to be the thing of
the kind insured; they no longer answer the denomination under which they were insured,
nor can they be utilised as the thing insured.
8. P was a passenger on a train from Delhi to Bombay. He carried two suitcases
in his first class compartment under his berth. At an intermediate station the train stopped
for 15 minutes. P left the compartment and returned to it 10 minutes later. One of his
suitcases was then missing. He sued the railway administration for the loss of the suitcase
and its contents which he valued at Rs. 5,000. I/cM, the railway's common carrier
liability as insurer of goods does not extend to passenger's luggage carried by him in his
own compartment.
9. S had bought a ticket at the Kanpur railway station and was rushing on the
platform to catch a train when he slipped on a banana skin and got injured and missed
the train. The railway administration is not liable to pay any damages to S.
 Chapter XV

Securities
PART 15-A

In this chapter we deal with different rights a person acquires in the property of
another, by way of security, for the liability that other person has contracted. Such rights
are generally designed as Securities." The following are the principal securities:
I. Pledge or Pawn;
2. Mortgage;
3. Charge;
4. Hypothecation;
5. Lien.
Pawn or Pledge—In a pledge, the possession of the goods is delivered to the
creditor (the Pledgee or Pawnee), as sceUt iry for the loan, but the ownership remains
with the Debtor (the Pledgor or Pawnor). We have already dealt with this subject in
Chapter Ill—Bailment and Pledge.
MORTGAGE
The law relating to mortgages of immovable property and charges is dealt with in
Secs. 58 to 104 of the Transfer of Properly Act, 1882.
Definition and Nature of Mortgage—The word mortgage has come to us via
England from the French language and it means "Dead Pledge." A Mortgage is the
transfer of interest in specific immovable property for the purpose of securing the
payment of money advanced or to be advanced by way of loan, an existing or future
debt, or the performacc of an engagement which my give rise to pecuniary liability. The
mortgagor as an owner of the property is possessed of all the interests in it, and when
he mortgages the property to secure a loan, he only parts with an interest in that property
in favour of the mortgagee. After mortgage the interest of the mortgagor is reduced by
the interest which has been transferred to the mortgagee. His ownership has become less
for the time being by the interest which he has parted with in favour of the mortgagee.
If the mortgagor transfers this property, the transferee gets it subject to the right of the
mortgagee to recover from it what is due to him.
There are three outstanding characteristics of a mortgage: (I) the termination of
the mortgagee's interest upon the performance of the obligation secured by the mortgage;
(2) the right of the mortgagee to enforce the mortgage by foreclosure upon the
mortgagor's failure to perform; and (3) the mortgagor's right to redeem or regain the
property. It should be noted that a mortgage is not a mere contract but it is the conveyance
or interest in the mortgaged property, and as soon as the mortgage deed is registered,
the interest in the property vests in the mortgagee.
Form of a Mortgage Contract—Where the principal money secured is Rs. 1(0
or upwards, a mortgage,-other than a mortgage by the deposit of title-deeds, can be
effected only by a regittered instrument signed by the mortgagor and attested by two

418
 SECURITIES 419

witnesses. A mortgage which secures less than Rs. 100 may be made either by a
registered instrument or by delivery of property. In Punjab and Delhi a mortgage can be
created orally, and even when it is in writing it need not be attested. This is so because
the Transfer of Property Act does not apply there.
Kinds of Mortgages—There arc in all six kinds of mortgages on immovable
property. namely,--Q Simple Mortgage; (ii) Mortgage by conditional sale; (iii)
Usufructuary Mortgage; (iv) English Mortgage; (v) Mortgage by deposit of title-deeds;
(vi) Anomalous Mortgage.
Simple Mortgage—In a simple mortgage the mortgagor undertakes personal
liability, and agrees that in the event of his failure to pay the mortgage money, the
mortgagee shall have a right to cause the property to be applied so far as may be
necessary by means of a decree for the sale of the property.
Mortgage by Conditional Sale—Where the mortgagor ostensibly sells the
mortgaged property—
(a) on condition that in default of payment of the mortgage money on a certain date,
the sale shall become absolute, or
(b) on condition that on such payment being made the sale shall become void, or
(c) on condition that on such payrnentbeing made the buyer shall transfer the property
to the seller,
the transaction is called mortgage by conditional sale and the mortgagee a mortgagee by
conditional sale. In this mortgage, the ostensible sale ripens into absolute proprietorship
on default by the mortgagor to repay the amount, in which case the mortgagee can sue
for foreclosure but not for sale. Registration is compulsory only if the consideration is
Rs. 100 or more.
Usufructuary Mortgage—Where the mortgagor delivers or expressly or by
implication hinds himself to deliver possession of the mortgaged property to the
mortgagee. and authorises him to retain such possession until payment of the mortgage
money, and to receive the rents and profits accruing from the property or any part of
such rents and profits, and to appropriate the same in lieu of interest. or in payment of
the mortgage money, or partly in lieu of interest and partly in payment of the mortgage
money, the transaction is called a usufructuary mortgage or mortgage with possession.
Registration of this kind of mortgage is necessary if the mortgage money is Rs. 100 or
more.
English Mortgage— Where the mortgagor binds himself to repay the mortgage
money on acertain dale and transfers the mortgaged property absolutely to the mortgagee
but subject to a proviso that he will retransfer it to the mortgagor upon payment of the
mortgage money as agreed, the transaction is called an English Mortgage. An English
mortgage represents two distinct transactions, that it involves a conveyance or transfer
of ownership and also the creation of personal liability of the mortgagor to repay by a
certain date. Registration is compulsory where the amount secured is Rs. 100 or more.
Mortgage by Deposit of Title Deeds or Equitable Mortgage—Where a person
delivers to a creditor documents of title to immovable property, (i.e., sale-deeds by which
the property had been acquired) with interest to create a security thereon, the transaction
is called a mortgage by deposit of title-deeds or an Equitable Mortgage. The terms or
which the deposit of title-deeds is made need not be reduced to writing. The usual practice
is that the mortgagor delivers the title-deeds to the mortgagee and also passes a
promissory note in his favour against which the mortgagee advances the.money. In case
of non-payment, the mortgagee can sue for sale, but he cannot foreclose the mortgaged
property.
420 MERCAI'tTIIE LAW

Anomalous Mortgage—A mortgage which is not of any of the kinds stated above
is called an anomalous mortgage. Anomalous mortgages are of many kinds, and may
arise by the combination of two or more of the above kinds or by usage in particular
localities. Thus Lekha Mkhi mortgage prevails in Punjab. In this mortgage the land is
transferred to the creditor for management who in addition to interest charges for the
management. In Waldi mortgage the mortgagee gels possession of the property but pays
one-tenth of the produce to the mortgagor as the landlord's dues.
Sub-Mortgage—Where the mortgagee transfers by mortgage his interest in the
mortgaged property, or creates a mortgage of a mortgage, the transaction is known as a
sub-mortgage. For example, where A mortgages his house to B for Rs, 10,000 and B
mortgages his mortgagee rights to C for Rs. 8,000, B creates a sub-mortgage.
Puisne Mortgage—Where a mortgagor, having mortgaged his property to secure
a loan of smaller amount than the value of the property, mortgages it to another person
to secure another loan, the second mortgage is called a Puisne Mortgage. For example.
A mortgages his house worth Rs. 50,000 to B for Rs. 20,000, he creates a mortgage,
and if he mortgages the house to C for a further sum of Rs. 20,000 and thus creates a
second mortgage, C would be the puisne mortgagee. The puisne mortgagee can recover
subject to the right of the first mortgagee to recover.

RIGHTS AND LIABILITIES OF MORTGAGOR

Rights of Redemption—By mortgaging the procrty the mortgagor only transfers

an interest in the property and does not cease to be its owner, and, therefore, he can
redeem the mortgage property by paying the mortgage plus any interest due on it, at any
time after the stipulated date for repayment, but before the right is extinguished by the
act of parties or by a decree of Court, or before it is barred by the Limitation Act. The
mortgagor is not entitled to redeem before the mortgage money becomes due on the date
fixed for repayment of the loan.
Right of Redemption or Equity of Redemption, as the term is called in English
law, is the essence of a mortgage, and any provision inserted in the mortgage deed to
prevent, evade or hamper redemption is void. The rule of equity that once a mortgage
always a mortgage, prohibits a "clog" on the right of redemption. In other words, once
a transaction is found to be a mortgage the Court would not permit any condition in a
mortgage deed which would prevent or impede redemption on repayment of the loan for
which the security was given, for if allowed, such a condition would have the effect of
clogging or fettering the equity or right of redemption. A "clog" on the equity or right
of redemption arise where an obligation continues during the term of the mortgage and
beoynd, thus rendering the property mortgaged less available in the hands of its owner
apart from the realization of the mortgage debt. Thus the right of redemption cannot be
controlled by any agreement made as a part of the transaction. But after the execution
of the mortgage the parties are at liberty by a fair bargain to extinguish the right of
redemption by an agreement which may be independent of the original bargain. t A
stipulation postponing redemption for aperiod of 40 years with a condition that in default
of redemption on a particular day the mortgage would be renewed for another period of
40 years would be a clog on redemption, as the provision gave a right of redemption for
one day only in 80 years and was designed to make a redemption almost impossible.2
Regarding the manner of redemption, it is provided that the mortgagor must pay
or offer to pay to the mortgagee the mortgage money at a proper time and place and if
the mortgagee accepts the tender the debt is discharged and redemption effected, or a

1. Mohd. Sher Khan v. Raja Seth Swami Dayal, 1992 P.C. 37.
2. Sarbdawan Singh v. Bijai Singh (1914)36 All. 551.
 SECURiTIES 421

suit for redemption should be filed. On redemption, the mortgagee must return the
mortgage deed and all other documents reating to the mortgaged property. Where the
mortgage is with possession of the properly the mortgagee must deliver to the mortgagor
the possession of the property. Where there is any increase of property after usufructuary
mortgage and before redemption, the mortgagor is entitled to get back the increased
property.
Partial Redemption—A mortgage, as a rule, being one and indivisible security
for the debt and every part of it, the mortgagor cannot redeem piecemeal he must redeem
the whole property. Similarly, where there are more than one mortgagor, a co-mortgagor
cannot redeem his portion of the mortgaged properties. But a mortgagor ofan undivided
share can always redeem the whole mortgage. Thus, the owner of a part of the equity
of redemption can redeem the entire mortgage but not any part of it 3 . A mortgagor who
has executed two or more mortgages can redeem any one or more of the mortgages,
unless there is a contract to the contrary, stipulating consolidation (Sec. 61).
Implied Contract by Mortgagor—The parties are free to enter into any terms
they like: where, however the contract does not contain all the terms. Sec. 65 provides
for implied terms: as follows:—
In the absence of a contract to the contrary, the mortgagor shall he (teemed to have
contracted with the mortgagee—
(a) that the mortgagor is entitled to transfer the interest (covenant for title):
(b) that the mortgagor will assist the mortgagee to enjoy the quiet possession:
(c) that the mortgagor will pay all public charges in respect of the property:
(d) that the mortgagor covenants as to the payment of the rent due oil where the
mortgaged property is a lease:
(e) that the mortgagor covenants as to payment of interest and principal on prior
encumbrances, where the mortgage is a second or subsequent encumbrance on the
property.
Mortgagor's Power to Lease—Sec. 65A permits a mortgagor in possession to
lease the property and the mortgagee will be bound by the lease if—
(a) the lost rent is reserved:
(b) no premium is paid or promised;
(c) no rent is promised to be paid in advance:
(d) there is no covenant for renewal of lease;
(c) the taking effect of the lease has not been postponed beyond 6 months:
(1) in a lease of building-4i) the duration of the lease does not exceed 3 years, and
(ii) there is a right of re-entry on non-payment of the rent reserved.

RIGHTS AND LIABILITIES OF MORTGAGEE

If the mortgagor does not pay the mortgage money, the mortgagee may proceed
to recover from the mortgaged properly or sue for recovery from the mortgagor
personally. The remedies of the mort g agee against the property are:-
1. Right to bring property to sale.
2. Right to foreclose.
3. Right to the possession of the property.
Remedy by Sale—In the case of a simple mortgage or a mortgage by deposit of
title-deeds (equitable mortgage), or an English mortgage, sale is the only remedy

3. Hijai Singh v. Randhir Singh, 1925 AU. 643.

422 MERCANTILE LAW

available to the mortgagee. He has to file a suit for sale of the mortgaged property and
if the Court is satisfied, it would give 6 months' time to the mortgagor to pay the decretal
amount. If he fails to pay, the mortgagee will get a final decree under which he can have
the property sold If the proceeds are more than the decretal amount, the balance, after
payment to the mortgagee, will be paid to the mortgagor, and if the proceeds fall short,
then a personal decree for the balance will be given against the mortgagor.
Foreclosure—The scond remedy is foreclosure, by means of a suit to get a
decree that the mortgagor shall be absolutely debarred of his right to redeem the
property, if the mortgagor does not pay within the period directed by the Court. After a
foreclosure decree is passed the mortgagee bcomcs the owner of the property. This
remedy is available only, in case of a mortgage by conditional sale, or in any anomalous
mortgage.
Possession— A usufructuary mortgagee has a right to file a suit for possession
and by use of the property he can repay himself of the debt due to him. He can retain
possession until his debt is discharged out of the income of the property. Hence where
possession is not given by the mortgagor, the mortgagee sues for JX)SSCSS1uii.
Right to Sue for Mortgage Money—The mortgagee has a right to sue for the
mortgage-money in the following cases and no other:—
(a) where the mortgagor hinds himself to repay the same.
(h) where, by any cause other than the wrongful act or default of the mortgagor or
mortgagee, the mortgaged property is destroyed or the security is rendered insuf-
ficient.
(c) where the mortgagee is deprived of the whole or part of his security by or in
consequence of the wrong act or default of the mortgagor.
(d) where the mortgagee, being entitled to the possession of the properly (usufruc-
tuary mortgage), is not put in possession of it, or where having been put into
possession, is dispossessed by the mortgagor or any other person claiming under
a superior title, e.g., a buyer by a registered deed.
Right of Private Sale By virtue of Sec. 69, a mortgagee can sell the property
privately, without the intervention of the Court, if the loan is not paid on a certain date
in the following three cases:—
(a) where the mortgage is an English mortgage and neither the mortgagor nor the
mortgagee is a Hindu. Mohammedan or Buddhist: or
(h) where the mortgagee is Itic Government and the mortgage deed confers an express
power of sale: or
(c) where the mortgage property was on the date of the execution of the mortgage
situated within the towns of Bombay, Calcutta and Madras.
The sale proceeds under a private sale of the property must be utilised. first, in
discharging prior encumbrances, if any; .ceo'idlv. in payment of all cost, charges and
expenses of the salc;ihirdlv. the surplus to be paid to the person entitled to the mortgaged
property. A mortgagee having right privately to sell the property can appoint a receiver
out of the income of the mortgaged property.
Liabilities of Mortgagee in Pos.ses.sion—A mortgagee in possession is bound—
(a) to manage the properly as a person of ordinary prudence would manage his own;
(h) to use his best endeavour to collect the rents and profits thereof;
(c) to pay out of the income all Government Revenue or other charges of a juhlic
nature;
(d) not to commit any act which is destructive to the property;
 sEciJRIrIEs 423

(e) to keep full and accurate accounts of all income and expenditure;
(f) when mortgagor tenders or deposits the mortgage money, to account for his
receipts from the property from the date of tender or deposit.

PRIORITY

The general rule of priority of different mortgagees on the same property is that
the successive mortgagee is paid after the prior mortgagee has been satisfied. Thus, if
two successive moages are created by the mortgagor on the same property, and both
cannot be satisfied out of the mortgaged property. the prior mortgagee will have the first
right to satisfy his whole debt and the balance, if any, will go to the subsequent
mortgagee.

MARSHALLING AND DISTRIBUTION

Marshalling—By Sec. 8 1, if the ownerof two or more properties mortgages them

to one person and then mortgages more than one of those properties to another person,
the subsequent mortgagee is, in the absence of a contract to the contrary, entitled to
have the prior mortgage debt satisfied out of tht properties not mortgaged to him, so far
as same will extend, but not so as to prejudice the rights of the prior mortgagee or of any
other person who has for consideration acquired an interest in any of the properties.
The rule of marshalling applies only where—
(a) the debtor is the same and contracts different debts in the same capacity;
(b) there is no contract to the contrary;
(c) the properties are separate and not fractional share of the same property;
(d) prior mortgagee's rights or of any other person who has for consideration acquired
an interest in any of the properties is not prejudiced.
An illustration will make the rule of marshalling clear. A mortgages properties X
and Y to B. Then he mortgages property Y to C. Suppose B obtains decree on his
mortgage for sale of properties X and Y which form security for his mortgage. Suppose
further that B applies in execution to the Court for sale of property Y which is also
mortgaged to C, C would be entitled to have the prior debt of B satisfied out of property
X, which is not mortgaged to C, and if the whole of B's debt is not satisfied out of
property X then and then alone, the property Y should be proceeded against.
Contribution (Sec. 82)—In marshalling we determine the different rights of the
competing mortgagces, while in contribution we have to determine the rights of the
mortgagors inter se with respect to the properties mortgaged by them. The mortgagors
inter se are liable to contribute in proportion to the value of their property which has
been included in the joint mortgage.4 A joint mortgage to secure one debt may either
arise where several owners of distinct properties contract a single mortgage debt, or
where a single mortgagor mortgages different properties of his to secure a single debt,
and on his death, the different properties by partition are inherited by his heirs, or where
a single mortgagor after having created a single mortgage on two of his properties sells
the equity of redemption in any one or more to a third person. In all these three cases,
there is competition between the owners of several properties mortgaged, and where any
one of them has been made to pay the whole debt of the mortgage, the owner of that
property can claim contribution from his co-mortgagors in proportion to the value of
their respective properties. For example, where three properties, X worth Rs. 4,000, Y
worht Rs. 2,000, and Z worth Rs. 2.000 belong to A, B. and C respectively and are
mortgaged to M for a debt of Rs. 4.000 and A. the owner of X property. pays off the
4. hi Nrain v. Raihik Behari La!, 1931 MI. 546.
424 MERCANTILE LAW

entire mortgage, he will be entitled to a contribution of Rs. l,0(() each from B and C,
the owners of Y and '/ respectively.
Subrogation—Subrogation, we know, is the right to step into the shoes of another
and thus acquire all rights and to enforce them in his own name. Sec. 92 provides that a
person who is interested in the discharge of a mortgage shall, on his discharging it, be
entitled to all the rights and remedies which the person paid off was entitled to. In order
to enjoy the right of subrogation, he should have a fight to redeem his mortgage and
redeem it. The common case is that of a subsequent mortgagee paying off a prior
mortgage. Although a subsequent mortgagee on paying off a priomortgage steps into
the shoes of the first mortgagee, he cannot ''Tack" his original security to the first so as
to get a priority over the intermediary mortgagee. "Tacking" is thus prohibited by Sec.
93. Suppose A creates successive mortgages on his property in favour of B, C and D. If
D redeems the mortgage in favour of B, he is subrogated to the rights of B and will
have priority in respect of the mortgage in favour of B over the mortgagee C; but he will
not be entitled to any priority with respect of his own mortgage which was third in point
of time. If tacking were permitted then C would be squeezed out and could redeem only
by paying off the first and third mortgages.
Mergers.—Whether merger will take place or not will depend upon different
circumstances. Where a third party purchases the equity of redemption from the
mortgagor and then redeems the mortgage on the property, merger would take place
unless the intention is to keep alive the mortgage. Where, however, the mortgagee or
chargeholder purchases the equity of redemption no merger takes place of his mortgage
rights irrespective of the fact that the purchasing mortgagee has expressly or impliedly
shown an intention to keep it alive as a shield against intermediate mortgages. Suppose
A mortgages his house worth Rs. 2,000 to B for Rs. 500 (first mortgage), to C for Rs.
600 (second mortgage) and to D for Rs. 700 (third mortgage), thereby parting with his
interest in the house to the extent of Rs. 1,800 in favour of the three mortgagecs, and
retaining with himself his interest in the property (technically known as equity of
redemption) amounting to Rs. 200. If he redeems the first mortgage in favour of B. the
interest in the property which he had parted with in favour of B. reverts to him, resulting
in a mergerof B's interest in the ownership ofA. In this way, A's interest will be enlarged
by Rs. 500, so that the value of his equity of redemption will go up to Rs. 700. Now
suppose A owes a simple debt to M who obtains a decree against A and in execution
sells the interest of A in the property which is purchased by N. N has purchased the
equity of redemption and thus steps into the shoes of the mortgagor A and then redeems
the mortgage in favour of B. Here merger of the interest of N and of the mortgagee
interest of B will take place unless it is shown that his object in redeeming B's mortgage
is to keep it alive: If in this illustration, C, the second mortgagee, were to purchase the
equity of redemption from A. no merger would take place of the interest of C as second
mortgagee of the property and of his interest as owner thereof. This is so because C is
not a stranger and has already an interest of a mortgagee in the property, and there being
a subsequent mortgagee D, C's mortgage would be kept alive.
Mortgage of Movable Property—A mortgage of movables may be defined as a
transfer, by way of sccurity, of the general ownership of the chattel, subject to the equity
of redemption of the mortgagor. No delivery of possession is necessary to complete a
mortgage in English Law, except in exceptional circumstances. In England, mortgages
of movables are regulated by the Bills of Sale Act, which require registration in order to
render such mortgages valid. In India, the mortgage of movables can be made by mere
parole and without transfer of possession. A mortgage of future goods, such as a crop
that may be grown on a certain plot or land, is a valid transaction in India. The rule is

5. (io&al Chand v. Puran Mull (1833) 10 Cal. 1035. P.C.

6. Misri Lalv. Marhar (1816) 13 Cal 262; The law on the -subject was stated by Beaman. J. in
Tehhiram v. Longin D'Mcllo. (1916) 18 R.L.R. 587.
 SECURiTIES 425

based on the maxim: Equity considers that as done which ought to be done. However,
the equitable title arising in a transaction of this kind will not avail against a subsequent
transferee of the property with possession, without notice of the previous title. Note,
although the term mortgage is used in connection with movable property, yet, strictly
speaking, it can be applied to immovable property. Therefore, to be more correct, where
a mortgage is created by deli , cry of possession of the goods, the transaction is a Pledge,
and where no possession is given to the lender, but only a right to recover the debt against
the specific goods, the transaction is a Hypothecation.

PART 15-B

CHA-RGE

Where immovable property of one person is by the act of parties or operation of

law made security for payment of money to another, and the transaction does not amount
Co mortgage, the ]alter person is said to have a charge on the property; and all the
provisions hereinbefore contained which apply to a simple mortgage shall, so far as may
he, apply to such a charge (Sec. 100).
It will be seen that a charge can be created either by the acts of parties or by the
operation of law, and although the property is made a security for the payment of the
loan, yet the transaction does not amount to a mortgage. We may with profit distinguish
between a charge and a mortgage.
Distinction between Charge and Mortgage-
1. mortgage is a transfer of an interest in the property made by mortgage as a
security for the loan, while the charge is not the transfer of interest in the property
though it is security for the payment of an amount.
2. A charge may be created by act of parties or by operation of law. A mortgage can
only be created by the act of parties.
3. Sec. 59. Transfer of Property Act, requires a mortgage deed to be attested by two
witnesses, while a charge need not be made in writing, and if reduced to writing,
it need not be attested.
4. In certain mortgages. (i.e., mortgages by conditional sale, and anomalous
mortgages) the mortgagor can foreclose the mortgaged prorty, but in a charge
the charge-holder cannot foreclose though he can gel the property sold as in a
simple mortgage.
5. From the very nature of it, a charge, as a general rule, cannot be enforced agai.
a transferee for consideration without notice. But in a mortgage, the transferze
of the mortgaged property from the mortgagor can only ,scque the reniarim
interest of the mortgagor, and is, therefore, bound by the mor,ije.7
6. In a charge created by act of parties the specification of the particular ft.nd or
property negatives a personal liability and the remedy of the charge-holder is
against the property charged only. When there is, in addition, a personal covenant
and the security will become collateral to the personal covenant and the security
will in that case appear to become a transfer of right of sale to support the personal
covenant and as the right of sale is a right in rem the transaction would be a
mortgage. For this reason the absence of a personal liability is the principal test
that distinguishes charge from a simple morlgage.8

7. Vir Bhan v. Salig Rain, 1937 Lab. 35; see also 1938 Born. 189.
8. Benas Rank Ltd. v. Harparshad, 1936 Lab. 482.
426 MEKCANTIU LAW

Charge how Created—A charge can be created either by acts of parties or by

operation of law.
By Act of Parties—When in a transaction for value both parties (debtor and
creditor) intend that the property existing or future shall be made available as security
for the payment of a debt and that creditor shall have a present right to have it made
available there is a charge. The charge is always created to take effect immediately and
not at some future time, although the present legal right can only be enforced at some
future date. It will be noted that the creditor gets no legal right of property, either absolute
or special or any legal right to possession but only gets a right to have the security made
available by an order of the Court. In a suit by A against B on the basis of a promissory
note, the parties, made a compromise which was embodied in the decree. It was prov.ded
that the decretai amount would be paid by easy instalments and that B would not dispose
of, in any way, his share in the Premier Aerated Co.. at Hazart Ganj, until the satisfaction
of the dccretal amount. held, that a charge was created on B's share in the property and
A was entitled to have the amount from the property even though B had sold his share
to a third person. Where M has executed a promissory note in favour of P and oil
same date a Reechik was sent by M to P, in which it was stipulated that the amount due
under the promissory note should come out of the deodar timber in the jungle, held, that
P was entitled to a charge on M's timber in the jungle. A document described as
Zarnanalnarna and containing a condition restricting the executant from certain property
was executed to secure repayment of a loan. It Was, however, not on a proper stamp
a mortgage. Held, that the instrument amounts to create a charge and not a mortgage.
By Operation of Law—Charges created by operation of law are those which arise
on account of some statutory provisions. They are not created by a voluntary action of
the parties but arise as the result of some legal obligation. An unpaid vendor has a charge
on the property sold. A co-mortgagor redeeming the mortgage is entitled to claim
contribution and acquires a charge in respect thereof. Also, where several properties
have been mortgaged by several owners to secure one debt and the property of one of
the owners has contributed more [hall proportionate share of the mortgage debt, that
owner is entitledto a charge oil remaining properties which have not discharged their
own share of the debt to contribute rateably towards the debt.'
Instances where no charge Created
I. Where the parties do not intend that there should be a present right to have the
security made available, but only thai there should be a right in the future by
agreerneni such as a licence to seize goods, there will be no charge.
2. A covenant that the obligee can recover from the "person and property" of the
debtor is too vague to create a charge on any of his properties.
3. Where at the foot of a hundi a note was added in the words: 'Haitian Delhi wa
Ludhiana ki jaitmd is qarza ki zimewar hogi' (our properties at Delhi and Ludhiana
will be responsible for this debt), it was held that these words did not create a
charge. 12
BILLS OF SALE

Bills of sale are securities under the English Law and are governed by the Bills of
Sale Act, 1878, as amended up to date. A brief description of these is given belo w for
the benefit of students who have to study them.

9. Mangat Ram v. Piyare La!, Sunder La!, 1929 Lah. 274.

10. Virhhanv.Salig Ram. 1937 Lah. 35.
11. Mohd. Mian v. Rharal Singh, 1930 Oudh. 260.
12. Puran Chand v. Puran ('hand. Official Receiver, 1923 Lah. 625.
 SR1IRITIES 427

A bill of sale has been defined as a document whereby the property in chattels is
transferred to a grantee, either absolutely or conditionally by way of mortgage, but
possession of the property remains with the grantor. The term "bill of Sale" includes
(1) bill of sale proper ; (2) assignment; (3) transfer; (4) declaration of trust without
transfer, (5) inventory of goods with receipt thereto attached; (6) receipt for purchase
money of goods; (7) powers of attorney, authorities or licences to take possession of
personal chattels as security for any debt; (8) any agreement by which a right in equity
to any personal chattels, or to any charge or security thereon, shall be conferred.
The following classes of instruments do not fall within the definition Of a bill of
sale, namely, (1) assignments for the benefit of the grantor's creditors; (2'oarriage
settlements; (3) transfers or assignments of any ship or any share thereof; (4J transfers
of goods in the ordinary course of business; (5) bills of sale of goods in foreign ports or
at sea; (6) bills of lading, India Warrants, warehouse-keeper's certificates, delivery orders
used in the ordinary course of husiuess.
The bills of sale are governed by the Bill of Sale Act, 1878, as amended up to date.
The primary aims of the Act are to protect both the grantor and the grantee where chattels
remaining in the possession of the grantor form the security for a loan made by the
granteej but third parties must also be protected, as they may be induced to enter into
financial relations with the possessor of the chattels on the strength of such possession.
Many arrangements other than bills of sale strictly so named, may involve the retention
of the goods after a charge has been created; hence the provision that a bill of sale must
be registered so that it should act as constructive notice to third parties.
The term ''personal chattels" under the Bills of Sale Act means goods, furniture,
and other articles capable of complete transfer by delivery, and (when separately
assigned or charged) fixtures or growing crops. Trade machinery is also generally so
regarded. But a bill of sale cannot he given in respect of any chose-in- action (actionable
claim of the Indian law).
A bill of sale may be either (i) Absolute, or (ii) Conditional,
Absolute Bill or Sale—An absolute bill of sale is the document executed for the
purpose of serving as evidence of the transfer of title. It serves as a protection to the
buyer, especially if the goods are to remain temporarily in possession of the seller. An
absolute bill of sale need not be in any specified form, but it must show the consideration
for the transaction, and must be explained to the grantor by a solicitor and witnessed by
a solicitor. The grantee may insert any conditions he pleases as to when he shall be
entit1d to take possession. Sometimes the possessor of property may be required to
submit evidence of ownership, and a bill of sale serves the purpose. For example, it is
generally required that before an automobile can be registered by a new owner a bill of
sale must be submitted.
SPECIMEN COPY OF AN ABSOLUTE BILL OF SALE
KNOW ALL MEN BY THESE PRESENTS:
That I, John Smith of Birmingham (England) in consideration of the sum of Five
Hundred Pound Sterling, to me paid by James Brown of Birmingham, the receipt
whereof is hereby acknowledged, have bargained, sold, granted, and conveyed, and by
these presents do bargain, sell, grant and convey unto the said James Brown, his
executors, and administrators, and assigns one Fordson Tractor, Model H. No. 06.543.
To have and to hold the same unto the said James Brown, his executors, administrators,
and assigns for ever. And I for myself and for my heirs, executors, and administrators,
do hereby covenant with the said James Brown, his executors, administrators, and
assigns, that / am the true and lawful owner of said described goods thereby sold and
have full power to sell and convey the same; that the title so conveyed, is clear, free,
428 MLRCAN11tJ lAW

and unencumbered; and furthur, that I do warrant and will defend the same against all
claim or claims of all persons whomsoever.
IN WITNESS WHEREOF,! have hereunto set my hand this fourteenth day of
March. 1977.
SIGNED AND DELIVERED IN THE PRESENCE OF:
(Signed) William Bragg. (Signed) .John Smith.
(Signed) Harry Hilton.
Conditional Bill of Sale—A conditional bill of sale is one given as security for
the payment of money, the grantor having the right to have the chattels reconveyed to
him upon fulfilling the condition. Such hills of sale are governed by the Hills of Sale Act
(187) and the Amendment Act, 1982. A conditional bill of sale need not be explained
by a solicitor, or witnessed by a solicitor, but it must he witnessed by at least one credible
witness. It must be in the exact form given in the Schedule to the Act, and must show
the consideration which must not be less than £30, also the rate of interest, the date of
repayment, and any condition on fulfilment of which the bill is to be void. An inventory
of the personal chattels comprised in the bill miNt be attached. The grantee can only
seize the goods comprised in the bill of sale forone of the following conditions mentioned
in the Act, namely; (I) failing to perform the covenant; (2) bankruptcy, or allowing
distraint to issue for rent, rates or taxes (3) fraudulently removing the goods; (4) failure
without reasonable excuse to produce the last receipt of rent, rates or taxes after written
demand; (5) allowing execution to issue. It should, however, be remembered that even
after seizure the goods cannot, without consent of the grantor, he removed from the
premises or sold for 5 days, and within such 5 days the grantor may apply to the Court
for relief if by payment or otherwise the cause of seizure no longer exists.
Registration of Hills of Sale—Every bill of sale, whether absolute orconditional,
must be registered within 7 days of execution; and re-registered every five years. If
executed out of England, registration must be effected within 7 days after the time in
which it would, in the ordinary course of post, arrive in England, if posted immediately
after execution. There must be produced to the Registrar the original bill, with a true
copy of it and every schedule or inventory attached to it; and affidavit of due execution,
stating the time it was given, and a description of the residence and occupation of the
grantor and all other attesting witnesses. A conditional bill of sale must have attached a
schedule specifically enumerating the chattels comprised in it, and chattels afterwards
acquired cannot be included, except by way of substitution. If the omission to register
arises from accident or inadvertence the judge inay make an order extending the time
for registration.

SPECIMEN COPY OF A CONI)ITJONAL BILL OF SALE

THIS INDENTURE made the .......day of .......One thousand nine hundred and
seventy-seven BETWEEN .......of .......of the one part and .......of .......of the other part
WITNESSETH that in consideration of the sum of ........the receipt of which the said
hereby acknowledges. He the said ......both hereby assign unto ......his executors,
administrators and assigns. All and singular the several chattels and things specifically
described in the schedule hereunto annexed by way of security for the payment of the
sum of .......Pounds and interest thereon at the rate of .... per cent, per annum. And the
said ......doth further agree and declare that he will duly pay to the said ......... theprincipal
sum aforesaid together with the interest then due by equal ......payments of ......on the
in each and every .......And the said ......doth also agree with the said........that he will
(Inset here terms as to insurance, payment of rent or otherwise which the parties
may agree to for the maintenance or defeasance of the security); provided always
 SECURITIES 429

that the chattels hereby assigned shall not be liable to seizure or to be taken posscssior
of by the said ....for any cause other than those specified in Sec. 7 of the Bills of Sale
Act (1878) and the Amendment Act, 1882. IN WITNESS whereof the parties to these
presents have hereunto set their hands and seals the day and year first above written.
Signed and sealed by the said....
In the presence of me (Add witness's name, address and description)

The Schedule above referred to

(Insert here the chattels and things comprised in the bill).

It should be remembered that the form must be strictly followed, otherwise the
conveyance would be void. The bill will be void if the name, address, and description
of the grantor, grantee or witness are omitted; or if the receipt clause is absent, or if the
copy filed discloses even a trifling error. A term introduced to enable the grantee to retain
a bill of sale after payment of the debt will also avoid the bill of sale, and so also will
any term which has the effect of introducing covenants not contained in the statutory
form, such as, for instance, incorporating terms by reference to another document.

HYPOTHECATION

The mortgage of movable property is called hypothecation. Neither the Indian

Contract Act nor the Transfer of Property Act deals with the problem of hypothecation,
but it is well settled that the mortgage of movable property, although unaccompanied by
delivery of possession, is called hypothecation IDeans v. Richardson (1871) 3 N.W.P.
54). Hypothecation may be described as a transaction whereby money is borrowed by
the debtor (owner of the goods) on the security of the movable property without parting
with the possession of the movable properly. The owner of the hypothecated goods is
called the Hypothecator, and the person to whom the goods are hypothecated is called
the Hypothecatee.
The rights of the hypothecatee depend on the terms of the contract between the
parties. For instance, he may be given, by the terms of the contract, the right to sell the
goods himself, on default of payment by the hypothecator on due date, and to realise his
dues from the sale proceeds. He can always file a suit to realise his dues by sale of the
goods hypothecated.
The hypothecatee nay lose his rights over the goods hypothecated under the
following circumstances:'
1. If the hypothecator, in possession of the goods sells them to bona fide
purchaser—for value without notice of the hypothecation the purchaser gets a good
title to the goods and the hypothecatee cannot proceed against them (Sreeram v.
Barn,nireddi, 42 Mad. 59; 35 M. L. J. 450),
2. If the hypothecator, in possession of the goods makes a valid pledge of the goods
and the pledgee has no notice of the hypothecation, the claim of the hypothccatee will
be postponed to that of the pledgee (Co-operative Hindustan Bank v. Surendra, 1932
Cal. 524).
Hypothecation differs from a mortgage in two respects:
(I) Mortgage relates to immovable properly and hypothecation relates to movable
property; (ii) In a mortgage there is a transfer of some interest in the property to the
creditor, but in hypothecation there is only an obligation to repay money, and there is
no transfer of any interest.

13. Adapted from Ranking Spicer& Pegler's Mercantile Law.

430 MFRCATIUi LAW

A pirige comes nearest to hypothecation. Both deal with movable property. But
even between those two there are points of distinction. In a pledge there must be delivery
of possession of the goods to the pledgee, but in hypothecation the goods need not be
delivered to the hypothecatee. A hypothecalee cannot sell the goods without decree of
the Court; but a pledgee can sell the goods after giving reasonable notice to the pledgor.

LIEN

Lien is the right of retaining goods belonging to another until a debt due to the
person retaining the goods is satisfied. Lien is of three kinds; (i) Possessor)' Lien. (ii)
Maritime Lien, and (iii) Equitable Lien. Possessory Lien is again of two kinds, viz., (a)
Particular Lien and (h) General Lien.
Possessory Lien—A possessory lien is one which can be exercised only by a
person in possession of goods. A particular lien is a right to retain goods until some
claim concerning those goods is paid. General lien is a right to retain all the goods of
another in the possession of a person until all the claims of the possessor are satisfied.
General lien may be conferred by an agreement to that effect or by custom and usage or
by the provisions of any statute. General lien exists in the case of solicitors, bankers,
factors, stock-brokers, warehousekeepers, wharfingers, and insurance brokers. (For
detailed discussion, refer to Chapter on Bailment).
An unpaid seller has also a lien over the goods in his possession and property to
which it has passed to the buyer until the price of the goods has been paid to him. This
is also a possessory lien, as it depends on the unpaid seller's possession of the goods and
not on title, and unless there is possession there is no lien.
A possessory lien can be enforced by retaining possession. The lien-holder cannot
sell the property except under certain special circumstances. For example, an unpaid
seller may sell the goods in his possession for non-payment of price to him after giving
reasonable notice to the buyer.
A possessory lien is extinguished in the following cases; (i) when possession is
lost, (ii) when the money due is paid. (iii) when the claimant takes some other security
and thereby, by implication, abandons the right of lien, and (iv) when the right of lien is
waived.
Maritime Lien—A maritime lien is a right specifically binding a ship, her
furniture, machinery, cargo and freight for the payment of a claim based upon the
maritime law. The persons who have a maritime lien are: seamen for their wages; the
master for wages and disbursement; the holder of a bottomry bond for his dues;
claimants for damages in cases of collision with the ship concerned; salvors, i.e. persons
who salvage or rescue ship or property from the sea. A maritime lien is not a possessory
lien. It is exercised by arresting the ship in the Admiralty Court- It comes to an end by
payment, release, waiver and by the destruction of the subject-matter of the lien.
Equitable Lien—An equitable lien is an equitable right conferred by law upon
one man to a charge upon the movable or immovable property of another until certain
specific claims have been satisfied. Thus, an unpaid vendor of immovable property has
an equitable lien on the property for the whole or part of the purchase money until actual
payment. An equitable lien is binding on all persons who take the property with notice
of the lien. It is enforced by a suit for the sale of the property to a bonafide purchaser
for value without notice.
A lien differs from all the other securities in that a lien is the creation of law under
certain circumstances, whereas the other securities are the creation of agreement between
the parties. A lien is only a defensive right and cannot be enforced by a suit or by the
sale of the property over which the lien is claimed. The only right that a holder of a lien
enjoys is to retain the goods until his dues are satisfied.
 Chapter XVI

Company Law
PART 16-A
NATURE AND CLASSIFICATION

Legal Persons—Law regulates the rights and obligations of persons, and divides
them into two classes—(i) naturalpersons, or (ii) artiji cia! persons. Natural persons are
human beings of different degrees of capacity with whom we have been dealing so far.
Artificial persons are such as are created and devised by human laws for the purposes
of society and government, which are called Corporations or Companies. We shall, in
the present Chapter, deal with this legal person—the Corporation or Company.
Corporation--A Corporation is an artificial person, with a distinctive name, a
common seal, and created by law for the purpose of preserving in perpetual succession
rights which would fail if vested in a natural person. Corporations are either "Corpora-
tions Sole" or "Corporations Aggregate.'
A Corporation Sole Consists of one corporator or member only at any given time,
who enjoys corporate personality in virtue of his capacity as occupant of some public
office for the time being. Examples are found in the perpetual offices such as the Crown,
the Presidentship or a Bishopric. The office is constant, only the occupant of the office
changes.
A Corporation Aggregate consists of a number of individuals contemporaneously
associated so that in the eye of the law they form a single person, e.g.. a Municipal
Corporation such as the Municipal Corporation of Delhi or Bombay or Calcutta, or a
company, which is formed mainly for the purposes of trade and commerce.
Company and its Meaning—In the ordinary common parlance, a company means
a group of persons associated to achieve some common objective. Our object is to deal
with a company which is formed for carrying on some business and providing for limited
liability of its members, Keeping this type in mind we may define a company as a
voluntary association for profit with capital divisible into transferable shares with limited
liabilit y , having a corporate body and common seal. The company is an artificial legal
person created by law and endowed with certain powers. It exists in the eyes or
contemplation of law as though it were a natural person, separate and distinct from the
persons who are its members. As the company is created by law and is not itself a human
being, and so has no physical existence, it is called artificial; and since it is clothed with
many of the rights of a real person, it is called a person. It is accordingly an artificial,
legal person.
This concept of the company as being a separate, legal person is fundamental in
understanding the rights and duties that arise in connection with companies. It means
that property of the company is not owned by the members who own shares but by the
company. t Debts of company are debts of this artificial legal person and not of the people

I. R.F. Perumal v. H. John. 1960 Mad. 43.

431
432 MERCANTILE LAW

running the company or owning shares in it. The company has a right to sue and can be
sued, can own property and have banking account in its own name, own money and be
a creditor but you cannot shake it by the hand, or knock it down in a fit of temper.
In consequence of the company being an entity separate and distinct from its
shareholders,2 the life of a company is not measured by the life of any member.
Accordingly. a company has independent life in the sense that it continues to exist
without regard to the death of the individuals involved in its corporate affairs or the
transfer by them of their interests in the company; even the death of all its members does
not end the company. On account of this separateness between the company and its
members, a shareholder can be its creditor, too. Also, a shareholder cannot be held liable
for the acts of the company, even though he holds virtually the entire share capital, as
may happen in what is known as a "One-man Company." Similarly, the shareholders
cannot bind the company by their acts; they are not its agents. These points are brought
out by the House of Lords in the celebrated case of Salomon v. Salomon & Company
Limited (1897) A.C. 22.
In this case, one Saloman, who carried on a prosperous leather business, sold it in
solvent condition for the sum of E30,000 to a company which he formed consisting of
himself, his wife and a daughter and his four sons as shareholders. His wife, daughter
and four sons took one f share each. Salomon took 20,000 £1 shares and debentures
of the amount of £10,000 secured by a floating charge on the company's assets as the
price of the business transferred to the company. The company ran into difficulties and
had to be wound up. The total assets amounted to £6,050: its liabilities were the £10,000
secured debentures and £8,000 owing to unsecured creditors who claimed the entire
assets of £6,050, on the ground that the company and Salomon were one and the same
person and that the company was mere " alias" or agent for Salomon, and hence they
should be paid in priority to Salomon. The House of Lords rejected this contention of
the unsecured creditors and held that as soon as the company was duly incorporated, it
became in the eyes of the law a separate and distinct, as well as independent person from
Salomon and was not his agent or trustee for him. Saloinon, though holding almost all
the shares in the company, was also a secured creditor, and so must be paid his debt out
of the assets of the company in priority to unsecured creditors.
This case established the legality of what were formerly well known as "One-
man" Companies. Once a company was validly formed with 7 members holding at least
one share each, it became a separate entity from the members even if one of them held
almost all the shares as did Salomon in this case. Although Salomon continued to be all
in all even after the incorporation of the company, the business ceased to be his personal
business and belonged to the company, and Salomon was its agent and not the company
the agent of Salomon. Lord Macnaghton added: "The company is at law a different
person altogether from the subscribers ... and, though it may be that after incorporation
the business is precisely the same as it was before, and the same persons are managers,
and the same hands receive the profits, the company is not in law the agent of the
subscribers or trustee for them. Not are the subscribers, as members, liable in any shape
or form, except to the extent and in the manner provided by the Act"
The legal personality and limited liability are the two important features of a
company. A person by buying shares, becomes entitled to participate in the profits when
the company decides to divide them, 3 and is at liberty to dispose of them whenever he
likes; and if anything goes wrong with the company, his liability is limited by the nominal

2. TunsIall v. Steigman (1962)2 All. E.R. 417; Dliulia etc. Transport Co. v. Roydiand, 1962
Born. 337.
3. Badia F. Giaadar v. Corn. Income-Tax. Bombay, 1955 S.C. 74; Short v. Treasury Commr.
(1948)1 K. B. 116.
 COMPANY LAW 433

amount of the shares held by him. As a natural consequence of incorporation and

transferability of shares, the company has perpetual succession. This means the life of
the company is independent of the lives of its members, giving immortality to the
company. Hence members may come and members may go, but the company goes on
(until dissolved).
To sum up, the principal characteristics of a company are as follows:
1. A company has a separate and distinct personality from its members which
constitute it:
2. In consequence of incorporation, it is an artificial legal person, enjoying similar
rights and owing similar obligations as a natural person.
3. As a corporate person the company is entitled to own and hold property as distinct
from its members.
4. As ajuristic person distinct from its members it has perpetual succession.
5. The shares in the share capital of the company are generally freely transferable.
This makes the life of the company independent of the lives of its members.
6. The liability of its shareholders is limited to the unpaid value of the shares held by
them.
7. A company, though a person having nationality and a domicile is not a citizen. 4 It
cannot therefore exercise the right of franchise, not can it be punished, in its own
person, by imprisonment for criminal offences, although it can be fined for the
contravention of the provisions of the Companies Act.
8. As the company is not a citizen and can act only through natural persons, it has no
fundamental rights under the Constitution. 5
Lifting or Piercing the Corporate Veil—The advantage of incorporation, as
explained in the previous section, particularly the concept of separate and distinct entity,
are allowed to be enjoyed only by those who do not make a fraudulent and dishonest use
of the company—the artificial legal person. For instance, the Court may not recognise
the separate existence of a company where the only purpose for which it appears to have
been formed is the evasion of taxes.6
The Court may also find it just to break through the corporate shell and apply the
principle of what is known as lifting or piercing the corporate veil, where it may become
necessary in public interest to examine the character of persons in real control of the
corporate affairs. In Daimler & Co. Ltd. v. Continental Tyre & Rubber Co. (1916)2
A.C. 307, the comany was registered in England, but on the declaration of var between
England and Germany, the persons in control of the company and resident in Germany
became alien enemies. The CoLrl disregarded the corporate fiction of separate entity of
the company and declared it an enemy company.
By virtue of Sec. 45, if the number of members falls below the statutory minimum,
and the company carries on business for more than 6 months, while the number is so
reduced, every shareholder who is aware of these facts shall be directly and severally
liable to the creditors for the debts of the company contracted during that time, the
creditors being pcnntted to look behind the company to the owners of the shares for
their satisfaction. Thus, the privilege of limited liability is lost by the shareholder.
Under Sec. 542, the legal personality of the company may also be disregarded if
in the course of winding up it appears that the machinery of incorporation has been used
for some fraudulent purpose, or for defrauding creditors of the company. Any persons

4. State Trading Corporation of India Ltd. v. C.T.O., 1963 S.CJ. 605.

5. Tata E. & L Co. Lid. v. State of Bihar, 1965 S.C.40.
6. In re Sir Dinahaw Manedtjee Petit. 1927 Born. 371.
434 MERCANTII.E LAW

who were knowingly parties to the carrying on of the business in that manner will be
held personally liable to the full extent for all debts, etc., of the company.
Bi was carrying on ajewellery business. He formed and registered a company with
himself and his wife as members. The company took over nothing, but a banking account
was opened in its name with £160 which B put in. B went on trading exactly as he did
before for the one-man company, as its managing and sole director. The company had
practically no assets. On a claim to recover £X7, being the value of jewellery entrusted
to him, it was contended on his behalf that the goods were delivered to him and the
contract made with him as managing director of the limited company, and that he was
not personally liable, field, it was a good case to lift or pierce the corporate veil and
hold B personally liable [!lurwitz v. Berman (The Times, Oct. 29, 1932)].
Classes or Companies—Companies are of different varieties. They maybe—
I. Chartered Companies, such as the East India Company, which are created by
Charter granted by the King or Queen in exercise of an ancient prerogative vested in the
Crown. A chartered company is regulated by its charter and the Companies Act does not
apply to it. Such companies have no place in India since Independence.
2. Statutory Companies, like the Reserve Bank of India or the State Bank of
India, which are created by Special Acts of Parliament or State Legislature. A statutory
company is governed by the provisions of the special Act creating it. The Companies
Act does not apply to such companies.
3. Registered Companies, which are incorporated under the Companies Act,
1956, or were registered under the previous Companies Acts therein consolidated and
recognised.
A registered company may be an unlimited company, in which case the liability
of its members would be unlimited so that they can be called upon to pay to the full
extent of Iheir fortunes in order to meet the obligations of the company. Such companies
are now almost extinct, as a vast majority of them have registeied themselves as limited
companies.
Another class of a registered company is a Guarantee Company, with its capital
limited by guarantee so that each member undertakes to be liable to pay the debts of the
company up to a certain amount in case of winding up. Clubs, trade associations and
societies for promoting social objects are examples of this type; and in the case of these
companies there is no intention to make profit.
The largest in number and most important in function are Limited Liability
Companies registered with a share capital divided into shares held by shareholders whose
liability is limited to the face value of the shares held by them. This class of company
will be almost exclusively dealt with by us.
Functionally, a registered company with limited liability may be either Private or
Public, or an Association not for Profit.
Private Company—A private company is defined by Sec. 3(1) (iii) as a company
which by its articles of association, (i) restricts the right to transfer its shares, (ii) limits
the number of its members (excluding employees who are members or ex-cmployëe.s
who were and continue to be members) to 50, and (iii) prohibits any invitation to the
public to subscribe for any of its shares and debentures. If two or more persons hold one
or more shares jointly, they shall be treated as a single member. 7 The name of every
private company must end with the words "Private Limited." Since the membership of
private company is confined more or less to friends and relatives, it enjoys certain special
privileges and exemptions.

7. Jarnail Singh v. Bakshi Sing, 1960 Punj. 555.



COMPANY LAW 435

Privileges of Private Company—A private company enjoys the following

privileges and exemptions:-
1. Only two signatories to the memorandum are sufficient to form a private company.
2. It can commence allotment of shares before the minimum subscription is sub-
scribed or paid.
3. It is not required to file a statement in lieu of prospectus as it is not allowed to issue
a prospectus to the public.
4. It need not offer further shares first to the existing shareholders under Sec. 81:
5. A private company may commence business immediately after incorporation.
6. It is not required to hold the statutory meeting and file the statutory report.
7. It may issue any kinds of shares and allow disproportionate voting right.
8. A private company need have only 2 directors.
9. Its director can vote on a contract in which he is interested.
10. Provisions relating to loans made to directors, duration of appointments, etc., of
managing director in a public company, etc., do not apply to a private company.
Loss of Privileges—A private company will lose its privileges and will be treated
as a public company, if it fails to comply with the essential requirements of a private
company, viz., restrictions on transfer of shares; limitation of its members to fifty; and
prohibition of invitation to the public to buy its shares or debentures (Sec. 43). The Court
may, however, relieve the company from the consequences of non-compliance with the
aforesaid regulations, if it is of opinion that the non-compliance was accidental or
inadvertent.
CIRCUMSTANCES UNDER WHICH A PRIVATE COMPANY
BECOMES A PUBLIC COMPANY
Section 34A was amended by the Companies (Amendment) Act, 1988, and with
effect from June 15, 1988. a private Company shall be deemed to be a public company
under any of the following circumstances:—
I. Where not less than 25 per cent of the paid up share capital is held by one or more
public companies or deemed public companies;
2. Where the average annual turnover of a private company during the period of three
consecutive financial years is Rs.lO irores or more, irrespective of the paid up
share capital;
3. Where not less than 25 per cent of the paid up share capital of a public company
is held by a private company;
4. Where on or after June 15, 1988, a private company accepts, after invitation by
advertisement, or renews, deposits from the public other than its members,
directors or their relatives.
However, even after a private company has become a deemed public company, its
articles may include provisions relating to matters specified in Section 3(l)(iii) and the
number of its members may be less than 7 and it may have only 2 directors.
Within 3 months from the date on which a private company becomes a public
company, it shall inform the Registrar that it has become a public company. Thereupon,
the Registrar will delete the word "Private" from the name of the company upon the
Register. The Registrar will issue a new Certificate of Incorporation without the word
"Private" in the name of the company. Failure to inform the Registrar will render the
company and every officer in default liable to fine up to Rs.500 per day during default
Conversion of public company into private company—A public company
having share capital, and a membership within the limits imposed upon private corn-
436 MERCANTILE LAW

parties by Sec.3 (I) (iii) may become a private company by passing a special resolution
altering the articles to include the necessary restrictions, limitations, and prohibitions,
and to delete any provisions inconsistent with the restrictions, e.g.. a power to issue share
warrants to bearer. The proviso to Sec. 31 now requires that approval of the Central
Government must be obtained to the conversion of a public company to a private
company. The name of the company must now end with the words "Private Limited."
Conversion or private company into public company—Sec. 44 lays down the
procedure as follows: The company must pass a special resolution altering its articles of
association in such a manner that they no longer include the provisions of Sec. 3 (1) (iii)
which are required to be included in the articles of a private company. On-the date of the
resolution the company ceases to be a private company and becomes a public company.
If the number of members is below 7, steps should be taken to raise it to at least seven,
and the number of directors should be increased to three, if it is less than three. It must
within 30 days file a prospectus' or statement in lieu of prospectus with the Registrar.
The company will also alter those regulations contained in the articles which are
inconsistent with the public company.
Public Company—A public company is one which is not a private company, and
whose membership is open to the public under the provisions of its articles. The
minimum number required to form such a company is seven, but there is no limitation
to the maximum number of members. It can offer shares and debentures to the public by
advertising such offer in a prospectus. Almost all the provisions of the Act apply to it.
Distinction between Public and Private Companies—The two types of com-
panies differ in the following respects:
1. The minimum number with which a public company can be formed is seven
and in the case of a private company it is only two.
2. There is no limitation to the maximum number of members in a public company.
In the case of a private company, the number of members must not exceed fifty.
3. A public company is required to have at least three directns. but a private
company may have only two directors.
4. The directors of a public company have to file with the Registrar consent to act
as directors, but those of a private company need not do so.
5. A public company may, and usually does, invite by the issue of prospectus the
general public to subscribe to its share capital or buy its debentures, but a private
company cannot do so; it must make private arrangement to raise capital.
6. The shares in a public company as a rule, are freely transferable. In a private
company, the transfer of shares can be made subject to certain restrictions as provided
in its articles.
7. Total managerial remuneration in a public company cannot exceed 11 per cent
of the net profits, but a private company which is not a subsidiary of a public company
may pay any remuneration.
8. A public company can issue only two kinds of shares preference and equity,
but a private company may issue any kinds of shares and even with disproportionate
voting rights.
Holding and Subsidiary Companies—Sec. 4 defines the terms holding company
and 'subsidiary' by explaining the circumstances in which a company shall be deemed
to be the subsidiary of another. If these circumstances of subsidiary relationship are found
to apply then the other company is deemed to be a holding company. The section, by
defining a subsidiary, brings out the meaning of a holding company.
A company is a subsidiary company of another if,—
(a) that other, (i.e., the holding or controlling company) controls the composition of
its Board of Directors; or
(b) that other (the holding or controlling company)-
 COMPANY LAW 437

(1) exercises or controls more than half of the total voting power of the existing
subsidiary company in which the holders of preference shares issued before April
1, 1956, have the same voting rights as equity shareholders;
(ii) holds more than half in nominal value of the equity share capital of a subsidiary
which is the holding company of another; or
(c) the subsidiary is a subsidiary of any company which is that other company's
subsidiary.
If company B is a subsidiary of company A, and company C is a subsidiary of
company B, then company C is a subsidiary of company A. If D is the subsidiary of C,
then D will be the subsidiary of B and also of A.
Shares held (or power exercisable) in fiduciary capacity are not to be counted and
do not make the latter a holding company; but shares held by a nominee are to be counted.
An Investment Company, that is to say, a company whose principal business is the
acquisition and holding of shares, stock, debentures or other securities is not a holding
company merely because part of its assets consists in 50 per cent or more of the shares
in another company.
Foreign Companies—A company incorporated in a country outside India and
under the law of that other country is a foreign company. Every foreign company having
a place of business in India is required to file with the Registrar at New Delhi and also
the Registrar of the State in which such place of business is situated a certified copy of
its charter, statute or memorandum and articles defining the constitution of the company
in English language, the full address of the registered or principal office of the company
and a list of its directors and its secretary, as well as the address of the principal place of
business in India. Every foreign company must conspicuously exhibit on the outside of
every office or place of business ni India the name of the company, indicating whether
Private Limited or Public Limited or unlimited, and where incorporated. The new
sub-sec. (2) to Sec. 591 provides that where not less than 50 010 of the paid-up share capital
(whether equity or preference or partly equity and partly preference) of a foreign
company having an established place of business in India, is held by one or more citizens
of India or by one or more Indian bodies corporate, such foreign company shall comply
with such of the provisions of the Act as may be prescribed with regard to the business
carried on by it in India.
The provisions regarding books of accounts and annual return are the same as per
the Indian companies, as also regarding registration of charges. The provisions regarding
prospectus are also almost the same as for an Indian company. A foreign company, which
has been carrying on business in India and stops its business here, may be wound up as
an unregistered company, even if it has been dissolved or has ceased to exist under the
laws of country in which it was incorporated.
Government Company--(Sec. 617). A Government company means any com-
pany in which not less than 51 per cent of the paid-up share capitol is held by the Central
Government, or by any State Government or Governments, or partly by the Central
Government and partly by one or more State Governments and includes a company
which is a subsidiary ofa Government company. Government companies are also subject
to the provisions of the Companies Act as any other company, except if the Central
Government by notification exempts any Government company from the application of
any of the provisions of the Act save Sees. 618, 619 and 619A specially dealing with
Governmentcompanies. Sec. 618 prohibits a Government company from having manag-
ing agent.
Sec. 619 provides for a special procedure for audit of Government companies and
lays down that the auditor of a Government company shall be appointed or re-appointed
by the Central Government on the advice of the Comptroller and Auditor General of
418 MERCM.rnLE LAW

India; provided no person will be appointed or re-appointed an auditor of more than 20

Government companies. The C. & A. G. can direct the manner in which the accounts
are to be audited, and may even conduct a supplementary audit. His report. if any, must
be placed before the annual general meeting along with the auditor's report. In addition
to the annual report on the working of the company. the Central Government must place
before both Houses of Parliament an annual report on the working and affairs of each
Government company, together with the audit report and any comments of C. & A. G.
of India.
Associations not for profit—Sec. 25 permits the registration, under a licence
granted by the Central Government, of associations not for profit with limited liability
without using the word limnited' or words 'private limited" to their names. An
association not for profit is a company formed for promoting commerce, art, science,
religion, charity, or any other useful object, and which does not irItcnd to pay any
dividend to its members, but to apply its profits or other income in promoting its objects.
It is registered without paying any stamp duty on its memorandum and articles. On
registration, the association enjoys all the privileges of a limited company, and is subject
to all its obligations except those in respect of which exemption is granted by the Central
Government. The Central Government may at any time revoke the licence whereupon
the company loses all exemptions and privileges and must publish its name with
• limited" or ''Private limited." This type of company cannot alter its object clause
without the previous approval in writing of the Central Government.
Prohibition of large partnerships—Illegal Associations--Sec. 11 provides that
no company, association or partnership consisting of more than 20 members (10 in the
case of banking business) be formed to carry on any business for gain unless it is
registered as a company under the Companies Act or is formed in pursuance of some
other Indian Law, or is ajoint Hindu family carrying on business as such. An association
or partnership contravening the above requirements is an illegal association, in the sense
that as a body, it has no legal existence, and cannot be wound up under the Act, not even
as an unregistered company. 8 It follows that an association which falls within the terms
of Sec. 11, and is not rgistered, has no legal existence; it is a phantom. The law does
not recognise it,9 and consequently, it is an illegal association.
As an illegal association, it—
(a) cannot enter into any contract;
(b) cannot sue any member or outsider. 10 not even if the company is subseqitently
registered;
(c) cannot be sued by a member. t or any outsider. for it cannot contract any debts;
(d) cannot be wound up by order of the Court. In fact, the Court should not entertain
a petition for its winding up, for if it did, it would be indirectly according
recognition to the illegal association.
The position of its members is an unenviable one, for every one of them is
individually liable in respect of all acts or contracts which he purports to do or make on
behalf of the association. they cannot, either individually or collectively, bring an action
association . t2 Thus,
to enforce any contract, so made, or to recover any debt due to the
every member of an illegal association is (i) personally liable for all liabilities incurred

8. Raghubar l)ayal v. Sarafa Chamber, 1954 At!. 555.

9. Madan Goral v. Sheo Das. 1934 lh.882.
10. Union of India v. Commercial Associatim, 1959, Punj. l.
11. l3adri Prasad v. Nagamsal (1959)29 CornCas, 229 (S.C.).
12. Wilkinson v. Levison (1925)42 T.I.R. 97.
 COMPANY LAW 439

in the carrying on of the business of or by the illegal association, and (ii) is punishable
with fine up to Rs. 1,000.
Company Law Board—A new Section 10 E has been substituted in place of the
old one with a view to establishing an autonomous Company Law Board with wider
powers. The Board will in future exercise most of the powers of the Court and the Central
Government
Meaning or Officer in default—A new Section 5 has been substituted in place
of the old Section 5. The new Section provides that for the purpose of penalty or
punishment the expression "officer who is in default" means an officer of the company
who is knowingly guilty of the default, or who knowingly authorises or permits such
default.
All the following officers of the company are covered by the expression "Officer
who is in default"
(i) the managing director or managing directors;
(ii) the whole-time director or whole-time directors;
(iii) the manager;
(iv) the secretary;
(v) any person in accordance with whose directions or instructions the Board of
directors of the company is accustomed to act;
(vi) any person charged by the Board of directors with the responsibility of complying
with the provisions, if the person has given his consent to the Board;
(vii) when a company has no managing or whole-time director, the specified directors
or all directors.

PART 16-B
FORMATION OF COMPANY

The promoters (persons wishing to form a company) must file with the Registrar
of the State in which the registered office of the company is to be situate-
1. The Memorandum of Association;
2. The Articles of Association;
3,, A statement of nominal capital, and where it exceeds 50 lakhs, a certificate from
the Central Government permitting the issue of capital; (the Controller of Capital
Issues grants this certificate):
4. A statutory declaration by an advocate or an attorney or a chartered accountant,
engaged in the formation of the company, or by a director or any other officer of
the company that all requirements of the Act and Rules thereunder in respect of
registration have been complied with.
5. A list of persons who have consented to be directors of the company;
6. A written consent duly signed to act as directors;
7. An undertaking in writing signed by each such director to take and pay for their
qualification shares, if any.
Ordinarily, both the private and public companies will file the notice of their
addresses of the Registered Office; (or it may be given within 30 days after the date of
incorporation).
When the necessary stamp duty and the registration fee have been paid and the
Registrar is satisfied that everything is in order, he will enter the name of the company
in the register of companies maintained by him and issue a Certificate otlncorporation
440 MERCANTILE LAW

which gives the company a legal existence from the date given on it. This certificate is
a conclusive evidence that everything is in order as regards registration and that the
company has come into being, with rights and obligations of a natural person, competent
to enter into contracts,
PRELIMINARY CONTRACTS
Very often a company is formed for the purpose of buying an existing business or
property. The promoters of the company would naturally like to have a binding contract
from the owner of the business or properly, but under the Companies Act, the company
can make a binding contract only after its incorporation. Consequently, according to the
Companies Act, a contract made before the incorporation of the company by some person
professing to act on its behalf is not binding on the company nor can the contract be
ratified by the company after incorporation forohviously a person cannot act as an agent
for another who is not yet in existence) 4 Also the company cannot sue the vendor if he
fails to carry out the contract. The persons purporting to enter into contract on behalf of
the company remain personally liable on the contract. Because of these difficulties it has
become customary for promoters to agree to the form of draft contract to be entered into
by the vendor and the company after incorporation. But Sees. 15 and 19 of the Specific
Relief Act have considerably alleviated the difficulty. Sec. IS provides that when a
contract is made "for the purpose of the company and such contract is warranted by the
terms of incorporation" specific performance thereof may be enforced by the company
though the contract is made before its incorporation. Sec. 19 of the same Act provides
that when the promoters of a public company before its incorporation enter into a
contract, specific performance thereof may be enforced against the company, ''provided
that the company has ratified and adopted the contract and the contract is warranted by
the terms of incorporation." These sections are, however, inapplicable to contracts to
take shares, nor will the specific performance of contracts of personal service be ordered
by the Court.
PROMOTER
The "promotion" of a company is a comprehensive term denoting that process
by which a company is ''incorporated" or brought into existence as a corporate body,
and 'floated', or established financially as a going concern, by the issue of a prospectus.
Anyone who assumes primary responsibility with regard to matters relating to promo-
tion, or any of them, may be held to be a "promoter". "The term 'promoter'." said
Boden L. J.. "IS a term not of law but of business, usually summing up in a single word
a nupiber of business operations familiar to the commercial world by which a company
is generally brought into existence".' The word promoter is used in common parlance
to denote any individual, syndicate, association, partnership, or company, which takes
all necessary steps to create and mould a company and set it going.
A promoter stands in a fiduciary relation to the company it promotes and to those
16
persons whom he induces to become shareholders in it. Although a promoter is not an
agent or trustee of the company before its formation, yet the responsibility of an agent
and trustee is placed upon him to account for all moneys secretly obtained by him.
Consequently, a promoter must act honestly, and must not make, directly or indirectly,
any profit at the expense of the company he is promoting. although he may receive some
remuneration for his work. The usual ways of receiving remuneration by the promoter

13. Jubilee cottooMills Ltd. v. Lewis (1924) AC. 958.

14. Re. English and Colonial Produce Co. (1906)2 Ch.435.
15, Whaley Bridge Printing Co. v. Green (1880)5 Q.B.D. 109.
16. LagunaS Nitrate Co. v. Lagunas Syndicate (1899)2 Ch. 392. Omniuni Electric Palaces Ltd. v.
Baines (1914)1 Ch, 332.
 COMPANY LA .V 441

are: l) by selling to the company at a profit some property purchased by the promoter
before he became one; (2) by taking a commission oil shares sold; (3) by taking a
grant of some shares of the cornpany;(4) by taking a grant of lump sum of money from
the company.
Commencement of Business—A private company may commence business
immediately after obtaining the certificate of incorporation.
A public company must obtain a 'certificate to commence business' from the
Registrar before it can commence business, The Registrar will grant this certificate only
when—
(a) the Minimum subscription has been allotted;
(b) the directors have taken up and paid for their qualification shares;
(c) the statutory declaration ard the prospectus orstatement inlieuofprospectus i ave
been filed.
Any new business (as mentioned under other objects in the memorandum) can be
started only after obtaining approval of the shareholders by a special resolution, and after
a declaration has been filed with the Registrar, verified by one of the directors or the
Secretary that the approval by special resolution has been given by the company in
general meeting.
All contracts entered into between the date of incorporation and the date of the
commencement of business are provisional and would bind the company only after it is
entitled to commence business. If the company does not commence hiisiness within one
year of its incorporation the Court may order it to he wound up.

MEMORANDUM OF ASSOCIATION

The Memorandum of Association of a company is of supreme importance in

determining its powers and, in this respect, it is the charter of the company, which
contains the fundamental conditions upon which alone the company can be incor-
porated. It defines, as well as confines the powers of the company, so that it not only
shows the object of its formation, but also the utmost scope of its operation beyond which
its action cannot go. It, in a way, regulates the external affairs of the company in relation
to outsiders. Its purpose is to enable shareholders, creditors and all those who deal with
the company to know what its powers are and what is the range of its activities or
enterprise.
The Memorandum must be printed, divided into paragraphs, numbered consecu-
tively and signed by seven subscribers (two in the case of a private company), in the
presence of a witness who shall attest the signature of each subscriber. Each subscriber
must add his address, description and occupation, and the number of shares taken.
Contents of Memorandum—Pursuant to Sec. 13, the memorandum of a com-
pany limited by shares must state the following:-
1. The name of the company, with limited" or "private limited" as the last words;
2. The State in which the registered office of the company is to be situate;
3. The objecti of the company: (a) Main; (b) Others;
4. The fact that the liability of the members is limited;
5. The proposed amount of the capital, and its division into shares of a fixed amount;
and
6. The declaration of association.
Name of the Company—Sec. 20(1) provides that no company must be registered
by a name which, in the opinion of the Central Government, is undesirable. This enables
442 MERCANTILE LAW

the Government to reject a name without giving any reason. The Registrar will continue,
as before, to refuse names identical with, or too closely resembling names already on
the register as undesirable names) 7 The company must not give an impression that the
company is carrying on the business of some other well established company. Under the
Emblem and Names (Prevention of Improper Use) Act, 1950, the Government may
declare what names and emblems are not to be used by companies in trade marks and
patents. The use of the following has been prohibited under the above Act, viz., name
and emblem of the U.N.O. and the W.H.O.. the Indian National Flag, the Official Seal
and Emblems of the Central and State Governments. Subject to the above restrictions a
company may adopt any name it likes. If by inadvertence a name is selected which is
similar to that of an existing company, it must be changed.
Once the name is registered, it must be painted or affixed on the outside of every
office or place of business, in a conspicuous position in letters easily legible in the
language in general use in the locality. It roust be engraved on the seal and mentioned
in all notices, advertisements, other official publications, negotiable instruments and
orders for money or goods (Sec. 147).
Registered Ornce—Every company must have a registered office as from the date
on which it commences business or the 30th day after incorporation date whichever is
earlier, to which notices and all other coinmunicarions can be sent.
Objects Clause—The objects clause indicates the extent of company's powers
and sphere of its activities. It defines and confines the scope of company's powers, and
once registered, it can only he altered as provided by the Act. The purpose of the
memorandum is two-fold: One, to inform the members in what kind of business their
capital may be used; .e'ond1y, to inform persons dealing with the company what its
powers are) A company cannot do anything beyond its powers, and any act beyond
such powers in ultra vires and void and cannot be ratified even by the assent of the whole
body of shareholders. The objects should, therefore, be clearly set forth in the memoran-
dum. Ambiguous and general provisions will not be of any use. Although express powers
are necessary a company may do anything which is incideital to and consequential upon
the powers specified, and the act will not be ultra sires) Thus a trading company has
an implied power to borrow, draw and accept bills in the ordinary form, but a railway
company cannot issue bills, although it may borrow money.
As the procedure laid down in Sec. 17 for the alteration of the objects clause when
some new venture is contemplated is rather cumbersome and the sanction of the
Company Law Board is essential, the promoters of companies have been making the
objects and purposes as wide as possible. This practice often enabled directors to
participate in activities which were neither the main activities nor were they ancillary
thereto, but were remote in character and far removed from the main purpose. Very often,
the members of the company knew nothing, or where they did know, they could not do
anything. In order to enable the shareholders to have a say in the matter, and also to let
the doctrine of ultra uires have some play. Sec. 13 of the Act was amended in 1965 so
as to make it compul sory in future for t promoters to specify in clear terms the Main
and Subsidiary objects of the company.
Sec. 13, as amended, provides in clauses (c) and (d) as follows:—
(c) in the case of a company in existence immediately before October IS, 1965, the
memorandum shall state the objects of the company;
17. Madame Tussand & Sons v. Tussand (1890)44 Ch.D.673.
18. Cotman v. Broughman (1918) AC. 504.
19. Attorney General v. G.E. Rly. Co. (1880)5 A.C. 473: Evan v. Bruner (1921) I Ch. 359.
20. The Vivian Bose Conrmission.while examining the case of Dalmia Jain Airways Lid., had
recommended the mention in the memorandum of the main and other objects separately.
 COMPANY LAW 443

(d) in the case of a company formed after October 14, 1965, the memorandum must
state-
(i) the main objects of the company to be pursued by the company on its incorporation
and objects incidental and ancillary to the attainment of the main objects.
(ii) other objects of the company not included in subclause (i).
An amendment to Sec. 149 prohibits a company from commencing any new
business (as stated under other objects) without obtaining the prior approval of the
shareholders by a special resolution passed in a general meeting. In some special cases
the Central Government may allow new business lobe commenced even if it is approved
by an ordinary resolution.
LIMITATION OF LIABILITY
A declaration that the liability of the members of the company is limited to the
amounts unpaid on their shares, must be made in the memorandum. If a shareholder has
paid Rs.50 on a Rs.100 share, he can be called upon to pay the balance of Rs.50, and if
another has paid Rs.100, he holds a full-paid share and cannot be called upon to pay
anything. But there is one exception to this rule, viz., that if a compan y continues to
carry on business for more than 6 months alter the membership has fallen below 7
in the case of a public company, and 2 in the case of a private company, then all
members aware of the fact are fully and severally liable for all debts contracted
after the 6 months, i.e., their liability becomes unlimited.
Capital Clause—The capital clause in the mcmorapdum of a company, having a
share capital, states the amount of capital with which it is registered, divided into shares
ofacertain amount. This-capital is called the registered,'' 'nominal" or authorised"
capital. The effect of this clause is that the company cannot issue more shares than are
authorised by the memorandum for the time being. A public company can issue only
two kinds of shares—Preference and Equity: and the shares must not give dispropor-
tionate voting rights. A private company may, however, issue any kinds of shares and
with disproportionate voting rights (Sees. 85. 88, 90).
Declaration of Association or the Association Clause—At the end of the
memorandum of every company there is a declaration of association or an association
clause which reads something like this: "We, the several persons whose names and
addresses and occupations are subscribed, are desirous of being formed into a company
in pursuance of this memorandum of association and respectively agree to take the
numberof shares in the capital of the company set opposite our respective names." Then
follow the names, addresses, occupations, the number of shares each person has taken
and his signature attested by a witness. Each subscriber has to take at least one share in
share capital of the company. At least 7 subscribers must sign the memorandum in the
case of a public company although 2 are sufficient in the case of a private company.
DOCTRINE OF "ULTRA VIRES"
We have observed, while dealing with the "objects clause," that company exists
only for the purposes which are stated in its memorandum of association or which are
incidental to or consequential upon these specified powers, and any act cone outside the
expressed or implied powers is ultra vires, and therefore null and void. 2 An ultra vires
act is improper because it is a violation of the law and diversion of the assets of the
company to a purpose not contemplated by the members and creditors of the company.
An ultra vires act is not binding upon the company and cannot be ratified. The company

21. Ashbuty Rail etc. Co. Ltd. v. Riche (1875)7 IlL 688.
444 MERCANTILt LAW

can be restrained from employing its funds for purposes other than those stated in the
memorandum. Thus a company formed to carry on one trade cannot carry on another
22 Where a company by its Memorandum was incorporated with the object of
trade.
making and selling railway carriages, it was held that the purchase3of a concession, for
erecting a railway in a foreign country was ultra vires the company. So also an authority
to a County Council to run trains does not empower it to run omnibuses. In India, by
virtue of the Companies (D)nations to National Funds) Act, 1951, a company by special
resolution may use its funds for making donations to the Gandhi National Memorial
Fund, Sar±ir Vallahhhhai National Memorial Fund or any other Fund for charitable
purposes which have been approved by the Central Government.
As a result, however, of the rigours of the doctrine of ultra vires, memoranda are
now very widely drawn, and frequently specify various trades and businesses which have
apparently very little if any connection with the main business of the company. It is then
possible for the company to extend its operations at any time without taking steps to alter
the objects of the company. It is because of this that the Bhaha Commission on Company
Law remarked: "As Memoranda of Association are drafted, the doctrine of ultra vires
was an illusory protection for shareholders or pitfall for third parties dealing with the
company." Now, in the case of a company fonned after the commencement of the 1965
Amendment Act, the 'main' objects and 'other' objects must be separately staled; and
thus, the doctrine of ultra vire.v remains very much in the picture, although alteration of
the objects clause can be made to include new purposes in the memorandum.
The doctrine of ultra sires is, however, subject to the following exceptions: (I) If
an act is ultra sires the powers of the directors only, e.g.. their borrowing powers, the
shareholders can ratify it. (2) If it is ultra tires the articles of the company, the articles
can be altered and the error rectified. (3) If an act is within the powers of the company,
but is irregularly done, consent of all the shareholders will validate the act. (4) The
company's rights over properly will he protected, even though the property has been
acquired by ultra vires expenditure. (5) Though the act is ultra sires, rights arising
independently thereout are not affected rherchy7 (6) A person borrowing money from
the company under a contract which is ultra sires can be sued by the company. (7) Where
there is an ultra vires borrowing by the company, or it obtains delivery of property from
a third party under an ultra sires contract, that third party has no claim against the
company on the basis of the loan, but he has a right to follow his money or property if
it exists in specie, and obtain an injunction restraining the company from parting with
it, provided he intervenes before the money is spent or the identity of the property is lost
jSinclair V. Brougham ( 1914) A. C. 398]. (X) The lender of money to a company under
a contract which is ultra sires, has a right to make the directors personally liable, on the
ground of implied warranty of authority, if their act amounts to an implied misrepresen-
tation of fact. (9) If a director of a company makes payment of a certain sum of money,
which is ultra sires the company, he can be compel led by the company to refund it but
the director in his turn may claim indemnity from the person who received it knowing
that it is ultra vires.
ALTERATION OF MEMORANDUM

For the purposes of alteration, the provisions contained in the memorandum are
classified into two heads: Conditions and other provisions. The "conditions" are those
provisions which are compulsory clauses, namely, the name, the place of registered
office (situation), objects, limited liability and share capital. The conditions can be altered
only as expressly provided by Sees.. 17, 21, 94, 99, 100 and 106.

22. Egyptian Salt Co. v. Purl Said Salt Ass. (1931 ) A.C. 677.
23, Ashhury Rail Case.
24. (lerrad v. James (1925) Ch. 616.
 COMPANY LAW 445

The other provisions, such as the terms of appointment of managing director or

manager contained in the memorandum can be altered by a special rcsolutiiin with the
approval of the Central Government, or a clause in the memorandum fixing limit
dividends to be paidon a particular elassof shares call altered by a special resolution.
ALTERATION OF CONDITIONS
Change or name—The name of the company can be changed any time by a special
resolution and with the written approval of the Central Government. If the change merely
involves the addition or deletion of the word 'Private" on the conversion of a public
company into a private company or ciec versa, no approval of the Central Government
is necessary. The change must be communicated to the Registrar by filing a printed or
type-written copy of the special resolution within 30 days of the passing thereof. The
Registrar will then issue a fresh certificate of incorporation, and the change of name will
be effective only thereafter. The changed name should be noted in each copy of the
memorandum and articles.
Change or Registered Office—The registered office may be changed any time
from one place to another within the local limits of the city, town or village where it is
situated, and a notice of the change be given to the Registrar within 30 clays of such
change.
If the office is to be removed from one city, town or village to another city, town
or village within the same State, a special resolution should be passed, and a printed or
type-written copy thereof filed within 30 days. Then within 30 days of the removal of
the office, a notice to the Registrar should be given of the location of the new office.
Change of Registered Office from one State to another or change of Objects—
The Registered office from one State to another State, or the objects of the company,
can be changed by special resolution, conlinned by the Company Law Board, if the
alteration is rendered necessary
(a) to carry on its business more economically or more efficiently;
(b) to attaus its main purpose by new or unproved means;
(c) to enlarge or change the location of its operations;
(d) to carry on some business which under existing circumstances may be convenient-
ly or advantageously combined with the business of the company;
(e) to restrict or abandon any of the objects specified in the memorandum;
(I) to sell or dispose of the whole, or any part, of the undertaking; or
(g) to amalgamate with any other company or body of persons.
The Company Law Board being satisfied that the notice of the resolution was given
to all persons whose interests are likely to be affected by the alteration, including the
Registrar, and having heard him and the creditors' objections, if any, may confirm the
alteration wholly or in part. A certified copy of the Company Law Board's order together
with a printed copy of the altered memorandum must be filed within 3 months of the
date of the order with the Registrar, who will register them and issue a certificate which
will be conclusive evidence that everything has been done properly (Sees. 17 . 19). The
alteration of the objects clause must leave the business of the company substantially what
it was before with only such changes in the mode of conducting it as would enable it to
be carried on more economically or more efficiently. 26
Where the alteration involves a transfer of the registered office from one State to
another, the certified copy of the Company Law Board's order confirming the change
must be filed with the Registrars of both the States who will register the same. All the

25: In rr Rampuna Cc*too Mills Ltd., 1959 ('at. 253.

26. Re Cyclists Touring ('tub (1907)1 ('h., 269.
446 MERCANTILE LAW

records of the company will then be transferred to the Registrar of the State to which the
registered office of the company has been transferred.
Alteration or Capital—Sec. 94 provides that a limited company having a share
capital may, if so authorised by its articles, alter the conditions of its memorandum
relating to capital by ordinary resolution in general meeting, so as:—
(a) to increase it by the issue of new shares of such amount as it thinks expedient;
(b) to consolidate and divide all or any of its share capital into shares of larger amount
than its existing shares;
(c) to convert all or any of its fully paid up shares into stock and reconvert that stock
into fully paid up shares of any denomination;
(d) to sub-divide us shares or any of them, into shares of smaller amount than is fixed
by the memorandum. But in the sub-division the proportion between the amount
paid and the amount, if any, unpaid on each reduced share shall be the same as it
was in the case of the share from which the reduced share is derived;
(e) In cancel shares which have not been taken or promised to be taken at the time of
the resolution and such cancellation will not be deemed to be reduction of share
capital. The company shall give the notice of the above alterations to the Registrar
within 30 days after doing so (Sees. 95 and 97).
FURTHER ISSUE OF CAPITAL
Sec. Hi has been amended to make it clear that where the Board of Directors
decides to increase the subscribed capital of a company by allotment of further shares,
the further shares should ordinarily be offered to existing holders of equity shares pro
raid; but these further shares may also be offered to any persons in any manner
irrespective of the existing equity shareholders if a special resolution is passed by the
company in general meeting or, although no such special resolution is passed in that
general meeting, if the proposal has been carried out by a majority of votes and the
Central Government is satisfied on the application of the Board of Directors that the
proposal is most beneficial to the company. The provisions of this section will apply
when the Board proposes to increase the subscribed capital by allotment of further shares
after the expiry of 2 years from the formation of the company or after the expiry of one
year from the first allotment of shares whichever is earlier.
However, the provisions of Sec. Hi will not apply to a private company nor in
relation to convertible loans or debentures, i.e., in relation to the increased subscribed
capital caused by the conversion of debentures or loans into shares of the company, if
the following two conditions are satisfied:—
(a) that the terms of issue of such debentures or loans include a term of such option
and such term has been approved by the company by a special resolution; and also
(b) has been approved by the Central Govcrnmetit before such issue, or such terms
are in conformity with the rules made by the Central Government.
But an amendment to Sec. H 1(3) made in 1963 does away with the requirement of
the approval by a special resolution in relation to the conversion into shares or debentures
issued to or loans raised from Government in this behalf. The effect of this change is
that the financial institutions, such as the L.l.C., I.F.C.. N.1.D.C., may, with the prior
approval of the Central Government, ask for the conversion of loans granted by them or
debentures held by them into shares of the company. The conversion will be made on
fair and equitable terms. Such conversion may sometimes have to be made on grounds
of public policy, but a right of appeal to the High Court is given to the company if the
terms of conversion proposed by the Government are not acceptable to the company.
The new Sec. 94A empowers the Central Government to administratively Increase the
 COMPANY LAW 447

authorised capital when conversion of debentures or loans into shares of the company
is ordered by it,
Reduction or Share Capital (Secs. 1-105)—If the articles provide for reduc-
tion of capital, a company may, by a special resolution and on its confirmation by the
Court on petition, reduce its share capital by (a) reducing or extinguishing the liability
of members for uncalled capital: or (b) by writing off or cancelling any paid-up capital
which is lost or unrepresented by available assets: or (c) by paying off capital which is
in excess of the wants of the company; or (d) in any other way approved by the Court.
Reduction under (b) and (c) may be either in addition to or without extinguishing or
reducing the liability of members for uncalled capital (Sec. 1(0). Where, however, the
reduction of share capital involves diminution of liability for unpaid capital or return to
any shareholder of any paid-up share capital all creditors are entitled to object to the
reduction. For this purpose the Court shall settle a list of creditors and hear their
objections, if any and on being satisfied that either the creditors consent to the reduction
or that their debts have been discharged or secured by the company, may confirm the
reduction on any terms it thinks fit. The Court may direct the company to add the words
'and reduced" to its name for a fixed period and to publish the reasons for reduction
for the information of the public (Sees. 101. 102). Pursuant to the reduction of the capital
necessary alterations must be made in the memorandum. The resolution as confirmed
by the Court will be effective only after the order of the Court and minutes as approved
by the Court have been filed with the Registrar who will register them and issue a
certificate of registration which will be conclusive evidence that everything was in order
(Sec. 103).
LIABILITY OF MEMBERS IN RESPECT OF REDUCED SHARES
Sec. 104 provides that, upon a reduction of share capital, a past or present member
of the company shall not he liable, in respect of any share, to any call or contribution
exceeding in amount the difference, if any, between the amount paid on the share, or the
reduced amount, if any, which is deemed to have been paid thereon, as the case may be,
and the amount of the share as fixed by the minute of reduction. If, however, any creditor
entitled to object to the reduction of share capital is not entered on the list of creditors,
by reason of his ignorance of the proceedings for reduction or of their nature and effect
with respect to his debt or claim, and the company is unable to pay his debt or claim,
then:—
(a) every person who was a member of the company at the date of the registration
of the order for reduction and minute, shall be liable to contribute for the payment of
that debt or claim an amount not exceeding the amount which he would have been liable
to contribute if the company had commenced to he wound up on the day immediately
before such date of registration; and
(b) if the company is wound up, the Court, on the application of such creditor and
proof of his ignorance as aforesaid, may accordingly settle a list of persons so liable to
contribute, and make and enforce calls and orders on the contributories settled an the
list, as if they were ordinary contributories in a winding up. This section, however, does
not affect the rights of contributories among themselves.
Sec. 105 provides for punishment with imprisonment extending to one year or with
fine or both, if any officer of the company knowingly conceals the name of any creditor
entitled to object to the reduction or misrepresents the nature or amount of claim or debt
or abets such concealment or misrepresentation.
VARIATION OF SHAREHOLDERS' RIGHTS (SEC. 106)
Where the share capital of a company is divided into different classes of shares,
the rights attached to the shares of any class may be varied with the consent in writing
of the holders of not less than three-fourths of the issued shares of that class. This can
448 MERCANTILE LAW

be done by circulating the resolution among all the shareholders of that class and
obtaining the consent in writing of the holders of at least three-fourths of the issued
share. The consent can also be obtained at a meeting of the holders of shares of that
class by getting the consent by three-fourths majority. The variation by either procedure
is possible only if provision for such variation is contained in the memorandum or articles
of the company, or even without such provision, provided the variation is not prohibited
by the terms of issue of the shares of that class.
Sec. 107 empowers dissentient shajeholders to apply to the Court for the cancel-
lation of the variation. Therefore, if the holders of 10 per cent of the issued shares of that
class who had not assented to the variation apply to the Court within 21 days of the date
of the consent or the passing of the resoliiti39. the Court may, after hearing the interested
parties, either confirm or cancel variation. The company must, within 30 days of the
service of the Court's order, forward a copy of the order to the Registrar.
CONVERSION OF SHARE INTO STOCK
Fully paid-up shares may, if authorised by the articles, be turned into stock by the
company in general meeting, and a notice be filed within one month of the conversion.
Default would mean a fine up to Rs. 50 per day during default. The register of rr1cinhers
and the list must show the amount of stock held by each member instead of the number
of shares held (Sec. 96). The shai must be issued first and fully paid-up and then
converted into stock. No original issue of stock is allowed. It should be noted that stock
is simply a set of shares put together, and m transfejd,Ie in sums of any amount, while
a share is transferable as a whole.

ARTICLES OF ASSOCIATION

A public company limited by shares may register articles of association signed by

the subscribers to the memorandum, and it may adopt any or all regulations entained
in Table A of First Schedule. If articles are not registered, Table A applies. An'unlimited
company, or a company limited by guarantee, or a private company limited by shares,
must register articles, though it may adopt any of the regulations of Table A (Sees. 26.
28). The articles must be printed, divided into paragraphs, with consecutive numbers,
stamped with requisite stamps and filed with the memorandum (Sec. 30). Articles of
association are the regulations or bye-laws which govern the internal organisation and
conduct of the company. They are subordinate to and controlled by the memorandum.
The general functions of articles were clearly stated in As/bury Carriage Co. v. Riche28
where Lord Cairns said that the articles "play a part subsidiary to the memorandum of
association. They accept the memorandum of association as the charter of incorporation
of the company and so accepting it the articles proceed to define the duties, the rights
and the powers of the governing body as between themselves and the company at large,
and the mode and form in which the business of the company is to be carried on, and the
mode and form in which change in the internal regulations of the company may from
time to time be made." The memorandum lays down the scope or powers of the
company, and the articles govern the way in which the objects of the company arc to be
carried out and can be framed and altered by the members. But in framing or altering the
articles care must be taken to see that its regulations do not exceed the powers of the
companygiven by the memorandum, nor are there any provisions contrary to the statute.
For, neither the articles themselves nor the power of altering them can alter the
constitution of the company as defined by the memorandum, nor give validity to any
provision which is inconsiTstent with the Companies Act. For example, taking powers in

27. Hindustan Commercial Bank t.td. v. Ilindustan General Electrical Corp. Ltd. 1960 Cal. 637.
28. (1875) I..R.6 IlL. 653.
 COMPANY LAW 449

articles to appoint managing director for more than 5 years, or without the written consent
of the Central Government, or to buy is own shares, is void. Sec. 9 of the Act expressly
provides that the provisions of the Act will override anything contrary to it contained in
the memorandum, articles, agreement, resolutions, whether registered or executed, and
whether befor or on or after April 1. 1956; and that any provision repugnant to the Act
will become or be void.
ALTERATION OF ARTICLES
The right to alter at any time is inherent in every registered company. Sec. 31
provides that subject to the provisions of the Act and to the conditions contained in its
memorandum a company may, by special resoluiion, alter or add to its articles. This
right is so important that a company cannot in any manner deprive itself of the power to
29 The alteration must, however, be made bona fide and in the best
alter its articles.
interests of the company. If the alteration is unfair or inequitable between the members
of the company, it will not be allowed. For example, an alteration will not be permitted
if it constitutes an oppression or fraud on the minority, or increases the liability of the
members, or is made for committing breach of contracts. No alteration in the articles can
be made so as to convert a public company into a private company without the approval
of the Central Government.
EFFECT OF MEMORANDUM AND ARTICLES
The memorandum and articles, when registered, bind the company and its mem-
bers as if they had been signed by the company and each member and contained
covenants by the company and each member to observe and be bound by all provisions
thereof (Sec. 36). The members are thus bound to the company and the company to the
30 the articles provided that
members as members. In Bradford Banking Co. v. Briggs,
the company shall have a first and paramount lien upon each share for debts due to the
company by the shareholders. One of the shareholders deposited his shares with a bank
to secure an overdraft and the bank gave notice of the deposit to the company. It was
held that shares deposited with the bank were bound by the articles, and the lien that the
company had under them precluded the bank from getting priority in respect of debts
incurred by the shareholder before the notice was given. But the company in its turn will
have no right to priority in respect of money becoming due to it after it has received
31
notice of the deposit. The new Act (Sec. 36) clearly says that the memorandum and
articles shall hind the company to its members and the members to the company as if
both had covenanted to observe all the provisions of the memorandum and articles. To
the rule of member's liability to the company as per the articles, there is an exception as
provided by Sec. 38 that an alteration of either the articles or memorandum increasing
the liability of members to contribute to the share capital of the company is not binding
upon any member unless he gives his consent in writing.
As between the members iO!cr se, each member is bound by the articles to the
other members, but that does not mean that the memorandum and articles create an
express contract between the members of the company. Thus, a member of a company
has no right to bring a suit in his own name against any other member or members. It is
the company alone which can bring a suit against the offender so as to protect the
aggrieved member. It was laid down in Burla'ad v. Earle,
32 that in order to redress a
wrong done to the company, or to receive money alleged to be due to the company, the
action should prima facie be brought by the company. The only exception to this rule is

29. Andrews v. Gass Meter Co. (1897)1 ('Ii. 361.

30. (1886) 12 A.C. 29.
31. Matheran Steam Tramway Co. v. Lang (193l)Bcn. L.R. 184.
32. (1902)A.C.83.
450 MERCANTILE LAW

where the persons against whom relief is sought control the majorit y of shares or voting
power and will not allow an action to be brought in the name of the company. In that
cvent,'the complaining shareholders may sue in their own names, provided they are able
to show that the acts complained of are either fraudulent or ultra vires.
As between outsiders and the company, neither the memorandum nor the articles
give any contractual rights to outsiders against the company even though their names be
mentioned in these documents in connection with the arrangements that the company
might have contemplated for carrying on its business. 3 In Eley's case, the articles
provided that Eley should be solicitor to the company and should not be removed from
office except for misconduct. Eley acted as solicitor to the company for some time, but
later the company ceased to employ him. He sued the company for damages for hi-each
of contract. It was held that he had no cause of action because the articles did not
constitute any contract between the company and himself. The party suing the coinpati
must prove a contract with the company outside and independently of the articles.
Krishna Rao who had been appointed a secretary by the articles, was later removed from
this post, whereupon he filed a suit for declaration that he was still the secretary under
the articles and that the Board of Directors had no power to remove him.-It was held that
his appointment must be regarded as dc hors' the articles and he must prove a contract
outside and independently of the articles.
With regard to outsiders the position is that the memorandum and articles, when
registered in accordance with Sec. 33 with the Registrar. become public documents, to
which all persons have access. Every person who contemplates entering into a contract
with a company has the means of ascertaining, and consequently is presumed to know,
not only the exact powers of the company, but also the extent to which those powers
have been delegated to the directors, and of any limitations placed upon the exercise of
these powers. Consequently, if he enters into a contract which is beyond the powers of
the con-ipany, as defined in the memorandum, or outside the limits set upon the authority
of the directors, he cannot, as a general rule, acquire any right.1 under the conirtict against
the company. The principle is somewhat modified by the further rule that persons dealing
with a company, having satisfied themselves that the proposed transaction is not in its
nature inconsistent with the memorandum and articles, are not bound to enquire into the
regularity of any internal proceedings. In other words, persons contracting with the
company are presumed to have knowledge of the articles, but they are entitled to assume
that the provisions of the articles have been observed. This limitation is called the
Doctrine of "Indoor Management" or the RULE IN ROYAL BRITISH BANK v.
TT..JRQUAND. 35 In that case, the directors of a banking company were authorised to
borrow on bond such sums of money as should from time to time, by a resolution of the
company in general meeting, be authorised to be borrowed. They gave a bond to
Turquand without the authority of any such resolution. It was held that Turquaiud could
sue the company on the bond, as he was entitled to assume that the necessary resolution
had been passed. The Rule, however, does not protect any one who has actual or
constructive notice that the person acting on behalf of the company has no authority to
enter into the transaction in question. The Rule does not apply to cases of forgery, or to
transactions which are void or illegal ab irjitio. nor does it hind the company to oficers
of the company or other per s ons who should know whether the regulations in the articles
have been observed.

33. Eky v. Positive Lire Ins. Co. (1876) I Ex. Div. tt; Ramkurnarv. ShotapurSpg. & Wvg. Co.
Ltd. (1934)36 Horn. L.R. 907.
34. Krishna Rao v.Aiijaneyulu. 1954 Mad, 113.
35. (1856)6E.&B.327.
 COMPANY LAW 451

PART 16-C
PROSPECTUS

Sec. 2 (36) defines a prospectus as 'any document described or issued as

prospectus and includes notice, circular, advertisement or other document inviting
deposits from the public or inviting offers from the public for the subscription orpurchase
of any shares in. or debentures of, a body corporate." In order to be a prospectus, a
document must be an invitation to make an offer to at least one member of the public to
subscribe for shares or debentures. According to Sec. 67, an offer or invitation to any
section of the public, whether selected as members or debentures-holders of the com-
pany, or as clients of the person making the invitation, will be deemed Lobe an invitation
to the public. But a public company may or may not make apuhlic issue; but if-it does,
it will be required to publish a prospectus. A prospectus issued by or on behalf of a
company, or in relation to an intended company, must be dated, and that date shall, unless
contrary is proved, be taken as the date of the publication of the prospectus (Sec. 55).
Sec. 58 prohibits the issue of prospectus which includes a statement purporting In be
made by an expert, unless he has given, and has not withdrawn, his consent to the issue
of the prospectus with the statement in the form and context in which it is included; and
a statement that he has given and has not withdrawn such consent appears in the
prospectus. Any contravention of the foregoing provisions regarding an expert and his
statements renders the company and every person who is knowingly a party to the issue
of prospectus, liable to a fine up to Rs. 5,000 ]Sec. 59(1)].
Sec. 60 requires the delivery of a copy of the prospectus to the Registrar before its
publication, duly signed by every director or proposed director, or by his agent authorised
in writing, and having endorsed thereon or attached thereto the following documents:
the consent of any expert; and if the prospectus is issued generally (i.e., to persons other
than existing members or debenture-holders) (i) a copy of every contract, or a memoran-
dum giving full particulars of a contract not reduced to writing; and (ii) if in any auditor's
and accountant's report adjustments of the figures have been made, then a written
statement signed by the persons making the report. Every prospectus on its face must
state that a copy has been delivered for registration. The Registrar will not register a
prospectus unless all the above things are done. Then within 90 days of the filing of the
copy with Registrar, the prospectus should he issued by newspaper advertisement or
otherwise. Every form of application for shares of debentures must be accompanied by
a memorandum containing the prescribed features of a prospectus. The Amendment Act,
1988, now allows comparnes to give an abridged prospectus with the application form,
but the company must furnish a copy of the prospectus to a person who ask.s for it. Any
contravention of this section renders the company and every other person party to the
issue of the prospectus liable to a fine up to Rs. 5.000.
CONTENTS OF PROSPECTUS
Sec. 56 provides that a prospectus must contain the matters specified in Part I of
Schedule II and set out the Reports specified in Part 11 of the Schedule, namely:-
1. The main objects of the company, with the names, occupations and addresses
of the signatories of the memorandum and the number of shares subscribed by them, as
also the number and classes of shares, if any, and the nature of interest of the holders in
the properly and profits of the company, together with the number of redeemable
preference shares with the date and method of redemption.
2. The number of shares, if any, fixed by the articles as the qualification of a
director, and the remuneration of directors for their services.
452 MERCANTILE LAW

3. The names, occupations and addresses of directors, managing director and

manager, together with any provision, or compensation for loss of office.
4. The minimum subscription on which the directors may proceed to allot shares,
the time of the opening of the subscription lists and the amount payable on application
and allotment on each share, and in the case of a second or subsequent offer Ushares.
the amount offered for subscription on each previous allotment made within the two
preceding years, the amount actually allotted, and the amount, if any, paid on the shares
so allotted.
5. The substance of any contract or arrangement giving to any person any option
or preferential right to subscribe for any shares in, or debentures of, a company, together
with the amounts payable and the periods during which option is to be exercised by such
persons, whose names, occupations and addresses must also be given.
6. The number, description, and amount of shares and debentures which within
the two preceding years have been agreed to be issued or otherwise than in cash, together
with the consideration. Also, the proposed date of issue; and where some shares of the
same class are to be issued at different premiums or some at discount, and others at
premium, the reasons for the difference.
7. The names, occupations and addresses of vendors of any property acquired by
the company and the amount paid or payable in cash, shares or debentures to the vendor
and, where there are more vendors than one, or the company is a sub-buyer, the amount
paid or payable to each vendor. The nature of the title or interests in such property, with
short particulars.
8. The name, description, address and occupation of each promoter or officer of
the company to whom any amount as commission for subscribing or agreeing to
subscribe for any shares or debentures or for underwriting them is paid within the 2
preceding years together with the amount paid and the rate of underwriting commission.
Any benefit paid or payable to promoter or officer.
9. The amount or estimated amount of preliminary expenses and the persons by
whom any of these expenses have been paid or are payable.
10. The dates of, parties to, and general nature of every contract appointing or
fixing the remuneration of a managing director, or manager whenever entered into, and
also every other material contract, and the time and place when such contract be
inspected.
11. Full particulars of the nature and extent of the interest if any, of every director
or promoter (i) in the promotion of the company, or (ii) in any property acquired by the
company within two years of the issue of the prospectus.
12.The right of voting at meetings of the company conferred by, and the rights in
respect of capital and dividends attached to. the several classes of shares respectively,
together with restrictions, if any, imposed by the articles on members, regarding
attendance, voting or speaking at meetings, on right of transfer of shares, as well as, on
the directors in respect of their powers of managemnenL
13. If the company has been carrying on business, the length of time of such
business, and if it proposes to acquire a business, the length of time such business has
been carried on.
14. If any reserves of profit of the company or any of its subsidiaries have been
capitalised, particulars of such capitalisalion, and particulars of surplus arising from any
revaluation of the assets of the company or any of its subsidiaries during the two years
preceding the date of the prospectus and the manner in which such surplus has been
dealt with.
 COMPANY LAW 455

I.S. The names and addresses of the auditors of the company and the report OF the
auditors in case the company had been in business regarding profits and losses and assets
and liabilities, together with the rate of dividends paid for each ofihe live financial years
immediately preceding the issue of the prospectus, giving particulars of each class of
shares on which such dividends have been paid and particulars of the cases in which no
dividends have been paid in respect of any class of shares for any of those years.
16. The report must deal with the profits and hisses of the company for each year
of the live financial years immediately preceding the issue of the prospectus and with
the assets and liabilities at the last date to which the accounts of the company were made
up. If the company has subsidiaries, the report shall deal with the above separately in
case of each subsidiary.
17. If the proceeds, or any part of the proceeds, of the issue of the shares or
debentures are or is to be applied directly or indirectly, (i) 10 the purchase of any business,
or (ii) in the purchase of an interest in any business, which will entitle the company to
an interest in the capital or profits and losses or both in such business exceeding 50 per
cent thereof, the report shall state the profits or losses of the business for each of the five
financial years immediately preceding the issue of the prospectus.
18. A statement that a copy of the prospectus has been filed with the Registrar,
together with the consent of the expert to file the prospectus, as well as a copy of every
contract appointing or fixing the remuneration of a managing director, or manager. Also
a statement that the consent of the Central Government has been obtained as required
under the Control of Capital Issue Act, 1947.
Reports from experts must not he included in a prospectus unless such experts are
unconnected with the formation or management of the company and unless they gave
the consent. There must be reasonable ground for believing that the professed expert
who made the statement, report or valuation was competent to make. He will be liable
for wrong statement, report or valuation made by him and contained in the prospectus.
There must be stated at a prominent place in every prospectus issued by a company
and also in every application form that it is an offence punishable with impi isunrnent up
to 5 years to make an application for shares in a fictitious name, or otherwise induce the
company to allot or register any transfer of any shares to him or any other person in a
Fictitious name.
In addition to these compulsory particulars, any other information may be, and
usually is, volunteered. This information may relate to the terms of the issue of shares,
application to deal in the shares of the company on the Stock Exchange. The intending
purchaser of shares is entitled to all true disclosures in the prospectus. Everything stated
therein roust be correct and everything material must not be kept hack. Misstatements
or non-disclosures are both fatal to the contract, for a person who buys shares on the
faith of a prospectus containing untrue statements or failing to disclose what ought to
have been disclosed, may rescind the contract within a reasonable time and before the
winding up of the company. The effect of such rescission would be that as against the
company the person would give up the shares and get hack his money with interest. In
addition, there is a right of compensation from any director, promoter and any other
person who authorised the issue of the prospectus.
The defences of a director or promoter are that—
L he had withdrawn his consent to become a director before the issue of the
prospectus, and it was issued without his authority or consent;
2. the issue was made without his knowledge or consent;
3. his consent was withdrawn after the issue of the prospectus and before allotment,
and public notice was given;


44 MiRCANT1lE LAW

A. he had reasonable ground to believe that the statements were true and he believed
them to be ture; or
5. the statement was a correct and fair summary or copy of an expert's report. or a
statement made by an official or in an official document.
Apart from theircivil liability to allottees, directors and other persons are criminal-
ly liable for untrue statements. Sec. 63 provides that where a prospectus contains an
untrue statement, every person responsible for its issue is liable to imirisoninent up to
2 years, or line up to Rs.5.00.ur both, unless he proves that the statement was immaterial
or that he believed it to be true and had reasonable ground for doing so. The expert is
exempt from criminal liability.
STATEMENT IN LIEU OF PROSPECTUS
A public company having privately arranged for the capital subscription may not
issue a prospectus: but in that event a STATEMENT IN LIEU OF PROSPECTUS must
be filed with the Registrar 3 days before any allotment of any shares or debentures can
he made. It should he signed by every director or proposed director and should contain
similar particulars as are required in ihe case of a prospectus, and should fulfil similar
conditions. Contravention of this provision will render the company and every director
liable to a fine up to Rs. I ,t)O0.
PUBLIC DEPOSITS
The new section 5A ciiij_swers the Central Government to frame rules in
consultation with the Reserve Bank of India, prescribing the limits lip to which, the
manner in which and the conditions subject to which, deposits may be invited or accepted
by a company, either from the public or from its members. No company shall invite any
deposits except in accordance with such rules. The company must also issue an
advertisement in the prescribed form, including therein a statement showing its financial
position.
Every deposit received by a company at any time before the commencement of
the Amendment Act. 1974, in accordance will) the directions of the Reserve Bank of
India, must be repaid in accordance with the terms of such deposit, unless renewed
according to the new rules. It is further provided that any deposits received before the
commencement of the Amendment Act and in contravention of the direction of the
Reserve Bank of India, must he repaid oil before April 1. 1975, and such payment
shall be made without prejudice to any action that may be taken for the contravention.
Any deposit received in contravention of the rules when framed must be paid back
by the company within 30 days from the date of acceptance of such deposit, or within
such further time, not exceeding 30 days, as the Central Government may, on sufficient
cause being shown by the company, allow.
Additionally, where a company omits or fails to repay any deposit as required by
the Act, the company shall he punishable with fine which shall not be less than twice
the amount not repaid, and half of the ammiount of the line, if realised. shall he paid by the
Court to the depositor. Further every officer of the company who is in default shall be
punishable with imprisonment up to 5 years and shall also be liable to fine.
Where a company accepts or invites any deposit in excess of the limits prescribed
by the rules or in contravention of the manner or conditions prescribed under the rules,
the company shall be punishable-
(i) where such contravention relates to the acceptance of any deposit, with fine which
shall not be less than an amount equal to the amount of the deposits so accepted.
(ii) where such contravention relates to the invitation of any deposits, with fine which
may extend to one lakh rupees but shall not be less than Rs. 5,(M.
 COMPANY LAW 455

Every officer of the company who is in default shall be punishable with imprison-
ment up to 5 years and also with line.
The provisions of Sec. 58A will not apply to a banking company, nor to any other
company specified by the Central Government in consultation with the Reserve Bank
of India. Financial companies may also be exempted from the application of the above
provisions except those relating to advertisement.
Where a company has failed to repay any deposit or part thereof, the Company
Law Board may, either on its OWfl motion or on the application of the depositor direct
the company to make repayment forthwith or within any specified time. Whoever fails
to comply with the order of the Company Law Hoard shall be punishable with imprison-
ment up to 3 years and shall also be liable to fine of not less than Rs-50 per day during
default.
Under Section 58B, provisions of the Act relating to a prospectus shall apply to
advertisement inviting deposits, so that a depositor may claim compensation under
Section 62 and the directors authorising the issue of a false advertisement shall be liable
to imprisonment up to 2 years under Section 63.
Ordinarily, deposits are to be accepted for a period not less than six months,
although to meet current liabilities they maybe accepted for a period, not less than 3
months. Further, no deposits can he accepted for a period exceeding 3 years, but they
can be renewed for a period not exceeding 3 years each time. The deposits accepted cot
a period not less than 3 months to meet current liabilities must not exceed 10 per cent of
the paid up capital of the company and its free reserves. Deposits may be accepted from
members, or guaranteed by directors, but the amount must not exceed 10 per cent of the
paid up capital and free reserves from those together with those accepted to meet current
liabilities. The amount from the public should not exceed 25 per cent of the paid up
capital and free reserves.

PART 16-D

MEMBERSHIP

MEMBERS
The "members" of a registered company are the corporator or persons who for
the time being constitute the company as corporate entity. Sec. 41 defines the term
''member'' by indicating the modes in which a person may acquire that character. The
effect of that section is that a person may become a member, either (1) by subscribing
to the memorandum, or (2) by agreeing in writing to become a member, and having his
name entered in the company's register of members.
By subscribing the memorandum—A '.uhscrihcr to the memorandum, who most
take directly from the company the agreed number of shares, bccomes a member the
moment the registration of the company takes place, without being placed on the register
of members. Allotment of a signatory's shares is unnecessary, as he is bound by virtue
of his subscription to take and pay for them. He cannot refuse to take shares even on the
ground of mnisreptesentation or on the ground that his name did not appear on the register
of members. By Sec. 266, a person who, being named in the articles or prospectus as a
director or proposed director, signs and files an undertaking to take his qualification
shares is, as regards those shares, in the sari' position as if he had subscribed the
memorandum for them.
Agreement and Registration—Apart from the subscribers of the memorandum,
'every other person who agrees in writing to become a member, and ' host' name is
entered in its register of members, shall he a member of the company.'' Registration of
456 MERCANTILE LAW

the name of a person as a member of a company may result from one or other of the
following:—
(a) By application and allotment—A person who applies for a certain number
01 shares becomes a member when shares are allotted to him, a notice of allotment is
given, and his name is entered in the register of members. The application for shares
may be absolute or conditional. If it is absolute, an allotment and its notice is sufficient
acceptance. If it is conditional, the allotment must be made accord.ng to the terms of the
application, otherwise no contract will result. In Raman B/mam'scase. R applied foi shares
to be allotted to him on the condition that he was first appointed a branch manager of
the company. Shares were allotted to R, but he was not appointed the branch manager.
Held, he could repudiate the contract, and was not liable as contributory oil up
of the company.
(h) By transfer of shares—A person can become a member by buying shares
from an exsting member and by having the transfer registered and getting his name
placed on the register of members.
(c) Transmission of shares--A person may become a member by registration
if lie succeeds to the estate of a deceased member. The Official Receiver or Assignee is,
likewise, entitled to be a member in the place of a shareholder who is adjudged an
insolvent.
(d) By acquiescence or estoppel—A person is deemed to be a member if he
allows his name, apart from any agreement to become a member, to be on the register
of members, orotherwise holds himself out or allows himself to be held out as a member.
In such cases he is estopped from denying that he is registered with his consent.
TERMINATION OF MEMBERSHIP
A person ceases to be a member when his name is removed from the register of
members for sufficient reason or proper cause. This may occur when (1) he transfers all
his shares; (2) his shares are forfeited: (3) he makes a valid surrender of his shares; (4)
his shares are sold by the company to enforce a lieu; (5) he dies; (6) redeemable
preference shares are redeemed; (7) his contract to take shares is rescinded; () he
becomes insolvent and Official Assignee or Receiver disclaims the shares or transfers
them; (9) share warrants in exchange of shares are issued; (10) the shares are held by the
liquidator who disclaims them.
LIABILITY OF MEMBERS
In the absence of an express agreement to the eourary, a shareholder must pay the
whole nominal value of his shares in cash. 'Cash' includes property, good.s, services,
release of debt or the surrender of a debenture, provided it is worth the money due on
the shares. But a cheque until honoured is not cash. If before the full amount is paid up,
the company goes into liquidation, the shareholder becomes liable as contributory to pay
the balance when called upon to pay (Sec. 429). If a person has ceased to he a member
within one year prior to the winding up of the company, he is liable to be included in the
'B' list (a list of past members) and pay on the shares which he held to the extent of the
amount unpaid thereon, if (1) on the winding up, debts exist which were incurred while
he was a member; and (ii) the members of the A' list (a list of present members) cannot
satisfy the contribution required from them in respect of their shares (Sec. 426). A person
is liable as member even in spite of a valid transfer of shares by him, if the name of the
transferee is not placed on the register of members, in place of transferor's name. If a
person applies for shares in the name of a fictitious person or a person not in existence.
or shares are allotted in that name, he will be liable to be punished with imprisonment
up to 5 years (Sec. 68A). The liability of members becomes unlimited and several even
 COMPANY LAW 457

in the case of a limited company, if the number of its members falls below 7 in the case
of a public company and 2 in the case of a private company and the company continues
to do business formore than 6 months after the fall of number below the aforesaid figures.
REGISTER OF MEMBERS

Sec. 150 enjoins upon every company to keep a register of its members at its
registered office. The register must contain the name, address and occupation of each
member, the amount and number of his shares, the date of entry on the register, the
amount paid on his shares and the dale on which he ceased to be a member. in case of
default thecompany and every officer permitting such default, are severally liable to fine
up to Rs. 50 for every day of default. The register is a priniafacie evidence of all its
contents (Sec. 164). Unless the register of members is in such form as to constitute in
itself an index, every company having more than 50 members must keep an index of the
names of its members, and must within 14 days note in the index any change made in
the register of members. Default results in fine up to Rs. 50 (Sec. 151). A company's
register is a public document and is open to inspection by any person on certain
conditions. A member can inspect it X raI is daily for 2 hours during business hours, and
other persons on payment-or Re. I. The register can, however, be closed at any time on
giving 7 days' previous notice by advertisement in a newspaper circulating in the district
in which the registered office of the company is situated, provided that the aggregate
number of days for which it is closed do not exceed 45 days in a year and 30 days at a
time (Sec. 154). Contravention of this provision will render the company and every
officer at fault liable to fine up to Rs. 5(X) for every day during which the register is so
closed.
RECTIFICATION OF REGISTER

Section 111(4), as inserted by the Companies (Amendment) Act. 19, now gives
wide powers to the Company Law Board to rectify the register of members on the
application of the person aggrieved, or any member of the company or the company,
if—
(a) the name of any person is, without sufficient cause, entered in the register of
members;
(h) the name of any member is removed from the register;
(c) default is made, or unnecessary delay takes place, in entering the name of a person
as a member;
(cJ) a person has ceased to be a member but the company fails or delays to remove his
name from the register: or
(e) the company refuses to register the transfer of shares.
The Company Law Board has wide powers and may also detennine conflicting
rights. Section 467 empowers the Board to rectify the register on the winding lip of the
company. The Company Law Board may also award damages to the aggrieved party.
The rectification will date back to the date on which the mistake or default or delay was
made which is being rectified. ' If deIaui is made in complying with the order of the
Company Law Board, the company and every officer in default is punishable with fine
up to Rs. 1.000 and a further fine of Rs. 100 for every day ofctefault.
NOTICE OF TRUSTS

See. 153, though short, is of very great importance. It lays down: ''Notice of any
trust, express, implied or constructive, shall he entered on the register of members or of

36. Paruma tat Sud v. Jagatjit Disnihhiiig, t952 Pepsu 2

455 MER(AN'tlI.t LAW

debenture-holders, or be receivable by the Registrar." This provision is made lore lieve

the company from taking any notice of equitable interests in shares, and to preclude
persons claiming under equitable titles from converting the company into a trustee for
them. For example, if a shareholder dies, leaving a will appointing A as executor and
bequeathing shares to B, who is a minor, A will hold the shares for B until he attains his
majority. In tha ease a "trust" is imposed on A. and he is said to be a "trustee." while
B is said to be a cesui que trust or "beneficiary." A's name is entered on the register
of members as holder of the shares, and accordingly lie is the legal owner of the shares:
all dividends are paid to him by the company and he is entitled to exercise the right of
voting and other privileges attaching to the holding of the shares. But the equitable
interest in the shares belongs to B, and therefore all dividends, etc., paid to A must be
held by him in trust for B, or paid to him. But the company does not take notice of this
relationship between A and B. A, as registered holder of the shares, is personally liable
to the company for calls made on the shares; B is subject to no liability whatever to the
company. If, therefore, the trustee of the shares m isappro.riames dividends or the
proceeds of sale of shares, the company will not he under any liability to the beneficiary.
Even if the company had constructive notice of the trust in respect of such shares, it
would not in any way make the company liable. The true effect of the provisions of Sec.
153 is that a shaic may be registered in the company's register in a name other than that
of its true owner. This can enable the persons who are really in control of the company
to conceal their position from the shareholders and from the public and to practise fraud
in regard to the Management of the company. To check such a practice, Sees. 247 and
248 respectively empower the Central Government to appoint an inspector to report on
the membership of a company arid, where it appears to the Central Government that there
is a good reason to investigate ihe ownership of shares or debentures of a company or a
body corporate which actsor has acted as the managing agent orsecretaries and treasurers
of a company, to require inforiiiatiomi br that purpose from persons interested iii such
shares or debentures.
PUBLIC TRUSTEE
The safeguards provided by Sees. 247 and 248 do not wern to have checked the
practice of indirect control of companies by moneyed and vested interests through
nominees. To prevent the use of voting rights attached to shares held by trusts for the
advancement of personal interests of the donors, it was considered necessary to regulate
the exercise of such rights in suitable cases. To meet this need, three new Sees. 153A.
153B and 153C were added in 1963. The Central Government has been empowered to
appoint a Public Trustee to exercise voting rights in respect of cases where—
(a) a trust is created by instrument in writing;
(h) trust money invested in shares in or debentures of a company amounts to at least
Rs.one lakh or where it exceeds Rs.one lakh and amounts to Rs. 5 lakhs or 25 per
cent of the paid up capital whichever is less.
Where a Public Trustee has been appointed the trustee must inform the Public
Trustee by means of a declaration that he is holding the shares or debentures as a trustee.
Failure to do so will render him liable to a fine up to Rs. 5,0(X) and for a continued default
for a further finçof Rs. 100 per day during default. If a trustee makes a false declaration.
he is liable to be imprisoned for a term extending to 2 years and also with line. After the
declaration by the trustee, he will cease to exercise voting right and the Public Trustee
will become entitled to vote at all meetings as a member or debentureholder. He will
also be entitled to receive papers, etc., as if he were a member or a debentureholder.
The intention of the new provision is not to interfere with the freedom of the
trustees to administer trusts or to dispose of trust funds. It is only to check the economic
 COMPANY LAW 459

Power of the donor. Public interest is to he the main consideration in the exercise of this
power and such interest may not be involved to any appreciable extent where the trust
has been created by an instrument in writing, or the value of the shares or debentures
held in trust does not exceed RS.OnC lakh or 25 per cent of the paid up capital.

BENAMI HOLDING OF SHARES

Every benarni holder of shares must file in the prescribed form and within the
prescribed time a declaration with the company specifying the particulars of the person
who has beneficial interest in such shares. Similar declaration must also be Ided by the
beneficial owner within 30 days of becoming one, specifying the particu'' js of the
benarni holder. Failure to do so will render the party in default liable to a .ne up to
Rs. 1.000 per day during the period,of default.
The company is required to make a note of such declaration in its register of
members and to file a return thereof with the Registrar within 30 days of the receipt of
the declaration. Failure to comply with this provision will render the company and every
officer in default liable to a line up to Rs. 100 per day during default. The Central
Government may appoint inspectors to investigate and report as to whether the above
provisiohs have been complied with.

ANNUAL RETURN
Sec. 159 requires that every company, having share capital, must prepare and file,
within 60 days from the day on which each of the annual general meetings is held, or, if
no annual general meeting is held, from the date when the meeting ought to have been
held, with the Registrar, a return containing the following particulars, as they stood on
the day: —(i) the address of the registered office of the company: (ii) the name of the
State outside India where any part of the register of members may he kept: (iii) a
summary, distinguishing wherever possible between shares issued for cash, bonus shares
and shares other than in cash and specially in respect of each class of shares, the amount
of nominal capita] and number of shares into which it is divided, the number of shares
taken from the commencement of the company tip to the date of last return, the amount
called up, the total amount of calls received up-to-date, and calls remaining unpaid, total
amount of commissions paid. discount allowed on any shares or debentures, shares
forfeited, share-warrants issued and surrendered, indebtedness of the company. A list of
all members, and those who have ceased to be members since the date of the last return
or since the incorporation if it is the first list, must be filed. This list must contain full
particulars of the past and present itiembers together with the number of shares held by
each existing member at the time of the return and details of transfers, if any. But, if any
of the two previous returns have given the full particulars, then very short return is to be
filed.

PART 16-E
SHARES

Sec. 2(46) defines a share as ''a share in the share capital of a company, and
includes stock except where a distinction between stock and shares is expressed or
implied." Farwell J. has defined a share as ''the interest of a shareholder in the company
e
measur d by a sum of motley, [i.e., the nominal auiiount, for the purpose of liability in
the first place, and of interest in the second, but also consisting of a series of mutual

37, See State of Bombay v. l3handhan Ram. 1961 S.C. 186. The annual rmUn) must hL filed
whether or not the annual meeting is held.
460 MERCANTILE LAW

covenants entered into by all the shareholders inter se'' Shares represent equal portions
into winch the capital is divided, each shareholder being entitled to a portion of a
company's profits corresponding to the numberof shares he holds. By Sec. 82, the shares
or oilier interest of any member in the coinl)aIiy is movable properly, transferable in the
mariner provided by the articles of the company; and according to the Sale of Goods Act,
1930, shares are goods. Shares are of various classes, and the most common varieties
are: Preference, Equity, Deferred or Founders. A private company may issue all or any
of these classes. But a public company can now issue only two kinds of shares: Preference
and Equity (Sec. 86).
PREFERENCE SHARES
By virtue of See. 8-5, preference share is that part of the share capital of the
company which fulfils both the following requirements, namely, that it carries preferen-
tial right in respect of dividends and also that it carries preferential right in regard to
repayment of capital. Preference shares participating in surplus profits, or participating
in surplus assets on a winding up are also allowed. With regard to the payment of
dividends a preference share may be cumulative or non-cumulative. The non cuniuliti me
or simple preference gives right to a fixed percentage as dividend out of the profits of
each year. In case no profits are available in a year the holders get nothing, nor can they
claim unpaid dividend in subsequent years. The rumulaliue preference, however, gives
a right to demand the unpaid dividend in any year, (luring the subsequent year or years
when the profits are ample Sec. 80 permits a company to issue redeernahie preference
shares. These shares call redeemed only if they are fully paid up and out of the profits
which would he available 1w dividend or out of the proceeds of the issue of new shares
made with the object of redemption. These shares cannot be redeemed out of the sale
proceeds of any properly of the company. For the purpose of redemption out of profits,
Capital Redemption Reserve Fund must he created by transferring to it any amount out
of profits equal to the nominal value of the shares to be redeemed. No company can now
issue shares which are redeemable after tell from the date of issue.
EQUITY SHARES
BySec. 85 (2)equity shares inezun all shares which arc not preferencc shares. Equity
shares receive dividends out of profits as determined by the directors and declared by
the members in the annual general tneeting. after due allowance for depreciation and
reserve, etc., has been made. If there are preference shares, the dividend is paid after the
payment of dividends on preference shares as per rights given by the articles of the
company, and in the case of a private company, before the payment of dividends on
deferred shares, if any. To put a check oil issue of shares with small denomination
carrying disproportionate voting rights. Sec. 87 provides that every member of a public
limited company, holding equity share capital, shall have votes in proportion to his share
of the paid-up equity capital of the company. Preference shareholders will, ordinarily,
vote only on matters relating to preference capital. Sec. 88 expressly prohibits a public
company from issuing any shares (not being preference shares) which carry voting rights,
or rights in the company as to dividend, capital or otherwise which are disprojorlionate
to the rights attaching to the holders of other shares (not being preference shares). Sec.
89 provides that all existing companies having such disproportionate rights must remove
these rights before April 1, 1957.

ALLOT\IEN'l' OF SHARES

An allotment of shares is an appropriation by the Board of Directors of a certain

number of shares in response to an application. It is in effct an acceptance by the
 COMPANY LAW 461

company of the offers to take shares. The Act requires certain conditions to be fulfilled
before a company can proceed to allot shares. Firstly, a public company must file a
prospectus, or statement in lieu of prospectus, before making the firs: allotment.
Secondly, it must have received in ca.sh the amount payable on application which shall
not be less than 5 per cent of the nominal amount of the share, and deposited the amount
so received in a Scheduled Bank before making any allotment. Thirdly, the minimum
subscription" as provided in the prospectus must have been subscribed or applied for
before the firs: allotment can be made (Sees. 69, 70). Sec. 72 now provides that no
allotment shall be made of shares applied for in pursuance of the prospectus until the
beginning of the 5th day after that oil the prospectus is issued (or such later time
as specified in the prospectus itself). Similarly, an applicant cannot withdraw his
application until after the expiration of the 5th day after the time of the opening of the
subscription lists. These are called opening and closing days of the subscription lists. It
is also provided that the day on which the subscription lists are closed must be announced
and that the allotment must he made and notice of allotment given not later than the 10th
day after such closing day.
Listing of Shares—Section 73, as amended by the 1988 Act, now makes listing
of shares by a public company which invites the public to subscribe for shares compul-
sory. Accordingly, every public company with a minimum issued equity capital of Rs,3
erores must, before issue of the prospectus, apply to a recognised stock exchange for the
listing of the shares and debentures. If permission is not granted within 10 weeks from
the date of the closing of the subscription lists, no allotment can be made, and if made,
it shall he void. But where an appeal against refusal by a stock exchange has been
preferred under Sec. 22 of the Securities Contracts (Regulation) Act, 1956, such
allotment shall not be void until the rejection of the appeal by the Central Government.
• If the application for listing has not been made or where permission for listing has
not been granted, the company must forthwith repay without interest all moneys received
from the applicants for shares. If such money is not repaid within 8 days after the
company becomes liable to repay it, the company and every director of the company
who is an officer in default shall jointly and severally be liable to repay that money with
interest at the following rates:
4 per cent for delay in payment of not more than 15 days:
5 per cent for delay of more than 15 days but not more than 30 days;
12 percent for delay of more than 30 days, but not more than 60 days;
15 per cent for delay of more than 60 days.
Where permission has been granted by the recognised stock exchange or stock
exchange, all moneys in excess of the application moneys on shares allotted must be
repaid forthwith without interest. If such money is not repaid within 8 days, then the
directors shall he jointly and severally liable to pay with 12 per cent per annum interest.
If default is made in complying with this' provision, then the company and every officer
who is in default shall be liable to he fined up to Rs. 5.000, and where repayment is not
made within 6 months from the c'piry of the 81h day, also with imprisonment up to one
year.

MINIMUM SLJBSCRIVI1ON
Minimum subscription is the minimum amount which, in the opinion of the
directors or of the signatories of the memorandum arrived at after due inquiry, must be
raised by the issue of shares to provide in respect of each of the following heads and
distinguishing the amount required under each head: (i) the purchase price of any
property bought or to he bought is to be defrayed in whole or in part of the proceeds of
the issue; (ii) preliminary expenses including any commission, underwriting or otherwise
462 MERCANTILE LAW

for subscription of shares, payable by the company; (iii) the repayment of sums borrowed
to provide for the foregoing; (iv) the working capital. and (v) any other expenditure,
staling the nature and purpose thereof and the estimated amount in each case. The
company must also specify the amounts to be provided in respect of the matters aforesaid
otherwise than out of the proceeds of the issue and the sources out of which thosç amounts
are to be provided ISec. 69(1) and Sch. 11(5)1. Sec. 69(2) further provides that shares
allotted for consideration other than cash are not to be included in the minimum
subscription.
CONSEQUENCES OF NON-FULFILMENT OF THE ABOVE CONDITIONS
lithe company for want of minimum subscription, or for the non-fulfilment of any
of the aforesaid conditions, has been unable to allot any shares within 120 days after the
first issue of the prospectus. it must forthwith refund without interest all moneys received
from the applicants. If the money is not repaid within 130 days of the issue of the
prospectus, the directors of the company shall be jointly and severally liable to repay
that money with interest at the rate of 6 per cent per annum from the expiration of the
130th day. But a director who can prove that the default in the repayment was not due
to any misconduct or negligence on his part may escape liability [Sec. 69 (5)1.
IRREGULAR ALLOTMENT
If a company, without complying with any of the above conditions makes an
ailotmenL the applicant may, if he so desires, avoid the allotment within 2 months after
the statutory meeting, but not later than that. If a company is not required to hold a
statutory meeting or if the allotment is made after such meeting, then he must avoid the
transaction within 2 months of the allotment. He can claim the refund of the money
within the period even if the company is being wound up. Notice of avoidance followed
by prompt legal proceedings after the two months would be sufficient. Furthermore, the
directors are liable to compensate the company or the allottee for any loss, damages and
costs suffered by either through such irregular allotment, provided that the proceedings
to recover such loss, damages or costs are commenced before the expiration of 2 years
from the date of the allotment (Sec. 71).
Penally for fraudulently inducing a person to invest money—By virtue of Sec.
68, any person who fraudulently, either by wrong statement or dishonest concealment
of material fact-c, induces or attempts to induce another person to enter into, or to offer
to enter into—
(a) an agreement to buy or dispose of shares or debentures or to underwrite them; or
(b) an agreement the purpose of which is to secure a profit to any of the parties from
the yield of shares or debentures;
shall be punishable with imprisonment for a term up to 5 years, or with fine up to
Rs. 10,000, or with both.
Issue and allotment of shares in fictitious name prohibited—The new Sec.
68A seeks to eradicate the practice of allotting shares in fictitious name or to non-existing
persons. The section makes it an offence punishable with imprisonment up to 5 years to
make an application for shares in a fictitious name or otherwise induce a company to
allot or register a transfer of any shares to him or any other in a fictitious name. The penal
provision must be inserted at a prominent place in every prospectus issued by a company
and in every application form.
Return of Allotment—A return of allotment, even if it is a single share, must be
tiled with the Registrar within 30 days thereafter, giving complete details of the number
and nominal amount of the shares, and the names, addresses and occupations of the
allonees, amount paid or due on each share, copies of written contracts in respect of
 COMPANY LAW 463

shares allotted for consideration other than cash, by services rendered to the company
or business or property sold to it, number and nominal amount of shares so allotted,
extent to which paid and the consideration. If in the return of allotment it is shown that
shares have been allotted for cash when cash has not been actually received in respect
of such allotment (and mere book adjustments have been made), every officer and every
promoter of the company who is guilty of this shall be punishable with fine up to
Rs. 5.000. No return of allotment need he filed in respect of shares reissued after
forfeiture. Where a contract in respect of shares allotted forconsideration other than cash,
is not reduced to writing, the company must, within 30 days after the allotment, file with
the Registrar the prescribed particulars of the contract duly stamped with the requisite
stamp duty. Default to file the return of allotment as required by Sec. 75 will render every
officer of the company liable to a fine up to Rs, 500 for every day the default continues.
Commission—A company may pay out of capital commission, including under-
writing commission, to any person who subscribes or agrees to subscribe, procures or
agrees to procure, subscription for any shares, or debentures of a company if the articles
authorise such payment. The rate of commission must not exceed 5 per cent of the price
at which the shares are issued or the rate authorised by the articles whichever is less, and
in the case of debentures, 2.5 per cent of the price of the debentures or the rate authorised
by the articles whichever is less. The rate must be disclosed in the prospectus. The number
of shares or debentures which persons have agreed for a commission to subscribe must
also be disclosed [Sec. 76(1)]. A copy of the contract for payment ofcommission must
be delivered5 to the Registrar along with the prospectus or the statement in lieu of
prospectus
The Act prohibits the payment of any commission, discount or allowance under
any other circumstances. But if a company has hitherto paid any "brokerage" it may
continue to do so. The Act also prohibits the payment of underwriting commission on
shares or debentures which have not been offered to the public but directly allotted or
privately subscribed. The effect of this new provision is that underwriting commission
cannot be paid to any person in respect of shares or debentures actually subscribed for
at flie time of filing the company's prospectus or statement in lieu of prospectus.
Underwriting commission and brokerage should be distinguished, as brokerage is
not "commission" under Sec. 76(3). The broker undertakes to "place" shares in
consideration of an agreed brokerage, and if he fails to dispose of certain shares he is
not personally liable to take them, nor is he entitled to any brokerage in respect of shares
not placed. The underwriter is bound to tak-e over the shares which the public has not
taken and is entitled to the whole of the agreed commission: he is an insurer against
under-subscription.
Issue of Shares at Premium--Sec. 78 empowers a company to issue shares at a
premium subject to certain restrictions. Where a company issues shares at a premium, a
sum represen t ing the total amount or value of the premium on such shares must be
transferred to an account known as the "Share Premium Account". The amount so
transferred can be applied by the company only for:—
(a) paying up shares of the company to be issued to members of the company as fully
paid bonus shares; or
(b) wi ting off the preliminary expenses of the company; or
(c) writing off the expenses or commission paid or discount allowed on any issue of
shares or debentures; or
(d) in providing for the premium payable on the redemption of any redeemable
preference shares or of any debentures of the company.

38. In re Calcutta Stock Exchange Ass. Lid., 1957 Cal. 438.

464 M}RCANtflt.E LAW

Issue of Shares at a Discount—Sec. 79 permits a company to issue shares at a

discount only on the following conditions (i) the issue must be of a class of shares
already issued; (ii) it must be authorised by a resolution passed in general meeting and
sanctioned by the Company Law Board; (iii) the maximum rate of discount must not
exceed 10 per cent or such higher rate as the Company Law Board may permit in any
special case; (iv) not less than one year has at the date of issue elapsed since the date of
which the company was entitled to commence bustnes; and (v) the shares must be
issued within 2 months of the sanction by the Company Law Board or within such
extended time as that Board may allow. Every prospectus at the date of its issue must
mention particulars of the discount allowed on the issue of the shares or the exact amount
of the discounts as has not been written off. Fine for default is Rs. 50..
RESTRICTIONS ON SHARE ISSUE (SEC. 77)
No company can buy its own shares, unless the consequent reduction of share
capital is effected and sanctioned by the Court in pursuance of Sees. 1(0 to 104 or of
Sec. 402. Furthermore, a public company or its subsidiary must not finance the purchase
by any person of its own shares or those of its holding company. A company may,
however, redeem its redeemable preference shares. A banking company may lend
money in the ordinary course of its business. A provision may be made by any company
to enable its employees, including a salaried director, to buy fully paid shares. It may
also lend an amount to an employee (excluding directors, or manager) equal to his six
months' salary or wages. Contravention renders the company and every officer at fault
to a fine up to Rs. 1.000.
SHARE CERTIFICATE

By Sec. 113, where shares have been allotted to an applicant, or where a valid
transfer of shares had been lodged, the company (unless the conditions of issue of the
shares otherwise provide) must deliver within 3 months after allotment and within 2
months after application for registration of transfer, accr1i1icati orcertificates e'vidcncing
the title of the allottee or transferee to the shares allotted or transferred. Default makes
the company and every officer in default liable to a fine up to Rs. 500 for every day of
default. To be a valid certificate, it must have the common seal of the company affixed
to it, and must also be stamped. One or more directors must sign it. It should state the
name, address and occupation of the holder, number of shares and their distinctive
numbers and amounts paid (Sec. 83). It is a prima facie evidence of the title of the
member to such shares. The amended Sec. 84 empowers a company to issue a duplicate
of a certificate if such certificate is proved to have been lost or destroyed, or having been
defaced or mutilated or torn, is surrendered to the company. If a company with intent to
defraud renews acerlificate or issues aduplicate thereof, the company shall be punishable
with fine up to Rs.10.(XX) and every officer of the company who is in default with
imprisonment up to six months or fine up to Rs.10,000 or with both.
SHARE WARRANT

By Sec. 114, a public (not private) company limited by shares, if authorisedhy its
articles, may, in respect offull y paid shares, issue under its common seal, and with the
previous approval of the Central Government, a share warrant stating that the bearer
thereof is entitled to share therein specified. It is a negotiable instrument and mere
delivery transfers the ownership of the shares. The dividends may be paid by coupons
or otherwise to the holder of the warrant. Sec. 115 provides that on the issue of a share
warrant, the company mut strike out of its register of members the name of the member
and must enter the following particulars : (i) the fact of the issue of the warrant: (ii) a
statement of the shares included in the warrant, distinguishing each share by its number;
 COMPANY LAW 45

and (iii) the date of the issue ofthe warrant. If the articles so allow the holder of the share
warrant may surrender it for cancellation, whereupon his name will be entered on the
register, and a share certificate will he issued in his name. The holder ofa warrant cannot
qualify himself as a director. If the articles so provide, the bearer of a share warrant may
be deemed to be a member of the company.
PERSONATION OF SHAREHOLDER (SE(--. 116)
If any person deceitfully personates an owner of any share or interest in a company,
or of any share warrant or coupon issued in pursuance of the Act, and thereby obtains
or attempts to obtain any such share or interest or any such share warrant or coupon, or
receives or attempts to receive any money due to such owner, he shall be punishable
with imprisonment for a term extending to 3 years and shall also he liable to fine.

TRANSFER OF SHARES

One of the most important characteristics of shares is their transferability. Sec. 82

empowers every shareholder to transfer his shares in the manner prescribed by the articles
of the company. The articles of a public company may and those of a private company
must restrict rights to transfer. The articles may give power to the directors to refuse
transfer without assigning any reasons as long as the refusal is honafide. 39 The refusal
must be by a resolution of the Board of Directors. In ease of refusal, it is now provided
that the company must send a notice to the transferee and the transferor within 2 months
from the date on which the instrument of transfer was delivered to the company. Default
renders the company and every officer at fault liable to a fine up to Rs. 50 for every day
of default. Any person dissatisfied with the refusal may apply to the Company Law Board
for rectification of the register of members tinder Sec. 111, which shall, after hearing all
the parties, order the registration of the transfer or reject the appeal according to the
circumstances of the case. The Company Law Board may compel the company to
diclose the reason for refusal to register a transfer (Sec. Ill).
Where the articles do not restrict the right to transfer, a shareholder may transfer
his shares to any one sujuris, even to a pauper, an insolvent, or even to escape liability
on them, and at the last moment before winding up, provided that the tra,psfer is real and
bonafide, without retaining by the transferor any interest in the shares. The mode of
transfer is provided in Sees. 108 to 110 and 114(3) of the Act. By virtue of Sec. 114(3).
when a share warrant to bearer has been issued in respect of fully paid shares, the
ownership of the shares is transferred by simple delivery of the share warrant, which
is a negotiable instrument. On the other hand, in the case of shares in respect of which
a share certificate, made out in the name of a shareholder whose name is entered on the
company's register of members, has been issued, a transfer of shares is effected by a
written instrument of transfer executed by the transferor and the transferee and duly
stamped, specifying the name, address and occupation of transferee, which is delivered
to the company for registration along with the share certificate, and if no such e'rtificate
is in existence along with the letter of allotment of the shares.
By virtue of Sec. 108, every instrument of transfer shall be in the prescribed form
and shall be presented to the prescribed authority (Registrar) before it is signed by or on
behalf of the transferor and before any entry is made therein, and the prescribed authority
shall stamp or otherwise endorse thereon the date on which it is so presented. Thereafter

39. B. Clsoulkhani v. Western lnda Theatis Lid, 1957 Cal. 709; See also Jagdish Mills Ltd.,
1955 Born. 79.
40. Under's Case (l910)lCh. 312.
466 MERCAN'flLE LAW

the transferor and the transferee shall execute this instrument of transfer and complete
it in all other respects, and then deliver to the company for registration:-
(i) in the case of shares dealt in or quoted on a recognised stock exchange at any time
before the date on which the register of members is closed in accordance with law
for the first time after the date of such presentation or within 12 months from the
date of such presentation, whichever is later;
(ii) in any other case, within two months from the date of such presentation.
An instrument which is not in conformity with these provisions shall not be
accepted by the company.
Unless the directors have power to refuse to register, the transfer must be registered
at the earliest moment of time and the naille of the transferee substituted on the register
of members for that of the transferor. The application for the registration of transfer may
by made either by the transferor or the transferee. Where it is made by the transferor and
relates to partly paid shares, the company must give notice of application by prepaid
registered post to the transferee. If the transferee does not object to the transfer within 2
weeks from the receipt of the notice, then his name should be entered on the register of
members. With regard to an application by the transferee or by the transferor relating to
fully paid shares, no notice is required. It should be noted that the transfer is complete
and the transferee becomes liable to pay as meinbercalls on partly paid shares only when
the instrument of transfer is registered and his name entered on the register of members
41
and not before, But as between the transferor and the transferee immediately after the
transfer is made, the transferee becomes the sole beneficial owner of the transferred
shares. A relation of trustee and ccstui que trasi is thereby established between them.
The transferor is under obligation to comply with all reasonable directions of the
transferee. The transferee should, however, take active and prompt steps to get his name
42
registered as a member on the register of the company.
CERTIFICATION OF TRANSFER
When a shareholder sells part only of the shares mentioned in the share certificate,
he does not deliver the share certificate to the buyer, but produces it along with the
transfer instrument to an officer of the company, who "Certifies" the transfer by writing
in its margin the words "Certificate lodged" and mentions the number of shares for
which it is lodged. This is called "Certification" and is taken by the buyer as tantamount
to delivery to himself of the shares in the "Certified transfer." In due course the company
will register the transferee as the holder of shares sold to him, cancel the old certificate
and prepare two certificates: one for the shares sold which will be given to the transferee
and the other for the unsold shares which will be handed over to the transferor.
FORGED TRANSFER
A forged transfer even if registered by the company, is void and the alleged
transferee gets no title to the shares. The company, however, does not incur any liability
by putting the transferee's name on the register, unless it issues a certificate and a person
suffers damage on the faith of it. The company can claim damages from the persom who
procures registration by forged transfer. Transrers made during winding up are void,
unless sanctioned by the Court or the liquidator.
Blank Transfer—When a shareholder signs the transfer form without filling in
the name of the transferee and the date of execution and hands it over with the share
certificate to the transferee thereby enabling him to deal with the shares, he is said to
have made a "transfer in blank". When used for legitimate business purposes it has

41. Amraoti Electric Supply Co. v. R.S. Chandak 1954 Nag. 239; Jagjmt D.& A. Industries v. Shiv
Ram, 1957 Pepsu 18.
42. R. Mathalorie v. Bombay Life Ass. Co. 1953 S.C. 385.
 COMJ'ANY LAW 467

some advantages. The holder of a blank transfer can again transfer the shares without
filling his name and signature to a subsequent transferee, and thus avoid the payment of
stamp duty. The ultimate holder, who wants to retain the shares, can fill his name and
date and get it registered in the company's hooks. For this ultimate transfer and
registration the first transferor will be regarded the transferor even if he is dead. On such
registration the last transferee will become the meniber of the company.
Transmission of Shares—Transmission of shares takes place when the registered
holder dies, or is adjudged an insolvent. Upon the death of a sole registered holder, so
far as the company is concerned, the legal representatives of the deceased are the only
persons having any title to the shares. All other persons have only equitable interest in
the shares. The legal representatives of the deceased member can, therefore, transfer the
shares or other interest in the company held by the deceased, without getting themselves
registered as members, and the transferee will get good title to the shares. The shares of
an insolvent vest in the Official Assignee or Receiver, either of whom may get himself
registered as holder of these shares or dispose of them. They can also disclaim them.
CALLS
Shares are generally issued to the public so that a certain amount not less than 5
per cent is payable on application and another sum on allotment. The balance may be
payable as and when called for. A Call is a demand by the company in pursuance of a
resolution of the Board and terms of the articles on the shareholders to pay the whole or
part of the balance still due on each share made at any time during the continuance of
the business, or during winding up. Each shareholder is liable to pay a valid call, which
can be made only alter the minimum subscription is allotted and the company is entitled
to commence business. A call must be made uniformly on all shares of a class, and must
be for the benefit of the company. By Sec. 92, a company may, if authorised by its
articles, receive advance calls and pay interest on them as also dividends (Sec. 93).
FORFEITURE OF SHARES
Shares can be forfeited for non-payment of a call only if special power in the
articles is given to the directors to do so. The forfeiture must be made strictly in
accordance with the regulations regarding notice, procedure and manner stated in the
articles. Any irregularity will make the forfeiture void, and the shareholder may sue for
annulment. The power to declare shares forfeit is in the nature of a trust and must be
exercised in good faith for the benefit of the company. After a valid forfeiture the
shareholder ceases to be a mnemnbe. of the company. but continues to be liable for any
money presently payable at the time of forfeiture, if the articles so provide, and can be
sued within three years of the forfeiture, as an ordinary debtor to the company. If shares
are forfeited within one year of winding up of the company, be will be liable as 'B list
contributory. Forfeited shares become the property of the company and it may either
cancel them or re-issue them, if articles so provide.
SURRENDER OF SHARES
The articles usually give power to the directors to accept surrender of shares: this
relieves them from going through the formality of forfeiture. A surrender of partly paid
shares can only be accepted when a forfeiture would be justified. The same rule applies
to fully paid shares which are surrendered for cancellation. A surrender accepted to
release a shareholder or in consideration paid to him is invalid, as that amounts to
purchase by the company of its own shares, which is strictly prohibited by the law.
DIVIDENDS
Dividend means "the sum paid and received as the quotient forming the share of
the divisible sum payable to the recipient." In simple words, dividends are the profits
468 MJRCAN11IF. LAW

of trading divided among the members in proportion to their shares. The mode of
payment is determined by the articles. The directors are required by Sec. 2 17 to make a
report on the balance sheet recommending the rate of dividend, which may he declared
in the annual general meeting, but it cannot in any event exceed the rate recommended
in the report. Besides these dividends the articles may provide for the paymentof Interim
Dividend; which can be declared at any time between two annual general meetings. Until
a dividend is declared, a shareholder cannot enforce its payment. But once it is declared,
it becomes a debt due from the company to each shareholder, for the recovery of which
he can sue the company 4 An interim dividend is not a debt and the directors can rescind
it by a resolution. Sees. 93 and 205 to 207 make special provisions for the payment of
dividends.
Sec. 93 empowers a company to pay, if authorised by its articles, dividends in
proportion to the amount paid on each share where a larger amount is paid tip on some
shares than on others. Sec. 205 has been amended to impose an obligation on manage-
ments to provide for depreciation before declaring dividends and also to pay dividends
only in cash. The section, as amiiended, provides that no dividend can be declared or paid
by a company except out of profits of the company arrived at after providing for
depreciation as laid down in Sec. 350, or in respect of each item of depreciable asset, for
such an amount as is arrived at by dividing 95 per cent of the orig!rIal cost thereof to the
company, or on any other basis approved by the Central Government.
The new Sub-Section (2A) to Sec. 205 further provides for the transfer of such
percentage of its profits for the year, not exceeding 10 per cent, as may be prescribed.
before declaring or paying dividend out of the profits of the current financial year. In
case of inadequacy or absence of profits in any year, the company may declare dividend
out of previous years' profits and transferred to reserves in accordance with rule to be
framed by the Central Government. Sec. 205A requires the transfer of unpaid or
unclaimed dividends within 7 days of the expiry of 42 days from the date of the
declaration of the dividend to a special account with a scheduled hank to be known as
"Unpaid Dividend Account of.....Co. Ltd/Co. Private Ltd." If the amount of the unpaid
dividends is not transferred to such account, then the Company shall pay interest at the
rate of 12 per cent per annum. Any money transferred to this account which remains
unpaid or unclaimed for 3 years shall be transferred to the general revenue account of
the Central Government., and claim shall be preferred to it for payment. Failure to comply
with any of the above provisions will render the company and every officer in default
liable to be fined UI) to Rs. 500 per day during the period of default.
The dividend may also be paid out of moneys provided by the Central or State
Government for the payment of dividend in pursuance of a guarantee given by such
Government. Although a dividend is payable only in cash, capitalisation of profits or
reserves for the purpose of issuing fully paid-up bonus shares or paying up any amount
for the time being unpaid on any shares held by the members of the company is allowed.
Dividend must be paid only to the registered shareholder to his order or to his bankers,
or to the producers of coupons in respect of share warrants (See. 206). Where a dividend
has been declared by the company but it has not been paid (or dividend warrant has not
been posted) within 42 days from the declaration of the dividend, to any shareholder
entitled to payment of the dividend, every director, managing agent, secretaries arid
treasurers, who are knowingly party to the default, shall be punishable with imprison-
ment up to 7 days and with line. The only exceptions to this are (i) where dividend
could not be paid by reason of some law: (ii) where the instructions of the shareholder
for payment of dividend cannot be complied with: (iii) where there is a dispute as to the
right to the dividend: (iv) where the dividend has been adjusted against a claim of the
company; or (v) where the company's failure to pay the dividend or post the dividend
warrant was not due to any fault on its part (Sec. 207).

41. General Ass. Society v. L.I.C. of India. 1964 S.C. 892.

 COMPANY LAW 469

Sub-Section (213) has been added to Section 205 and provides that a company
which fails to redeem the redeemable preference shares as required by the new Section
80, inserted by the 1988 Amendment Act, must not dcclaic any dividend on its equity
shares as long as such failure continues.
PAYMENT OF INTEREST OUT OF CAPITAL
The general rule as laid down in Sec. 205 is that dividends must not be paid out
of capital. An exception to this rule is, however, constituted by Sec. 208, which provides
in effect that where shares are issued to raise money to defray the cost of works or
buildings or of plant which cannot be made profitable for a long period, the company
may pay interest on the amount of capital paid up in respect of such shares, and may
charge the same to capital as part of the cost of the works, buildings or plant, provided
that-4i) no such payment shall he made unless it is authorised by the articles or by a
special resolution, and previous sanction of the Central Government is obtained; (ii) the
payment of interest shall be made only for such period as may be determined by the
Central Government and in no case beyond the end of the half year following the half
year of the actual completion of the plan; (iii) the rate of interest must not exceed 4 per
cent per annum or any other rate which the Central Government may pennic; (iv) the
payment of interest shall not operate as a reduction of the share capital.
cAPrrALIsATI0N OF PROFITS
A company, if authorised by its articles, may capitalise its profits instead of paying
them off as dividends. In such a case, the company declares a dividend or bonus" out
of its undistributed profits and issues at the same time a corresponding number of new
shares and then applies the dividend or bonus which belongs to the shareholders in full
payment of the amount due on shares. The effect of capitalisation is that the company
does not part with any of its assets, and is enabled to increase iLs capital, and the
shareholders get their dividend in the shape of further shares which are called "Bonus
Shares." Thus, capitalisation of undistributed profits is made by issuing paid-up shares
to the members, thereby transferring the Sum capitalised from the profit and loss account
and reserve account via the bonus to the share capital. The reason why bonus is first paid
out of reserve and then taken hack for payment on the newly issued shares is that direct
transfer from reserve to capital in payment of fully paid shares will be payment by the
company to the company, which is illegal.

PART 16-F
BORROWING POWERS

MORTGAGES AND CHARGES

Every commercial or trading company is deemed to have borrowing powers; but
in the case of a non-trading company its memorandum must lay down such powers to
enable it to borrow. A company having power to borrow may do so to any extent within
the limitations laid down by the memorandum or articles or the AcL If a company
borrows beyond its powers, the borrowing is ultra i'ires the company and void. No debt
is created, and any security which may have been given in respect of the borrowing is
also void. The lender cannot sue the company for the repayment of the loan . 45 If the
borrowing is ultra vires the directors only, the rule in Royal British Bank v. Turquand

44. Pooley V. Hall Colliery Co. (1869), 21 LT. 690.

45. Sinclair v. Broughaln(19l4)AC 39&
470 MERCANTILE LAW

46
applied, if the shareholders elect to ratify in general meeting the act of the directors.
In either case, if the money has not been spent by the company, the lender can get an
injunction to prevent thc company from parting with it, or he may sue the directors for
damages for breach of warranty of authority. If the money has been used in paying off
debts which could have been enforced 'against the company, the lender may sue the
company as he steps into the shoes of the creditors who have been paid off by virtue of
the piinciplc of subrogation.
A company having borrowing powers has also the power to give security to the
tender for the loan advanced by him. This may be done by charging or mortgaging any
or all of the company's property. The loan may be secured by any one or more of the
following ways: (i) a legal mortgage of its property; (ii) an equitable mortgage by deposit
of title deeds; (iii) a mortgage of movable property: (iv) bonds; (v) promissory note;,
hills of exchange; (vi) a charge on calls made but not paid: (vii) a floating charge, (viii)
a charge on a ship or any share in a ship; (ix) a charge on goodwill, on a patent or a
licence under a patent, on a trade mark or on a copyright. (x) by debentures or debenture
st:ck.
DEBENTURES AND DEBENTURE STOCK
When a company desires to borrow a considerable sum of money and therefore
intends to invite the general public to subscribe, it gives a form of bond known as
debenture." A debenture is an acknowledgment of a debt by a company to some
person or persons, and is issued to the public by means ofa prospectus in the same manner
as shares. A debenture stock is borrowed capital consolidated into one mass for the sake
of convenience. Instead of each lender having a separate bond, he has a certificate
entitling him to a certain sum, being a portion of one large loan. It is generally secured
by a trust deed.
KINDS OF DEBENTURES
Debentures, like ordinary bonds, may be unsecured by any mortgage or charge on
the property of the company, and are known as "naked" debentures; or may be. and
usually are, secured, and are called "secured" or ''mortgage" debentures. They may be
'registered," when they are made out in the name of a particular person who is registered
by the company as holder, and are transferable in the same way as shares; or "bearer"
which, like share warrants, are made out to bearer, and are negotiable instruments.
Debentures may also be ''redeemable,'' that is to say, issued on the terms that the
company is bound to repay the amount of the debentures, either at fixed date, or upon
demand; or "perpetual" or 'irredeemable" debentures in which case no time is fixed
in which the company is bound to pay, although it may pay back at any time it chooses;
the debenture-holder cannot demand payment as long as the company is going concern
and does not make default in payment of interest. But all debentures, whether ir-
redeemable or otherwise, become payable on the company going into liquidation. A
company may also issue convertible debentures which can be converted into equity
shares.
Section 117 prohibits the issue of any debentures carrying voting rights at any
meeting of the company. The conditions on which debentures are issued are indorsed
on the back of the bond which gives different rights to the holders. One of the conditions
usually is the debenture is one of a series of a certain number, each for a like sum, say,
Rs. l(, and that all the debentures of a series rankpari passu, i.e., all the debentures of
one series are to be paid rateably, so that, if there is not enough to go round, they will
all abate proportionally. If the words 'pipassu" are not used, the debentures will be

6. Irvine v. Union Bank of Australia (1895) 3 Cal. 250, P.C.

 COMPANY LAW 471

payable according to the date of issue, and if they all are issued on the same day, they
will be payable according to their numerical order.
FLOATING CHARGE
A charge upon properly of the company may be 'fixed" or "floating." A fixed
charge passes legal title to certain specific assets, and the company loses the right to
dispose of the property. In other words, the company can transfer the property charged
only subject to the charge—the charge holder must be paid first whatever is due to him.
A floating charge is an equitable charge on the assets for the time being of a going
concern, it attaches to the subjects charged in the varying conditions in which they
happen to be from time to time. The governing idea of floating security is to allow a
going concern to carry on its business in the ordinary course, the effect which would be
to make the assets liable to constant fluctuations. Thus the company can deal with its
property so charged in a manner it likes until the charge "crystal lises" or ''attaches."
The essence of a floating charge is that the security remains dormant until it is fixed or
crystallises. The floating charge crystallises: (i) when the company ceases to be a going
concern; (ii) upon the commencement of the winding up; (iii) on the appointment of a
Receiver at the request of a debenture-holder who has intervened. Until one of these
three things happens the charge will not become fixed, and the company may even sell
the undertaking if that is one of the objects specified in the memorandum. But this does
not make it a future security. It is a present security which presently affects all the assets
of the company expressed to be included in it. The creation of a floating charge leaves
company free to create a specific mortgage of its property having priority over the
floating charge. A floating charge is also ix)stponed to the rights of the following persons
if they act before the security crystallises, namely, (i) a landlord who distrains for rent,
(ii) a creditor under garnishee order absolute, (iii) a decree holder who attaches goods
and has them sold, (iv) a mortgagee of the same property, even where the mortgage is
created after the floating charge. Furthermore, under Sec. 123, they are postponed to the
preferential debts, mentioned in Sec. 530, e.g.. rates, taxes, wages, salaries, etc. A
supplier of goods on hire-purchase Sy%lem has priority over such charge until goods are
paid for in full.
TRUST DEED

The most common form of securing debentures is to execute a trust deed conveying
the property of the company to trustees and declaring a trust in favour of the debenture-
holders, charging the property. This (teed contains elaborate provisions for the benefit
of the debenture-holders and the company until the security becomes enforceable by the
trustees. The advantages of having a trust deed are : (i) in the case of default by the
company the trustees can take the necessary stepson behalf of all the debenture-holders;
(ii) the trustees usually have power to sell and so realise the security with the aid of the
Court; (iii) the legal estate is vested by the deed in the trustees and thus a subsequent
mortgagee cannot get priority: and (iv) the company can he made to issue property by
the covenants in the deed. Sec. 112 makes any contract void by which trustee is exempted
from liability forbreach of trust where he fails to act carefully and diligently as a trustee.
Debentures may be issued at a discount if the articles allow, the reason being that
they do not form part of the canital of the company. Similarly, interest payable on them
is a debt and can be paid out of capital. All sums allowed by way of discount must be
stated in every balance sheet of the company until written off. Sec. 122 provides that
specific performance of a contract to give debentures may be enforced against the
company, and that the company may specifically enforce against any one a contract to
take up and pay for any debentures. A debenture issued in arm irregular manner may be
treated as an agreement to issue a debenture.
472 MERCAN'llI.E LAW

RE-ISSUE OF DEBENTURES
Unless any provision to the contrary is contained in the articles, or in the conditions
of issue, or in any contract, or the company has by resolution decided to cancel the
debentures, the company may re-issue its redeemable debentures which it has redeemed,
either by re-issuing the same debentures or by Issuing other debentures in their place
ISec. 121 (I)j. In this manner the company can revive the debentures, i.e., give to a new
debt the same security as if it were the old debt. It is as if A's debt had not been paid and
he had transferred the debt and security to B. Sec. 121(2) expressly provides that on the
re-issue of these debentures, the person entitled to the re-issue debenture shall have, and
shall be deemed always to have had, the same rights and priorities as if the debentures
had never been redeemed.
REMEDIES OF DEBENTURE-HOLDERS
A debenture-holder who wishes to release his security and get hack his money,
may make use of all or any of the following remedies'.-
1. He may sue on behalf of himself and all other debenture- holders to obtain payment
or to enforce his security by sale. The Court will appoint a Receiver and a manager,
for the company's business, if necessary, and declare the debentures to be a charge
on the assets of the company, and order the sale of the property.
2. He may appoint a Receiver, if the conditions of the issue of the debentures give
him power to do so. The Receiver will sell the property and the sale proceeds will
be utilised for the payment of debentures.
3. He may apply to the Court for the principal and interest thereon, present a petition
for the winding up of the company.
4. He may, as a creditor for the principal and interest thereon, present a petition for
the winding up of the company.
5. I-Ic may have the property sold by the trustees if the debenture trust deed permits
the sale.
6. If the company is insolvent, and his security is insufficient he may value his
security and prove for the whole debt.
If a debenture-holder owes a debt to the company which is unable to pay its
debentures in full, the debenture-holder cannot set off his debt against flue liability he
owes to the company. The rule of law is that a person who claims share of a fund must
first pay up everything he owes to the fund.

REGISTRATION OF CHARGES

REGISTER OF DEBENTURE-HOLDERS
Sec. 152 now requires every company to keep in one or more books a register of
the holders outs debentures (except hearer debentures) and to enter therein the following
particulars: (i) the name, address and occupation of each debenture-holder; (ii) deben-
tures held by each holder distinguishing each debenture by its number, and the amount
paid or agreed to be paid on these debentures; (iii) the date at which each person was
entered in the register as a debenture-holder; and (iv) the date at which any person ceased
to be a debenture-holder. Like a register of members, this register should have an index,
is open to inspection and may be closed iii the same manner. Similarly, no notice of trust
is to be registered thereon (Secs. 153, 154).
 COMPANY LAW 473

COMPANY'S REGISTER OF CHARGES

Section 124 provides that for the purpose of registration and register of charges,
the expression "charge" includes a mortgage. By Sec. 143, every company must keep
at its registered office a register of charges in which all charges specifically affecting
property of the company and all floating charges oil undertaking or on any property
of the company must be entered. The register must contain a short description of the
property charged; the amount of the charge; the names of the persons entitled to the
charge. Sec. 136 requires every company to keep at its registered office a copy of every
instrument creating any charge requiring registration. The register and the document
should be open to inspection.

REGISTER OF CHARGES KEPT BY REGISTRAR

Section 130 has been redrafted under the 1988 Amendment Act. It now makes it
compulsory for every company to file with the Registrar particulars of all charges
required to be registered under Section 125. The Registrar is required to maintain, in
respect of each company, a register of charges and register particulars of all charges filed
with him and indicated in Sections 128 and 129 stated in the following paragraphs. The
pages of the register shall be consecutively numbered and cacti page must he signed or
initialled by the Registrar. The Registrar will issue a Certificate of Registrations and
1etuni all instruments to the company. Section 133 states that the company itiust cause
a copy of every registration to be endorsed on every debenture issued by the company,
and the payment of which is secured by the charge so registered.
REGISTRATION OF CHARGES

Sec. 125 requires a company to file within 30 days of the creation of charge with
the Registrar complete particulars together with the instrument, if any, creating or
evidencing the charge, or a verified copy, of certain charges, otherwise the charge sha!1
be void against the liquidator and creditors, although the money will become presently
payable. The Registrar is now given power to allow 7 more days for filing the particulars
if sufficient cause for delay is shown by the company. The charges requiring registra-
tion are as follows:--(a) a charge for the purpose of securing any issue
of debentures;
(b) a charge on uncalled share capital of the company; (c) a charge on any immovable
property, wherever situate, or any uitcrest therein; (d) a charge oil tsmk debts of the
company; (e) a charge, not being a pledge, on any movable property of the company; (1)
a floating charge on the undertaking or any property of the company including stock-in-
trade; (g) a charge on calls made but not paid; (h) a charge on a ship or any share in a
ship; (i) a charge on goodwill, on a patent or licence under a patent, on a trade mark, om
on a copyright or a licence under a copyright.
The particulars required to be registered under Sec. 125 by filing with the Reistra
are as follows:
(a) When the deben lure- jio1dr5 of the same series are made to rank pari passe,
Sec. 128 requires the following particulars to be registered: (i) the total aimmount secured
by the whole series; (ii) the dates of resolutions authorising the issue of the series and
the date of the covering deed, if any, by which the security is created or defined; (iii) a
general description of the property charged; (iv) the names of the tnistees, it any. for the
debenture-holders The deed containing the charge, or a copy of the deed verified in the
prescribed manner, or, if there is no such deed, one of the debentures of the series must
also be filed. If any commission, allowance, or discount has been paid or made by the
company to any person for subscribing, agreeing to procure any subscription for any
debenture, the amount or rate rer cent so paid or made musralso be filed (Sec. 129).
474 MERCANTILE LAW

(b) In the case of any other charge, the particulars are: (i) if the charge was created
by the company, the date of creation of the charge; and if the charge was a charge existing
on property acquired by the company, the date of acquisition of the property; (ii) the
amount secured; (iii) short particulars of the property charged; and (iv) the persons
entitled to the charge (Sec. 130).
A registration under Sec. 125 constitutes a notice to whosoever acquires a future
inteist on the charged assets (Sec. 126). The Registrar should enter in his register the
appointment of a Receiver or Manager. if made (Sec. 137). To enable the Registrar to
make an entry relating to a charge, it is primarily the duty of the company to send to the
Registrar the particulars. but Sec. 134 empowers every person interested in the charge
which requires registration to get it registered; and such person shall be entitled to recover
from the company any fees properly paid by him to the Registrar (Sec. 134). Under Sec.
138, the company must intimate to the Registrar within 30 days of, when they occur any
payment or satisfaction in full, or any change in the charges. The Registrar, after giving
notice to the charge holder, will make an entry of satisfaction. The register of charges
can be rectified by the order of the Court. Omission to register particulars of charges in
the manner prescribed by the Act and described above is made punishable with fine. The
company, and every officer of the company or other person who is in default shall be
liable to fine up to Rs. 500 for every (lay of default.

PART 16-C
Ml}:r1N(; AND PROCEEDINGS

There are three kinds of general meetings of a company—S1a1ith'rY. Annual and

Eitranrdinary. A private company is not required to hold a statutory meeting. Every
general meeting of a company requires 21 days' notice in writing.
STATUTORY MEETING
By Sec. 165, every public company limited by shares, and limited by guarantee
and having a share capital, must hold a general meeting of its members, to be called "the
Statutory Meeting." within a period of not less than one month nor more than 6 months
from the date at which the company is entitled to commence business. At least 21 days
before the day of the meeting, the Board of Directors must forward to every member a
report called "Statutory Report" (along with the notice of the meeting). The statutory
report must state : (i) the toLal number of shares allotted; (ii) the total amount of cash
received; (iii) an abstract of the receipts and payments by the company up to a date within
7 days of the date of the report and the balance in hand; (iv) estimate of preliminary
expenses, and any commission or discount paid on shares or debentures (v) the names,
addresses and occupations of the directors, auditors and also of the managing agent,
secretaries and treasurers, manager and secretary, if any, of the company, the changes
which have taken place in the names, etc., of the above since the date of incorporation,
(Vi) the particulars of any contract, or its modification, if any; (vii) the extent o which
any underwriting contract has not been carried out and the reason thereof; (viii) the
arrears due on calls from every director; (ix) the particulars of any commission or
brokerage paid or to be paid to any director, etc.
The statutory report must be certified as correct by at least two directors, one of
whom must be a managing director, if there is one. It must also be certified as correct
by the auditors of the company. A certified copy must be filed with the Registrar. A list
of members showing their names, addresses and occupations together with the number
of shares held by each must be kept in readiness and produced at the commencement of
the meeting and kept open for inspection during the meeting. The members may discuss
 COMPANY LAW 475

any matter at the meeting relating to the formation of the company or arising out of the
report. No resolution can, however, be passed unless notice thereof has been given.
Default renders the company and every director liable to fine up to Rs. 500. Moreover,
if the meeting is not held or the report is not filed, the Registrar or a contributory may,
after expiration of 14 days of the day when the meeting ought to have been held, apply
for the winding up of the company. The Court may either order winding up, or give
directions for the holding of the meeting and filing of the report, and order the payment
of costs by any persons at fault.
ANNUAL GENERAL MEETING
The provisions of the original Sec. 166 were not effective against delay in holding
of annual general meeting, because a financial year could be of more or less duration
than a calendar year. The section has been redrafted to make it more effective. Now,
every company must hold its first annual general meeting within 18 months from the
date of its incorporation. Thereafter, it must hold in each year, in addition to any oilier
meetings, an annual general meeting. so specified in the notices calling it, provided that
not more than 15 months shall elapse between two annual general meetings. In case of
difficulty to hold any annual general meeting (except the first meeting) the Registrar may
grant an extension up to a period of not more than 3 months. This meeting must be held
on a day other than a public holiday, during business hours, at the registered office of
the company, orother place within the city, town or village in which the registered office
of te company is situate, The Central Government may, however, exempt any class of
companies from this provision. A public company or a subsidiary of a public company
may by its articles fix the time for its annual general meetings and may also by a
resolution passed in one annual general meeting fix the time for its subsequent annual
general meetings. A private company may in like manner and also by a resolution agreed
to by all the membe rs thereof fix the time as well as the place for its annual general
meeting. If default is made in holding this meeting, the Company Law Board may, on
the application of any member of the company, call or direct time calling of the meeting.
Also, if this meeting is not held either originally or when ordered by the Company Law
Board, then the company and every officer who is in default is punishable with fine up
to Rs. 5,000, and in the case of continuing default, with a further fine of Rs, 250 per day
during default. Theordinary business to be transacted at this meeting is: (i) consideration
and adoption of accounts and reports of the Board and auditors: (ii) appointment of
directors; (iii) appointment and fixation of remuneration of auditors; (iv)declaralion of
dividend.
EXTRAORDINARY GENERAL MEETING
Every general meeting other than the statutory meeting and the annual general
meeting is an Extraordinary General Meeting. It is usually called by the directors for
transacting some special or urgent business which has to be done before the next annual
general meeting. Only the special business for which it is convened can be done at this
meeting. Sec. 169 provides that such meeting must be called by the Board on the
requisition of members holding 10 per cent of the paid-up capital carrying voting right
in respect of the matter, and where the company has no share capital, on the requisition
of members holding 10 per cent of the total voting power, within 21 days of the deposit
of the requisition, stating the matters for consideration at the meeting. If the Board does
not hold the meeting within 45 days of the requisition, the requisitionists may hold the
meeting within 3 months of the requisition. The requisitionists can recover from the
company their reasonable expenses and the company can make them good from the
directors at fault.
476 MERCANTILE LAW

NOTICE OF MEETINGS
Every member of a company is entitled to a notice of not less than 21 days of every
general meeting, and such notice must be given in writing to every member. An annual
genera] meeting may, however, be called by giving a shorter notice, if it is consented to
by all the members entitled to vole at the meeting: and any other meeting if the holders
of 95 per cent of the paid-up share capital or of the total voting power consent to the
shorter futiLe. Notice must also be given to the auditor of the company and to the legal
representatives of a deceased member. In the case of a company having share capital, or
where articles allow the appointment of proxy, the notice should state that a member
entitled to attend and vote i'jentillcd to appoint one or more proxies, that the proxy need
not be a member of the company.
ORDINARY AND SPECIAL BUSINESS
In the case of an annual genera] meeting the ordinary business will be (i) the
consideration of the accounts, balance sheet and reports of the Board of Directors and
auditors; (ii) the declaration of dividend: (iii) the appointment of directors in the place
of those retiring: and (iv) the appointment and fixing the remuneration of auditors. All
oilier business at an y annual general fleeting and any business at any oilier meeting
will he deemed to be special. In the case of any items of business deemed to be special,
the notice of the meeting most set out all material facts concerning the business. In regard
to special business, the notice should also state the nature and extent of the interest of
the directors, or manager in such business.
QUORUM
A number of members of any body sufficient to transact business at a meeting is
a quorum. The quorum is generally used by the articles, and the number of members to
form this quorum must be personally present at the meeting. Unless the articles provide
for a larger number, 5 members personally present in the case of a public company, and
2 members personally present in the case of a private company, shall be the quorum for
a general meeting of the company. Unless the articles otherwise provide, if within half
an hour from the time appointed for holding a meeting of the company, a quorum is not
present, the meeting if called upon the requisition of members, shall stand dissolved; but
in all other cases, it shall stand adjourned to the same day in the next week, at the same
time and place, or as the Board may determine. If a quorum is not similarly presnt at
the adjourned meeting, then the members present shall be a quorum (Sec. 174). Any
resolution passed without a quorum is invalid, unless all the members, though smaller
in number than the quorum, are personally present.
CHAIRMAN
The chairman is a necessary element of the company's meetings, and is usually
appointed by the articles. But if he is not so designated, the members personally present
at the meeting may elect one of themselves to be the chairman thereof on a show of
hands. If a poll is demanded on the election of the chairman, it must forthwith he taken
at that meeting under the chairmanship of the person elected by the show of hands (Sec.
175). The chairman must preserveorder, conduct proceedings of the meetings in a regular
way and take care that the sense of the house is ascertained with regard to the question
before it. He must see to it that the majority do not refuse to hear the minority. The
chairman may adjourn the meeting if circumstances demand, but he must act honafide
and should not leave the chair. If it is brought to his notice that the meeting was
improperly convened and constituted, he should declare the ptoceedmgs invalid. The
chairman must be a member of the company.
 COMPANY LAW 477

PROXIES
A proxy is both an nistninienL appointing another person to vote for the appointer
as well as the person so appointed. Sec. 176 provides that a member of a company who
is entitled to attend and vote at a meeting of the company may appoint another person
whether a member or not as his proxy to attend and vote instead of himself. A proxy has
no right to speak at the meeting. The instrument appointing a proxy must be in writing
and signed by the appointer, bearing a 15 paise stamp, or with its sea] in the case of a
company. No company can make it compulsory for any one to lodge proxies earlier than
48 hours before the meeting. If an invitation is issued at the expense of the company
asking for the appointment of a particular person as proxy for members, every officer at
fault will be liable to a fine up to Rs. 1A)0. During the period beginning 24 hours before
the time fixed for the commencement of the meeting and ending with the conclusion of
the meeting any member may inspect the proxies lodged, by giving not less than 3 days'
notice in writing to the company of his intention. As regards the right to appoint a proxy,
Sec. 176 states that unless the articles otherwise provide, in the case of company having
no share capital, a member cannot appoint a proxy, and in the case of private company,
he can appoint only one proxy, and a proxy shall not be entitled to vote except on a poll.
In the case of a public company or where articles permit, a member may appoint one or
more proxies, according to the number of votes held by him. He can split his votes and
give a few to one proxy and others to another proxy or other proxies. A proxy may be
revoked before the person appointed has voted. Where the President of India or a
Goveniorof a State is a member of a company, he may appoint any one to represent him
and vote for him.
VOTING AND POLL
Voting is in the first instance by a show of hands. Since voting by show of hands
does not always reflect the interest of members upon a 'value' basis, provision has been
made in Sec. 179 for demanding a poll, and voting rights must be exercised in accordance
with Sec. 87 which provides that every shareholder will have votes ii) proportion to the
equity capital held by him and not according to the number of shares. Where a company
has no share capital every member has one vote. Only the persons whose names appear
on the register as holders of shares are entitled to vote. If a poll is demanded, then if it
relates to the question of election of the chairman or adjournment of the meeting, poll
must be taken forthwith; otherwise it may be taken within 48 hours of the demand. A
poll may be ordered by the chairman or it may be demanded in the case of a public
company having share capital, by any member or members present in person or by proxy
and holding shares in the company conferring one-tenth of the total voting power in
respect of the resolution, or holding shares on which a sum of not less than Rs. 50.(X)
has been paid up in the aggregate. In the case of private company, one member, where
not more than 7 members are present, and 2 members, ifmore than 7 members are present,
may demand a poll. A public company or its subsidiaries cannot preclude a member from
voting oil ground that he has not held the shares for a certain period or any other
ground except the non-payment of calls or other sums presently payable by him, or in
regard to the exercise of the right of lien by the company.47
COMPANY LAW BOARD MAY CALL MEETING

If for any reason it is impracticable to call a meeting of a company (other than an

annual general meeting), the Company Law Board may, on the application of a director,
a member having a right to Vote, or on its own motion order a meeting of the company

47. Mahalirainv. Fort C. Jute Manufacturing Co. Lid.. 1955 Cat. 132.


478 MERCAN111,E LAW

to be called and conducted as the Company Law Board thinks fit, and may also give
such other ancillary consequential directions as it thinks expedient. Such a meeting will
be a proper meeting (Sec. 186).

RESOLUTIONS

The Act primarily recognises two types of resolutions; (i)Ordinary, and (ii)
Special. To these a third type has been added as a resolution requiring special nolice
(Sees. 189. 190). The category of extraordinary resolution has been abolished; and by
Sec. 651, any reference to extraordinary resolution in the articles of a company, or
elsewhere, shall in future be construed as referring to a special resolution.

ORDINARY RESOLUTION
A resolution shall be an ordinary resolution when the voles in a general meeting
cast in its favour are more than Votes against it. The votes may be cast on a show of hands
or on a poll in general meeting of which 21 days' notice has been given [Sc. 189 (1)].

SPECIAL RESOLUTION
A special resolution is one in regard to which the intention to propose the resolution
as a special resolution is specifically mentioned in the notice of the general meeting, and
is passed by such a majority that the number of votes cas t in favour Of the resolution is
three times the number cast against it, either by a show of hands or on a poll in person
orhy proxy. In other words, three-fourths majority of the votes cast is necessary to special
resolution at a general meeting of which 21 days' notice is given [Sec. 189(2)1. The Act
requires sanction of members by special resolution in respect of the following matters
among others:—
(I) For changing provisions of memorandum so as to (i) change its registered office
from one State to another. (ii) change of the objects clause (Sec. 17); (2) for changing
the name of the company (Sec. 21); (3) for altering articles (Sec. 31); (4) for reducing
share capital (Sec. 100); (5) for paying interest out of capital (Sec. 208); (6) for asking
for investigation (Sec. 237); (7) for making directors' liability unlimited (Sec. 323); (8)
for paying for an order of winding up (Sec. 433); (9) for voluntary winding up (Sec.
484).
RESOLUTIONS REQUIRING SPECIAL NOTICE
A resolution requiring special notice may be passed by the members at a general
meeting by a simple or three-fourths majority according to the provisions of the Act in
respect of different matters, provided the following procedure is followed: A notice of
intention to move the resolution (which requires special notice as provided by the Act
or in the articles) should be given to the company not less than 14 days before the meeting
at which it is to be moved, excluding the days on which the notice is served and the day
of the meeting; and the company should give to as members notice of such resolution
along with the notice of the meeting, i.e., 21 days' notice, or if it is not practicable to
give such notice, it must give notice, either by advertisement in a newspaper having an
appropriate circulation or in any other mode allowed by the articles, not less than 7 days
before the meeting.
Special notice is required by the Act in the following matters:-
1. For a resolution at an annual general meeting appointing all auditor, a person other
than a retiring one
2. Foi a resolution at an annual general meeting to provide that a retiring auditor shall
not be appointed.
3. For a resolution to remove a director before the expiry of his period of office.
 COMPANY LAW 479

4. For a resolution to appoint another director in place of the removed director.

5. For a resolution to appoint a person as director in place of a retiring director.

CIRCULATION OF MEMBERS' RESOLUTION SEC. 188)

If members having 5 per cent of the total voting power of the company, or, if 100
members having the right to vote and coin inandmg a paid-up capital of Rs. one lakh or
more require the company to do so, the company must circulate any resolution of which
those members give notice of intention to move at the meeting, and also circulate any
statement of not more than 1,000 words with respect to any matter or resolution to be
considered at the meeting, provided the resolution is deposited with the company 6 weeks
before the meeting or the statement is so deposited 2 weeks before the meeting, and a
reasonable sum of money to meet the cost has also been deposited. The company need
not circulate astatement if the Court is satisfied oil application either of the company
or any other aggrieved person that the rights so conferred are being abused to secure
needless publicity for defamatory matter. A banking company need not circulate such
statement, if its Board considers that its circulation will injure the interests of the
company. Default of above provisions renders every officer of the company in default
liable to a fine up to Rs. 5.000.
REGISTRATION OF RESOLUTIONS AND AGREEMENTS
Sec. 192 makes it compulsory for a company to file with the Registrar printed or
typewritten copies of the following resolutions and agreements. within 30 days after the
passing or making thereof:—(a) special resolutions; (h) resolutions which have been
agreed to by all the members or class of members; (c) any resolution of the Board, or an
agreement appointing or re-appointing or varying the terms of appointment of a manag-
ing director; (d) any agreement appointing or reappointing managing agents or
secretaries and treasurers; (e) all resolutions or agreements which effectively hind all
members of any class of shareholders though not agreed to by all those members: (1)
resolutions passed by the company according consent to the Board of any of the powers
urder Sec. 293(l)(a), (d) and (e), and approving the appointment of sole selling agents
under Sec. 294: (g) resolutions for voluntary winding up, passed under Sec. 484(1). If
default is made in filing any of the above, the company and every officer (including a
liquidator) who is in default are liable to a fine up to Rs. 20 for every day of default. A
copy of every such resolution or agreement shall be embodied or annexed to every copy
of registered articles issued after passing thereof.
MINUTES OF MEETINGS
Every company nnist keep minutes containing a fair and correct summary of all
proceedings of general meetings and Board meetings in books kept for that purpose. The
minutes books must have their pages consecutively numbered and the minutes must be
recorded thereon within 30 days of the meeting. Each page of every such book must be
initialled or signed by the chairman of the meeting. The minutes must be recorded on
the pages of the minutes book, and in no case must the minutes be pasted on the pages.
All appointments of officers made at any meeting must be included in the minutes. In
the case of Board meetings, the minutes must also state the names of directors present
and ofthose who may have dissented from a resolution passed at a meeting. The chairman
of the meeting may exclude from the minutes any matter which he reasonably regards
defamatory of any person or irrelevant or immaterial to the proceedings (Sec. 193).
Where the minutes are duly kept, they are presumptive evidence that the meeting was

Note : Directors age limit of 65 years deleted by 1965 Act

480 MERCANTILE LAW

duly called and held and all the proceedings were duly taken. The minutes books must
be kept at the registered office of the company and be open to inspection in the usual
manner. The minutes books of the Board meetings are not open to inspection. Sec. 197
prohibits advertising or circulating at the expense of the company any report or proceed-
ings of general meetings, unless the minutes circulated or advertised were duly made
and entered in the minutes book. Contravention of this provision renders the company
and every officer in default liable to lifle up to Rs. 500 for each offence.

PART 16-H
ACCOUNTS, AUDIT AND INVESTIGATION

BOOKS OF ACCOUNT (SEC. 209)

Every company must keep at its registered office proper books of account with
respect to (a) all sums of money received and expended by the company and the matters
in respect of which the receipt and expenditure takes place; (h) all sales and purchases
of goods by the company; and (c) the assets and liabilities of the company provided
that all or any of the books of account aforesaid may be kept at such other place in India
as the Board may decide, and then the compzny must within 7 days of the decision file
with the Registrar a notice in writing giving the full address of that other place. Where
the company has a branch office, the books of account relating to transactions effected
at the branch office must be kep at that office and proper summarised returns sent to the
head office at intervals of not more than 3 months The books of account shall give a
true and fair view of the affairs of the company or branch office, and explain it
transactions. These books shall be open to Inspection by any director during business
hours as-also by the Registrar or an officer authorised by the Central Government. It is
now provided that the books of account relating to a peiod of at least 8 years'
immediately preceding the current year, or if the company has not been in existence for
8 years, then for the whole period of its existence, shall be preserved in good order.
Default on the part of any of the following persons to secure compliance with the
above requirements renders him liable in respect of each offence to be punished with
imprisonment up to 6 months, or a fine up to Rs, 1,0(X) or with both. The persons are
(i) managing agent or secretaries and treasurers, or managing director or manager; (ii)
partners in a managing agency firm or a firm of secretaries and treasurers; (um) every
director, if they are a body corporate; (iv) every director of the company, if it has neither
a managing agent nor secretaries and treasurers nor managing director nor manager. But
if any person has been charged by any of the above persons to comply with the
requirements of the section and he makes a default, then he will be liable to the same
punishment of imprisonment to 6 months or a fine up to Rs. 1,000 or both, and the person
so charging will be excused.
ANNUAL ACCOUNTS AND BALANCE SHEET
Sec. 210 requires that at every annual general meeting of the company, the BOard
of Directors must lay before the company a Balance Sheet and a Profit and Loss Account;
and in tha case of non-profit companies, an Income and Expenditure Account should be
submitted. The profit and loss account should relate, in the case of the first annual general
meeting, to the period beginning with the incorporation of the company and ending with
a day, the interval betwcerf which and the date of the meeting does not exceed 9 months.
In the case of subsequent annual general meeting, the profit and loss account should
relate to the period beginning with the day immediately after the period for which the
preceding profit and loss account was made, and ending with a day, the interval between
 COMPANY LAW 481

which and the date of the meeting does riot exceed 6 months : but where the Registrar
has granted extension of time for holding the meeting by more than 6 months and the
extension granted. The period to which the profit and loss account relates is known as
the "Financial Year''; and the period of the financial year must not exceed 15 months,
but with the special permission of the Registrar 18 months. If any director fails to take
all reasonable steps to comply with the above requirements, he is, in respect of each
offence, liable to imprisonment up to 6 months, or a fine up to Rs. 1.000, or both, unless
some other competent person can be held liable.
CONTENTS OF BALANCE SHEET (SEC. 211)
A balance sheet is astatement of the assets and liabilities of the company conveying
a full and truthful information as to the company's position. Every balance sheet and
every profit and loss account ofacompany must give a "true and fair" view of the affairs
of the company and the company's profit and loss respectively, at the end of the financial
year to which they relate. The form of the balance sheet and the details to be given in
the profit and loss account are set out in Schedule VI to the Act. The requirements of
this section will not apply to banking, insurance and electricity companies which are
governed by their respective Acts.
The Balance Sheet of holding company should have annexed to it the following
documents relating to its subsidiary : (i) a copy of the balance sheet of the subsidiary;
(ii) a copy of its profit and loss account; (iii) a copy of its directors' report; (iv) a copy
of its auditors' report; (v) a statement containing the following particulars; (a) extent of
holding company's interest in the subsidiary at the end of last financial year; (b) the net
aggregate amount of the profits and losses of the subsidiary, whether dealt with or not
in the holding company's accounts; (vi) a statement containing the following : (a) any
change in holding company's interest in the subsidiary; (h) any material changes since
last financial year; (vii) where the directors of the holding company are unable to obtain
the necessary information for the purpose aforesaid, then a statement to that effect (See.
212). The financial year of the subsidiary may end on the same day or not as of the
holding company, but it should not be earlier than 6 months from the day on which
holding company's year ends. The duration of financial year of both must be the same
(Sec. 213). A holding company may by resolution authonsc its representatives to inspect
the books of its subsidiaries (Sec. 214).
Except in the case of a banking company. the balance sheet and profit and loss
account of a company must be signed on-behalf of the Board by two directors and
countersigned by the manager, or secretary, if any. If the company has a managing
director, he should be one of the signing directors. The B/S and P and L NC must be
approved by the Board before they are submitted to the auditors who must in turn attach
their report thereto (Sees. 215, 216). There should be attached to the balance sheet a
report of the Board regarding the company's state of affairs, the amount proposed to be
carried to reserves, the amount recommended for dividend and also any change which
occurred during the financial year in regard to the nature of the business of the company
and its subsidiaries. The report should also explain all adverse remarks of the auditor
(Sec. 217).
By Sec. 219, not less than 21 days before the date of the meeting, a copy of the
B/S together with the P and L NC, auditor's and Board's reports, must be sent to (i)
every member of the company, (ii) every registered debenture-holder, (iii) every trustee
for debenture-holders, (iv) every person entitled to a share in consequence of the death
or insolvency of a member, (v) the auditors. Even a private company has to comply with
these provisions. By Sec. 220, three copies of the B/S and P and L NC must be filed
with the Registrar within 30 days after the annual general meeting. A private company
will file three copies of each separately. All officcrs of the company must make necessary
42 MERCANTILE LAW

disclosures and give all necessary information for the purposes of the annual accounts
to the company and its auditors. Banking and insurance companies should publish
half -yearly statements in the months of February and August.
The Amendment Act, 1974 requires every company, while appointing an auditor,
to obtain a certificate from the auditor to the effect that the appointment or re-appointment
will be in accordance with the following limits. The limits are that from the financial
year next following the commencement of the Amendment Act, no auditor shall be
appointed or re-appointed. if he is at the date of appointment or re-appointment an auditor
of 20 companies each of which has a paid-up share capital of less than Rs.25 lakhs, and
in any other case. 20 companies, out of which not more than 10 shall be companies each
of which has a paid-up share capital of Rs. 25 lakhs or more. Where a person or a firm
is an auditor of more than 20 companies, immediately before the commencement of the
Amendment Act, he shall, within 60 days from such commencement, intimate his or its
unwillingness to be re-appointed as the auditor front the financial year from such
commencement, to the company or companies of which he or it is not willing to be
re-appointed as the auditor. He or it will simultaneously intimate to the Registrar the
names of the companies of which he or it is unwilling to be re-appointed as the auditor
and forward a copy of the intimation to each of the companies referred to therein.
Where a firm is appointed as auditors, the ceiling of 20 will be per partner so that
firms may not get an advantage over the individual auditors. And where any partner of
a firm of
of auditors is also a partner in any other firm or firms of auditors, the overall ceiling
in relation to such partner will also be 20, so that he may not be able to get an extra
advantage by becoming a partner in more than one firm of auditors and thereby defeat
the purpose of the provisions of the Act.
The new Sec. 224A provides that in the case of a company in which not less than
25 per cent of the subscribed share capital is held, whether singly or in combination,
by—
(a) a public financial institution or a Government Company or Central Government
or any State Government, or
(b) any financial or other institution established by any Provincial or State Act in which
the State Government holds not less than 51 percent of the subscribed share capital.
or
(c) a nationalised bank or an insurance company carrying on general insurance
business,
the appointment or re-appointment at each annual general meeting of an auditor or
auditors shall be made by aspecial resolution. If no special resolution in appointing an
auditor is passed at an annual general mnecting, then the Central Government will appoint
a person as an auditor of the company.
AUDIT AND AUDITORS
Every company must, at each annual general meeting, appoint an auditor or
auditors to hold office from the conclusion of that meeting until the conclusion of tile
next annual general meeting and must, within 7 days of the appointment, give intimation
thereof to the auditor so apTx)intcd; and such auditor must, within 30 days of the
intimation of his appointment, inform the Registrar in writing that he has accepted the
appointment or refused it. A retiring auditor must be re-appointed unless he is dis-
qualified for appointment, as auditor, or he has expressed his unwillingness to be
appointed, or the company has passed a resolution against his re-apxiintment, or notice
has been given to the company for the appointment of another person as auditor and that
other person has become incapable of acting. If an auditor is not appointed or re-ap-
 COMPANY LAW 483

pointed at the annual general meeting, the company should notify the fact to the Central
Government within 7 days thereafter, and thereupon the Central Government may make
8
the appointment.
The first auditors must be appointed by de Board within one month of the
company's registration, and they shall hold office until the conclusion of the first annual
general meeting, unless removed by the company at an earlier general meeting. An
auditor (other than the first auditor) may be removed by the company in general meeting
with the previous approval of the Central Government (Sec. 224). For the appointment
as auditor of a person other than the retiring auditor, special notice of 14 days of the
intention to move a resolution at the annual general meeting should be given to the
company. On receipt of such notice, the company should immediately send a copy
thereof to the retiring auditor, who is entitled to make a written representation of
reasonable length, which the company should bring to the notice of the members,
otherwise the auditor is entitled to have his representation read out at the rncctinj. If the
auditor abuses this right so as to secure needless publicity for defamatory matter, the
Company Law Board may, on application, prohibit the circulation of the representation
(Sec. 225).
QUALIFICATIONS AND DISQUALIFICATION'S (SEC. 226)
Only a person qualified as an auditor can be appointed an auditor of any com-
pany—private or public. To be qualified a person must be a Chartered Accountant in
practice, that is to say, he must be a member of the Institute of Chartered Accountants
of India and must be in actual practice and must not be in full-time employment else-
where. A firm whereof all partners practising in India are Chartered AccounEants may
be appointed in its firm name and any partner may act in firm name. But the following
persons cannot be appointed as auditors of a company (i) a limited company. (ii) any
officer or employee of the company. (iii) a partner or employee of the foregoing. (iv) a
person who owes the company more than Rs. 1.000, (v) directors or members holding
more than 5 percent of the subscribed capital of the above corporate bodies. If an auditor
becomes disqualified in any of the atxve ways after his appointment as auditor, then he
shall be deemed to have vacated office.

POWERS AND DUTIES

Every auditor of a company is empowered to have free and complete access at all
times to the books, accounts and vouchers of the company wherever kept, and also
require from the officers of the company such information and explanation as may be
necessary for the performance of his duties as an auditor (Sec. 227(1)1. He is further
entitled to receive notice of and to attend the general meeting of the company and be
heard oil part of the business which concerns him as auditor (Sec. 231).
The auditor must make a report to the members of the company on the accounts
examined by him and also every B/S and P&L A/C. The report, besides other things
necessary in any particular case, must expressly state : (a) whether, in his opinion and
to the best of his information and according to the explanations given to him the accounts
give the information required by the Act and in the manner so required. (b) whether the
balance sheet gives a true and fair view of the company's affairs as at the end of the
financial year and the profit and loss account, of the P and L for its financial year. (c)
whether he has obtained all the information and explanations required by him for the
purposes of his audit., (d) whether, in his opinion, proper books of account as required
by law have been kept by the company, and proper returns for the purposes of his audit
have been received from the branches not visited by him. (e) whether the company's P/S

48. See Council of C.A. of India V. Jnanendra Nath, 1955 Assam 8.

 494 MFRC'ANTtU LAW

and P and L A/C dealt with by the report are in agreement with the hooks of account and
returns.
Sub-section (IA) to Sec. 227 now further requires an auditor to inquire:—
(a) whether loans and advances made by the company have been properly secured
and whether the terms of the loans are not prejudicial to the interests ofthd company
or its members;
(b) whether transactions of the curilpany which are represented merely by book entries
are not prejudicial to the interests of the company;
(c) where the company is not an investment or a banking company, whether so much
of the assets of the company as consist of shares, debentures and other securities
have been sold at a price less than that at which they were purchased by the
company;
(d) whether loans and advances made by the company have been shown as deposits;
(e) whether personal expenses have been charged to revenue account;
(I) where it is stated in the books and papers of the company that any shares have been
allotted for cash whether cash has actually been received in respect of such
allotment.
The Central Government may, by order, require the auditor to include in his report
statement on such matters as may be specified in the order.
Where any of the matters on which the auditor is required to report are answered
in the negative or with a qualification, the auditor's report must state the reason for the
answer (Sec. 227). The accounts of branch offices should ordinarily be audited by
qualified auditors, and where they are not so audited, the head office auditor will audit
thebooks of the branch (Sec. 22)). The auditor's report must be signed only by a qualified
auditor practising in India, and in case a firm is appointed an auditor only a practising
partner and not the firm (Sec. 229). The auditor's report must be read at the general
meeting and be open to inspection by any member of the company (Sec. 230).
A company auditor must be honest and must exercise reasonable skill and care,
otherwise he may be sued fordamages. He must be a good watchdog, be alert and careful
and ascertain the true position of the company's affairs by examining the books and by
making inquiry. While he must exercise reasonable care, he is not bound to be a detective
and approach his work with suspicion or with a foregone conclusion that there is
something wrong. He is a watchdog, but not a bloodhound. He must not, however,
confine himself merely to the task of arithmetical accuracy of the balance-sheet, but
should ascertain by comparison with the books of the company that it was properly drawn
so as to show the correct financial position. The auditor is personally liable for
neglecting wilfully to perform his duties imposed by law. Thus, default to comply with
requirements of Sec. 229 regarding his report, makes him liable to a fine up to Rs. 1.000.
and he must be sued by the company for damages.
SPECIAL AUDIT AT THE INSTANCE OF CENTRAL GOVERNMENT
(SEC. 233A)
Where the Central Government is of the opinion that the affairs of any company
are not being managed in accordance with sound business principles or prudent com-
mercial practices, or the company is being managed in a manner likely to cause serious
injury or damage to the interests of the trade, industry or business to which it pertains,
or the financial position of the company is such as to endanger its solvency, the Central
Government may at any time by order direct that a special audit of the company's
49. Registrant. St. Co.v. Fledge, 1954 Mad. 108ft, In re City Equitable Fire Ins. Co. (1925)2 Ch.
407;Controller of Insurance v. H.C. Das, 1957 Cal. 387.
 COMPANY LAW 45

accounts for such period or periods as may he specified in the order shall be conducted
by the Chartered Accountant specially appointed by the Government or by the
company's auditor. Such special auditor will report to the Central Government. and the
latter, on receipt of the report, shall take such action as is necessary. But if the
Government does not take any action on the report within 4 months from the date of its
receipt, it shall send to thecornpany a copy of the report with its comments for circulation
among the members of the company. The expenses of the special audit, as determined
by the Central Government. shall be paid by the company.
Cost Audit--Proper books of accounts, in the case of companies engaged in
production, processing, manufacturing or mining activities must include particulars
relating to utilisation of material apd labour and other items of cost, so that the auditor
may be able to conduct cost audit. The records are expected to enable the auditor to report
on the efficiency and character of management. The Central Government may, by order,
direct that a cost audit of any of the companies following the aforesaid activities be made
for obtaining a true and fair view of the state of affairs of the company. The cost auditor
should be a Cost Accountant within the meaning of the Cost and Works Accountants
Act, 1959. However, as long as, in the opinion of the Central Government, sufficient
number of qualified Cost Accountants are not available, that Government may direct
that for a specified period aChartered Accountant possessing the prescribed qualification
may also conduct cost audit.
The auditor under this section will be appointed by the Board of directors of the
company with the previous approval of the Central Government. The auditor of the
company cannot be appointed its cost auditor, nor a person who is disqualified to be an
auditor. Further, if the cost auditor, after his appointment as such, suffers from any of
disqualifications, he must cease to act as cost accountant.
The company must give all facilities and assistance to the cost auditor who will
have all the powers of an auditor. The cost auditor will make his report to the Central
Government and forward at the same time a copy of the report to the company. The
Central Government may call for further information or explanations, and take whatever
action it considers appropriate, after considering the report and explanations. The
Government may direct the company to circulate the report to its members along with
the notice of the annual general meeting to he held after the submission of the report.
Default is made punishable with fine up to Rs. 5,000, and in case of every officer in
default with imprisonment up to 3 years, or fine up to Rs.5,000 or with both.
Registrar may require intormation (Sec. 234). Where, on perusing any docu-
ment filed with him, the Registrar is of opinion that any information or explanation is
necessary, he may ask the company to supply in writing such information or explanation
within a specified time. On receipt of this order, the company and every officer of the
company, past or present, must furnish such information or explanation. If no informna-
(ion is supplied or it is inadequate the Registrar may by another order call on the company
to produce before him such books as he considers necessary. Default renders the
company and each officer at fault liable to line up to Rs. 500 for each offence and for
continuing default Rs. 50 per day during default; and the Court [nay, on the application
of the Registrar, order the company to comply with the orders of the Registrar.
Furthermore, if the information or explanation is not furnished within the specified time,
or the document submitted discloses an unsatisfactory state of affairs, or does not disclose
full and fair statement of the matter, the Registrar must report to the Central Government.
If it is represented to the Registrar that the business of the company is being carried on
for fraudu lent or unlawful purposes, he may, after hearing the company, order it to furnish
similar information and explanation.
 MERCANTILE LAW

The new Sec. 234A provides that where, upon information in his possession or
otherwise, the Registrar has reasonable ground to believe that books and papers of, or
relating to, any company or other body corporate, or any managing director or manager
of such company or other body corporate, may be destroyed, mutilated, altered, falsified
or secreted, the Registrar may apply to the Magistrate of the First Class or Presidency
Magistrate having jurisdiction for an order for the seizure of such books and papers. The
Magistrate may, by order, authorise the Registrar to enter the place or places where the
books and papers are kept, search the places and seize such books and papers as he
considers necessary. The Registrar may take copies and then within 30 days of the seizure
return the books and papers to the persons from whose custody he took them and inform
the Magistrate accordingly. The search will be made under the Criminal Procedure Code.

INVESTIGATION
Section 235 has been recast by the 1988 Amendment Act, and now provides that
the Central Government may appoint one or more competent persons as inspectors to
investigate the affairs of a company on the report of the Registrar that the company has
failed to supply him information or explanation under Section 234.
Again, where an application has been made by not less han 200 members or by
members holding not less than one-tenth of the total voting power in the case of a
company having a share capital, and from one-fifth of the total number of members, in
the case of a company having no share capital, the Company Law Board may, after
hearing the parties, declare that the affairs of the company ought to be investigated and
on such declaration being made, the Central Government must appoint one or more
inspectors who will report to the Central Government.
As per Section 237, the Central Government must appoint an inspector or inspec-
tors, if the company by special resolution, or the Court by order, declare that the affairs
of the company need to be investigated. Furthermore, It may do so, it in the opinion of
the Company Law Board the business of the company is being conducted with intent to
defraud its creditors. members or other persons. or otherwise for a fraudulent or unlawful
purpose, or the members of the company have not been given all the information with
respect to its affairs. -
An inspector investigating the affairs of the company may, with the previous
approval of the Central Government, inspect also the affairs of other connected com-
panies (Sec. 239). The inspector may examine on oath past or pre';ent officers and other
employees and agents (including bankers, legal advisers and auditors), and where the
company is or was managed by managing agent or secretaries and treasurers, require
them to produce all books and documents in their custody and also to preserve them.
The inspector has to report to the Central Government who must supply a copy of the
report to the company, and any other body corporate. managing agent, secretaries and
treasurers, and their associates, applicants for investigation, the Court, where Court
ordered the appointment. Copies may also be supplied to members or creditors of the
company. If it seems desirable from the report. the Central Government may petition the
Court for the winding up of the company or for an order under Sec. 397 for relief in case
of oppression, or under Sec. 398 for relief in case of m i smanagement. or may sue persons
in the name of the company or other body corporate for the recovery of damages or
property or prosecute persons criminally liable.
One of the methods adopted to delay investigation into the affairs of a company
was that air application for relief against oppression and mismanagement was ndiirg
before the Court or that the company had passed a special resolution for its voluntary
winding up. The new Sec. 250A provides that an investigation under Secs. 235, 237,
239, 247, 248 or 249 may be initiated notwithstanding the pendency of such application
 COMPANY LAW 487

in the Court or the passing of the special resolution for voluntary winding , up of the
COrflpally.
INVESTIGATION OF OWNERSIIII'OF COMPANY
The Central Government may appoint inspectors to investigate and report on the
membership of any company for the purpose of determining who are the persons
financially interested in its success or failure or able to control its policy. It must appoint
inspectors where the Company Law Board during any proceeding orders such appoint-
ment. The inspector may also investigate whether there are any secret arrangements or
understandings observed in practice. If the company has or had a managing agent, the
powers of the inspector extend to the ownership and control of the managing agency
company. He may also investigate (with the prior approval of the Central Government)
the ownership of other connected companies. The inspector should submit his report to
the Central Government who is under no obligation to supply copies thereof to any one.
Also, instead of appointing inspectors to investigate the ownership of shares or deben-
tures, or the associateship with managing agent or secretaries and treasurers, the Central
Government may require an interested party to give information. Whenever any inves-
tigation is in progress, the Central Government may impose the following restrictions
on any shares : (i) that no voting rights should be exercised in respect of those shares;
(ii) that no payment in respect of those shares by way of dividend, capital or otherwise
should be made; (iii) that there shall he no issue of similar shares; (iv) that no transfer
of such shares will be made. Similar restrictions can be imposed on debentures.
Contravention is punishable with imprisonment up to 6 months.

PART 16-I
MANAGEMENT OFA COMPANY

The registration of a company under the Companies Act brings into being a legal
entity, capable of carrying on business and of owning and disposing of property. Yet
such an impersonal creation of law must act through some human intermediary who, in
practice, takes the form of the Company Directors. For its efficient management, it Is
essential that the persons who discharge the various managerial and other functions
should be competent, honest, and legally qualified to act. The Act lays down certain
gejcrai rules for preventing the management of a company by undesirable persons.
Therefore, Sec. 202 prohibits an undischarged insolvent from acting as a director, or
manager of a company, or taking part in the promotion or formation or management of
any company on pain of imprisonment tip to 2 years Sec. 203 empowers the Court to
make an order prohibiting a person (i) who is convicted of all in connection with
the promotion or management of a company, (ii) who, in the course of winding up, has
been found guilty of fraud, misfeasance or breach of duty, from acting in any of the
aforesaid capacities for a period of 5 years. A company must not appoint a firm or a
company to or in any office of profit under it. (other than as technician or consultant)
for more than 5 years at a time, but the Central Government may allow the initial
employment for ten years. No company shall appoint or employ at the same time, or
continue the appointment or employment at the same time, of more than one of the
following categories of managerial personnel, namely:—
(a) Managing Director,
(h) Manager
498 MERCANTTLE LAW

1)1 R ICT OR S

Meaning or Director—A company is an artificial legal person without intel-

ligence and will and having no physical existence. It can, therefore, act effectively only
tugh the agency of natural persons—men or women. The supreme executive authority
in the control of a company and its affairs resides by delegation in individuals known as
directors who are collectively designated the Buaid of Directors. Sec. 2(13) reads:
"director includes any person occupying the position of director, by whatever name
called" and explanation (1) to Sec. 303 says: "any person in accordance with whose
direction and instructions the Board of Directors of a company is accustomed to act shall
be deemed to be a director of the company. A director may, therefore, be described as
an individual who guides, directs, conducts, governs, manages or superintends the policy
and affairs of a company by whatever name called.
Number or directors—The articles of a company genes any prescribe the number
of directors that may be appointed, but a pubuc company must have at least three
directors, and a private company including a private company which is regarded as a
public company under Sec. 43A, must have at least two directors (Sec. 252). Only an
individual—a man or a woman—can be a director (Sec. 253).
Appointment—The director of a company may be appointed in any of the
following ways:—
(a) By articles of association as first directors;
(b) By the company in general meeting:
(c) By the Board of directors as an additional director, or to fill a casual vacancy or
as an alternative director,
(d) By debenture-holders or other creditors or by workers, if articles give power so to
appoint;
(e) By the Central Government;
(f) By the rule of proportional representation.
(a) First directors—The first directors are usually named in the articles, but such
an appointment will be valid only if each one of the proposed directors, before the
registration of the articles or the publication of the prospectus. has (i) signed the
memorandum for his qualification shares, or taken such shares and paid or agreed to pay
for them, or signed and filed with the Registrar an undertaking to take such shares, and
pay for them, or made and filed an affidavit that shares to qualify him are registered in
his name. These conditions do not apply to private company (Sec. 266).
lithe articles are not registered (because Table A has been adopted) or if the
directors are not named in the articles, the subscribers to the Memorandum may appoint
directors after the company has been registered. If the subscribers do not appoint any
directors, then the subscriber s to the memorandum, who are individuals, are deemed to
be the directors, ur.iI the first directors are duly appointed by the members in a general
meeting (Sec. 254).
(h) Appointment by the Company—See. 255 provides that not less than two-
thirds of the total numberof directors of a public company or of a private company which
is a subsidiary of a public company must be appointed by the company in general
meeting. These two-thirds of the total number of directors, unless the articles provide
for the retirement of all the directors at every annual general meeting, must be subject
to retirement by rotation, and at the first annual general meeting, the number nearest to
one-third must retire from office, the rotation for retirement being determined by the
length of office of directors, or in case all were appointed on the same date, by lots. At
 COMPANY LAW 459

every subsequent meeting one-third must retire. The retiring directors are eligible for
election to fill up the vacancies thus created. If the place of the retiring directors is not
filled up, the meeting shall stand adjcurncd till the same day in the next week. If at the
adjourned meeting also, the place of the retiring directors is not filled, the retiring
directors shall be deemed to have been re-appointed. The general meeting may, however,
resolve not to fill the vacancies (Sec. 256).
A person, other than a retiring director, who wishes to stand for directorship, or
any other person who intends to propose him, must give to the company a notice in
writing at least 14 days before the meeting, and the company shall then inform the
members not later than 7 days before the meeting about the candidature of the person
for the office of directorship (Sec. 257) Appointment of directors of a public company
or its subsidiary must he voted on individually by separate ordinary resolution.
(c) Appointment by Board of Directors—By virtue of Sec. 260, the Board of
directors may, if so authorised by the articles, appoint additional directors who will hold
office only up to the next annual general meeting of the company. The number of
directors and additional directors together must not exceed the maximum strength for
the Board by the articles.
Sec. 262 permits the Board to fill acasual vacancy in the office of directorship. It
says that in the case of a public company or a subsidiary of a public company, if the
office of any director appointed by the company in general meeting is vacatedhcfore his
term of office will expire in the normal course, the resulting casual vacancy may, subject
to any regulations in the articles of the company, be filled by the Board of Directors at
a meeting of the Board. A person so appointed shall hold office only up to the date up
to which the director in whose place is appointed would have held office.
Sec. 313 permits the Board of directors to appoint, if the articles or a resolution
passed by the company in general meeting authorise, an alternate director in place of
"the original director" who may have to he absent from the State for a period longer
than 3 months. The alternate director will not hold office for a period longer than that
permissible to the original director, and shall vacate office if and when the original
director returns to the State in which meetings of the Board are held.
(d) Appointment by debenture-holders, etc.—The articles may under certain
circumstances give power to debenture-holders or other creditors to appoint their
nominee or nominees to the Board. The debentures or the trust deed may also provide
that debenture-holders may nominate a director to the Board of the company. The articles
may also provide for the election of a representative of the employees on the Board of
directors. The directors so appointed should not exceed one-third of the total strength of
the Board.
(e) Appointment by Central Government—The Central Government may
appoint such number of directors as the Company Law Board may, by order in writing,
specify as being necessary to effectively safeguard the interests of the company, or its
shareholders or the public interest for a period not exceeding 3 years on anyone occasion,
if the Company Law Board on reference made to it by the Central Government or on an
application of not less than 100 members of the company or of the members holding not
less than one-tenth of the total voting power is satisfied after such inquiry as it deems fit
to make, that it is necessary to make the appointment in order to prevent the affairs of
the company being conducted either in a manner, which is oppressive to any members
of the company or in a manner which is prejudicial to the interests of the company or
the public interest.
(f) Appointment by proportional representation—The arlicles of a company
may provide for the appointment of not less than two-thirds of the total number of
directors of a public company or of a private company whithis a subsidiary of a public
company according to the principle of proportional representation, either by the single
490 MERCANTILE LAW

transferable vote or by a system of cumulative voting or otherwise. The appointments

are to be made once in every three years.
Increase in the number ofdireclors—Scc. 258 allows a company to inc-rease or
decrease the number of its directors, by an ordinary resolution passed in general meeting.
so long as the total number remains within the maximum and minimum limits fixed by
the articles and the Act. A public company or its subsidiary can increase the number of
its directors beyond the maximum so fixed only with the approval of the Central
Government, although no such approval is now necessary if the increase in the number
will not make the total number of directors more than twelve.
NUMBER OF DIRECTORSHIPS
A person cannot hold office at the same time as a director in more than 20
companies (excluding private companies which are not subsidiaries). If a person who is
already a director of 20 companies, is appointed a director in any other company or
companies, the appointment will not be effective unless within 15 days therealtei the
director has vacated his office in some other company or companies so as to keep the
number within the maximum allowed (Sec. 227). Any person who holds office, or acts,
as a director of more than 20 public companies is liable to be fined up to Rs. 5,000 in
respect of each of those companies alter the first twenty (Sec. 279).
SHARE QUALIFICATIONS
The articles usually provide for a cerLiin sliuc qualification furelection asdirector.
Where a qualification is required by the articles, then the Act provides that (i) it must be
disclosed in the prospectus; (ii) each director must take his qualification shares within 2
months after his aplxuntment; (iii) the nominal value of the qualification shares must not
exceeds Rs. 5,(X)) or the nominal value of one share where it exceeds Rs. 5.(X)O; (iv)
share warrants payable to bearer will not count for purposes of qualification shares (Sec.
270). If a director fails to qualify within 2 months, he vacates office, and if he ads as
director after the expiry of the 2 months without taking the qualification shares, he is
liable to a fine up to Rs. 50 for every day until he stops acting (Sec. 272). But the company
will he bound to third parties for the ac.s of such directors until the defect in appointment
or qualification is disclosed, although acts done after the disclosure will not hind the
company . Thus, a de facto director is as good as a de jure director so far as persons
having no notice of the defect are concerned (Sec. 29(1). But a dcfaelt director cannot
claim remuneration.
DISQUALIFICATIONS
By virtue of Sec. 274, the following persons cannot be appointed as directors : (1)
a person found by Court to be of unsound mind; (2) an undischarged insolvent; (3) a
person who has applied to be adjudged an insolvent; (4) a person who has been convicted
of an offence involving moral turpitude and sentenced to 6 months' imprisonment, and
a period of years has not passed from the date of the expiry of the sentence: (5) a person
who has failed to pay calls for 6 months: (6) a person who has been disqualified by Court
under Sec. 203. A private company may, by its articles, provide additional disqualifica-
tions.
VACATION OF OFFICE
By Sec. 283, the office of a director shall become vacant, if (a) he fails to qualify
within 2 months of his appointment, or ceases to hold the qualification shares; (h) he is
found by the Court to be of unsound mind; (c) he applies to be ad j udged insolvent; (d)
he is adjudged an insolvent; (e) he is convicted by Court of any offence involving moral
turpitude and is sentenced to imprisonment for 6 months or more; (1) he fails to pay nay
 CO.1PANY LAW 49

call within 6 months from the last date used for the payment, un less the Central
Government by notification in the Official Gazelle has removed the disqualification; (g)
he absents himself from three consecutive meetings of the Hoard of Directors, or from
all meetings of the Board for continuous period of 3 months whichever is longer, without
leave of absence from the Board: (Ii) he receives a loan from the company; (i) he fails
to disclose to the Board his interest in any contract or arrangement of the company; (j)
he is debarred by a Court from being a director: (k) he is removed from directorship by
an ordinary resolution passed by members in general meeting after special notice; (I) if
he became director by virtue of an office or as managing agent's nominee, o coming
to an end of the office or the managing agency. In the case of (d), (c) and (j), th.''acalion
of office will take effect after 30 days from the ad j udication, sentence or order, or if any
appeal is filed, then after 7 days from the date of disposal of the appeal. A private
company m.y provide additional grounds in its articles for vacation of office. If person
functions as a director after the office has become vacant, he is liable to be lined UI) to
Rs. 500 per day during the period he so functions.
REMOVAL AND RESIGNATION
A company may. by ordinary resolution after special notice, remove a director
other than a director appointed by the Central Government (Sec. 40). or a directo: of
a private company holding office for life oil 1, 1952. or in case of proportional
representation. A removed director may claim compensation for loss of office, or may
continue to hold the additional office. On the removal of a director another person may
be appointed in the same way to hold office for the balance of the period (Sec. 284).
A director may resign his office in the manner provided by the articles, but if the
articles contain no provision, he may resign at any time by giving reasonable notice, no
matterwhcthercompany accepts it or not. Once :i director has resigned by apropermotice,
0
he canrH)t withdraw his resignation even where the company has not accepted it:
Remuneration—Directors are not entitled to any remuneration apart from express
Si
provision in the articles, or a resolution of the company in general meeting. .Sec. 309,
recognising this principle, provides that subject to the general provisions of Sec. 198
dealing with the overall managerial remuneration, the remuneration of directors may be
determined by the articles or by a resolution of the company, or if the articles so require,
by special resolution, and the remuneration payable to such director shall be inclusive
of the remuneration payable to him for services rendered by him in any other capacity.
He can, however, be paid extra for services rendered which are of professional nature,
and in the opinion of the Central Government, the director possesses the requisite
qualifications for the practice of the profession. A director may receive remuneration by
way of a fee for each meeting of the Board, or a Committee of the Board attended by
him. The redrafted Sub-Sec. (4) of Sec. 309 provides that a director who is neither in the
whole-time employment of the company not a managing director may be paid remnunera-
tion (i) by way of monthly, quarterly or annu-ul payment with the approval of the Central
Government: or (ii) by way of commission if the company by special reiolution
authorises such payment: provided in either case, the remuneration paid to such director,
or where there are more than one such director, to all of them together shall not exceed
one per cent of the net profits of the company, if the compan y has a managing director,
a whole-time director or manager, and three per cent of the net profits of the company
in any other case. Higher remuneration may, however, be paid, if the company in general
meeting, with the approval of the Central (',ns'emrnent. so authorises. Sec. 310 has been
amended to do away with the approval of the Central Government, if the increase mit the

50. ('lossop v. Gloss (1907). 2 Ch. 370.

St - in r George Newman & Co. (1895)1 Ch. 674.
492 MERCAN11I.E LAW

remuneration is only byway of fee for each meeting of the Board or a Committee thereof
attended by any such director and the amount of the fee after such increase does not
exceed the prescribed rates.
A managing director or a whole-time director may be paid remuneration either by
way of a monthly payment or at a specified percentage of the net profits of the Company
or partly by one way and partly by the other: provided that except with the approval of
the Central Government such remuneration shall not exceed S per cent of the net prolitc
from one such director, and if there are more than one such director 10 per cent for all
of them together. A whole-time director, or a managing director, who is in receipt of any
commission from the company, shall not be entitled to receive any commission or other
remuneration from any subsidiary of such company. The provisions of Sec. 309 do not
apply to a private company.
Board Meetings—Directors must ordinarily act at a Board meeting, unless special
fX)WCS are delegated to a director or a Committee of the Board. In the case of every
company, a meeting of its Board of directors must be held at least once in every three
months and at least four such meetings .sIujll be held in every year. The Central
Government may, however, by notification exempt any class of companies (Sec. 285).
A written notice of every Board meeting must be given to all directors (Sec. 286). The
quorum for a Board meeting must be one-third of its total strength or two directors,
whichever is higher. Any interested director will not count for quorum and in be left
out of account at the time of discussion or vote o n any matter in which he is interested;
and tithe number of the interested directors exceeds or is equal to two-thirds of the total
strength, the balance of the directors present (not being less than two) will be the quorum
(Sec. 287). By the amended Sec. 292, the following powers must be exercised by the
Board by resolutions passed at Board meetings: (a) the power to make calls; (h) the power
to issue debentures: (c) the power to borrow moneys otherwise than oil (d)
the power to invest the funds of the company and (e) the power to make loans. The Board
nay, however, by resolution passed at a fleeting, delegate to any committee of directors,
the managing director, the manager or any other principal officer of the company the
powers specified in clauses (c), (d) and (e) on such conditions as the Board prescribe.
The Board should specify the total amount lip to which the delegate may borrow money
under (e), invest funds under (d) and make loans and the purposes of the loan tinder (e).
The company may in general meeting iinlx>se restrictions on the Board's powers.
Receiving of deposits by a banking company in the ordinary course of its business will
not be deemed borrowing, nor will any money borrowed from another banking company
or the Reserve Bank or the State Bank of India he regarded borrowing.
RESTRICTIONS ON BOARD'S POWERS
lii the case of a public company and its sub.idiary, the Board cannot do any of the
following without the consent of the company in general meeting: (a) sell, lease or
otherwise dispose of company's undertaking; (h) remit. or give time for the repayment
of any debt due by a director, except in the case of renewal or continuance of an advance
made by a banking company to its director in the ordinary course of business; (c) invest
otherwise than in trust securities the amount of compensation received by the company
in respect of the compulsory acquisition, after the commencement of this Act; (d) borrow
in excess of the aggregate paid-up capital plus free reserves (temporary loans front the
company's hankers in the ordinary course of the business of the company being left out
Of account for this purpose); (e) contribute to charitable and other funds not relating to
the business of the company amounts exceeding Rs. 25.X or 5 per cent of : is average
net profits in the course of any financial year. If the company wants to borrow in excess
of (d), it shall, by resolution in general meeting, fix the amount up to which the Board
may borrow, and also fix the amount if it wishes to contribute ' more than Rs. 25.000
 COYIPANY LAW 493

under (e). The expression "temporary loans " in (d) means loans repayable on demand
or within six months from date of the loan. If the Board acts in contravention of the
above, the third parties acting in good faith are protected (Sec. 293).
POLITICAL CONTRIBUTIONS
The Companies (Amendment) Act. 1985 has substituted Sec. 293A with a new
section. The new Sec. 293A permits non-Government Companies which are in existence
for not less than 3 financial years, to make contributions, directly or indirectly, in any
financial year, to any political party, or for political purpose to any person, any amount
or amounts not exceeding 5 per cent of their average net profits of 3 immediately
preceding financial years. Expenses incurred on advertisements in souvenirs will also
be included in the total quantum of 5 per cent of net profits. Every company must disclose
in its profit and loss account any amount or amounts contributed by it to any political
party or for political purpose and also the name of the party or person to which or to
whom such amount has been contributed. If a company makes any contribution in
contravention of this provision, it is liable to be fined up to three times the amount so
contributed. Also every officer in default is liable to be imprisoned for a term up to 3
years and be fined.
By virtue of Sec. 293 B, the Board of directors of a company may contribute any
amount to National Defence Fund or any other Fund approved by the Central Govern-
ment for the purpose of National Defence.
APPOINTMENT OF SOLE SELLING AGENTS
No company must appoint a sole selling agent for any area for a term exceeding
5 years at a time, the renewals for 5 years at a time being permitted. Any appointment
of a sole selling agent made by the Hoard shall cease to be valid from the date of the
meeting, if it is not approved by the company in the first general meeting held after the
appointment.
Where a company has a sole selling agent, the Central Government may require
the company to furnish to it such information regarding the terms and conditions of the
appointment for the purpose of determining whether or not such terms and conditions
are prejudicial to the interests of the company. If the company refuses or neglects to
furnish any such information, the Central Government may appoint a suitable person to
investigate and report. If the said Government, after the perusal of the information
supplied by the company or of the report by the investigator, is of the opinion that, the
terms and conditions are prejudicial to the interests of the company, it may, by order,
vary them and then the terms and conditions of appointment of the sole agent shall be
regulated by such order. P there are more selling agents than one, the Central Govern-
ment will, after following the above procedure, determine who will be the sole selling
agent for any particular area and on what terms.
The new Sec. 294AA provides that where the Central Government is of opinion
that the demand for the goods of any category is substantially in excess of the
production or supply of such goods and that the services of sole selling agents will not
be necessary to create a market for such goods, it may, by notification in the Official
Gazette, prohibit the appointment of sole selling agents for specified period of time.
Further, no individual, firm or body corporate having substantial interest in the company
(i.e. holds shares paid-up value of which is Rs. 5 lakhs or 5 per cent) is 10 be appointed
sole selling agent without the previous approval of the Central Government. Again, no
company having a paid-up share capital of Rs. 50 lakhs or more shall appoint a sole
selling agent except with the consent of the company accorded by a special resolution
and the approval of the Central Government. Where a company has a sole selling agent
494 MERCANTILE LAW

at the date of the commencement of the Amendment Act, it must obtain consent and
approval as above within 6 months from such commencement, otherwise the appoint-
ment will stand terminated on the expiry of the 6 months.
COMPENSATION FOR LOSS OF OFFICE OF SOLE SELLING AGENT
A company shall not pay or be liable to pay to its sole selling agent any
compensation for the loss of his office in the following cases:—
(a) where the appointment of the sole selling agent ceases to be valid because the
company in general meeting has not approved it;
(b) where he resigns his office in view of the reconstruction of the company or its
amalgamation with other body or bodies corporate and is appointed as the sole
selling agent of the reconstructed or amalgamated company;
(c) where he resigns his office of his own accord;
(d) where he has been guilty of fraud or breach of trust in relation to, or of gross
negligence in, the conduct of his duty, as the sole selling agent;
(e) where he has instigated, or has taken part directly or indirectly in bringing about.
the termination of the sole selling agency.
Where the compensation is payable, it must not exceed the remuneration which
he would have earned if he had been in office for the residue of his term, or for 3 years,
whichever is shorter (Sec. 294A).
LOANS TO DIRECTORS
Sec. 295 provides that without obtaining previous approval of the Central Govern-
ment, a public company or its subsidiary cannot, directly or indirectly, lend money or
guarantee or secure loans to:—
(a) a director of the company or of its holding company;
(h) a partner or relative of any such director;
(c) any firm in which any such director or relative is a partner;
(d) any private company 25 per cent or more of whose total voting power may be
exercised or controlled by any such director, or two or more directors together;
(e) any body corporate, the Board or managing director, or manager whereof is
accustomed to act in accordance with the directions or instructions of any director
or directors of the lending company.
The above restrictions do not apply to loans by a private company; or by a banking
company; or by a holding company to its subsidiary.
DISCLOSURE OF DIRECTOR'S INTEREST
Except with the consent of the Board given in advance by a resolution at a Board
meeting, a director of a company, or his relative, or a firm in which such director or a
relative is partner, or any pat! r of such a firm, or a private company in which such
director is a member or a director, should not enter into any contract with the company
for the sale, purchase, or supply of any goods, materials, or services, or for underwriting
the company's shares or debentures. Such contracts up to Rs. 5,000 in the aggregate in
any calendar year are, however, permitted if they are part of the regular trade or business
of such director, etc., or the company (Sec. 297). Where a company has a paid-up share
capital of one crore rupees, approval of the Central Gover. .nent is also necessary. A
director of a company who is in any way concerned or interested in a contract or
arrangement by or on behalf of the company must disclose such interest or concern at
the Board meeting at which the contract is disclosed or at the first Board meeting after
 COMPANY LAW 495

the director's becoming interested. A general declaration that he is a member of a

particular firm or company will be deemed to be sufficient disclosure (Sec. 299). An
interested director must not participate in the discussions or Vote on the particular
contract. If he does vote, his vote will not count, nor will his presence count for quorum.
These restrictions do not apply in the case of a private company (Sec. 3(X)). A register
must be kept in which shall be entered particulars of all contracts to which Sec. 297 or
299 applies. The members must be informed of the director's interest in any contract
appointing manager, or managing director.
REGISTER OF DIRECTORS, ETC.
Every company must keep at iis rcgisicied office a Register of Directors, Manag-
ing Director, Manager and Secretary, and must file a copy within 30 days of the
appointment of the first directors and must notify the Registrar of any subsequent changes
within 30 days of the happening thereof. The particulars in case of each of the above that
the register must contain are (a) in case of individuals, his name, usual residential
address, nationality, business occupation, and details of any directorship, managership,
etc.: (h) in case of corporation, its corporate name, registered office, and full name,
address and nationality of its directors; (c) in case of firm, full name, address and
nationality of each partner and the date of becoming partner; (d) if any directors have
been nominated by a corporation, its corporate name and particulars in (a) and (b); (e)
if any firm has nominated directors, their similar particulars as in (a) and (c) (Sec. 303).
In addition to the above register. a separate register called the "Register or
Director's Shareholdings," showing in regard to each director the number, description
and amount of the shares or debentures in the company or its subsidiaries or its holding
company or a subsidiary of a holding company, held by or in trust for each director or
of which each director has the right to become the holder. The register must also show
the date of each share or debenture transaction and the consideration thereof when the
transaction is entered into after the commencement of the Act. The register must be open
to inspection of members and debenture -holders immediately before the annual general
meeting and at the meeting (Sec. 307). No director can now assign his office, if it is done,
it will be void. These provisions apply to managers as they apply to directors.
DIRECTOR AND OFFICE OF PROFIT
Section 413 provides that no director shall hold an office of profit without the
consent of the company accorded by a special resolution.
As regards a partner or relative of a director of a company, or a firm in which such
director or relative of such director is a partner, or a private company of which such
director is a director or member, or a director or, manager of such a private company,
sub-sec. (I B) as read with Notification 3, provides that if an office of profit is held by
any one of them as follews:-
(a) No approval by special resolution is required if the monthly remuneration of the
relative, etc. is below Rs. 3,000;
(b) A special resolution is required if the monthly remuneration ranges between
Rs. 3,000 and Rs. 5,000;
(c) Central Government's approval in addition to special resolution is necessary if the
monthly remuneration is to be Rs. 6,000 or more.
But the office of managing director, manager, hanker, or trustee for debenture
holders is exempt from the above restrictions; and they can hold office of profit.
COMPENSATION FOR LOSS OF OFFICE
No compensation for loss of office may be paid by a company to any director other
than the managing or whole time directors, or directors who are managers. Even in the
496 MERCANTILE LAW

case of managing or whole-time director, or manager-director, no such payment will be

made; (I) where the director resigns his office on reconstruction or amalgamation of the
company, or for some other reason; (ii) where office has to be vacated (being fraudulent
person); (iii) he has to give up directorship beyond 20; (iv)the winding up of the company
is due to his negligence or mismanagement; (v) the termination of his office is brought
about collusively. Where the compensation is payable, it must not exceed the remunera-
tion which would have been earned for the unexpired residue of the term or 3 years
whichever is shorter (Sec. 318). In case of uansfcr of undertaking of a company, a
director cannot receive compensation for loss of office, but the transferee company may
pay.
LEGAL POSITION OF DIRECTORS
Directors have been described by judges as 'agents,' trustees' or 'nanagi
partners.' The best description seems to be the one given by Jessel, M-R., who says:
they are commercial men managing a trading concern for the benefit of themselves
and of all the shareholders in it. They stand in a fiduciary position towards the cornpan
in respect of their powers and capital under their control." Lord Selborne, L,C., said:
"The directors are the mere trustees or agents of the company—trustees of the
company's money and property: agents in the transactions which they enter into on
behalf of the company."
AS AGENTS
Directors are correctly described as agents of the company, and the ordinary rules
of agency apply. The company being a legal person, the directors as agents act on its
behalf. They are agents for the company with powers and duties of carrying on the,
business subject to restrictions imposed by the articles and the Act. They make contracts
on behalf of the company and are not personally liable, unless they contract in their own
name, or fail to exclude personal liability. If they make contracts ultra vires the company,
they will not be liable on them unless there is an implied breacH of warranty of authority.
If the act done is only ultra ejres the directors, then a contract made (i) with a member
is voidable, (ii) with an outsider, who had no notice of the want of authority, is binding
on the company. In either case, however, it may be made valid by the acquiescence of
ALL shareholders.
AS TRUSTEES
Directors are not trustees in the full sense of the term inasmuch as no property is
vested in them in their capacity as directors. Trustees are persons in whom is vested the
legal ownership of assets which they administer for the benefit of others, who are said
to have beneficial or equitable interest in those assets, and who can enforce their interests
by suing the trustees. Directors are not vested with the ownership of the company's
assets: the company owns its own property. Not are the directors trustees for the
individual shareholders. Nevertheless, they are in certainrespects in the position of
trustees for the company. In the first place, as Lindley, L.J., observed: 54 "Although
directors are not properly speaking trustees, yet they have been considered and treated
as trustees of money which comes to their hands or which is actually under their coitrol;
and ever since joint-stock companies were invented directors have been held liable to
make good moneys which they have misapplied, upon the same footing as if they were
trustees." In the second place, directors are in the position of trustees for their company
as regards the exercise of all powers which they are authorised to exercise on the
52. Re Forest of Dean ('oat Co. (1878) 10 Ch. D. 450.
53. G.P.R.L.Y. Co. v. Turner (1872) LR. ItCh. App. 149.
54. Re Lands Allotment Co. (1894). 1 Ch. 616.
 COMPANY LAW 497

company's behalf 55 For example, they are trustees of their powers of allotting shares,
making calls, accepting payment of calls in advance, passing or rejecting transfer of
shares and forfeiting shares or accepting their surrender. Thirdly, a director's position
partakes of the fiduciary character of trusteeship so that he is precluded from allowing
the interests of the company to clash with his own interests.
DUTIES
The duties of directors are usually regulated by the company's articles, and are
likely to depend Ufl the size and nature of the business of a company. Romer. J.,
56
observes: "In discharging his duties a director njust act honestly, and must exercise
such degrees of skill and diligence as would amount to the reasonable care which an
ordinary man might be expected to take in the circumstances on his own behalf." In
other words, directors should use fair and reasonable diligence in the management of
their company's affairs, and to act honestly, but as long as they fulfil these conditions,
they "are not liable for want of error of judgment." A director is not bound (apart from
special agreement, e.g.. whole-time director) to give continuous attention to the affairs
of the company. His duties are of an intermittent nature to be performed at periodical
Board meetings. He may entrust, having to the exigencies of business, to some trusted
official. But a director cannot assign his office.
LIABILITIES
The various liabilities of adirectur may be considered under the following heads:—
As shareholder—The liability of directors for payment of share money is
ordinarily limited in the same way as that of the other shareholder of the company. But
the memorandum of a company may make the Liability of any or all the directors
unlimited as provided by Secs. 322 and 323. A notice that his liability will be unlimited
must be given to the director before he accepts that office.
Breach or fiduciary duty—By Sec. 71(2), any director who knowingly con-
travenes or permits the contravention of the statutory restrictions with respect to
allbtment, remains for two years after the allotment under a statutory liability to
compensate the company for any loss or damage or costs incurred. Apart from statutory
liability, directors as trustees are liable for breach of their fiduciary duty to the Company.
The failure of directors to act within powers (ultra vires acts) will çe7nder them liable,
and they shall have to indemnify the company for any loss or damage: Apart from ultra
i'ires acts, directors may incur liability to their company as for breach of trust or
misfeasance, if they act ma/a fide, i.e., otherwise than honestly for the benefit of the
company. It is on this ground that directors maybe required to account for and surrender
secret profits to thc:r company. Again, quite apart from na1afides, directors may be
liable to the company for negligence in the exercise of their powers, if they do not act
with such care as is reasonably expected from them, i.e., they do not exercise reasonable
diligence in the management of company's affairs and the company suffers a loss. If
they give all sorts of powers to the managing director and thus enable him to commit
misconduct, they are negligent and liable to make good the loss. 58 Directors are also
liable for wilful wrong or wilful misconduct.
LIABILITY TO THIRD PARTY
Directors may become personally liable to allottees of shares who apply on the
faith of a prospectus containing untrue statements. They may also become liable, if the

55. Syke's Came (1872), l_R. 13 Eq.Cas. 255.

56. Re City Equitable Ins. Co. (1925), Ch. 407.
57. Re Sharp (1892), 1 Ch. 154; Eastern Shipping Co. v. Rangkee (1924), A.C. 177.
58. Gov ind v. Ranganath (1930), 45 Born. 226.
498 . MERCAN111,E LAW

money is not paid hack to the applicant for shares within 130 days of the issue of the
prospectus when the company fails to allot shares within 120 days. They are also liable
for irregular allotments, as also when their liability has been made unlimited under Sees.
322 and 323. In the winding up ofa company. directors responsible for fraudulent trading
on the part of the company may, by order of the Court under Sec. 542, be made personally
liable, without any limit, for all or any of the debts or liabilities of the company. Apart
from the Act, directors may incur personal liabilities for breach of warranty of authority.
They will also be liable for acts ultra vires themselves. A director acting in his own name
or without excluding personal liability on a negotiable instrument may be liable.
The Act also provides for various statutory penalties for non-compliance with the
provisions, and they are referred to in their appropriate places. Directors may also
become criminally liable under the com4non law, the Indian Penal Code or the Corn
panics Act. Sixteen sections of the Act provide forcriininal proceedings. Offences under
the Indian Penal Code generally relate to frauds, perjury, mis-appropriation or embez-
zlement of funds, conspiracy to defraud, etc. Most of these offences are now expressly
covered by the Companies Act.

MANAGING DIRECTOR

A managing director is a director who, by virtue of an agreement with the company

or of a resolution passed by the company in general or by its Board of directors, or by
virtue of its memorandum or articles of association, is entrusted with substantial powers
of management which would not otherwise he exerciseable by him, and includes a
director occupying the position of a managing director by whatever name called. He is,
however, subject to the control of the Board of directors.
Art undischarged insolvent, or a person who has at any time been adjudged an
insolvent, or suspends, or has at any time suspended, payment to his creditors,sr makes
or has made at any time a composition with them, or is, or has at any time been convicted
by a Court of an offence involving moral turpitude cannot be appointed a managing
director or a whole-time director of a company.

MANAGER

A manager means an individual who, subject to the superintendence, control and

direction of the Board of directors, has the management of the whole, or substantially
the whole, of the affairs of the company, and includes a director or any other person
occupying the position of a manager, by whatever name called. No company must
appoint or continue the an or employment of any person as its manager who
(i) is an undischarged insolvent, or (ii) has at any time within the preceding 5 years been
adjudged an in solvent; or (iii) suspends or has suspended payment to his creditors; or
(iv) makes, or has at any time within the preceding 5 years made, a composition with
them; or (v) is, or has at any time within the preceding 5 years been, convicted of an
offence involving moral turpitude. The Central Government may relax this restrition
in appropriate cases (Section 385).
Appointment of Managing Director or Manager—No person can be appointed
a managing director or manager for more than 5 years at a time and of more than 2
companies; and the appointment to the second company must be made by a unanimous
resolution of the Board.
Section 269. as amended by the Companies (Amendment) Act, 1988, provides that
with effect from June 15, 1988, every public company or a subsidiary of a public
company having a paid up share capital of Rs. 5 crorcs or more must have a managing
director, whole-time director or a manager. No approval of the Central Govirnment is
 COMPANY LAW 499

necessary if such an appointment is made in accordance with the conditions specified in

Part II, and shareholders' resolutions are passed in general meeting as specified in Part
III of Schedule XIII. A return of appointment must be filed within 90 days from the date
of such appointment.
If the conditions specified in Schedule XIII are not complied with, then an
application must be made to the Central Government within 90 days of the appointment.
The Central Government shall not accord approval of the application for appointment,
if it is satisfied that (i) the appointee is, in its opinion, not a fii or proper person to be
appointed as such or such appointment is not in the public interest; or (ii) the terms and
conditions of the ap*intrnent are not fair and reasonable. The Central Government may
accord approval for a period lesser than the period proposed by the cnrnpany. If the
appointment is not approved by the Central Government, the person so appointed shall
vacate his office on the date on which the decision of the Central Government is
communicated to the Company. Failure to vacate office will render him liable 'to fine
up to Rs. 500 per day during period of default.
Where the Central Government is of opinion that any appointment is made without
approval in contravention of Schedule XIII, it may refer the matter to the Company Law
Board, If the Company Law Board, after giving opportunity to the Company and the
appointee to be heard, comes to the conclusion that the appointment has been made in
contravention of the Schedule, the company shall be liable to a line up to Rs. 5,000 and
every officer in default to a fine up to Rs. 10,000 and the appointment shall be deemed
to have come to an end. The person so appointed shall, in addition to a fine of Rs. 10,000
refund the entire amount of salaries, commissions and perquisites received or enjoyed
by him. Further, if a company does not comply with the aforesaid provision or any
direction given by the Company Law Board, every officer in default and the appointee
shall be punishable with imprisonment up to 3 years and fine up to Rs. 50 for every day
of default. However, all acts done by the appointee whose appointment has been
terminated shall, if the acts so done are valid otherwise, be valid.
The appointment of a managing director, whole time director or manager requires
approval of the Central Government in the case of a newly formed company.
SCHEDULE XIII
PART - I
Appointments - No person shall he eligible for appointment as a managing
director or whole-time director or manager (hereinafter referred to as managerial
person) of a company unless he satisfies the following conditions, namely -
(a) he had not been sentenced to imprisonment for any period, or to a fine exceeding
Rs. 1.000, for the conviction of an offence under any of the following Acts
(I) the Indian Stamps Act, 1899
(ii) the Central Excise and Salt Act, 1944
(iii) the Industries (Development and Regulation) Act, 1951
(iv) the Prevention of Food Adultration Act, 1954
(v) the Essential Commodities Act. 1955
(vi) the Companies Act, 1956
(vii) the Securities Contracts (Regulation) Act, 1956
(viii) the Wealth Tax Act. 1957
(ix) the Income Tax Act. 1961
(x) the Customs Act. 1962
(xi) the Monopolies and Restrictive Trade Practices Act, 1969
(xii) the Foreign Exchange Regulation Act. 1973
(xiii) the Sick Industrial Companies (Special Provisions) Act. 1985
(xiv) the Securities and Exchange Board of India Act. 1992
500 MERCANflLE LAW

(xv) the Forei'ji Trade (Development and Regulation) Act. 1992

(h) he had not been detained for any period under the Conservation of Foreign
Exchange and Prevention of Smuggling Activities Act, 1974.
(c) he had completed the age of 25 years and has not attained the age of 70 years or
the age of retirement, if an y . specified by the compan y , whichever is earlier.
(d) where he is managerial person in more than one company he opts to draw
remuneration from onl y one company.
(e) he is iesideiit lit India.
Explanation. For the purpose of this Schedule resident in India includes a person
who has been staving in India for a continuous period of not less than twelve months
immediately preceding the date of his appointment as a managerial person and who has
come to stay in India
(i) for taking up emplo y ment in India or
(ii) for carrying oil business or vocation in India.
PART It
Remuneration
Section 1. Remuneration pa able b y companies ha ,. ing profits --
Subjectto the provisions of Section 19K and Section 3(y), it having
profits in a financial year may pay 11`1v nenllunerationi by wa y of salar y , dearness
allowance, perquisites. commission and other allowances which shall not exceed 5 per
cent of the net profits for one such managerial person or 10 per cent for all of them
tocether.
Section II. Remuneration payable by companies having no profits or inade-
quate profits -
I. Notwithstanding anything contained in this PART, wherein any financial year
durine the currency nil tenure of the managerial person, a company has no profits or its
profits are inadequate, it may pay remuneration to a managerial person, by way of
salary, dearness allowance, perquisites and any other allowances not exceeding ceiling
limit of Rs. 10, 50,000 per annum or Rs. 87, 500 per month ca1cu1atedon the following
Scale:

Where the effective Capital of Company is Monthly Remuneration

Payable shall not exceed
(i) less than Rs. one crore Rs. 40,000
(ii) Rs. one crore or more but less than Rs. 5 crores Rs. 57,000
(iii) Rs. 5 crores or more but less than Rs. 15 crores Rs. 72,000
(iv) Rs. 15 crores or more Rs. 87,500
2. Perquisites. A managerial personal shall also be eligible to the following
perquisites which shall not be included in the computation of the ceiling on remunera-
tion specified in paragraph-I of this Section
(a) contribution to Provident Fund, Superannuation Fund, or Annuity Fund to the
extent these either singly or put together are not taxable under the Income-Tax
Act, 1961
(b) gratuity payable at a rate not exceeding half a month's salary for each completed
year of service, and
(c) encashment of leave at the end of the tenure.
 COMPANY LAW 501

3. In addition to the perquisites specified in paragraph 2 of this Section, an

expartriate managerial person (including a non-resident Indian) shall be eligible to the
following perquisites whicn shall not be included in the computation of the ceiling on
remuneration specified paragraph I of this Section.
(a) Children's education allowance in case of children studying in or outside India,
an allowance limited to a maximum of Rs. 5000 per month per child or actual
expenses incurred whichever is less. Such allowance is admissible up to a
maximum of two children.
(b) Holiday passage for children studying outside India family staying abroad.
Return holiday passage once in a year by economy class or once in two years by
first class to children and to the members of the family from theplace of their
study or stay abroad to India if they are not residing in India with the managerial
person.
(c) Leave travel concession: Return passage for self and family in accordance with
the rules specified by the company where it is proposed, that the leave be spent
in home country instead of any where in India.
PART III
I. The appointment and remuneration shall be subject to approval by a resolution
of the shareholders in general meeting.
2. The auditor or Secretary of the Company or where the company has not
appointed a Secretary, a Secretary in whole-time practice shall certify that the require-
ments of the Schedule have been complied with and such certificate shall be incorpo-
rated in the return filed with the Registrar under sub-section (2) of Section 269.
Note The remuneration paid with reference to effective capital is Minimum
Remuneration for the purpose of Section 198 of the Companies Act;! 956. which would
he admissible in the event of absence or inadequacy of net profit in any financial year,
without the approval of the Central Government in individual cases.
DIRECTORS' SITTING FEE

Paid up share Capital of the Company - J

Maximum Fee per meeting attended
(i) uplo Rs. 50 l g hs, Rs. 250
(11) over Rs. 50 lakhs but up to Rs.5 crores Rs. 500
(iii) Over Rs. 5 crores but up to Rs. 10 crores Rs. 750
(iv) Over Rs. 10 crores Rs, 1,000

GOVERNMENT'S POWER TO FIX MANAGERIAL REMUNERATION

The new Sec. 637AA empowers the Central Government to fix, while according
approval to any appointment or re-appointment or to ar)y remuneration at such amount
or percentage of profits of the company, within the maximum limit fixed by the Act, as
it deems lit. But while fixing the remuneration, the Central Government shall have regard to-
(i) the financial position of the company;
(ii) the remuneration or commission drawn by the individual concerned in any other
capacity, including his capacity as a sole selling agent;
(iii) the remuneration or commission drawn by him from any other company;
(iv) professional qualifications and experience of the individual concerned;
(v) public policy relating to the removal of disparities in income.
 MERCAN1ILE LAW

MANAGING AGENTS
By See. 2(25), Managing Agent means "any individual firm or body corporate
entitled, subject to the provisions of this Act, to the management of the whole, or
substantially the whole, of the affairs of the company by virtue of an agreement with the
company, or by virtue of its memorandum and articles, and includes any individual, firm
or body corporate occupying the position of a managing agent, by whatever name called.
RESTRICTIONS ON FORMER MANAGING AGENTS
The managing agencies and the category of secretaries and treasurers have been
abolished altogether with effect from April 3, 1970. No company is therefore allowed
to appoint or re-appoint any managing agent or secretaries and treasurers after April 2.

A new Sec. 204A inserted by the Amendment Act, 1974, provides that during a
period of 5 years from the date of the commencement of the Amendment Act, no
erstwhile managing agents, secretaries and treasurers or their associates shall be ap-
pointed as secretary, consultant or adviser or to any other office, by whatever name
called, without the prior approval of the company in general meeting and the Central
Government. If such appointment exists on that date, it must terminate within 6 months
hereof, unless approvea by the company in general meeting and the Central Govern 'nent
SECRETARY
Section 2(45) defines secretary as 'a Company Secretary within the meaning of
clause (c) of sub-section (1) of Section 2 of the Company Secretaries Act, 1980, and
includes any other individual possessing the prescribed qualifications and appointed to
perform the duties which ma be performed by a secretary under this Act and any other
ministerialpr administrative duties." Only an individual can be a secretary.
Section 383A provides that every company having a paid up share capital of Rs. 25
lakhs or more must have a whole-time secretary, and where the Board of directors of
any such company, comprises only two directors, neither of them can be the secretary
of the company. If the company fails to appoint a whole-time secretary, then the company
and every officer in default is liable to a line up to Rs. 50 per day during default. However,
a person proceeded against may offer as defence that all reasonable care was taken to
comply with the provisions or the financial position of the company was such that it was
beyond its capacity to engage a whole-time secretary.
Inter-Company Loans—Section 370 provides that a company may make a loan
to another company only after the lending company has been authorised by a special
resolution passed in its general meeting. But the proviso, as read with Notification 449(E)
of April 17, 1989 states that no special resolution will be necessary in the case of loans
made to other companies not under the same management where the aggregate of such
loans does not exceed 20 per cent of the aggregate of the subscribed capital of the (ending
company and its free reserves. The aggregate of the loans made by the lending company
to all other companies shall not, except with the prior approval of the Central Govern-
ment, exceed (i) 30 per cent of the aggregate of the subscribed capital of the lending
company and its free reserves; (ii) 20 per cent of the aggregate of the subscribed capital
of the lending company and its free reserves, where all such companies are under the
same management as the lending company. The term "loan" includes any deposits of
money made by one company with another company, not being a banking company.
Inter-Company Invest ments—Section 372, as amended by the 1988 Amend-
ment Act, and as read with Notification, dated the 17th April. 1989, provides: (1) A
company, whether by itself or together with its subsidiaries shall not be entitled to invest
in the shares of any other company except as stated below.
The Board of directors of the investing company may invest in any shares of any
other company up to 25 per cent of the subscribed equity share capital or the aggregate
 COMPANY LAW 503
or the paid up equity and preterence share capital, whichever is less. And the aggregate
of the investments made by the Board in all other companies shall not, except with the
previous approval of the Central Government exceed (i) 30 per cent of the aggregate of
the subscribed capital and free reserves of the investing company and (ii) 20 per cent of
the aggregate of the subscribed capital and free reserves of the investing company, where
such other companies are in the same group. The provisions of this section do not apply
to investments by a holding company in its subsidiary, other than a subsidiary which is
controlled by the holding company through the composition of its Board of directors.
MEANING OF RELATIVE
Sec.6 specifically states the relatives as follows: A person shall be deemed to be
a relative of another if, and only if,—
(a) they are members of a Hindu undivided family; or
(b) they are husband and wife; or
(c) the one is related to the other in the manner indicated below.
List of Relatives
l-ather, Mother (including step-mother); Son (including step-son); Son's wife;
Daughter (including step-daughter); Father's father; Fathers mother; Mother's mother;
Mother's father; Son's son; Son's son's wife; Son's daughter; Son's daughter's hus-
band; Daughter's husband; Daughter's son's wife; Daughter's daughter; Daughter's
daughter's husband; Brother (including step-brother); Brother's wife; Sister (including
step-sister); Sister's husband.
PART 16-1
COMPROMISE AND ARRANGEMENT
Arbitration_-Sec 389 of the Act, empowered a company, like an individual or
a firm, to refer to arbitration, only under the Arbitrition Act, 1940, any dispute between
itself and any other company or person. This created difficulties with regard to foreign
arbitrations, as foreign arhitral awards could not be enforced although India is one of the
signatories to the New York Convention (1948) on the recognition and enforcement of
foreign arhitral awards, Consequently, Sec. 399 has been deleted and Indian companies
arc now free to enter into such arbitration agreements as may be permitted by their
memoranda and articles, and not only under the Arbitration Act, 1940.
Compromise or Arrangement—Sec. 391 confers power on a majority of
creditors to come to some suitable arrangement (beneficial to all concerned) with the
company which is unable immediately to meet its liabilities. Similarly, a compromise or
air ingeinent can be made between a company and its members. The procedure is this.
Where it is proposed to make a compromise or arrangement between the company and
its creditors or any class of them; or between a company and its membe rs or any class
of them, an application is made to the Court by the company or creditor or member, or
where the company is being wound up, the application is made by the liquidator. The
Court may order a meeting of the creditors or the memnbers to be called and conducted
according to the directions of the Court. If the majority in number representing three-
fourths in value of the creditors, or the members, as the case may be, present and voting
in person or by proxy, at the meeting, agree to the compromise or arrangement, the
compromise or arrangement shall, if sanctioned by the Court, be binding on all the
creditors, or all the members, as the case may be, and also on the company. But the court
cannot make an order sanctioning a compromise or arrangement unless it is satisfied that
the company or any other person, by whom an application has been made, has disclosed
to the Court, by affidavit or otherwise, all material facts relating to company, such as the
latest financial position of the company, the latest auditor's report on the accounts of the
company, the pendency of any investigation proceedings in relation to the company
under Sees 235 to 251 and the like. Furthermore, no compromise or arrangement or
scheme of amalgamation of a company which is being wound up will be sanctioned by
 MERCANTILE LAW

the Court unless the Court has re&:eived a report from the Company Law Board or the
Registrar that the affairs of the company have not been conducted in a manner prejudicial
to the interests of its rnCmners or to public interest. Similarly, no order for the dissolution
of the company will be passed by the Court unless a similar report has been received
from the Official Liquidator.
The new Sec. 394A makes it obligatory on the Court to give notice to the Central
Government of every application made to it under Sec. 391 or 393 and take into
consideration the representation made by that Government before passing any order on
the proposed compromise or arrangement or scheme of amalgamation. Subject to the
aforesaid requirement, the Court has wide powers in sanctioning or rejecting the scheme.
It will sanction the scheme only if th scheme is hona jide. beneficial to all concerned,
and is not a coercion on the minority: Where the Court has made an order sanctioning
the compromise or arrangement, it will have effect only after a certified copy of the order
has been filed with the Registrar. A copy of the order must also be annexed to every
copy of the memorandum of the company. Where the scheme involves reorganisation
or reductionf share capital, the company must also comply with the provisions of Sees.
94 and 100.
RECONSTRUCTION OR AMALGAMATION
Sees. 394 and 395 provide for facilitating arrangements for the purposes of
reconstruction or amalgamation of companies. Reconstruction of a company can take
place under Sec. 484 by winding up the company voluntarily, but that may take a long
time and involve great expense. Sees. 391 and 394 provide for reconstruction or
amalgamation without winding up. By Sec. 394, where, on an application under Sec.
391, it is shown to the Court that the scheme of arrangement has been proposed for the
purpose of reconstruction ofa company, or the amalgamation of two or more companies,
and the scheme involves the transfer of the whole or any part of the undertaking, property
or liabilities by one company (i.e., the transferor company) to another company (i.e.. the
transferee company), the Court may, in sanctioning the scheme (or thereafter) provide
by order for all or any of the following matters: (i) the transfer to the transferee company
of the whole or any part of the undertaking, property or liabilities of any transferor
company; (ii) the allotment or appropriation by the transferee company of any shares,
debentures, policies, or other like interests in that company; (iii) the continuation by or
against the transferee company of any pending proceedings; (iv) dissolution without
winding up to transferor company; (v) provisions for dissenting member; (vi) any other
incidental or concquc'ntial matters. The properly transferred by the order of the Court
vests in the transferee company, as well as liabilities;
As stated in the previous section, no scheme of amalgamation ofa company which
is being wound up will be sanctioned by the Court unless the Court has received a report
from the Company Law Board or the Registrar that the affairs of the company have not
been conducted in a manner prejudicial to the interests of its members or against the
public interest. Further, no order of dissolution of the company will be passed by the
Court unless a similar report has been received from the Official Liquidator. Also, the
Court must give notice to the Central Government of every application under Sec. 391
or 394 and take into consideration the representation made by that Government before
passing the order on the proposed scheme of amalgamation.
Sec. 395 enables the transferee company to compulsorily acquire the shares of
dissenting members and provide as follows : Where a scheme or contract involving
transfer of shares or any class of shares in the transferor company to the transferee
company has, within 4 months after the making of the offer in that behalf by the
v. New [tank of India
59. See In re Nature Kamala Bank Lid. (1937) 1 Cal. 36; Snit. Bhagwaii
Ltd., 1950 E. P. Ill.
60. Palace lloels Lid. (l912)2Ch. 4381.
 COMPANY LAW 505

transferee company, been approved by the holders of not less than nine-tenths in value
of the shares whose transfer Is involved, the transferee Company may, at any time within
2 months after the expiry of the said 4 months, give notice in the prescribed manner to
any dissenting shareholder, that it desires to acquire his share; and when such a notice
is given, the transferee company is unless, on the application made by the dissenting
shareholders within one month from the date of the notice, the Court thinks fit to order
otherwise, entitled and bound to acquire those shares on the terms on which the shares
of the approving shareholders are to be transferred to the transferee company. The
transferee company is required to give notice to the dissenting shareholders within one
month of the transfer under the scheme or contract, and any such holder may, within 3
months of the notice to him, require the transferee company to acquire his shares, sri
the company should do so. The transferee company is required to notify the transl ror
company of the transfer to it of the shares, pay the share value to the transferor corn oany
whereupon the transferor company roust register the transferee company as the holder
61
of those shares.
Take-over Bids—Sec. 395 has been amended to check malpractices in relation to
'take-over' and acquisition of shares of dissenting shareholders under a scheme or
contract approved by the majority. The amendment provides for disclosure of adequate
information to shareholders in a take-over hid' so that they can judge for themselves
whether or not to accept the offer. The amended Sub-section (3) of Sec. 395 now provides
that the transferor company, after registering the transferee company as the holder of the
shares of the dissenting shareholders, inform, within one month of the date of such
registration, and of the receipt of the amount or other consideration representing the price
payable to them by the transferee company. In the meantime, the transferor company
must keep the money so received in a separate account in trust for those shareholders.
Another safeguard has b e en provided by the addition of a new Sub-section (4A).
It lays down that in relation to every offer of a scheme or contract involving the transfer
of shares or any class of shares in the transferor colilpany to the transferee company, no
circular containing an offer to take over the shares of the compan y should be issued until
a copy thereof is presented to the Registrar who will have the power to refuse to register
any such circular if it does not contain all the requisite information prescribed by the
Government or if it sets out any information in such a way as to give a false impression.
An appeal lies to the Court against the refusal by the Registrar tc register the circular.
Anyone issuing an unregistered circular is liable to be fined up to Rs. 50.
Amalgamation by order of Central Government—By Sec. 396. the Central
Government may, where it is satisfied that it is essential in the public interest that two
or more companies should amalgamate, by notification, provide for the amalgamation
of those companies into a single company. Every member or creditor of each of the
companies before amalgamation shall have, as nearly as may be, the same interest [if
rights against the company resulting from amalgamation as he had in the company in
which he was originally a member or creditor. If his rights in the new company become
less, he shall get compensation for it.
Preservation of hooks and papers of Amalgamated Company—A new Sec.
396A has been added to prevent the practice of destroying incriminating accounts and
records of the company which has amalgamated with another company. This section
provides that books and papers of a company which has been amalgamated with, or
whose shares have been acquired by, another company under the provisions relating to
take-overs and acquisition of shares shall not be disposed of without the prior permission
of the Central Government. The Central Government, before granting the permission,
may appoint a person to examine the books and papers or any of them for the purpose

61. S V p shwanath v. East India D. & S. Factories I id.. 1957 Mad. 34 I.

506 MEKCAtIt.E LAW

of ascertaining whether they contain any evidence of the commission of an offence in

Connection with the promotion or formation, or, the management of the affair', of 'he
first mentioned company or its amalgamation or the acquisition of its shares.

PREVENTION OF OPPRESSION AND MISMANACEMENT

Special powers have been vested in the Company Law Board for the protection of
members against oppression by the majority of shareholders and for intervention in case
of mismanagement of a company's affairs. This has been done because the cardinal rule
laid down in Foss v. !Iarboltle,62 that the minority is bound by the decision of the
majority, is abused in many cases. Secs. 397 and 409 provide for remedial measures.
lithe oppressed minority consider that to wind up the company would not relieve
but on the contrary, they would be unfairly prejudiced by winding up, they may petition
the Court under Sec. 397, and the Court may impose a solution on the disputants. A
certain number of members (stated below) may apply to the Company Law Board for
relief on the grounds that the affairs of the company are being conducted:—
(a) in a manner oppressive to any member or members, or
(h) in a manner prejudicial to the interests of the company, or
(c) in a manner prejudicial to the public interest, or
(d) that a material change has taken place in the management or control of the company
and that by reason of such change it is likely that the affairs of the company will
be conducted in a ii anner prejudicial to the interests of the company.
If the Company Law Board is satisfied that the affairs of the company are being
conducted as complained of, it may pass any orders with a view to bringing to an end
the matters complained of, or apprehended.
The number of members necessary to make application is (1) in the case of a
company having share capital, 100 members or 10 per cent of the total number of
members, whichever is less, or members holding 10 per cent of the issued capital; (ii) in
the case of a company not having share capital. 20 per cent of its total number of
members. The Central Government may. in appropriate cases, authorise any lesser
number to apply. The Central Government is also entitled to apply to the Company Law
Board for an order as above.
The Company Law Board may in its discretion make any order that it thinks fit,
and in particular, it may provide for-
(i) the regulation of the company's affairs in future, and may even frame fresh
regulations; (ii) the acquisition of the shares or interests of any members by other
members or by the company; (iii) the consequent reduction of the share capital in case
of (ii) above; (iv) termination, setting aside or modification of any agreement. howsoever
arrived at, between the company and the managing agent, secretaries and treasurers,
managing director, any other director, or manager; (v) termination, setting aside or
modification of any agreement between the company and any other person with the
latter's consent; (vi) setting aside any transfer, delivery of good ,;, payment, execution or
other act relating to property made or done by or against the company within 3 months
of the application which would amount to a fraudulent preference in the case of an
individual's insolvency; (vii) any other matter for which in the opinion of the Company
Law Board it is just and equitable that provision should be made (Sec. 402). No
compensation is payable for loss of office resulting from the termination of agreement
by the Company Law Board. Any person whose agreement of office has been terminated
cannot act for the company for 5 years thereafter without the leave of the Company Law

62. (1t43)2 flare 461.

 COMPANY LAW 507

Board. In addition tothe above order, heavy penalties are provided, as stated in Schedule
XI.
POWERS OF CENTRAL GOVERNMENT
Sec. 408 provides another measure to prevent oppression or mismanagement as
follows. On the application of 100 members or members holding 10 per cent or more of
the total voting power or on its own motion, the Central Government may appoint such
number of persons as the Company Law Board may specify as being necessary to
effectively safeguard the interests of the company, or its shareholders or the public
interest as additional directors for 3 years at a time, and such directors will not be subject
to retirement by rotation nor need they hold any qualification shares; and any change in
the Hoard after such appointment will be ineffective unless confirmed by the Company
Law Board; or the Government may, instead, direct the company to alter its articles so
as to arrange for the election of its directors oil the basis of proportional representation.
Special powers are conferred by Sec. 409 on lie Central Government to prevent changes
in the Board in consequence of a change in the ownership of shares.The Government
can stop any change in the Board, or pennit the saoe, if not prejudicial to the interests
of the company.
Advisory Committee—By deleting Sees. 410 to 415, the Advisory Commission
has been abolished, and by a new Sec. 410 art Advisory Committee has been substituted
for the Advisory Commission. The Advisory Committee is to consist of not more than
5 persons with suitable qualifications and will advise, whenever required, the Central
Guveijimnent or the Company Law Board on such matters arising out of the administra-
tion of the Companies Act as may be referred to it by the Govenunent or Board. All
cases pending before the Advisory Commission were transferred to the Central Govern-
ment on October 15. 1965, for disposal. As (lie result of this change the powers of the
Central Government have been enhanced, as there is nk; compulsion on its part to refer
any eases to the Advisory Committee as was necessary to refer certain s I cifid cases
to the Advisory Commission before it was abolished.

PART 16-K
%'INlHN(; (II'

WINDING UP 13Y COURT

A winding up by the Court, or compulsory winding up, as it is often called, is
initiated by an application by way of petition presented to the appropriate Court for
winding up order. The winding up of a company with a capital of one lakh or more must
take place only in the High Court; but in other cases, the High Court may transfer the
application to a District Court subordinate to it.
GROUNDS FOR COMPULSORY WINDING UP
Sec. 433 provides that a company may he wounded up by the Court:
(a) lithe company may petition, resolved to he wound up by the Court.
(h) If default is made in delivering the statutory report to the Registrar or in holding
the statutorymeeting.
(c) If the company does not commence its business within a year from its incorpora-
tion, or suspends its business for a whole year.
(d) lfthenumber of members falls below seven (or in case ofa private company, below
two).
08 MERCANItLl. LAW

(e) lithe company is unable to pay its debts.

(f) lithe Court is of opinion that it is just and equitable that the company should be
wound up.
WHO MAY PETITION
The following may petition : (1) the company: (2) creditor; (3) contributory; (4) all
or any of the above parties: (5) the Registrar; (6) any person authorised by the Central
Government as per Sec. 243, i.e.. following upon a report of inspectors; (7) by virtue of
Sec. 440, when a company is already being wound up voluntarily, the Court may order
winding up by it.
A contributory can petition only on the ground (i) that the number has fallen below
the statutory minimum, or (ii) at least some of the shares held by him were originally
allotted to him, or have been held by him and registered in his name, for at least 6 months
during the 18 months before the commencement of the winding up or have devolved
upon him through the death of a former holder. A fully paid up shareholder is a
contributory under Sec. 428, and may petition, even when the company may have no
assets for distribution among the shareholders after the satisfaction of its liabilities
The Registrar may. with the previous sanction of the Central Government, present
a petition for winding up only on the following grounds: (i) if default is made in filing
the statutory report or in holding the statutory meeting: (ii) if the company does not
commence its business within a year froin its incorporation or suspends it for a whole
year; (iii) if it appears to him from the balance sheet or from the report of the inspectors
that the company is unable to pay its debts: or (iv) where the Registrar is authorised by
the Central Government under Sec. 243 to petition. The workers have the right to be
heard in winding up proceedings and not to allow them to doso is contrary to the principle
of natural justice (National Textile Workers Union v. P.R. Rania Krishnan, 1983
S.C. 75).
PROCEDURE
On hearing the petition, theCourt may dismiss it, adjourn it, make an interim order,
or make a compulsory order for winding up the company. Where the winding up order
is made, the Official Liquidator attached to each High Court will become the liquidator.
The Court will also settle the list of contrihutories, make calls and settle any question
arising out of winding up. The creditors will be asked to provide their claims, where
necessary and the liquidators will realise the assets and distribute the proceeds among
the creditors, whereupon the Court may pass an order that the company be dissolved.
But within two years of the dissolution, the Court may, on the application of the
Liquidator or any other person interested, declare the dissolution to have been void.
VOLUNTARY WINDING UP
A company may be wound up voluntarily: (i) when the period (if any) fixed for
duration has expired or an event on the happening of which the company is to be
'ound up has happened and the company in general meeting has passed an ordinary
solution to wind up: or (ii) if the company passes a special resolution to wind up
oluntarily (Sec. 484). When the resolution has been passed, notice must he given by
he company within 14 days of the passing thereof by advertisement in the Official
3azette, and also in some newspapers circulating in the district where the registered
office is situated.
There are two kinds of voluntary winding up, namely : Members' or Creditors'.
A company may be wound up as members' voluntary winding up, if a declaration of the
company's solvency is made by its directors, or where there are more than 2 directors,
by the majority of directors, at the Board meeting that they are of opinion that the
 COMPANY LAW 500

company has no debts, or that it will be able to pay its debts in lull within 3 years from
the commencement of winding up. The declaration inwil he supported by an affidavit of
the above directors, and must ix made within 5 weeks, intinediately preceding the date
of the resolution for winding up and must he delivered to the Registrar before that date,
and should embody a statement of company ' s assets and liabilities. On the passing of
the resolution for winding up the company must in genera I in eet in g appoint one or more
liquidators and fix his or then remuneration. Any remuneration so fixed cannot he
increased at all, not even by the sanction ol the C'ouit (Sec. 490). ()o the appointment of
he liquidator, all the powers of the Board and4 t lie itia nag lug or whole - time director and
manager,
ager. cease. Within 10 days of the apjsi tilt o ent oft he liquidator, the company must
give notice to the Registrar.
If in a members' voluntary winding up, the liquidator is of opinion that tile
company will not be able to pay its debts in lull within the period stated in the declaration.
or if the period has expired without full payment of debts, he must forthwith call a
meeting of iliecreditors and lay before it a statement ofcuitipativ's , .sets and liabilities.
In the event of the winding up continuing for mine than one year, the liquidator must
call a general meeting of the company at the end of the first year of the cnmiiiencenment
of winding up and of each succeeding year. and Oust lay before the meeting iii account
of his acts and dealings and of the cnndiict of svutding up. When the affairs of the
company are fully wound up the liquidator Oust mike up an account and call a final
meeting of the company and la y these accouot before the meeting, then within on week
of this ineeting send to the Registrar and the Official Liquidator a copy each of the
accounts and make it return to each OfIlICIn of the holding of the meeting and of the date
thereof; and the Registrar will forthwith register them. The Official Liqit idatoi will
scrutinise the hooks and papers olcompany and make a report to the Court that its affairs
have not been conducted in a manner Prejudicial to the interests of its mcititx'rs or against
Public interest. If the'report indicates that the altairs have been conducted in prejudicial
manner the Court may order the Official Liquidator to make further investigation. On
receipt of this report, the Court may either make an order that the company shall stand
dissolved front the specified date or make such othei order as the circumstances of the
case brought out in the report permit.
CREDITORS' VOLUNTARY WINDING UP
Where a declaration of solvency is not made and filed with the Registrar, it is
presumed that the company is insolvent. In such a case, the company roust call a meeting
of its creditors for the day or the day next lollowing the day fixed for comnpan s genera'
meeting for passing the resolution for winding up.
Subject ro the right of the preferential creditors, the assets of a comr'llany on its
winding up are applied in satisfaction of its liabilities pari p assu, and any surplus is
divided among the members according to their rights (Sec. II).
WLNI)ING UP UNDER SUPERVISION
Where a company is being wound up voluntarily the Coumt may order the
continuation of voluntary winding tip subject to its supervision on any terms or condi.
lions. The liquidator will continue to exercise all powers suhect to any restrictions laid
down by the Court.

CONSEQUENCES OF WINDING LI' Gl•:Nl;RAI,I.Y

AS TO SHAREHOLDERS

A shareholder is liable to pay full amount of shares held by him. This liability
continues after winding titi, but he is then described as a ''contributor y .'' By Sec. 428,
a contributory is "every person liable to contribute M. the assets of 3 company iii the


510 MERCANTILE LAW

event of its being wound up, and includes a holder of fully paid up sli;ires. and also any
person alleged to be contributory." Contributories are either present or past, and it is the
former who is liable to pay calls, and the latter call called upon to pay only if the
present contributory is unable to pay. The nature of a contributory's liahility after
winding up is legal and not contractual. He cannot set off his debt against his liability
for calls even if there is an express agreement to do so.
AS 1*0 CREDITORS
A company can never be adjudged insolvent, although it may have become
insolvent in the sense that it is unable to pay its debts. Where a solvent company is to be
wound up all claims against the company are admissible, and when they are proved,
payment is made. In the case of an insolvent company, the insolvency law applies. A
secured creditor may either (i) rely on the security and ignore the liquidation, or(ii)value
his sevority and prove for the balance of his debt, or (iii) give up his security and prove
for the whole amount. Unsecured creditors of all company are paid in this
order : (i) preferential payments under Sec. 530, (ii) other debts pari paasii.
Preferential Payments are as follows:
(a) all revenues, taxes, cesscs and rates are payable by the company within 12 months
next before the commencement of winding up:
(h) all wages or salary of any employee due for the period not exceeding 4 months
within the 12 months next before the commencement of winding op, provided the
amount payable to one claimant will not exceed Rs, 000;
(c) all accrued holiday remuneration becoming payable to any employee on account
of winding up;
(d) unless the company is being wound up voluntarily for the J)UrlS) S C of rcconstriic-
lion, all contributions payable during the 12 mouths next before winding up, by
the company as the employer of any persons, under Employees' State Insurance
Act, 194, or any other law for the time being in force:
(e) all sums due as compensation under Workmen's Compensation Act, 1923:
(f) all sums due to any employee from a provident fund, a pension fund, a gratuity
fund or any other fund for the welfare of the employees, maintained by the
coinpaiiy
(g) the expenses of any investigation held under Sec. 235 or 237, in so far as they are
payable by the company.

Persons who claim to be creditors must prove their debts within the time fixed by the
Court, or by the voluntary liquidator.
FRAUDULENT PRI'FERENCI
The insolvency rules is to fraudulent preference apply to companies. The object
of the Act being a pari I1(zs.s.0 distribution, Sec. 531 provides that every transfer of
property, movable, or immovable, delivery of goods, payment, execution or other act
relating to property made, taer5 or done by or against a company within 6 months before
the commencement of its winding up shall he deemed. in the event of its being wound
up, a fraudulent preference of its creditors mid he invalid accordingly.
AS 10 SERVANTS AND OFFICERS
A winding tip order operates as a notice 1)1 discharge ti he employees and officers
of the company except when the business of the company Is being continued (Sec. 444).
A voluntary winding up also operates as a notice of discharge.


COMPANY LAW sit

AS TO PROCEEDINGS
After a winding up petition is presented the Court may sta y' all proceedings against
the company. After the winding up order is passed, all proceedings against the company
must cease unless the Court gives special leave for them to continue. Further, any
attachment, distress, execution put in force against the assets of the company after the
commencement of winding up is void (Sec. 537). In voluntary winding lip also the Court
may restrain proceedings against the company if it thinks lit,
AS TO COSTS
If the company, while in liquidalton, brings or (lefL'nds any action and is ordered
to pay costs, they are paid first out of the assets of the company. The same rule applies
in a voluntary winding up. Similarly, all costs, charges and expenses of liquidation are
payable out of the assets of the company prior to all other claims except those of secured
creditors, if any (Sec. 520).

OFFENCES ANTECEDENT TO OR IN COURSE OF WINDING UP

OFFENCES OF OFFICERS
Every past and present officer of a compan y which is being wound up must assist
the liquidator and if he fails to do so he is liable to he punished. He is liable to be
imprisoned up to 5 years, or fined or given both punishments, if he within 12 months
next before winding up and at any time thereafter fraudulently or under false pretences
obtains credit for or on behalf of the company which company does not pay, or pawns
pledges or disposes of any property of the company which has been obtained oil
and has not been paid for. The pawnee or pledgee is also punishable with imprisonment
up to 3 years or fine or both. Similarly, a past and present officer ut the company is
Punishable with imprisonment up to 2 years, or line, or both, if he does not fully and
truly discover to the liquidator all property of the company within his knowledge, or
does not deliver up to liquidator all property, hooks and ii'm's that are in his custody or
under his control, or conceals any part of the company's property to the value of Rs. 100
or more or conceals any debt due to or from the company, or fraudulently removes any
part of company's property, or makes any material omission in any statement relating
to the affairs of the company, or fails to inform the liquidator about false debts having
been proved within his knowledge, or prevents the product ion of any hooks after winding
up or cancels, destroys, mutilates or falsifies any book or paper affecting or relating to
the property of the company, or makes any false entry in any book or paper relating to
the properly of the company, or is guilty of any representation or other fraud for getting
creditor's consent in relation to affairs of the company.
If with intent to defraud or deceive any person, any officer or contributory of a
company in liquidation destroys, mutilates, alters, falsifies or secretes (or is privy to any
of these acts) any books, papers, or securities, or makes any fraudulent entry in any
register, book of account or document belonging to the compan y. he shall be punishable
with imprisonment up to 7 years and fine (Sec. 539).
If proper books of account were not kept by it for it of 2 years
immediately preceding the commencement of winding up. or 7eriod between incorpora-
tion and winding up, which is shorter, every officer who is in default is liable to
imprisonment up to one year (Sec. 541).
If in the course of the winding up of a company, it appears that any business of the
company has been carried oil intent to defraud creditors of the company, or any
other persons, or for any fraudulent purpose, the Court may declare that any persons who
512 MERCANTILE LAW

were knowingly parties to the carrying on of the business in the manner aforesaid shall
be personally responsible without any limitation of liability for all or any debts or other
liabilities of the company. In addition, the persons are liable to imjrisonffleflt up to 2
years, or fine up to Rs. 5,000 or'both.
MISFEASANCE PROCEEDINGS
Sec. 543 provides that where, in the course of winding up a company(whether
voluntarily or by or under the supervision of the Court), it appears that any person who
has taken part in the promotion or formation of the company or any past or present
director, managing agent. secretaries and treasurers, manager, liquidator or officer of the
company, has misapplied or retained or become liable or accountable for any money or
property of the company, or has been guilty of any misfeasance or breach of (rust in
relation to the company. the Court may, on application of the liquidator, or of any creditor
or contributory made within five years from the date of the winding up order, or of the
first appointment of the liquidator, or of the misapplication, retainer, intsfcasance or
breach of trust, as the case may be, whichever is longer. examine into the conduct of the
Person, director, managing agent, secretaries and treasurers, manager, liquidator or
officer aforesaid, and compel him to repay or restore the money or properly or any part
thereof respectively with interest at such tale as the Court thinks just, or to conitrihule
such sum to the assets of the company by way of c'mpensatiofl, notwithstanding that
offence is one for which the offender may he criminahy liable. An auditoT of the cialipany
an officer for the above purposes, as also the secretary.

PROSECUTION OF DELINQUENTS
By Sec. 545. if in awinding up by or under the super v ision of the Court, it appears
that any pastor present officer, or any member, has been guilty of any offence in relation
to the company in respect of which he is criminally liable, the Court may direct liquidator
either himself to prosecute the offender or to refer the matter to the Registrar. In voluntary
winding up, the liquidator must refer the matter to the Registrar. The Registrar may, in
turn, refer it to the Central Government for further inquiry. The Central Government
must thereupon investigate and may apply to the Court for an order conferring oil
government nominee the power to investigate the affairs of the company. After the report
of the investigation is received the Central Government may direct the Registrar to
prosecute the Offender-

LIQUID ATORS

COMPULSORY WINDING UP

The Official Liquidator attached to each High Court will become the hquidatur on
a winding up order being passed. He may also he appointed as a provisional liquidator
with the same powers.
Within 21 days after the winding up order, or the appointment of provisional
liquidator, a statement of affairs of the company must be submitted to the Official
Liquidator. The statemitemit must show the assets and liabilities, the names, addresses of
creditors and amount due to each, debts due to the company, together with the names,
addresses, occupations of debtors and amounts due from cacti of them, and any other
information required by the Official Liquidator. The statement must be supported by an
affidavit by one or more directors aridhy the manager, secretary or any other chief officer
of the company.
The Official Liquidator must, after the receipt of the statement, within 6 month
at the latest of the order, submit to the Court a preliminary report its to the amour
 COMPANY LAW 513

capital issued, subscribed and paid up, and thee stim a led amount of the company's assets
and liabilities if the company has failed, the causes of its failure, and whether in his
opinion any further inquiry is desirable (Sec. 455).
Within 2 months of the winding up order, the Official Liquidator must convene a
meeting of the creditors to find out whether they would like to appoint a ''Ccmmittee
of Inspection." Then within 14 days of the above meeting, he should convene a
contributories' meeting for the purpose. If the committee is to be ap1xnnted, then the
total number of its members will not be more than 12, made up of equal number
representing creditors and contributories.
POWERS OF LIQUIDATOR
As soon as a winding up order is made, or a provisional liquidator is appointed,
the liquidator will t.ke into his custody or under his control all the property of the
company and its effects and actionable claims and get the help of the Presidency
Magistrate or the District Magistrate for this purpose (Sec. 456).
The liquidator may, with the sanction oft/u' Court, (i) institute or defend any suit,
prosecution, or the legal proceeding in theaine of the company, (ii) carry on the business
of the company for its beneficial winding up, (iii) sell company's properly. (iv) raise
money on the security of the company's assets, and (v) do all other things necessary for
the winding up. He may. without sanction of i/ic Court. (i) do all acts, and execute ill the
name of the company, all deeds, receipts and other documents, (ii) inspect the records
and returns of the company on the files of the Registrar gratis. (iii) prove, rank and claim
in the insolvency of any contributory and to receive dividends therefrom, (iv) draw,
accept, make, endorse any negotiable instrument in the name of the company, (v) take
out, on his official name, letters of administration to any deceased contributory, and do
other necessary things to obtain payment. (Vi) appoint an agent.
By Sec. 456, the liquidator may, with the sanction of the Court or a special
resolution, according as the winding up is compulsory or voluntary. (i) pay any class of
creditors in full; (it) make compromise or arrangement with creditors; (iii) compromise
with contributory or debtor.
DUTIES OF LIQUIDATOR
Sec. 46() requires the liquidator to conduct the winding up according to the
direction given by resolution of creditors' or contrihuturics' meetingor by the Committee
of Inspection. He must summon meetings of creditors or contributories when requisi-
tioned by the holderof 10 percent of the value. His principal duty is to get in the property
and pay the debts and distribute the balance among contributories. He must keep the
proper books of account. minutes books, and allow inspection thereof: twice in each
year present to the Court an account of his receipts and payments in duplicate, and send
a copy of the audited accounts to each creditor and contributory. He must keep all the
funds of the company in ''the public account of India" in the Reserve Bank of India;
and must not keep any such money in his private account All papers of the company
must indicate that the company is being wound up, e.g.. by adding the words 'In
liquidation'' after the name of the company.
VOLUNTARY LIQUIDATOR
The voluntary liquidator is appointed by resolution in general fleeting of the
company and/or of the creditors and his remuneration fixed. By Sees .513 to 515. a body
corporate cannot be appointed a voluntary liquidator; and person who gives or agrees to
give or offers to any member or creditor any gratification with a view to securing his
514 MERCANTilE LAW

own appointment as company's liquidator, or that of some other person, will be

punishable with fine up to Rs. 1000.
Within 21 days after his appointment, the liquidator most publish in the ()ffici:'l
Gazette and deliver to the Registrar a notice of his appointment.

POWERS AND DUTIES

A voluntary liquidator is a paid agent of the coinp.iii and is liable in damages if
hv neglects his duties as such. He must not make any secret profits and must keep funds
of the company in Scheduled Bank to the credit of a special banking account called "the
Liquidation Account of .... Co. Ltd' ' or 'Private Ltd.'', or ''Company.'' He must not
deposit such money in his persona] account nor must he retain with him more than
Rs. 500 for more than 10 days. He will also he liable for misfeasance, if he pays any
money to a person who has no claim against the company. He nay, with the sanction of
special resolution, in members' orof the Court in creditors', winding upor the Committee
of Inspection, do what an Official Liquidator can do under clauses (i) to(iv) of Sec.
457(2) noted above Sec. 512 further empowers him to do without the sanction of the
Coon everything that the Official Liquidatorbon do, amid also exercise soiiue oldie puss crs
of the Court, e.g.. settle lists of contrihutorues, admit claims, make calls, call general
meetings, etc., and perform other functions.

DISCLAIMER BY A LIQUIDATOR

Section 535(1) empowers the liquidator, with the leave of tile Court to disclaim
any onerous property of the company. It provides that where an y part of the properly of
a company ill liquidation is unsaleable or is not readily saleable, the liquidator, with leave
of the Court, may disclaim it in writing signed by him at any time within 12 months after
the commencement of winding up. But where an application in writing is made to the
liquidator by any person interested in the property, requiring him to decide whether he
will disclaim or not and the liquidator has not within 28 (lays of the receipt of the
application given notice to the applicant of his intention to disclaim, the right to disclaim
is lost.

WINDING UP OF UNRE(;IS'I'FRII) COMPANIES

Sec. 582 specifies "unrcgistcredcompanies" which may he wound uphy tlieorder

of the Court. By that section, an 'unregistered company dues not include (and so
cannot be wound up under Sec. 583). (i) a railway company incorporated by any Act of
Parliament or other Indian Law or any Act of Parliament of the United Kingdom; (ii) a
company registered under the Companies Act of 1956; or (iii) a company registered
under previous companies law, whose registered office is in India. Except as aforesaid,
any partnership, association or company consisting of more than seven members at the
time of petition for winding up will be deemed to be an ''unregistered company' and
may be wound up by order of the Court. An 'illegal association'', formed in contraven-
tion of Sec. II, cannot be wound up by order of the Court under the present Act.
Sec. 583 provides that an unregistered company may he wound up by the order of
the Court having jurisdiction in the State where the company has its principal place of
business, and where the principal place of business is situated in more than one State, in
each such State, and where the proceedings are instituted on the following grounds: (a)
if the company is dissolved, or has ceased to carry on business, or is carrying on business
only for the purpose of winding up; (h) if the company is unable to pay its debt: (c) if
the Court is of opinion that it is just Prid equitable that the company should be wound
 COMPANY LAW 515

up. An unregistered company cannot he wound up voluntarily or subject to the super-

vision of the Court.
By virtue of Sec. 584, if a company, incorporated outside India carrying on
business in India, ceases to carry on business in kidi I. it may be ordered to be wound up
as an ''unregistered company." even if t1i- company has been dissolved or ceases to
exist by virtue of the laws of the country under which it was incor1airated.
Where an unregistered company is being wound up, every person is deemed to he
a contributory, who is liable to pay, or contribute to the payment of ( i) any debt or liability
of the company, (ii) any sum for the adjustment of the rights of members among
themselves, or (iii) the costs, charges and exl)cim s cs of winding up (Sec. 585).
The same provisions as are applicable in the winding up of a ''company" under
the Act will apply in respect of the stay of proceedings before or after the winding up.
If an unregistered company has no power to site and he sued in a common name, or if
the Court for arty other reason considers it expedient, the Court may direct that all or any
part of the property of all description shall vest in the Official Liquidator. The Official
Liquidator may sue or defend a suit in his official naimic (See. 599). Sec. 589 makes it
clear that these provisions are in addition to other provisions relating to winding UI) of
a"company"

CASES FOR RECAPITULATION

1. A solicitor, on the instructions of promoters who became the directors of the

company, prepared the Memorandum and Articles before its formation. On demand by
the solicitor of his costs and charges. it was held that the company was not liable to pay,
although it has taken , the benefit of his work ]Rc Log/is/i Colonial Produce Co. Ltd.
(1906)2 Ch. 4351.
2. A loan was advanced by a director of a company, acting on behalf of the
company. This director was also a directorofa private company which was the managing
agent of the borrower company, and the entire powers of the managing agency had been
vested in him. The lender sued the company for the recovery of the loan. It was pleaded
that the company was not liable to pay as no resolution had been passed by the Board
of directors of the company authorising him to borrow on its behalf. held, the lender is
entitled to recover from the company. The act of the director iii hot rowing the money
bound the company. It did not matter that there was no resolution of the Board ufdmrectors
of the borrower company, authorising the director to borrow on behalf of the company.
The lender was protected by the doctrine of Indoor Mamiageincnt ]Lo.nmi Room Cotton
Mills Co. Ltd. v. J. J. Jute Mills Co. Lid, (1957) 27 Comp. Cas. 6601.
3. The N. Company agreed with C, as agent of the Pauline Syndmca:e before its
formation, that the company would grant a lease of a mine to the syndicate. The
syndicate, after it was incorpor:itcd, discovered a scans of coal. The company refused
to carry out the contract. Held, there was no binding contract between the company and
the syndicate, as at the time of agreement with C. who purported to act on behalf of the
syndicate it did not come into existence by incorporation ]NotalLand. etc. Co. v. Pauline
Colliery Syndicate, Ltd. (1904) AC. 1201.
4. The company acquired a piece of land for the purposes of its railway. The
railway line was laid and the railway run on arches. The company let the arches as
workshop. etc. The neighbours objected (on account of noise and rubbish), and claimed
that letting the articles was ultra vires the company. Held, the act of company was valid,
as being fairly incidental to the powers of the company ]Foster v. London, Chat/ram
and Dover Rail Co. (1995) 1 Q.B. 7111.
516 MI;RCANTILE LAW

5. The mensnrandurn gave the company power to make arid sell railway carriages.
The directors hcught a railway concession in Belgium. The article gave express power
to the company to extend its business beyond the memorandum by special resolution.
The company passed a special resolution to i aimly the purchase. llt'ld, the purchase was
had, being ulrra tires of the company. Lord ('aims, L.C.. said : 'If every shareholder
had been in the room, and if every shareholder had said, ­ :hat is a contract which we
authorise the directors to make, it would he void. The shareholders would thereby, by
unanimous consent, have been attempting to do the very thing wInch by the Act of
Parliament they were prohibited from doing" 1 ,.simburr Railwa y Carriage and Iron Co.
v. Ru/ic (1875) L.R. 7 H.L. 653].
6. A company in which the directots held a majority of the shares altered its articles
so as to give power to the directors to require any shareholder who competed with the
company's business to transfer his shares at their full value to nominees of the directors.
A shareholder holding a minority of shares was doing competing business with the
company. Ile.'d, the alteration was valid, as it Was made /,00ajmdc for the benefit of the
company as a wholc ,and so enforceable by the majority against the minority ].Smdeboltoom
v. Ker s/maw Lees & Co. Lid. (1920) 1 Ch. 1541.
7. The articles gave the company a lien o il shares ''mint fully paid tip." for calls
due to the company. A was the nnlyholder of fully paid up shares; he also owed money
to the company for calls due to other shares. A died. The company altered its articles by
striking out the words ''not frilly paid up,' and thus gave itself .i lien over all A's shares.
lie/il, the alteration was valid and gave the company a lien on fully paid up shames of A
in respect of debts bef ire the date of alteration JAIlen v. Gold Pie/s ol West Africa, Lid.
(1900)1 Ch. 656J.
8. The directors of a company prepared a document, which was mrs form an offer
of shares to persons generally. The document was mint, however, advertised, but was
shown only to Nash with a view to his joining the company and becoming a director.
The document omitted to state the number of shares allotted for a consideration other
than cash. On discovering that almost all the shares had been allotted fora consideration
other than cash. Nash claimed damages (i 2,000) oil ground that they had issued a
false prospectus. held, by the House of Lords, reversing the decision of the Court of
Appeal. that the document was not a prospectus because It was never ''issued" to the
public as a prospectus. Nash was not entiticd to claim any daitiages or compensation
Na.clm v. Lvnde ( 1929) A.C. 158].
9. An employee of the press where a prospectus was being printed read it during
the printing and oil faith of the statements made therein purchased some shares in
the company. The statements were false. He claimed to repudiate the contract and also
compensation from the directors. The directors are not liable to him as the prospectus
had not been ''issued to the public'', including him. (Based on Nash v. Lyndej.
10. R converted his business into a company. lie has business assets of the value
offl,XX) and debts of the same amount. R continued to carry on the whole business of
the company, and without any meeting of the Board of directors or of the company issued
debentures to D for £ 5.000 under the seal of the company. The articles empowered the
company to issue debentures.-The company was ordered to be wound up. held, D was
entitled to assume that the debentures were valid (doctrine of Indoor Managemeni), and
he thus had priority over the other creditors ]Duck v. 'lower Gal uani:mng Co. Lid. (1901)
2 K.B. 3141.
11. A prospectus offering debentures for subscription stated that ''the annual
balance available .....after providing for depreciation and interest on the existing
debenture stocks has been sufficient to pay interest on time present issue more than five
(lines over," and after providing for all taxation, depreciation of the fleet. etc. .... the
 COMPANY LAW 517

dividends on the ordinary stock, during the last 17 years have been a follows Every
statement in the prospectus was literally true; but the prftus did not disclose that
profits had been made in the years 1918 to 1920, and that there had been losses in every
year from 1921 to 1927, and that dividends had been all these years out of the reserves
accumulated in the past. Held, the prospectus was false in a material particular in that
conveyed a false impression that the company had been prospering between 1921 to
1927, whereas actually it had been suffering losses. The managing director and
Chairman. Lord Kylsant, who had made the statement, was held to be criminally liable
[R. v Kylsani (Lord) (1932) 1 K.B. 4421.
12. A company carrying on business in jute is empowered by the objects clause of
its memorandum to do any other business not connected withjute. By a special resolution
passed unanimously the company resolved to alter the objects clause to include the power
to carry on additional business in rubber. The Registrar opposed the company's applica-
tion to the court for confirmation of the alteration on the ground that the business sought
to be added was entirely new and also alien to the existing business and that it could not
be profitably, conveniently or advantageously combined with the existing business.
Held, the Registrar's contention could not prevail and the company could alter its objects
clause for including the power to carry on additional business in rubber, since the
additional business is not destructive of or inconsistent with the existing business of jute
[See Parent Tyre Co. Ltd. (1927) 2 Sh. 222; In re•Bhutoria Bros. (P) Lid. 1957 Cal.
593; In ye Na: esar Spg. & Wv8. Mills, 1960 Mad. 257].
13. The directors ofacompany are prosecuted fordefault in filing the balance sheet
and the profit and loss account with the Registrar of Companies. Their defence is that
the annual general meeting for the relevant year was not held for some reason and
therefore, since the occasion for placing the same before the general meeting did not
arise, they are not guilty of contravention of Sec. 220, Held, the directors cannot take
advantage ft4eir own default in holding the annual general meeting and were therefore
guilty. The fact that no annual general meeting of the company has been held is no
defence to a prosecution for not filing the balance sheet and profit and loss account (State
of Bombay v. Bhandhiin Ram (1961) I.S.C. 801; (1961)31 Comp. Cas. 1; India
Nutrirnents Ltd. v, Registrar of Conipan:es (1946) 34 Comp. Cas. 1601.
14. The directors of a company bought some of its shares from a shareholder while
they were negotiating for a transaction financially advantageous to the company, and
which, if successful, would have substantially raised the market value of its shares. They
did not disclose this information to the shareholderwhen buying his shares. The erstwhile
shareholder sued the directors for rescission of sale on the ground nf fraud. Held, the
purchase of shares by the directors was good and the transaction could not be set aside,
as there had been no misrepresentation. The directors are trustees and agent for the
company and for individual shareholders; they owed no duty to the shareholder to
disclose the circumstances which would increase the value of the shares [Percival v.
Wright (1902)2 Ch. 4211.
15. Two directors of P company gave guarantee to a railway company, by reason
of which the railway company agreed to carry goods on credit for P company. The Board
of directors of company therefore agreed that it should indemnify the two directors by
creating a charge on its uncalled capital. The articles of P company had given to the
directors to secure money only when borrowed and also contained a provision generally
authorising the Board of directors to carry on all business of the company in accordance
with the memorandum and articles. The memorandum had given powers to the company
to issue securities generally. Held, the directors had power to give this charge. The
directors arelhc only persons who can deal with the matters thus as.igned to them, and
their decision cannot be overruled even by a general meeting of the compaiy [Re. Pyle
Works (No. 2) (1891)1 Ch. 1731.
6 18 MERCANTILE LAW

16. The debentures issued by a company created a floating charge on the

company's property and stock-in-trade, with the condition that the company , was not to
create any prior charge. The manager of the company having forgotten his commitment
deposited the title deeds of the company's property with a bank by way of -security for
a loan obtained. The bank also happened to hold some of the company's debentures on
deposit for one of its customers. In a contention between the debenture-holders and the
bank as regards profits of charges it was held that the bank had priority as it had no notice.
actual or constructive, of the provision in the debentures [Re Val/ert Sanitary Steam
Laundry Co. Lid. (1903)2 Ch. 6541.
17.On March 15, 1966, a company, in consideration of a past debt of Rs. 75,000
and a future advance of Rs. 25000, issued debentures to a creditor accompanied by a
floating charge over its assets. On August 20. 1966, the company is wound up. Field, the
floating charge, so far as the past debt of Rs. 75,000 is concerned, is invalid, but so far
as the fresh advance of Rs. 25,000 is concerned the charge is valid—Sec. 534 tin re
!lavmanç'hrisiv and Lilly.Ltd. (1917)1 Ch. 231.
19. A creditor having recovered judgment against a company in respect of a trade
debt the Sheriff levied execution on the goods of the company which paid the amount
of the debt and the costs to the Sheriff in order to avoid sale. Before the money was paid
over by the Sheriff to the execution creditor, certain debenture-holders of the company
who held a floating charge on its assets made their security effective by the appointment
of a receiver who thereupon claimed the money in the hands of the Sheriff. held, that
the title of the receiver subsequently appointed under the debentures prevailed over that
of the garnishor or execution creditor. Where aftci a judgment creditor has obtained and
served on a company a garnishee order absolute, attaching debts due from the company
to the judgment creditor, the company borrows money on the security of the attachment
on its goods, the title of the receiver subsequently appointed under the debenture prevails
over that of the gamishor [Geisse v. Taylor (1905) 2 K.B. 6581.
19. The auditors of a company presented a confidential report to the directors.
pointing out that the security for the loans was insufficient and that there was difficulty
in realisation. They also reported that in their opinion no dividend should he paid for the
year. In their report to the shareholders, they merely stated that the value of the assets
depended upon realisation. The company declared a dividend of 7 per cent out of the
capital and not out of income. held, the auditors were guilty of misfeasance and liable
to make good the amount of the dividends paid ]ReLondon andGeneralBank (2)(1895)
2 Ch. 6731.
20. A buys from B 4.000 shares in a company on the faith of a share certificate
issued by the company. A tenders to the company a transfer from B to himself duly
executed together with B's share certificate. The company discovers that the certificate
in the name of B has been fraudulently obtained and refuses to register the transfer. Held,
although the certificate is not a warranty of title upon which A can maintain an action
against the company, it estops the company from disputing A's right to be registered.
The company cannot deny the title of the holder to the shares' as against a person who
has relied and acted upon the certificate. A could claim damages from the company to
the extent of the value of the shares at the time of the refusal to register] In re Oiios Kopje
Diamond Mines (1893) 1 Ch. 6181.
21. A company, without passing a resolution in its general meeting and getting
sanction of the Court, allotted 500 shares at a discount to G, its chairman, and placed his
name on the register of members. In the winding up of the company, G claimed that he
was not liable to be made a contributory.as the allotment was made in contravention of
the provisions of the Companies Act and so void, field. G was liable to be made a
contributory. His name appeared as a member nit the register of members at the time of
 COMPANY LAW 510

winding up of the company, and so he was liable under Sec. 426 of the Act and his
statutory liability to contribute arose on the winding up of the company. He was not
thereafter entitled to raise any objection as regards the invalidity of, or irregularity in,
the allotment. When the company is in the process of being wound up, the liability of
the members is cx lege and not ex coniractu. Whatever liability there was under the
contract, whether void or voidable, terminates and liability thereafter, when the process
of winding up starts, becomes a statutory liability and attaches by reason of the fact that
the person is a member of the company (K-L. Goenka v. S.R. Majunidar (1958) 28 Coin.
Cas. 536.
22. A was oil list of contributories as a member ho had transferred his shares
%k

within a year before the winding up order. After a call had been made against him by
the liquidator, he bought certain debts which were due from the company before he
transferred his shares, and claimed a reduction in his liability under the call to the extent
of those debts. held, his claim was not tenable. A person who is both a contributory and
a creditor of the company cannot set off his debt against his liability for calls even if
there is an express agreement to do so. The debt of contributory became payable on call
and could only be extinguished by payment: and that his liability was not reduced by the
purchase after call of debts due by the company before the transfer of his shares [In re
Apca Film Distributors, Ltd. (1959) 3 W.L.R. 81.
23. The executors of L were the registered shareholders of 700 shares in a
company. In March, 1966, they transferred these shares to NI and in May, 1966, a winding
up order of the company was made. M was put on A list for 4.500 shares, including
these 700 shares. In February, 1967, a call of Rs. 4(X) per share was made on NI: but he
was able to pay only a small amount. In November, 1967, the liquidator put the executors
of on B list and in June,1968, a call of Rs. 350 per share (in respect of these 700 shares
only) was made on them. Evidence showed that there was a probability that amounts
received from the contributories in the A list would not be sufficient to pay all the debts
of the company including some debts which the company owed whilst L, and his
executors were its members. Held, that in the circumstances, the executors were rightly
put on the B list and a call was rightly made on them to the extent that M was unable to
pay the calls made on the 700 shares formerly held by the executors [Hclbcr s'. Banner
Re. Parried's Ba,k (1971) L.R. 5 H.L. 281.
24. A lent a sum of money to a company, upon the terms that he should have a
collateral security of fully paid shares in the company. The company handed over to A
certificates for 10,000 shares offl each. The certificates stated that he was the registered
holder of the shares and that they were fully paid. No money had in fact been paid upon
the shares which were issued from the company direct. A did not know it and believed
that they were fully paid shares. Subsequently the company was wound up and A was
placed on the list of contributories. Held, the company and its liquidator were estopped
from denying that shares were fully paid. and A could he removed frcm the list. If
the certificate states that the shares are fully paid, the company cannot afterwards allege
that they are not fully paid, [Bloo,nenthalv, Ford (1897) A.C. 1561.
25. D carried on business under the name and style of Oriental Metal Pressing
Works. In 1955, a private company was incorporated under the name of Oriental Metal
Pressing Works Private Ltd., and D transferred his business to this company. By an
agreement between the company and D, tie was appointed the managing director of the
company for life and was given thepower to appoint any person to he a managing director
in his place and stead. D died in 1957, leaving a will whereby he purported to appoint
G, his son and one of the shareholders of the company. The Bombay High Court held
the appointment as void being in contravention of Sec. 312 which prohibits assignment
of his office by a director. The Supreme Court, in reversing this judgment, held that Sec.
312 makes the assignment of his office by a director void. 11 does not on the face of it
520 MERCANTILE LAW

say that an appointment by a director of another person as the directoi in his place would
be void. In Sec. 312 the word assignment does not include or mean 'appointment'. In
assignment there is a transfer of his office by a director when he holds it, whereas an
Pressing
appointment to an office can be made only if the office is vacant IOriental Mesa/
Works (Private) Lid. v. Bhasker Thakoor, 1961 S.C. 5731.
26. For the year ending 31st December, 1959, a private company doing agcocy
business had declared dividends and had stated that the dividends would be disbursed
as soon as it received the commission due to it. The company received the commission
due to it in May, 1960, but the dividends were not paid. H and K, two shareholders,
made a statutory demand on the company for the payment of the dividends, and on the
failure of the company to pay the dividends, H and K filed a petition for the winding up
of the company. On behalf of the company it was contended that when the shares held
by K were transferred to B in April, 1960, the right to the dividend was transferred along
with the shares; (ii) the resolution passed in 1959 to disburse dividend on receipt of the
commission was invalid as it enabled payment of declared dividends conditional; (iii)
the applicants would be contributories in case the company was wound up and so could
not be regarded as creditors of the company. The petition was dismissed on the ground
that the company being solvent an order for its winding up could not be passed. On
appeal, the Division Bench of Madras High Court held the company can he wound up
under Sec. 434(1 )(a) even though it is solvent if it fails to meet its creditors' demand for
payment. Held, further that a transfer of shares effected after the declaration of
dividends does not convey title to the dividend to the transferee as far as the company
is concerned even if the shares have been expressly transferred rum dividend. When the
dividend is declared, it becomes adebt immediately payable by the company to registered
shareholders; the company becomes their debtor. It was also held that it is open to a
company to declare a dividend on the basis of its accounts. Where it is based on estimated
profits which have not actually come in the form of cash to the company, it will be open
to it to pay such dividends from out of other cash in its hands or even to borrow aid pay
them off. The declaration of dividends before actual receipt of assets was therefore valid.
As dividend had,become debts due to the shareholder. H and K could file a petition as
creditors of the company for its winding up. The Court ordered the winding up of the
company on the ground of its inability to pay its debt, but at the same time directed the
order to be kept in abeyance for a period of 3 weeks in order to enable the company to
pay up the dividends to the two creditors 11lari Prasad v. Amalgamated Commercial
Trqders Private Ltd. (1964) (34) Comp. Cas. 2091.
27. The A company has offered to buy all the shares in the B company and the
holders of nine-tenths in value of the shares in the B company have agreed to the sale.
The remaining shares are held by X, who objects to the sale. The A company may acquire
the shares held,by X compulsorily and so obtain all the shares in the B company, by
giving notice to.him within 4 months of the offer by the A company as provided by Sec.
395.
28. A wa.s, appointcd a director of a company on April 1, 1970. The company was
ordered to be wound up on May 29, 1970 before A had obtained his qualification shares.
The liquidator, has placed his name on the list of contributories in respect of the
qualification shares. held, A's name cannot be included in the list of contributories, as
he does not hold any shares and his name does not appear on the register of members.
A director is required to obtain his qualification shares any time within 2 months after
his appointment. Since winding up of the company has commenced before the expiry of
the 2 months and before he acquired the shares, he was not a member ]Zahir Ahmed V.
Banaji (1957) 27 Comp. Cas. 6341.
 Chapter XVII

THE FACTORIES ACT, 1948

The main object of the Factories Act, as amended in 1987, is to ensure adequate
safety measures and to promote the health and welfare of workers employed in factories.
The Act extends to whole of India and covers all factories as defined under it.
DEFINUI1ONS
Section 2 lays down that in this Act, unless there is anything repugnant in the
subject or context,
(a) adult means a person who has completed his 18th year of age;
(b) adolescent means a person who has completed his 15th year of age but has
not completed his 18th year;
(bb) calendar year means the period of 12 months beginning with the first day of
January in any yeam;
(c) Child means a person who has not completed his 15th year of age;
(ca) competent person, in relation to any provision of this Act means a person or
an institution recognised as such by the Chief Inspector for the purpose of
carrying out tests, examinations and inspections required to be done in a
factory under the provisions of this Act having regard to -
(i) the qualifications and experience of the person and facilities available at
his disposal; or
(ii) the qualifications and experience of the persons employed in such institu-
tion and facilities available therein;
with regard to the conduct of such tests, examinations, and inspections and more than
one person or institution can be recognised as a competent person in relation to a factory;
(cb)hazardous process means any process or activity in relation to an industry
specified in the First Schedule where unless special care is taken, raw materials
used therein or the intermediate or finished products, by-products, wastes or
efflu- ents thereof would -
(i) cause material impairment to the health of the persons engaged in or
connected therewith, or
(ii) results in the pollution of the general environment:
Provided that the State Government may, by notification in the Official Gazette
amend the First Schedule by way of addition, omission or variation of any industry
specified in the said Schedule:
(d) young person means a person Who 5 either child or an adolescent.
(c) day means a period of 24 hours beginning at midnight:

521


522 MERCANflLI I SW

(f) week means a period of 7 days beginning at midnight on Saturday night or

such
other night as may be approved in Writing for a particular area by the Chief
Inspector of Factories;
(g) Power means electrical energy or any other form of energy which is mechani-
cally transmitted and is not generated by human or animal agency;
(h) Prime mover means any engine. motor or other appliance which generates or
otherwise provides power;
(i) Transmission machinery means any shaft, wheel, drum, pulley, system of
pulleys, coupling, clutch, driving belt or other appliance or device by which
the motion of prime mover is transmitted to or received by any machinery or
appliance:
(j) machinery includes prime movers, transmission machinery and all other
appliances whereby power is generated, transformed, transmitted or applied;
(k) manufacturing process means any process for -
(i) making, altering, repairing, ornamenting, finishing, packing, oiling,
washing, cleaning, breaking-up, dmolmshing, or otherwise, treating or
adapting any article or substance with a view to its use, sale, transport,
delivery or disposal; or
(ii) pumping oil, water or sewage or my other substance; or
(60 generating, transforming, lransn lung power, or
(iv) composing types for printing, 1 rimiting by letter press, lithogaphy,
photogravure or other similar pr , r-ess, or hook binding: or
(v) constructing, reconstructing, rcl : .ormng, refitting, finishing or breaking tip
ships or vessels; or
(vi) preserving or storing any article i n cold storage.
This definition is comprehensive and artificially projected beyond the natural
meaning of "manufacturing process'', as it includes even transporting, washing, clean-
ing. oiling and packing in its meaning although ;hesc do not involve any transformation
as such. According to this definition, therefore, immanufacturing process refers to particular
business carried on and does not necessarily refer it) production of some article.
The following have been held as manufacturing processes:
I. Bid i-making (State (?f Bombay v. All So/nh Kashini Tamboli, (1955)11 LL.J.l 82);
2. Salt making from sea water (Ardeslu'r v. lhrnihay Stale. (1962). S. C. 29);
3. Preparation of foodstuff in Kitchen of restaurants (New Tajnialial Cafe Ltd. v.
1isj;'c'tor o[Factorie.s (1956) 1 LL. J. 273);
4. Pumping of petrol from underground tank and pouring into the tanks of motor
vehicles (Gal ewav Auto Service v, Director ESIC (1980)11 LL. J. 255).
5. Sun-cured tobacco leaves subjected 10 processes of moistening, stripping, etc.
with a view to transporting to company's factory for their use in cigarette making
(V. P. Gopla Rani v. Public Prosecutor. (1970) S. C. 66).
6. Peeling, washing. etc. of prawn for putting them in cold storage (Re D'Souza v.
Krishnan Nair (1968) F. 1. R. 469).
(I) Worker means a person employed directly or through any agency (including
a contractor) with or without the knowledge of the principal employer,
whether for remuneration or not, in any manufacturing process, or in cleaning
any part of the machinery or premises used for mnanutactrirmng process in .0)
 THE FACTORIES A(1', 1948 523

other kind of work incidental to, or connected with the manufacturing process
or the subject of the manufacturing process, but does not include any member
of the armed forces of the Union.
A person, in order to be a worker under this section, need not necessarily receive
wages. t The concept of employment involves these ingredients: (i) the employer; (ii)
the employee; and (iii) the Contract of employment. The priniafacie test for determining
the relationship between the employer and employee is that the employer has the right
to supervise and control the work done by the employcc. And the employment should
he in connection with the manufacturing process which is being carried on in 0',
Therefore in ,Slzankar !lalaji Waje v. State of Ma/iaraslitra, 1962 S. C. 517. 'ILi 'roller"
was held not to be a worker under the section. p rolled hidis in appellant's factory.
There was no contract of service between the appellant and P. and P was not bound to
attend the factory for any fixed hours of work or period. He was free to go to the factory
as he liked and leave it when he chose to do so. Leaves were supplied to him to take
home for cutting. He was paid at a fixed rate on the quantity of hidis turned out. He
was not bound to roll the hidis at the factory, he could do that at home. field, he was not
a worker, as the three criteria of employment were not fulfilled in this case.
(in) factory means any premises including the precincts thereof-
(i) whereon 10 or more workers are working, or were working on any day
of the preceding twelve months; and in any part of which a manufacturing
process is being carried with the aid of power. or is ordinarily so carried
on, or
(ii) whereon 20 or more workers are working, or were working on any day
of the preceding 12 months, and in any part of which a manufacturing
process is being carried on without the aid of power, or ordinarily so
carried on;
but does not include a mine subject to the operation of the Mines Act. 1952, or a mobile
unit belonging to the armed forces of the Union, a railway running shed, or a hotel,
restaurant or eating place.
Explanation I—For computing th number of workers for the purposes of this
clause all the workers in different groups and relays in a day shall he taken into account.
Explanation fl—For the purposes of this clause, the mere fact that an Electronic
Data Processing Unit or a Computer Unit is installed in any premises or part thereof,
shall not be construed to make it a factory if no manufacturing process is being carried
on in such premises or part thereof.
The term factory includes premises where anything is done towards the making
or finishing of an article up to the stage when it is ready to he sold, It includes everything,
machine rooms, sheds not godowns, yards, open lands. A railway work shop is a factory,
but a railway running shed is not a factory, nor is a mine. In Ardes/rer v. Bombay State.
1962, S. C. 29, it was held that the word 'premises' is a generic term meaning open land
or land with buildings or buildings alone. Lands in which the process of manufacturing
of salt is carried on is a factory. Precincts means a space enclosed by walls or fences. A
place solely used for some purpose other than the manufacturing process does not
constitute a factory. Accordingly, to constitute a factory there must be (r) premises; (ii)
a manufacturing process, and (iii) tell more workers, if the manufacturing is carried
on with the aid of power or 20 or more workers if the immanufzicturiniz process is carried
on without the aid of power.

1. State of Bombay v. Al satmi h Kas hi ma 'l'camhot i, 1 1 )55 I iii. 2

2. Chintaman Rao v. State1959S.C.
of Ml'.. 188.
524 MERCANTILE LAW

(n) Occupier of a factory means the person who has ultimate control over the
affairs of the factory:
Provided that-
(i) 10 the case of a firm or othci association of individuals any one of the
individual partners or members thereof shall be deemed to be the occupier;
(ii) in the case of the company, any one of the directors shall be deemed to be the
occupier;
(iii) in the case of a factory owned or controlled by the Central Governmment or
any State Government. or any local authority, the person or persons appointed
to manage the affairs of the factory by the Central Government, the State
Government or the local authority, as the case may be, shall be deemed to be
the occupier;
Provided further that in the case of a ship, which is being repaired, or on which,
inaintcnance work is being carried out, in a dry dock which is available for hire—
(I) owner of the dock shall be deemed to be the occupier for the purposes of
I j iC
any matter provided for, by or under (a) Sections 6,73A, 7B, or 11 or 12; (b)
Section 17 in so far as it relates to the providing and maintenance of sufficient
and suitable lighting in or around the dock; (c) Sections l, 19, 42, 46, 47 or
49 in relation to the workers employed on such repair or maintenance;
(2) the owner of the ship or his agent or master or other officer-in-charge of the
ship or any person who contracts with such owner, agent or master or other
officer-in-charge to carry out the repair or maintenance work shall be deemed
to be occupier for the purposes of any matter provided in this proviso or
chapter VI, VII, VIII or IX or Sections 108, 1C9. or 110. In relation (0(a) the
workers employed directly by him or by or through any agency, and (b) the
machinery, plant or premises in use for the purposes of carrying out such repair
or maintenance work by such owner, agent, master or other officer-in-charge
or person.
Occupier means a person who occupies the factory either by himself or his agent.
He may be an owner, a lessee or a mere licensee but he must have the right to occupy
the property and dictate terms of management. He must control the working of the
factory. A mere servant charged with specific duties is not an occupier. A manager of a
factory who resides in the portion of the premises, of the factory is not an occupier. An
owner of a factory who has left the whole conduct of the affairs of his factory to a
manager, is an occupier, in so far as he has ultimate control over the affairs of the factory
(Emperor v. Modi (1930) 33 Born, L. R. 309; State of U. P. v. Modi, 1968 All. 197).
But where premises are given over to partnership in return for periodic payments and
the owner has no control over them, he is not an occupier (Slate of Maharsiura v.
Jani,iabaiPurshoilam, 1968 S. C. 53).
Power to declare different departments to be separate factories
Section 4 empowers the State Government, either on its own motion or on an
application by an occupier, to direct by an order in writing and subject to such conditions
as it may deem fit that for all or any of the purposes of this Act different departments or
branches of a factory of the occupier specified in the application shall be treated as
separate factories or that two or more factories of the occupier specified in the application
shall be treated as a single factory. But no order under this Section shall be made by the
State Government on its own motion unless an opportunity of being heard is given to
the occupier.
 ThE FA(lDk!IES ACT, I98 525

Power to exempt during Public Emergency

As per Section 5, in any case of public emergency, the State Government may, by
notification in the Official Gazette, exempt any factory, or class ordescription factories
from all or any of the provisions of this Act, except Section 67, for such period and
subject to such conditions as it may think fit. However, no exemption can be granted for
a period exceeding three months at a time.
APPROVAL OF LICENSING AND REGISTRATION OF FACTORIES
Sections 6 and 7 empower Factory Inspectorate to scrutinise the plans and
specifications of factory building prior to their construction or extension. Section 6
empowers the State Government to make rules requiring (a) the submission of plans of
any class or description of factories to the Chief Inspector or the State Government, (b)
previous permission in writing of the State Government or the Chief Inspector to be
obtained for the site on which the factory is to be situated and for construction or
extension of any factory. (c) for considering applications for permission, the submission
of plans and specifications. (d) nature of plans and specifications and the authority to
certify them. (e) registration and licensing of factories, (f) fees payable for registration
and licensing and for the renewal of licences. The licence shall not be granted unless 15
days notice as specified in Section 7 has been given.
If an application is made for approval in compliance with the foregoing require-
ments, and no reply is received within 3 months from the date on which it is sent, the
application stands automatically approved. If the application is not approved, the
applicant may within 30 days of such disapproval appeal to the Central Government
against the order of the State Government and to the State Government against the order
of any other authority.
Notice by Occupier—Section 7 provides that the occupier shall, at least 15 days
before he begins to occupy or use any premises as a factory, send to the Chief Inspector
a written notice containing-
1. The name and situation of the factory;
2. The name and address of the occupier;
3. The name and address of the owner of the premises or building;
4. The address to which communication relating to the factory should be sent,
5. The nature of manufacturing process to be carried on in the factory during the
next 12 months;
6. The total rated horse power installed or to be installed in the factory which
shall not include the rated horse power of any separate standby plant
7. The name of the Manager of the factory for the purposes of this Act.
8. The number of workers likely to be employed in the factory.
9. Such other particulars as may be prescribed.
In respect of all factories, the occupier shall send a written notice to the Chief
Inspector containing the aforesaid particulars within 30 days from the date of the
commencement of this Act. In the case of a seasonal factory which is engaged in a
manufacturing process for less than 180 days in the year, the occupier shall, before he
resumes work, give such notice at least 30 days before the commencement of work.

3. Section 67 states that no child who has not completed his fourteenth year shall be required or
allowed to work in a factory.
526 MERCANTilE LAW

Whenever a new manager is appointed, the occupier shall send to the Inspector a
written notice and to the Chief Inspector a copy thereof, within 7 days from the date on
which such person takes overcharge. If no manager is appointed or the person appointed
as a manager is not functioning the occupier shall he deemed to be the manager of the
factory.
General Duties of the Occupier
Section 7A was inserted by the Factories (Ainctidineni) ALL 197 as follows:
far as Is reasonably practicable, the health,
I. Every occupier shall ensure, so
safety and welfare of all workers while they are at work in the factory:
2. Without prejudice to the generality of the provisions of sub section (1) the
matters to which such duty extends shall include:
(a) the provision and maintenance of plant and systems of work in the factory that
are safe and wjthou; risks to health;
s
(h) the arrangement in the factory for ensuring safety and absence of ri ks to health
in connection with the use, handling, storage and transport of articles ad
substances;
(c) the provision of such information, instruction, training and supervision as are
necessary to ensure the health and safely of all workers at work;
(d) the maintenance of all places of work in the factory in a condition that is safe
and without risks to health and the provision and maintenance of such means
of access to, and egress from, such places as are safe and without such risks;
(e) the provision, maintenance or inonitom ing of such working environment in the
factory for the workers that is safe, with risks to health and adequate as
regards facilities and arrangements for their welfare at work;
3. Except in such cases as may he prescribed, every occupier shall prepare, and
s
as often as may he appropriate, revise, a written tatement of his general policy with
respect to the health and safety of the workers at work and the organisation and
arrangements for the time being in force fm carrying out that policy, and to bring the
statement and any revision thereof to the notice of all the workers in such manner as
may be prescribed.
General Duties of Manufacturers, etc.
Section 7B, inserted by the 1987 Amendment Act provides for the general duties
of manufacturers, etc., as regards articles and substances for use in factories. It states—
(I) Every person who designs, manufactures. imports or supplies any article for
USC in any factory shall—

(a) ensure, so far as is reasonably practicable, that the article is so designed and
constructed as to be safe and without risks to the health of the workers when
properly used;
(b) carry out or arrange for the carrying out of such tests and examinations as may
be considered necessary for effective mniplemnentatmon of the provisions of
clause (a);
(c) take such steps as may he necessary to ensure that adequate information will
be available-
(i) in connection with the use of the article in any factory:
(ii) about the use for which it is designed and tested; and
(iii) about any conditions necessary to ens ore I tat the article, when put to
such use, will he safe, and without risks to the health of the workers:
 111E FAC10RIt:S ACT. 1948 527

Provided that where an article designed or manufactured outside India, it shall

be obligatory on the part of the impo!er to see.
(a) that the article (including plant and iiiachinery) conforms to the same standards
of such article as manufactured in India: or
(h) if the standards adopted in ne country outside for the manufacture of such
article are above the standad.s adopted in India, that the article conforms to
such standards;

(2) Every person who undertakes to design or manufacture any article for use in
any factory may carry out or arrange for the carrying out of necessary research with a
view to the discovery and so far as is r&'asonably practicable the elimination or minimisa-
tion of any risk to the health or safet y of workers to which design or article may give
rise.
The Section further provides that If research, testing, etc.; has already been
exercised or carried out, then no such research is required again. The foregoing duties
relate only to things dune in the course of the business carried on by him, and to matters
within his control. However, the person may get relief from the exercise of aFX)Ve duties
if he gets an undertaking in writing from the user of such article to take necessary steps
that the article will be safe and without risk to the health of the workers. The term article
in this section shall include plant and machinery.

TIlE INSPECTING STAFF

The State Government is empowered to appoint persons possessing prescribed

qualifications as Inspectors and assign to them such local limits as it may think fit. The
State Government may also appoint a Chief Inspcctor who shall, in addition to the powers
conferred on him as Chief Inspector, exercise the powers of an Inspector throughout the
State. The said Government may appoint Additional Chief Inspectors, Joint Chief
Inspectors and Deputy Chief Inspector to assist the Chief Inspector as may be specified.
Every District Magistrate shall beex-officio Inspector. The State Government may
also appoint certain public officers to he additional Inspectors for certain areas assigned
to them. The Chief Inspector is apfx)inteu fur the whole State and exercises the powers
of an Inspector in addition to the powers conferred on him as Chief Inspector. To be
appointed in any of the capacities as stated above, apersnrm must not be interested directly
or indirectly in any facto.j. He shall cease to hold such Of lice if he gets interested in any
factory, after his appointment.
Powers of the Inspector (Sec. 9)
Subject to any rules made under the Act, an Inspector may exercise any of the
following powers '. ithin the local limits for which he is appointed
I. He may enter anyplace which is used or which he has reason to believe is used
as a factory. For this purpose, he may take the assttance of any person (0 in the service
of the Government or (ii) any local or public authority, or (iii) of an expert.
2. He may make e'ainination of the premises, plant, machinery, article or
substance;
3. Inquire into any accident or dangerous occurrence whether resulting in bodily
injury, disability or not, and take on the spot or otherwise statements of any person which
he may consider necessary for such inquiry;
4. Require the production of any prescribed register or any other document relating
to the factory;
528 MERCANTILI: LAW

5. Seize, or take copies of, any register, record or other document or any portion
thereof as he may consider necessary in respect of the offence under this Act, which he
has reason to believe has been committed.
6. Direct the occupier that any premises or any part thereof, and anything lying
therein, shall be left undisturbed for so long as is necessary for the purpose of any
examination.
7. Take measurements and photographs and make such recording as he considers
necessary for the purpose of any examination, taking with him any necessary instrument
or equipment;
8. In case of any article or substance found in any factory which appears to him
to be dangerous to the health or safely of the workers, direct it to he dismantled or subject
it to any test and take possession of it for making examination;
9. He may exercise such other powers a may be prescribed.
However, the Inspector is not authorised to ask the proprietor or manager or
occupier to produce the registers or other documents in his office; he can do so only in
the factory premises. Moreover, no person shall be compelled to answer any question or
give any evidence tending to incriminate himself.
CERTIFYING SURGEONS (Sec. 10)
The State Government may appoint qua] ified medical practitioners to be certifying
surgeons for the purposes of this Act within such limits or for such factory, or class of
factories as it may assign to them respectively.
A certifying surgeon must not have any connection with, or interest in the factory
directly or indirectly. A certifying surgeon will exercise the following functions:
(a) the examination and certification of young persons under this Act;
(b) the examination of persons engaged in factories in such dangerous occupations
or processes as may be prescribed;
(c) the exercising of such medical supervision as may beprescribed for any factory
or class or description of factories, where-
(i) cases of illness have occurred which it is reasonable to believe are
due to the nature of the manufacturing process carried on or other
conditions of work prevailing therein;
(ii) young persons are, or are to be, employed in any work which is likely
to cause injury to their health;
(iii) by reason of any change in the manufacturing process carried on ox
in the substances used therein or by reason of the adoption of any
new manufacturing processes or of any new substance for use in the
manufacturing process, there is a likelihood of injury to the health of
workers employed in that manufacturing process.
(iv) any certifying surgeon may, with the approval of the State Govern-
ment authorise any qualified medical practitioner to exercise any of
his powers under this Act on such conditions and for such a period
of time as the State Government may prescribe.
A Certifying Surgeon, will examine children and adolescents (young persons)
desirous of being employed and issue certificates of age and fitness to young persons
and re-examine them, if need be. The certifying surgeon shall ordinarily visit every
factory within his local limits in which young persons are known to be employed at least
once in three months after giving previous notice of his visit. He will by personal
 TILE FACTORIES ACT. 1949 529

examination satisfy himself that the young persons employed in the factory are fit to
work therein.

H EALTII

Cleanliness (See. 11)

(1) Every factory shall be kept clean and free from effluvia arising from any drain,
privy, or other nuisance, and in particular—
(a) all the accumulated dirt and refuse on floors, staircases and passages in the
factory shall be removed daily by sweeping or by any other effective method.
Suitable arrangements should also he made for the disposal of such dirt or
refuse. Benches in workrooms should be wiped clean;
(b) Once in every week, the floor of every workroom should be cleaned by
washing using disinfectant or by some other effective method;
(c) Effective method of drainage shall he made and maintained for removing
water, to the extent possible, which may have collected on the floor due to
some manufacturing process;
(d) to ensure that interior walls and ceilings etc. are kept clean; they should be-
(i) whitewashed or colour washed at least once in every period of 14
months;
(ii) where surface has been painted or varnished, repaint or revarnish
should be done once in every 3 years; if washable, then washed in
every 6 months;
(iii) where the surface is smooth and impervious, it should be cleaned
once in every period of 14 months.
(e) All doors, window frames and other wooden or metallic framework and
shutters shall be painted or varnished at least once in every period of 5 years.
(f) The dates on which such processes are carried out shall be entered in the
Prescribed register.
Disposal of Waste and Effluents (Sec. 12)
Every occupier of a factory shall make effective arrangements for the treatment of
wastes and effluent due to the manufacturing process carried on in the factory so as to
render them innocuous for their disposal. Such amingemnents should be in accordance
with the rules, if any, laid down by the State Government, or approved by the prescribed
authority.
Ventilation and Temperature (Sec. 13)
Evey factory should make effective and imitable provisions for securing and
maintaining (i) adequate ventilation by the circulation of fresh air, and (ii) such a
temperature as will secure to the workers reasonable conditions of comforf and prevent
injury to health. Walls and roofs shall be of such material and so designed that such
temperature shall not be exceeded but kept as low as practicable. The State Government
may prescribe a standard of adequate ventilation and reasonable temperature for any
factory or class of factories and direct that proper measuring instruments shall be
provided and such records as may be prescribed, shall he maintained.
530 MERCAWILL LAW

Dust and Fume (Sec. 14

In a number of factories such as textiles. Jute, cotton ginning and chemicals, the
manufacturing process disseminates large amount of dust and fume, arrangements for
the elimination of which are frequently defective. Effective measures must be taken to
prevent the inhalation of dust and its accumulation in any workroom. If any exhaust
appliance is necessary for this purpose, it shall he applied at a suitable point.
Furthermore, no stationary internal combustion engine shall he operated in any
factory, unless the exhaust is conducted into the open air.
Artificial Humidification (Sec. 15)
The humidification of cotton textile mills in India affects the physique of workers.
It is, therefore, necessary that adequate standards, must be laid down to check excessive
humidity which is artificially introudced in our country.
For this purpose. Section 15 provides that in respect of all factories in which the
humidity of air is artificially increased, the State Government may prescribe standards
of humidification, regulate the methods for artificially increasing humidity and require
the recording of humidity at different intervals. The water for this purpose shall be taken
from a public supply, or other source of drinking water or shall be effectively purified
before it is so used. Methods for securing adequate ventilation and cooling of the air in
the workrooms should be used.
Overcrowding (Sec. 16)
Overcrowding is another factor that injures the health of workers. Section 16
provides that no room in any factory shall be overcrowded to an extent injurious to the
health of the workers employed therein. In every workroom of a factory in existence on
April, 1949, there must be at least 9.9 cubic metres and of a factory built after that date
at least 14.2 cubic metres of space for every worker employed therein. This space
measurement has to be taken up to 4.2 metres above the level of the floor of the room.
Lighting (Sec. 17)
The sense most employed in locating things is sight. Therefore, in every part of a
factory where workers are working or passing, there must be provided and maintained
sufficient and suitable lighting, natural or artificial, or both. All glazed windows and sky
lights must always be kept clean so as to admit adequate light. Effective provision is also
required to be made for the prevention of glare, either directly from a source of light or
by reflection from a smooth or polished surface, and the formation of shadows which
are likely to cause eye strain or accident to any worker. The State Government may lay
down standards of sufficient and suitable light.
Drinking Water (Sec. 18)
In a country like India there is hardly any need to emphasize the importanceof
providing a liberal supply of cool and pure water. Section 18 lays down that in every
factory effective arrangements must be made to provide and maintain at suitable points
conveniently situated for all workers employed therein a sufficient supply of
wholesome drinking water. All such points must be legibly marked "drinking water"
in a language understood by a majority of workers employed in the factory, and no such
pthnt must be situated within 6 metres of any washing place, urinal or latrine unless a
shorter distance is approved in writing by the Chief Inspector. Also, in every factory
wherein more than 250 workers are ordinarily employed provision must be made for
cooling drinking water during hot weather by effective means and for distribution
 1111 FAC'IORII:S A('I. 1945 531

thereof. The Stale Government may make rules for securing compliance with these
provisions.
Latrines and Urinals (Sec. 19)
In every factory—

(a) sufficient latrine and urinal accommodation of prescribed type shall be

provided conveniently situated and accessible to workers at all times while they are at
the factory:
(b) separate enclosed accommodation shall he provided for male and female
workers;
(c) such accommodation shall be adequately lighted and ventilated, and no latrine
or urinal shall, unless specially exempted in writing by the Chief Inspector, communicate
with any workroom except through an intervening open space or ventilated passage:
(d) all such accommodation shall he maintained in a clean and sanitary condition
at all times:
(e) sweepers shall be employed whose primary duty it would be to keep clean
latrines, urinals and washing places.

It is further provided that in every factory wherein more than 250 workers are
ordinarily employed—

(a) all latrine and urinal accommodation shall he of prescribed sanitary type;
(b) the floors and internal walls, up to a height of 90 centimetres, of the latrines
and urinals and the sanitary block shall be laid in glazed tiles or otherwise finished to
provide a smooth polished impervious surface;
(c) in addition to urinal and latrine accommodation being kept clears all the time,
the floors, fx)rlions of the walls and blocks so laid or finished and the sanitary pans of
latrines and urinals shall be thoroughly washed and cleaned at least once in every 7 days
with suitable detergents or disinfectants or with both.
The State Government may prescribe the number of latrines and urinals to be
provided in any factory in proportion to the number of male and female workers
ordinarily employed therein, including the obligations of workers in this regard, as it
considers necessary in the interest of the health of the workers employed therein.
Spittoons (Sec. 20)
A sufficient number of spittoons are required to be provided in every factory at
convenient places and kept in a clean and hygienic condition. No person must spit within
the premises of a factoij except in the spittoons provided for the purpose. Any one
spitting in contravention of this condition shall be punishable with a fine not exceeding
Rs. 5. A notice containing this provision and the penalty for its violation must be
prominently displayed at suitable places in the premises. The State Government may
prescibe the number of spittoons and their location in any factory.

SAFETY

There is a duty to fence a prime mover, and every moving part thereof, every part
of transmission machu)ery and every dangerous part of any other machinery (Sec. 21).
Prime mover is machinery such as an engine or motor which provides mechanical energy.
Transmission machinery is one by which the motion of a prime mover is transmitted to
or received by. any machine.
532 MERCANTILE LAW

Examination of any part of a machinery, in motion may be carried out only by a

specially trained adult male worker, wearing tight-fitting clothing. No Woman or young
person shall be allowed to clean, lubricate or adjust any part of a prime mover or
transmission machinery when in motion, or to clean, lubricate or adjust any part of any
machine if the cleaning, lubrication or adjustment thereof would expose the woman of
young person to risk of injury from any moving part either of that machine or of any
adjacent machinery (Sec. 22). A young person must not work at dangerous machines,
unless he has been fully instructed as to the dangers arising in connection with the
machines and the precautions to be observed. Such person must have received sufficient
training to work at the machine and should be under adequate supervision of a person
having thorough knowledge and experience of the machine (Sec. 23).
Suitable and efficient mechanical appliance such as striking gear must be provided
and always used to move driving belts. Suitable devices for cutting off power in
emergencies from running machinery must be maintained iii every workroom (Sec. 24).
To reduce risk of accidents, no traversing part of a self-acting machine, and no material
carried on it, must be allowed to run within a distance of 45 centimetres from any fixed
structure, if the space over which it runs is one in which any person is likely to pass (Sec.
25). Sec. 26 provides for casing of machinery to prevent accident or danger. Under Sec.
27, no woman or young person must he allowed or required to work for pressing cotton
where a cotton opener is at work. Every hoist and lift inust he properly constructed so
as to be good mechanical construction, sound material and adequate strength, and
properly maintained. It must he sufficiently protected by enclosures and must be fitted
with gates. It must be examined every six months by a competent person. (Sec. 28).
Cranes and other lifting machinery must he sound and well constructed, and free
from defects. They must he thoroughly examined at least once a year by a competent
person (See. 29). Sec. 30 states that effective steps must be taken to ensure that the sale
working peripheral speed of every revolving machine and appliance driven by power is
not exceeded, and the safe speed must be stated on a notice to be kept near each machine
where the process of grinding is carried on. To ward against the danger of explosion it
is provided in Sec. 31 that if any part of any plan[ or machinery is operated at a pressure
above atmnoshperic pressure, then effective measures must he taken to ensure that the
safe working pressure is not exceeded. All floors, steps. stairs, passages and gangways
must be of sound construction and properly maintained and kept free from obstructions;
handrails and fencing must be provided where necessary (Sec. 32). Pits, sumps, fixed
vessels, tanks, openings must be securely covered or securely fenced (Sec. 33).
No person should be employed to lift, carry or move any load so heavy as to be
likely to cause him injury (Sec. 34). Screens or suitable goggles must be provided for
the protection of persons employed on or in immediate vicinity of mechanical or other
processes which involve any danger of injury to the worker's eyesight (Sec. 35).
Precautions must be taken against dangerous fumes, by manholes or other effective
means of egress. No person must enter or be permitted to enter any confined space such
as chamber, tank, vat, pit, pipe, flue in which dangerous fumes are likely to be present,
unless it is provided with a manhole or oilier effective means of egress (Sec. 36). The
liability exists even though the worker entered without permission (Slate Y. Chinuhhai
(1958) Born. 226). Effective enclosures of the plant or machinery, removal or preven-
tion of accumulation of dust, gas, fume or vapour, exclusion or effective enclosure of all
possible source of ignition must be taken, with a view to preventing any explosion which
might be the result of dust, gas, fume or vapour produced through any manufacturing
process (Sec. 37).
Every factory must be proMided willi adequate means of escape in case of fire.
Doors of rooms must not be locked or fastened so that they cannot be easily and
immediately opened from the inside and unless they are of the sliding type, they must
 THE FACTORIES ACT. 1948 533

open outwards. Every fire exit must be distinctly marked in a language understood by
the majority of workers and in red letters of adequate size, Clearly audible means of
warning in case of fire must be provided (Sec. 38). If it appears to the Inspector that any
building of a factory is dangerous, he may ask the occupier or manager or both to carry
out suggested repairs, or if the danger appears to be imminent, prohibit the use of the
building until repaired (Sec. 40). If it appears to the Inspector that any huilJing or part
of a building in a factory is in such a state of disrepair as is likely to be detrimental to
the health and welfare of workers, he may order in writing the occupier, manager or both
to carry out the specified measures by a specified date (Sec. 40A). Wherein 1,000 or
more workers are ordinarily employed, or wherein, in the opinion of the State Govern-
ment, any manufacturing process or operation is carried on, which process or operation
involves any risk of bodily injury, poisoning or disease, or any other hazard to health to
the person employed in the factory, the State Government may require the occupier to
employ SAFETY OFFICERS having specified qualifications (Sec. 40B).

PROVISIONS RELATING TO HAZARDOUS PROCESSES

A new Chapter IVA was added by the 1987 Amendment Act dealing with
hazardous processes.
Section 41 A— Constitution of Site Appraisal Committee. (I) The State Govern-
ment may, for purposes of advising it to consider applications for grant of permission
for the initial location of factory involving a hazardous process or for the expansion of
any such factory, appoint a Site Appraisal Committee consisting of—
(a) the Chief Inspector of the State who shall be its Chairman;
(b) a representative of the Centra Board for the prevention and control of Water
Pollution appointed by the Central Government under Section 3 of the Water
(Prevention and Control of Pollution) Act, 1974;
(c) a representative of the Central Board for the Prevention and Control of Air
Pollution referred to in Section 3 of the Air (Prevention aid Control of
Pollution) Act, 1974;
(d) a representative of the State Board appointed under Section 4 of the Water
(Prevention and Control of Pollution) Act, 1974;
(e) a representative of State Board for the Prevention and Control of Air Pollution
referred to in Section 5 of the Air (Prevention and Control of Pollution) Act;
1981;
(1) a representative of the Department of Envirommient in the State;
(g) a representative of the Meteorological Department ofthe Government of India;
(h) an expert in the field of occupational health; and
(i) a representative of the Town Planning Department of the State Government;
and not more than five other members who may be co-opted by the State Government
who shall be -
(I) a scientist having specialised knowledge of the hazardous process which
will be involved in the factory;
(ii) a representative of the local authority within whose jurisdiction the
factory is to be established; and
(iii) no more than three other persons as deemed fit by the State Government.

(2) The Site Appraisal Committee shall examine an application for the stablish-
ment of a factory involving hazardous process and make its recommendation to the State
534 MERCANTILE LAW

government within a period of9Odays of the receipt of such application in the prescribed
form.
(3) Where any process relates to a factory owned or controlled by the Central
Government or to a corporation or a company owned or controlled by the Central
Government. the State Government shall co-opt in the Site Appraisal Committee a
representative nominated by the Central Government as a member of the Committee.
(4) The Site Appraisal Committee shall have power to call for any information
from the person making an application for the establishment or expansion of a factory
involving hazardous process.
(5) Where the Stale Government has granted approval to an application for the
establishment or expansion of a factory involving a hazardous process, it shall not be
necessary for an applicant to obtain a further approval from the Central Board or the
State Board established under the Water and Air (Prevention and Control of Pollution)
Act.
Section 4111. Compulsory Disclosure of Inlormalion by the Occupier
(1) The occupier of every factory involving a hazardous process shall disclose in
the manner prescribed all information regarding dangers, including health hazards, and
the measures to overcome such hazards arising from the exposure to or handling of the
materials or substances in the manufacture, transportation, storage, and other processes,
to the wokers employed in the factory, the Chief Inspector, the local authority within
whose jurisdiction the factory is situated and the general public in the vicinity.
(2) The occupier shall at the time of registering the factory involving a hazardous
process, lay down a detailed policy with respect to the health and safety of the workers
employed therein and intimate such policy to the Chief Inspector and the local authority
and, thereafter, at such intervals as may be prescribed, inform the Chief Inspector and
the local authority of any change made in the said policy.
(3) The information furnished under sub-sec. (1) shall include accurate informa-
tion as to the quantity, specifications and other characteristics of wastes and the manner
of their disposal.
(4) Every occupier shall, with the approval of the Chief Inspector, draw up an
on-site emergency plan and detailed disaster control measures for his factory and make
known to the workers employed therein and to the general public living in the vicinity
of the factory the safety measures required to be taken.in the event of an accident taking
place.
(5) Every occupier of a factory shall—
(a) if such factory is engaged in a hazardous process on the commencement
of the Factories (Amendment) Act. 1987 within a period of 30 days of
such commencement. and
(I,) if such factory proposes to engage in hazardous process at any time after
such commencement, within a period of 30 days before the commence-
ment of such process; inform the Chief Inspector of the nature and details
of the process in such form and in such manner as may be prescribed.

(6) Where any occupier of a factory contravenes the provisions of sub-sec. (5),
the Licence issued under Section 6 to such factory shall notwithstanding any penalty to
which the occupier or factory shall be subjected to under the provisions of this Act, be
liable for cancellation.
(7) The occupier of a factory involving a hazardous process shall, with the
previous approval of the Chief Inspector, lay down measures for the handling, usage,
 TiLE FACTORIES ACT, 1948 535

transportation and storage of hazardous substances inside the factory premises and the
disposal of such substances outside the factory premises and publicise them in the
manner prescribed among the workers and the general public living in the vicinity.
Specific Responsibility of the Occupier in relation to Hazardous Processes
—Section 41C states that every occupier of a factory involving hazardous process
shall—
(a) maintain accurate and up-to-date health records or, as the case may be, medical
records, of the worker in the factory who are exposed to any chemical, toxic or any other
harmful substancess which are manufactured, stored, handled or transported and such
records shall be accessible to the workers subject to suchcunditions as maybe prescribed;
(b) appoint persons who possess qualifications and experience in handling haz-
ardous substances and are competent to supervise such handling within the factory and
to provide at the working place, all necessary facilities for protecting the workers in the
manner prescribed;

Provided that where any question arises as to the qualifications and experience of
a person so appointed, the decision of the Chief Inspector shall be final;
(c) provide for medical examination of every worker-
(i) before such worker is assigned to a job involving the handling of, or
working with, a hazardous substance; and
(ii) while continuing in such job, and after he has ceased to work in such job
at intervals not exceeding 12 months, in such manner as may be
prescribed.
Power of Central Government to appoint Inquiry Committee
As per Section 41D. (1) The Central Government may, in the event of the
occurrence of an extraordinary situation involving a factory engaged in a hazardous
process, appoint an Inquiry Committee to inquire into the standards of health and safety
observed in the factory with a view to finding out the causes of any failure or neglect in
the adoption of any measures or standards prescribed for the health and safety of the
workers employed in the factor y or the general public affected, or likely to be affected
due to such failure or neglect and the prevention and recurrence of such extraordinary
situation in future in such factory or elsewhere.
(2) The Committee appointed under Sub-sec. (I) shall consist of a Chairman and
two other members and the terms of reference of the Committee and tenure of office of
its members shall be such as may be determined by the Central Government according
to the requirements of the situation. The recommendations of the Committee shall be
advisory in nature.
Emergency Standards—Sec. 41E. (1) Where the Central Government is satis-
fied that no standards of safety have been prescribed in respect of hazardous process or
class of hazardous processes, or where the standards so prescribed are inadequate, it may
direct the Director-General of Factory Advice Service and Labour Institutes or any
institution specialised in matters relating to standards of safety in hazardous processes,
to lay down emergency standards for enforcement of suitable standards in respect of
such hazardous processes.
(2) The emergency standards laid down under Sub-Sec. (1) shall, until they are
incorporated in the rules made under this Act, be enforceable and have the same effect
as if they had been incorporated in the rules made under this Act.
516 MERCANTILE LAW

Permissible Limits or Exposure of Chemicals and Toxic Substances---Sec-

4 IF. (I) The maximum pcnnissible threshold limits of exposure of chemical and toxic
substances in maufacturing process (whether hazardous or otherwise) in any factory
shall be of the value indicated in the Second Schedule.
(2) The Central Government may, at any time, for the purpose of giving effect to
any scientific proof obtained from specialised lflStltUtLOnS or experts in the field, by
notification in the Official Gazette, make suitable changes in theaid Schedule.
Workers participation in Safety Management. Sec. 410. (1) The occupier
shall, in every factory where hazardous process takes place, or where hazardous
substances are used or handled set up a Safety Committee consisting of equal number
of representatives of workers and management to promote cooperation between the
workers and the management in maintaining proper safety and health at work and to
review periodically the measures taken in this bchalf,
Provided that the State Government may, by order in writing and for reasons to be
recorded, exempt the occupier of any factory or class of factories from setting up such
Committee.
(2) The composition of the Safety Committee, the tenure of office of its members
and their rights and duties shall be such as may be prescribed.
Right of Workers to Warn about Imminent Danger. Sec. 41H.
(I) Where the workers employed in any factory engaged in a hazardous process
have reasonable apprehension that there is a likelihood of imminent danger to their lives
of health due to any accident, they may bring the same to the notice of the occupier,
agent, manager or any other person who is incharge of the factory or the process
concerned directly or through their representatives in the Safely Committee and simul-
taneously bring the same to the notice of the Inspector.
(2) It shall be the duty of such occupier, agent, manager, or the person incharge
of the factory or the process to take immediate remedial action if he is satisfied about
the existence of such imminent danger and send a report forthwith of the action taken to
the nearest Inspector.
(3) If the occupier, agent, manager, or the person incharge referred to in sub-sec.
(2) is not satisfied about the existence of any imminent danger as apprehended by the
workers, he shall, nevertheless, refer the matter forthwith to the nearest Inspector whose
decision on the question of the existence of such imminent danger shall be final.

WELFARE

In every factory separate and adequately screened washing facilities, conveniently

accessible to male and female workers must be provided and maintained. They must be
adequate, suitable and kept in clean condition (Sec 42). Suitable arrangements for sitting
must be provided and maintained for all workers who have to work in a standing position,
in order that they may take advantage of any opportunities for restwhich may occur in
the course of their work (Sec. 44).
First-aid boxes or cupboards equipped with prescribed contents and not less than
one in number for every 150 workers at any one time must be provided and maintained
in every factory so as to be accessible during all working hours. Nothing except the
prescribed contents shall be kept in first -aid boxes or cupboards. Each first-aid box or
cupboard must be kept in the charge of a separate responsible person who holds a
certificate in first-aid treatment recognised by the State Government who shall always
be readily available during the working hours of the factory. Further, in every factory in
which more than 500 workers are ordinarily employed an ambulance room of the
 THE FACTORIES ACT, 194* 537

prescribed size, containing the prescribed equipment and in the charge of such medical
and nursing staff as may bre prescribed, must he provided and maintained and those
facilities must laways be made readily available during working hours of the factory
(Sec. 45).
The State Government may require the occupier of any factory employing more
than 250 workers to provide and maintain a canteen or canteens for the use of the workers
(Sec. 46). In every factory in which more than 150 workers are ordinarily employed,
adequate and suitable shelters or rooms and suitable lunch rooms sufficiently lighted and
ventilated, with provision for drinking water, where workers can eat meals brought by
them, must be provided and maintained in a cool and clean condition for the use of Ui
workers (Sec. 47).
In every factory wherein more than 30 women workers are ordinarily empli yed
there must be provided and maintained a suitable room or rooms for the use of children
under the age of 6 years of such women. Such rooms (creches) must provide adequate
accommodation and must be adequately lighted and ventilated. They must be kept in
clean and sanitary condition, and must be under the charge of women trained in the care
of children and infants. The State Government may by rules require the provision of
additional facilities for the care of such children, and provision of free milk or refresh-
ment or both for these children. Facilities may also be required to be given to mothers
to feed their children at the necessary intervals (Sec. 48).
In every factory wherein 500 or more workers are ordinarily employed, the
occupier of the factory must employ in the factory the prescribed number of welfare
officers. The State Government may also prescribe the duties, qualificat ions and condi-
tions of service of such welfare officers (Sec. 49).
Sec. 50 empowers the State Government to exempt any factory or class or
description of factories from complm.uice with any of these welfare provisions, provided
that it prescribes alternative arrangements for the welfare of workers. It may order that
the workers, representatives shall he associated with the management of the welfare
arrangements for workers.

WORKING HOURS OF ADULTS

It is now generally recognised that shorter hours of labour result in increased

efficiency. Sees. 51 and 54 provide that no adult worker shall be required or allowed to
work in a factory for more than 48 hours in any week, or 9 hours in any day provided
that, subject to the previous approval of the Chief Inspector, the daily maximum of 9
hours may be exceeded in order to facilitate the change of shift. Sees. 55 and 56 provide
that the period of adult workers in a factory each day shall be so fixed that no period
exceeds 5 hours and no worker shall work for more than 5 hours before he had an interval
of rest for half an hour, but in special cases the period of work may be 6 hours if the
Chief Inspector permits it. The spread-over on any day (i.e., the total number of hours
of his stay in the factory inclusive of rest interval) shall not be more than l0 unless it
is increased by the Chief Inspector in writing for specified reasons up to 12 hours.
Weekly Holidays (Sec. 52)

No adult worker shall be required or allowed to work in a factory on the first day
of the week (i.e.. Sunday, hereinafter referred to as the said day), unless (a) he has or
will have a holiday for a whole day on one of the three days immediately before or after
the said day, and (b) the manager of the factory has, before the said day or the substituted
day under clause (a), whichever is earlier, delivered a notice at the office of the Inspector
of his intention to require the worker to work on the said day and of the day which is to
535 MERCANTILE LAW

be substituted, and displayed a notice to that effect in the factory. No substitution shall,
however, be made which will result in any worker working for more than 10 days
consecutively without a holiday for a whole day. The above notices may be cancelled,
if necessary, by a notice delivered at the office of the Inspector and a notice displayed
in the factory not later than the day before the said day or the holiday to be cancelled,
whichever is earlier. Again, when any worker works on the said day and has had aholiday
on one of the three days immediately before it, that said day shall, for the purpose of
calculating his weekly hours of work, be included in the preceding week.
Compensatory Holidays (Sec. 53)
Where, as a result of the passing of an order or the making of a rule under the
provisions of this Act exempting a factory or the workers therein from the provisions of
Sec. 52 with regard to weekly holiday, a worker is deprived of any of the weekly holidays
for which the holidays were due to hiin or within the month in which the holidays were
due to him or within the two months immediately following that month, compensatory
holidays of equal number to the holidays so lost.
Night Shifts (Sec. 57)
Where a worker in a factory works on a shift which extends beyond midnight, (a)
for the purpose of Secs. 52 and 56, a holiday for a whole day shall mean in his case a
period of 24 consecutive hours beginning when his shift ends; (h) the following day for
him shall be deemed to i'e the period of 24 hours beginning when such shift ends, and
the hours he has workd after midnight shall he counted in the previous day.
Prohibition of Overlapping Shifts (Sec. 58)
Work shall not be carried on in any factory by means of a system of shifts so
arranged that more than one relay of workers is engaged in work of the same kind at the
same time. The State Government or subject to the control of the State Government. the
Chief Inspector may, however, exempt any factory or class or description of factories
from this provision on specified conditions.
Extra Wages for Overtime (Sec. 59)
(1) Where a worker works in a factory for more than 9 hours in any day or foi
more than 48 hours in any week he shall, in respect of overtime work, be entitled to
wages at the rate of twice his ordinary rate of wages. The Section applies only to cases
of overtime work done beyond 9 hours a day and 48 hours a week. If the normal working
bout's are 8 hours a day and 44 hours a week, and a worker works beyond 8 hours but
not beyond 9 hours, he is not entitled to overtime rate (The Clothing Factory. Naiionl
Workers' UnjonAvdi, Madras v. Union of India, 1990 S.C. 1383). (2) For the purpose
of Sub-Sec. (1), "ordinary rate of wages" means the basic wages plus such allowances,
including the cash equivalent of the advantage accruing through the concessional sale
to workers of foodgrains and other articles, as the worker is for the time being entitled
to, but not included a bonus and wages for overtime work. (3) Whore any workers in a
factory are paid on a piece-rate basis, the time rate shall be deemed to be equivalent to
the daily average of their full-time earnings for the days on which they actually worked
on the same or identical job during the month immediately preceding the calendar month
during which the overtime work was done, and such time rates shall be deemed to be
the ordinary rates of wages of those workers; provided that in the case of a worker who
has not worked in the immediately preceding calendar month on the same or identical
job, the time rate shall be deemed to be equivalent to the daily average of the earnings
of the worker for the days on which he actually worked in the week in which the overtime
work was done. For the purpose of Sub-Sec. 3. in computing the earnings for the days
 THE FACTORIES ACT, 1941 539

on which the worker actually worked such allowances, including the cash equivalent of
the advantage accruing through concessional sale to workers of foodgrains and other
articles, as the worker is for the time being entitled to, shall be included but any bonus,
or wages for overtime work payable in relation to the period with reference to which the
earnings are being computed shall be excluded (4) The cash equivalent of the advantage
accruing through concessional sale to a worker of foodgrains and other articles shall be
computed as often as may be prescribed on the basis of the maximum quantity of
foodgrains and other articles admissible to a standard family, consisting of the worker,
his or her spouse and two children below the age of 14 years requiring in all three adult
consumption units. The Stale Government may prescribe the manner in which cash
equivalent shall be computed and also the registers that shall be maintained in the factory
for securing the compliance with the provisions of this Section.
Restriction on Double Employment (Sec. 60)
No adult worker shall be required or allowed to work in any factory on any day
on which he was already been working in any other factory, save in such circumstances
as may be prescribed.
Notice of Periods of Work for Adults (Sec. 61)
In every factory thei e shall be displayed at some conspicuous and convenient place
at or near the main entrance of the factory and maintained in a clean and legible condition,
a notice in English and in a language understood by the majority of workers in the factory,
stating the periods of work for adults, and showing clearly everyday the periods during
which adult workers may be required to work. The periods shown in the notice must be
fixed beforehand in accordance with the provisions given below, and must in no case
contravene any of the provisions of Sees. 51,52,54, 55 and 56. The periods of workers
must be fixed as follows:-

1. Where all the adult workers are not required to work during the same periods,
Ihe manager shall classify them into groups according to the nature of their work
indicating the number of workers in each group.
2. For each-group which is required to work on a system of shifts, the manager
shall fix the periods during which the group may be required to work.
3. Where any group is required to work on a system of shifts and the relays are
not to be subject to pre-determined periodical changes of shifts, the manager shall fix
the periods during which each relay of the group may be required to work. But if the
relays are to be subject to pre-determined periodical changes of shifts, the manager shall
fix periods during which any relay of the group may be required to work and the relay
which will be working at any time of the day shall be known for any day.
The State Government may prescribe forms of the notice and the manner in which
it shall be maintained. In the case of a factory beginning work after April 1, 1949 a copy
of the notice shall be sent in duplicate to the Inspector before the day on which work is
begun in the factory. Further, if any change in system of work is proposed in any factory
which will necessitate a change in the notice, it shall be notified to the Inspector in
duplicate before the change is made, and except with the previous sanction of the
Insjlector, no such change shall be made until one week has elapsed since the last change.
Register of Adult Workers (Sec. 62)
The manager of every- factory shall maintain a register of adult workers to be
available to the Inspector at all times during working hours, or when any work is being
carried on in the factory, showing (a) the name of each adult worker in the factory, (b)
S40 MERCANTILE LAW

the nature of his work. (c) the group, if any, in which he is included, (d) where his group
works on shifts, the relay to which he is allotted, and (e) such other particulars as may
be prescribed: provided that, if the Inspector is of opinion that any muster roll or register
maintained as part of the routine of a factory gives in respect of any or all the workers
the particulars required under this Section he may, by order in writing, direct that such
muster roll or register shall to the corresponding extent be maintained in place of, and
be treated as, the register of adult workers in that factory. No adult worker shall be
required or allowed to work in any factory unless his name and other particulars have
been entered in the register of adult workers. The State Government may prescribe the
form of the register, the manner in which it shall be maintained and the period for which
it shell be preserved.
Section 63 provides that the hours of work must correspond with notice under Sec.
61 and register under Sec. 62. Sec. 64(1) empowers the State Government to make rules
defining the persons who hold positions of supervision or management or are employed
in a confidential position in a factory; and the above provisions, except the provision
prohibiting the employment of women between the hours of 7 p.m. and 6 am, shall not
apply to any person so defined; provided that any person so defined or declared shall,
where the ordinary rate of wages of such person does not exceed Rs. 750 per month, be
entitled to extra wages in respect of overtime work under Sec. 59.
Section 64(2) provides that the State Government may make rules in respect of
adult workers in factories providing for the exemption, to such extent and subject to such
conditions as may be prescribed—

(a) of workers engaged on urgent repairs, from the provisions of Sec 51, 52, 54.55
and 56;
(b) of workers engaged in work in the nature of preparatory or complementary work
which must necessarily be carried on outside the limits laid down for the general
working of the factory, from the provisions of Sees. 51.54.55 and 56;
(c) of workers engaged in work which is necessarily so intermittent that the intervals
during which they do not work while on duty ordinarily amount to more than the
intervals for rest required by or under Sec. 55, from the provisions of Sees. 51, 54,
55 and 56;
(d) of workers engaged in work which for technical reasons must be carried on
continuously, from 'the provisions of Sees. 51, 52, 54. 55 and 56;
e) of workers in making or supplying articles of prime necessity which must be made
or supplied everyday, from the provisions of Sees. 51 and 52;
(1) of workers engaged in a manufacturing process which cannot be carried on except
at times dependent on the irregular action of natural forces, from the provisions of
the Sees. 52 and 55;
(g) of workers engaged in a manufacturing process which cannot be carried on except
during fixed seasons, from the provisions of Sec. 52.
(h) of workers engaged in engine-rooms or boiler-houses or in attending power-plant
or transmission machinery from the provisions of Sees. 51 and 52;
(i) of workers engaged in the printing of newspapers, who are held up on account of
the breakdown of machinery, from the provisions of Sec. 51,54 and 56;
(j) of workers engaged in the loading or unloading of railway wagons or lorries or
trucks, from the provisions of Sees. 51,52.54,55 and 56;
(k) of workers engaged in any work, which is notified by the State Government in the
Official Gazette as a work of national importance from the provisions of Sees. 51,
52, 54, 55 and 56.
 THE FArrORIES ACT, 1948 541

4. In making rules under this Section, the State Government shall not exceed,
except in the case of workers engaged on urgent repairs, the following limits of work
inclusive of voer- time: (i) the total number of hours of work in any day shall not exceed
10; (ii) the spread-over, inclusive of intervals for rest, shall not exceed 12 hours in any
one day: provided that the State Governmen, may in respect of workers engaged in any
work which for technical reasons must be carried on continuously, make rules rescrib-
ing the circumstances in which, and the conditions subject to which, the restrictions
imposed by (i) and (ii) shall not apply in order to enable a shift worker to work the whole
or part of subsequent shift in the absence of worker who has failed to report for duty;
(iii) the total number of hours of work in a week, including over-time, shall not exceed
sixty; (iv) the total number of hours of overtime work shall not exceed SO for any one
quarter. These rules for exemption shall remain in force for not more than five years.
Explanation. "Quarter" in (ii) above means a period of 3 consecutive months
beginning on the 1st of January, the 1st of April, the 1st of July or the 1st of October.
Power to make Exempting Orders (Sec. 65)--Where the State Government is
satisfied that, owing to the nature of the work carried on or to other circumstances, it is
unreasonable to require the fixation in advance of the working periods, it may by written
order, relax or modify the provisions of Sec. 61. It or subject to its control, the Chief
Inspector, may by written order exempt any or all of the adult workers in any factory or
group or class or description of factories froin any or all of the provisions of Sees. 51,
52, 54 and 56 on the ground that the exemption is required to enable the factory or
factories to deal with an exceptional pressure of work: provided that any such exempt ion
shall be subject to the following conditions:
(i) the total number of hours of work in any day shall ri ot exceed twelve;
(ii) the spred-over. inclusive of intervals for rest shall not exceed 13 hours in any one
day;
(iii) the total number of hours of work in any week, including overtime, shall not exceed
sixty:
(iv) no worker shall be allowed to work overtime for more than 7 days at a stretch and
the total number of hours of overtime work in any quarter shall not exceed
severity-live.

EMPLOYMENT OF WOMEN

In addition to the general provisions applicable to adult workers of both sexes a

few special provisions relating to women workers have been introduced in the Act. All
the different provisions of the Act have been collected here for the convenience of the
reader:
1. No woman shall be allowed in any factory to clean. lubricate or adjust any part
of the machinery while that is in motion, or to work between moving parts, or between
fixed and moving parisof an y machinery which is in motion (Sec. 222)].
2. No woman shall be employed in any part of a factory for pressing cotton in
which a cotton-opener is at work: provided that if the feed-end of a cotton-opener is in
a room separated from the delivery end by a partition extendin g to the roof or to such
height as the Inspector may in any particular case specify in writing, women may be
employed on the side of the partition where the feed-end is situated (Sec. 27).
3. In every factory wherein more than 30 women workers are ordinarily employed
there shall be provided and maintained a suitable room or rooms for the use of children
under the age of 6 years of such women. Facilities shall be given for the mothers of such
children to feed them at the necessary intervals (Sec. 48).
542 MERCANT!U LAW

4. No exemption from the provisions of Sec. 54 may be granted in respect of any

woman. In other words, nowoman shall be required or allowed to work more than 48
hours in any week or 9 hours in any day [Sec. 66(a)]
5. In the case of woman workers, there shall be no change of shifts except after a
weekly holiday or any other holiday.
6. No woman shall be required or allowed to work in any factory except between
the hours of 6 a.m. and 7p.m. provided that the State Government may by notification
in the Official Gazette, in respect of any factory or group or class or description of
factories, vary the limits, but so that no such variation shall authorise the employment
of any woman between the hours of 10 p.m. and 5 am. The State Government may.
however, make rules providing for the employment of women workers during the night
in fish-curing and fish-canning factories to prevent damage to, or deterioration in. any
raw material. Such roles shall remain in force for a maximum period of three years at a
time (Sec. 66).
7. Where under Sec. 87 the State Government declares any manufacturing process
or operation in any factory as dangerous it may prohibit or restrict the employment of
women in that manufacturing process or operation [Sec. 87(b)I.

EMPLOYMENT OF YOUNG PERSONS

Child labour laws have been adopted in all civilised countries. They are founded
on the principle that the supreme right nithe State of the guardianshipof children controls
the natural rights of the parent when the welfare of society or of the children themselves
conflicts with parental rights. The supervision and control of minors is a subject which
has always been regarded as within the province of the legislative authority. How far it
shall be exercised is a question of expediency which it is the province of legislature to
determine. The legislature has fixed an age limit below which children shall not be
employed. ii has also prohibited their employment at night in one or more kinds of work,
and without a medical certificate of age and fitness. The present Act lays down certain
special provisions relating to children and adolescents under the above heading, but
some otier provisions are also introduced at different places. For the sake of continuity,
all the provisions relating to children and adolescents are given here.
Prohibition of Employment of Young Children (Sec. 67)
No child who has not completed his fourteenth year shall be required or allowed
to work in any factory.
Non-adult Workers to carry Tokens (Sec. 68)
A child who has completed his fourteenth year or an adolsecent shall not be
required or allowed to work in any factory unless (a) a certificate of fitness granted with
reference to him under Sec. 69 is in the custdoy of the manager of the factory and (b)
such child or adolescent carries while he is at work a token giving a reference to such
certificate.
Certificate of Fitness (Sec. 69)
1. A certifying surgeon shall, on the application of any young person or his parent
or guardian accompanied by a document signed by the manager of a factory that such
person will be employed therein if certified to be fit for work in a facotry, or on the
application of the manager of the factory in which any young person wishes to work.
examine such person and ascertin his fitness for work in a factory.
2. The certifying surgeon, after examination may grant to such young person, in
the prescribed from, or may renew-
 THE FACTORIES ACT. 1948 543

(a) a certificate of fitness to work in a factory as an adult, if he is satisfied that the

young person has completed his fourteenth year, that he has attained the prescribed
physical standards and that he is fit for such work;
(b) a certificate of fitness to work in a factory as an adult, if he is satisfied that the
young person has completed his fifteenth year and is fit for a full day's work in a
factory;
Provided that unless the certifying surgeon has personal knowledge of the place
where the young person proposes to work and of the manufacturing process in which he
will be employed, he shall not grant or renew a certificate under this sub-section until
he has examined such place.
3. A certificate of fitness granted or renewed under Sub-Sec. 2(a), shall be valid
only for a period of twelve months from the date thereof; (b) may be made subject to
conditions in regard to the nature of the work in which the young person may be
employed, or requiring re-examination of the young person before the expiry of the
period of twelve months.
4. A certifying surgeon shall revoke any certificate granted or renewed under
Sub-Sec. (2) if in his opinion the holder of it is no longer fit to work in the capacity stated
therein in a factory.
5. Where a certifying surgeon refuses to grantor renew a certificate or a certificate
of the kind requested or revokes a certificate, he shall, if so requested by any person who
could have applied for the certificate or the renewal theteof, state his reasons in writing
for so doing.
6. Where a certificate under this Section with reference to any young person is
granted or renewcd s&ihject to such conditions as are referred to in clause (b) Sub-Sec.
(3), the young person shall not be required or allowed to work in any factory except in
accordance with those conditions.
7. Any fee payable for a certificate under this Section shall be paid by the occupier
and shall not be recoverable-from the young person, his parents or guardian.
Effect of Certificate of Fitness granted to Adolescents (Sec. 70)
An adolesecent who has been granted a certificate of fitness to work in a factory
as an adult, and who while at work in a factory carries a token giving reference to the
certificate, shall be deemed to be an adult; provided that no such adolescent who has not
attained the age of 17 years shall be employed or permitted to work in a factory during
night, i.e., between 10 p.m. and 7 a. m. An adolescent who has not been granted a
certificate of fitness to work as an adult shall, notwithstanding his age, be deemed to be
a child for all the purposes of this Act.
Working Hours for Children (Sec. 71)
(1) No child shall be employed or permitted to work in any factory (a) for more
than 41 hours on any day, and (b) during the night, i.e., a period of at least 12 consecutive
hours which shall include an interval of at least 7 consecutive hours falling between 10
p.m. and 6 a.m. (2) The period of work of all children employed in a factory shall be
limited to two shifts which shall not overlap or spread over more than five hours each;
and each child shall be employed in only one of the relays which shall not, except Auth
previous permission in writing of the Chief Inspector, be changed more frequently than
once in a period of 30 days. (3) The provisions of Sec. 52 relating to weekly holidays
apply also to child workers, and no exemption from the provisions of that section may
be granted in respect of any child. (4) No child shall be required to work in any factory
544 MERCANTILE LAW

on any day on which he has already been working in another factory. No female child
shall be required or allowed to work in any factory except between 8 a.m. and 7 p.m
Notice of Periods of Work for Children (Sec. 72)
There shall be displayed and correctly maintained in every factory in which
children are employed a notice of period of work for children in the same manner as
provided for adult workers in Sec. 61. The fixation of the periods in the notice shall be
made according to the procedure laid down in that Section: but such periods as shown
in the notice relating to work by children must not be such as would require or allow
the children to work in contravention of Sec. 71.
Register of Child Workers (Sec. 73)
The manager of every factory in which children are employed shall maintain a
register of child workers, to be available to the Inspector at all times during working
hours or when any work is being carried on in a factory, showing (a) the name of each
child worker in the factory, (b) the nature of his work, (c) the group, if any, in which
he is included, (d) where his group works in shifts, the relay to which he is allotted, and
(e) the number of his certificate of fitness granted under Sec. 69, No child worker shall
be required or allowed to work in any factory unless his name and other particulars have
been entered in the register of child workers. The State Government may prescribe the
form of the register of child workers, the manner in which it shall be maintained and the
period for which it shall be preserved.
Hours of Work to correspond with Notice and Register (Sec. 74)
No child shall be employed in any factory otherwise than in accordance with the
notice of periods of work for children displayed in the factory and the entiies made
beforehand against his name in the register of child workers of the factory.
Power to require Medical Examination (Sec. 75)
Where an Inspector is of opinion (a) that any person working in a factory without
a certificate of fitness is a young person, or (b) that a young person working in a factory
with a certificate of fitness is no longer fit to work in the capacity stated therein, he may
serve on the manager of the factory a notice requiring that such person or young person,
as the case may be, shall be examined by a certifying surgeon and such person or young
person shall not, if the Inspector so directs, be employed, or permitted to work, in any
factory until he has been so examined and has been granted a certificate of fitness or a
fresh certificate of fitness, as the case may be, under Sec. 69, or has been certified by the
certifying surgeon examining him Qot to be a young person.
Power to make Rules (Sec. 76)—The State Government may make rules (a)
specifying the forms of certificate of fitness, providing for the grant of duplicates in the
event of loss of the original certificates, and fixing the fees which may be charged for
such certificates and renewals thereof and such duplicatas,. (b) prescribing the physical
standards to be attained by children and adolescents working in factories. (c) regulating
the procedure of certifying surgeons, (d) specifying other duties which the certifying
surgeons may be required to perform in connection with the employment of young
persons in factories, and fixing the fees for such durties and the persons by whom they
shall be payable.
Section 22(2) provides that no child shall be allowed in any factory to clean,
lubricate or adjust any part of the machinery while that part is in motion, or to work
between moving parts, or between fixed and moving parts, of any machinery which is
in motion.
 THE FACTORIES ACT, 1948 545

Section 23 lays down that no young person shall work at any machine which has
been declared by the State Government as dangerous for young persons, unless he has
been fully introduced as to the dangers arising in connection with the machine and the
precautions to be observed and has also received sufficient training in work at the
machine, or is under adequate spervision by a person who has a thorough knowledge
and experience of the machine.
Section 27 provides that no child shall be employed in any part of a factory for
pressing cotton in which a cotton-opener is at work: provided that if the feed-end of a
cotton-opener is in a room separated from the delivery-end by a partition extending to
the roof or to such height as the Inspector may in any particular case specify in writing.
children may be employed on the side of the partition where the feed-end is situated. It
further lays down that where the State Government declares any operation in any factor)
as dangerous it may prohibit or restrict the employment of adolescents or children in that
operation.
Furthermore, Sec. 77 lays down that the provisions of this Act relating to young
persons are in addition to, and not in derogation of the provisions of the Employment
of Children Act, 1938. The act has been passed to prohibit the employment of children
in certain occupations and workshops to which the Factories Act does not apply. Sec. 3
of the Employment of Children Act reads:

1. No child who has not completed his fifteenth year shall be employed or permitted
to work in any occupation (a) connected with the transport of passengers, goods or mails
by railway or (b) connected with a Port Authority within the limits of any port.
2. No child who has completed his fifteenth year but has not completed his
seventeenth year stall be employed or permitted to work in any occupation referred to
in Sub-Sec.(l), unless the periods of work of such a child for any day are so fixed as to
allow an interval of rest for at least twelve consecutive hours which shall include at least
seven consecutive hours between 10 p.m. and 7 a.m. as may be prescribed.
Also, no child who has not completed his fourteenth year shall be employed or
permitted to work in any workshop where any of the following scheduled processes are
carried on, namely:—Bidi-making; carpet-weaving; cement manufacture, including
bagging of cement; cloth printing, dyeing and weaving; manufacture of matches,
explosives and fireworks; mica cutting and splitting; shellac manufacture; soaprnantifac-
ture; tanning and wool cleaning. The requirements of this provision will not, however,
apply to any workshop wherein any process is carried on by the occupier with the aid of
his family and without employing hired labour or to any school established by, or
receiving assistance or recognition from, a State Govemmenl
A contravention of any of the provisions of this Act is made punishable with simple
imprisonment which may extend to one moth or with fine up to Rs. 500 or with both.

LEAVE WITH WAGES

The Industrial Labour Conference adopted in 1936 a Convention (No. 52) whereby
workers in industrial and commercial undertakings are entitled loan annual paid holiday
of at least six working days after one year of service. The Indian Factories Act, 1934,
was amended in 1945 to include a special section dealing with annual paid holidays in
respect of all perennial factories. The present Act has introduced elaborations and deals
with the question of paid holidays in a separate chapter (Secs. 78-84), which has again
been recast by the Amending Acts of 1954 and 1976.
Section 78 lays down that the following provisions relating to leave with wages
will not in any way prejudice the rights to which a worker may be entitled under an
W MERcANr1U LAW

other law or under the terms of any award, agreement including settlement or contract
of service; and where such award, agreement including settlement or contract of service
provides for a longer annual leave with wages than provided in the present Act, the
quantum of leave, which the worker shall be entitled to, shall be in accordance with such
award, agreement, settlement or contract of service, but in relation to matters not
provided for in such award, agreement, settlement oX contract of service or matters which
are provided for less favourably therein, the provisions of Sees. 79 to 82, so far as may
be, shall apply. The Railway rules regarding leave are more liberal than the provisions
of this Act, therefore, the provisions stated here do not apply to a factory of a Railway
administered by the Government.
Annual Leave with Wages (Sec. 79)
I. Every worker who has worked for a period of 240 days or more in a factory
during a calendar year shall be allowed during the subsequent calendar year leave with
wages for a number of days calculated at the rate of-
(i) if an adult, one day for every 20 days of work performed by him during previous
calendar year.
(ii) if a child, one for every 15 days of work performed by him during the previous
calendar year.
For the purposes of Sub-Sec. (1): (a) any days of layoff, by agreement or contract
or as permissible under the standing orders; (h) in the case of a female worker maternity
leave for any number of days not exceeeding 2 weeks; and (c) the leave earned in the
year prior to that in which this leave is enjoyed, shall be deemed to be days on which
the worker has worked iii a factory for the purpose of computation of 240 days or more,
but he shall not earn leave for these days. Also, the leave admissible under this
sub-section shall be exclusive of all holidays whether occurring during or at either end
of the period of leave.
2. A worker whose service commences otherwise than on the first day of January
shall be entitled to leave with wages at the rate laid down above if he has worked for
two-third of the total number of days in the remainder of the calendar year.
3. If a worker is discharged or dismissed from service or quits his employment or
is superannuated or dies while in service, during the course of the calendar year, he or
his heir or nominee, as the case may be, shall be entitled to wages in lieu of the quantum
of leave to which he was entitled immediately before his discharge, dismissal, quitting
of employment, superannuation or death calculated at the rates specified in Sub-Sec. (1)
even if he had not worked for the entire period specified in Sub-Sees (1) or (7) making
him eligible to avail of such leave, and such payment shall be made: (i) where the worker
is discharged or dismissed or quits employment, before the expiry of the second working
day from the date of such discharge, dismissal or quitting; and (ii) where the worker is
superannuated or dies while in service, before the expiry of 2 months from the date of
such superannuation or death.
4. In calculating leave under this Section fraction of leave of half a day or more
shall be treated as full day's leave, and fraction of less than half a day shall be omitted.
5. if a worker does not in anyone calendar year take the whole of the leave allowed
to him under Sub-Sec. (1) or Sub-Sec. (2), as the case may be, any leave not taken by
him shall be added to the leave to be allowed to him in the succeeding calendar year,
subject to a maximum of 30 days in the case of an adult or 40 days in the case of a child.
If, however, a worker who has applied for leave with wages but has not been given such
,beave in accordance with any scheme laid down in Sub-Sees. (8) and (9) or in
 THE FACTORIES ACT. 1948

contravention of Sub-Sec. (10), he shall be entitled to carry forward leave refused without
any limit.
6. A worker may at any time apply in writii g to the manager of a factory not less
than 15 days (30 days in case of a public utility s..-vice) before the date on which he
wishes his leave to begin, to take all leave or any portion thereof allowable to him during
the calendar year. A worker cannot take leave more than 3 times during a year.
7. If a worker wants to avail himself of the leave with wages due to him to cover
a period of illness, he shall be granted such leave even if the application for leave is not
made within the time specified in Sub-Sec. (6) and in such a case wages as admissible
under Sec. 81 shall be paid not later than 15 days or in the case of a public utility service
not later than 30 days, from the date of the application for leave.
8. For the purpose of ensuring the continuity of work, the occupier or manager of
the factory, in agreement with the Works Committee of the factory constituted under the
Industrial Disputes Act, 1947, if any, or a similar Committee or the other Committee, in
agreement with the representatives of the workers therein, may lodge with the Chief
Inspector a scheme in writing whereby the grant of leave allowable under this Section
may be regulated.
9. Such a scheme, which shall be in force for 12 months, shall be posted in a
conspicuous and convenient place in the factory and may be renewed with or without
modification for a period of 12 months at a time, provided that there is an agreement as
staled in (8) above,
10. No application for leave duly made as required by Sub-Sec. (6) can be refused
unless the refusal is in accordance with the schemes mentioned above in Sub-Sees. (8)
and (9).
11. If the employment of worker who is entitled to leave is terminated by the
occupier before he has taken the entire leave to which he is entitled, or if having applied
for and having not been granted such leave, the worker quits his employment before he
has taken the leave, the occupier of the factory shall pay him wages for the leave not
taken before the expiry of the second working day, after the termination of employment,
or on or before the next pay day where the worker himself quits his employment.
12. The unavailed leave of a worker must not be taken into consideration in
computing the period of any notice required to be given before discharge or dismissal.
Wages during Leave period (Sec. 8)
1. For the leave allowed to him under Sec. 78 or Sec. 79, as the case may be, a
worker shall be paid at rate equal to the daily average of his total full-time earnings for
the days on which he actually worked during the month immediately preceding his leave
exclusive of any overtime and bonus but inclusive of dearness allowance and the cash
equivalent of the advantage accruing through concessional sale to the worker of
foodgrins and other articles.
2. The cash equivalent of the advantage accruing through the conc.essional sale to
the worker of foodgrains and other articles shall be computed as often as may be
prescribed. on the basis of the maximum quantity of foodgrains and other articles
admissible to a standard family. A "standard family" has been defined to mean a family
consisting of a worker, his or her spouse and two children below the age of 14 years,
requiring in all three adult consumption units. An "adult consumption unit" means the
consumption unit of a male above the age of 14 years: and of a female above the age of
14 years and that of a child below the age of 14 years shall be calculated at the rates of
8 and 5 respectiverly of one adult consumption unit.
 548 MERCANTILE LAW

The State Government has been empowered to make rules for the computation of
the cash equivalent of the above-mentioned advantage and for the mainleriance of
registers in the factory.
Payment in Advance In Certain Cases (Sec. 81)
A worker who has been allowed leave for not less than 4 days, in the case of an
adult, and 5 days in the case of a child, shall before his leave begins, be paid the wages
due for the period of leave allowed.
Mode or Recovery of Unpaid Wages (Sec. 82)
Any sum required to be paid by an employer of the leave period but not paid by
him shall be recoverable as delayed wages under Sec. 15 of the Payment of Wages Act,
1936.
Section 83 empowers the State Government to prescribe for the keeping by
managers of factories of registers showing such particulars as may be required and
requiring such registers to be made available for examination by Inspectors. Sec. 84
provides that when the State Government is satisfied that the leave rules applicable to
workers in a factory provide benefits which in its opinion (taking the totality of benefits
into account) are not less favourable than those provided by this Act, it may exempt, by
a written order, the factory from all or any of the provisions relating to leave with wages,
subject to such conditions as may be specified in the order.
Section 85 empowers the State Government to declare any place as a factory even
if the number of workers employed are less than 10 if power is used and less than 20 if
no power is used, provided that such a place cannot be so declared if the owner carries
on a manufacturing process with the help of his family members. Any public institution
having any workshop attached to it may be exempted from the application of the
provisions of the Factories Act Sec. (86).
Dangerous Operations
Section 87 provides that where the State Government is of opinion that any
manufacturing processor operation carried on in a factory exposes any persons employed
in it to serious risk of bodily injury, poisoning or disease, it may make rules—
(a) specifying the manufacturing process or operation and declaring it, to be
dangerous;
(b) prohibiting or restricting the employment of women, adolescents or children in the
operation;
(c) providing for the medical examination of persons employed, or seeking to be
employed, in the operation, and prohibiting the employment of persons not
certified as fit for such employment and requiring the payment by the occupier of
the factory of fees for such medical examinations;
(d) providing for the protection of all persons employed in the operation or in'the
vicinity of the places where it is carried on;
(e) prohibiting, restricting or controlling the use of any specified materials or proces-
ses in connection with the operation;
Of) requiring the provision of additional welfare amenities and sanitary facilities and
the supply of protective equipment and clothing, and laying down the standards
thereof, having regard to the dangerous nature of the manufacturing process or
operation;
(g) enabling the Inspector to ask the occupier or manager to take measures for
removing conditions dangerous to the health of the workers.
 THE FACTORIES ACT, 1948 549

Section 87A states (1) where it appears to the Inspector that conditions in a factory
or part thereof are such as may cause serious hazard by way of injury or death to the
persons employed therein or to the general public in the vicinity, he may, by order in
writing to the occupier of the factory, stale the particulars in respect of which he considers
the factory or part thereof to be the cause of such serious hazard and prohibit such
occupier from employing any person in the factory or part thereof other than the
minimum number of persons necessary to attend to the minimum tasks till the hazard is
removed.
2. Any order issued by the Inspector under Sub-Sec. (I) shall have effect for a
period of three days unless extended by the Chief Inspector by a subsequent order.
3. Any person aggrieved by an order of the Inspector under Sub-Sec. (1) and Chief
Inspector under Sub-Sec. (2) shall have the right to appeal to the High Court-
4. Any person whose employment has been affected by an order issued under
Sub-Sec. (I) shall be entitled to wages and other benefits and it shall be the duty of the
occupier to provide alternative employment to him wherever possible and in the manner
prescribed.
5. The provisions of Sub-Sec. (4) shall be without prejudice to the rights of the
parties under the Industrial Disputes Act, 1947.
Section 88 provides that where in any factory an accident occurs which causes
death, or which results in any bodily injury preventing the worker from working for a
period of 48 hours or more, the manager of the factory must send to the prescribed
authority a notice of the accident. However, where a notice related to an accident causing
death, the authority to whom the notice is sent shall make an inquiry into the occurrence
within one month of the receipt of the notice or, if such authority is not the Inspector,
cause the Inspector to make an inquiry within the said period.
Section 88 A slates that where in a factory any dangerous occurrence of such nature
as may be prescribed occurs, whether causing any bodily injury or disability or not, the
manager of the factory shall send notice thereof to such authorities, and in such forms
and within such time, as may be prescribed.
Where any worker in a factory contracts any ofthe scheduled diseases, the manager
of the factory must send notice thereof to prescribed authorities. The medical practitioner
treating such worker must send a report to the office of the Chief Inspector and if he fails
to do so, he is liable to be fined up to Rs. 1000.
Safety and Occupational Health Surveys
Section 91 A provides that (1) the Chief Inspector, or the Director General of
Factory Advice Service and Labour Institutes, or the Director General of Health Services,
to the Government of India, or such other officer as may be authorised in this behalf by
the State Government may, at any time during the normal working hours of a factory,
or at any other time as is found by him to be necessary, after giving notice in writing to
the occupier or manager of the factory, undertake safety and occuptional health survey
and such occupier or manager shall afford all facilities for such surveys, including
facilities for the examination and testing of plant and machinery and collection of
samples and other data relevant to the survey.
(2) For the purpose of facilitating surveys, every worker shall, if so required by
the person conducting the survey, present himself to undergo such medical examination
as may be considered necessary by such person and furnish all information in his
possession and relevant to the survey.
(3) Any time spent by the worker for undergoing medical examination or furnish-
ing information shall, for the purpose of calculating wages and extra wages for overtime
work, be deemed to be time during which such worker worked in the factory.
550 MERCANTILE LAW

Explanation—For the purpose of this Section, the report, if any, submitted to the
State Government by the person conducting the survey shall be deemed to be a report
submitted by an Inspector under this Act.
Penalties and Procedure
Section 92 provides for penalty generally for offences against the Act, and states
that if there is contravention of any provision of the Act or rules thereunder, then the
occupier and the manager are punishable with impnsoment up to two years or with fine
up to Rs. one lakh, or with both. If the contravention is continued after conviction, then
a further fine up to Rs. 1.000 per day during the period of contravention. Furthermore,
where the contravention of any of the provisions relating to safety and dangerous
operations has resulted in an accident causing death or serious bodily injury, the line
shall not be less than Rs. 25,000 in case of death and Rs. 5,000 in case of serious bodily
injury. Under certain circumstances the owner of the building used as a factory is made
liable instad of the occupier of the factory.
Section 96A provides that whoever fails to comply with or contravenes any of the
provisions of Sections 41B, 41C or 41H or the rules made thereunder relating to
hazardous processes shall be punishable with imprisonment up to 7 years and with line
up to Rs. 2 lakhs, and in case, the failure or conua'.ention cOnhiilur; with additional fine
up to Rs. 5.000 for every day during which such failure or contravention continues after
the conviction for the first such failure or contravention. And if the failure or contra y en-
tion continues beyond a period of one year after the date of conviction, the offender shall
be punishable with imprisonment up to ten years.
Liability and Obligations of Workers
Section 97 provides that subject to the provisions of Section Iii. if any worker
employed in a factory contravenes any provision of the Act or any rules or orders made
thereunder, imposing any duty or liability on workers, he shall be punishable with fine
up to Rs 5000. Further, where a worker is convicted for such contravention, the occupier
or manager of the factory shall not be deemed to be guilty in respect of that contraven-
tion, unless it is proved, that he failed to take all reasonable measures for its prevention.
Section 111 provides that (1) no worker in a factory—
(a) shall wilfully interfere with or misuse any appliance, convenience or other
things provided in a factory for the purpose of securing the health, safety or welfare of
the workers therein;
(b) shall wilfully or without reasonable cause do anything likely to endanger
himself or others; and
(c) shall wilfully iscglect to make use of any appliances or other things provided
in the factory for the purpose of securing the health or safety of the workers therein.
(2) If any worker employed in a factory contravenes any of the provisions of this
section or of any rule or order made thereunder be shall be punishable with imprisonment
up to 3 months, or with fine up to Rs. 100, or with both.
klghta of Workers
Section lilA lays down that every worker shall have the right to-
(i) obtain from the occupier, information relating to workers' health and safety at
work;
(ii) get trained within the factory wherever possible, or to get himself sponsored
by the occupier for getting trained at a training centre or institute, duly approved by the
Chief Inspector, where training is imparted for workers' health and safety at work;
 THE FA(OR1ES Acr, 1948 551

(iii) represent to the inspector directly or through his representative in the matter
of inadequate provision for protection of his health or safety in the factory.
Exemption of Occupier or Manager from liability—Where the occupier or
manager of a factory is charged with an offence punishable under this Act, he is entitled
to give to the prosecutor not less than 3 clear days' notice in that behalf and state that he
is really not responsible on the charge levelled against him but than some other (named)
person is responsible for the offence- He may then have that person brought before the
court at the time appointed for bearing the charge (Sec. 101).
Presumption as to employment—If a person is found in a factory at a time when
work is actually going on, he shall, unless contrary is proved, be deemed to have been
employed in the factory (Sec. 103).
No court shall take cognizance of any offence under this Act except on complaint,
by or with the previous sanction in writing of, an Inspector, before a Presidency
Magistrate of First Class (Sec. 105). Further, no court can take cognizance of any offence
under this Act unless the complaint is made within 3 months of the date on which the
alleged offence came to the knowledge of the Inspector. If the offence consists of
disobeying a written order made by an Inspector, the complaint about its commission
can be made within 6 months of the date on which the offence is alleged to have been
committed (Sec. 106).
Section 114 states that no fee or charge shall be realised from any worker in respect
of any arrangements or facilities to be provided, or any equipment or appliances to be
supplied by the occupier under the provisions of this Act.
The new Sec. 119 states that the provisions of the Factories Act. 1948 shall have
effect notwithstanding anything inconsistent thereith contained in the Contract Labour
(Regulation and Abolition) Act, 1970,
 Chapter XVI1I

The Workmen's Compensation

Act, 1923
tu. VIII of 1923

The Workmen's Compensation Act aims to correct the evils that existed under the
Common Law. Prior to the Act if an employee in a factory was injured or killed on
account of accident due to his employment he or his dependants could file a Suit for
damages, and could recover them only if the injury or death could be attributed to the
negligence of the employer.
The position was hardly equitable as the claims could easily be defected on other
grounds, such as (I) the doctrine of' 'Common employment' • , (2) 'o(entl non fit Inji4ria,
i.e., the defence of 'assumed risk", and (3) the principle of "contributory negligence''.
According to the doctrine of common employment, if a workman suffered injury or death
through the act or omission of a fellow-worker the employer was held not liable, as the
same could not be attributed to his negligence. The ddfence of the ''assumed risk" was
based upon the idea that the employee assumed the risk knowing full well the dangers
of employment. It was said that when he knew of the dangers of employment, workman
was himself responsible for the calamity when it arose out of siicrm employment. The
economic theory upon which this principle was based may be stated thus: The wages
of the workman represent a compensation for the labour he expends and the danger of
the employment. These two—the price of the labour and the price of the risk that he
voluntarily assumed in doing the work—pass into the price of the product sold by the
employer, thereby transferring the burden to the consumer. Since the workman does not
bear the burden of the risk, but is rather paid for it, he has no right to claim any
compensation for any injury arising out of his employment. The principle was so rigidly
applied that even where some person to whom the employer had delegated the duty of
supplying reasonably safe appliances and such person neglected his duty and thus
caused the casualty, the employer could escape liability by pleading that the employee
had assumed the unnecessary risk voluntarily.
The third principle was often used to escape liability, because even in a case like
the above, the employer could plead that the injury was the result wholly or partly of
the injured workman's own contributory negligence. In other words, if the worker had
been careful the accident would not have taken place. The defences often resulted in
great injustices to the worker. But under the old system, the employer also many a time
suffered a great deal. Sometimes heavy damages, half of which was the opposing
Counsel's booty, were awarded Igalnst him, The Compensation Act is in a way a
compromise between the employer and the employee. The employer is given only a
limited and fixed liability, and the worker is sure of getting something without litigation.
The principle on which the Compensation Act works is that injuries to employees ''are

552
 TIlE W0RKM1S COMPENSATtON ACT, 1923 553

no longer the result of fault or negligence, but they are the product of the industry ifself."
Therefore there should be indemnity in every case where casualty is incidental to the
employment, unless indeed the casualty is brought about by the injured person's own
wilful negligence. The workman is not to bear the pecuniary burden, even where the
casualty is the result of the negligence of the workman or his fellow-workers, as accidents
are an essential feature of industrial undertakings, and the effective force in creating and
managing the employment is the employer. Moreover, the work is undertaken primarily
in the interest of the employer and ultimately for the public, and the compenastion he
has to pay can easily be transferred by him to the consumer, thus placing the burden of
the workman's disablement or death upon the society. Therefore, thcemployez must pay
for an accident arising out of and in course of employment.
The Workmen's Compensation Act performs a great servii-.x to both the employer
and the employee, by providing a very simple procedure for the. recovery of compensa-
tion. It is cheap, prompt and both the parties know how much i'to be paid, as schedules
for different types of casualties are provided in the Act. It must, however, be remembered
that the Compensation Act does not Lake away the employev:'s Common Law right to
claim damages which may be quite substantial, if he can pro ye negligence or breach of
duty on the part of the employer. The workmareor his depen dants are at liberty to either
file a suit for damages against the employer, and run the ri sk of the employer's escape
from liability on airy of the three defences, or be content with the compensation awarded
under the Workmen's Compensation Act, Both remedies are in no case open to the
workman or his descendants. Theysriust make their choice one way or the other.
Another very important Act—the Employer's Lirblity Act was passed in 1938.
This Act declares that the defences of "common employment" and "assumed risk"
cannot be raised by employers in suits for damage. Conti acting out ofemployer's liability
is also void. Sec. 3 bais defence of common employment; the new Sec. 3A makes void
any agreement concluding or limiting employer's lial4ity; and Sec. 4 bars the defence
of assumed risk. The three sections are reproduced bebw.
"3. Where personal injury is caused to a workatan-
(a) by reason of the omission of the employer to maintain in good and safe
condition any way, works, machinery or plant connected with or used in his trade or
business, or by reason of any like omission on the part of any person in the service of
the employer with the duty of seeing that such way, works, mahinery or plant are in
good and safe condition; or
(b) by reason of the negligence of any person in the service of the employer who
has any superintendence entrusted to him, whilst in the exercise of such superintendence;
or
(c) by reason of the negligence of any person in the service of the employer to
whose orders or directions the workman at the time of the injury was bound to conform
and did conform where the injury resulted from his having so conformed; or
(d) by reason of the act or omission of any person in the service of the employer
done or made (i) in the normal performance of the duties of that person: or (ii) in
obedience to any rule or bye-law of the employer; or (iii) in obedience to particular
instructions given by any other person to whom the employer has delegated authority in
that behalf.
a suit for damages in respect of the injury instituted by the workman or by any person
entitled in case of his death shall not fail by reason only of the fact that the workman
was at the time of the injury workman of, or in the service of, or engaged in the work
of, the emplo5er.
554 MERCANTILE LAW

3A. Any provision contained in a contract of service or apprenticcship or in a

agreement collateral thereto, shall be void ins far as it would have the effect of excludi'g
or limiting any liability of the employer in respect of personal injuries caused to the
person employed or apprenticed by the negligence of the persons in common employ-
ment with him.
4. In any such suit for damages, the workman shall not be deemed to have
undertaken any i isk attaching to the employment unless the employer proves that the
risk was fully explained to and undertook by the workman and that the workman
voluntarily undertook the same.
Nature and Scope or the Act
The Workmen's Compensation Act is the first measure of social security intro-
duced in this country on all-India basis. The Act is intended to promote the public
welfare, but it does not concern itself with measures of preventive nature. This is left
to the Factories Act The underlying principle, as said above, is that compensation is
not a remedy for negligence on the part of the employer, but it is rather in the nature of
insurance of the workman against certain risks of accident. The Act is so drafted that
under it men without any expert legal knowledge, the employer and his workman, will
be able to decide for themselves whether in any particular case compensation is due and
if so, what that compensation amounts to.

DEFINITIONS

Section 2 lays down that in this Act, unless there is anything repugnant in the
subject or context:-
1. Dependant means any of the following relatives of a deceased workman,
namely:

(i) a widow, a minor legitimate son, unmarried legitimate daughter, or a widowed

mother; and
(ii) if wholly dependent on the earnings of the workman at the time of his death,
a son or a daughter who has attained the age of 18 years and who is infirm;
(iii) if wholly or in part dependent on the earnings of the workman at the time of
his death, a widower, a parent other than a widowed mother, a minor illegitimateson,
an unmarried illegitimate daughter, a daughter legitffiate or illegimate if married and a
minor, or if widowed and a minor, a minor brother, an unmarried sister or a widowed
sister if a minor, a widowed daughter-in-law, a minor child of pre-deceased son, a minor
child of a pre-deceased daughter where no parent of the child is alive, or, where no
parent of the wo;kman is alive, a paternal grandparent.

2. Employer includes any body of persons whether incorporated or not and any
managing agent of an employer and the legal representative of a deceased employer, and
when the services of a workman are temporarily lent or let on hire to another person by
the person with whom the workman has entered into a contract of service or appren-
ticeship, means such other person while the workman is working for him.
3. Managing agent means any person appointed or acting as the representative
of another person for the purpose of carrying on such other person's trade or business,
but does not include an individual manager subordinate to an employer. The Chief
Engineer of Public Works Department is managing agent since he is in charge of the
management (Chief Engineer, P.WD. v.Smi. Kausa!, 1966 M.P. 297).
4. Minor means a person who has not attained the age of 18 years.
 THE WORKMI'4'S COMPJSATION ACT, 1923

5. Partial disablement means, where the disablement is of a temporary nature

such disablement as reduces the earning capacity of a workman in any employment in
which he was engaged at the time the accident resulting in the disablement and where
the diiblement is of a parmanert nature, such disablement as reduces his earning capacity
in every employment which he was capable of undertaking at that time, provided that
every injury specified in Part II of Table 11 (p. 593) shall be deemed to result in permanent
partial disablement. Where an employee becomes unfit for a particular class of job but
is fit for another class which is offered to him by the employer, held that th' workman
was entitled to claim compensation on the basis of partial disablement a- not total
disablement (General Manager, G.I.P. R1v. v. S/tanker. 1950 Nag. 201). 'Increfore, in
cases of permanent partial disablement, the Commissioner should determine whether the
earning capacity of the injured workman has been reduced in every employment which
he, was capable of undertaking at the time of the accident and not merely in the particular
job in which he was employed at that time (Bhagat Singh Rain Saran v. Punjab Stale,
1966 Punj. 397);
The Act is not limited only to physical capacity of disablement, but extends to the
reduction of earning oapacity as well (Sukkai v. Hukani C/sand Jute Mills Lid., 1957 Cal.
601). So in determnininog compensation payable for permanent partial disablement, the
Court should take iOto account the nature of the injury, the nature of the work which the
workman was capable of undertaking and its availability to him. The Court need not
follow the medical opinion. The medical certificate may be dealing only with physical
inability (Maharashtra Sugar Mills Lid. v. Tribhu van, 1966 Born. 240).
6. Total disablement means such disablement, whether of a temporary or
permanent nature, as incapacitates a workman for all work which he was capable of
performing at the tune of the accident resulting in such disablement provided that
permanent total disablement shall be deemed to result from every injury specified in Part
I of Table II (p. 593) or from any combination of injuries specified in Part II of Table II
where the aggregate percentage of the loss of earning capacity, as specified in Part II of
that Table against those injuries, amounts to 100 916 or more.
Also, if, alter a partial permanent disablement, a workman becomes physically fit
to resume his former employment and earn his former wage, but fails to secure a job
because of such a disablement. he will be deemed to be totally disabled and will get
compensation on the basis of total disablement. A miner was-permanently blinded in
the right eye as a result of an accident, but was physically fit to do his former job. In
spite of all his efforts he failed to secure ajob either as a miner or a quarry man. He was
awarded compensation on the basis of total disablement (Tonnoch v. Brownieside Coal
Co. Lid. (1929) A. C. 542). In Pratap Narain Singh Deo v. ShrinivasSahata. 1976 S.
C. 222. the Supreme Court held that where personal injury was caused to a carpenter in
the course of employment and his left hand above the elbow had to be amputated, the
disablement was total and not partial, since a carpenter cannot work with one hand.
7. Wages include any privilege or benefit which is capable of being estimated in
money other than a travelling allowance or the value of any travelling concession or a
contribution paid by the employer of a workman towards any person or provident fund
or a sum paid to a workman to cover any special expenses entailed on him by the nature
of his employment.
The wages or earnings of a workman are whatever he receives from his employer
in return for his services which include not only actual cash but also money's worth. In
computing wages it will be necessary to estimate the value of any concessions in such
matters as house-rent. food or clothing given by the employer. It will include all those
sources of extra income which are recognised by the custom of the trade or the usage
and practice of the particular employment. Thus ''tips" may be included if they were
336 MERCANTILE LAW

received by the workman with the knowledge of the employer. Dearness allowance and
profit sharing bonus are also included in wages (Chdtru Tan.ii v. Tata Co. 1946 Pat. 437;
Godavri Sugar Mills Lid. v. Shakuniala 1948 Born. 154).
8. Workman means any person (other than a person whose employment is of a
casual nature AND who is employed otherwise than for the purpose of the employer's
trade or business) who is-

(i) a railway servant as defined in Sec. 3 of the Indian Railways Act, 1890 (LX of
1890), i.e., persons who are employed by the railway administration in connection
with the service of a railway, not permanently employed in any administrative,
district or sub-divisional office of a railway and not employed in any such capacity
as specified in Schedule II, or
(ii) employed in any such capacity as is specified in Schedule II.

whether the contract of employment was made before or after the passing of this Act
and whether such contract is expressed or implied, oral or in writing; but does not include
any person working in the capacity of a member of naval, military or air force; and any
reference to a workman who has been injured shall, where the workman is dead, include
a reference to his dependants or any of them.
The maximum limit of "monthly wages not exceeding Rs. 1(XX)" has been
removed by the Workmen's Compensation (Amendment) Act. 1984, with the result that
every workman, as defined in section 2 of the Act is eligible for compensation for
personal injury; but the amount of compensation paid will be on the basis of Rs. 1000
if his monthly wages are more than Rs. 1000.
Schedule II further elaborates the above definition. It does not limit the scope of
the definition of "workman", but merely illustrates it by saying that the following
persons would fall within the meaning of the term workman, that is to say, any person
who is-
(i) employed, otherwise than in a clerical capacity or on a railway, in connection
with the operation or maintenance of a lift or vehicle propelled by steam or other
mechanical power or by electricty or in connection with the loading or unloading of any
such vehicle; or
(ii) employed, otherwise than in a clerical capacity in any premises wherein, or in
the precincts whereof, manufacturing process, as defined in clause (k) of See. 2 o the
Factories Act. 1948, is being carried on, or
(iii) employed for the purpose of making, altering, repairing, ornamenting, finish-
ing or otherwise adapting for use, transport or sale any article or part of an article in any
premises wherein or within the precincts whereof, on any one day of the preceding
twelve months. 20 or more persons have been so employed;
For the purposes of this clause, persons employed outside such premises or
precincts but in any work incidental to, or connected with, the work relating to making,
altering, repairing, ornamenting, finishing orotherwise adapting for use, transport or sale
any article or part of an article shall be deemed to be employed within such premises or
precincts; or
(iv) Employed in theriianufacture or handling of explosives in connection with
the employer's trade or business; or
(v) employed in a mine as defined in clause (i) of Sec. 2 of the Mines Act, 1952,
in any mining operation, or any kind of work, other than clerical work incidental to or
connected with any mining operation or with the mineral obtained, or in any kind of
work whatsovever below ground; or
 TIlE WORKMEN'S COMPENSATION ACT, 1923 559

compensation, Besides bodily injury, the Section provides fore in ployer's liability to pay
compensation to an employee of his if the employee contracts any of the occupational
diseases as specified in Table Ill on page. For the purposes of the Act contracting of
these occupational disceases is deemed to be an injury by accident arising out of and in
the course of employment. unless the contrary is proved.
We have seen above that the Workmen's Compensation Act has abolished the
Common law doctrines of negligence, contributory negligence, assumption of risk and
common employment. The employee is declared to be entitled to the benefits of the
Statute regardless of negligence, actual or imputed, on the part of the employer, and also
notwithstanding the fact that lie himself might have been guilty of negligence. Under the
Act, the issue is as to whether the injury was accidental and arose out of and in the course
of his employment. If the iiijtiry(l)was accidental AND (2) arose out of and in the course
of his employment, he would he entitled to get compensation, otherwise not.

Meaning of Accident
The word accident is used in the Act in the popular and ordinary sense as denoting
an unlooked-for mishap or an untoward event which is not expected or designed. The
word is employed in contradistinction to the expression "wilful inisconduct''or "wilful
disobedience". Therefore, an "injury by accident" includes any injury not expected or
designed by the injured workman himself, irrespective of whether or not it was brought
about by the wilful act of someone else. The Statute contemplates injuries not expected
or designed by the workman himself. It should be noted that the language of the Act is
not "personal injury by an accident" but "personal injury by accident". This means
"personal injury not by design, but accident, by some mshap unforeseen and unex-
pected: accidental personal injury"
Arising out of and In the Course of the Employment
Probably, no other expression has received so much judicial consideration as the
pharse "arising out of and in the course of the eniploynienl''. Several Judges have, with
more or less success, offered explanations. A few of the explanations by eminent Judges
are stated here to give an idea of the meaning of the phrase. Before, however, discussing
the meaning of the expression it may he emphasized that the injury must not only arise
'in the course or' but also "out of" the employment. Proof of the one without the other
will not make the employer liable to pay compensation. While an accident arising out
of an employment almost necessarily occurs in the course of it, the converse does not
follow. An injury which occurs in the course of the employment will ordinarily arise out
of the employment, but not necessarily so. To bring the case within the Compensation
Act the employee must show that he was at the time of the injury engaged in the
employer's business, or in furthering that business, and was not doing something for his
own benefit or accommodation. As to whether an accident arose out of his employment
or not would depend on the following test laid down by Lord Summer in Lancashire
and Yorkshire RIy. Co. v. Flighicy (1971) A.C. 352, The test is: Was it part of the injured
person's employment to hazard, to suffer or to do that which caused his injury? If yes,
the accident arose out of his ernpolyment. If no, it did not, because what was not part of
the employment to hazard, to suffer, or to do, cannot well be the cause Of an accident
arising out of the employment. ''The decision," says Lord Atkinson, ''must turn on
whether the workman was, when the accident which injured him occurred in the course
of performing some duty arising out of his contract of service which he owed to his
employP-r."
Ramaswami, J., in Mackinnon Mackenzie & Co. Pvt. Ltd. v. Ibrahim Mo/md IssaA,
(1970) 1 S.C.R. 869, observed: "To come within the Act the injury by accident must
arise both out of and in the course of employment. The words 'in the course of
560 MEk('AT1I.E LAW

employment' mean in the course of work which the workman is employed to do and
which is incidental to it. The words 'arising out of the employment' are understood to
mean that during the course of the employment, injury has resulted from some risk
incidental to the duties of the service, which, unless engaged in the duty owing to the
master, it is reasonable to believe the workman would not otherwise have suffered. In
Other words, there must be a causal relationship between the accident and the employ-
ment. The expression is not confined to the mere nature of the employment but applies
to the employment as such—to its nature, its conditions, its obligations and its incidents.
If by reason of any of these factors the workman is brought within the scene of special
danger, the injury would be one which arises out of employment. To put it differently,
if the accident had occurred on account of risk which is an incident of the employment,
the claim for compensation must succeed, unless, of course, the workman has exposed
himself to an added peril by his own, imprudent act."
While returning from his duty a workman was crushed by an engine, held he met
with an accident in the course of his employment (Workman, C. & W. Shops v. Malmabir,
1954 All. 132). Where a watchman in the course of his duty lifts G.I. Pipe in order to
keep it in a safe place, the injuries must be taken to have been received in the course of
his employment, if he is injured (R.M. Pandey v.A.P. I. Ltd., 1956 Boin. 115). A boy
returning to the factory canteen after having served tea in his usual round to certain
persons in the factory premises was struck by a bullet and he died the following day.
Field, death of the boy was due to an accident arising out and in the course of his
employment (National iron & Steel Co. v. Manorwima, 1953 Cal. 143).
In an English case of unusual character the same point was emphasised. Mrs. S.
sued as the widow of S, all employee of the Coal Board, who was killed in a collision
with T, another employee of the Board. T had finished his day's work and was bicycling
across the Board's premises to collect his wages at the Board's pay office. He made a
detour across a bus park on those premises and when riding between two buses knocked
down the deceased, who died from the injuries he then received. Field. the Coal Board
was liable, because when the employee was actually on his employer's premises going
to the place which the employer has said was the place to which he was required to come
in order to draw his wages, it would be a very unreal and strange state of affairs if he
was no longer in course of his employment [Mrs. Staton v. National Coal Board (1957)
2 All, E.R. 667].
A railway employee was ordered to travel to a certain station and repair a
watermain. After finishing his work he was hurrying across the platform to catch his
train, when he slipped and died as a result of the fall. Field, the injuries arose out of and
in the course of the employment . Also, if a man is engaged in doing work, and as part
of that work and in the course of it does something which he might do cutside, but which,
nonetheless, happens in the course of and arising out of his work, and injures him or
causes his death, the accident has arisen out of and in the course of employment. A
workman was engaged in the dock in loading and discharging cargo from ships. He left
his home for work at 5 am. in a perfect state of health to all appearances. At 6 am, he
began work of loding china clay. At 9 a.m. after taking his breakfast he was lifting his
hand above his head to fasten a hook to a bag for dragging it when he fell down and died.
He had heart disease, but there'was nothing to show that without the work this man was
engaged on he would have died of this heart disease. The case fell within the Act
(Falrnaui/i Dock and Engineering Co. Lid. v. Treloar 119331.A.C. 481). Again, if a
workman does, in a negligent way, an act which is within the scope of his employment
and sustains injuries, he is entitled to compensation. But if he does an act which, from
its nature, is outside the scope of his employment altogehter, he takes upon himself an
added risk and is not entitled to compensation for injuries sustained. The deceased was
a workman in the employ of the defendant railway company. He was sent on an errand
 T! 1E WORKMEN'S COMPENSATION ACT. 1923 557

(vi) employed as the master or as a seaman of (a) any ship which is propelled
wholly or in part by steam or other mechanical power or by electricity or which is towed
or intended to be towed by a ship so propelled, or (h) any ship not included in sub-clause
(a) of 25 tons net tonnage or over; or (c) any sea-going ship not inlcudcd in (a) or (h);
or
(vii) employed for the purpose of (a) loading, unloading, fuelling, construction,
repairing, demolishing, cleaning or painting any ship of which he is not the master or a
member of the crew, or in the handling or transport within the limits of any port subject
to the Indian Ports Act, 1908, goods which have been discharged from or are to be loaded
into any vessel; or (h) warping a ship through the lock; or (c) mooring and unmooring
ships at harbour wall berths or in pier; or (d) removing or replacing dry dock caissons
when vessels are entering or leaving dry docks; or (e) the docking or undocking of any
vessels during an emergency; or (1) preparing splicing coir springs and check wires,
painting depth marks on lock-sides, removing or replacing fenders whenever necessary,
landing or gangways, maintaining life-buoys up to standard or any other maintenance
work of a like nature; or (g) any work on jolly-boats for bringing a ship's line to the
wharf; or
(viii) employed in the construction, repair, or demolition of (a) any building which
is designed to be or is or has been more than one storey in height above the ground or
12 feet or more from the ground level to the apex of the roof; or (b) any dam or
embankment which is 12 feet or more in height from its lowest to its highest point, or
(c) any road, bridge, or tunnel, or (d) any wharf, quay. seawell, or marine work including
any moorings of ships; or
(ix) employed in setting up, repairing, maintaining or taking dowrl any telegraph
or telephone line or post or any overhead electric line or cable or post or standard or
fittings and fixtures for the same; or
(x) employed, otherwise than' in a clerical capacity, in the construction, working,
repair or demolition of any aerial ropeway, pipeline, sewer; or
(xi) employed in the service of any fire brigade; or
(xii) employed upon a railway as defined in clause (4) of Sec. 3, and Sub-Sec. (1)
of Sec. 148 of Indian Railways Act, 1890, either directly or through a sub-contractor, by
a person fulfilling a contract with the railway administration.
(xiii) employed as an inspector, mail guard, sorter or van peon in the Railway Mail
Service, or as a telegraphist or as a postal or railway signaller, or employed in any
occupation involving outdoor work in the Indian Posts and Telegraphs Department or
(xiv) employed, otherwise than in a clerical capacity, in connection with opera-
(ions for winning natural petroleum or natural gas; or
(xv) employed in any occupation involving blasting operations; or
(xvi) employed in the making of any excavation in which on any one day of the
preceding twelve months more than 25 persons have been employed or explosives have
been used, or whose depth, from its highest to its lowest point exceeds 12 feet; or
(xvii) employed in the operation of any ferry boats capable of carrying morethan
10 persons or:
(xviii) employed, otherwise than in a clerical capacity, on any estate which is
maintained for the purpose of growing cardamom, cinchona, coffee, rubber or tea and
on which on any one day in the preceding twelve months 25 or more persons have been
so employed; or
(xix) employed, otherwise than iii a clerical capacity, in the generating, transform-
ing, or supplying of electrical energy or in the generating or supplying of gas; or
 RcAtml.E tw

(xx) employed in a lighthouse as defined in clause (d) of Sec. 2 of the Indian

Lighthouse Act, 1927; or
(xxi) employed in producing cinematograph pictures intended for public exhibi-
tion or in exhibiting such pictures; or
(xxii) employed in the training, keeping, or working of elephants or wild animals,
or
(xxiii) employed in the tapping of palm-trees or the felling or Logging of trees, or
the transport of timber by inland waters, or the control or extinguishing of forest fires;
or
(xxiv) employed in operations for the catching or hunting of elephants or other
wild animals; or
(xxv) employed as a diver; or
(xxvi) employed in the handling or transport of goods in, or within the precincts
of:—
(a) any warehouse of other place in which goods are stored, and in which on any one
day of the preceding twelve months 10 or more persons have been so employed;
or
(b) any market in which on any one day of the preceding twelve months 50 or more
persons have been so employed; or
(xxvii) employed in any occupation involving the handling and manipulal ion of
radium or X-ray apparatus, or contact with radio-active substance: or
(xxviii) employed in or in connection with construction, erection, dismantling,
operation or maintenance of an aircraft as defined in Sec. 2 of the Indian Aircraft Act,
1934; or
(xxix) employed in farming by tractors or other contrivances driven by steam or
other mechanical power or electricity; or
(xxx) employed, otherwise than in a clercial capacity, in the construction, work-
ing, repair or maintenance of a tube-well; or
(xxxi) employed in the maintenance, repair or renewal of electric fittings in any
building; or
(xxiii) employed in a circus.
ExpIana!io'-4n this Schedule 'the preceding twelve months" relates in any
particular case to the twelve months ending with the day on which the accident in such
case occurred.
There has been a great deal of controversy as to who is an 'employee' or 'workman'
within the meaning of Workmen's Compensation Act. Without going into controversial
points, we may state the cardinal rule that there must be the relationship of master and
servant. A servant is a person subject to the control and command of his master as to the
manner in which he shall do his work, and there is a contract of employment between
the two. Therefore, an independent contractor is not a workman, even where his
remuneration is based upon the amount of work done. But a L asual worker, employed
for the purpose of the trade orhusiness of the employer, is a workman.

WORKMEN'S COMPENSATION

Employer's Liability
Section 3 provides that if personal injury is caused to a workman by accident
arising out of AND in the course of his employment, his employer shall be liable to pay
 THE WORKMEN'S COMPENSATION ACT, t')23 561

from Bombay to Kalyan, and from Kalyan back to Bombay. Oil way back he was
travelling by the defendant company ' s electric train, and stood in the open doorway.
The train, going oil bridge recoivcd a jerk. and &s a result of that he fell down on the
lutes and war killed. The company pleaded, among other things, negligence and
disobedience on the part of the deceased, as, iwcording to them he had ignored the
warning notice which stated 'Don't stand near the door". The Court held otherwise and
awarded compensation, on the grounds (a) that the notice was for securing safety of
passcnge; in general, and not for that of workmen. (h) that the accident was in the course
of and arose out of the employment of the deceased and he did not take greater risk than
an ordiary traveller would do while travelling oil of these electric trains ((;.I.P
Rly. v. Kashinath C/iininaji 1929 Ruin. I).
On the other hand, where a boy employed in a boot-making business took home
contrary to the orders of authroities a pairof txnrts for repairing them and thus to improve
his own skill and while doing the repairs at home, he injured an eye with all and it
had to be removed, it was held 'hat injury did not arise out of and in the course of
emplyment(Rorlt'y V. Oekendr'n 1192512KB. 325). The applicant wilt) was a piecer in
a cotton mill, went out of his work and interfered with tin rollers while in motion and
his dhoti having been caught he put out his hand to pull it and got his hand crushed. It
was held that he was not entitled tocomnpensat ion (GouriKinkarRhakat v. Rod/ia Kishan
Colton Mills, Cal. 220). To conclude, it may be stated that an accident arises out of and
in the course of employment when a causal connection exists between the employment
and the accident.
In Saurashira So/i Mfg. Co. v. fbi Valu Raja, 1958 S.C. 881. the Supreme Court
has laid down a rule of law relating to the theory of notional extension, i.e., the liability
or otherwise of the employer for injury to his workman away from the works. It was
observed in this case that ''as a rule, the employment of a workman does not commence
until he has reached the place of employment and does not continue when he has left
the place of employment, the journey to and from the place of employment being
excluded. It is now well-settled, however, that this is subject to the theory of notinal
extension of the employer's premises so as to include an area which the workman passes
and repasses in going to and in leaving the actual place of work. There may be some
reasonable extension in both time and place and a workman may be regarded as in the
course of his employment even though he had not reached or had left his employer's
premises. The facts and circumstances of each case will have to be examined very
carefully in order to detennine whether the accident arose out and in the course of the
employment of a workman, keeping in view at all limes this theory of notional
extension."
In this case, R was employed as a workman in the salt works. While returning
home after finishing his work he, along with other workers, had to go by a public path,
then through a sandy area open to the public and finally across a creek through ferry
boat. R, while crossing the creek in a public ferry boat, which capsized due to had
weather,was drowned. On a claim for compensation it was held on the facts of the case,
that the accident could not be said to have arisen out of and in the course of employment
while crossing the creek inasmuch as the theory of notional extension could not extend
to the point where the boat capsized. It was said that "when a workman is on a public
road or a public place or on a public transport he is there as any other member of the
public and is not there in the course of his employment unless the very nature of his
employment makes it necessary for him to be there. A workman is not in the course of
his employment from the moment he leaves his borne and is on his way to his work. He
certainly is in the course of his employment if he reaches the place of work or a point or
an area which comes within the theory of notional extension, outside of which the
employer is not liable to pay compensation for any accident happening to him."
S62 MERCANTILE LAW

Employer not liable

The employer shall not be liable to pay compensation
(a) if the incapacity or disablement does not last for more than three days; or
(b) if the injury, not resulting in death, is caused by an accident which is directly
attributable to—
(i) the workman having been at the time of the accident under the influence of
drink or drugs; or
(ii) the wilful disobedience of the workman to an order expressly given, or to a
rule expressly framed for the purpose of securing the safety of workmen; or
(iii) the wilful removal or disregard by the workman of any safety guard or other
device which he knew to have been provided for the purpose of securing the
safety of workmen; or
(c) if the accident causing the injury to or death of a workman did not arise both out
of and in the course of his employment; or
(d) if the workman has instituted in a Civil Court a suit for damages in respect of the
injury against the employer or any other person.
A disablement lasting for a period of 3 days or less is considered trivial and is
excluded to check workers from staying away for a day or so at intervals and also
claiming compensation on account of minor injuries.
Where the injury is directly attributable to the influence of drink or drugs, the
employer is saved from liability. This is because the workman by his own drunkenness
is deemed to add a peril to his employment and the effective cause of the accident is said
to be his state of drunkenness. He is, therefore, deemed to be the cause of the injury.
Wilful disobedience is not negligence, contributory negligence or carelessness.
"Wilful" imports that disobedience or misconduct is deliberate and intentional and not
a thoughtless act on the spur of the moment. Even a reckless or a rash act does not save
the employer from liability. Again, wilful disobedience must be of a rule or order,
expressly framed for the safety of workmen by the employer, and the accident must be
the direct result of such wilful disobedience.
Wilful removal or disregard by the workman of any safety appliance is now an
offence under the Factories Act, 1948, and the Compensation Act deprives him of the
worker's right to compensation.
Alternative rights of election of remedies are given to the workman under the Act.
He cannot recover both damages and compensation: If he is injured by the personal
negligence or wilful act of the employer or his agent, the worker may either claim
compensation or claim damages under his right at Common Law, Therefore, it is
provided that if in exercise of his right at Common Law, he files a suit for damages in a
Civil Court, he has made his choice and cannot claim compensation from his employer
under this Act.
Amount or Compensation (Sec. 4)
The amount of compensation payable depends on the nature of the injury. Under
the Act compensation is payable for (1) Death; (2) Permanent total disablement; (3)
Permanent partial disablement; and (4) Temporary disablement as provided byhe new
section 41 and according to Schedule IV which is reproduced below as Table I.

I. Ky the Workmen's Compensation (Amendment) Act, 1984, the old sec. 4 has been substituted
by anew sec. 4.
2. Nce As per the 1959 Amendment Ad, every workman, whether ad ltorminor,i,entitled
to receive the same amount of compensation.
 TIlE WORKMEN'S COMPENSATION ACT, 1923 563

The new section 4 provides that (I) subject to the provisLorts of the Act, the arnoun
of compensation shall be as follows, namely :-
(a) Death
Where death results from the injury—
an amount equal to 40 percent of the monthly wages of the deceased workman
multiplied by the relevant factor, or Rs. 20,000 whichever is more;
(b) Permanent Total Disablement
Where permanent total diosahiernent results from the injury -
an amount equal to 50 percent of the mothly wages of the injured workman
multiplied by the relevant factor, or Rs. 24,000 whichever is more.
Explanation I—For the purpose of clauses (a) and (b) "relevant factor", in relation
to a workman means the factor specified in the second column of Schedule IV,
given here as Table I against the entry in the first column of that Table specifying
the number of years which are the same as the completed years of the age of the
workman on his last hirhtday immediately preceding the date on whch the
compensation fell due;
Explanation II— Where the monthly wages of a workman exceed Rs. 1,000, his
monthly wages for the purpose of clauses (a) and (b) shall be deemed to be Rs,
1,000 only.
(c) Permanent Partial Disablement
Where permanent partial disablement results from the injury -
(i) in the case of an injury specified in Part II of Table II given below, such
percentage of the compensation which would have been payable in the case
of.permannt total disablement as i6 specified therein as being the percentage
of the loss of earning capacity caused by the injury; and
(ii) in case of an injury not specified in Table 11, such percentage of the permanent
total disablement as is proportionate to the loss of earning capacity (as
assessed by the qualified medical practitioner) permanently caused by the
injury.
Explanation I—Where more injuries than one are caused by the same accident,
the amount of compensation payable under this head shall be aggregated but not so in
any case as to exceed the amount which would have been payable if permanent total
disablement had resulted from the injuries.
Explanoiion 11—In assessing the loss of earning capacity for the purpose of
sub-clause (): the qualified medical practitioner shall have regard to the percentage of
loss of earning capacity in relation to different injuries specified in Table IL
(d) Temporary Disablement
Where temporary disablement whether total or partial results from the injury—
a half monthly payment of the sum equivalent to 25 percent of the monthly wages
of the workman, to be paid in accordance with the provisions of sub-section (2),
as slated below:
(2) The half-monthly payment referred to in clause (d) of sub-section (1) shall be
payable on the sixteenth day-
(i) from the date of disablement where such disablement lasts for a period of 28
days or more, or
(ii) after the expiry of awaiting period of three days from the date of disablement
where such disablement lasts for a period of less then 28 days; and thereafter
half-monthly during the disablement or during a period of 5 years, whichever
period is shorter: Provided that -

564 MEK('ANi1Ll LAW

(a) there shall be dedticted from any lumpsum or half-monthly payment.s to which
the workman is entitled, the amount of any payment or allowance which the
workman has received from the employer by way of compensation during the
period of disablement prior to the receipt of such lumpsum or of the first half
monthly payment. as the case may be; and
(h) no monthly payment shall in any case exceed the amount, if any, by which half
the amount of the monthly wages of the workman before the accident exceeds half
the amount of such wages which he is earning after the accident.
Esplanalion-Any pa yment or allowance which the workman has received from
the employer towards his medical treatment shall not be deemed to be a payment or
allowance received by him by way of compensation within the meaning of clause (a) 91
the provision.
(3) Oil ceasing of the disablement before the date on which any half-monthly
pay ment falls due there shall be payable in respect of the half-month a sum
proportionate to the duration of the disahlemct in that half-month.

IAIUJ: i

Factors for working out lumpsum equivalent of compensation amount

in case of Permanent Disablement and Death

Completed years of age on Completed years of age on

the last birthda y of the the last birthday of the
workman immediately Factors workman immediately Factors
preceding the elate on which preceding the date on which
the compensation fell due (lie corn pen.sation fell due

Not more 16 228.54 Not more 41 181.37
than 17 227.49 than 42 178.49
1% 226.38 43 175.54
4 19 4
225.22 172.52
20 224.00 45 169.44
21 222.71 46 166.29
22 221.37 47 163.07
23 219.95 48 159.80
24 218.47 49 156.47
25 216.91 50 153.09
26 215.28 51 149.67
27 213.57 52 146.20
28 211.79 53 142.68
29 209.92 54 139.13
30 207.98 55 135.56
31 205.95 56 131.53
32 203.85 57 128.53
33 201.66 58 124.70
34 199.40 59 121.05
35 197.06 60 117.41
36 194.6.4 61 113.77

3. Substituted by 1984 Amendment Act for the original Schedule IV

 TIlE WORKMEN'S COMPENSATION ACT, 1923 565

I 2 1 2

37 192.14 62 110.52
38 189.56 63 106.52
39 186.90 64 102.93
40 184.17 65 or more 99.37

TABLE lI

[See Sees. 2(1) and 41

Percent-
age of
Description of Injury lass of
earning
capacity

PART I

List of injuries deemed to result in permanent total disablement

Loss of both hands or amputation at higher sites .. 1(X)

Loss of a hand and a foot. 1(X)
Double amputation through leg or thigh, or amputation through leg or
thigh on one side and loss of other foot . . 100
Loss of sight to such an extent as to render the claimant unable to 1s.'rformn
any work for which eyesight is essential •. 100
Very severe facial disfigurement .. 100
Absolute deafness . . 100
PART II
List of injuries deemed to result in permanent partial disablement
Amputation Cases—Upper limbs (cifher arm)
Amputation through shoulder joint 90
Amputation below shoulder with stump less than 8" from tip of acrOmion 80
Amputation from 8' from tip of acromion to less than 4 1 below tip of
olecranori 70
Loss of a hand or of the thumb and four lingers of one hand or amputation
from 41 below tip of olecranon 60
Loss of thumb 30
Loss of thumb and its metacarpal bone 4()
Loss of four lingers of one hand

4. Substituted by 1959 Act for the Original schedule.


66 MERCANTILE LAW

Percent-
age of
Description of injury loss of
earning
capacity

Loss of three fingers of one hand 30

Loss of two fingers of one hand 20
Loss olterminal phalanx of thumb 20
Amputation Cases—lower limbs
Amputation of both feet resulting in end bearing stumps 90
Amputation through both feet proximal to the meta tarsophalangeal joint 80
Loss of all toes of both feet through the meta tarsophalangeal joint 40
Loss of all toes of both feet proximal to the proximal to interphalangeal
Joint 30
Loss of all toes of both feet distal to the proximal to interphalangeal joint 20
Amputation at hip 90
Amputation below hip with stump not exceeding 5" in length measured
from tip of great trenchanter 80
Amputation below hip with stump exceeding 5" in length measured from
tip of great trenchanter but not beyond middle thigh 70
Amputation below middle thigh to 1i below knee 60
Amputation below knee with stump exceeding 3--' but not exceeding 5" 50
Amputation below knee with stump exceeding 5' 40
Amputation of one foot resulting in end-bearing 30
Amputation of one foot proximal to the met at arsophalangeal joint - 30
Loss of all toes of one foot through the metatarsophalangeal joint 20
Or/icr Injuries
Loss of one eye, without complications, the other being normal 40
Loss of vision of one eye, without complications or disfigurement of
eye-ball, the other being normal 30
Loss of-
4—Fingers of right or left hand
Indev Finger
Whole 14
Two phalanges 11
One phalanx 9
Guillotine amputation of tip without loss of bone 5
Middle Finger
Whole 12
Two phalanges 9
One phalanx -- 7
Guillotine amputation of tip without loss of bone 4
Ring or Little Finger
Whole 7
Two phalanges 6
One rhalanx 5
Guil il ,- c' amputation of tip without loss of bone 2
B—Toes of right or left foot
Great toe
Through metatarsophalangeal joint 14
 THE WORKMEN'S COMPENSATION ACT. 1923

Percent-
age of
Description of Injury loss of
earning
capacity

Part, with some loss of bone

Any other toe 3
Through metatarsnphalangcal joint • 5
Part, with some loss of hone
Two toes of one foot. excluding great toe
Through metatarsophalangeai joint
5
Part, with some loss of bone
2
Three toes of one foot, excluding great toe
Through metatarsophalangeal joint
Part, with some loss of bone
6
3
Four toes of one foot. excluding great toe
Through metatarsophalangeal joint
9
Part, with some loss of bone
2

Note : Complete and permanent loss of the use of any limb or member referred to
in this Table shall be deemed to be the equivalent of the loss of that limb or member.

TABLE m5
(See Section 3)
List or Occupational Diseases

Serial No. Occupational Disease Employment

1 2 3

PART A
1. Infectious and parasitic diseases (a) A work involving exposure to
contracted in an occupation health or laboratory work;
where there is a particular risk of (b) All work involving exposure
contamination, to veterinary work;
(c) Work relating to handling
animals, animal carcasses,
part of such carcasses, or
merchandi se which may
have been contaminated by
animals or animal carcasses;
(d) Other work carrying a par-
ticular risk of contamination.
2. Diseases caused by work in com- All work involving exposure 11)
pressed air. the risk concerned.
3. Diseases caused by lead or its All work involving exposure to
toxic compounds. the risk concerned.

5. Inserted by the Amendment Act, 1984.

 MERCANTILE LAW
568

I I 2

4. Poisoning by nitrous fumes All work involving exposure to

the risk concerned.
5. Poisoning by organophosphorus All work involving exposure to
compounds. the risk concerned.

PART B
1. Diseases caused by phosphorus or All work involvingg exposure to
its toxic compounds the risk concerned.
2. Diseases caused by mercury or its All work involving exposure to
toxic compounds the risk concerned.
3. Diseases caused by benzene or its All work involving exposure to
toxic homologues the risk concerned.
4.. Diseases caused by nitro and All work involving exposure to
amido toxic derivatives of ben the risk concerned.
zene or its homologues.
5. Diseases caused by Chromium ri All work involving exposure to
its toxic compounds. the risk concerned.
6. Diseases caused by arsenic or its All work involving exposure to
toxic compounds. the risk concerned.
7. Diseases caused by radioactive All work involving exposure to
substances and ionising radia- the action of radioactive substan-
tions. ces or ionising radiations.
8. Diseases caused by the toxic All work involving exposure to
halogen derivatives hydro-car- the risk concerned.
bons (of the aliphatic and
aromatic series).
9. Primary epitheliomatous cancer All work involving exposure to
of the skin caused by tar, pitch, the risk concerned.
bitumen, mineral oil, anthracene,
or the compounds, products or
residues of these substances.
10. Diseases caused by Carbon disul- All work involving exposure to
phide. the risk concerned.
11. Diseases caused by rnanagnese or All work involving exposure to
its toxic compounds. the risk concerned.
12. Skin diseases caused by physical All work involving exposure to
agents not included in other items. the risk concerned
13 Hearing impairment caused by All work involving exposure to
noise. the risk concerned.
14. Poisoning by dinitrophenol or a All work involving exposure tb
homologue or by substituted the risk concerned.
dinitrophenol or by the salts of
st'ch substances.
15 Diseases caused by beryllium or All work involving eX1XSUIC to
its toxic compounds. the risk concerned.
16. Diseases caused by cadmium or All work involving exposure
its toxic cmpounds. tothe risk concerned.
17. Occupational asthma caused by All work involving exposure to
recognised sensitising agents in the risk concerned.
herent to the work process.
18. Diseases caused by fluorine orits All work involving exposure to
toxic compounds. the risk concerned.
 THE WORKMEN'S COMPENSA11ON ACT, 1923 369

19. Diseases caused by nitroglycerin All work involving exposure to

or other nitroacid esters. the risk concerned.
20. Diseases caused by alcohols and All work involving exposure to
Ketones. the risk concerned.
21. Diseases caused by asphyxiants All work involving exposure to
carbon monoxide and its toxic the risk concerned.
derivatives, hydrogen sulphide.
22. Lung cancer and mesotheliomas All work involving exposure to
caused by asbestos. the risk concerned.
23. Primary neoplasm of the All work involving exposure .
epithelial lining of the urinary the risk concerned.
bladder or the Kidney or the
ureter.

PART C
Pneumoconioscs caused by All work involving exposure to
selerogenic mineral dusts the risk concerned.
(silicosis anthran silicosis asbes-
tosis) and silico-tuberculosis
provided that silicosis is an essn-
tial factor in causing the resultant
incapacity or death.

2. Bagassosis All work involving exposure to
the risk concerned.
I. Bronchopulmonary disease All work involving exposure to
caused by cotton, flax hemp and the risk concerned.
sisal dust (Byssinosis).
4. Extrinsic allergic alveelitis All work involving exposure to
caused by the inhalation of or- the risk concerned.
ganic dusts.
5. Bronchopulmonaxy diseases All work involving exposure to
caused by hard metals. the risk concerned.

Calculation of Monthly Wages (Sec. 5)

The amount payable to the employee is to be determined from the amount of his
average monthly wages. What constitutes such wages is a question of fact that requires
consideration to be given to numerous circumstances; such as absence from work,
duration and continuity of employment, remuneration in additior1 to regular wages, and
the existence of concurrent employments. Specific methods for ascertaining such
average monthly wages are prescribed in Sec. 5, as follows.
The expression "monthly wages" means the amount of wages deemed to be
payable for a month's service (whether the wages are payable by the month or by
whatever other period or at piece rates), and are calculated as follows:—
(a) where the workman has, during a continuous period of not lc:ss than twelve
months immediately preceding the accident, been in the service of the employer who is
liable to pay compensation, the monthly wages of the workman shall be one-twelfth of
the total wages which have fallen due for payment to him by the employer in the last
twelve months of that period;
(b) where the whole of the continuous period of service immediately preceding
the accident during which the workman was in the service of the employer who is liable
to pay the compensation was less than one month, the monthly wages of the workman
570 MERCANTILE LAW

shall be deemed to be the average monthly amount which, during the twelve months
immediately preceding the accident, was being earned by a workman employed on the
same work by the same employer, or, if there was no workman so employed, by a
workman employed on similar work in the same locality;
(c) in other cases, the monthly wages shall be 30 times the total wages earned in
respect of the last continuous period of service immediately preceding the accident from
the employer who is liable to pay compensation, divided by the number of days
comprising such period.
£xplana1io—A period of service shall be deemed to be continuous which has not
been interrupted by a period of absence from work exceeding 14 days.
Computation of Half-monthly Payment (Sec. 7)
Any right to receive half-monthly payments may, by agreement between the parties
or if the parties cannot agree and the payments have been continued for not less than six
months, on the application of either party to the Commissioner be redeemed by the
payment of a lump sum of such an amount as may be agreed to by the parties or
determined by the Commissioner, as the case may be.
The Commissioner, on the application either of the employer or of the workman
accompanied by the certificate of a qualified medical practitioner that there has been a
change in the conditio,r thworkman, may review any half-monthly payment agreed
to by the parties or fixed by the commissioner. On such review the half-monthly payment
may be continued, increased, decreased, or ended, or if the accident is found to have
resulted in permanent oicablement, be converted to the lump sum to which the workman
is entitled less any amount which he has already received by way of half-monthly
payments (Sec. 6).
Distribution of Compensation (Sec. 8)
Where an adult male worker has been totally or partially disabled by an injury the
employer may either pay the compensation to the worker or deposit it with the Commis-
sioner, who will then pay to the worker.
Where the compensation is payable—
(a) in respect of death of a workman, or
(b) in lump sum to a woman or a person under legal disability, it must be deposited
with the Commissioner, and noi paid directly to the dependants of the deceased
workman or to a woman or a person under legal disability, as the case may be.
Provision, however, is made for small payments out of the compensation amount
by the employer to the deceased workman's dependants as (i) advances not
exceeding Rs. 100 in the aggregate, or (ii) for workman's funeral expenses not
exceeding Rs. 50.
On the deposit of the compenstion money, the Commissioner shall distribute it
among the dependants of the deceased workman in any proportion as he thinks fit, or
may even allot it to any one descendant. If he is satisfied that no dependant exists, the
Commissioner shall repay the money to the employer by whom it was deposited. Where
the amount is payable to a woman or a person under a legal disability, such sum may
be invested or otherwise dealt with for the benefit of such woman or person under legal
disability.
According to a recent ruling of the Supreme Court in Prwap Narain Singh Deo v.
ShrinivasSahata, 1976 S.C. 222, the employer becomes liable to pay compensation as
soon as the injury is caused to the workman at the rate as provided by Scc.4. If he fails
 THE WORKMEN'S COMPENSATION ACF, 1923 571

to pay and also makes no provisional payment under Sec. 4(2) but challenges the
jurisdiction of the Commissioner, the employer is liable to pay interest and penalty.
For the purpose of protecting workmen from money-lenders and others Sec. 9
provides that no lump-s'im or half-monthly payment payable as compensation shall in
any way be capable of being assigned or charged or be liable to attachment or pass to
any person other than the workman by operation of law, nor shall any claim be set off
against the same.
Notice and Claim (Sec. 10)
The Commissioner shall not entertain any claim for compensation unless a notice
of the accident has been given to the employer or someone on his behalf as soon as
practicable after the happening thereof, and unless the claim is preferred before him
(Commissioner) within two years of the occurrence of the accident or, in the case of
death, within two years from the date of the death: provided that the Commissioner may
entertain the claim if he is satisfied that the failure or delay to give notice or prefer the
claim was due to sufficient cause. The notice must give the name and address of the
person and state in ordinary simple language the cause of the injury and the date on which
the accident happened.
As the notice is meant for the benefit of the employer, it will not be necessary if
the accident to the knowledge of the employer or any person responsible to the employer
for management, or if he waives it, or if the delay or failure does not prejudice the
employer.
Fatal or Serious Accidents
Sections 10 A and 10 B provide that all cases of fatal accidents or serious bodily
injury should be brought to the notice of the Commissioner within 7 days of the death
or th
e serious bodily injury and the circumstances attending the death. Default to give
noti ce is punishable with fine up to Rs. 500. Where a Commissioner receives information
from any ource that a fatal accident has occurred, he may require, by means of a
registered postal notice, the deceased workman's employer to submit, within 30 days of
the service of the notice, a statement giving circumstances attending the death, and
indicating whether r not the employer considers himself li able to deposit compensation.
If he admits liability, the employer must make the deposit within 30 days of the notice,
and if he denies it, he must state the grounds for disclaiming liability. If the employer
disclaims liability, the Commissioner may inform any of the dependants of the deceased
that it is open to them to prefer a claim, and may give them such other further information
as he thinks fit.
Medical Examination (Sec. 11)
A workman who has given notice of accident must, if the employer wishes, submit
himself for medical examination by a duly qualified medical man provided and paid for
by the employer. It he refuses to do so, or obstructs the examination, his right to receive
compensation or to take proceedings to recover it are suspended until he complies. The
exercise of this right of the employer to ask the workman to submit to medical
examination is not limited to one occasion or to any period of time, so long as the exercise
is nqt unreasonable. Whilst receiving half-monthly payment of compensation the
workman must also submit to medical examination from time to time at the request of
the employer, and if he refuses or obstructs the examination such periodical payments
may be suspendedz The medical man so examining the workman will issue a certificate
as to the workman's condition and fitness for employment, specifying, if necessary, the
kind of employment for which he is fit. His right to compensation shall also be suspended
if he volunatrily leaves without having been so examined the vicinity of the place of his
572 MERCANTILE LAW

employment. If a workman whose payment of compensation was suspended dies before

such medical examination, the Commissioner may direct the payment to the dependanic
of the decesed workman. If an injured workman has refused to be attended by a qualified
medical practitioner whose services have been offered to him by the employer free of
charge or having accepted such offer has deliberately disregarded the instructions of such
medical man, then, unless the workman has been regularly attended by a medical
practitioner, and the injury has been aggravated thereby, the injury and resulting
disablement shall be deemed to be of the same nature and duration as they might
reasonably have been expected to be if the workman had been regularly attended by a
qualified medical man whose instructions he had followed, and compensation if any
shall be payable accordingly.
Contracting Out (Sec. 12)
Any contract or agreement whether made before or after toe commencement of
this Act, whereby a workman relinquishes any right of compensation from the employer
for personal injury arising out of and in the course of the employment shall be null and
void in so far as it purports to remove or reduce the liability of any person to pay
compensation under this Act.
Section 13 provides that where a third party was responsible for the accident the
employer may recover from that third party any compensation he has paid to his
workman, in addition to any other damages he may be able to claim.
Where an employer, who has insured his liability for compensation under the Act,
becomes an insolvent, or if the employer being a company has gone into liquidation, the
rights of the employer against the insurers shall pass to the workman; and if the insurers'
liability is less than the liability of the employer to the workman, the workman can prove
for the balance in the insolvency proceedings or liquidation. Any breach of the contract
by the employer shall not operate against the workman, so long as the preinia have been
regularly paid (Sec. 14).

COMMISSIONER

The Act is administered on a State basis by the Commissioners for Workmen's

Compensation appointed by the State Governments. In Madras, West Bengal and Bihar
the duties of the Commissioner are being discharged by Labour Commissioners. The
Government of Maharashtra has appointed one Commissi o ne r of the more important
areas and for other areas it has declared Sub-Judges to be ex-officio Commissioners. In
other States either the District Magistrates or the District and Sessions Judges discharge
the duties of the Commissioners under the Act.
The duties of the Commissioner include the settlement of disputed claims, disposal
of compensation in case where injury results in death, or where deposit is made because
the claimant is a woman or a person under legal disability, and the revision of periodical
payments.
An appeal shall lie to the High Court from the orders of a Commissioner.
 Chapter XIX

The Trade Unions Act, 1926

(No. XVI or 1926)

Definitions
Trade Union means any combination, whether temporary or permanent, formed
primarily for the purpose of regulating the relations between workmen and employers
or between workmen and workmen, or between employers and employers, or for
imposing restrictive conditions on the conduct of any trade or business, and includes any
federation of two or more Trade Unions. But this definition does not cover (i) any
agreement between partners as to their own husines; (ii) any agreement between an
employer and those employed by him as to such employment; (iii) any agreement in
consideration of the sale of the goodwill of a business or of instruction in any profession,
trade or handicraft.
It will be noticed that the terminology of the definition is very vague and its scope
very wide. Strictly speaking the term "Trade Union" should refer only to workers' or
employees' organisation. 'A Trade union is essntially an organisation of employees,
not of employers, nor of independent workers."
Trade dispute means any dispute between employers and workmen or between
workmen and workmen, or between employers and employers which is connected with
the employment or non-employment, or the terms of employment or the conditions of
labour, of any person, and 'workmen" means all persons employed in trade or industry
whether or not in the employment of the employer with whom the trade dispute arises.

REGISTRATION

The appropriate Government is required to appoint a person as the Registrar of

Trade Unions for each State. It may appoint Additional and Deputy Registrars for local
areas. Such Additional or Deputy Registrars will, under the superintendence and direc-
tions of the Registrar, exercise such powers and functions as are delegated to them and
shall be deemed to be Registrars for their respective local limits.
Any seven or more members of a Trade Union may subscibe their names to the
rules of the Trade Union and apply to the Registrar; but before they can be granted a
certificate of registration, they must comply with certain requirements in regard to rules
as laid down in Sec. 6 of the Act. An application made as stated above will not become
invalid if not more than half the number of applicants have disassociated themselves
after the date of application and before registration.
An application for registration must be accompanied by a copy of the rules of the
Trade Union and must also give the following particulars
(a) the names, occupations and addresses of the members making the application;
(h) the name of the Trade Union and the address of its head Office; and
(c) the titles, names, age, addresses and occupations of the officers of the Trade Union.
573
574 MERCANTILE LAW

In the case of a Trade Union in existence for more than a year before application,
a statement of its assets and liabilities must also accompany the application for registra-
tion (Sec. 5).
The registration will be granted only if at least one-half of the total number of its
office-bearers are persons actually engaged or employed in the industry with which the
Union is concerned unless exemption is granted by the appropriate Government, and the
rules of the Union provide fin the following matters:
1. The name of the Trade Union.
2. The whole of the objects for which the Trade Union has been established.
3. The whole of the purposes for which the general funds of the Trade Union shall
be applicable, all of which purposes shall be purposes to which such funds are all
fully applicable under this Act.
4. The admission of ordinary members who shall be persons actually engaged or
employed in an industry with which the Trade Union is connected, and also the
admission of the number of honorary or temporary members as officers required
under Sec. 22 to form the executive of the Trade Union.
5. The maintenance of a list of members of the Trade Union ano adequate facilities
for the inspection thereof by the office-bearers and members of the Trade Union.
6. The payment of a subscription by members of the Trade Union which shall be not
less than 25 paise per month per member.
7. The conditions under which any member shall bç entitled to any benefit assured
by the rules and under which any fine or forfeiture may be imposed on the
members.
8. The manner in which the rules shall be amended, varied or rescinded.
9. The manner in which the members of the executive and the office-bearers of the
Trade Union shall be appointed and removed.
10. The safe custody of the funds of the Trade Union, and annual audit in such manner
as may be prescribed, of the accounts thereof, and adequate facilities for the
inspection of the account books by the office-bearers and members of the Trade
Union.
11. The manner in which the Trade Union may be dissolved (Sec. 6).
Name
The name to be adopted and registered must not be similar to that of any existing
Trade Union (Sec. 7). Any Trade Union may, with the consent of not less than two-thirds
of the total number of its members, change its name (Sec. 23). Notice in writing of every
change of name, signed by the Secretary and by seven members of the Trade Union
changing its name, shall be sent to the Registrar, who will register the change if the
proposed name is neither identical nor resembles with the name of any existing Trade
Union (Sec. 25).
Certificate of Registration
The Registrar. on being satisfied that the Trade Union has complied with all the
requirements of the Act in regard to registration; shall register the Trade Union (S. 8).
On registering the Trade Union, the Registrar shall issue a certificate of registration in
the prescribed form which will be conclusive evidence of the fact that the said Trade
Union has been duly registered (S. 9).
 TRADE UNIONS ACi 1926 575

Cancellation of Registration
The Registrar cfTrade Unions is authorised to withdraw or cancel registration of
a Trade Union on the application of the Union itself, or if lie is satisfied that a certificate
has been obtained by fraud or mistake, or the Trade Union has ceased to exist or if any
Union has wilfully and after notice from the Registrar contravened any provision of the
Act, or allowed any rule to continue in force which is inconsistent with any such
provision, or has rescinded any rule which is required by the Act. But before the
cancellation of registration, on grounds other than application of the Union itself, the
Registrar is required to give two months' previous notice stating grounds for proposed
cancellation (S. 10).
Appeal
Any person aggrieved by any refusal of the Registrar to register a Union, or by
cancellation of certificate can perfer an appeal to the High Court if the head office of the
Union is in a Presidency Town, or to such Court as the appropriate Governments may
appoint in other cases. The final appellate authority is the High Court in all cases (S. 11).
Minor Members
Any person who has attained the age of fifteen years may be a member of a
registered Trade Union subject to any rules of the Trade Union to the contrary, and may,
subject as aforesaid, enjoy all the rights of a member and execute all instruments and
give all acquittances necessary to be executed or given under the rules.
Office Bearers
Not less than one-half of the total number of the office-bearers of every registered
Trade Union shall be persons actually engaged or employed in an industry with which
the Trade Union is connected. The appropriate Government may, however, by special
or general order, exempt any Trade Union or class of Trade Unions from the application
of this rule (S. 22).
But no person can be chosen as, and be. a member of the executive or any other
office-bearer of a registered Trade Union if—
(a) he has not attained the age of 18 years
(b) he has been convicted by a Court in India of any offence involving moral turpitude
and sentenced to imprisonment, unless a period of 5 years has elapsed since his
release (Sec. 21A).

Registered omce
All communications and notices to a registered Trade Union may be addressed to
its registered office. Any change in the address of the head office must be communicated
within 14 days of such change to the Registration will record it in the register maintained
by him (Sec. 12).
Incorporation
Every registered Trade Union shall be a body corporate by the name under which
it is registered, and shall have perpetual SUCCCSSiOn and a common seal with power to
acquire and hold movable and immovable property and to colitract, and shall by the said
name sue and be sued (S. 13).

RIGHTS AND PRIVILEGES OF A REGISTERED TRADE UNION

The Act grants immunity to office-bearers and members of a registered Trade

Union against criminal proceedings in respect of any agreements for the purpose of
516 MERCANTILE LAW

furthering any legal objects of the Union, but not in respect of an agree men Ito commit
an offence (S. 17). Immunity has also been granted from civil suits in respect of any act
done in contemplation or furtherance of trade dispute on the ground that such act induces
some other persons to break a contract of employment or that it is an interference with
the trade, business or employment of some other person.
A registered Union cannot be sued in respect of any tortious acts of its agents if
committed without the knowledge of, or contrary to the express instructions given by
the executive of the Union (S. 18). But no immunity is granted for any act of deliberate
trespass.
An agreement between the members of a registered Trade Union is not void or
voidable mere by reason of the fact that any of the objects of the agreement is in restraint
of trade. But this does not apply to an agreement between members of a Trade Union
for the sale of goods, business transactions, work, or employment (S. 19).
Minors, who have attained the age of 15 years are eligible to become members of
a Trade Union, unless its rules prohibit their entrance: but they cannot become office-
bearers in any case. To become an office-hearer of a Trade Union a person must hve
attained the age of 18 Ycras(S. 21).

FUNDS OF THE TRADE UNION

The Act limits the expenditure of general funds of a registered Trade Union to
objects specified in Section 15, namely :-

(a) the payment of salaries, allowances and expenses to office- bearers of the Trade
Union:
(b) the payment of expenses for the administration of the Trade Union, including
audit of the account of the general funds of the Union:
(c) the prosecution or defence of any legal proccedins to which the Union or any
member thereof is a party, when such prosecution or defence is undertaken for the
purpose of securing or protecting any right of the Trade Union as such or any right arising
out of the relations of any member with his employer or with a person whom the member
employs:
(d) the conduct of trade disputes on behalf of the Trade Union or any member
thereof;
(e) the compensation of members for loss arising out of trade dispu.es ;
(f) allowances to members or their dependants on account of death, old age,
sickness, accidents or unemployment of such members:
(g) The issue of, or the undertaking of liability under policies of assurance on the
lives of members, or under policies insuring members against sickness, accident or
unemployment;
(h) the provision of educational, social or religious benefits for members (includ-
ing the payment of the expenses of funeral or religious ceremonies for deceased
members) or for the dependants of members;
(i) the upkeep of a periodical published mainly for the purpose of discussing
questions affecting employers or workmen as such;
(j) the payment, in furtherance of any of the objects on which the general funds
of the Trade Union may be spent, or contributions to any cause intended to benefit
workmen in general: provided that the expendiure in respect of such contributions in any
financial year shall not at any time during that year be in excess of one-fourth of the
combined total of the gross income which has up to that time accrued to the general funds
 TRADE UNIONS ACT, 1926

of the Trade Union during that year and of the balance at the credit of those funds at the
commencement of the year. and
k) subject to any condition contained in the notification, any other object notified
by the appropriate government in the Official Gazette.

SEPARATE FUND FOR POLITICAL PURPOSES

Sec. 16 provides that registered Trade Union may constitute a separate fund, from
contributions separately levied for or made to that fund, from which payments may be
made, for the promotion of the civic and political interests of its members in furtherance
of any of the objects specified below, namely :-
(a) the payment of any expenses incurred, either directly or indirectly, by a
candidate or prospective candidate for election as a member of any legislative body
constituted under the Constitution of India, or of any local authority, before, during or
after the election in connection with his candidature or election: or
(b) the holding of any meeting or the distribution of any literature or documents
in support of any such candidate or prospective candidate; or
(c) the maintenance of any person who is member of any legislative body
constituted under the Constitution of India, or of any local authority; or
(d) the registration of electors or the selection of a candidate for any legislative
body constituted under the Constitution of India or of a candidate for any local authority;
or
(c) the holding of political meetings of any kind, or the distribution of pcilitiical
literature or political documents of any kind.
No member shall be compelled to contribute to the fund constituted for political
purposes: and a member who does not contribute to the said fund shall not be excluded
from any benefits of the Trade Union, or placed in any respect either directly or indirectly
under any disability or at any disadvantage as compared with other members of the Trade
Union (except in relation to the control or management of the said fund) by reason of
his not contributing to the said fund and contribution to the said fund shall not be made
a condition for admission to the Trade Union.

AMALGAMATION OF TRADE UNIONS

Any two or more registered Trade Unions may become amalgamated togehter as
one Trade Union with or without dissolution or division of the funds of such Trade
Unions or either or any of them: provided that the votes of at least one-half of the
members of each and every such Trade Union entitled to vote are recorded, and that at
least 60 per cent of the votes recorded are in favour of the proposal. Notice in writing,
signed by the Secreatry and by seven ineinbcr.s of each and every Trade Union which is
party thereto, shall be sent to the Registrar, and where the head office of the amalgamated
Trade Union is situated in a different State, to the Registrar of such State. The Registrar
of the State in which the head office of the amalgamated Trade Union is situated shall,
if he is satisfied that the provisions of this Act in respect of amalgamation have been
complied with, register the Trade Union and the amalgamation oftwo or more regitered
Trade Unions shall not prejudice any right of any of such Trade Unions or any right of
a creditor of any of them (Sees 21.26).
BOOKS AND RETURNS
The books of account of a registered Trade Union and its list of members shall be
open to inspection by any officer or .nernhcr of the Trade Union at such times as may
be provided for in the rules. A statement, audited in the prescribed manner, of all receipts
578 ML11CAN11Lf. LAW

and expenditure during the year ending on the 31st day of December shall be sent
annually to the Registrar. Any changes made in the rules of the Trade Union during the
year and all changes of office-bearer, during this period must also accompany this
statement. A copy of every alteration made in the rules must be sent to the Registrar
within 15 days of such alteration. The Registrar or any officer authorised by him by
general or special order may at all reasonable times inspc'i the certificate of registration,
account books, registers and other documentis relating to a Trade Union, at its registered
office or may require their production at such place as he may specify, but that place
must not be at a distance of more than 10 miles from the registered office of the Trade
Union.
PENALTIES

Failure to Submit Returns (Sec. 31)

1. If d2fault is made on the part of any registered or recognised Trade Union in
giving any notice or sending any statement, return or other document as required by or
under any provision of this Act, every officer or other person bound by the rules of the
Trade Union to give or send the same or, if there is no such officer or person, every
member of the executive of the Trade Union, shall be punishable with fine which may
extend to Rs. 5 arid, in the case of a continuing default, with an additional line which
may extend to Rs. 5 for each week after the first during which the default continues:
Provided the aggregate line shall not exceed Rs. 50.
2. Any person who wilfully makes or causes to be made, any false entry in. or any
omission from the general statementt required by Sec. 28, or in or from any copy of rules
or of alteration of rules sent to the Rcgisterr under that Section or in or from any retrun
referred to in Sec. 28 shall be punishable with fine which may extend to Rs. 500.
3. Sec. 32 provides that any person who with intent to deceive, gives to any
member of a registered Trade Union or to any person intending or applying to become
a member of such Trade Union any doucinent puqxmnlng to be a copy of the rules of the
Trade Union or of any alterations to the same which he knows, or has reason to believe,
is not a correct copy of such rules or alterations as are for the time being in force, or any
person who with the like intent, gives a copy of any rules of an unregistered Trade Union
to any person on the pretence that such rules are the rules of a registered Trade Union,
shall be punishable with fine which may extend to Rs. 200.
Sec. 33 provides that no court inferior to that of a Presidency Magistrate or a
Magistrate of the first class shall try any offence under this Act.

DISSOLUTION

1. When a registered Trade Union is dissolved, notice of the dissolution signed

by seven members and by the Sccreatry of the Trade Union shall, within 14 days of the
dissolution, be sent to the Registrar, and shall be registered by him if he is satisfied that
the dissolution has been effected in accordance with the rules of the Trade Union, and
the dissolution shall have effect from the date of such registration.
2. Where the dissolution of a registered Trade Union has been registered and the
rules of the Union do not provide for the distribution of funds of the Union on dissolution,
the Registrar shall divide the funds amongst the members in such manner as may be
prescribed.
Regulation 11 of the Central Trade Union Regulations, 1938, provides that where
it is necessary for the Registrar to distribute the funds of a Trade Union which has been
dissolved, he shall divide the funds in proportion to the amounts contributed by the
members by way of subscription during their membership.
 Chapter XX

The Payment of Wages Act, 1936

(No. IV or 193)

Application and Scope (Sec. 1)

The Act applies only to the payment of wages to persons receiving less than Rs.
1.000 per mensem. It applies to the payment of wages to persons employed in any
factory and to persons employed (otherwise than in a factory) on any railway by a railway
administration or either directly or through a subcontractor, by a person fulfilling a
contract with a railway administration to coal-mines and plantations, as well as to
establishments in which work relating to the construction, development or maintenance
of buildings, roads, bridges, canals, or relating to operations connected with navigation,
irrigation or the supply of water, or relating to generation, transmission and distribution
of electricity or any other form of power is carried on. The State Governments are,
however, authorised to extend all or any of the provisions of the Act to any industrial
establishment. But it cannot do so in relation to any industrial establishment owned by
the Central Government with objects not confined to one State, without consulting the
Central Government.
Definitions (Sec. 2)
For the purpose of this Act—

(a) industrial establishment means any tramway or motor omnibus service; air
transport service; dock, wharf or jetty, inland vessel mnenchanically propelled; mine,
quarry or oilfield; plantation; workshop or other establishment in which articles are
produced, adapted or manufactured with a view to their use, transport or sale; estab-
lishment in which any work relating to the construction, development or maintenance
of buildings, roads, bridges or canals, or relating to operations connected with navigation,
irrigation or the supply of water, or relatingg to the generation, transmission and
distribution of electricity or any other form of power is being carried on;
(b) wages means all remunerations (whether by way of salary, allowance or
otherwise) expressed in terms of money or capable of being so expressed which would,
if the terms of employment, express or implied, were fulfilled, be payable to a person
employed in respect of his employment or of work done in such employment, and
include—
(a) any remuneration payable under any award or settlement between the parties
or order of a Court;
(b) any rumuneration to which the person employed is entitled in respect of
overtime work or holidays or any leave period;
(c) any additional remuneration payable under the terms of employment (whether
called a bonus or by any other name):

579
550 MERCANTILE LAW

(d) any sum by reason of the termination of employment of the person employci
is payable under any law, contract or instrument which provides for the payment of such
sum, whether with or without deductions, but does not provide for the time within which
the payment is to be made;
(e) any sum to which the person employed is entitled under any scheme framed
under any law fr the time being in force;
but does not include-
1. any bonus (whether under a scheme of profit sharing or otherwise) which does not
form part of the remuneration payable under terms of employment or which is not
payable under any award or settlement between the parties or orderr of a Court;
2. the value of any house accommodation, or of the supply of light, water, medical
attendance or other amenity or of any service excluded from the computation of
wages by a general or special order of the State Government;
3. any contribution paid by the employer to any pension or provident fund, and the
interest which may have accrued thereon;
4. any travelling allowance or the value of any travelling concession;
5. any sum paid to the employed person to defray special expenses entailed on him
by the nature of his employment: or
6. any gratuity payable on the determination of employment in cases other than those
specified in sub-clause (d).
Responsibility for Payment or Wag-s (See. 3)
The responsibility for payment of wages to workmen is primarily that of the
employer. In the case of factories, the manager; in industrial establishments, the person
responsible to employer for supervision and control of the establishment; and upon
railways, the person nominated by the railway administraion on this behalf for the local
area, shalt be responsible for such payment. In respect of contractors, the intention of
the Act is that the contractor should be responsible for payment where he undertakes
actual work for the principal employer, and is in charge of the labour and that the principal
employer or his manager shall be responsible where the contractor merely contracts for
the supply of labour to the employer.
Wage-periods (Sec. 4)
Every person responsible for the payment of wages must fix wage-periods in
respect of which wages shall be payable, and see that no wage-period exceeds one month
in any case. The penalty for contravention of this provision is fine extending to Rs. 200.
Time of Payment or Wages (Sees. 5, 6)
In regard to the time of payment of wages the following rules must be
observed
1. In the case of undertakings employing less than one thousand persons wages 'ust
b paid before the expiry of the seventh day, and in other cases before the expiry
of the tenth day, after the last day of the wage-period in respect of which the wages
are payable. In the case of persons employed arm a dock, wharf or jetty or in mine,
the balance of wages found due on completion of the final tonnage account of the
ship or wagons loaded or unloaded, as the case may be, shall be paid before the
expiry of the seventh day from the day of such completion.
2. A discharged worker must be pai n his wages before the expiry of the second
working day from the day on which his eçoymenI is terminated.
 PAYMENT OF WAGES AC!', 1936 581

3. All payments of wages must be made oil working day (See, 5). Penalty for
contravention is fine up to Rs, 500.
4. All wages must be paid in current coin or currency notes or in both or with the
written authorisation of the employed person, wages may be paid by cheque or by
crediting the wages in his bank account (Sec. 6). Penalty for contravention is fine
up to Rs, 200.
Deductions which may be made from Wages (Sec. 7)
It is laid down in this Section that notwithstanding the provisions of Sec. 47(2) of
the Indian Railways Act, 1890, the wages of employed person shall be paid to him
without deductions of any kind except those authorised by or under this Act. Sec. 47(2)
of tile Indian Railways Act provides for line or forfeiture of one month's pay for breach
of rules made under that Section. According to Sec. 7 of the present Act, no such
deduction can be made in respect of any railway worker whose monthly wages do not
amount to Rs. 1,0(X) or more.
Every payment made by the employed person to the employer or his agent shall
be deemed to be a deduction from wages.
Any loss of wages resulting from the imposition, for good and sufficient cause,
upon a person employed of any of the following penalties, namely-

(i) the withholding of increment or promotion (including the stoppage of increment

of an efficiency bar);
(ii) the reduction to a lower post or time-scale or to a lower stage in a time-scale; or
(in) suspension;
shall not be deemed to be a deduction 1mm wages in any case where the rules framed
by the employer for the imposition of such penalty are in conformity with the require-
menis as specified by the State Government.
Deductions from the wages of an employed person shall be made only in accord-
ance with the provisions of this Act, and may be of the following kinds only: (1) fines;
(2) for absence from duty; (3) for damages or loss; (4) for house accommodation; (5) for
amenities and services; (6) on account of advances which the employer is compelled to
make, including advances for travelling allowance or conveyance allowance, or for
adjustment of over-payment of wages; (7) on account of payments to certain provident
funds, to cooperative societies, or premium for life insurance; (8) for recovery of loans
made from any fund constituted for the welfare of labour; for recovery of loans granted
for house building; (9) for income-tax payable ny the employed person; (10) under an
order of a Court; (Ii) for payment to cooperative societies; (12) made with the written
authority of the worker in furtherance of any War Savings scheme approved by the State
Government for the purchase of securities of the Government of India; (13) for payment
of insurance prrcmia; (14) for recovery of losses sustained by a railway administration
1)11 account of acceptance by the employed person of counterfeit or base coins, mutilated
or forged currency notes; (15) other losses sustained by a railway administration through
the negligence of an employed person.

The total amount of deductions which may he made in any wage-period from the
wages of any employed person shall not exceed-

(i) in cases where such deductions are wholly or partly made for payment to coopera-
tive societies, 75 per cent of such wages; and
(ii) in anyot her case. 50 per cent of such wages.
592 MERCANTILE LAW

Fines (Sec. 8).

- The following rules apply to deductions byway of fines-
1. Fines can be imposed only for acts and omissions specified in notices approved
by the State Government, or the Chief Inspector of Factories, in the case of
factories, or the Supervisor in other cases.
2. No fine can be imposed on any employed person uliless he has been given an
opportunity of showing cause against the line.
3. No tine can be imposed on any employed person who is under the age of 15 years.
4. The total amount of fine which may be imposed in any wage-period on any
employed person must not exceed an amount equal to half-an-anna in the rupee
of the wages payable to him in respect of that wage-period.
5. The fine shall be deemed to have beem imposed on the day of the act or omission
in respect of which it was imposed and cannot be recovered from the person by
instalments or after the expiry of 60 days from the day on which it was imposed.
6. All the fines so recoverd or realised must be recorded in a prescribed register and
must be credited to a fine fund.
7. The proceeds of the fine fund must be utilised only for such purposes beneficial
to the workers of the factory or the estahilishment as are approved by the
prescribed authority. Penalty for contravention of any of these rules is fine up to
Rs. 500.
Deductions for Absence from Duly JSec. 9
Deductions for absence from duty are permitted but the amount of such deductions
cannot exceed the sum which the person would have been entitled to if he had worked
the same number of days for which the deduction is made; provided that, subject to any
rules made in this behalf by the State Government, if ten or more employed persons
acting in concert absent themselves, without due notice and without reasonable cause,
such deduct ion from any such person may include such amount not exceeding his wages
for S days as may by any such terns he due to the employer in lieu of the due notice. By
an amending Act of 1937 employers are permitted to withhold wages in the case of
stay-in" strikes. Penalty for contravention is fine up to Rs. 500.
Deductions for Damage or Loss (Sec. 10)
Deductions for damage to or loss of goods expressly entrusted to the employed
person for custody, or for loss of money for which he is required to account are permitted
only where such damage or loss is directly attributable to his neglect or default, and only
after he has been given an opportunity of showing cause against the deduction. Such
deductions are not to exceed the amount of the damage or loss to the employer and must
be recorded in a prescribed register. Penalty for contraventat ion is fine up to Rs. 500.
Deduction for Services Rendered (Sec. 11)
Deductions for house accommodation and for amenities and services rendered by
th.-, employer are permitted, but only when an employed person has accepted the hosue
accommodation, amenity or service as a term of employment or otherwise, and shall not
exceed an amoun: equivalent to their value. Furthennore, the deductions in respect of
amenities and services can he made subject only to the following conditions;
1. The approval of the Chief Inspector of Factories shall be obtained in writing to
compulsory or general deductions from wages for any amenities or services
provided by the employer.
 PAYMENT OF WAGES ACT, 1936 583

2. The kind and standard of services and amenities provided shall be subject to the
approval of the Chief Inspector of Factories.
3. The maximum deduction shall not exceed half the wages at any period.

Penalty for the contravention of any provisions of this Section is fine up to Rs.
500.
The house accommodation, for which deductions are now allowed, may be
supplied by the employer or by Government or by any housing board set up under law,
e.g., under the Subsidised Industrial Housing Scheme (whether the Government or the
board is theemployeror not)or any other authority engaged in the business ofsubsidising
house -accommodation.
Deductions for Recovery of Advances (Sec. 12)
Deductions for recovery of advances or for adjustment of over-payments of wages
can be made only on the following conditions
1. An advance of money made before employment must be recovered from the
first payment of wages, but advances given for travelling expenses can in no case be
recovered.
2. Advances of wages not already earned are subject to rules made by State
Governments, which are as follows
(i) an advance of wages not already earned shall not, without the previous
permission of an Inspector, exceed an amount equivalent to the wages earned by the
employed person during the preceding two (Bombay four) calendar months, or if he has
not been employed for that period, twice the wages he is likely to earn during the two
(Bombay four) subsequent calendar months;
(ii) the advance may be recovered in instalments by deductions from wages spread
over not more than twelve (Bombay eighteen) months. No instalment shall exceed
one-third, or where the wages of any wage-period are not more than twenty rupees,
one-fourth of the wages for the wage-period in respect of which the deduction is made;
(iii) the amounts of all advances sanctioned and the payments thereof shall be
entered in a prescribed register;
(iv) (Bombay only) the rate of interest charged for advances granted shall not
exceed 6 per cent per annum.

Penalty for contravention is fine up to Rs. 500.

Other Deductions Permitted by the Act
The Act also permits the following deductions from the Wages of an eniployee
1. deductions of income-tax payable by the employed person;
2. deductions required to be made by order of a Court or other competent authority;
3. deductions for contribution to and repayment of advance from any recognised or
approved fund;
4. deductions, made with the written authorisation of the employee for payment of
any premium on his life insurance policy to the Life Insurance Corporation of
India, or for the purchase of securities of the Government of India or of any State
Government or for being deposited in any Post Office Saving Bank in furtherance
of any savings scheme of any such Government;
deducjons, made with the written authorisation of the employed person, for
contribution to the Prime Minister's National Relief Fund or to such other Fund
as the Central Government may, by notification in the Official Gazette, specify.
554 MERcAf'rrlLt LAW

Penalty for contrvention is line up to Rs. 500.

The administration and enforecement of the Act is the responsibility of the State
Inspector: of Factories in the case of factories within their local limits, and that of the
Chief Labour Commissioner (Central) in the case of persons employed on railway (other
than in rai1w y factories). The Inspector or the Labour Commissioner may, at all
reasonable hours, enter on any premises, and make such examination of register or
document relating to the cakulation and payment of wages, and take on the spot
otherwise such evidence of any person, and exercise such other powers of inspection, as
he may deem necessary for carrying out the purpose of this Act (Sec. 14).
Claims for Wrongful Deductions (Sec. 15)
The State Government may either appoint a presiding officer of any Labour Court
or Industrial Tribunal or a Commissioner for Workmen's Compensation or other Officer
with judicial experience (Civil Judge or magistrate) to hear and decide all claims arising
out of deductions from the wages, and delay in payment of wages.
Where any wrongful deductions have been made from the wages of a person, or
any payment of wages has been delayed, such person himself, or any legal parctitioner
or any official of a registered trade union authorised in writing to act on his behalf, or
any Inspector under this Act, or any other perosn acting with the permission or the
authority may, within twelve months of the date of deduction or the date on which the
payment of wages was due, apply to the authority for a direction. An application
presented after the expiry of twelve months may he admitted by the authority for
sufficient cause.
Oil the application, the authority will give an opportunity to the applicant
and the employer or any person responsible for the payment of s to c heard, and
on being satisfied, direct the employer or the other person to pay to the claimant the
amount wrongfully withheld plus compensation up to ten times that sum in the case of
deduction, and not exceeding Rs. 25 per head in the case of delay. But the payment of
cornpenstaion for delayed wages will not be ordered if the delay was due to—

(a) honafide error or honaJide dispute as to the amount payable to the employee; or
(b) the occurrence of an emergency or the existence of exceptional circumstances,
such that the person responsible for the payment of the wages was unable, though
exercising reasonable diligence, to make prompt payment; or
(c) the failure of the employed person to apply for or accept payment.

An amount directed to be paid by the employer to the employed person may be

recovered as if it were a fine imposed by a magistrate.
The authority may refuse to entertain the application, if after giving the apphcant
an opportunity to be heard, the authority is satisfied that—

(a) the applicant is not entitled to present an application; or

(b) the delay in payment of wages was excusable, as provided above: or
(c) the applicant shows no sufficient cause for making a direction for payment; or
(d) the application is insufficiently stamped or is otherwise incomplete.

lithe authority hearing the application is satisfied that it was either malicious or
vexatious, the authority may direct the applicant to pay a penalty not exceeding Rs. 50
to the employer.
 PAYMENT OF WAGES MT, 1956 585

An appeal against all or direction of the authority, can he preferred within

30 days of such order before a court of Small Causes in a Presidency town, and before
the District Court elsewhere.
Sec. 22 provides that persons coining under the Act shall be limited to its procedure
in respect of the recovery of unpaid wages or wrongful deductions. In consequence, no
Court shall entertain any suit for the recovery of wages or of any deduction from wages,
a claim for which could he made under Sec. 15 of this Act.
The Act prohibits contracting out agreements Sec. 23 provides that any contract
or agreement, whether made before or after the commencement of this Act, whereby an
employed person relinquishes any right conferred by this Act shall be null and void in
so far as it purports to deprive hint of such right.
Sec. 25 provides that the person responsible for the payment of wages to persons
employed in a factory shall cause to be displayed its such factory a notice containing
such abstracts of this Act and of the rules made thereunder in English and in the language
of the majority of the persons employed in the factory, as may be prescribed. Penalty
for contravention of this Section is fine extending to Rs. 20.
The Act provides penalties for the contravention of its various provisions, but Sec.
21 lays down that no prosecution call instituted unless a successful claim has been
made under the Act or unless the authority or the appellate Court considers a prosectition
to be warranted.
 Chapter XX!

The Industrial Disputes Act, 1947

The Act came into force on April, 1947 and extends to the whole of India. The
purpose of the Act is to provide macLnery for a just and equitable settlement by
adjudication by independent Tribunals, by negotiations and by conciliation of industrial
disputes. The Supreme Court laid down in the case of Workmen ofDimakuchi Tea Estate
v. Dimakuchj Tea Estate, 1950 S.C. 353, the following objectives of the Act, namely:-
(i) Promotion of measures for securing and preserving amity and good relations
between employer and workmen.
(ii) An investigation and settlement of industrial disputes between employers and
employers, employers and workmen, or workmen and workmen, with a right of
representation by registered trade union or federation of trade unions or an
association of employers or a federation of association of employers.
(iii) Prevention of illegal strikes and lockouts.
(iv) Relief to workmen in the matter of layoff and retrenchment
(v) Promotion of Collective bargaining.
Definitions (Sec. 2)

1. appropriate Government [2(a)] Means -

(i) the Central Government in relation to industrial dispute concerning any of the
following:

(a) any industry carried on by or under the authority of the Central Government, or
by a railway company;
(b) any such controlled industry as may be specified by the Central Government,
(c) a Dock Labour Board; or
(d) the Industrial Finance Corporation of India; or
(e) the Employees' State Insurance Corporation; or
(f) the Board of Trustees constituted under Sec. 3A of the Coal Mines Provident Fund
and MjscellaneousProv is ions Act, 1942;
(g) the Central Board of Trustees and State Board of Trustees constituted under
Section 5A and Section SB, respectively of the Employees' Provident Fund and
Miscellaneous Provisions Act, 1952; or
(h) the Indian Airlines and Air India Corporations; or

(I) the Life Insurance Corporation of India; or
(j) the Oil and Natural Gas Commission; or
(k) the Deposit Insurance and Credit Guarantee Corporation; or
(I) the Central Warehousing Corporation; or
(m) the Unit Trust of India. or

596
 THE INDUSTRIAL DtSPLTh.S ACt', 1947 587

(n) the Food Corporation of India. or

(o) the International Airports Authority of India, or
(p) a Regional Rural Bank estabished under Sec. 3 of the Regional Rural Banks Act.
1976. or
(q) the Export Credit and Guarantee Corporation Ltd.; or
(r) the Industrial Reconstruction Bank of India Ltd.; or
(s) the Banking Service Commission or a banking and an insurance company, or
(t) a mine, an oilfield, aCanioninent Board nra major Port.
(ii) In relation to any other industrial dispute, the appropriate government means the
State Government within whose territory the industrial dispute arises.

2. Average lay [See. 2aaa)]

Average pay in the case of a workman means-

(i) in the case of monthly paid workman. the average of monthly wages payable in
three Complete Calendar months;
(ii) in the case of weekly paid workman, the average of the weekly wages payable in
four complete weeks;
(iii) in the case of daily paid workman, the average of the wages for twelve full working
days;
provided that any of the foregoing periods shall he period preceding the date on which
the average pay becomes payable, if the workman had worked during the said period,
and where such calculation cannot he made, the average pay shall be calculated as the
average of thcwagcs payable to the workman during the period he actually worked.
3. Award means an interim or limil determination of any industrial dispute or any
question relating thereto by any Labour Court, Industrial Tribunal or National
Tribunal and includes an arbitration award made tinder Section WA.
4. Banking Company means a banking company as defined in Section 5 of the
Ranking Regulation Act, 1949, having bratielics or tither establishments in more
than one State, and includes the Export-lnix)rt Bank of India, the Industrial
Reconstruction Bank of India, the Industrial Development Bank of India. the
Reserve Bank of India, the State Bank of India. and its subsidiary banks, and
Nationalised Banks.
5. Board means a Board of Conciliation constituted under this Act.
6. Conciliation Officer means a conciliation officer appointed under this Act.
7. Controlled Industry means any industry the control of which by the Union has
been declared by any Central Act to be expedient in the public interest.
8. Court means a Court of Inquiry Constituted under this Act.
9. employer means

(i) in relation to an industry carried ott by or under the authority of any department
of Central Government or a State Government the authority prescribed in this
behalf, or where no authority is prescribed, the head of the department; -
(ii) in relation to an industry carried on by or on behalf of a local authority, the
Chief Executive officer of that authority.
This definition of an employer is neither exhaustive nor inclusive. The employer
in relation to industries carried on by other authority or person will be construed in the
ordinary sense.
588 MERCANTILE LAW

In Hussainbhai v. Alath Factory Tcbzilai Union, 1978 S.C. 1410, the Supreme
Court observed that where a worker or group of workers labour to produce goods or
services and those goods and services are for the business of another, that other is, in
fact, the employer.

10. Executive, in relation to a Trade Union, means the body by whatever name called
to which the management of the affairs of the Trade Union is entrusted.
11. Indèpendenl. A person shall be deemed to be independent for the purpose of his
appointment as the Chairman or other member of a Board. Court or Tribunal, if
he is unconnected with the industrial dispute referred to such Board, Court or
Tribunal or with any industry directly affected by such dispute:
Provided that no person shall cease to be independent by reason only of the fact
that he is a shareholder of an incorporated company which is connected with, or
likely to be affected by, such industrial dispute; but in such a case, he shall disclose
to the appropriate Government the nature and extent of the shares held by him in
such coman.
12. Industry means any systematic activity carried on by cooperation between an
employer and his workmen (whether such workmen are employed by such
employer directly or by or through any agency, including a contractor) for the
production, supply or distribution of goods or services with a view to satisfy human
wants or wishes (not being Wants and wishes which are merely spiritual or religious
in nature), whether or not, -
(i) any capital has been invested for the purpose of carrying on such activity; or
(ii) such activity is carried on with a motive to make any gain or profit;
and includes—
(a) any activity of the Dock Labour Board established under Sec. SA of the Dock
Workers (Regulation of Employment) Act, 1948;
(b) any activity relating to the promotion of sales or business or both carried on
by an establishment,
but does not include—
(1) any agricultural operation except when such agricultural operation is carried
on in an integrated manner with any other activity (being any such activity as
is referred to in the foregoing provisions of this clause) and such other activity
is the predominant one.
Explanation.—For the purpose of this sub-clause "agricultural operation" does
not include any activity carried on in a plantation as defined in clause (f) of Section 2 of
the Plantations Labour Act, 1951:
the term ''industry" also does not include—
(2) hospitals or dispensaries; or (3) educational, scientific research or training institu-
tions; or (4) institutions owned or managed by organizations wholly or substantially

1. This new definition of industry substituted by the lnduinal Disputes (Amendment) Act.
1982, nullifies many decisions of the Supreme Court and high Coons.
 THE INDUSTRIAL DISPUTES ACT, 1947 589

engaged in any charitable, social or philanthropic services; or (5) Khadi or Village

industries; or (6) any activity of the Government relatable to the sovereign functions of
the government including all the activities carried on by the departments of the Central
Government dealing with defence research, atomic energy and space; or (7) any domestic
services; or (8) any activity, being a profession practised by an individual or body of
individuals, if the number of persons employed by the individual or body of individuals
in relation to such profession is less than ten; or (9) any activity, being an activity carried
on by a cooperative society or a club or any other like body of individuals, if the number
of persons employed by the cooperative society, club or other like body of individuals
in relation to such activity is less than ten.
Ii Industrial dispute means any dispute or difference between employers and
employers, or between employers and workmen, or between workmen and
workmen, which is connected with the employment or non-employment or the
terms of employment or with the conditions of labour, of any person.
As the definition of "industrial dispute" speaks of a dispute between employer
and workmen and not employer and workman, a single workman who is aggrieved by
an action of the employer cannot raise an industrial dispute. Thus, before the insertion
of Sec. 2A, which is also of limited application, an individual dispute could not per se
be an industrial dispute, but it could become one if taken up by the Trade Union or a
number of workmen; it becomes an industrial dispute only when workmen as a body
make common cause with the individual workman.
By virtue of Sec. 2A, when any employer discharges, dismisses, retrenches or
otherwise terminates the services of an individual workman, any dispute or difference
between that workman and his employer connected with, or arising out of, such
discharge, dismissal: retrenchment or termination shall be deemed to be anindustrial
dispute notwithstanding that no other workman nor any union of workmen is a party to
the dispute.
As stated above, Sec.2A has limited application. It does not declare all individual
disputes to be industrial disputes. If the dispute or difference is connected with any matter
other than those mentioned in the section, then it must be a collective dispute.
14. Industrial establishment or undertaking means an establishment or undertaking
in which any industry is earned on
Provided that where several activities are earned on in an establishment or
undertaking and only one or some of such activities is or are an industry or industries,
then—
(a) If any unit of such establishment or undertaking carrying on any activity, being
an industry, is severable from the other units of such establishment or under-
taking, such unit shall be deemed to I e a separate industrial establishment or
undertaking;
(b) If the predominant activity or each of the predominant activities carried on in
such establishment or undertaking or any unit thereof is an industry and the
other activity or each of the other activities carried on in such establishment
or undertaking or unit thereof is not severable from and is, for time purpose of
carrying on, or aiding the carrying on of, such predominant activity or
activities, the entire establishment or undertaking or, as the case may be, unit
thereof shall be deemed to be an industrial establishment or undertaking.
15. Insurance Company means a company defined in Sec. 2 of the Insurance Act,
1938 having branches or other establishments in more than one State,
 90 MERCANTILE LAW

Under the Insurance Act, an Insurance Company means any insurer being a
company, association of partnership which may be wound up under the Companies Act.
1956, or to which the Partnership Act, 1932 applies.

16. Khadi has the meaning assigned to it in clause (d) of Sec.2 of the Khadi and Village
Industries Commission Act, 1956.
17. Labour Court means a Labour Court constituted under Section 7 of the Act.
18. Layoff (with its grammatical vuialions and cognate expressions) means (a) the
failure, (b) refusal, or
(c) inability of the employer-
(i) on account of shortage of coal, or
(ii) Power, or
(iii) raw materials, or
(iv) the accumulation of stocks, or
(v) the break down of machi'nei'y. or
(vi) natural calamity, or
(vii) for any other connected reason
to give employment to a workman whose name is borne on the muster rolls of his
industrial establishment and who has not been retrenched.
A workman is deemed to be paid off for the day, if within 2 hours of the normal
lime, employment is not given to him.
However, if the workman instead of being given employment at the commence-
ment of any shift for any day is asked to present himself for the purpose during the second
half of the shift for the day and is given employmeift then be shall bedeemed to have
been laid off only for one half of that day. In case, he is not given any employment even
after so presenting himself, he shall not be deemed to have been laid off for the second
half of the shift for the day and shall be entitled to full basic wages and dearness allowance
for that part of the day.

19. Lock-out means the temporary closing of a place of employment, or the suspen-
sion of work, or the refusal by an employer to continue to employ any number of
persons employed by him.
20. Major Port means a port as defined in clause (8) of Section 3 of the Indian Ports
Act, 1903. As defined in this clause Major Port' means any port which the Central
Government may by notification in the Official çazette declare or may by any law
for the time being in force have declared to be a major port.
21. Mine means a mine as defined in clause (f) of sub-section (1) of Section 2 of the
Mines Act, 1952. As per this clause Mine means any excavation where any
operation for the purpose of searching for or obtaining mineral has been or is being
carried on, and includes, unless exempted by the Central Government by notifica-
tion in the Official Gazette, any premises or part thereof on which any proces
ancillary to the getting, dressing or preparation for sale of mineral or of coke is
being carried on.
22. National Tribunal means a National Industrial Tribunal constituted under Section
lB of the Act.
23. Public Utility Service means-
(i) any railway service;
(ii) any transport service for the carriage of passengers or goods by air;
(iii) any service in or in connection with the working of any major port or dock;
 THE INDUSTRIAL DISPUTES ACT. 1947 591

(iv) any section of an industrial establishment, on the working of which the safety
of the establishment or the workmen employed therein depends;
(v) any postal telegraph or telephone service;
(vi) any industry which supplies power, light or water to the public;
(vii)any industry specified in the First Schedule which the appropriate government
may, if satisfied that public emergency or public interest so requires, by
notification in the Official Gazette declare to be a public utility service for the
purpose of this Act, for such period as may be specified in the notification.
However, the period specified is not, in the first instance, to exceed 6 months,
but may be extenJed from time to time by any period not exceeding 6 months
at any time, if in the opinion of the appropriate governments public emergency
or public interest requires such extension.

The following 20 industries are mentioned in the First Schedule:

1. Transport (other than railways) for the carriage of passengers or goods by land
or water. 2. Banking. 3. Cement. 4. Coal. 5. Cotten Textiles. 6. Foodstuff. 7. Iron and
Steel. 8. Defence Establishments. 9. Service in Hospitals and Dispensaries. 10. Fire
Brigade Service. 11. India Government Mints. 12. India Security Press. 13. Copper
Mining. 14. Lead Mining 15. Zinc Mining. 16. Iron Ore Mining. 17. Service in Oil fields.
18. Service in Uranium Industry. 19. Pyrites Mining. 20. Security Paper Mill, Hoshan-
gabad.
24. Retrenchment means the termination by the employer of the services of a
workman for any reason whatsoever, otherwise than as a punishment inflicted by
way of disciplinary action. It does not include-
(i) voluntary retirement of the workman; voluntary resignation by the employee,
is covered by the expression voluntary retirement. By accepting resignation
the employer does not retrench the employee V.K. Cotton Spg. & Wvg. Mills.
Co. Lid. v. State of U.P., 1990 S.C. 1808)., or
(ii) retirement of the workman on reaching the age of superannuation in terms of
contracts of employment, or
(iii) termination of the service of the workman as a result of the non-renewal of the
contract of employment between the employer and the workman concerned,
on its expiry, or of such contract being terminated under a stipulation in that
behalf contained therein, or
(iv) termination of the service of a workman on the ground of continued ill-death.
25. Settlement means a settlement arrived at in the course of conciliation proceedings
and includes a written agreement between the employer and workman arrived at
otherwise than in the cause of conciliation proceedings where such agreement has
been signed by the parties thereto in such manner as may be prescribed and a copy
thereof has been sent to an officer authorised in this behalf by the appropriate
government and the conciliation officer.
26. Strike means a cessation of work by a body of persons employed in any industry
acting in combination or a concerted refusal, or a refusal under a common
understanding of any number of persons who are or have been so employed to
continue to work or to accept employment.
27. Tribunal means an Industrial Tribunal constituted under Section 7A and includes
an Industrial Tribunal Constituted before the 10th day of March, 1957 under this
Act.
92 MER(,\ lAW

I
Unfair Labour Practices Sec. 2(ra)j
28. The definition of unfair Labour Practices was incorporated into the Act by the
Amendment Act of 192 and came into force with effect from 21st August, 1994.
The term means any of the following practices on the part of employers and
employees.
Unfair Labour Practices on the part of the employers and their Unions
The following labour practices on I he part of employers and their unions are unfair,
namely:-
1. To interfere with, restrain from, or coerce, workmen in file exercise of their rights
to organise, form, join or assist a trade union or to engage in concerted activities
for the purse of collective bargaining or other mutual aid or protection, that is
to say—
(a) threatening workmen with discharge, dismissal, if they join trade union;
(b) threatening a lockout or closure, if a trade union is organised:
(c) granting wage increase to workmen at crucial periods of trade union organisa-
tion, with a view to undermining the efforts of the trade union at organisation.
2. To dominate, interfere with or contribute support, financial or otherwise, to any
trade union, that is to say—
(a) an employer taking an active interest in organising a trade union of his
workmen: and
(h) an employer showing partiality or granting Favour to one of several trade
unions attempting to organise his workmen or to its members where such a
trade union is not a recognised trade union.
3. To establish employer-sponsored trade unions of workmen.
4. To encourage or discourage membership in any trade union by discriminating
against any workman, that is to say—
(a) discharging or punishing a workman because lie urged other workmen to join
or organised trade union:
(b) dischargitmg or dismissing a wurkiiizin for taking part in any strike ([lot being
a strike which is deemed to be an illegal strike under this Act);
(c) changing seniority rating of a workman because of trade union activities:
(d) refusing to promote workmen to higher posts on account ot their trade union
activities;
(e) giving unmerited promotions to certain workmen with a view to creating
discord amongst other workmen, or to undermine the strength of their trade
union;
(f) discharging office-bearers or active members of the trade union on accountof
their trade union activities.
5. To discharge or dismiss workmen;
(a) byway of victimisation;
(b) not in good faith, but in the colourable exercise of the employer's rights;
(c) by falsely implicating a workman in a criminal case on false evidence or on
concocted evidence;
(d) for patently fase reasons;
 11IE INDUSTRIAL DISPUTES M1, 1947 593

(e) on untrue and trumped up allegations of absence without leave;

(f) in utter disregard of the principles of natural justice in the conduct of domestic
enquiry or with undue haste;
(g) for misconduct of a minor or technical character without having any regard to
the nature of the particular misconduct or the past record or service of the
workman, thereby leading to a disproportionate punishment.
6. To abolish the work of a regular nature being done by workmen, and to give such
work to contractors as a measure of breaking a strike.
7. To transfer a workman nia/afide from one place to another under the guise of
following management policy.
g • To insist upon individual workmen who are on a legal strike to sign a good conduct
bond, as a precondition to allowing them to resume work.
9. To show favouritism or partiality to one set of workers regardless of merit.
10. To employ workmen as "badlis'', casuals or temporaries and to continue them as
such for years, with the object of depriving them of the status and privileges of
permanent workmen.
11. To discharge or discriminate against any workman for hung charges or testifying
against an employer in any enquiry or proceeding relating to any industrial dispute.
12. To recruit workmen during a strike which is not an illegal strike.
13. Failure to implement award, settlement or agreement;
14. To indulge in acts of force or violence.
15. To refuse to bargain collectively, in good faith with the recognised trade unions.
16. Proposing or continuing a lockout deemed to be illegal under this Act.
Unfair Trade Practices on the Part of Workmen and their Unions include:
(1) To advise or actively support or instigate any strike deemed to be illegal under this
Act.
(2) To coerce workmen in the exercise of their right to self- organisation or to join a
trade union or refrain from joining any trade union, that is to say—
(a) for trade union or its members to picketing in such a manner that non-striking
workmen are physically debarred from entering the work place;
(b) to indulge in acts of force or violence or hold out threats of intimidation in
connection with a strike against non-striking workmen or against managerial
staff.
(3) For a recognised trade union to refuse to bargain collectively in good faith with
the employer.
(4) To indulge in coercive activities against certification of a bargaining repre-
sentative.
(5) To stage, encourage or instigate such forms of coercive actions as wilful "go
slow", squating on the work premises after working hours or "gherao" of any of
the members of the managerial or other staff.
(6) To stage demonstration at the residence of the managerial staff members.
(7) To incite or indulge in wilful damage to employer's property connected with the
industry.
(8) To indulge in acts of force or violence or to hold out threats of intimidation against
any workman with a view to prevent him from attending work.
594 MERCAN11LE LAW

(29) Wages means all remuneration capable of being expressed in terms of money,
which would, if the terms of employment express or implied, were fulfilled be
payable to a workman in respect of his employment or work done in such
employment, and includes-
(i) such allowances (including dearness allowances) as the workman is for the
time being entitled to;
(ii) the value of any house accommodation, or of supply of light, water, medical
attendance or other amenity or of any service or any concessional supply of
foodgrains or other articles;
(iii) any travelling concession;
(iv) any commission payable on the promotion of sales or business or both.
But the term "wages" does not include—
(a) any bonus;
(b) any contribution paid or payable by the employer to any pension fund or
provident fund or for the benefit of the workmen under any law for the time
being in force;
(c) any gratuity payable on the termination of his service.
(30) Workman means any person (including an apprentice) employed in any industry
to dc' any manual, unskilled, skilled, technical, operational, clerical or supervisory
work for hire or reward, whether the terms of employment be express or implied.
Furthermore, for the purposes of any proceedings, under this Act in relation to an
industrial dispute, workman includes any such person who has been dismissed,
discharged or retrenched in connection with or as a consequence of that dispute,
or whose dismissal, discharge or retrenchment has led to that dispute.
However, workman does not include-
(i) any person who is subject to the Army Act, 1950, or Air force Act, 1950. or
the Navy (Disputes) Act. 1934; or
(ii) any person who is employed in the police service or as aR officer or other
employee of a prison; or
(iii)any person who is employed mainly in a managerial or administrative
capacity; or
(iv) any person who is employed in a supervisory capacity and drawing wages
exceeding Rs. 1600 per month.
(v) any supervisor who exercises, either by the nature of the duties attached to the
office or by reason of the powers vested in him, functions mainly of a
managerial nature.
It should be noted that the definition of workman presupposes the relationship of
master and servant. Consequently, an independent contractor is not covered by the
definition of workman.

AUTHORITIES UNDER THE ACT

Works Committee (Sec. 3)

In the case of an industrial establishment in which 100 or more workmen are
employed or have been employed on any day in the preceding 12 months, the appropriate
Government may by general or special order require the employer to constitute a Works
 THE INDUSTRIAL DISPUTES Ad', 1947

Committee consisting of representatives of employers and workmen engaged in the

establishment, the number of representatives of workmen not being less than that of the
representatives of the employers, and the representatives of the workmen to be chosen
from among the workmen engaged in the establishment and in consultation with their
trade union, if any. The duties of the Works Committee are to promote measures for
securing and preserving amity and good relations between the employer and workmen
and to comment upon matters of their interest or concern, and to endeavour to compose
any material difference of opinion in respect to such matters.
Conciliation Officers (Sec. 4)
The appropriate Government by notification in the Official Gazette appoint
conciliation officers for any specified area or for one or more specified industries, either
permanently or for a limited period. Conciliation officers are charged with the duty of
holding conciliatory proceedings for the purpose of bringing about a fair and amicable
settlement of any industrial dispute.
Boards of Concilliation (Sec. 5)
The appropriate Government may, as occasion arises, by notification in the Official
Gazette, constitute a Board of Conciliation for promoting the settlement of an industrial
dispute. A Board shall consist of a Chairman and two or four other members. The
Chairman shall be an independent person and the other members shalt represent in equal
number the parties to the dispute; and shall be appointed on the recommendation of the
party they represent. The quorum for a meeting is two where the total number is three.
and three where the number is five. A Board, having a quorum, may act notwithstanding
the absence of the Chairman or any of its members, or any vacancy in its number. But
if the Government informs the Board that the services of the Chairman or any other
mncoiher have ceased to be available, the Board must not act until a new Chairman or
member has been appointed.
Courts of Inquiry (Sec. 6)
The appropriate Government may, as occacio n arises, by notification in the Official
Gazette, constitute a Court of Inquiry for inquiring into any matter appearing to be
connected with or relevant to an industrial dispute. Such a Court may consist of one or
more independent persons, according as the Government may appoint. Where it consists
of more than one member, one of them shall he appointed the Chairman. The Court
having the prescribed quorum may act even if the Chairman or a member is absent; but
not if the services of the Chairman have ceased to be available, and no other Chairman
has been appointed. The Court shall inquire into the matters referred to it and report
thereon to the appropriate Government within fi mouths from the commencement of the
inquiry.
Labour Courts (Sec.7)
The appropriate Government may, by notification in the Official Gazette, con-
stitute one or more Labour Courts for the adjudication of industrial disputes relating to
any of the following matters or for performing such other functions as ma'y be assigned
to them under the Act. The Labour Courts may adjudicate on a dispute relating to-
(i) the propriety or legality of an order passed by an employer under standing orders;
(ii) the application and interpretation of standing orders;
(iii)discharge or dismissal of workmen including re-instatement of, or grant of relief
to, workmen wrongfully dismissed;
(iv) withdrawal of any customary concession or privilege:
596 MERCANTIII LAW

(v) illegality or otherwise of a strike or lockout, and

(vi) all matters other than those reserved for the Industrial Tribunals,
A Labour Court shall consist of one person only to he appointed by the appropriate
Government. But no person shall be appointed as Presiding Officer of a Labour Court,
unless (a) he is. or has been a Judge of a High Court; or (h) he has for a period not less
than 3 years been a District Judge or an Additional District Judge; or (c) he has held the
office of Chairman or any other member of the Labour Appellate Tribunal, or of any
Tribunal, for a period of not less than two years; or (d)he has held any judicial office in
India for not less than seven years; or (e) he has been the Presiding Officer of a Labour
Court constituted under any ProvinciaL Act for not less than five years.
Industrial Tribunals (7A)
The appropriate Government nay, by notification in the Official Gazette. Con-
stitute one ormore Industrial Tribunals for the ad j udication of industrial disputes relating
to any matters specified above as in the case of Labour Courts, or the following matters,
namely,-
(i) Wages, including the period and node of payment;
(ii) Compensatory and other allowances;
(iii) Hours of work and rest intervals;
(iv) Leave with wages and holidays;
(v) Bonus, profit sharing, provident fund and gratuity;
(vi) Shift working otherwise than in accordance with standing orders;
(vii) Classification by grades;
(viii) Rules of discipline;
(ix) Ratinalisation;
(x) Retrenchment of workmen and closure of establishment; and
(xi) Any other matter that may he prescribed.
A Tribunal shall consist of one person only to he appointed by the appropriate
Government. A person to be appointed a presiding officer of a Tribunal must be, or must
have been, a Judge of a High Court; or must have field the office of the Chairman or any
other member of the Labour Appellate Court, or of any Tribunal, fora period of not less
than two years. The appropriate Government inay also, if it so thinks fit, appoint two
persons as assessors to advise the Tribunal in the proceeding before it.
National Tribunals (7B)
The Central Government may, by notification in the Official Gazette, constitute
one or more National Industrial Tribunals for the adjudication of industrial disputes
which, in the opinion of the Central Government, involve questions of national linpor-
tance or are of such a nature that industrial establishments situated in more than one state
are likely to be interested in, or affected by, such disputes. A National Tribunal shall
consist of one person only to be appointed by the Central Government. To be qualified
for appointment as a presiding officer of a National Tribunal, a person must be, or must
have been, a Judge of a High Court, or must have held the office of the Chairman or any
other member of the Labour Appellate Tribunal for at least 2 years. The Central
Government may appoint two assessors to advise the N tional Tribunal.
IMsqualiflcations (7C)
No person shall be appoint ' ed to, or continue in, the office of the presiding officer
of s Labour Court. Industrial Tribnal or National Tribunal, if (a) he is not an independent
person; or (b) he has attained the age of 65 years.
 THE INDUSTRIAL DISPt.TFES ACF, 1947 597

Filling of Vacancies (Sec. 8). If, for any reason a vacancy (other than a temporary
absence) occurs in the office of the presiding officer of a Labour Court, Tribunal or
National Tribunal or in the office of the Chairman or any other member of a Board or
Court, then in the case of a National Tribunal, the Central Government and in any other
case, the appropriate Government, shall appoint another person in acco dance with the
provisions of this Act to fill the vacancy, and the proceedings may be continued before
the Labour Cowl, Tribunal, National Tribunal, Board or Court, as the case may be, from
the stage at which the vacancy is filled.
Section 9 provides that no order of the appropriate government or of the Central
Government appointing any person as the Chairman or any other member of a Board or
Court or as the presiding officer of a Labour Court, Tribunal or National Tribunal shall
be called in question in any manner; and no act or proceeding before any Board or Court
shall be called in question in any manner on the ground merely of the existence of any
vacancy in or defect in the constitution of, such Board or Court. Also, no settlement
arrived at in the course of a conciliation proceeding shall be invalid by reason only of
the fact that such settlement was arrived at after the expiry of the period fixed by the Act
for submitting the report. And where the report of any settlement arrived at in the course
of conciliation proceeding before a Board is signed by the Chairman and all the other
members of the Board, no such settlement shall be invalid by reason only of the causal
or unforeseen absence of any of the members (including the Chairman) of the Board
during any stage of the proceeding.
Notice of Change (9A). Under this new provision, oo employer, who proposes to
effect any change in the conditions of service applicable to any workman in respect of
the matters specified below, shall effect such change (a) without giving to the workman
likely to be affected by such change a notice in the prescribed manner of the nature of
the change to be effected; or (b) within 21 days of giving such notice: provided that no
such notice shall be required for effecting any such change (i) where the change is
effected in pursuance of any settlement, award or decision of the Labour Appellate
Tribunal; or (ii) when the workmen likely to be affected by the change are persons to
whom the Fundamental and Supplementary Rules, Civil Services (Temporary Services)
Rules, Revised Leave Rules, Civil Services Regulations, Civilians in Defence Services
(Classification, Control and Appeal) Rules or the Indian Railway Establishment Code
or appropriate Government in the Official Gazette, apply.
Section 913, however, provides that where the appropriate Government is of
opinion that the application of the provisions of Sec. 9A to any class of industrial
establishments or to any class of workmen eiployed therein affect the employees in
relation thereto so prejudicially that such application may cause serious repercussion on
the industry concerned and that public interest so requires, the appropriate Government
may by notification in the Official Gazette, exempt that industrial establishment or
workers from the application of the provisions.

REFERENCE OF DISPUTES TO BOARDS, COURTS OR TRIBUNALS

Section 10 lays down: (1) Where the appropriate Government is of opinion that
any industrial dispute exists or is apprehended, it may at any time by order in writing,—
(a) refer the dispute to a Board for promoting a settlement thereof; or
b) refer to any matter appearing to be connected with or relevant to the dispute
to a Court of Inquiry; or
(c) refer to a Labour Court for adjudication of the dispute or any matter appearing
to be connected with or relevant to the dispute, if it relates to any of the following
matters:
598 MERCANTILE LAW

(I) the propriety or legality of an order passed by an employer under the standing
orders;
(ii) the application and interpretation of standing orders;
(iii) discharge or dismissal of workmen including re-instatement of, or grant of relief
to workmen wrongfully dismissed;
(iv) withdrawal of any customary concession or privilege;
(v) illegality or otherwise of strike or lockout;
(vi) all matters other than those specified to be adjudicated by Industrial Tribunals;
(d) refer to a Tribunal for adjudication of the dispute or any matter appearing to
be connected with or relevant to the dispute, whether it relates to any matter specified
above in (c) or to any matters given hereafter, viz.,
(i) wages, including the period and mode of payment;
(ii) compensatory or other allowances;
(iii) hours of work and rest intervals;
(iv) leave with wages and holidays;
(v) bonus, profit sharing, provident fund and gratuity;
(vi) shift working otherwise than in accordance with standing orders;
(vii) classification of grades;
(viii) rules of discipline;
(ix) rationalisation;
(x) retrenchment of workmen and closure of establishment; and
(xi) any other matter that may be presented;
Provided that when the dispute relates to any of the above matters and is not likely
to affect more than 100 workmen, the appropriate Government may make the reference
to a Labour Court:
Provided further that when the dispute relates to a public utility service and notice
under Sec. 22 has been given, the appropriate Government shall, unless it considers that
the notice has been frivolously or vexatiously given or that it would be inexpedient so
to do, may make a reference, notwithstanding that any other proceedings under this Act
in respect of the dispute may have commenced.
I .A. When the Central Government is of opinion that any industrial dispute exists
or is apprehended and the dispute involves any question of national importance or is of
such a nature that the industrial establishments situated in more than one State are likely
to be interested in or affected by such dispute and that the dispute should be adjudicated
by a National Tribunal, then the Central Government may (whether or not it is the
appropriate Government in relation to that dispute) at any time, by order in writing, refer
the dispute or any matter appearing to he connected with, or relevant to, the dispute,
whether it relates to any of the matters specified in (c) or (d) above, to a National Tribunal
for adjudication.
2. Where the parties to an industrial dispute apply in the prescribed manner,
whether jointly or separately, for a reference of the dispute to a Boafd, Court, Labour
Court, Tribunal, or National Tribunal the appropriate Government may, if satisfied that
the person applying represent the majority of each party, shall make the reference
accordingly.
3. Where an industrial dispute has been referred to a Board or the Labour Couit
or the Tribunal or the National Tribunal under this Section the appropriate Government
may by order prohibit the continuance of any strike or lockout in connection with such
dispute which may be in existence on the date of the reference.
 THE ThJPUSTRJAL DISPUTES ACT, 1947 599

4. Where in an order referring an industrial dispute to a Labour Court, Tribunal

or National. Tribunal under this section or in a subsequent order, the appropriate
Government has specified the points of dispute for adjudication, the Labour Court or the
Tribunal or National Tribunal as the case may be, shall confine its adjudication to those
points.
5. Where a dispute concerning any establishment or establishments has been, or
is to be, referred to a Labour Court. Tribunal or National Tribunal under this section
and the appropriate Government is of opinion, whether on an application made to it in
this behalf or otherwise, that the dispute is of such a nature that any other establishment
group or classof establishments of a similar nature is likely to be interested in, or affected
by such dispute, the appropriate Government may at the time of making the reference
or at any time thereafter but before submission of the award, by order in writing inc)i,e
in that reference such establishments whether or not at the time of such inclusior my
dispute exists or is apprehended in any of those establishments.
6. Where any reference has been made under Sub-Sec. (IA) to a National Tribunal,
then notwithstanding anything contained in this Act. no Labour Court or Tribunal shall
have jurisdiction to adjudicate upon any matter which is under adjudication before the
National Tribunal, and accordingly—
(a) if the matter under adjudication before the National Tribunal is pending in a
proceeding before a Labour Court or Tribunal, the proceeding before the Labour
Court or the Tribunal, as the case may be, in so far as it relates to such matter,
shall be deemed to have been quashed oil reference to the National Tribunal;
and
(b) it shall not be lawful for the appropriate Government to refer the matter under
adjudication before the National Tribunal to any Labour Court or Tribunal for
adjudication during the pendency of the proceeding in relation to such matter
before the National Tribunal.
7. Where any industrial dispute, in relation to which the Central Government is
not the appropriate Government. is referred to a National Tribunal, then notwithstanding
anything contained in this Act, any reference in Sees. 15, 17, 19, 33A, 33B and 36A to
the appropriate Government in relation to such dispute shall be construed as a reference
to the Central Government hut, save as aforesaid and as otherwise expressly provided
in this Am anyreference in any other provision of this Act to the appropriate Government
in relation to that dispute shall mean a reference to the State Government.
Voluntary reference to arbitration (IOA)
1. Where any industrial dispute exists or is apprehended and the employer and the
workmen agree to refer the dipute to arbitration, they may, at any time before the dispute
has been referred under Sec. 10 to a Labour Court or Tribunal or National Tribunal, by
a written agreement, refer the dispute to arbitration and the reference shall be to such
person or persons (including the presiding officer of a Labour Court or Tribunal or
National Tribunal) as an arbitrator or arbitrators as may be specified in the arbitration
agreement.
IA. Where an arbitration agreement provides for a reference of the dispute to an
even number of arbitrations, the agreement must provide for the appointment of another
person as umpire, who shall enter on the reference, if the arbitrators are equally divided
in their opinion, and the award of the umpire shall prevail.
2. An arbitration agreement referred to in Sub-Sec. (1) shall be in such form and
shall be signed by the parties thereto in such manner as may be prescribed.
600 MERCANTILE LAW

3. A copy of the arbitration agreement shall be forwarded to the appropriate

Government and the conciliation officer and the appropriate Government shall, within
14 days from the date of the receipt of such copy, publish the same in the Official Gazette.
4. The arbitrator or arbitrators shall investigates the dispute and submit to the
appropriate Government the arbitration award sigpcd by the arbitrator or all the
arbitrators, as the case may be.
5. Nothing in the Arbitration Act. 1940 shall apply to arbitrations under this
section.
PROCEDURE AND POWERS OF AUTHORITIES

Section 11 lays down the procedure and powers of the different authorities as
under-
1. Subject to any rules that may be made in this behalf, an arbitrator, a Board,
Court, Labour Court, Tribunal or National Tribunal shall follow such procedure as the
arbitrator or other authority concerned may think fit.
2. A Conciliation Officer or a member of i Board or Court or the presiding officer
of a Labour Court, Tribunal or National Tribunal may for the purpose of inquiry into
any existing or apprehended industrial dispute, after giving reasonable notice, enter the
premises occupied by any establishment to which the dispute relates.
3. Every Board, Court, Labour Court, Trihuirl and National Tribunal shall have
the same powers as are vested in a Civil Court under C.P.C., 1908 when trying a suit, in
respect of the following matters, viz.,—(a) enforcing the attendance of any person and
examining him on oath; (h) compelling the production of documents and material
objects; (c) issuing commissions for the examination of witness; (d) in respect of such
other matters as may be prescribed; and every inquiry by a Board. Court, Labour Court,
Tribunal or National Tribunal shall be deemed to be a judicial proceeding within the
meaning of Sees. 193 and 228 of the Indian Penal Code.
4. A Conciliation Officer may call for and inspect any document which he has
ground for considering to be relevant to tlufindustrial dispute or to be necessary for the
purpose of verifying the implementation of any award or carrying out any duty imposed
on him under this Act and for the aforesaid purposes. the Conciliation Officer shall have
the same powers as are vested in a Civil Court in respect of compelling the production
of documents.
5. A Court, Labour Court, Tribunal or National Tribunal may, if it so thinks fit,
appoint one or more persons having special knowledge of the matter under consideration
as assessor or assessors to advise it in the proceeding before it.
6. All Conciliation Officers, members of a Board or Court and the presiding
officers of a Labour Court. Tribunal or National Tribunal shall be deemed to be public
servants within the meaning of Sec. 21 of the Indian Penal Code.
7. Subject to any rules made under this Act, the costs of, and incidental to, any
proceeding before a Labour Court, Tribunal or National Tribunal shall be in the
discretion of that Labour Court, Tribunal or National Tribunal, and the Labour Court,
Tribunal or National Tribunal, as the case may be, shall have full power to determine by
and to whom and to what extent and subject to what conditions, if any, such costs are to
be paid, and to give all necessary directions for the purpose aforesaid and such costs
may, on application made to the appropriate Government by the person entitled, be
recovered by the Government in the same manner as an arrear of land revenue.
8. Every Labour Court, Tribunal or National Tribunal shall be deemed to be a
Cotrt for the pwlxsc of Sees. 480,482 and 484 of the Criminal Procedure Code, 1948-
 TIlE INDUSFRIAL DISPUTES AD', 1947 601

Duties of Conciliation Officers (Sec. 12). For the purpose of bringing about fair
ØM amicable settlement of an industrial dispute the Conciliation Officer is required to
discharge the following duties-
1. Where any industrial dispute exists or is apprehended, the Conciliation Officer
may, or where the dispute relates to a public utility service and a notice under Sec. 22
has been given, shall hold conciliation proceedings. He will interview both the employer
and the workmen concerned with the dispute and endeavour to bring about a settlement.
2. The Conciliation Officer shall, for the purpose of bringing about a settlement
of the dispute, without delay investigate the dispute and all matters affecting the merits
and the right settlement thereof and may do all such things as he thinks fit for the purpose
of inducing the parties to come to a fair and amicable settlement of the dispute.
3. If a settlement of the dispute or of any of the matters in dispute is arrived at in
the course of the conciliation proceedings the Conciliation Officer shall send a report
thereof to the appropriate Government together with a memorandum of the settlement
signed by the parties to dispute.
4. If no such settlement is arrived at the Conciliation Officer shall, as soon as
practicable after the close of the investigation, send to the appropriate Government a full
report setting forth the steps taken by him for ascertaining the facts and circumstances
relating to the dispute and for bringing about a settlement thereof, together with a full
statement of such facts and circumstances, and the reasons on account of which, in his
opinion, a settlement could not be arrived at.
5. The report must be submitted within 14 days of the commencement of the
conciliation proceedings or within such shorter period as may be fixed by the appropriate
Government: provided that, subject to the approval of the Conciliation Officer, the time
for the submission of the report may be extended by such period as may be agreed upon
in writing by all the parties to the dispute.
6. If, on a consideration of the report in respec& of failure of settlement, the
appropriate Government is satisfied that there is a case for reference to Board, Labour
Court, Tribunal or National Tribunal, it may make such reference. Where the Govern-
ment does not make such a reference, it shall record and communicate to the parties
concerned its reasons therefor.
Duties or Boards (Sec. 13). The duties of the Boards are similar to those of
Conciliation Officers, and reference should be made to those. It has to endeavour to bring
about a settlement of a dispute referred to it and to do anything th induce the parties to
come to a fair and amicable settlement. Where a settlement is reached a similar report
and a memorandum of settlement have to be submitted to the appropriate Government.
But in case of failure, the Board, apart from furnishing all the details as required in the
case of a report by a conciliation Officer, is also required to give in its report its
recommendations for the determination of the dispute. The time limit prescribed for
submission of such reports is 2 months of the date on which the dispute was referred to
it or within such shorter period as may be fixed by the appropriate Government or
extended by it for not more than 2 months. All the parties to the dispute may, however,
further extend the period by agreement in writing. Where a dispute, in which the Board
has failed to bring about a settlement, relates to a public utility service and the
Government does not refer it to a Labour Court, Tribunal or National Tribunal, though
it may if it so desires, it must inform the parties concerned its reasons for not doing so.
Duties of Courts (Sec. 14). The Court of Inquiry shall into the matters
referred toil and report thereon to the appropriate Government ordinarily within a period
of 6 months from the commencement of its inquiry.
Duties or Labour Courts, Tribunals and National Tribunal. Where an in-
dustrial dispute has been referred to Labour Court. Tribunal or National Tribunals for
adjudication, it shall hold its proceedings expeditiously and shall, as soon as it is
602 MERCAN11LE LAW

practicable on the conclusion thereof, submit its award to the appropriate Government
(Sec. 15).
The report of a Board or Court shall be in writing and shall be signed by all the
members of the Board or Court, as the case may be: provided that a member may record
a minute of dissent. The award of a Labour Court or Tribunal or National Tribunal shall
be in writing and shall be signed by its presiding officer (Sec. 16.).
Every report of a Board or Court together with any minute of dissent recorded
therewith, every arbitration award and every award of Labour Court, Tribunal or
National Tribunal shall a period of 30 days from the date of its receipt by the
appropriate Government. be published in such manner as the appropriate Government
thinks fit. And subject to the provisions of Sec. 17A, the award published as stated above
shall be final and shall not be called in question by any Court in any manner whatsoever
(Sec. 17A).
Commencement or the Award (Sec. 17A) 1. An award (including an arbitration
award) shall become enforceable on the expiry of 30 days from the date of its publication
under Sec. 17: provided that (a) if the appropriate Government is of opinion, in any case
where the award has been given by a Labour court or Tribunal in relation to an industrial
dispute to which it is a party; or (b) if the Central Government is of opinion, in any case
where the award has been given by a National Tribunal, that it shall be inexpedient on
public grounds affecting national economy or social justice to give effect to the whole
or any part of the award, the appropriate Govcnunent, or as the case may be. the Central
Government may, by notification in the Official Gazette, declare that the award shall not
become enforceable on the expiry of the said period of 30 days.
2. Where any declaration has been made in relation to an award under the proviso
to Sub-Sec. (1), the appropriate Government or the Central Government may, within 90
days from the date of publication of the award under Sec. 17, make an order rejecting or
modifying the award, and shall, on the first available opportunity, lay the award together
with a copy of the order before the Legislature of the State, if the order has been made
by the State Government, or before Parliament if the order has been made by the Central
Government.
3. Where an award as rejected or modified by an order made under Sub-Sec. (2)
is laid before a Legislature of a State or before Parliament, such award shall become
enforceable on the expiry 0115 days from the date on which it is so laid; and where no
order under Sub-Sec. (2) is made in pursuance of a declaration under the proviso to
Sub-Sec. (1) the award shall become enforceable on the expiry of the period of 90 days
from the date on which it is so laid.
4. Subject to the provisions of Sub-Sec. (1) and Sub-Sec. (3) regarding the
enforceability of an award, the award shall come into operation with effect from such
date as may be specified therein, but where no date is specified, it shall come into
operation on the dale when the award becomes enforceable under Sub-Sec. (1) or
Sub-Sec. (3), as the case may be.
Person on whom settlements and awards are binding (Sec. 18). 1. A settle-
ment arrived at by agreement between the employer and workmen otherwise than in the
course of conciliation proceeding shall be binding on the parties to the agreement who
referred the dispute to arbitration.
2. Subject to the provisions of Sub-Sec. (3). an arbitration award which has
become enforceable shall be binding on the parties to the arbitration agreement.
3. A settlement arrived at in the course of conciliation proceedings under this Act
or an arbitration award in a case where a notification has been issued under Sub-Sec.
(3A) of Sec. 10A or an award of a Labour Court, Tribunal or National Tribunal which
has become enforceable shall be binding on-
 THE INDUSTRIAL DISPUTES ACt. 1947

(a) all parties to the industrial dispute. (b) all other parties summoned to appear
in the proceedings as parties to the dispute, unless the Board, arbitrator, Labour Court.
Tribunal or National Tribunal, as the case may be, records the opinion that they were so
summoned without proper cause; (c) where a party referred to in clause (a) or clause
(b) is an employer, his heirs, successors or assigns in respect of the establishment to
which the dispute relates: (d) where a party referred to in clauses (a) or (b) is composed
of workers, 'all persons who were employed in the establishment or part of the
establishment as the case may be, to which the dispute relates on the date of the dispute
and all persons who subsequently become employed in that establishment or part.
Period of operation of settlements and awards (Sec. 19). A settlement shall
come into operation on such date as is agreed upon by the parties to the dispute, and if
no date is agreed upon, on the date on which the memorandum of the settlement is signed
by the parties to the dispute. Such settlement shall be binding for such period as is agreed
upon by the parties, and if no such period is agreed upon, for a period of 6 months front
the date on which the memorandum of settlement is signed by the parties to the dispute,
and shall continue to be binding on the parties after the expiry of the periods aforesaid,
until the expiry of 2 months from the date on which a notice in writing of an intention
to terminate the settlement is given by one of the parties to the other party or parties to
the settlement. An award shall remain in operation for one year from the date on which
it becomes enforceable under See. 17A, unless the appropriate Government fixes a
shorter period, or extends its operation for a year at a time up to a maximum of 3 years
from the date when it came into operation. If, however, any material change in the
circumstances on which the award was based has taken place, the appropriate Govern-
ment may refer the award to a Labour Court, if it was the Labour Court's award, or to a
Tribunal if it was that of 4 Tribunal or of a National Tribunal for decision whether or
not the award should cease to be in operation before the period so fixed.
Commencement and Conclusion of Proceedings (Sec. 20). 1. A conciliation
proceeding shall be deemed to have commenced on the date on which notice of strike
or lockout under Sec. 22 is received by the conciliation officer or on the date of the order
referring the dispute to a Board, as the case may be.
2. A conciliation proceeding shall be deemed to have concluded-
-(a) where a settlement is arrived at, when a memorandum of the settlement is signed
by the parties to the dispute;
(b) where no settlement is arrived at, when the report of the conciliation officer is
received by the appropriate Government or where the report of the Board is
published under Sec. 17, as the case may be; or
(c) when the reference is made to a Court, Labour Court, Tribunal or National Tribunal
under Sec. 10 during the pendency of conciliation proceedings.
3. Proceedings before an arbitrator under Sec. lOA or before a Labour Court,
Tribunal or National Tribunal shall be deemed to have commenced on the date of the
reference of the dispute for arbitration or adjudication, on the date on which the award
becomes enforceable under Sec. 17A.

STRIKES AND LOCKOUTS

ProMbition of Strikes and Lockouts (Sec. 22)

1. No person employed in a public utility service shall go on strike in breach of
contract—

(a) without giving to the employer notice of strike, as hereinafter provided, within 6
weeks before striking; or
604 MERCANrTILE LAW

(b) within 14 days of giving such notice; or

(c) before the expiry of the date of strike specified in any such notice as aforesaid; or
(d) during the pendency of any conciliation proceedings before a conciliation officer
and 7 days after the conclusion of such proceedings.
2. No employer carrying on any public utility service shall lockout any of his
workmen without complying with the conditions as specified in Sub-Sec. (1).
3. But notice of a strike or lockout will not be necessary where there is already in
existence a strike or lockout in the public utility service. The employer in such a case
must notify such authority as may be appointed by the appropriate Government of the
declaration of a strike or lockout,
General Prohibition of Strikes and Lockouts (Sec. 23)
No workman who is employed in any industrial establishment shall go on strike
in breach of contract and no employer of any such workman shall declare a lockout—
(a) during the pendency of conciliation proceedings before a Board and 7 days after
the conclusion thereof;
(b) during the pendency of proceedings before a Labour Court, Tribunal or National
Tribunal and 2 months after the conclusion thereof;
(c) during the period in which a settlement or award is in operation in respect of any
of the matters covered by it.
Illegal Strikes and Lockouts (Sec. 24)
A strike or e lockout shall be illegal if (a) it is commenced or declared in
contravention of Sec. 22 or 23; (b) is continued in contravention of the prohibitory order
of the Government after the dispute has been referred under Sec. 10. But where a strike
or a lockout in pursuance of an industrial dispute has already commenced and is in
existence at the time of the reference of the dispute to a Board, a Labour Court, Tribunal
or National Tribunal, the continuance of sueF strike or lockout shall not be illegal, if it
was not originally illegal. A lockout declared in consequence of an illegal strike or a
strike in consequence of an illegal lockout shalt not be deemed to be illegal. Sec. 25
prohibits the spending or application of any money by any one in furtherance or support
of any illegal strike or lockout.

LAYOFF AND RETRENCHMENT

(Chapter V-A)

Section 25A provides that Sees. 25C to 25E inclusive (relating to compensation
payable for layoff) shall not apply to industrial establishments to which Chapter V-B
applies, or—
(a) to industrial establishments (i.e., factories, mines and plantations) on which less
than fifty workmen on an average per working day have been employed in the
preceding calendar month; or
(b) to industrial establishments which are of seasonal character or in which work is
performed only intermittently.
Definition of Continuous Service (Sec. 258). 1. A workman shall be said to be
in continuous service for a period if he is, for that period, in uninterrupted service,
including service which may be interrupted on a.count of sickness or authorised leave
 THE INDUS1TRJAL DISPUTES ACT, 1947 605

or an accident or a strike which is not illegal, or a lockout or a cessation of work which

is not due to any fault on the part of the workman;
2. Where a workman is not in continuous service within the meaning of clause (1)
for a period of one year or six months, he shall be deemed to be in continuous service
under an employer—
(a) for a period of one year, if the workman, during a period of 12 calendar months
preceding the date with reference to which calculation is to be made, has actually worked
under the employer for not less than-
(i) one hundred and ninety days in the case of a workman employed below ground in
mine; and
(ii) two hundred and forty days, in any other case;

(b) for a period of 6 months, if the workman, during a period of 6 calendar months
preceding the date with reference to v. hich calculation is to be made, has actually worked
under the employer for not less than-

(i) ninety-five days, in the case of a workman employed below ground in a mine; and
(ii) one hundred and twenty days, in any other case.

Explanation—For the purposes of clause (2), the number of days on which a

workman has actually worked under an employer shall include the days on which-

(i) he has been laid-off under an agreement or as pennittcd by standing orders, or

under this Act or under any other law applicable to the industrial establishment;
(ii) he has been on leave with full wages, earned in the previous year;
(iii) he has been absent due to temporary disablement caused by-accident arising out
of and in the course of his employment;
(iv) in the case of a female, she has been on maternity leave; so however, that the total
period of such maternity leave does not exceed 12 weeks.
Right of Workman laid-off for Compensation (Sec. 25C)
Whenever a workman (other than a badli workman or a casual workman) whose
name is borne on the muster rolls of an industrial establishment and who has completed
not less than one year of continuous service under an employer is laid-off, whether
continuously or intermittently, he shall be paid by the employer for all days during which
he is so laid-off, except for such weekly holidays as may intervene, compensation which
shall be equal to 50 per cent of the total of the basic wages and dearness allowance that
would have been payable to him had he not been so laid-off;
Provided that if during any period of 12 months, a workman is so laid-off for more
than 45 days, no such compensation shall be payable in respect of any period of the
Jay-off after the expiry of the first 45 days; if there is an agreement to that effect between
the workman and the employer;
Provided further that it shall be lawful for the employer in any case falling within
the foregoing proviso to retrench the workman in accordance with the provisions
contained in Sec. 25F at any time after the expiry of the first 45 days of We layoff and
when he does so, any comensation paid to the workman for having been laidoff during
the preceding 12 months may be set off against the compensation payable for retrench-
ment.
Explanation—' Radii workman" means a workman who is employed in an
industrial establishment in the place of another workman whose name is borne on the
muster rolls of the establishment, but shall cease to be regarded as such for the purpose
of this section, if he has completed one year of continuous service in the establishment.
606 MERCANTflLE LAW

Sec. 25D requires the employer to maintain a muster roll and allow workmen to
make entries thereon when they present themselves for work at the establishment, even
where workmen have been laid-off.
Workmen Laid-off not EntiIed to Compensation (Sec. 25E)
No compensation shall be paid to a workman who has been laid-off-
(ij if he refuses to accept any alternative employment in the same establishment from
which he has been laid-off, or in any other establishment belonging to the same
employer situated in the same town or village or situated within a radius of Smiles
from the establishment ta which he belongs, if, in the opinion of the employer,
such alternative does not call for any special skill or previous experience and can
be dune by the workman, provided that the wages which would normally have
been paid to the workman are offered for the alternative employment also; or
(ii) if he does not present himself for work at the establishment at the appointed time
during normal working hours at least once a day: or
(iii) if such laying-off is due to a strike or slowing-down of production on the part of
workmen in another part of their establishment.
Conditions of Retrenchment (Sec. 25F)
No workman employed in any industry who has been in continuous service for
not less than one year under an employer shall be retrenched by that employer until—
(a) the workman has been given one month's not.ce in writing indicating the reasons
for retrenchment and the period of notice has expired, or the workman has been
paid in lieu of such notice wages for the period of the notice;
(b) the workman has been paid, at the time of retrenchment, compensation which
shall be equivalent to 15 days' average pay for every completed year of continuous
service or any part thereof in excess of 6 months; and
(c) notice in the prescribed manner is served on the appropriate Government or such
authority as may be specified by the appropriate Government by notification in
the Official Gazette.
Sec. 25FF provides that where the ownership or management of an undertaking is
transferred whether by agreement or by operation of law, from the employer in relation
to that undertaking to a new employer, every worlurian who has been in continuous
service for not less than one year in that undertaking immediately before such transfer
shall be entitled to notice and compensation in accordance with the provisions of Sec.
25F, as if the workman had been retrenched: Provided that nothing in this Section shall
apply to a workman in any case where there has been a change of employers by reason
of the transfer, if—
(a) the service of the workman has not been interrupted by such transfer;
(b) the terms and conditions of service applicable to the workman after such transfer
are not in any way less favourable to the workman than those applicable to him
immediately before the transfer; and
(c) the new employer is, under the terms of such transfer or otherwise, legally liable
to pay the workman, in the event of his retrenchment, compensation on the basis
that his service has been continuous and has not been interrupted by the transfer.
Sec. 25FFA provides that (1) an employer who intends to close down an under-
taking shall serve, at least 60 days before the date on which the intended closure is to
become effective, a notice, in the prescribed manner, on the appropriate Government
 TM INDUS1TRIAL DISP1JIES ACT, 1947 607

stating clearly the reasons, for the intended closure of the undertaking: Provided that
nothing in this sub-section shall apply to—
(a) an undertaking in which (i) less than SO workmen are employed, or (ii) were
employed on an average per working day in the preceding 12 months,
(c) an undertaking setup for the construction of buildings, bridges, roads, canals, dams
or for other construction work or project.
2. Notwithstanding anything contained in sub-sec. (1), the appropriate Govern-
ment may, if it is satisfied that owing to such exceptional circumstances as accident in
the undertaking or death of the employer or the like it is necessary so to do, by order,
direct that provisions of sub-sec. (1) shall not apply in relation to such undertaking for
such period as may be specified in the order.
Sec. 25FFF provides: (I) Where an undertaking is closed down by any reason
whatsoever, every workman who has been in continuous service for not less than one
year in that undertaking immediately before such closure, subject to the provisions of
Sub-Sec. (2), be entitled to notice and compensation in accordance with the provisions
of Sec. 25f, as if the workman had been retrenched: Provided that where the undertaking
is closed down on account of unavoidable circumstances beyond the control of the
employer, the compensation to be paid to the workman under clause (b) of Sec. 25F shall
not exceed his average pay for 3 months.
Explanation. An undertaking which is closed down by reason merely of financial
difficulties (including financial losses) or accumulation of undisposed of stocks or the
expiry of the period of the lease or the licence granted to it where the period of the lease
or the licence expires on or after April 1, 1967, .hall not be deemed 10 have been closed
down on account of unavoidable circumstances beyond the control of the employer
within the meaning of the proviso to this Sub-Section.
(I A) Notwithstanding anything contained in Sub-Sec. (1), where an undertaking
engaged in mining operations is closed down by reason merely of the exhaustion of the
minerals in the area in which such operations are earned on, no workman referred to in
that sub-section shall be entitled to any notice or compensation in accordance with the
provisions of Sec. 25F, if—
(a) the employer provides the workman with alternative employment with effect from
the date of closure at the same remuneration as he was entitled to receive and on
the same terms and conditions of services as were applicable to him, immediately
before the closure;
(b) the service of the workman has not been interrupted by such alternative employ-
ment; and
(c) the employer is, under the terms of such alternative employment or otherwise,
legally liable to pay to the workman, in the event of his retrenchment, compensa-
tion on the basis that his service has been continuous and has not been interrupted
by such alternative employment.
2. Where any undertaking set up for the construction of buildings, bridgcs, roads,
canals, dams or other construction work is closed down on account of the completion of
the work within 2 years from the date on which the undertaking has been set up, no
workman employed therein shall be entitled to any compensation under clause (b) of
Sec. 25F, but if the construction work is not so completed within 2 years, he shall be
entitled to notice and compensation under that Section for every completed year of
continuous service or any part thereof in excess of 6 months.
608 MERCANTI1I1 LAW

Procedure for Retrenchment (Sec. 25G)

Where any workman in an industrial establishment, who is a citizen of India, is to
be retrenched and he belongs to a particular category of workmen in that establishment,
in the absence of any agreement between the employer and the workman in this behalf,
the employem shall ordinarily retrench the workman who was the last person to be
employed in that category, unless for reasons to be recorded the employer retrenches
any other workman.
Re-employment of Retrenched Workmen (Sec. 25H)
Where any workmen are retrenched and the employer proposes to take inta his
employ any persons, he shall, in such manner as may be prescribed give an opportunity
to the retrenched workmen who are citizens of India to offer themselves for re-employ-
ment, and the retrenched workmen who offer themselves for re-employment, and the
retrenched workmen who offer themselves for re- employment, shall have preference
over others. But this section cannot he applied retrospectively (R Ranidaval v. Labour
Appellate Tribunal (1964 S.C.-567).
2
Rhapter V-11)

Special Provisions relating to layoff, retrenchment and closure in certain estab-

llshments
Application of Chapter V.11
Sec 25K. 1. The provisions of this chapter shall apply In an industrial estab-
lishment (not being an establishment of a seasonal character or in which work is
performed only intermittently) in which not less than 300 workmen were employed on
an average per working day for the preceding 12 months.
2. If a question arises whether an industrial establishment is of a seasonal character
or whether work is performed therein only intermittently, the decision of the appropriate
Government shall be final.
Definitions
Sec. 24L provides that for the purpose of this chapter,—
(a) industrial establishment means-
(i) a factory as defined in clause (m) of Sec. 2 of the Factories Act, 1948;
(ii) a mine as defined in clause (j) of sub-Sec. (1) of Sec. 2 of the Mines Act, 1952;or
(iii) a plantation as defined in clause (f) of Sec. 2 of the Plantations Labour Act, 1951.
b) Notwithstanding anything contained in sub-clause (ii) of clause (I) of Sec.
2,-
(i) in relation to any company in which not less than 51 per cent of the paid-up share
capital is held by the Central Government. or
(ii) in relation to any corporation (not being a corporation referred to in sub-clause (i)
of clause (1) of Sec. (2) established by or under any law made by Parliament,
the Central Government shall be the appropriate Govenurient.

2. Added by the Industrial Dispute's (Amendment) Act. 1976.

 ME INDUS1TRIAI. DlSPW1S ACT, 1947 609

Prohibition of Layoff (Sec. 25M)3

(1) No workman (other than a baili wurkinaii or a casual workman) whose name
is borne on the muster rolls of an industrial establishment to which this chapter applies
shall be laid off by his employer except with the prior permission of the appropriate
Government or such authority as may be specified by that Government (hereinafter in
this section referred to as the specified authority), obtained on an application made in
this behalf, unless such layoff is due to shortage of power or to natural calamity, and in
the case of mine, such layoff is due also to fire, flood, excess of inflammable gas or
explosion.
(2) An application for permission under sub-section (1) shall be made by the
employer in the prescribed manner slating clearly the reasons for the intended layoff and
a copy of such application shall also be served simultaneously on the workmen concerned
in the prescribed manner.
(3) Where the workmen (other than laid/i workmen or casual workmen) of an
industrial establishment, being a mine, have been laid-off under sub-section (I) for
reasons of fire, flood or excess of inflammable gas or explosion, the employer in relation
to such establishment, shall within a period of 30 days from the date of commencement
of such layoff, apply in the prescribed manuel, to the appropriate Government or the
specified authority for permission to continue the layoff.
(4) Where an application for permission under subsection (1) or sub-section (3)
has been made, the appropriate Government or the specified authority, after making such
inquiry as it thinks fit and after giving a reasonable opportunity of being heard to the
employer, the workmen concerned and the person interested in such layoff, may, having
regard to the genuineness and adequacy of the reasons for such layoff, the interests of
the workmen and all other relevant factors, by order and for reasons to be recorded in
writing, grant or refuse to grant such permission and a copy of such order shall be
communicated to the employer and the woikimien.
(5) Where an application for permission has been made and the appropriate
Government or the specified authority does not communicate the order granting or
refusing to grant permission to the employer within a period of 60 days from the date on
which such application is made, the pennissioli applied for shall be deemed to have been
granted on the expiration of the said period of 60 days.
(6) An order of the appropriate Government or the specified authority granting or
refusing to grant permission shall, subject to the provisions of sub-section (7) be final
and binding on all the parties concerned and shall remain in force for one year from the
date of such brder.
(7) The appropriate Government or the specified authority may, either on its own
motion or on the application made by the employer or any workman, review its order
grantiiig7 or refusing to grant permission under sub-section (4)or refer the matter or, as
the case nay be, cause it to be referred to a Tribunal for adjudication:
Provided that where reference has been mi:mde to a Tribunal under this sub-section,
it shall pass an order within a period of 30 days from the date of such reference.
(8) Where no application for permission under sub-section (I) is nade, or where
no application for permission under subsection (3) is made within the period specified
therein, or where the permission for any layoff has been refused, such layoff shall be
deemed to be illegal from the date on which the workmen had been laid off and the
workmen shall be entitled to all the benefits under any for the time being in force as if
they had not been laid off.
3. Substituted by the Amendment Act, 1984.
610 MERCAN1TILE LAW

(9) Notwithstanding anything contained in the foregoing provisions of this

Section, the appropriate Government may, if it is satisfied that owing to such exceptional
circumstances as accident in the establishment or death of the employer or like, it is
necessary so to do, by order, direct that the provisions of sub-section (I), or, as the case
may be. sub-section (3) shall not apply in relation to such establishment for such period
as may be specified in the order.
(10) The provisions of Sec. 25C (other than the second proviso thereto) shall apply
to the cases of layoff referred to in this section.
Explanalion—FOr the purposes of this section, a workman shall not be deemed to
be laid-off by an employer if such employer offers any alternative employment (which
in the opinion of the employer does not call for any special skill or previous experience
and can be done by the workman) in the same establishment from which he has been
laid-off or in any other establishment belonging to the same employer, situate in the same
town or village, or situate within such distance from the establishment to which he
belongs as may be prescribed and the transfer will not involve undue hardship to the
workman having regard to the facts and circumstances of his case, provided that the
wages which would normally have been paid to the workman are offered for the
alternative appointment also.
Conditions Precedent to Retrenchment of Workmen (Sec. 25N) 4
(I) No workman employed in any industrial establishment to which this Chapter
applies, who has been in continuous service for not less than one year under an employer
shall be retrenched by that employer until—
(a) the workman has been given 3 months notice in writing indicating the reasons
for retrenchment and the period of notice has expired, or the workman has
been paid in lieu of such notice, wages for period of the notice; and
(b) the prior permission of the appropriate Government or such authority as may
be specified by that Government by the notification in the Official Gazette
(thereafter in this section referred to as the specified authority) has been
obtained on an application made in this behalf-
(2) An application for permission under sub-sec. (1) shall be made by the employer
in the prescribed manner stating clearly the reasons for the intended retrenchment and a
copy of such application shall also be served simultaneously on the workmen concerned
in the prescribed manner.
(3) When an application for permission under sub-section (I) has been made, the
appropriate Government or the specified authority, after making such inquiry as it thinks
fit and after giving a reasonable opportunity of being heard to the employer, the workmen
concerned and the person interested in such retrenchment. may, having regard to the
genuineness and adequacy of the reasons stated by the employer, the interests of the
workmen and all other relevant factors, by order and for reasons to be recorded in writing,
grant or refuse to grant such permission and a copy of such order shall be communicated
to the employer and the workmen.
(4) When an application for permission has been made under sub- section (I) and
the appropriate Government or the specified authority does not communicate the order
granting or refusing to grant'permissiofl to the employer within a period of 60 days from
the date on which such application is made, the permission applied for shall be deemed
to have been granted on the expiration of the said period of 60 days.
(5) An order of the appropriate Government or the specified authority granting or
refusing to grant permission shall, subject to the provisions, of sub-section (6), be final

4. Substituted by the Amendment Ad, 1984.

 THE INDUSTIRIAL DISPUThS ACT, 1947 611

and binding on all the parties concerned and shall remain in force for one year from the
date of such order.
(6) The appropriate Government or the specified authority may, either on its own
motion or on the application made by the employer or any workmen, review its order
granting or refusing to grant permission under sub-section (3) or refer the matter or, as
the case may be, or cause it to be referred, to a Tribunal for adjudication:
Provided that where a reference has been made to a Tribunal under this sub-sec-
tion, it shall pass an award within a period of 30 days from the date of such reference.
(7) When no application for permission under sub-section (1) is made, or where
the permission for any retrenchment has been refused, such retrenchment shall be
deemed to be illegal from the date on which the notice of retrenchment was given to the
workman and the workman shall be entitled to all the benefits under any law for the time
being in force as if no notice had been given to him.
(8) Notwithstanding anything contained in the foregoing provisions of this
section, the appropriate Government may, if it is satisfied that owing to such exceptional
circumstances as accident in the establishment or death of the employer or the like, it is
necessary so to do, by order, direct that the provisions of sub-section (1) shall not apply
in relation to such establishment for such period as may be specified in the order.
(9) Where permission for retrenchment has been granted under sub-section (3) or
where permission for retrenchment is deemed to be granted under sub-section 4) every
workman who is employed in that establishment immediately before the date of applica
tion for permission under this Section shall be entitled to receive, at the time of
retrenchment, compensation which shall be equivalent to 15 days average pay for every
completed year of continuous service or any part thereof in excess of 6 months.
Ninety days' Notice of intention to close down undertaking Sec. 250)
1. An employer who intends to close down art of an industrial
establishment to which this chapter applies shall serve, for previous approval at least 90
days before the date on which the intended closure is to become effective, a notice, in
the prescribed manner, on the appropriate (',overnnieru stating clearly the reasons for the
intended closure of the undertaking:
Provided that nothing in this section shall apply to an undertaking set up for the
construction of buildings, bridges, roads, canals, dams or for other construction work.
2. On receipt of a notice under sub-sec. (I) the appropriate Government may, if it
is satisfied that the reasons for the intended closure of the undertaking are not adequate
and sufficient or such closure is prejudicial to the public interest, by order, direct the
employer not to close down such undertaking.
3. Where a notice has been served on the appropriate Government by an employer
under Sec. 25FFA(l) and the period of notice has not expired at the commencement of
the Amendment Act, 1976, such employer shall not close down the undertaking but shall.
within a period of 15 days from such commencement apply to the appropriate Govern-
merit for permission to close down the undertaking.
& Where an application for permission has been niade underSub-Sec.(3) and the
appropriate Government does not comnmminicab, the permission or the refusal to grant
the permission to the employer within 2 months from lie date on which ihe application
is made, the permission applied for shall be deemed to have been granted oil
expiration of the said period of 2 months.
5. When no application for permission under Sub-Sec. (1) is made, or where no
application for permission under Sub-Sec. (3) is made within the period specified therein
or where the permission forclosure has been refused, the closure ofthc undertaking shall
be deemed to be illegal from the date of closure and the workman shall be entitled to all
612 MERCANrnLE LAW

the benefits under any law for the time being in force as if no notice had been given to
him.
6. Notwithstanding anything contained in Sub-Sec. (1) and Sub-Sec. (3) the
appropriate Government may, if it is satisfied that owing to such exceptional circumstan-
ces as accident in the undertaking or death of the employer or the like it is necessary so
to do, by order, direct that the provisions of Sub-Sec. (1) or Sub-Sec. (3) shall not apply
in relation to such undertaking for such period as may be specified in the order.
7. When an undertaking is approved or permitted to be closed down under sub.-Sec.
(I) or Sub-Sec. (4), every workman in the said undertaking who has been in the
continuous service for not less than one year in that undertaking immediately before the
date of application for permission under this section shall be entitled to notice and
compensation as specified in Sec. 25N as if the said workman has been retrenched under
that section.
Special Provisions as to Restarting of Undertaking closed down before Commen-
cement of Amendment Act, 1976
Sec. 25P provides that if the appropriate Government is of opinion in respect of
any undertaking of an industrial establishment to which this Chapter applies and which
closed down before the Commencement of the Industrial Disputes (Amendment) Act.
1976.-
(a) that such undertaking was closed down otherwise than on account of unavoidable
circumstances beyond the control of the employer;
(b) that there are possibilities of restarting the undertaking;
(c) that it is necessary for the rehabilitation of the workmen employed in such
undertaking before its closure or for the maintenance of supplies and services
essential to the life of the community to restart the undertaking or both; and
(d) that the restarting of the undertaking will not result in hardship to the employer in
relation to the undertaking.
it may, after giving an opportunity to such employer and workmen, direct, by order
published in the Official Gazette, that the undertaking shall he restarted within such time
(not being less than one month from the date of the order) as may be specified in the
order.
Penalty for layoff and Retrenchment without Permission (Sec. 25Q)
Any employer who contravenes the provisions of Sec. 25M or Sec. 25N shall be
punishable with imprisonment for a term which may extend to one month, or with line
which may extend to Rs, 1,000, or with both.
Penalty for Closure (Sec. 25R)
1. Any employer who closes down an undertaking without complying with the
provisions of the Sub-Sec. (I) of Sec. 25 0 shall be punishable with imprisonment up
to 6 months, or with fine up to Rs. 5.000, or with both.
2. Any employer, who contravenes a direction given under Sub-Sec. (2) of Sec.
250 or Sec. 25P, shall be punishable with imprisonment up to one year, or with line up
to Rs. 2,000 for every day during which the contravention continues after the conviction.
3. Any employer who contravenes the provisions ofSub-Sec. (3) of Sec. 250 shall
be punishable with imprisonment up to one month, or with fine up to Rs. 1,000, or with
both.
 THE INDUSTFPJAL DISPUTES ACT, 1947 613

Certain provisions of Chapter VA to apply to an Industrial Establishment to

which Chapter YB applies
Sec. 25S states that the provisions of Sees. 25B, 251). 25FF, 25G. 25}i and 25J in
Chapter VA shall, so far as may be, apply also in relation to an industrial establishment
to which the provisions of this Chapter (ic,, Chapter VB) apply.

PENALTIES

Any workman who commences, continues, or otherwise acts in furths .nce of an

illegal strike is punishable with imprisonment up to one month, or fine up to R.s. 50, or
with both. Any employer who doe; the same as above in connection with an illegal
lockout sha l l be punishable with imprisonment up to one month, or fine up to Rs. 1,000,
or with both (Sec. 26). Any person who instigates or incites others to take part in, or
otherwise acts in furtherance of, an illegal strike or an illegal lockout shall be punishable
with imprisonment up to 6 months, or fine up to Rs. 1,000, or with both (Sec. 27). Any
person who knowingly gives financial aid to illegal strikes and lockouts shall be
punishable in like manrer as specified in Sec. 27 (Sec.28). Any person who commits a
breach of any term of any settlement or award, which is binding on him under this Act,
shall be punishable with imprisonment up to 6 months, or with fine, or with both and
where the breach is a continuing one, with a further line up to Rs. 200 for every day
during which the breach continues after the conviction for the first, and the court trying
the offence, if it fines the offender, may direct that the whole or any part of the fine
realised from him shall be paid, by way of compensation, to any person who, in its
opinion, has been injured by such breach (Sec. 29). Any employer who in contravention
of the provisions of Sec. 33 alters conditions of service shall be punishable with
imprisonment up to 6 months, or fine up to Rs. 1,000 or with both (Sec. 31).

MISCELLANEOUS

Offences by Companies (Sec. 32)—Where a person committing an offence under

this Act is a company, or other body corporate, or an association of persons (whether
incorporated or not), every direcior, manager, secretary, agent or other officer or person
concerned with the management thereof shall, unless he proves that the offence was
committed without his knowledge or consent, be deemed to be guilty of such offence.
Conditions of Service, etc., to Remain Unchanged during Pendency of Proceed-
ings (Sec. 33)
1. During the pendency of any conciliation proceeding before a Conciliation
Officer or a Board or of any proceeding before an arbitrator or a Labour Court orTribunal
or National Tribunal in respect of an industrial dispute, an employer shall,—
(a) in regard to any matter connected with the dispute, not alter, to the prejudice of
the workmen concerned in such dispute, the conditions of service applicable to
them immediately before the commencement of such proceedings, or
(b) any misconduct connected with the dispute, not discharge or punish, whether by
dismissal or otherwise, any workman concerned in this dispute, save with the
express permission in writing of the authority before which the proceeding is
pending.
2. During the pendency of such proceeding in respect of an industrial dispute, the
employer mar, in accordance with the standing orders applicable to a workman con-
cerned in such dispute, or, where there are no such standing orders, in accordance with
the terms of the contract, whether express or implied, between him and the workman,-
614 ERCANTflLL LAW

(a) alter, in regard to any matter not connected with the dispute the conditions of
service applicable to that workman immediately before the commencement of such
proceeding; or
(b) for any misconduct not connected with the dispute, discharge or punish, whether
by dismissal or otherwise, that workman provided that no such workman shall be
discharged or dismissed, unless he has been paid wages for one month and an
application has been made by the employer to the authority before which the
proceeding is pending for approval of the action taken by the employer.

3. Notwithstanding anything contained in Sub. (2). no employer shall, during the

pendency of any such proceeding in respect of industrial dispute, take an action against
any protected workman concerned in such dispute.
(a) by altering, to the prejudice of such protected workman, the conditions of service
applicable to him immediately before the commencement of such proceedings; or
(b) by discharging or punishing, whether by dismissal or otherwise, such protected
workman, save with the express permission in writing of the authority before which
the proceeding is pending.

E.splanation.—For the purposes of this Sub-Sec. a protected workman, in relation

to an establishment, means a workman, who being a member of the executive or other
office bearer of a registered trade union connected with the establishment, is recognised
as such in accordance with rules made in this behalf.
4. In every establishment, the number of workmen to be recognised as protected
workmen for the purposes of Sub-Sec. (3) shall be one per cent of the total number of
workmen employed therein subject to a minimum of 5 protected workmen and a
maximum number of 100 protected workmen and for the aforesaid purpose, thç ap-
propriate Government may make rules providing for the distribution of such protected
workmen among various trade unions, if any, connected with the establishment and the
manner in which the workmen may be chosen and recognised as protected workmen.
5. Where an employer makes an application to a Conciliation Officer. Board, an
arbitrator, a Labour Court. Tribunal or National Tribunal under the proviso to Sub-Sec.
(2) for approval of the action taken by him, the authority concerned shall, without delay,
hear such application and pass, as expeditiously as possible, such order in relation thereto
as it deems lit.
Sec. 33A provides that if an employer contravenes the provisions of Sec. 33, any
employer aggrieved by such contravention may make a complaint in writing to the
Labour Court, Tribunal or National Tribunal, and the latter shall adjudicate upon the
complaint as if it were a dispute.
Sec. 33B empowers the appropriate Government to withdraw by order in writing
for reasons to be stated therein, any proceeding pending before a Labour Court. Tribunal
or National Tribunal and to transfer the same to another Labour Court, Tribunal or
Nalional Tribunal, as the case may be, for the disposal of the proceeding. A Tribunal
or National Tribunal is also authorised to transfer Lu a Labour Court any proceeding
before itself.
Recovery of Money Due from an Employer (Sec. 33C). Where any money is
due to a workman from an employer under a settlement or an award or for layoff or
retrenchment, the workman himself or any other person authorised by him in writing in
this behalf, or in the case of the death of the workman, his assign or heirs may, without
prejudice to any other mode of recovery, make an application, within one year from the
date on which the money became due to the workman, to the appropriate Government
 THE INDUSTIRIAL DISPLJFES ACt-. 1947 615

for the recovery of money due to him, and if the appropriate Government is satisfied that
any money is due to him, it shall issue a certificate for that amount to the Collector who
shall proceed to recover the same in the same manner as an arrear of land revenue. Where
any workman is entitled to receive from the employer any benefit which is capable of
being computed in terms of money, the amount may be determined by the specified
Labour Court and may be recovered in the same manner as stated above.
No person refusing to take part or to continue to take part in any strike or lockout
which is illegal under this Act shall, by reason of such refusal or by reason of any step
taken by him, be subject to expulsion from any trade union or society or to any fine or
penalty, or to deprivation of any right or benefit to which he or his legal representatives
would otherwise be entitled, or be liable to be placed in any respect. either directly or
indirectly, under any disability or at any disadvantage as compared with other members
of the union or society, anything to the contrary in the rules of a trade union or society
notwithstanding (Sec. 35).
Representation of Pat-lies (See. 36). A workman who is a party to an industrial
dispute shall be entitled to be represented in any proceeding under this Act by (I) any
member of the executive or other office bearer of a registered trade union of which he
is a member; (ii) any member of the executive or other office bearer of a federation of
trade unions to which the trade union referred to in (i) is affiliated; (iii) where a worker
is not member of any trade union, by any member of the executive or other office bearer
of any trade union connected with, or by any other workman employed in, the industry
in which the workçr is employed and authorised in such manner as may be prescribed.
An employer who is a party to a dispute shall be entitled to be represented in any
proceeding under this Act by (i) an officer of an association of employers of which he
is a member; (ii) by an office bearer of a federation of associations of employers to which
the association referred to irf(i) is affiliated; (iii) where the employer is not a member of
any association of employers, by an officer of any association of employers connected
with, or k'y any other employer engaged in the industry in which the employer is engaged
and authorised in such manner as may be prescribed.
No party to a dispute shall be entitled to be represented by a legal practitioner in
any conciliation proceedings under this Act or in any proceedings before a Court. But
in any proceeding before a Labour Court. Tribunal or National Tribunal, a party to a
dispute may be represented by a legal practitioner with the consent of the other parties
to the proceeding and with the leave of the Labour Court, Tribunal or National Tribunal,
as the case may be.
By virtue of 36A, the appropriate Government may, if in its opinion any difficulty
or doubt arises as to the interprestation of any provision of an award or settlement, refer
the question to such Labour Court. Tribunal or National Tribunal as it may think fit. The
Labour Court, Tribunal or National Tribunal shall, after giving the parties an opportunity
of being heard, decide such question and its decision shall be final and binding on all
such parties, Sec. 37 provides that no suit, prosecution or other legal proceeding shall
lie against any person for anything which is in good faith done or intended to be done
in pursuance of this Act or any rules made thereunder.

REPEAL OF THE INDUSTRIAL DISPUTES (APPELLATE TRIBUNAL)

ACT (No. 48 of 1950)

The above Act has been repealed by the Industrial Disputes (Amendment and
Miscellaneous Provisions) Act, 1956, and consequently the Labour Appellate Tribunal
has been abollhed. The abolition of the Appellate Tribunal is expected to save time in
the disposal of cases and also to save about Rs. 6 lakhs in expenditure.
 Chapter XXII

The Minimum Wages Act, 1948

(No. XI of 1948)

The Minimum Wages Act, 1948 empowers the Central or State Government to fix
minimum rates of wages in respect of scheduled employments, after due enquiries. The
present schedule includes employments in (1) any woollen carpet-making or shawl
weaving establishment; (2) any rice mill, flour mill or dal mill; (3) tobacco (including
bidi-making) inanufactory; (4) plantation, i.e.. any estate maintained for the purpose of
growing cinchona, rubber, tea or coffee; (5) oil mill; (6) under any local authority; (7)
on the construction or maintenance of roads or in building operations; (8) stone-break-
ing or stone-crushing; (9) lac manufactory; (10) mica works; (11) public motor
transport; (12) tanneries and leather manufactory; (13) manganese mines; (14) china
clay mines; (15) Kyanite mines; (16) copper mines; (17) clay mines; (18) magnesitc
mines; and (19) agriculture including farming, dairy, horticulture, poultry, forestry or
timber operations. Sec. 27 empowers the appropriate Government to add to the schedule
any employment in respect of which it is of opinion that minimum rates of wages should
be fixed under this Act.
Minimum rates of wages in respect of scheduled industries excepting agriculture
were to be fixed within two years from the date of the commencement of the Act, and
in the case of agriculture it was to be done within three years. The minimum rate of
wages includes a basic rate and a special allowance adjusted to accord with the variation
in the cost of living index number. The procedure for fixing minimum rates of wages is
to appoint a committee to hold enquiries and publish its proposals for rates to be paid,
giving two months' time for filing objections or making representations. The rate so
fixed may be reviewed àr revised, if necessary. Provision has been made to set up a
machinery to decide claims arising out of payment of-less than the minimum rates of
wages. Infringement by the employer of certain provisions of the Act has been made
punishable with imprisonment or fine or with both.
Interpretation (Sec. 2)
In this Act, unless there is anything repugnant in the subject or context.—
(a) adult, adolescent and child have the meanings respectively assigned to them in
Sec. 2 of the Factories Act;
(b) appropriate Government in relation to any scheduled employment has the
meaning assigned to it in Sec.2(a) of the Industrial Disputes Act, 1947;
(c) competent authority means the authority appointed by the appropriate Govern-
ment by notification in its Official Gazette to ascertain from time to time the cost of
living index number applicable to the employees employed in the Scheduled employ-
ments specified in such notification;

616
 THE MINIMUM WAGES ACT, 1948 617

(d) cost of living index number in relation to employees in any scheduled

employment in respect of which minimum rates of wages have been fixed, means ths.
index number ascertained and declared by the competent authority by notification in the
Official Gazette to be the cost of living index number applicable to employees in such
employment;
(e) employer in relation to any scheduled employment has the meaning assigned
to it in the Factories Act and the Industrial Disputes Act;
(I) wages means all remuneration capable of being expressed in terms of money,
which would, if the terms of the contract of employment, express or implied, were
fulfilled, be payable to a person employed in respect of his employment or of work done
in such employment, and includes house rent allowance, but does not include-
(i) the value of—
(a) any house-accommodation, supply of light, water, medical attendance, or
(b) any other amenity or any service excluded by general or special order of the
appropriate Government;
(ii) any contribution paid by the employer to any Pension Fund or Provident Fund or
under any scheme of social insurance;
(iii) any travelling allowance or the value of any travelling concession;
(iv) any sum paid to the person employed to defray special expenses entailed on him
by the nature of his employment; or
(v) any gratuity payable on discharge.
(g) employee means any person who is employed for hire or reward to do any
work, skilled or unskilled, manual or clerical, in a scheduled employment in respect of
which minimum rates of wages have been fixed; and includes an out-worker to whom
any articles or materials are given out by another person to be made up, cleaned,
washed, altered, ornamented, finished, repaired, adapted or otherwise processed for sale
for the purposes of the trade or business of that other person where the process is to be
carried out either in the home of the out-worker or in some other premises not being
premises under the control and management of that other person; and also includes any
employee declared to be an employee by the appropriate Government; but does not
include any member of the armed forces of the Union.
Fixing of Minimum Rates of Wages (Sec.3)
1. The appropriate Government shall, in the manner hereinafter provided,—
(a) fix the minimum rates of wages payable- to employees employed in an
employment specified in Part land Part II of the Schedule and in an employment added
under Sec. 27: provided that the appropriate Government may instead of fixing mini-
mum rates of wages under this sub-clause for the whole State, fix such rates for a part
of the Slate or for any specified class or classes of such employment in the whole State
or part thereof; and
(b) review at such intervals as it may think fit, such intervals not exceeding 5
years, the minimum rates of wages so fixed and revise the minimum rates, if necessary:
Provided that where for any reason the appropriate Government has not reviewed the
minimum rates of wages fixed by it inrespcct of any scheduled employment within any
interval of 5 years, nothing contained in this clause shall be deemed to prevent it from
reviewing the minimum rates after the expiry of the said period of 5 years and revising
them, if necessary, and until they are so revised the minimum rates in force immediately
before the expiry of the said period of 5 years shall continue in force.
618 MERCANTILE LAW

IA. Notwithstanding anything contained in Sub-Sec. (I), the appropriate Govern-

ment may refrain from fixing minimum rates of wages in respect of any scheduled
employment in which there are in the whole less than, 1,000 employees engaged
in such employment, but if at any time the appropriate Government comes to a finding
after such inquiry as it may make or cause to be m'.de in this behalf that the number of
employees in any scheduled employment in respect of which it has refrained from fixing
minimum rates of wages has risen to 1,000 or more, it shall fix minimum rates of wages
payable to employees in such employment as soon as may be after such finding.
2. The appropriate Government may fix (a) minimum time rate; (b) a minhllium
piece rate; (c) a guaranteed time rate; (d) overtime rate.
2A. Where in respect of an industrial dispute relating to the rates of wages payable
to any of the employees employed in a scheduled employment, any proceeding is
pending before a Tribunal or National Tribunal or before any other like authority, or an
award has been made and is in operation, any notification fixing minimum rates of
wages shall not operate during pendency of proceedings and during the currency of the
award.
3. In fixing or revising minimum rates of wages under this section different
minimum rates of wages may be fixed fcr (i) different scheduled employments; (ii)
different classes of work in the same scheduled employment; (iii) adults, adolescents,
children and apprentices; (iv) different localities. Minimum rates of wages may be fixed
by any one or more of the following wage periods; by the hour, by the day, by the
month, or by any larger wage period as may be prescribed; and where such rates are
fixed by the day or by the month, the manner of calculating wages for a month or for a
day, as the case may be, may be indicated.
Minimum Rates of Wages (Sec. 4)
1. Any minimum rate of wages fixed or revised by the appropriate Government in
respect of scheduled employments under Sec.3 may consist of-
6) a basic rate of wages and a special allowance at a rate to be adjusted at such
intervals and in such manner as the appropriate Government may direct, to accord as
nearly as practicable with the variation in the cost of living index number applicable to
such workers (hereinafter referred to as the "cost of living allowance' s ); or
(ii) a basic rate of wages with or without the cost of living allowance, and the cash
value of the concessions in respect of supplies of essential commodities at concession
rates, where so authorised;
(iii) an all-inclusive rate allowing for the basic rate, the cost of living allowance
and the cash value of the concession, if any.
2. The cost of living allowance and the cash value of the concessions in respect of
supplies of essential commodities at concession rates shall be computed by the competent
authority at such intervals and in accordance with such directions as may be specified
or given by the appropriate Government.
Procedure for Fixing Wages (Sec. 5)
1. In fixing minimum rates of wages in respect of any scheduled employment for
the first time under this Act or in revising minimum rates of wages so fixed, the
appropriate Government shall either—
(a) appoint as many committees and sub-committees as it considers necessary to hold
enquiries and advise it in respect of such fixation or revision, as the case may be,
or
(b) by notification in the Official Gazette, publish its proposals for the information of
persons likely to be affected thereby and specify a date not less than two months
 T}th MINTh11JM WAGES ACE, 1948 619

from the date of the notification, on which the proposal will be taken into
consideration.
2. After considering the advice of the committee appointed under clause (a) of
Sub-Sec. (I), or as the case may be, all representations received by it before the date
specified in the notification under clause (b) of the sub section, the appropriate Govern-
ment shall, by notification in the Official Gazette, fix, or, as the case may be, revise the
minimum rates of wages in respect of each scheduled employment, and unless such
notification otherwise provides, it shall come into force on the expiry of three months
from the date of its issue: Provided that where the appropriate Government proposes to
revise the minimum rates of wages by the mode specified in clause (h) of Sub-Sec. (1),
the appropriate Government shall consult the Advisory Board also.
Committees and Advisory Boards (Sees. 7-9)
For the purpose of co-ordinating the work of committees and sub-committees
appointed under Sec. 5 and advising the appropriate Government generally in the matter
of fixing and revising minimum rates of wages, the appropriate Government shall
appoint an Advisory Board (Sec. 7). For the purpose of advising the Central and State
Governments in (he matters of the fixation and the revision of minimum rates of wages
and other matters under this Act and for co-ordinating the work of the Advisory Boards,
the Central Government shall appoint a Central Advisory Board, which shall consist of
persons to be nominated by the Central Government representing employers and
employees in the scheduled employments, who shall be equal in number, and inde-
pendent persons not exceeding one-third of its total number of members. One of such
independent persons shall be appointed the Chairman of the Board by the Central
Government (Sec.8). Each of the Committees, Sub-Committees and the Advisory Board
shall consist of persons to be nominated by the appropriate Government in the same
manner as for the Central Advisory Board (Sec. 9).
Sec. 10 provides that the appropriate Government may, at any time, by notifica-
tion in the Official Gazette, correct clerical or arithmetical mistakes in any order fixing
or revising minimum rates of wages under this Act, or errors arising therein from any
accidental slip or omission. Every such notification, after it is issued, shall be pled
before the Advisory Board for information.
Wages in Kind (Secil)
Minimum wages payable under this Act are to be paid in cash, but where it has
been the custom to pay wages wholly or partly in kind, the appropriate Government may
allow the continuance of this method of payment. The appropriate Government may
also authorise the supply of essential commodities at concession rates, if it is of the
opinion that it should be done in the interest of the employees, This cash value of wages
in kind and of concessions in respect of supplies shall be estimated in the prescribe
manner.
Payment of Minimum Wages (Sec.12)
The employer must pay to every employee engaged in a scheduled employment
under him wages at a rate not less than the minimum rate of wages fixed by notification
foj that class of employees in that employment without any deductions except as may
be authorised by the appropriate Government. This provision will not, however, affect
the provisions of the Payment of Wages Act, 1936.
Section 13(1) empowers the appropriate Government to fix the number of hours
of work which shall constitute a normal working day, inclusive of one or more specified
intervals, and provide for a day of rest in every period of seven days and for the payment
620 MERCANFtLE LAW

01 remuneration in respect of such days of rest. If an employee is required to work on a

rest day he must be paid the overtime rate, and such a rate must be paid even where a
worker is required to work overtime for any length of time. If an employee, whose
minimum rate of wages has been fixed under this Act by the day, works on any day for
a period less than the reputed number of hours constituting a normal working day, he
shall be entitled to receive wages in respect of work done by him on that day as if he had
worked for a full normal working day: provided that he shall not be entitled to receive
wages for the full day, if he was unwilling to work and the employer was ready to give
him the work, or if there were such other circumstances which warranted such non-pay-
ment.
2. The provisions of Sub-Sec. (1) shall, in relation to the following classes of
employees, apply only to such extent and subject to such conditions as may be
prescribed;
(a) onployees engaged on urgent work, or in any emergency which could not have
been foreseen or prevented;
(b) employees engaged in work in the nature of preparatory or complementary work
which must necessarily be carried on outside the limits laid down for the general
working in the employment concerned;
(c) employees whose employment is essentially intermittent;
(d) employees engaged in any work which for technical reasons has to be completed
before the duty is over;
(e) employees engaged in a work which could not be carried on except at times
dependent on the irregular action of natural forces.
3. An employment is intermittent when it is declared to be so by the appropriate
Government on the ground that the daily hours of duty of the employee, the hours of
duty, normally include periods of inaction during which the employee may he on duty
but is not called upon to display either physical activity or sustained attention.
Where an employee does two or more classes of work to each of which a different
minimum rate of wages is applicable, the employer shall pay to such employee in
respect of the time respectively occupied in each such class of work, wages at not less
than the minimum rate in force in respect of each such class (Sec.16). Where an
employee is employed on piece-work for which minimum time rate and not a minimum
piece-rate has been fixed under this Act, the employer shall pay to such employee wages
at not less than the minimum time rate (Sec. 17).
Register and Records (Sec. 18)—Every employer shall maintain such registers
and records giving such particulars of employees employed by him, the work performed
by them, the wages paid to them, the receipts given by them and such other particulars
and in such form as may be prescribed. He shall also keep exhibited in the factory,
workshop or place where the employees in the scheduled employment may be
employed, or in the case of out-workers, in such factory, workshop or place as may be
used for giving out work to them, notices in the prescribed form containing prescribed
particulars. The appropriate Government may provide for the issue of wage books or
wage slips to employees employed in any scheduled employment in respect of which
minimum rates of wages have been fixed and prescribe the manner in which entries shall
be made and authenticated in such wage books or wage slips by the employer or his
agent.
Inspectors (Sec.19)—Tbe appropriate Government may. by notification in the
Official Gazette, appoint such persons as it thinks fit to be Inspectors for the purposes
of this Act, and define the local limits within which they shall exercise their functions.
Subject to any rules made in this behalf, an Inspector may within his loc*l limits
 THE MINIMUM WAGES ACT. i4S 621

(a) enter, at all reasonable hours, with such assistants, if any, as he thinks fit, any
premises or place where employees are employed or work is given out to out-workers
in any scheduled employment in respect of which minimum rates of wages have been
fixed, for the purpose of examining any register, record of wages or notices and require
the production thereof for inspection; (b) examine any employee, (c) require any person
giving out-work and any out-workers, to give any information with regard to the work
and the payments made for the work; (d) seize or take copies of any register, record of
wages or notices or portions thereof as he may consider relevant in respect of any
offence under this Act which he has reason to believe has been committed by an
employer; and (e) exercise such other power as may be prescribed.
Claims (Sec.20)—Thc appropriate Government may, by notification in the Offi-
cial Gazette, appoint any Commissioner for Workmen's Compensation or any officer of
the Central Government exercising functions as a Lalxwz Commissioner for any region,
or any officer of the State Government not below the rank of Labour Com?nissioner or
any Judge of a Civil Court or a Magistrate to be the Authority to hear and decide for any
specified area all claims arising out of payment of less than the minimum rates of wages
or in respect of remuneration for days of rest or for work done on such days under
Sec.13 or of wages at the overtime rate under Sec. 14 to employees employed or paid in
that yea.
2. Where an employee has any claim of the nature reterred to in (1) the employee
himself. or any legal practitioner or any official of registered trade union authorised in
writing to act on his behalf, or any Inspector, or any person acting wiil; the permision
of the Authority. may apply to such Authority for a direction under Su ti-Sec. (3):
provided that every such application shall be presented within six months from die date
on which the minimum wages or other amount became payable, unless the Authority
admits an application after this period on sufficient cause being shown.
3. When an application under Sub-Sec. (2) is entertained, the Authority shall hear
the applicant and the employer or give them an opportunity of being heard, and after
such further enquiry, if any, as it may consider necessary may, without prejudice to any
other penalty to which the employer may be liable under this Act, direct (i) in the case
ofaclaim arising out of payment of less than the minimum rates of wages, the payment
to the employee of the amount by which the minimum wages payable to him exceed the
amount actually paid, together with the payment of such compensation as the Authority
may think fit, not exceeding ten times the amo nt of such excess in any other case, the
payment of the amount due to the employee, together with the payment of such
compensation as the Authority may think fit, not exceeding ten rupees, and the Authority
may direct payment of such compensation in cases where the excess or the amount due
is paid by the employer to the employee before the disposal of the application.
4. If the Authority hearing any application is satisfied that it was either malicious
or vexatious, it may direct the applicant to pay the employer a penalty not exceeding
Rs-50. Every direction of the Authority under this section shall be final.
Section 21 provides that subject to such rules as may be prescribed, a single
application may be presented under Sec.20 on behalf or in respect of any number of
employees employed in the scheduled employment in respect of which minimum rates
of wages have been fixed and in such cases the maximum compensation which may be
awarded shall not exceed ten times the aggregate amount of such excess or ten rupees
per head, as the case may be. The Authority may deal with any number of separate
applications as a single application.
Penalties and Procedure (Sec.22)
1. Any employer who pays to any employee less than the minimum rates of wages
for that employee's class of work, or less than the amount due to him under the provisions
622 MERCANTILE tAW

of this Act or contravenes any order or rule made under Sec. 13 shall be punishable with
imprisonment for a term-which may extend to six month.s. or with fine which may extend
to Rs. 500, or with both. In imposing any fine, the Court shall take into consideration
the amount of any compensation already awarded against the accused in any proceedings
taken under Sec. 20.
Section 22A provides that an employer who contravenes any provision of this
Act or of any rule or order made thereunder shall, if no other penalty is provided for such
contravention by this Act, be punishable with fine up to Rs. 500.
Section 2213 lays down that no Court shall take congnii.ance of a complaint
against any person for an offence (a) under Sec. 22 for paying less than the minimum
rate of wages unless an application under Sec. 20 has been granted wholly or in part, and
the appropriate Government or an official authorised by it in this behalf has sanctioned
the making of the complaint, or (h) for not csnnplying with rules or order under Sec. 13
or under Sec. 22A, except on a complaint made by, or with the sanction of. all
The complaint under Sec. 22A must be made within 6 months of the date of the offence
and in other cases within one month of the offence.
Section 22C says that if the person committing any offence under this Act is a
company, every person who at the time the offence was committed, was in charge of,
and was rcspomsihle to, the company for the conduct of the business of the company as
well as the company shall be deemed to be guilty of the offence and shall be liable to be
proceeded against and punished accordingly: provided that he shall not be liable if he
proves that the offence was committed without his knowledge or he had exercised due
diligence to prevent the commission of (fie offence. If an offence by a company has been
committed with the consent or connivance of, or is attrihutimhleto any neglect on the part
of any director, manager. secretary or other officer of the company, then such person
shall also be guilty of that offence and liable to be punished. A company includes any
body corporate, a firm or other association of individuals and a director includes a
partner.
Section 221) provides that all amounts payable by an employer to an employee
under this Act must be deposited with the prescribed authority to be dealt with, if the
employee has died or cannot be traced.
Section 22E exempts from attachment any amount deposited by an epployer with
the appropriate Government as security for the due performance of any contract or any
amount due to the employer from the Government in respect of such contract shall not
be liable to attachment under any decree or order of any Court in respect of any debt or
liability of the employer other than any debt or liability towards any employee employed
in connection with the contract aforesaid.
Section 22F* empowers the appropriate Government to direct by notification that
any or all of the provisions of the Payment of Wages Act, 1936. will apply to the wages
payable to employees in such scheduled employments as may be specified in the
notification; and time Inspector employed under this Act shall be deemed to be the
Inspector for the purpose of the enforcement of those provisions.
Exemption of Employer from Liability (Sec.23)—Wherc an employer is
charged with an offence against this Act, he shall be entitled, upon complaint duly made
by him to have any other person, whom he charges as the actual offender, brought before
the Court at the time appointed for hearing the charge; and if, after the commission of
the offence has been proved, the employer proves to the satisfaction of the Court
(a) that he has used due diligence to enforce the execution of this Act, and
(b) that the said other person committed the offence in question without his
knowledge, consent or connivance,
Inserted by Amendment Act of 1957.
 THE MINIMUM WAGES ACT, 1948 623

that other person shall be convicted of the offence and shall be liable to the like
punishment as if he were the employer and the employer shall be discharged. The
employer will be liable to be examined on oath and the evidence of the employer or his
witness shall be subject to cross-examination by the other person so charged and by the
prosecution.
Section 24 bars the institution of any suit for the recovery of wages which can be
or could be recovered under Sec. 20 of this Act. Sec. 25 prohibits contracting out
agreement in respect of minimum rate of wages payable under this Act.
Exemptions and Exceptions (Sec. 26)
1. The appropriate Government may, subject to such conditions if any as it may
think fit to impose, direct that the provisions of this Act shall not apply in relation to the
wages payable to disabled employees.
2. The appropriate Government may, if for special reasons it thinks so fit, by
notification in the Official Gazette, direct that subject to such conditions and for such
period as it may specify the provisions of this Act or any of them shall not apply to all
or any class of employees employed in any scheduled employment or to any locality
where there is carried on a scheduled employment.
2A. The appropriate Government may, if it is of opinion that, having regard to the
terms and conditions of service applicable to any class of employees in a scheduled
employment generally or in a scheduled employment in a local area, or to any estab-
lishment or a part of any establishment in a scheduled employment it is not necessary to
fix minimum wages in respect of such employees of that class or in respect of employees
in such establishment or such part of any establishment as are in receipt of wages
exceeding such limit as may be prescribed in this behalf, direct, by notification in the
Official Gazette and subject to such conditions, if any, as it may think fit to impose, that
the provisions of this Act or any of them shall not apply in relation to such employees.
3. Nothing in this Act shall apply to the wages payable by an employer to a
member of his family who is living with him and is dependent on him.
Explanation—In this Sub-Section a member of the employer's family shall be
deemed to include his or her spouse or child or parent or brother or sister.
Section 27 empowers the appropriate Government to add to the scheduled employ-
merit any other employment, whereupon the schedule shall in its application to the State
be deemed to be amended accordingly. Sec. 28 empowers the Central Government to
give directions to a State Government as to the carrying into execution of this Act in the
State. Sec. 29 provides that the Central Government may by notification in the Official
Gazette make riles prescribing the term of office of the members, the procedure to be
followed in the conduct of business, the method of voting, the manner of filling up casual
vacancies in the membership and the quorum necessary for the transaction of business
of the Central Advisory Board. Sec. 30 empowers the appropriate Government to make
similar rules in respect of committees, sub-committees, and the Advisory Board; and in
relation to other cases. Sec. 31(1) empowers an appropriate Government to validate the
fixation of certain minimum rates of wages and provides that where during the period
commencing on the 1st April. 1952, and ending with the commencement of the
Amending Act of 1954, minimum rates of wages have been fixed by an appropriate
Government as being payable to employees employed in any employment specified in
Part I of the Schedule in the belief or purported belief that such rates were being fixed
under Sec. 3 (1)(a)(i), such rates shall be deemed to have been fixed in accordance with
law, and shall not be questioned in any Court on the ground merely of the expiry of the
time: provided that nothing contained in this section shall extend, or be construed to
extend to affect any person with any punishment or penalty whatsoever by reason of the
payment by him by way of wages to any of his employees during the period specified
624 MERCAtS1I1E LAW

in this section an amouQt which is less than the minimum rates of wages referred to in
this section or by reason of non-compliance during the period aforesaid with any order
or rule issued under Sec. 13.
2. The provisions of Sub-Sec. (1) shall apply in relation to minimum rates of wages
fixed by an appropriate Government during the period commencing on the 31st day of
December. 1954. and ending with the date of the commencement of the Minimum Wages
(Amendment) Act. 1957, as they apply in relation to minimum rates of wages fixed by
an approii iatc Government during the period commencing on the 1st day of April, 1952,
and ending with the date of commencement of Minimum Wages (Amendment) Act.
1954, subject to the modification that for the words, figures, brackets and letter 'employ-
ment specified in Part I of the Schedule in the belief or purported belief that such rates
were being fixed under sub-clause (i) of clause (a)of Sub-Sec. (1) of Sec.3", the words,
figures, brackets and letter ''employment specified in Part I or Part 11 of the Schedule in
the belief or purported belief that such rates were being fixed under sub-clause (i) or
sub-clause (ii) of clause (a) Sub-Sec. (1) of Sec.3' shall be substituted.

THE SCHEDULE

ISee Sees. 2(g) and 271

PART I

1. Employment in any woollen carpet-making or shawl weaving establishment.

2. Employment in any rice mill, flour mill and dal mill.
3. Employment in any tobacco (including hidi-making) manufactory.
4. Employment in any plantation, that is to say, any estate which is maintained for
the purpose of growing cinchona, rubber, tea or coffee.
5. Employment in any oil mill.
6.Employment under any local authority,
7. Employment on the construction or maintenance of roads or in building operations.
8. Employment in stone-breaking or stone-crushing.
9. Employment in any lac manufactory.
10. Employment in any mica works.
11. Employment in public motor transpOrt.
12. Employment in tanneries and leather manufactory.
13. Employment in manganese mines.
14. Employment in china clay mines.
15. Employment in kyanite mines.
16. Employment in copper mines.
17. Employment in clay mines.
18. Employment in magncsite mines.
PART II
1. Employment in agriculture, that is to say, in any form of fanning, including the
cultivation and tillage of the soil, dairy farming, the production, cultivation, growing and
harvesting of any agricultural or horticultural commodity, the raising of livestock, bees
or poultry and any practice performed by a farmer or on a farm as incidental to or in
conjunction with farm operations (including any forestry or timbering operations and
the preparation for market and delivery to storage or to market or to carriage for
transportation to market of farm produce).
 Appendix I

The Indian Contract Act, 1872,

125th April. 18721
(ACT No. IX of 1872)

Whereas it is expedient to define and amend certain parts of the law relating to
contracts; it is hereby enacted as follows:
Preliminary
This Act may be called the Indian
1. Short title, extent and commencement.
Contract Act, 1872.
It extends to [the whole of India] except the State of Jammu and Kashmir; and it
shall come into force on the first day of September. 1872.
Nothing herein contained shall affect the provisions of any Statute, Act orRegula-
nor any incident
tion nor hereby expressly repealed, nor any usage or custom of trade, ,
of any contract not inconsistent with the provisions of this Act.
ion -CtUse In this Act the following words and expressions are
2. InterpretaI
used in the following senses, unless a coomtrary intention appears from the context.—
erson signifies to another his willingness to do or to abstain from doing
(a) When one p
anything, with aview to obtaining the assent of that other to such act or abstinence,
he is said to make a proposal;
(h) When the person to whom the proposal is made signifies his assent thereto, the
proposal is said to be accepted. A proposal, when accepted, becomes a promiSe
and the person accepting
(c) The person making the proposal is called the "promisor",
the proposal is called the "promisee";
(d) When, at the desire of the promisor, the promisee or any other person has done or
abstained from doing. or does or abstains from doing or promises to do or to abstain
from doing, something, such act or abstinence or promise is called a consideration
for the promise;
(e) Every promise and every set of promises, forming the consideration for each other,
is an agreement;
(f) Promises which fomin the consideration or part of the consideration for each other
are called reciprocal promises;
(g) An agreement not enforceable by law is said to be void;
h) An agreement enforceable by law is a contract;
(i) An agreement which is enforceable by law at the option of one or more of the
parties thereto, but not at the option of th e other or others, is a voidable contract;
(j) A contract which ceases to he enforceable by law becomes void when it ceases to
be enforceable.

625

626 MERCANTILE LAW

CHAPTER 1

Of the Communication, Acceptance, and Revocation of Proposals

3. Communication, acceptance and revocation of proposals. The communica-

tion of proposals, the acceptance of proposals, and the revocation of proposals and
acceptances, respectively, are deemed to be made by any act or omission of the party
proposing, accepting or revoking by which he intends to communicate such proposaL
acceptance or revocatioa or which has the effect of communicating it.
4. Communication when complete. The communication of a proposal is complete
when it comes to the knowledge of the person to whom it is made.
The communication of an acceptance is complete, —as against the proposer, when
it is put in a course of transmission to him, so as to be out of the power of the acceptor;
as against the acceptor, when it comes to the knowledge of the proposer.
The communication of a revocation is complete,—as against the person who
makes it, when it is put into a course of transmission to the person to whom it is
made, so as to be out of the power of the person who makes it, as against the person
to whom it is made, when it comes to his knowledge.

Illustrations

(a) A proposes, by letter, to sell a house to B at a certain price.

The communication of the proposal is complete when B receives the letter.
(b) B accepts A's proposal by a letter sent by post.
The communication of the acceptance is complete as against A. when the letter is
posted; as against B, when the letter is received by A.
(c) A revokes his proposal by telegram.
The revocation is complete as against A, when the telegram is despatched.
It is complete as against B, when B receives ii
B revokes his acceptance by telegram. B's revocation is complete as against B,
when the telegram is despatched, and as against A, when it reaches him.
5. Revocation of proposal and acceptance. A proposal may be revoked at any
time before the communication of its acceptance is complete as against the proposer, but
not afterwards.
An acceptance may be revoked at any time before the communication of the
acceptance is complete as against the acceptor, but not afterwards.

Illustrations

A proposes, by a letter sent by post, to sell his house to B.

B accepts the proposal by a letter sent by post.
A may revoke his proposal at any time before or at the moment when B posts his
letter of acceptance, but not afterwards.
B may revoke his acceptance at any time before or at the moment when the letter
communicating it reaches A. but not afterwards.
6. Revocation how made. A proposal is revoked-
1. by the communication of notice of revocation by the proposer to the other party;
2. by the lapse of the time prescribed in such proposal for its acceptance or, if no time
is so prescribed, by the lapse-of a reasonable time, without communication of the
acceptance;
 11IE INDIAN CONTRACT ACT, 1872 627

3. by the failure of the acceptor to fulfill a condition precedent to acceptance; or

4 by the death or insanity of the proposer, if the fact of his death or insanity comes
to the knowledge of the acceptor before acceptance.
7. Acceptance must be absolute. In order to convert a proposal into a promise,
the acceptance must-
1. be absolute and unqualified;
2. be expressed in some usual and reasonable manner, unless the proposal prescribes
the manner in which it is to be accepted. If the proposal prescribes a mariner in
which it is to be accepted, and the acceptance is not made in such manner, the
proposer may, within a reasonable time after the acceptance is communicated to
him, insist that his proposal shall be accepted in the prescribed manner, and not
otherwise; but if he fails to do so, he accepts the acceptance.
8. Acceptance by performing conditions, or receiving consideration. Perfor-
mance of the conditions of a proposal, or the acceptance of any consideration for a
reciprocal promise which may be offered with a proposal, is an acceptance of the
proposal.
9. Promises, express and implied. In so far as the proposal or acceptance of any
promise is made in words, the promise is said to be express. In so far as such proposal
or acceptance is made otherwise than in words, the promise is said to be implied.

CHAPTER II

Of Contracts, Voidable Contracts and Void Agreements

10. What agreements are contracts? All agreements are contracts if they are
made by the free consent of parties competent to contract, for a lawful consideration and
with a lawful object, and are not hereby expressly declared to be void.
Nothing herein contained shall affect any law in force in India and not hereby
expressly repealed, by which any contract is required to be made in writing or in the
presence of witnesses, or any law relating to the registration of documents.
11. Who are competent to contract? Every person is competent to contract who
is of the age of majority according to the law to which he is subject, and who is of sound
mind, and is not disqualified from contracting by any law to which he is subject.
12. What is a sound mind for the purposes of contracting ? A person is said
to be of sound mind for the purpose of making a contract, if at the time when he makes
it, he is capable of undertaking it and of forming a rational judgment as to its effect upon
his interests.
A person who is usually of unsound mind, but occasionally of sound mind may
make a contract when he is of sound mind.
A person who is usually of sound mind, but occasionally of unsound mind, may
not make a contract when he is of unsound mind.

Illusiralions

(a) A patient in a lunatic asylum, who is at intervals of sound mind, may contract
during those intervals.
(b) A sane man, who is delirious from fever or who is so drunk that he cannot
understand the terms of a contract or form a rational judgment as to its effect on
his interest, cannot contract whilst such delirium or drunkenness asts.
628 MERCANTILE I AW

13. "Consent" defined. Two or more persons are said to consent when they
agree upon the same thing in the same sense.
14. "Free consent" defined. Consent is said to be free when it is not caused by-
1. coercion, as defined in Sec. IS. or
2. undue influence as defined in Sec. 16, or
3. fraud, as defined in Sec. 17. or
4. misrepresentation as defined in Sec. 18. or
5. mistake, subject to the provisions of Sees. 20, 21 and 22.
Consent is said to be so caused when it would not have been given but for the
existence of such coercion, undue influence, fraud, misrepresentation or mistake,
15. "Coercion" defined. ''Coercion" is the committing, or threatening to com-
mit, any act forbidden by the Indian Penal Code (XLV of 1860), or the unlawful
detaining, or threatening to detain, any property, to the prejudice of any person whatever,
with the intention of causing any person to enter into an agreement.
E.splana!:on. It is immaterial whether the Indian Penal Code (XLV of 1860) is or
is not in force in the place where the coercion is employed.

Illustrations

A on board of an English ship on the high seas, causes B to enter into an

agreement by an act amounting to criminal intimidation under the Indian Penal Code
(XLV of 1860).
A afterwards sues B for breach of contract at Calcutta.
A has employed coercion, although his act is not an offence by the law of
England, and although Sec. 506 of the Indian Code (XLV of 1860) was not in force at
the time or place where the act was done.
16. "Undue influence" defined.
1. A contract is said to be induced by "undue influence" where the relations
subsisting between the parties are such that one of the parties is in a position to dominate
the will of the other and uses that position to obtain an unfair advantage over the other.
2. In particular and without prejudice to the generality of the foregoing principle,
a person is deemed to be in a position to dominate the will of another—
(a) where he holds a real or apparent authority over the other, or where he stands in a
fiduciary relation to the other; or
(b) where he makes a contract with a person whose menial capacity is temporarily or
permanently affected by reason of age, illness, or mental or bodily distress.
3. Where a person who is in a position to dominate the will of another enters into
a contract with him, and the transaction appears, on the face of it or on the evidence
s
adduced, to be uncon cionable, the burden of proving that such contract was not induced
by undue influence shall lie upon the person in a position to dominate the will of the
Other.
Nothing in this sub-section shall affect the provisions of Sec. 111 of the Indian
Evidence Act, 1872 (I of 1872).

Illustrations

(a) A having advanced money to his son B. during his minority, upon B's coming of
age obtains, by misuse of parental influence, a bond from B for a greater amount
than the sum dae in lesçect of the advance. A employs undue influence.
 THE INDIAN CONTRACT ACT. 1872 629

(b) A. a man enfeebled by disease or age, is induced by B's influence over him as his
medical attendant to agree to pay B an unreasonable sum for his professional
services. B employs undue influence.
(c) A, being in debt to B, the money-lender of his village, contracts on a fresh loan on
terms which appear to be unconscionable. It lies on B to prove that the contract
was not induced by undue influence,
(d) A applies to a banker for a loan at a time when there is stringency in the money
market. The banker declines to make the loan except at an unusually high rate of
interest. A accepts the loan on these terms. This is a transaction in the ordinary
course of business, and the contract is not induced by undue influence.
17. "Fraud"- defined. "Fraud" means and includes any of the-following acts
committed by a party to a contract, or with his connivance or by his agent, with intent
to deceive another party thereto or his agent; or to induce him to enter into the contract:-
1. the suggestion, as a fact, of that which is not true by one who does not believe it
to be true;
2. the active concealment of a fact by one having knowledge or belief of the fact;
3. a promise made without any intention of performing it
4. any other act fitted to deceive;
5. any such act or omission as the law specially declares to be fraudulent.
Explanation. Mere silence as to facts likely to affect the willingness of parties
would make it A's duty to tell B if the horse is unsound.
are such that, regard being had to them, it is the duty of the person keeping silence to
speak, or unless his silence is, in itself, equivalent to speech.

Illustrations

(a) A sells by auction to B, a horse which A knows to be unsound. A says nothing to

B about the horse's unsoundness. This is not fraud in A.
(b) B is A's daughter and has just come of age. Here the relation between the parties
would make it A's duty to tell B if the horse is unsound.
(c) B says to A—"If you do not deny it. I shall assume that the horse is sound". A
says nothing. Here A's silence is equivalent to speech.
(d) A and B being traders, enter upon a contract. A has private information of a change
in prices which would affect B's willingness to proceed with the contract. A is not
bound to inform B.
18 . "Misrepresentation" defined. "Misrepresentation" means and includes-
!, the positive assertion, in a manner not warranted by the information of the person
making it, of that which is not true, though he believes it to be true;
2. any breach of duty which, without an intent to deceive, gains an advantage to the
person committing it, or any one, claiming under him, by misleading another to
his prejudice or to the prejudice of any one claiming under him;
3. causng, however innocently, a party to an agreement to make a mistake as to the
substance of the thing which is the subject of the agreement.
19. Voidability of agreements without free consent. When consent to an
agreement is caused by coercion .....fraud or misrepresentation the agreement is a
contract voidable at the option of the party whose consent was so caused.
630 MERCANTiLE LAW

A party to a contract, whose consent was caused by fraud or misrepresentation,

may, if he thinks fit, insist that the contract shall be performed, and that he shall be pot
in the position in which he would have been if the representations made had been true.
Exception. If such consent was caused by misrepresentation or by silence
fraudulent within the meaning of Sec. 17, the contract, nevertheless, is not voidable, if
the party whose consent was so caused had the means of discovering the truth with
ordinary diligence.
Explanation. A fraud or misrepresentation which did not cause the consent to a
contract of the party on whom such fraud was practised, or to whom such misrepresen-
tation was made, does not render a contract voidable.

Illustrations

(a) A, intending to deceive B. falsely represents that live hundred maunds of

indigo a,e made annually at A's factory, and thereby induces B to buy the factory. The
contract is voidable at the option of B.
(b) A, by a misrepresentation. leads B erroneously to believe that five hundred
maunds of indigo are made annually at A's factory. B examines the accounts of the
factory, which show that only four hundred maunds of indigo have been made. After
this B buys the factory. The contract is not voidable on account of A's misrepresenta-
tion.
(c) A fraudulently informs B that A's estate is free from incumbrance B there-
upon buys the estate. The estate is subject to a mortgage. B may either avoid the
contract, or may insist on its being carried out and the mortgage-debt redeemed.
(d) B, having discovered a vein of ore on the estate of A. adopts means to conceal,
and does conceal, the existence of the ore from A. Through A's ignorance l is enabled
to buy the estate at an under-value. The contract is voidable at the option of A.
(e) A is entitled to succeed to an estate at the death of B. B dies; C, having received
intelligence of B's death, prevents the intelligence reaching A and thus induces A to sell
him his interest in the estate. The sale is voidable at the option of A.
undue influence. When consent
19-A. Power to set aside contract induced by
to an agreement is caused by undue influence, the agreement is a contract voidable at
the option of the party whose consent was so caused.
Any such contract may be set aside either absolutely or, if the party who was
entitled to avoid it has received any benefit thereunder, upon such terms and conditions
as to the Court may seem just.

Illustrations

(a) A's son has forged B's name to a promissory note. B, under threat of
prosecuting A's son obtains a bond from A for the amount of the forged note. If B sues
on this bond, the Court may set the bond aside.
(b) A, a money-lender, advances Rs.100 to B, an agriculturist, and by undue
influence, induces B to execute a bond for Rs.200 with interest at 6 per cent per month.
The Court may set the bond aside, ordering B to repay the Rs.100 with such interest as
may seem just
to matter of fact.
20. Agreement void where both parties are under mistake as
Where both the parties to an agreement are under a mistake as to a matter of fact
essential to the agreement, the agreement is void.
 THE INDIAN COWTRACr ACT, 1872 631

Explanation. An erroneous opinion as to the value of the thing which forms the
subject-matter of the agreement is not to be deemed a mistake as to a matter of act.
Illustrations

(a) A agrees to sell to B a specific cargo of goods supposed to be on its way from
England to Bombay. It turns out that before the day of the bargain, the ship conveying
the cargo had been cast away and the goods lost. Neither party was aware of the facts.
The agreement is void.
(b) A agrees to buy from B a certain horse. It turns out that the horse was dead at
the time of the bargain, though neither party was aware of the fact. The agreement is
void.
(c) A. being entitled to an estate for the life of B, agrees to sell it to C, B was dead
at the time of the agreement, but both parties were ignorant of the fact. The agreement
is void.
21.Effect of mistakes as to law. A contract is not voidable because it was caused
by a mistake as to any law in force in [India]; but a mistake as to a law nct in force in
[India] has the same effect as a mistake of fact.

Illustration
A and B make a contract grounded on the erroneous belief that a particular debt is
barred by the Indian Law of Limitation; the contract is not voidable.
22. Contract caused by mistake of one party as to matter of fact—A contract
is not vcidable merely because it was caused by one of the parties to it being under a
mistake as to a matter of fact.
23. What considerations and objects are lawful and what not?—The con-
sideration or object of an agreement is lawful, unless—
it is forbidden by law; or
is of such a nature that, if permitted, it would defeat the provisions of any law; or
is fraudulent; or
involves or implies injury to the person or property of another; or the Court regards
it as immoral, or opposed to public policy.
In each of these cases, the consideration or object of an agreement is said to be
unlawful. Every agreement of which the object or consideration is unlawful is void.
Illustrations
(a) A agrees to sell his house to B for 10,000 rupees. Here B's promise to pay the
sum of 10,000 rupees is the consideration for A's promise to sell the house, and *'s
promise to sell the house is the consideration for B's promise to pay the 10.000 rupees.
These are lawful considerations.
(h) A promises to pay B 1,000 rupees at the end of six months, if C, who owes that
sum to B, fails to pay it. B promises to grant time to C accordingly. Here the promise of
each party is the consideration for the promise of the other party and they are lawful
considerations.
(c) A promises, for a certain sum paid to him by B, to make good to B the value
of his ship if it is wrecked on a certain voyage. Here A's promise is the consideration
for B's payment, and B's payment is the consideration for A's promise and these are
lawful considerations.


632 MERCANTILE LAW

(d) A promises to maintain B's child and B promises to pay A 1.000 rupees yearly
for the purpose. Here the piornise of each party is the consideration for the promise of
the other party. They are lawful considerations.
(e) A, B and C enter into an agreement for the division among them of gains
acqiircd or to be acquired, by them by fraud. The agreement is void as its object is
unlawful.
(I) A promises to obtain for B an employment in the public service, and B promises
to pay 1,000 rupees to A. The agreement is void, as the consideration for it is unlawful.
(g) A. being agent for a landed proprietor, agrees for money, without the
knowledge of his principal, to obtain for B a lease of land belonging to his principal. The
agreemeni between A and B is void, as it implies a fraud by concealment by A, on his
principal.
(h) A promises B to drop a prosecution which he has instituted against B for
robbery, and B promises to restore the value of the things taken. The agreement is void,
as its object is unlawful.
(i) A's estate is sold for arrears of revenue under the provisions of an Act of the
Legislature, by which the defaulter is prohibited from purchasing the estate. B. upon an
understanding with A. becomes the purchaser, and agrees to convey the estate to A upon
receiving from him the price which B has paid. The agreement is void, as it renders the
transaction, in effect, a purchase by the defaulter, and would so defect the object of the
law.
U) A, who is B's mukhtar, promises to exercise his influence, as such, with B in
favour of C and C promises to pay 1.000 rupees to A. The agreement is void, because it
is immoral.
(k) A agrees to let her daughter to B for concubinage. The agreement is void,
because it is immoral, though the letting may not be punishable under the Indian Penal
Code (XLV of 1860).

Void Agreements

24. Agreements void, if considerations and objects unlawful in part.lf any part
of a single consideration for one or more objects, or any one or any part of any one of
several considerations for a single object, is unlawful, the agreement is void.

Illusiralions

A promises to superintend, on behalf of B. a legal manufacture of Indigo, and an

illegal traffic in other articles. B promises to pay to A a salary of 10.000 rupees a year.
The agreement is void, the object of A's promise and the consideration for B's promise
being in part unlawful.
25. Agreement without consideration void, unless it is in writing and
registered, or is a promise to compensate for something done, or is a promise to pay
a debt, barred by limitation law—An agreement made without consideration is void
unless-

1. it is expressed in writing and registered under the law for time being in force for
the registration of Idocuments), and is made on account of natural love and
affection between parties standing in a near relation to each other, or unless
2. it is a promise to compensate, wholly or in part, a person who has already
voluntarily done something for the promiser, or something which the promisor
was legally compelled to do, or unless
 THE INDIAN CONTRACF ACT, 1872 633

3. it is a promise, made in writing and signed by the person to be charged therewith,

or by his agent generally or specially authorised in that behalf, to pay wholly or in
part a debt of which the creditor might have enforced payment but for the law for
the limitation of suits.
In any of these cases, such an agreement is a contract
Explanation ]—Nothing in this section shall affect the validity as between the
donor and donee, of any gift actually made,
Explanation 2—An agreement to which the consent of the promisor is freely given
is not void merely because the consideration is inadequate; but the inadequacy of the
consideration may be taken into account by the Court in determining the question
whether the consent of the promisor was freely given.

Illustra!nns

(a) A promises, for no consideration, to give to B Rs. 1,000 - This is a void agreement.
(h) A, for natural love and affection, promises to give his son B Rs. 1,000. A puts his
promise to B into writing and registers it. This is a contract
(c) A finds B's purse and gives it to him. B promises to give A Rs. 50. This is a contract.
(a) A supports B's infant son. B promises to pay A's expenses in so doing. This is a
contract.
(c) A owes B Rs. 1.000, but the debt is barred by the Limitation Act. A signs a written
promise to pay B Rs. 500 on account of the debt. This is accstract.
(f) A agrees to sell a horse worth Rs. 1,000 for Rs. 10. A's consent to the agreement
was freely given. The agreement is a contract notwithstanding the inadequacy of
the consideration.
(g) A agrees to sell a horse worth Rs. l,fXX for Rs. 10. A denies that his consent to
the agreement was freely given.
The inadequacy of the consideration is a fact which the Court should take into
account in considering whether or not A's consent was freely given.
26. Agreement in restraint of marriage void—Every agreement in restraint of
the marriage of any person, other than a minor, is void.
27. Agreement in restraint of trade void—Every agreement by which anyone
is restrained from exercising a lawful profession, trade or business of any kind, is to that
extent void.
Exception /—Saving of agreement not to carry on business of which goodwill
is sold—One who sells the goodwill of a business may agree with the buyer to refrain
from carrying on a similar business, within specified local limits, so long as the buyer,
or any person deriving title to the goodwill from him, carries on a like business therein:
Provided that such limits appear to the Court reasonable, regard being had to the nature
of the business.
28. Agreements in restraint of legal proceedings void—Every agreement, by
which any party thereto is restricted absolutely from enforcing his rights under or in
respect of any contract, by the usual legal proceedings in the ordinary tribunals, or which
limits the time within which he may thui enforce his rights, is void to that extent.
Exception I—Saving of contract to refer to arbitration dispute that may
arise This section shall not render illegal a contract by which two or more persons
agree that any dispute which may arise between them in respect of any subject or class
of subjects shall be referred to arbitration, and that only the amount awarded in such
arbitration shall be recoverable in respect of the dispute so referred.
634 MERCANTILE LAW

Suits barred by such contracts. When such a contract has been made, a suit
may be brought for Its specific performance and if sult,other than for such specific
performance, or for the recovery of the amount so awarded, is brought by one party
to such contract against any other such party in respect of any subject which they
have so agreed to refer, the existence of such contract shall be a bar to the suit.
Exception 2—Saving of contract to refer questions that have already arisen—
Nor shall this section render illegal any contract in writing, by which two or more
persons agree to refer to arbitration any question between them which has already
arisen, or affect any provision of any law in force for the time being as to references to
arbitration.
29. Agreement void for uncertainty—Agreements, the meaning of which is not
certain, or capable of being made certain, are void.
Illustrations

(a) A agrees to sell to B "a hundred tons of oil". There is nothing whatever to show
what kind of oil was intended. The agreement is void for uncertainty.
(b) A agrees to sell to B one hundred tons of oil of a specified description, known as
an article of commerce. There is no uncertainty here to make agreement void.
(c) A, who is a dealer in coconut oil only, agrees to sell to B, "one hundred tons of
oil". The nature of A's trade affords an indication of the meaning of the words.
and A has entered into a contract for the sale of one hundred tons of coconut oil.
(d) A agrees to sell to B "all the grain in my granary at Ramnagar". There is no
uncertainty here to make the agreement void.
(e) A agrees to sell to B "one thousand maunds of rice at a price to be fixed by C".
As the price is capable of being made certain, there is no uncertainty here to make
the agreement void.
(I) A agrees to sell to B ''my white horse for rupees five hundred or rupees one
thousand". There is nothing to show which of the two prices was to be given. The
agreement is void.

30. Agreements by way of wager void—Agreements by way of wager are void;

and no suit shall be brought for recovering anything alleged to be won on any wager, or
entrusted to any person to abide the result of any game or other uncertain event on which
any wager is made.
Exception In favour of certaili prizes for horse racing—This section shall not
be deemed to render unlawful a subscription, or contribution, or agreement to subscribe
or contribute, made or entered into for or toward any plate, prize or sum of money, of
the value or amount of five hundred rupees or upwards, to be awarded to the winner or
winners of any horse-race.
Section 294-A of the Indian Penal Code not affected—Nothing in this section
shall be deemed to legalize any transaction connected with horse-racing, to which the
provisions of Sec.294-A of the Indian Penal Code (XLV of 1560) apply.

CHAPTER III

Of contingent contracts
31. "Contingent contract" def'med—A "contingent contract" is a contract to
do or not to do something, if some event, collateral to such contract does or does not
happen.
 TIffi INDIAN CONTRACT ACT. 1872 635

Illustration

A contracts to pay B Rs. 10.000 if B's house is burnt. This is a contingent contract.
32. Enforcement of contracts contingent on an event happening—Contingent
contracts to do or not to do anything if an uncertain future event happens cannot be
enforced by law unless and until that event has happened.
If the event becomes impossible such contracts become void.

Illustrations

(a) A makes a contract with B to buy B's horse if A survives C. This contract cannot
be enforced in law unless and until C dies in A's life-time.
(b) A makes a contract with B to sell a horse to B at a specified price if C. to whom
the horse has been offered, refuses to buy him. The contract cannot be enforced
by law unless and until C refuses to buy the horse.
(c) A contracts to pay B a sum of money when B marries C. C dies without being
married to B. The contract becomes void.
33. Enforcement of contracts contingent on an event not happening—Contin-
gent contracts to do or not to do anything if an uncertain future event does not happen
can be enforced when the happening of that event becomes impossible, and not before.

Illustration

A agrees to pay B a sum of money if a certain ship does not return. The ship is
sunk. The contract can be enforced when the ship sinks.
34. When event on which contract is contingent to be deemed impossible, if' it
is the future conduct of a living person—If the future event on which a contract is
contingent is the way in which a person will act at an unspecified time, the evcnt shall
be considered to become impossible when such person does anything which renders it
impossible that he should so act within any definite time, or otherwise than under further
contingencies.

Illustrations

A agrees to pay B a sum of money if B marries C.

C marries D. The marriage of B to C must now be considered impossible, although
it is possible that D may die and that C may afterwards marry B.
35. When contracts become void which are contingent on happening of
specified event within fixed time—Contingent contracts to do or not to do anything if
a specified uncertain event happens within a fixed time become void if, at the expiration
of the time fixed, such event has not happened, or if, before the time fixed, such event
becomes impossible.
When contracts may be enforced which are contingent on specified event not
happening within fieiJ time—Contingent contracts to do or not to do anything if a
specified uncertain event does not happen within a fixed time may be enforced by law
when the time fixed has expired and such event has not happened, or, before the time
fixed has exp'red, if it becomes certain that such event will not happen.

536 MERCANTILE LAW

illusuauons

(a) A promises to pay B a sum of money if a certain ship returns within a year. The
contract ma' be enforced if the ship returns within the y ear, and becomes void if
the ship is burnt within the year.
b) A promises to pay B a sum of money if a certain ship does not return within a year.
The contract may be enforced if the ship does not return within the year, or is burnt
within the year.
36. Agreement contingent on Impossible events void—Contingent agreements
to do or not to do anything, if an impossible event happens, are void, whether the
impossibility of the event is known or not to the parties to the agreement at the i line when
it is made.

Illustrations

(a) A agrees to pay B 1,000 rupees if two straight lines should enclose a space. The
agreement is void.
(b) A agrees to pay B 1,000 rupees if B will marry A's daughter C. C was dead at the
time of the agreement. The agreement is void.

CHAPTER IV

OF THE PERFORMANCE OF CONTRACTS

Contracts wtikli must be performed

37. Obligation of parties to contracts—The parties to a contract inu.t either

perform, or offer t perform their respective promises, unless such performance is
dispensed with or excused under the provisions of this Act, or of any other law.
Promises bind the representatives of the promisors in case of the death of such
promisors before performance, unless a contrary intention appears from the contract.

Illustrations

(a) A promises to deliver goods to B on a certain day on payment of Rs. 1.000. A dies
before that day. A's representatives are bound to deliver the goods to B. and B is
bound to pay the Rs. 1.000 to A's representatives.
(b) A promises to paints picture for B by a certain day. at a certain price. A dies before
that day. The contract cannot be enforced either by A's representatives or by B.
38. Effect or refusal to accept offer or performance—Where a promisor has
made an offer of performance to the promisce, and the offer has not been accepted. the
promisor is not responsible for non-performance, nor does he thereby lose his rights
under the contract-
Every such offer must fulfill the following conditions:-
1. it must be unconditional;
2. it must be made at proper time and place, and under such circumstances that the
person to whom it is made may have a reasonable opportunity of ascertaining that
the person by whom it is able and willing there and then to do the whole of what
he is bound by his promise to do;
 THE INDIAN CONTRACT ACE, 1872 637

3. if the offer is an offer to deliver anything to the promisee the promisee must have
a reasonable opportunity of seeing that the thing offered is the thing which the
promisor is bound by his promise to deliver.
An offer to one of several joint promisees has the same legal consequences as an
offer to all of them.

Illustration

A contracts to deliver to B at his warehouse, on the first March, 1873. 100 bales
of Cotton of a particular quality. In order to make an offer of a performance with the
effect stated in this section. A must bring the cotton to B's warehouse, on the appointed
day. under such circumstance; that B may have a reasonable opportunity of satisfying
himself that the thing offered is cotton of the quality contracted for, and that there are
100 hales.
39. Effect of refusal of party to perform promise wholly—When a party to
contract has refused to perform or disabled himself from performing his promise in its
entirety, the promisee may put an end to the contract, unless he has signified by words
or conduct, his acquiescence in its continuance.

Illustrations

(a) A, a s i rger, enters into contract with B, the manager of a theatre, to sing at his
theatre two nights in every week during the next two months, and B engages to pay her
100 rupees for each night's performance. On the si th night A wilfully absents herself
from the theatre. B is at liberty to put an end to the contract.
(b) A, a singer, enters into a contract with B, the manager of a theatre, to sing at
his theatre two nights in every week during the next two months, and B engages ii) pay
her at the rate of 100 rupees for each night. On the sixth night A wilfully absents herself.
With the assent of B, A sings on the seventh night. B has signified his acquiescence in
the continuance of the contract, and cannot now put an end to it but is entitled to
compensation for damage sustained by him through A's failure to sing on the sixth night.

By whom Contracts must be performed

40. Person by whom promise is to he performed—If it appears from the nature
of the ease that it was the intention of the parties to any contract that any promise
contained in it should be performed by the promisor himself, such promise must be
performed by the promisor. In other cases, the promisor or his representative may employ
a competent person to perform it.

Illustrations

(a) A promises to pay B a sum of money. A may perform this promise, either by
personally paying the money to B or by causing it to be paid to B by another; and if A
dies before t}'e time appointed for payment, his representatives must perform the
promise, or employ some proper person to do so.
(b) A promises to paint a picture for B. A must perform this promise personally.
41. Effect of accepting performance from the third person—When apromisee
accepts performance of the promise from a third person, he cannot afterwards enforce it
against the promisor.
635 MLRCA'.11LE LAW

42. Devolution ofjoinl liabilitics—Whcn two cr more persons have made ajoint
promise, then unless a contrary intention appears from the contract, all such persons,
during their joint lives, and after the death of any of them, his representative jointly with
the survivor, or survivors, and after the death of the last survivol, the reVresent.itives of
all jointly, must fulfil the promise.
43. Any one of joint promisors may be compelled to perform—When two or
more persons make a joint promise, the promisee may, in the absencc of express
agreement to the contrary, compel any lone or morel of such joint promisors to perform
the whole of the promise.
Each promisor may compel contribution—Each of two or more joint promisors
may compel every other joint promisor to contribute equally with himself to the
performance of the promise, unless a contrary intention appears from the contract.
Sharing of loss by default in contribution If any one of two or more joint
promisors makes default in such contribution, the remaining Joint promisors must bear
the loss arising from such default in equal shares.
Explanation —Nothing in this section shall prevent a surety from recovering from
his principal, payments made by the surety on behalf of the principal, or entitle the
principal to recover anything from the surety on account of payments made by the
principal.
Illustrations
(a) A, H and C jointly promise to pay D, 3.000 rupees. D may compel either A or B
or C to pay him 3,000 rupees.
(b) A. B and C jointly promise to pay D the sum of 3,000 rupees. C is compelled to
pay the whole. A is insolvent, but his assets are sufficient to pay one-half of his
debts. C is entitled to receive 500 rupees from A's estate, and 1.250 rupees from
B.
(c) A, H and C are under a joint promise to pay D, 3,000 rupees. C is unable to pay
anything, and A is compelled to pay the whole. A is entitled to receive 1,500 rupees
from B.
(d) A, H and C are under a joint promise to pay D. 3,000 rupees. A and B being only
sureties for C. C fails to pay. A and B are compelled to pay the whole sum. They
are entitled to recover it from C.
44. Effect of release of one jaint promisor—Where two or more person h..ve
made a joint promise, a release of one of such joint promisors by the promisee does not
discharge the other joint promisor or joint promisors: neither does it free the joint
promisor so released from responsibility to the other joint promisor or joint promisors.
45. Devolution of joint rights—When a person has made a promise to two or
more persons jointly, then, unless a contrary intention appears from the contract, the
right to claim performance rests, as between him and them, with them during their joint
lives, and after the death of any of them, with the representative of such deceased person
jointly with the survivor or survivors, and after the death of the last survivor, with the
representatives of all jointly.
Uustration
A. in consideration .. .X) rupees lent to him by B and C, promises B and C
jointly to repay them that suin with interest on a day specified. B dies. The right to claim
performance rcI ih H's representative jointly with C dur i ng C's life, and after the
death of C with ,hi rcprcsenLatives of B and C jointly.
 THE INDIAN CONTRACT ACT. 1872 639

Time and place for performance

46. Time for performance or promise where no application Is to be made and

no time Is specified—Where by the contract, a promisor is to perform his promise
without application by the promisee, and no time for performance is specified, the
engagement must be performed within a reasonable time.
Explanaiion—The question "what is a reasonable time" is, in each particular
case, a question of fact.
47. Time and place for performance of promise, where time is specifed and
no application to be made—Where a promise is to be performed on a certain day and
the promisor has undertaken to perform it without application by the promisee, the
promisor may perform it at any time during the usual hours of business on such day and
and at the place at which the promise ought to be performed.

Jllusircwori

A promises to deliver goods at B's warehouse on the first January. On that day A
brings the goods at B's warehouse, but after the usual hour for closing it, and they are
not received. A has not performed his promise.
48. Application for performance on certain day to be at a proper time and
place—Where a promise is to be performed on a certain day, and the promisor has not
undertaken to perform it without application by the promisee, it is the duty of the
promisee to apply for performance at a proper place and within the usual hours of
business.
Explanation--The question 'what is a proper time and place" is, in each par-
ticular case, a question of fact.
49. Place for performance of promise where no application to be made and
no place fixed for performance—When a promise is to be performed without applica-
tion by the promisee, and no place is fixed for the performance of it, it is the duty of the
promisor to apply to the promisee to appoint a reasonable place for the performance 01
the promise, and to perform it at such place.

Illustration

A undertakes to deliver a thousand maunds of jute to B on a fixed day. A must

apply to B to appoint a reasonable place for the purpose of receiving it, and must deliver
it to him at such place.
50. Performance In manner or at time prescribed or sanctioned by
promisee —The performance of any promise may be made in any manner, or at any
time which the promisee prescribes or sanctions.

illustrations
(a) B owes A 2,000 rupees. A desires B to pay the amount to A's account with C,
It banker. B, who also banks with C, orders the amount to be transferred from his
account to A's credit, and this is done by C. Afterwards, and before A knows of the
transfer, C fails. There has been a good payment by B.
(b) A and B are mutually indebted. A and B settle an account by setting off one
item against another, and B pays A the balance found to be due from him upon such
settlement. This amounts to a payment by A and B respectively, of the sums which they
owed to each other.
640 MERCANTILE LAW

(c) A owes B 2.000 rupees. B accepts some of A's goods in deduction of the debt.
The delivery of the goods operates as a part payment.
(d) A desires B. who ..,wes him Rs. 100, to send him a note for Rs.100 by post. The
debt is discharged as soon as B puts into the post a letter Containing the note duly
addressed to A.

Performance of Reciprocal Promises

51. Promisor not hound to perform, unless reciprocal promisee ready and
silling to perform—When a contract consists of reciprocal promises to be simul-
taneously performed. no promisor need perform his promise unless the promisee is
ready and willing to perform his reciprocal promise.
IIIu,'trat,o,ir

(a) A and B contract that A shall deliver goods to B to be paid for by B on delivery.
A need not deliver the goods. unless B is ready and willing to pay for the goods
on delivery.
B need not pay br the goods unless A is ready and willing to deliver them on
payment.
(h) A and B contract that A shall deliver goods to B at a price to he paid by
instalment, the first instalment to he paid on delivery.
A need not deliver, unless B is ready and willing to pay the first instalment on
delivery.
B need not pay the first instalment, unless A is ready and willing to deliver the
goods on payment of the first instalment.
52. Order of performance of reciprocal promises—Where the order in which
reciprocal promises are to be performed is expressly fixed by the contract, they shall be
performed in that order; and, where the order is not expressly fixed by the contract, they
shall be performed in that order which the nature of the transaction requires.

Illustrations

(a) A and B contract that A shall build a house for B at a fixed price. A's promise
to build the house must be performed before B's promise to pay for it.
(h) A and B contract that A shall make over his stock-in-trade to B at a fixed price.
and B promises to give security for the payment of the money. A's promise need not be
performed until the security is given, for the nature of the transaction requires that A
should have security before he delivers up his stock.
53. Liability of party preventing event on which the contract is to take
effect—When a contract contains reciprocal promises, and one party to the contlact
prevents the other from performing his promise, the contract becomes voidable at the
option of the party so prevented, and he is entitled to compensation from the other party
for any loss which he may sustain in consequence of the non-performance of the contract.

Illustration

A and B contract that B shall execute ce'iain work for A for a thousand rupees. B
is ready and willing to execute the work accordingly, but A prevents him from doing so.
 THE INDIAN CONTRACT AcT, 1872 641

The contract is voidable at the option of 8; and if he elects to rescind it, he is entitled to
recover from A compensation for any loss which he has incurred by its non-performance.
54. Effect of default as to that promise which shoild be ft-at performed, in
contract consisting of reciprocal promises--When a contract consists of reciprocal
promises, such that one of them cannot be performed, or that its performance cannot be
claimed till the other has been performed, and the promisor of the promise last mentioned
fails to perform it such promisor cannot claim the performance of the reciprocal promise,
and must make compensation to the other party to the contract for any loss which such
other party may sustain by the non-performance of the contract.

illustration-s

(a) A hires B's ship to take in and convey, from Calcutta to the Mauritius, a cargo
to be provided by A, B receiving a certain freight for its conveyance. A does not provide
any cargo for the ship. A cannot claim the performance of B's promise, and must make
compensation to B for the loss which B sustains by the non- performance of the contract.
(b) A contracts with B to execute certain builder's work for a fixed price, B
supplying the scaffolding and timber necessary for the work. B refuses to furnish any
scaffolding or timber, and the work cannot be executed. A need not execute the work,
and B is bound to make compensation to A for any loss caused to him by the
non-performance of the contract.
(c) A contracts with B to deliver to him, at a specified price, certain merchandise
on board a ship which cannot arrive for a month, and B engages to pay for the
merchandise within a week from the date of the contract. B does not pay within the week.
A's promise to deliver need not be performed. and H must make compensation.
(d) A promises B to sell him one hundred bales of merchandise, to be delivered
next day and B promises A to pay for them within a month. A does not deliver according
to his promise, B's promise to pay need not be performed, and A must make compen-
sation.
55. Effect of failure to perform at fixed time in contract in which time is
essential—When a party to a contract promises to do a certain thing at or before a
specified time, or certain things at or before specified times, and fails to do any such
thing at or before the specified time, the contract, or so much of it as has not been
performed, becomes voidable at the option of the promisee, if the intention of the parties
wa,s that time should be of the essence of the contract.
Effect of such failure when time is not essential—If it was not the intention of
the parties that time should be of the essence of the contract, the contract does not become
voidable by the failure to do such thing at or before the specified time. but the promisee
is entitled to compensation from the promisor for any loss occasioned to him by such
failure.
Effect of acceptance of performance at time other than that agreed upon—
If, in case of contract voidable on account of the promisor' s failure to perform his promise
at the time agreed, the promisee accepts performance of such promise at any time other
than that agreed, the promisee cannot claim compensation for any loss occasioned by
the non-performance of the promise at the time agreed, unless, at the tir ,rie of such
acceptance, he gives notice to the promisor of his intention to do so.
56. Agreement to do impossible act—An agreement to do an ac ,n1x)Ssihlc in
itself is void.
Contract to do actafterwards becoming impossible or unlawful---A contract
to do an act which, after the contract is made, becomes impossible, or by reason of some
event which the promisor could not prevent, unlawful, becomes sold when the act
becomes impossible or unlawful.
642 MERCANTILE LAW

Compensation for loss through non-performance of act known to be impos-

sible or unlaw1u1—Whce one person has promised to do something which he knew,
or, with reasonable diligence, might have known, and which the promisee did not know
to be impossible or unlawful, such promisor must make compensation to such promisee
for any loss which such promisee sustains through the non-performance of the promise.
Illustrations
(a) A agrees with B to discover treasure by magic. The agreement is void.
(b) A and B contract to marry each other. Before the time fixed for the marriage, A
goes mad. The contract becomes void.
(c) A contracts to marry B being already married to C. and being forbidden by the law
to which he is subject to practise polygamy. A must make compensation to B for
the loss caused to her by the non-performance of his promise.
(d) A contracts to take in cargo for B at a foreign pori. A's Government afterwards
declares war against the country in which the port is situated. The contract
becomes void when war is declared.

(e) A contracts to act at a theatre for six months in consideration of a sum paid in
advance by B. On several occasions A is too ill to act. The contract to act on those
OcCaSiOfls becomes void.
57. Reciprocal promise todo things legal, and also other things illegal—Where
persons reciprocally promise, firstly, to do certain things which are legal, and, secondly,
under specified circumstances to do certain other things which are illegal, the first set of
promises is a contract. but the second is a void agreement.

Illustration

A and B agree that A shall sell B a house for 10,000 rupees, but that, if B uses it
as a gambling house, he shall pay A 50,000 rupees for it.
The first set of reciprocal promises, namely, to sell the house and pay 10,000
rupees for it is a contract.
The second set is for an unlawful object, namely that B may use the house as a
gambling house and is a void agreement.
58. Alternative promise, one branch being illegal—In the case of an alternative
promise, one branch of which is legal and the other illegal, the legal branch alone can
be enforced.

Illustration

A and B agree that A shall pay 1.000 rupees, for which B shall afterwards deliver
to A either rice or smuggled opium.
This is a valid contract to deliver rice and a void agreement as to the opium.

Appropriation of Payments

59. Application of payment where debt to be discharged is indicated—Where

a d or owing several distinct debts to one person, makes a payment to him, either with
express intimation, or under circumstances implying that the payment is to be applied
to the discharge of some parlicular debt, the payment, if accepted, must be applied
accordingly.
 INN CONTRACT ACl. 1872 643

I11ustraIio?l5

(a) A owes B, among other debts. 1.000 rupees upon a promissory note which falls
due on the first June. He owes B no other debt of that amount. On the first June A pays
to B 1,000 rupees. The payment is to be applied to the discharge of the promissory note.
(b) A owes to B among other debts, the sum of 567 rupees. B writes to A and
demands payment of this sum. A sends to B 567 rupees. This payment is to be applied
to the discharge of the debt of which H had demanded payment.
60. Application of payment where debt to be discharged is not indicated—
Where the debtor has omitted to intimate and there are no other circumstances indicating
to which debt the payment is to be applied, the creditor may apply it at his discretion to
any lawful debt actually due and payable to him from the debtor, whether its recovery
is or is not barred by the law in force for the time being as to the limitation of suits.
61. Application of payment where neither party appropriates—Where
neither party makes any appropriation the payment shall be applied in discharge of the
debts in order of time, whether they are or are not barred by the law in force for the time
being as to the limitation of suits. If the debts are of equal standing, the payment shall
be applied in discharge of each proportionably.
Contracts which need not be performed
62. Effect of novation, rescission and alteration of contract—if the parties to a
contract agree to substitute a new contract for it or to rescind or alter it, the original
contract need not be performed.

Illusirajions

(a) A owes money to B under a contract. It is agreed between A, B and C that B

shall thenceforth accept C as his debtor, instead of A. The old debt of A to B is at an end,
and a new debt from C to B has been contracted.
(b) A owes B 10,000 rupees. A enters into an arrangement with B, and gives B a
mortgage of his (A's) estate for 5.000 rupees in place of the debt of 10.000 rupees. This
is a new contract and extinguishes the old.
(c) A owes B 1,000 rupees under a contract. B owes C 1.000 rupees- B orders A
to credit C with 1,000 rupees in his books but C does not assent to the arrangement. B
still owes C 1.000 rupees, and no new contract has been entered into.
63. Promisee may dispense with or remit performance of promise—Every
promisee may dispense with or remit, wholly or in part, the performance of the promise
made to him, or may extend the time for such performance, or may accept instead of it
any satisfaction which he thinks fit.
11Iu51rajo,is
(a) A promises to paint a picture for B. B afterwards forbids him to do so. A is no
longer hound to perform the promise.
(b) A owes B 5,000 rupees. A pays to B and B accepts in satisfaction of the whole
debt 2,000 rupees paid at the time and place at which the 5,000 rupees were payable.
The whole debt is discharged.
(c) A owes B 5,000 rupees. C pays to B 1,000 rupees and H accepts them, ii.
satisfaction of his claim on A. This payment is discharge of the whole claim.
(d) A owes B, under a contract, a sum of money, the amount of which has not been
ascertained. A without ascertaining the amount gives to B, and B, in satisfaction thertof,
accepts the sum of 2,000 rupees. This is a discharge of the whole debt, whatever may be
its amount.
644 MERCANTILE LAW

(e) A owes B 2,000 rupees, and is also indebted to other creditors. A makes an
arrangement with his creditors, including B to pay them a [composition] of 50 paise in
the rupee upon their respective demands. Payment to B of 1.000 rupees is a discharge
of B's demand.
64. Consequences of rescission of voidable contract—When a person at whose
option a contract is voidable rescinds it, the other party thereto need not perform any
promise therein contained in which he is promisor. The party rescinding a voidable
contract shall, if he has received any benefit thereunder from another party to such
contract, restore such benefit, so far as may be, to the person from whom it was received.
65. Obligation of person who has receivedadvantage under void agreement
or contract that becomes void—When an agreement is discovered to be void or when
a contract becoiles void, any person who has received any advantage under such
agreement or contract is bound to restore it, or to make compensation for it to the person
from whom he received ii
Illustrations
(a) A pays B 1,000 rupees in consideration of B's promising to marry C, A's
daughter. C is dead at the time of the promise. The agreement is void, but B must repay
• the 1.000 rupees.
(b) A contracts with B to deliver to him 250 maunds of rice before the first of May.
• delivers 130 maunds only before that day, and none after, B retains we 130 maunds
after the first of May. He is bound to pay A for them.
(c) A, a singer, contracts with B, the manager of a theatre, to sing at his theatre for
two nights in every week during the next two months, and B engages to pay her a hundred
rupees for each night's performance. On the sixth night. A wilfully absents herself from
the theatre, and B, in consequence, rescinds the contract. B must pay A for the five nights
on which she had sung.
(d) A contracts to sing for B at a concert for 1,000 rupees, which are paid in
advance. A is too ill to sing. A is not bound to make compensation to B for the loss of
the profits which B would have made if A had been able to sing, but must refund to B
the 1,000 rupees paid in advance.
66. Mode of communicating or revoking rescission of voidable contract—The
rescission of a voidable contract may be communicated or revoked in the same manner,
and subject to the same rules, as apply to the communication or revocation of a proposal.
67. Effect of neglect of promisee to afford promisor reasonable racililies for
performance.—If any promisee neglects or refuses to afford the promisor reasonable
facilities for the performance of his promise, the promisor is excused by such neglect or
refusal as to any non-performance caused thereby.
Illustration
A contracts with B to repair Bs house.
B neglects or refuses to point out to A the places in which his house requires repair.
A is excused for the non-performance of the contract if it is caused by such neglect
or refusal.
CHAPTER V

Of certain relations resembling those created by contract

68. Claim for necessaries supplied to person incapable of contracting or on

his account—If a person, incapable of entering into a contract, or any one whom he is
 TIlE INDIAN COt'flRACF ACT, 1872 645

legally bound to support is supplied by another person with necessaries suited to his
condition in life, the person who has furnished such supplies is entitled to be reimbursed
from the property of such incapable person.

Illustrations

(a) A supplies B, a lunatic, with necessaries suitable to his condition in life. A is

entitled to be reimbursed from B's prnperty
(b) A supplies the wife and children of B, a lunatic, with necessaries suitable to their
condition in life. A is entitled to be reimbursed from B's property.
69. Reimbursement of person paying money due by another in payment of
which he is interested—A person who is interested in the payment of money which
another is bound by law to pay, and who therefore pays it, is entitled to be reimbursed
by the other.
Illustration

B holds land in Bengal, on a lease granted by A. the iamindar, Th revenue

payable by A to the Government being in arrear, his land is advertised for sale by the
Government. Under the revenue law, the consequence of such sale will be the annul-
ment of B's lease. B, to prevent the sale and the consequent annulment of his own lease,
pays to the Government the sum due from A. A is bound to make good to B the amount
so paid.
70. Obligation or person enjoying benefit of non-gratuitous act—Where a
person lawfully does anything for another person, or delivers anything to him, not
intending to do so gratuitously, and such other person enjoys the benefit thereof, the
latter is bound to make compensation to the former in respect of, or to restore, the thing
so done or delivered.

Illustrations

(a) A, a tradesman, leaves goods at B's house by mistake. B treats the goods as his
own. He is bound to pay A for them.
(b) A saves B's property from fire. A is not entitled to compensation from B, if the
circumstances show that he intended to act gratuitously.
71. Responsibility of finder of goods--A person who finds goods belonging to
another and takes them into his custody, is subject to the same responsibility as a bailee.
72. Liability of person to whom money is paid, or thing delivered by mistake
or under coercion—A person to whom money has been paid, or anything delivered by
mistake or under coercion, must repay or return it.

Illustrations

(a) A and B jointly owe 100 rupees to C. A alone pays the amount to C. and B. not
knowing this fact, pays 100 rupees over again to C. C is bour.d to repay the amount to
B.
(b) A railway company refuses to deliver up certain goods to the consignee except
upon the payment of an illegal charge for carriage. The consignee pays the sum charged
in order to obtain the goods. He is entitled to recover so much of the charge as was
illegally excessive.
646 MERCANTILE LAW

CHAPTER Vi

Of the Consequences of Breach of Contract

73. Compensation for loss or damage caused by breach of contract—

When a contract has been broken, the party who suffers by such breach is entitled to
receive, from the party who has broken the contract, compensatiull for any loss or
damage caused to him thereby, which naturally arose in the usual course of things from
such breach, or which the parties knew, when they made the contract, to be likely to
result from the breach of it.
Such compensation is not to be given for any-remote and indirect loss or damage
sustained by reason of the breach.
Compensation for failure to discharge obligation resembling those created by
contract—When an obligation resembling those created by contract has been incurred
and has not been discharg d, any person injured by the failure to discharge it is entitled
to receive the same compensation from the party in default, as if such person had
contracted to discharge it and had broken his contract.
Explanalson—ln estimating the loss or damage arising from a breach of contract,
the means which existed of remedying the inconvenience caused by the non-performance
of the contract must be taken into account-

Illustrations

(a) A contracts to sell an.i deliver 50 maunds saltpctre to B, at a certain price to be

paid on delivery. A breaks his promise. B as entitled to receive from A, by way of
compensation, the sum, if any, by which the contract price falls short of the price for
which B might have obtained 50 maunds of saltpetre of like quality at the time when the
saltpetre ought to have been delivered.
(h) A hires B's ship to go to Bombay, and there takes on board, on the first January
a cargo which A is to provide and to bring it to Calcutta, the freight to be paid when
earned. B's ship does not go to Bombay, but A has opportunities of procuring suitable
conveyance for the cargo upon terms as advantageous as those on which he had
chartered the ship. A avails himself of those opportunities, but is put to trouble and
expense in doing so. A is entitled to receive compensation from B in respect of such
trouble and expense.
(c) A contracts to buy of B, at a stated price. 50 maunds of rice, no time being
fixed for delivery. A afterwards informs B that he will not accept the rice if tendered to
him. B is entitled to receive from A. by way of compensation, the amount, if any, by
which the contract price exceeds that which B can obtain for the rice at the time when
A informs B that he will not accept it.
(d) A contracts to buy B's ship for 60,000 rupees, but breaks his promise. A must
pay to B, by way of compensation, the excess, if any, of the contract price over the price
which B can obtain for the ship at the time of the breach of promise.
(e) A, the owner of a boat, contracts with B to take a cargo of jute to Mirzapur, for
sale at that place, starting on a specified day. The boat, owing to some avoidable cause,
does not start at the time appointed, whereby the arrival of the cargo am Mirzapur is
delayed beyond the time when it would have arrived if the boat had sailed according to
the contrac,. Alter that date and before the arrival of the cargo, the price of jute falls. The
measure of the compensation payable to B by A is the difference between the price
which B could have obtained for the cargo at Mirzapur at the time when it would have
 THE INDIAN CONTRACT ACT, 1872

arrived if the boat had sailed according to the contract, and its market price at the time
when it actually arrived.
(f) A contracts to repair B's house in a certain manner, and receives payment in
advance. A repairs the house, but not according to contract, B is entitled to recover from
A the cost of making the repairs confonn to the contract.
(g) A contracts to let his ship to B for a year, from the first of January, for a certain
price. Freights rise, and on the first of January, the hire obtainable for the ship is higher
than the contract price. A breaks his promise. He must pay to B, by way of compensation,
a sum equal to the difference between the contract price and the price for which B could
hire a similar ship for a year on and from the first of January.
(h) A contracts to supply B with a certain quality of iron at a fixed price, being a
higher price than that for which A could procure and deliver the iron. B wrongfully
refuses to receive the iron. B must pay to A, by way of compensation, the difference
between the contract price of the iron and the sum for which A could have obtained and
delivered it.
(i) A delivers to B, a common carrier, a machine to be conveyed, without delay.
to A's mill, informing B that his mill is stopped for want of the machine. B unreasonably
delays the delivery of the machine, and A in consequence, loses a profitable contract
with the Government. A is entitled to receive from B, by way of compensation, the
average amount of profit which would have been made by the working of the mill
during the time that delivery of it was delayed, but not the loss sustained through the
loss of the Government contract.
(j) A, having contracted with B to supply B with 1,000 tons of iron at 100 rupees
a ton, to be delivered at a stated time, contracts with C for the purchase of 1,000 tons of
iron at 80 rupees a ton, telling C that he does so for the purpose of performing his
contract with B. C fails to perform his contract with A. who cannot procure other iron,
and B, in consequence, rescinds the contract C must pay to A 20,000 rupees, being the
profit which A would have made by the performance of his contract with B.
(k) A contracts with B to make and deliver to B, by a fixed day, for a specified
price a certain piece of machinery. A does not deliver the piece of machinery at the time
specified, and, in consequence of this, B is obliged to procure another at a higher price
than that which he was to have paid to A, and is prevented from performing a contract
which B had made with a third person at the time of his contract, with A (but which had
not been then communicated to A). and is compelled to make compensation for breach
of that contract. A must pay to B, by way of compensation, the difference between the
contract price of the piece of machinery and the sum paid by B for another, but not the
sum paid by B to the third person by way of compensation.
(I) A, a builder, contracts to erect and finish a house by the tirstof January, in order
that B may give possession of it at that time to C, to whom B has contracted to let it. A
is informed of the contract between B and C. A builds the house so badly that, before
the first of January, it falls down and has to be rebuilt by B, who, in consequence, loses
the rent which he was to have received from C. and is obliged to make compensation to
C for the breach of his contract. A must make compensation to B for the cestof rebuilding
the house, for the rent lost, and for the compensation made to C.
(m) A sells certain merchandise to B. warranting it to be of a particular quality,
and B, in reliance upon this warranty, sells it to C with a similar warranty. The goods
prove to be not according to the warranty, and B becomes liable to pay Ca sum of money
by way of compensation. B is entitled to be reimbursed this sum by A.
(n) A contracts to pay a sum of money to B on a day specified. A does not pay the
money on that day; B in consequence of not receiving the money on that day, is unable
to pay his debts. and is totally ruined. A is not liable to make good to B anything except
the principal sum he contracted to pay, together with interest up to the day of payment.
648 MERCANTILE LAW

(o) A contracts to deliver 50 maunds of saltpetre to B on the first of January, at a

certain price. B afterwards, before the first of January, contracts to sell the saltpetre to
C at a price higher than the market price of the first of January. A breaks his promise. In
estimating the compensation payable by A to B. the marked price of the first of January,
and not the profit which would have arisen to B from the sale to C, is to be taken into
account.
(p) A contracts to sell and deliver 500 bales of cotton to B on a fixed day. A knows
nothing of B's mode of conducting his business. A breaks his promise. and B, having
no cotton, is obliged to close his mill. A is not responsible to B for the loss caused to B
by the closing of the mill.
(q) A contracts to sell and deliver to B. on the first of January, certain cloth which
B intends to manufacture into caps of a particular kind, for which there is no demand,
except at that season. The cloth is not delivered till after the appointed time, and too late
to be used that year in making caps. B is entitled to receive from A, by way of
compensation, the difference between the contract price of the cloth and its market price
at the time of delivery, but not the profits which he expected to obtain by making caps,
not the expenses which he has been put to in making preparation for the manufacture.
(r) A, a ship owner, contracts with B to convey him from Calcutta to Sydney in
A's ship, sailing on the first of January. and B pays to A, by way of deposit, one-half of
his passage-money. The ship does not sail on the first of January, and B. after being, in
consequence, detained in Calcutta for some tune, and thereby put to some expense,
proceeds to Sydney innother vessel and, in consequence, arriving too late in Sydney,
loses a sum of money. A1iab1e to repay to B his deposit, with interest, and the expense
to which he is put by his dctenfibn in Calcutta, and the excess, if any, of the passage
money paid for the second ship over that agreed upon for the first, but not the sum of
money which B lost by arriving in Sydney too late.
74. Compensation for breach of contract where penalty stipulated for—
When a contract has been broken, if a sum is named in the contract as the amount to be
paid in case of such breach, or if the contract contains any other stipulation by way of
penalty, the party complaining of the breach is entitled, whether or not actual damage or
loss is proved to have been caused thereby, to receive from the party who has broken
the contract, reasonable compensation not exceeding the amount so named or, as the
case may be, the penalty stipulated for.
Explanation--A stipulation for increased interest from the date of default may be
a stipulation by way of penalty.
Exception—When any person enters into any hail-bond, recognizance or other
instrument of the same nature, or, under the provisions of any law, or under the orders
of the Central Government or of any State Government, gives any bond for the
performance of any public duty or act in which the public are interested, he shall be
liable, upon breach of the condition of any such instrument, to pay the whole sum
mentioned therein.
Explanation---A person who enters into a contract with Government does not
necessarily thereby undertake any public duty, or promise to do an act in which the public
are interested.

Illustrations

(a) A contracts with B to pay B Rs. 1.000 if he fails to pay B Rs. 500 on a given
day. A fails to pay B Rs. 500 on that day. B is entitled to recover from A such
compensation, not exceeding Rs. 1,000, as the Court considers reasonable.
(b) A contracts with B that if A practises as a Surgeon within Calcutta, he will pay
B Rs. 5.000. A practises as a Surgeon in Calcutta. B is entitled to such compensation,
not exceeding Rs. 5,000, as the Court considers reasonable.
 THE INDIAN CONTRACT ACT, 1872 649

(c) A gives a recognizance binding him in a penalty of Rs. 500 to appear in Court
on a certain day. He forfeits his recognizance- He is liable to pay the whole penalty.
(d) A gives B a bond for the repayment of Rs 1.000 with interest at 12 per cent
at the end of six months, with a stipulation that in case of default, interest shall be
payable at the rate of 75 per cent, from the date of default. This is a stipulation by way
of penalty. and B is only entitled to recover from A such compensation as the Court
considers reasonable.
(e) A, who owes money to B. a money-lender, undertakes to repay him by
delivering to him 10 rn..unds of grain on a certain date, and stipulates that in the event
of his not delivering the stipulated amount by the stipulated date, he shall be liable to
deliver 20 maunds. This is a stipulation by way of penalty and B is only entitled to
reasonable compensation in case of breach.
(f) A undertakes to repay B a loan of Rs. 1,000 by five equal monthly instalments
with a stipulation that, in default of payment of any instalment, the whole shall become
due. This stipulation is not by way of penalty, and the contract may be enforced
according to its terms. -
(g) A borrows Rs. 100 from B and gives him a bond for Rs. 200 payable by five
yearly instalments of Rs. 40, with a stipulation that, in default of payment of any
instalment, the whole shall become due. This is a stipulation by way of penalty.
75. Party rightfully rescinding contract entitled to compensation—A person
who rightfully rescinds a contract is entitled to compensation for any damage which he
has sustained through the non-fulfilment of the contract.

Illusirojion

A, a singer, contracts with B, the manager of a theatre, to sing at his theatre for
two nights in every week during the next two months, and B engages to pay her 100
rupees for each night's performance. On the sixth night, A wilfully absents herself from
the theatre, and B, in consequence, rescinds the contract- B is entitled to claim compen-
sation for the damage which he has sustained through the non-fulfilment of the contract.

CHAPTER VII

Sale or Goods

Sees. 76-123 Repealed by the Indian Sale of Goods Act, 1930

(III of 1930), Sec.65

CHAPTER VIII

Of Indemnity and Guarantee

124. "Contract of indemnity" defined—A contract by which one party

promises to save the other from loss caused to him by the conduct of the promisor
himself, or by the conduct of any other person, is called a "contract of indemnity'.

Illustraiion

A contracts to indemnify B against the consequences of any proceedings which C

may take against B in respect of a certain sum of 200 i-upecS. This is a contract of
indemnity.
650 MERCANTILE LAW

125. Rights of indemnity-holder when sued—The promisee in a contract of

indemnity, acting within the scope of his authority, is entitled to recover from the
promisor-
1. all damages which he may be compelled to pay in any such suit in respect of any
matter to which the promise to indemnify applies;
2. all costs which he may be compelled to pay in any such suit if, in bringing or
defending it, he did not contravene the order of the promisor, and acted as it would
have been prudent for him to act in the absence of any contract of indemnity, or if
the promiser authorised him to bring or defend the suit:
3. all sums which he may have paid under the terms of any compromise of any such
suit, if the compromise was not contrary to the orders of the promisor, and was
one which it would have been prudent for the promisee to make in the absence of
any contract of indemnity, or if the promisor authorized him to compromise the
suit.
126. ''Contract of guarantee'', "surety'', "principal debtor" and
"creditor"--A "contract of guarantee", is a contract to perform the promise, or
discharge the liability, of a third person in case of his default. The person who gives the
guarantee is called the "surety", the person in respect of whose default the guarantee is
given is called the "principal debtor", and the person to whom the guarantee is given
is called the "creditor". A guarantee may be either oral or written.
127. Consideration for guarantee—Anything done, or any promise made for
the benefit of the principal debtor may be a sufficient consideration to the surety for
giving the guarantee.
illusiralions

(a) B requests A to sell and deliver to him goods on credit. A agrees to do so.
provided C will guarantee the payment of the goods. C promises to guarantee the
payment in consideration of A's promise to deliver the goods. This is a sufficient
consideration for C's promise.
(b) A sells and delivers goods to B. C afterwards requests A to forbear to sue B
for the debt for a year and promises that if he does so, C will pay for them in default of
payment by B. A agrees to forbear as requested. This is a sufficient consideration for
C's promise.
(c) A sells and delivers goods to B. C afterwards, without consideration, agrees to
pay for them in default of B. The agreement is void.
128. Surety's liability—The liability of the surety is co-extensive with that of the
principal debtor, unless it is otherwise provided by the contract.

Illustration

A guarantees to B the payment of a bill of exchange by C. the acceptor. The bill

is dishonoured by C. A is liable not only for the amount of the bill but also for any
interest and charges which may have become due on it.
129. "Continuing guarantee"—A guarantee which extends to a series of
transactions is called a "continuing guarantee".
 ME INDIAN CONTRACt' ACT, I 8?2 651

/llusiriig,ons

(a) A, in consideration that B will employ C in collecting the rents 6f B's

zainindari, promises B to be responsible, to the amount of 5,000 rupees, for the due
collection and payment by C of those rents. This is a continuing guarantee.
(h) A guarantee payment to B, a tea-dealer, to the amount of £100. for any tea he
may from time to time supply to C. B supplies C with tea to the value of £100. and C
pays B for it. Afterwards B supplies C with tea to the value of £200. C fails to pay. The
guarantee given by A was ,i continuing guarantee, and he is accordingly liable to B to
the extent of £100.
(c) A guarantees payment to B of the price of five sacks of flour to be delivered
by B to C and to be paid for in a month. B delivers five sacks to C. C pays for them.
Afterwards B delivers four sacks to C, which C does not pay for. The guarantee given
by A was not a continuing guarantee, and accordingly he is not liable for the price of the
four sacks.
130. Revocation or continuing guarantee—A continuing guarantee may at any
time be revoked by the surety, as to future transactions, by notice to the creditor.

Illus!raiir,,e,

(a) A, inconsideration of B's discounting, at A's request, bills of exchange for C

guarantees to B, for twelve months, the due payment of all such bills to the extent of
5,000 rupees. B discounts bills for C to the extent of 2,000 rupees. Afterwards at the end
of three months, A revokes the guarantee. This revocation discharges A from all liability
to B for any subsequent discount, But A is liable to B for the 2,000 rupees, on default of
C.
(b) A guarantees to B, to the extent of 10,000 rupees, that C shall pay all the bills
that B shall draw upon him, B draws upon C. C accepts the bill. .A gives notice of
revocation. C dishonours the bill at maturity. A is liable upon his guarantee.
131. Revocation of continuing guarantee by surety's death—The death of the
surety operates, in the absence of any contract to the contrary, as a revocation of a
continuing guarantee, so far as regards future transactions.
132. Liability of two persons primarily liable, not affected by Aimangement
between them that one shall be surety on other's default—Whcre two persons
contract with a third person to undertake a certain liability, and also contract with each
other that one of them shall be liable only on the default of the other, the third person
not being a party to such contract, the liability of each of such two persons to the third
person under the first contract is not affected by the existence of the second contract,
although such third person may have been aware of its existence.

Illustration

A and B make a joint and several promissory note to C. A makes it, in fact as
surety for B, and C knows this at the time when the note is made, The fact that A, to the
knowledge of C, made the note as surety for B, is no answer to a Suit b, C against A
upon the note.
133. Discharge of surety by variance in terms of contract—Any variance,
made without the surety's consent, in the terms of the contract between the principal
debtor and the creditor, discharges the surety as to transactions subsequent to the
variance,
652 MERCANTILE LAW

Illustrations

a) A becomes surety to C for B's conduct as a manager in C's bank. Afterwards,

B and C contract, without A's consent, that B's salary shall be raised, and that he shall
become liable for one-fourth of the losses on overdrafts. B allows a customer to
overdraw, and the bank loses a sum of money. A is discharged from his suretyship by
the variance made without his consent, and is not liable to make good this loss.
(b) A guarantees C against the misconduct of B in an office to which 13 is
appointed by C, and of which the duties are defined by an Act of the Legislature. By a
consequent Act, the nature of the office is materially altered. Afterwards. B misconducts
himself. A is discharged by the change from future liability under his guarantee, though
the misconduct of B is in respect of a duty not affected by the late Act.
(c) C agrees to appoint B as his clerk to sell goods at yearly salary, upon A's
becoming surety to C for B's duly accounting for moneys received by him as such clerk.
Afterwards, without A's knowledge or consent, C and B agree that B should be paid by
a commission on the goods sold by him and not by a fixed salary. A is not liable for
subsequent misconduct of B.
(d) A gives to C a continuing guarantee to the extent of 3,000 rupees for any oil
supplied by C to B on credit. Afterwards B becomes embarrassed, and without the
knowledge of A, B and C contract that C shall continue to supply B with oil for ready
money, and that the payments shall be applied to the then existing debts between B and
C. A is not liable on his guarantee for any goods supplied after this new arrangement.
(e) C contracts to lend B 5,000 rupees on the 1st March. A guarantees repayment.
A pays the 5,000 rupees to B on the 1st January. A is discharged from his liability, as
the contract has been varied inasmuch as C might sue B for the money before the 1st of
March.
134. Discharge or surety by release or discharge of principal debtor—The
surety is discharged by any contract between the creditor and the principal debtor, by
which the principal debtor is released, orhy any act or omission of the creditor, the legal
consequence of which is the discharge of the principal debtor.

Illustrations

(a) A gives a guarantee to C for goods to be supplied by C to B. C supplies goods

to B and afterwards B becomes embarrassed and contracts with his creditors (including
C) to assign to them his property in consideration of their releasing him from their
demands. Here A is released from his debt by the contract with C, and A is discharged
form his suretyship.
(b) A contracts with B to grow a crop of indigo on A's land and to deliver it to B
at a fixed rate, and C guarantees A's performance of this contract. B diverts a stream of
water which is necessary for irrigation of A's land and thereby prevents him from
raising the indigo. C is no longer liable on his guarantee.
(c) A contracts with B for a fixed price to build a house for B within a stipulated
time, B supplying the necessary timber. C guarantees A's performance of the contract.
B omits to supply the timber. C is discharged from his suretyship.
135. Discharge or surety when creditor compounds with, gives time to, or
agrees not to sue, principal debtor—A contract between the creditor and the principal
debtor, by which the creditor makes a composition with, or promises to give time to, or
not to sue, the principal debtor, discharges the surety, unless the surety assents to such
contract.
 THE INDIAN COYI RACT ACT. 1872 653

136. Surety and discharged when agreement made with third person to give
time to principal debtor—Where a contract to give time to the principal debtor is made
by the creditor with a third person, and not with the principal debtor, the surety is not
discharged.
Illustration

C, the holder of an overdue bill of exchange drawn by A as surety for B, and

accepted by B. contracts with M to give time to B. A is not discharged.
137. Creditor's forbearance to sue does not discharge surety—Mere for-
bearance on the part of the creditor to sue the principal debtor or to enforce any other
remedy against him does not, in the absence of any provision in the guarantee to the
contrary, discharge the surety.

Ii1is!ratio,,

B owes to C a debt guaranteed by A. The debt becomes payable. C does not sue
B for a year after the debt has become payable. A is not discharged from his suretyship.
138. Release of one co-surety does not discharge others—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 responsibility to the other sureties.
139. Discharge of surely by creditor's act or omission impairing surety's
eventual remedy—If the creditor does any act which is inconsistent with the right of
the surety, or omits to do any act which his duty to the surety requires him to do, and the
eventual remedy of surety himself against the principal debtor is thereby impaired, the
surety is discharged.

Illustrations

(a) B contracts to build a ship for C for a given sum, to be paid by instalments as
the work reaches certain stages. A becomes surety to C for B's due performance of the
contract. C, without the knowledge of A, prepays to B the last two instalments. A is
discharged by this prepayment.
(b) C lends money to B on the security of ajoint and several promissory note made
in C's favour by B, and by A as surety for B, together with a bill of sale of B's furniture,
which gives power to C to sell the furniture, and apply the proceeds in discharge of the
note. Subsequently. C sells the furniture hut, owing to his misconduct and willful
negligence, only a small price is realized. A is discharged from liability oil the note.
(c) A puts M as apprentice to B, and gives a guarantee to B for M's fidelity. B
promises on his part that he will, at least once a month, see M make up the cash. B omits
to see this done as promised, and M embezzles. A is not liable to B on his guarantee.
140. Rights of surely on payment or performance—Where a guaranteed debt
has become due, or default of the principal debtor to perform a guaranteed duty .has
taken place, the surety, upon payment or performance of all that he is lihble for, is
invested with all the rights which the creditor had against the principal debtor,
141. Surety's right to benefit of creditor's securities—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 of the
existence of such security or not; and, if the creditor loses, or. without the consent of the
surety, pans with such security the surety is discharged to the extent of the value of the
security
654 MF:RCAtITILE LAW

Illustration,;

(a) C advances to B, his tenant. 2.000 rupees on the guarantee of A. C has also a
further security for the 2,00) rupees by a mortgage of B's furniture. C cancels the
mortgage. B becomes insolvent, and C sues A on his guarantee. A is discharged from
liability to the amount of the value of the furniture.
(b) C, a creditor, whose advance to B is secured by a decree, receives also a
guarantee for that advance 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 dis-
charged.
(c) 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. Subcqucntly.
C gives up the further security. A is not discharged.
142. Guarantee obtained b y misrepresentation invalid—Any guarantee
which has been obtained by means of misrepresentation made by the creditor or with his
knowledge and assent, concerning a in part of the transaction, is invalid.
143. Guarantee obtained by concealment inalid—Any guarantee which the
creditor has obtained by means of keeping silence a s to material circumstances is
invalid.
I/lust rat,on.s

(a) A engages B as clerk to collect money for him B fails to account for some of
his receipts. and A in consequence calls upon him to furnish security for his duly
accounting. C gives his guarantee for B's duly accounting. A does not acquaint C with
B's previous conduct. B afterwards makes default. The guarantee is invalid.
(h) A guarantees to C payment for iron to be supplied by hun to B to the, amount
of 20X) tons. B and C have privately agreed that B should pay five nipecs per ton
beyond the market price, such excess to be applied in liquidation of an old debt. This
agreement is concealed from A. A is not liable as a surety.
144. Guarantee on cc-.tract that creditor shall not act on it until co-surety
joins—Where a person gives . uarantee upon a contract that the creditors shall not act
upon it until another person has joined in it as co-surety, the guarantee is not valid if that
another person does not join.
145. Implied promise to indemnify surety—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 principal debtor whatever sum he has rightfully
paid under the guarantee, but no sums which he has paid wrongfully.

Illustrations

(a) B is indebted to C. and. A is surety for the debt. C demands payrnnt from A,
and on his refusal sues hiin for the amount. A defends the suit, having reasonable
grounds for doing so, but is compelled to pay the amount of the debt with costs. He car'
recover from B the amount paid by him for costs, as well as the principal debt.
(b) C lends B a suin of money, and A. at the request of B. accepts bill of exchange
drawn by B upon A to secure the amount. C. the holder of the bill, demands payment of
it from A and, on A's refusal to pay, sues him upon the bill. A, not having reasonable
grounds for so doing, defends the suit, and has to pay the amount of ihc Bill and costs,
 TIlE INDIAN CONTRA(1' ACT. 1872 655

He can recover from B the amount of the bill, but not the sum paid for costs, as there
was no real ground for defending the action.
(c) A guarantees to C. to the extent of 2,000 rupees, payment for rice to he
supplied by C to B. C supplies to B rice to a less amount than 2.000 rupees, but obtains
from A payment of the sum of 2.000 rupees in respect of the rice supplied. A cannot
recover from B more than the price of the rice actually supplied.
146. Co-sureties liable to contribute equally. Where two or more persons are
co-sureties for the same debt or duty, either jointly or severally, and whether under the
same or different contracts, and whether with or without the knowledge of each other,
the co-sureties in the absence of any contract to the contrary. are liable, as between
themselves, to pay each an equal share of the whole debt, or of that part of it which
remains unpaid by the principal dchtr.

111us$ rat eons

(a) A, B and C are sureties to D for the sum of 3,000 rupees tent to E. E makes
default in payment. A. B and C are liable, as between themselves, to pay 1,000 rupees
each.
(b) A, B and C are sureties to D for the sum of 1.000 rupees lent to E, and there is
a contract between A, B and C that A is to be responsible to the extent of one-quarter,
B to the extent of one-quarter and C to the extent of one-half. E makes default in
payment As between the sureties, A is liable to pay 250 rupees, B 250 rupees and C 500
rupees.
147. Liability of co-sureties bound in different sums—Co-sureties who are
bound in different sums are liable to pay equally as far as the limits of their respective
obligations permit.

Illustrations

(a) A, B and C. as sureties for D. enter into three several bonds, each in a different
penalty, namely. A in the penalty of 10.0(X) rupees. B in that of 20.000 rupees. C in that
of 40,00() rupees, conditioned for D's duly accounting to E. D macs default to the
extent of 30.000 rupees. A, B and Care each liable to pay 10,00) rupees.
(b) A. B and C. as sureties for D, enter into three several tx,nds, each in a different
penalty, namely. A in the penalty of 10,000 rupees, B in that of 20.000 rupees, C in that
of 40.000 rupees, conditioned for D's duly accounting to E. D makes default to the
extent of 40.(X)0 rupees. A is liable to pay 10.0(0 rupees. and B and C 15.0(() rupees
each.
(c) A, B and C, as sureties for D, enter into three several bonds, each in a dJferent
penalty, namely. A in the penalty of 10,000 rupees. B in that of 20,(XX) rupees. C in that
of 40.000 rupees, conditioned for D's duly accounting to E. D makes default to the
extent of 70000 rupees. A, B and C have to pay each the full penalty of his bond.

CHAPTER IX

Of Bailment

148. "Bailment'', ''bailor" and ''taiLe" defined—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, he returned or otherwise disposed of according
656 MERCA'.TtIi: LAW

to the directions of the person delivering them. The person delivering the goods is called
the "bailor". The person to whom they are delivered is called the 'hailce''.
Explanation. If a person already in possession of the goods of another contracts to
hold them as a bailee, he thereby becomes the bailee, and the owner becomes the bailor,
of such goods although they may not have been delivered by way of bailment.
149. Delivery to bailee how made—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 any person authonsed to hold theiii on his behalf.
150. Bailor's duty to disclose faults in goods bailed—The bailor is bound to
disclose to the bailee faults in the goods bailed, of which the bailor is aware and which
materially interfere with the use of them or expose the bailee to extraordinary risks; and,
if he does not make such disclosure, he is responsible for damage arising to the bailee
directly from such faults.
If the goods are hailed for hire, the bailor is responsible for such damage whether
he was or was not aware of the existence of such faults in the goods hailed.

Illustrations

(a) A leads a horse, which he knows to be vicious, to B. He does not disclose the fact
that the horse is vicious. The horse runs away. B is thrown and injured. A is
responsible to B for damage sustained.
(b) A hires a carriage of B. The carriage is unsafe, though B is not aware of it. and A
is injured. B is responsible to A for the injury.
151. Care to be taken by bailee. In all eases of bailment the bailee is bound to
take as much care of the goods hailed to him as a man of ordinary prudence would under
similar circumstances take of his own goods of the same bulk, quantity and value as the
goods bailed.
152. Bailee when not liable for loss, etc., of thing bailed—The bailee, in the
absence of any special contract, is not responsible for the loss, destruction or deteriora-
tion of the thing hailed, if he has taken the amount of care of it described in Sec. 151.
153. Termination of bailment by bailee's act inconsistent with conditions. A
contract of bailment is voidable at the option of the bailor if the bailee does any act with
regard to the goods hailed, inconsistent with the conditions of the bailment.

Illustration

A let to B, for hire, a horse for his own riding. B drives the horse in his carriage.
This is, at the option of A. a termination of the bailment.
154. Liability of bailee making unauthorized use of goods haIed—If the
bailee makes any use of the goods bailed, which is not according to the coridit ions of the
bailment, he is liable to make compensation to the bailor for any d.apige arising to the
goods from or during such use of them.

Illustrations

(a) A lends a 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 accidentally falls and is injured.
B is liable to make compensation to A for the injury done to the horse.
 THE INDIAN CONTRACt' ACt', 1872 - 657

(b) A hires a horse in Calcutta from B expressly to march to Benares. A rides with
due care, but marches to Cuttack instead. The horse accidentally falls and is injured. A
is liable to make compensation to B for the injury to the horse.
155. Effect of mixture, with bailor's consent, of his goods with bailee's—If
the bailee, with the consent of the bailor, mixes the goods of the bailor with his own
goods, the bailor and the bailee shall have an interest, in proportion to their respective
shares, in the mixture thus produced
156. Effect or mixture without bailor's consent, when the goods can he
separated—If the bailee, without the consent of the bailor, mixes the goods of the bailor
with his own goods, and the goods can be separated or divided, the property in the goods
remains in the parties respectively; but the bailee is bound to bear the expense of
separation or division, and any damage arising from the mixture.

Illustrations

A hails 100 bales of cotton marked with a particular mark to B. B, without A's
consent, in the 100 hales with other bales of his own, hearing a different mark. A is
entitled to have his 100 hales returned, and B is bound to bear all the expenses incurred
in the separation of the hales and any other incidental damage.
157. Effect of mixture, without hailor's consent, when the goods cannot he
separated—If the bailee, without the consent of the bailor, mixes the goods of the bailor
with his own goods, in such a manner that it is impossible to separate the goods bailed
from the other goods and deliver them back, the bailor is entitled to be compensated by
the bailee for the loss of the goods.

illustration

A bails a barrel of Cape flour worth Rs. 45 to B. B, without A's consent mixes the
flour with country flour of his own, worth only Rs. 25 a barrel. B must compensate A
for the loss of his flour.
158. Repayment by bailor or necessary expenses—Where, by the 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 the
bailment.
159. Restoration of goods lent gratuitously—The lender of a thing for use may
at any time require its return, if the loan was gratuitous even though he lent it for a
specified time or purpose. But if, on the faith of such loan made for a specified time or
purpose, the borrower has acted in such a manner that the return of the thing lent before
the time agreed upon would cause him loss exceeding the benefit derived by him from
the loan, the lender must, if he compels the return, indemnify the borrower for the
amount in which the loss so occasioned exceeds the benefit so derived.
160. Return or goods bailed on expiration of time or accomplishment of
purpose-11 is the duty of the bailee to return, or deliver according to the bailors
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 hailed has been accomplished.
161. Bailee's responsibility when goods are not duly returned—If by the
default of the bailee, the goods are not returned, delivered or tendered at the proper time.
he is responsible to the bailor for any loss, destruction or deterioration of the goods from
that time.
658 MERCANTILE LAW

162. Termination of gratuitous bailment by death—A gratuitous bailment is

terminated by the death either of the bailor or of the bailee.
163. Bailor entitled to increase or profits from goods hailed—In the absence
of any contract to the contrary, the bailee is hound to deliver to the bailor, or according
to his directions, any increase or profit which may have accrued from the hailed.

Illustration

A leaves a cow in the custody of B to be taken care of. The cow has a calf. B is
bound to deliver the calf as well as the cow to A.
164. Bailor's responsibility to bailee—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 hack the goods or to give directions respecting them.
165. Bailment by several joint owners—If several joint owners of goods bail
them, the bailee may deliver them back to, or according to the directions of one Joint
owner without the consent of all, in the absence of any agreement to the contrary.
166. Bailee not responsible on re-delivery to bailor without tit le—If the bailor
has no title to the goods, and the hailee, in good faith, delivert them back to, or
according to the directions of, the bailor, the bailee is not responsible to the owner in
respect of such delivery.
167. Right of third person claiming goods bailed—If a person, other than the
bailor, claims goods bailed, he may apply to the Court to stop the delivery of the goods
to the bailor, and to decide the title to the goods.
168. Right of finder of goods; may sue for specific reward offered—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 ii.
169. When finder of thing commonly on sale may sell it. When a thing which
is commonly the subject of sale is lost, if the owner cannot with reasonable diligence be
found or if he refuses, upon demand, to pay the lawful charges of the finder, the finder
may sell it-
1. When the thing is in danger of perishing or of losing the greater Part of its value,
or
2. When the lawful charges of the finder in respect of the thing found, amount to
two-thirds of its value.
170. Bailee's particular lien—Where the bailee has, in accordance with the
purpose of the bailment, rendered any service involving the exercise of labour or skill
in respect of the goods hailed, he has, in the ahence 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) A delivers a rough diamond to B, a jeweller, to be cut and polished, which is

accordingly done. B is entitled to retain the stone till he is paid for the services he
has rendered.
 TILE INI)1AN CONTRACT ACT, 1872 659

(b) A gives cloth to R. a tailor, to make into a coat. B promises A to deliver the coat
as soon as it is finished, and to give three months' credit for the price. B is not
entitled to retain coat until he is paid.
171. General lien of bankers, factors, wharfingers, attorneys and policy
brokers—Bankers. factois. wharlingers, 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 not 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.

Bailments of Pledges

172. "Pledge", "pawnor" and "pawnee" defined—The bailment of goods as

security for payment of a debt or performance of a promise, is called "pledge". The
bailor is in this case called the 'pawnor". The bailee is called the "pawnee''.
173. Pawnee's right of retainer—The pawnec may retain the goods pledged,
not only for payment of the debt or the performance of the promise, but for the interest
of the debt., and all necessary expenses incurred by hun in respect of the possession or
for the preservation of the goods pledged.
174. Pawnee not to retain for debt or promise other than that for which
goods pledged. Presumption in case of subsequent advances—The pawnee shall not,
in the absence of a contract to that effect, retain the goods pledged for any debt or
promise other than the debt or promise for which they are pledged; but such contract, in
the absence of anything to the contrary, shall be presumed in regard to subsequent
advances made by the pawnee.
175. Pawnee's right as to extraordinary expenses incurred—The pawnee is
entitled to receive from the pawnor extraordinary expenses incurred by him for the
preservation of the goods pledged.
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 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.
If the proceeds of such sale are less than the amount due in respect of the debt or
promise, the pawnor is still liable to pay the balance. Lithe proceeds of the sale are
greater than the amount so due, the pawnee shall pay over the surplus to the pawnor.
177. Defaulting pawnor's right to redeem—If a time is stipulated for the
payment of the debt, or performance of the promise, for which the pledge is made, and
the pawnor makes 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 expenses which have
arisen from his default.
178. Pledge by tr.ercantile agent--Where a mercantile agent is, with the consent
of the owner, in possession of POOd iie documents of title to goods any pledge made
by him, when acting in the ordin y cirse oFbusiness of a mercantile .tgcmi' shall be as
valid as if he were expressly authorm ' y the owner of the goods to make u. same:
provided that the pawnce acts in good faith '7 ,1 's not at the time of the pledge nt.ticed
that pawnor has no authority to pledge.
660 MERCANtiLE LAW

£rplanaiion-4n this section, the expression 'mercantile agent and 'documents of

title' shall have the meaitings assigned to them in the Indian Sale of Good. Act, 1930
(III of 1930).
178-A. Pledges by person in possession under voidable contract—When the
pawnor has obtained possession of the goods pledged by him under a contract voidable
under Sec. 19 or Sec. 19-A, but the contract has not been rescinded at the time of the
pledge, the pawnee acquires a good title to the goods, provided he acts in good faith and
without notice of the pawnor's defect of title.
179. Pledge where pawnor has only a limited interest—Where a person
pledges goods in which he has only a limited interest, the pledge is valid to the extent
of that interest.

Suits by Baileer Bailors against Wrong-doers

180. Suit by bailor or bailee against wrong-doer—If a third person wrongfully

deprives the bailee of the use or possession of the goods bailed, or does them any injury,
the bailee is entitled to use such remedies as the owner might have used in the like case
if no bailment had been made: and either the baior or the bailee may bring a suit against
a third person for such deprivation or injury.
181. Apportionment of reliel or compensation obtained by such suit.—
Whatever is obtained by way of relief or compensation if any such suit shall, as between
the bailor and the hailee, be dealt with according to their respective interests.

CHAPFER X

Agency

Appointment and Authority of Agents

182. "Agent" and "principal" defined—An "agent" is a person employed to

do any act for another or to represent another in dealing with third persons. The person
for whom such act is done, or who is so represented, is called the "principal".
183. Who may employ 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 employ an
agent.
184. Who may he an agent—As between lhe principal and third persons any
person may become an agent, but no person who is not of the age of majority and of
sound mind can become an agent, so as to be responsible to his principal according to
the provisions in that behalf herein contained.
185. Consideration not necessary—No consideration is necessary to create an
agePcy.
186. Agent's authority may be expressed or implied—The authority of an agent
may be expressed or implied.
187. Definitions of express and implied authority—An authority is said to be
express when it is given by words spoken or written. An authority is said to be implied
when it is to be inferred from the circumstances of the case; and things spoken or written,
or the ordinary course of dealing may be accounted circumstances of the case.
 THE INDIAN CONTRACT ACF, 1872

Illustration

A owns a shop in Scranpur, living himself in Calcutta, and visiting the shop
occasionally. The shop is managed by B, and he is in the habit of ordering goods from
C in the name of A for the purposes of the shop, and of paying for them out of A's funds
with A's knowledge. B has an implied authority from A to order goods from C in the
name of A for the purposes of the shop.
188. Extent of agent's authority—An agent having an authority to do an act has
authority to do every lawful thing which is necessary in order to do such act.
An agent having an authority to carry on a business has authority to do every lawful
thing necessary for the purpose, or usually done in the course of conducting such
business.

Illustrations

(a) A is employed by B, residing in London, to recover at Bombay a debt due to B. A

may adopt any legal process necessary for the purpose of recovering the debt and
may give a valid discharge for the same.
(b) A constitutes B his agent to carry on his b'jsiness of shipbuilder. B may purchase
timber and other materials, and hire workmen, for the purposes of carrying on the
business.
189. Agent's authority in an emergency—An agent has authority, in an
emergency, to do all such acts for the purpose of protecting his principal from loss as
would be done by a person of ordinary prudence in his own ease, under similar
Circumstances.

Illustrations

(a) An agent for sale may have goods repaired if it be necessary.

(b) A consigns provisions to B at Calcutta, with directions to send them immediately
to C at Cuttack. B may sell the provisions at Calcutta, if they will not bear journey
to Cuttack without spoiling.

Sub-Agents
190. When agent cannot delegate—An agent cannot lawfully employ another
to perfonn acts which he has expressly or impliedly undertaken to perform personally,
unless by the ordinary custom of trade a sub-agent may, or from the nature of the
agency, a sub-agent must, be employed.
191. "Sub-agent" defined—A "sub-agent" is a person employed by, and
acting under the control of, the original agent in the business of the agency.
192. Representation of principal by sub-agent properly appointed—Where a
sub-agent is properly appointed the principal is, so far as regards third persons, repre-
sented by the sub-agent and is bound by and responsible for his acts as if he were an
agent originally appointed by the principal.
Agent's responsibility forsub-agents---The agent is responsible to the principal
for the acts of the sub-agent.
Sub-Agent's responsibility—The sub-agent is responsible for his acts to the
agent, but not to the principal, except in case of fraud or wilful wrong.
662 MERCAN11LE LAW

193. Agent's responsibility for sub-agent appointed without authority—

Where an agent, without having authority to do so, has appointed a person to act as a
sub-agent, the agent stands towards such person in the relation of a principal to an agent,
and is responsible for his acts both to the principal and to third persons, the principal is
not represented by or responsible for the acts of the person so employed, nor is that
person responsible to the principal.
194. Relation between principal and person duly appointed by Agent to act
in business of agency—Where an agent, holding an express or implied auihoiity to
name another person to act for the principal in the business of the agency, has named
another person accordingly, such person is not a sub-agent but an agent of the principal
for such part of the business of the agency as is entrusted to him.

Illustrations

(a) A directs B, his solicitor, to sell his estate by auction, and to employ an auctioneer
for the purpose. B names C, an auctioneer, to conduct the sale. C is not a sub-agent,
but is A's agent for the conduct of the sale.
(h) A authorises B. a merchant in Calcutta, to recover the money due to A from C &
Co. A instructs D, a solicitor, to take proceedings against C & Co.. for the recovery
of the money. I) is not a sub-agent but is solicitor for A.
195. Agent's duty in naming such person—In selecting such agent for his
principal, an agent is bound to exercise the same amount of discretion as a man of
ordinary prudence would exercise in his own case; and if he does this he is not
responsible to the principal for the acts or negligence of the agent so selected.

Illustrations

(a) A instructs B, a merchant, to buy a ship for him. B employs a ship surveyor of
good reputation to choose a ship for A. The surveyor makes the choice negligently and
the ship turns out to be unseaworthy and is lost. B is not, but the surveyor is responsible
to A.
(h) A consigns goods to B, a merchant, for sale. B in due course, employs an
auctioneer in good credit to sell the goods of A, and allows the auctioneer to receive the
proceeds of the sale. The auctioneer afterwards becomes insolvent without having
accounted for the proceeds. B is responsible to A for the proceeds.

Ratification

196. Right of person as to acts done for him without his authority. Effect of
rat ifleation—Where acts are done by one person on behalf of another, but without his
knowledge or authority, he may elect to ratify or to disown such acts. If lie ratifies them,
the same effects will follow as if they had been performed by his authority.
197. Ratification maybe expressed or implied—Ratification may be expressed
or may be implied in the conduct of the person on whose behalf the acts are done.

Illustrations

(a) A, without authority, buys goods for B—Afterwards B sells them to C on his
own account; B's conduct implies a ratification of the purchase made for him by
A.
 THE It'4DIAN CONTRACT Ad, 1872 663

(b) A, without B's authority, lends B's money to C. Aftcrwarcic B accepts interest on
the money from C. B's conduct implies a ratification of the loan.
19g . Knowledge requisite for valid ratification—No valid ratification can be
made by a person, whose knowledge of the facts of the case is materially defective,
199. Effect of ratifying unauthorized act forming part of a transaction—A
person ratifying any unauthorized act done on his behalf ratifies the whole of the
transaction of which such act formed a part.
200. Ratification of unauthorized act cannot injure third person—An act
done by one person on behalf of another, without such other person's authority which,
if done with authority, would have the effect of subjecting a third person to damages, or
of terminating any right or interest of a third person, cannot, by ratification, be made to
have such effect.

lb slrdU,on.c

(a) A, not being authorized thereto by B, demands on behalf of B, the delivery of a

chattel, the property of B, from C, who is in possession of it. This demand cannot
be ratified by B, so is to make C liable for damages for his refusal to deliver.
(b) A holds a lease from B, terminable on the three months' notice. C, an unauthorized
person, gives notice of termination to A. The notice cannot be ratified by B, so as
to be binding on A.

Revocation of authority

201. Termination of agency—An aency is terminated by the principal revok-

ing his authority; or by the agent renouncing the business of the agency; or by the
business of the agency being completed; or by either the principal or agent dying or
becoming of unsound mind: or by the principal being adjudicated an insolvent under the
provisions of any Act for the time in force for the relief of insolvent debtors.
202. Termination of agency where agent has an interest in subject-matter-
Where the agent has himself an interest in the property which forms the subject matter
of the agency cannot, in the absence of an express contract, be terminated to the
prejudice of such interest.

lbusiraisons

(a) A gives authority to B to sell A's land, and to pay himself, out of the proceeds, the
debts due to him from A. A cannot revoke this authority, nor can it be terminated
by his insanity or death.
(b) A consigns 1.000 bales of cotton to B, who has made advances to him on such
cotton, and desires B to sell the cotton, and to repay himself out of the price, the
amount of his own advances. A cannot revoke this authority, not is it terminated
by his insanity or death.
203. When principal may revoke agent's authority—The principal may, save
as is otherwise provided by the last preceding section, revoke the authority given to his
agent at any time before the authority has been exercised so as to hind the principal.
204. Revoca(ioii where authority has been partly exercised—The principal
cannot revoke the authority given to his agent after the authority has been partly
exercised sofas as regards such acts and obligations as arise from acts already done in
the agency.
664 MERCANTILE LAW

Illustrations

(a) A authorises B to buy 1,000 hales of cotton on account of A, and to pay for it
out of A's money remaining in B's hands. B buys 1,000 hales of cotton in his own name,
so as to make himself personally liable for the price. A cannot revoke B's authority so
far as regards payment for the cotton.
(b) A authorises B to buy 1,000 bales of cotton on account of A, and to pay for it
out of A's money remaining in B's hands. B buys 1,000 bales of cotton in A's name and
so as not to render himself personally liable for the price. A cannot revoke B's authority
to pay for the cotton.
205. Compensation for revocation by principal, or renunciation by agent—
Where there is an express or implied contract that the agency should be continued for
any period of time, the principal must make compensation to the agent, or the agent to
the principal as the case may be, for any previous revocation or renunciation of the
agency ithout sufficient cause.
206. Notice of revocation or renunciation—Reasonable notice must be given
of such revocation or renunciation, otherwise the damage thereby resulting to the
principal or the agent, as the case may be, must be made good to the one by the other.
207. Revocation and renunciation may be expressed or implied—Revocation
and renunciation may be expressed or may be implied in the conduct of the principal or
agent respectively.

Illustration

A empowers B to let A's house. Afterwards A lets it himself. This is an implied

revocation of B's authority.
208. When termination of agent's authority takes effect as to agent, and as
to third persons—The termination of the authority of an agent does not. so far as regards
the agent, take effect before it becomes known to him, or so far as regards third persons,
before it becomes known to them.

Illustrations

(a) A directs B to sell goods for him, and agrees to give B five per cent
commission on the price fetched by the goods. A afterwards, by letter, revokes B's
authority. B, after the letter is sent, but before he receives it, sells the goods for 100
rupees. The sale is binding on A, and B is entitled to five rupees as his commission.
(b) A, at Madras, by letter directs B to sell for him some cotton lying in a
warehouse in Bombay, and afterwards, by letter, revokes his authority to sell, and
directs B to send the cotton to Madras. B, after receiving the second letter, enters into a
contract with C, who knows of the first letter, but not of the second, for the sale to him
of the cotton. C pays B the money, with which B absconds. C's payment is good as
against A.
(c) A directs B, his agent, to pay certain money to C. A dies, and D takes ot
probate to his will. B, after A's death, but before hearing of it, pays the money to C. The
payment is good as against D. the executor.
209. Agent's duty on termination of agency by principal's death or in-
sanity—When an agency is terminated by the principal dying or becoming of unsound
 THE INDIAN CONTRAC1' A(1, 1972 665

mind, the agent is bound to take, on behalf of the representatives of his late principal, all
reasonable steps for the protection and preservation of the interests entrusted to him.
210. Termination of sub-agent's authority—The termination of the authority
of an agent causes the termination (subject to the rules herein contained regarding the
termination of an agent's authority) of the authority of all sub-agents appointed by him.

Agent's Duty In Principal

211. Agent's duly in conducting principal's business—An agent is bound to
conduct the business of his principal according to the directions given by the principal.
or in the absence of any such directions, according to the custom which prevails in doilb
business of the same kind at the place where the agent conduct such business. When ic
agent acts otherwise, if any loss be sustained, he must make it good to his principal i rid,
if any profit accrues, he must account for it.

Illustrations

(a) A, an agent engaged in carrying on for B a business, in which it is the custom to

invest from time to time, at interest, the moneys which may be in hand, omits to
make such investment. A must make good to B the interest usually obtained by
such investment.
(b) B, a broker, in whose business it is not the custom to sell on credit, sells goods of
A on credit to C, whose credit at the time was very high. C, before payment,
becomes insolvent. B must make good the loss to A.
212. Skill and diligence required from agent—An agent is bound to conduct
the business of the agency with as much skill as is generally possessed by persons
engaged in similar business, unless the principal has notice of his want of skill. The
agent is always bound to act with reasonable diligence, and to use such skill as he
possesses; and to make compensation to his principal in respect of the direct consequen-
ces of his own neglect; want of skill or misconduct, but not in respect of loss or damage
which are indirectly or remotely caused by such neglect, want of skill or misconduct.

Illustration

(a) A, a merchant in Calcutta, has an agent B, in London to whom a sum of money

is paid on A's account, with orders to remit. B retains the money for a considerable time.
A, in consequence of not receiving the money, becomes insolvent. B is liable for the
money and interest from the day on which it ought to have been paid, according to the
usual rate, and for any further direct loss as, e.g.. by variation of rate of exchange—but
not further.
(b) A, an agent for the sale of goods, having authority to sell on credit, sells to B
on credit, without making the proper and usual enquiries as to the solvency of B. B. at
the time of such sale, is insolvent. A must make compensation to his principal in respect
of any loss thereby sustained.
(c) A, an insurance broker, employed by B to effect an insurance on a ship, omits
to see that the usual clauses are inserted in the policy. The ship is afterwards lost. In
consequence of the omission of the clauses nothing can be recovered from the under-
writers. B is bound to make good the loss to A.
(d) A, a merchant in England, directs B. his agent at Bombay, who accepts the
agency, to send him 100 bales of cotton by a certain ship. B, having it in his power to
send the cotton, omits to do so. The ship arrives safely in England. Soon after arrival the
666 MERCANTILE LAW

price of cotton rises. B is bound to make good to A the profit which he might have made
by the 100 bales of cotton at the time the ship arrived; but not any profit he might have
made by the subsequent rise.
213. Agent's accounts—An agent is bound to render proper accounts to his
principal on demand.
214. Agent's duty to communicate with principal—It is the duty of an agent.
in case ofdifficulty, to use all reasonable diligence in cuilimunicating with his principal,
and in seeking to obtain his instructions.
215. Right of principal when agent deals, on his own account in business of
agency without principal's consent—If an agent deals on his own account in the
business of the agency, without first obtaining the consent of his principal and acquaint-
ing him with all material circumstances which have come to his own knowledge on the
subject, the principal may repudiate the transaction, if the case shows either that any
material fact has been dishonestly concealed from him by the agent or that the dealings
of the agent have been disadvantageous to him.

Illustrations

(a) A directs B to sell A's estate. B buys the estate for himself in the name of C.
A, on discovering that B has bought the estate for himself, may repudiate the sale, if he
can show that B has dishonestly concealed any material fact, or that the sale has been
disadvantageous to him.
(h) A directs B to sell A's estate. B, on looking over the estate before selling it,
finds a mine on the estate which is unknown to A. B informs A that he wishes to buy
the estate for himself, but conceals the discovery of the mine. A allows B to buy, in
ignorance of the existence of the mine. A. on discovering that B knew of the mine at the
time he bought the estate, may either repudiate or adopt the sale at his option.
Note:—The Law as to the principal's right of repudiation under Sec. 215 can be
summed up thus:—'Have been disadvantageous' means 'disadvantageous in fact'. 102
IC 366. The burden of proving that the transaction is not disadvantageous to the principal
is on the agent. 110 IC 6.
216. Principal's right to benefit gained by agent dealing on his own account
in business of agency—If an agent, without the knowledge of his principal, deals in the
business of the agency on his own account instead of on account of his principal, the
principal is entitled to claim from the agent any benefit which may have resulted to him
from the transaction.

Illustration

A directs B, his agent, to buy a certain house for him. B tells A it cannot be bought
and buys the house for himself. A may, on discovering that B has bought the house,
compel him to sell it to A at the price he gave for it.
217. Agent's right of retainer out of sums received on principal's account.
An agent may retain, out of any sums received on account of the principal in the
business of the agency, all moneys due to himself in respect of advances made or
expenses properly incurred by him in conducting such business and also such remunera-
tion as may be payable to him for acting as agent.
 TItE INDIAN CONTRACr ACT, 1872 667

219. Agent's duty to pay sums received for principat—Suhject to such

deductions, the agent is bound to pay to his principal all sums received on his account.
219. When agent's remuneration becomes due—In the absence of any special
contract, payment for the performance of any act is not due to the agent until the
completion of such Act, but an agent may detain moneys received by him on account of
goods sold, although the whole of the goods consigned to him for sale may have not
been sold, or although the sale may not be actually complete.
220. Agent not entitled to remuneration for business misconducted—An
agent who is guilty of misconduct in the business of the agency is not entitled to any
remuneration in respect of that part of the business which has been misconducted.

Illustrations

(a) A employs B to recover 1,00.000 rup,es from C, and to lay it out on good
security. B recovers the 1,00.000 rupees and lays out 90,000 rupees on good security,
but lays out 10,000 rupees on security which he ought to have known lobe bad, whereby
A loses 2.000 rupees. B is entitled to remuneration for recovering the 1,00,000 rupees
and for investing the 90,000 rupees. He is not entitled to any remuneration for investing
the 10.()00 rupees and he must make good the 2.000 rupees to A.
(b) A employs B to recover 1,000 rupees from C. Through B's misconduct the
money is not recovered. B is entitled to no remuneration for his services, and must make
good the loss.
221. Agent's lien on principal's property—In the absence of any contract to the
contrary, agent in entitled to retain goods, papers and other properly, whether movable
or immovable, of the priacipal received by him, until the amount due to himself for
commission, disbursements and services in respect of the same has been paid or
accounted for to him.

Principal's Duly to Agent

222. Agent to be indemnified against consequences of lawful acts—The

employer of an agent is bound to indemnify him against the consequences of all lawful
acts done by such agent in exercise of authority conferred upon him.

11114 stral,on,s

(a) B. at Singapore. under instructions from A of'Calcutta, contracts with C to

deliver certain goods to him. A does not send the goods to B, and C sues B for breach
of contract. B informs A of the suit, and A authorises him to defend the suit. B defends
the suit, and is compelled to pay damages and costs, and incurs expenses. A is liable to
B for such damages, costs and expenses.
(b) B, a broker at Calcutta, by the orders of A, a merchant there, contracts with C
for the purchase of 10 casks of oil for A. Afterwards A refuses to receive the oil, and B
sues C. B informs A, who repudiates the contract altogether. B defends, but unsuccess-
fully, and has to pay damages and costs and incurs expenses. A is liable to B for such
damages, costs and expenses.
223. Agent to be indemnified against consequence of acts done in good
faith—Where one person employs another to do an act, and the agent does the act in
good faith, the employer is liable to indemnify the agent against the consequences of
that act, though it causes an injury to the rights of third persons.
668 MERCANTILE LAW

Illustrations

(a) A. a decree-holder and entitled to execution of B's goods, requires the officer
of the Court to seize certain goods, representing them to be the goods of B. The officer
seizes the goods, and is sued by C, the true owner of the goods. .A is liable to indemnify
the officer for the sum which he is compelled to pay to C, in consequence of obeying
A's directions.
(h) B, at the request of A, sells goods in the possession of A, but which A had no
right to dispose of. B does not know this, and hands over the proceeds of the sale to A.
Afterwards C. the ture owner of the goods, sues B and recovers the value of the goods
and costs. A is liable to indemnify B for what he has been compelled to pay to C and for
B's own expenses.
224. Non-liability of employer of agent to do a criminal act—Where one
person employs another to do an act which is criutmal, the employer is not liable to the
agent, either upon an express or an implied promise, to indemnify him against the
consequences of that act.
Illustrations

(a) A employs B to beat C, and agrees to indemnify him against all consequences
of the act. B thereupon beats C, and has to pay damages to C for so doing. A is not liable
to indemnify B for those damages.
(h) B. the proprietor of a newspaper, publishes, at A's request, a libel (defamation
in writing) upon C in the paper, and A agrees to indemnify B against the consequences
of the publication, and all costs and damages of any action in respect thereof. B is sued
by C and has to pay damages and also incurs expenses. A is not liable to B upon the
indemnity.
225. Compensation to agent for injury caused by principal's neglect—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.
Illusiraiion..s

A employs B as a bricklayer in building a house, and puts up the scaffolding

himself. The scaffolding is unskilfully put up, and B is in consequence hurt. A must
make compensation to H.

Effect of agency on contract with third persons

226. Enforcement and consequences of Agent's contract—Contract entered

into through an agent, and obligations arising from acts done by an agent, may be
enforced in the same manner and will have the same legal consequences, as if the
contracts had been entered into and the acts done by the principal in person.

Illustrations

(a) A buys goods from B, knowing that he is an agent for their sale, but not knowing
who is the principal. B's principal is the person entitled to claim from A the price
of the goods, and A cannot, in a suit by the principal, set off against that claim a
debt due to himself from B.
 THE INDIAN CONTRACT ACT. 1972 669

(b) A, being B's agent with authority to receive money on his behalf, receives from
C a sum of money due to B. C is discharged of his obligation to pay the sum in
question to B.
227. Principal bow far hound, when agent exceeds authority—When an agent
does more than he is authorized to do, and when the part of what he does, which is
within his authority, can be separated from the part which is beyond his authority, so
much only of what he does as is within his authority, is binding as between him and his
principal.

Illustration

A, being owner of a ship and cargo, authorises B to procure an insurance for 4,000
rupees on the ship. B procures a policy of 4,0(X) rupees on the ship, and another for the
like sum on the cargo. A is hound to pay the premium for the policy on the ship, but not
the premium for the policy on the cargo.
228. Principal not bound when excess of agent's authority is not separable—
Where an agent does more than he is authorised to do, and what he does beyond the
scope of his authority cannot be separated from what is within it, the principal is not
bound to recognise the transaction.

Illustration

A authorises B to buy 500 sheep for him. B buys 500 sheep and 200 lambs for one
sum of 6,000 rupees. A may repudiate the whole transaction.
229. Consequences of notice given to agent—Any notice given to or informa
tion obtained by the agent, provided it be given or obtained in the course of the business
transacted by him for the principal, shall as between the principal and third parties, have
the same legal consequences as if it had been given to or obtained by the principal.

Illustrations

(a) A is employed by B to buy from C certain goods of which C is the apparent

owner and buys them accordingly. In the course of the treaty for the sale. A learns that
the goods really belonged to D. but B is ignorant of that fact. B is not entitled to set off
a debt owing to him from C against the price of the goods.
(h) A is employed by B to buy from C goods of which C is the apparent owner. A
was, before he was so employed, a servant of C, and then learnt that the goods really
belonged to D. but B is ignorant of that fact. In spite of the knowledge of his agent. B
may set off against the price of the goods a debt owing to him from C.
230. Agent cannot personally enforce, nor be bound by, contracts on behalf
of principal—In the absence of any contract to that effect, an agent cannot personally
enforce contracts entered into by him on behalf-of his principal, nor is he personally
bound by them.
Presumption of contract to contrary—Such a contract shall be presumed to
exist in the following eases:--
1. where the contract is made by an agent for the sale or purchase of goods for a
merchant resident abroad;
2. where the agent does not disclose the name of his principal;
3. where the principal, though disclosed, cannot be sued.
670 MERCANTILE LAW

231. Rights of parties to a contract made by agent not disclosed—If an agent

makes a contract with a person who neither knows, not has reason to suspect, that he is
an agent, his principal may require the performance of the contract: but the other
contracting party has, as against the principal, the same rights as he would have had as
against the agent if the agent had been principal.
If the principal discloses himself before the contract is completed, the other
contracting party may refuse to fulfil the contract, if he can show that if he had known
who was the principal in the contract, or if he had known that the agent was not a
principal, he would not have entered into the contract.
232. Performance of contract with agent supposed to be principal ­--Where
one man makes a contract with another, neither knowing nor having reasonable ground
to suspect that the other is all the principal, if he requires the performance of the
contract, can only obtain such performance subject to the rights and obligations subsist-
ing between the agent and the other party to the contract.

Illusi ration

A, who owes 5(X) rupees to B, sells l.(XX) rupees' worth of rice to B. A is acting
as agent for C in the transaction, but B has no knowledge nor reasonable ground of
suspicion that such is the case. C cannt compel B to take the rice without allowing him
to et off A's debt.
233. Right of person dealing with agent personally liable—In cases where the
agent is personally liable, a person dealing with him may hold either him or his
principal, or both of them liable.

Illustration

A enters into a contract with B to sell him 1(X) bates of cotton, and afterwards
discovers that B was acting as agent for C. A may sue either B or C. or both, for the price
of the cotton.
234. Consequence of inducing agent or principal to act on belief that
principal or agent will be held exclusively liable—When a person who has made a
contract with an agent induces the agent to act upon the belief that the principal only will
be held liable or induces the principal to act upon the belief that the agent only will be
held liable, he cannot afterwards, hold liable the agent or principal respectively.
235. Liability of pretended agent—A person untruly representing himself to be
the authorised agent of another, and thereby inducing a third person to deal with him as
such agent, is liable, if his alleged employer does not ratify his acts, to make compensa-
tion to the other in respect of any loss or damages which he has incurred by so dealing.
236. Person falsely contracting as agent not entitled to performance—A
person with whom a contract has been entered in the character of agent is not entitled40
require the performance of it if he was in reality acting, not as agent, but oil his own
account.
237. Liability of principal inducing belief that agent's unauthorised acts
were authorised—When an agent has, without authority, done acLs or incurred obliga-
tions to a third person on behalf of his principal, the principal is bound by such acts or
obligations if he has by his words or conduct induced such third persons to believe that
such acts and obligations were within the scope of the agent's authority.
 THE INDIAN CONTRACT ACT. 1872 671

Illustrations

(a) A consigns goods to B for sale, and gives him instruction, not to sell under a fixed
price. C, being ignorant of B's instructions, enters into a contract with B to buy
the goods at a price lower than the reserved price. A is bound by the contract.
(b) A entrusts B with negotiable instruments endorsed in blank. B sells them to C in
violation of private orders from A. The sale is good.
239. Effect, on agreement, of misrepresentation or fraud b y agent—Mis-
representations made, or frauds committed, by agents acting in the course of their
business for their principals, have the same effect on agreements made by such agents
as if such misrepresentations or frauds had been made or conimnilted by the principals;
but misrepresentations made, or frauds committed, by agents in matters which do not
fall within their authority, do not affect their principals.

7Ixi rats onv

(a) A being B's agent for the sale of goods, induces C to buy them by a mnisrepresen-
tation, which he was not authorised by B to make. The contract is voidable, as
between B and C. at the option of C.
(b) A. the captain of B's ship, signs bills of lading without having received on board
the goods mentioned therein. The hills of lading are void as between B and the
pretended consignor.

CHAPTER XL

Of Partnership

Sections 239-266 Repealed by the Indian Partnership Act, 1932 (IX of 1932). Sec.
73 and Schedule II,

SCHEDULE

Enactments Repealed

[Repealed by Sec. 3 and Schedule 11 of the Repeating and Amending Act. 1914
(X of 1914)]
 Appendix II

The Indian Partnership

Act, 1932
(Ac( No. IX of 1932)

Whereas it is expedient to define and amend the law relating to partnership: It is

hereby enacted as follows:—

CHAPTER I

Preliminary

1. Short title, extent and commencement. (I) This Act may be called the Indian
Partnership Act, 1932.
(2) It extends to the whole of India.
(3) It shall come into force on the 1st day of October, 1932, except Sec. 69, which
shall come into force on the 1st day of October. 1933.
2. Definitions. In this Act, unless there is anything repugnant in the subject or
context,—
(a) an "act of firm" means any act or omission by all the partners, or by any partner
or agent of the firm which gives rise to a right enforceable by or against the firm;
(b) ''business" includes every trade, occupation and profession
(c) "prescribed" means prescribed by rules made under this Act;
(d) ''third party" used in relation to a firm or to a partner therein means any person
who is not a partner in the firm; and
(e) expressions used but not defined in this Act and defined in the Indian Contract
Act, 1872 (IX of 1872), shall have the meanings assigned to them in that Act.
3. Application of provisions of Act IX of 1872—The unrepcalcd provisions of
the Indian Contract Act, 1872 (IX of 1872), save in so far as they are inconsistent with
the express provisions of this Act, shall continue to apply to Firms.

CHAPTER 11

The Nature of Partnership

4. Definition of "partnership", "partner", "firm", and "firm name".

"Partnership'' is the relation between persons who have agreed to share the
profits of a business carried on by all or any of them acting for all,

672
 THE INDIAN PARTNERSHIP ACT, 1932 673

Persons who have entered into partnership with one another are called individual-
ly "partners" and collectively "a firm", and the name under which their business is
carried on is called the firm name''.
5. Partnership not created by status—The relation of partnership arises from
contract and not from status, and, in particular, the members of a Hindu undivided
family carrying on a family business as such, or a Burmese Buddhist husband and wife
carrying on business as such are not partners in such business.
6. Mode of determining existence of partnership—In determining whether a
group of persons is or is not a finn, or whether a person is or is not a partner in a firm,
regard shall be had to the real relation between the parties, as shown by all relevant facts
taken together.
Explanation /—The sharing of profits or of gross returns arising from property b
persons holding ajoint or coinirron interest in that property does not of itself make such
persons partners.
£planation 2—The receipt by a person of a share of the profits of a business, or
of a payment contingent UOfl the earning of profits or varying with the profits earned
by a business, does not of itself make hun a partner with the persons carrying on the
business; and, in particular, the receipt of such share or payment—
(a) by a lender of money to persons engaged or about to engage in any business,
(h) by a servant or agent as remuneration.
(c) by the widow or child of a deceased partner. as annuity, or
(d) by a previous owner or part owner of the business, as consideration for the sale of
the goodwill or share thereof,
does not outsell m1ke the receiver a partner with the person carrying on the business.
7. Partnership at will—Where no provision is made by contract between the
partners for the duration of their partnership. or for the determination of their partner-
ship, the partnership is ''partnership at will''.
8. Particular partnership—A person may become a partner with another person
in particular adventures or undertakings.

CHAPTER III

Relations of partners to one another

9. General duties of partners—Partners are bound to cairy on the business of

the firm to the greatest common advantage, to be just and faithful to each other, and to
render true accounts and full inforin:ilion of all things affecting the firm to any partner
or his legal representative.
10. Dut y to indemnif y for toss caused by fraud—Every partner shall indemnify
the firm for any loss caused to it by his fraud in the conduct of the business of the firm.
11. Determination of rights and duties Of partners by contract between the
partners.
1. Subject to the provisions of this Act, the mutual rights and duties of the partners
of a firm may be determined by contract between the partners, and such contract may be
expressed or may be implied by a course of dealing.
Such contract may be carried by consent of all the partners, zumd such consent may
be expressed or may be implied by a course of dealing.
2. Agreement in restraint ur trade —Notwithstanding anything contained in Sec.
27 of the Indian Contract Act. 1872 (IX of 1872), such contracts may provide that a
partner shall not carry on any business other than that of The firm while he is a partner.
674 MERCANTILE LAW

12. The conduct of the business—'Suhje.t it) contract heiwecit the partners.—
(a) every partner has a right to take part in the conduct of the business;
(h) every partner is bound to attend diligently to his duties in the conduct of the
business;
(c) any difference arising as to ordinary matters connected with the business may be
decided by a majority of the partners, and every partner shall havo the right to
express his opinion before the matter is decided, hut ho change may be made in
the nature of the business without the consent of all the partners; and
(d) every partner has a right to have access to and to inspect and copy any of the books
of the firm.
13. Mutual rights and liabilities—Subject to contract between the partners,—
(a) a partner is not entitled to receive remuneration for taking part in the conduct of
the business;
(h) the partners are entitled to share equally in the profits earned, and shall contribute
equally to the lOSSeS sustained by the firm;
(c) where a partner is entitled to interest on the capital subscribed by him such interest
shall be payable only out of profits;
(d) a partner making for the purposes of the business any payment or advance beyond
the amount of capital he has agreed to subscribe, is entitled to interest thereon at
the rate of six per cent per annum;
(e) the firm shall indemnify a partner in respect of payment made and liabilities
incurred by him-
(i) in the ordinary and proper conduct of the business, and
(ii) its doing such act, in an emergency, for the purpose of protecting the firm from
loss, as would be done by a person of ordinary prudence, iii his own case, under
similar circumstances;
(f) a partner shall indemnify the firm for any loss caused to it by his wilful neglect in
the conduct of the business of the firm.
14. The property of the firm—Subject to contract between the partners, the
property of the firm includes all property and rights and-interests in property originally
orought into the stock of the firm, or acquired, by purchase or otherwise, by or for the
firm, or for the purposes and in the business of the firm, and includes also the goodwill
of the business.
Unless the contrary intentli)n appears, properly and rights and interesLs in property
acquired with money belonging to the firm are deemed to have been acquired for the
firm.
15. Application of the property of the firm—Subject to contract between the
partners, the property of the firm shall be held and used by the partners exclusively for
the purposes of the business.
16. Personal profits earned by partners—Subject to contract between the
partners.—
(a) if a partner derives any profiLs for himself from any transaction of the firm, or from
the use of the property or business connection of the firm or the firm name, he shall
account for that profit and pay it to the firm;
(b) if a partner carries on any business of the same nature as and competing with that
of the firm, he shall account for and pay to the firm all profits made by him in that
business.
 TilE U'DL&N PAR1NERSI1I1 1 ACT, 1932 675

change in the firm, after the expiry

17. Rights and duties of partners after a
of the term of the firm, and where additional undertakings are carried out—Sub-
ject to contract between the partners,—

(a) where a change occurs in the const i tution : a firm, the mutual rights and duties
of die partners in the reconstituted firm remain the same as they were immediately
before the change, as far as may be;
(b) where a firm constituted for a fixed term continues to carry on business after the
expiry of that term the miiutual rights and duties of the partners remain the same
as they were before the expiry, so far as they may he consistent with the incidents
of partnership at will; and
(c) where a firm constituted to carry out one or more adventures or undertakings
carries out other adventures or undertakings the mutual rights and duties of the
partners in respect of the other adventures or undertakings are the same as those
in respect of the original adventures or undertakings.

CHAPTER IV

Relations of partners to third parties

18. Partners to he agent of the firm—Subject to the provisions of this Act, a

partner is the agent of the fix in for the purposes of the business of the firm.
19. Implied authority of partner as agent of the firm.
I. Subject to the provision of Sec. 22, the act of a partner which is done to carry
on, in the usual way, business of the kind carried on by the firm, binds the firm.
The authority of a partner to bind the firm conferred by this section is called his
'implied authority''.
2. In the absence of usage or custom of trade to the contrary. the implied authority
of a partner does not empower him to—

(a) submit a dispute relating to the business of the firm to arbitration.

(b) open a banking account on behalf of the firm in his own ozone.
(c) compromise or relinquish any claim or portion of a claim by time firm,
(d) withdraw a suit or proceeding filed on behalf of the firm,
(e) admit any liability in a suit or proceeding against the firm.
(I) acquire immovable property oil of the firm,
(g) transfer immovable property belonging to the firm. or
(h) enter into partnership on behalf of the firm.

20. Extension and restriction of partner's implied authority—The partners in

a firm may, by contract between the partners, extend or restrict the implied authority of
any partner.
Notwithstanding any such restriction, any act done by it partner on behalf of the
firm which falls within his implied authority hinds the firm, unless the person with
whom he is dealing knows of the restriction or does not know or believe that partner to
be a partner.
21. Partner's authority in an emergency—A partner has authority, in an
emergency, to do all such acts for the purpose of protecting the firm from loss as would
be done by a person of ordinary prudence, in his own case, acting under similar
circumstances, and such acts hind the firm,
676 MERCANTILE LAW

22. Mode of doing act to bind firm—In order to bind a firm, an act or instrument
done or executed by a patner or other person on behalf of the finn shall be done or
executed in the firm name, or in any other manner expressing or implying intention to
bind the firm.
23. Effect of admissions by partner—An admission or representation made by
a partner concerning the affairs of the firm is evidence against the firm, if it is made in
the ordinary course of business.
24. Effect of notice to acting partner—Notice to a partner who habitually acts
in the business of the firm of any matter relating to the affairs of the firm operates as
notice to the firm, except in the case of a fraud on the firm committed by or with the
consent of that partner.
25. Liability of a partner for acts of the firm—Every partner is liable jointly
with all the other partners and also severally, for all acts of the firm done while he is a
partner.
26. Liability of the firm for wrongful acts of a partner—Where by the
wrongful act or omission of a partner in the ordinary course of the business of a firm or
with the authority of his partners, loss or injury is caused to any third party or any
penalty is incurred, the firm is liable therefor to the same extent as the partner.
27. Liability of firm for misapplication by partners. Where—
(a) a partner acting within his apparent authority receives money or property from a
third party and misapplies it. or
(b) a firm in the course of its business receives money or property from a third party,
and the money or property is misapplied by any of the partners while it is in the
custody of the firm,
the firm is liable to make good the loss.
28. Holding out.
1. Any one who by words spoken or wntten or by conduct represents himself, or
knowingly permits himself to be represented, to be a partner in a firm, is liable as apartner
in that firm, to any one who has on the faith of any such representation given credit to
the firm whether the person representing himself or represented to be a partner does or
does not know that the representation has reached the person so giving credit.
2. Where after a partner's death the business is continued in the old firm name,
the continued use of that name or of the deceased partner's name as a part thereof shall
not of itself make his legal representative or his estate liable for any act of the firm done
after his death.
29. Rights of transferee of a partner's interest,
1. A transfer by a partner of his interest in the firm, either absolute or by mortgage,
or by the creation by him of a charge on such interest, does not entitle the transferee,
during the continuance of the Finn, to interfere in the conduct of the business, or to
require accounts, or to inspect the books of the firm, but entitles the transferee only to
receive the share of profits of the transferring partner, and the transferee shall accept the
account of profit agreed to by the partners.
2. If the firm is dissolved or if the transferring partner ceases to be a partner, the
transferee is entitled as against the remaining partners to receive the share of the assets
of the firm to which the transferring partner is entitled, and for the purpose of ascertaining
that share, to an account as from the date of dissolution.
30. Minors admitted to the benefits of partnership.
I. A person who is a minor according to the law to which he is subject may not
be a partner in a firm, but with the consent of all the partners for the time being, he may
be admitted to the benefits of partnership.
 THE INDIAN PARTNERSHIP ACT, 1932 677

2. Such minor has a right to such share of the property and of the profits of the
firm as may be agreed upon, and he may have access to and inspect and copy any of the
accounts of the firm.
3. Such minor's share is liable for the acts of the firm, but the minor is not
personally liable for any such act.
4. Such minor may not sue the partners for an account or payment of his share of
the property or profits of the firm, save when severing his connection with the finn, and
in such case the amount of his share shall be determined by a valuation made as far as
possible in accordance with the rules contained in Sec. 48,
Provided that all the partners acting together or any partner entitled to dissolve the
firm upon notice to other partners may elect in such suit to dissolve the firm, and
thereupon the Court shall proceed with the suit as one for dissolution and for settling
accounts between the partners, and the amount of the share of the minor shall be
determined along with the share of the partners.
5. At any time within six months of his attaining majority, or of his obtaining
knowledge that he had been admitted to the benefits of partnership, whichever date is
later, such person may give public notice that he has elected to become or that he has
elected not to become a partner in the firm, and such notice shall determine his position
as regards the firm:
Provided that, if he fails to give such notice, he shall become a partner in the firm
on the expiry of the said six months.
6. Where any person has been admitted as a minor to the benefits of partnership
in a firm, the burden of proving the fact that such person had no knowledge of such
admission until a particular date after the expiry of six months of his attaining majority
shall lie on the person asserting that fact.
7. Where such person becomes a partner,—
(a) his rights and liabilities as a minor continue up to the date oil he becomes
a partner, but he also becomes personally liable to third parties for all acts of the
firm done since he was admitted to the benefits of partnership. and
(b) his share in the property and profits of the firm shall be the share to which he was
entitled as a minor.
8. Where such person elects not to become a partner,—
(a) his rights and liabilities shall continue to be those of a minor under this section up
to the date on which he gives public notice.
(b) his share shall not be liable for any acts of the firm done after the date of the notice,
and
(c) he shall be entitled to sue the partners for his share of the property and profits in
accordance with Sub-Sec. (4).
9. Nothing in Sub-Sees. (7) and (8) shall affect the provisions of Sec. 28.

CHAPTER V

Incoming and outgoing partners

31. Introduction of a partner.

Subject to.the contract between the partners and to the provisions of Sec. 30, no
person shall be introduced as a partner into a firm without the consent of all the
existing partners.
678 MERCANTILE LAW

2. Subject to the provisions of Sec. 30, a person who is introduced as a partner into
a firm does not thereby become liable for any act of the firm done before he became
a partner.
32. Retirement of a partner.
1. A partner may retire—
(a) with the consent of all the other partnçrs.
(b) in accordance with an express agreement by the partners. or
(c) where the partnership is at will, by giving notice in writing to all the other partners
of his intention to retire.
2. A retiring partner may be discharged from any liability to any third party for
acts of the firm done before his retirement by an agreement made by him with such third
party and the partners of the reconstituted firm, and such agreement may hc implied by
a coursç of dealing between such third party and the reconstituted firm after he had
knowledge of the retirement.
3. Notwithstanding the retirement of a partner from a firm, he and the partners
continue to be liable as partners to third parties for any act done by any of them which
would have been an act of the firm if done before the retirement, until public notice is
given of the retirement.
Provided that a retired partner is not liable to any third party who deals with the
firm without knowing that he was a partner.
4. Notices under Sub-Sec. (3) may be given by the retired partner or by any
partner of the reconstituted firm.
33. Expulsion of partner.
1. A partner may not be expelled from a firm by any majority of the partners, save
in the exercise in good faith of powers conferred by coniract between the partners.
2. The provisions of Sub-Sees. (2). (3) and (4) of Sec. 32 shall apply to an expelled
partner as if he were a retired partner.
34. Insolvency of partner.
- Where a partner in a firm is adjudicated an insolvent he ceases to he a partner
on the date on which the order of adjudication is made, whether or not the loin is thereby
dissolved.
2. Where under a contract between the partners the firm is not dissolved by the
adjudication of a partner as an insolvent, the estate of a partner so adjudicated is not
liable for any act of the firm and the firm is not liable for any act of the insolvent, done
after the date on which the order of adjudication is made.
35. Liability of estate of deceased partner—Where under a contract between
the partners the finn is not dissolved by the death of a partner, the estate of deceased
partner is not liable for any act of the firm done after his death.
36. Rights of outgoing partner to carry on competing business.
1. As outgoing partner may carry on a business competing with that of the firm
and he may advertise such business, but subject to contract to the contrary he may not—
(a) use the firm nam
(b) represent himself as carrying on the business of the firm, or
(c) solicit the custom of persons who were dealing with the firm before he ceased to
be a partner.
 THE INDIAN PARTNLRSIflP ACE, 1932 679

2. Agreements in restraint of trade—A partner may make an agreement with

his partners that on ceasing to be a partner he will not early on any business similar to
that of the firm within a specified period or within specified local limits; and not-
withstanding anything contained in Sec. 27 of the Indian Contract Act, 1872 (IX of
1872), such agreement shall be valid if the restrictions imposed are reasonable.
37. Right of outgoing partner in certain cases to share subsequent profit—
Where sny member of a finn has died or otherwise ceased to be a partner, and the
survivg cr continuing partners carry on the business of the firm with the property of
the firm without any final settlement of accounts as between them and the outgoing
p1ner or his estate, then, in the absence of a contract to the contrary, the outgoing
partner or his estate is entitled at the option of himself or his representatives to such
share of the profits made since he ceased to be a partner as may be attributable to the use
of his share of the property of the firm or to interest at the rate of six per cent per annum
on the amount of his share in the property of the firm:
Provided that where by contract between the partners an option is given to
surviving or continuing partners to purchase the interest of a deceased or outgoing
partner, and the option is duly exercised, the estate of the deceased partner, or the
outgoing partner o, his estate, as the case may be, is not entitled to any further or other
share of profits; but if any partner assuming to act in exercise of the option does not in
all material respects comply with the terms thereof, he is liable to account under the
foregoing provisions of this section.
38. Revocation of continuing guarantee by change in firm—A countinuing
guarantee given to a firm, or to a third party in respect of the transactions of a firm, is,
in the absence of agreement to the contrary, revoked as to future transaction from the
date of any change in the constitution of the firm.

CHAP'JER VA

Dissolution of a firm

39. Dissolution of a firm—The dissolution of partnership between all the

partners of a firm is called the 'dissolution of the firm''.
40. Dissolution by agreement—A firm may be dissolved with the consent of all
the partners or in accordance with a contract between the partners.
41. Compulsory dissolution. A firm isdissolved-
(a) by the adjudication of all the partners or of all the partners but one as insolvent, or
(b) by the happening of any event which makes it unlawful for the business of the
firm to be carried on or for the partners to carry it on in partnership:
Provided that, where more than one separate adventure or undertaking is carried
on by the firm, the illegality of one or more shall not of itself cause the dissolution of
the firm in respect of its lawful adventures and undertakings.
42. Dissolution on the happening of certain contingencies—Subject to con-
tract between the partners a firm is dissolved—
(a) if constituted for a fixed term, bythe expiry of that term;
(b) if constituted to carry out one or more adventures or undertakings, by the complc
tion thereof;
(c) by the death of a partner; and
(d) by the adjudication of partner as an insolvent.
680 MERcAm1.E LAW

43. Dissolution by notice of partnership at will.

1. Where the partnership is at will the firm may be dissolved by any partner giving
notice in writing to all the other partners of his intention to dissolve the firm.
2. The firm is dissolved as from the date mentioned in the notice as the date of
dissolution or, if no date is so mentioned, as from the date of the communication
of the notice.
44: Dissolution by the Court-=-At the suit of a partner, the Court may dksnl vc a
firm on any of the following grounds, namely:—
(a) that a partner has become of unsound mind, in which case the suit may be brought
as well by the next friend of the partner who has become of unsound mind as by
any other partner;
(b) that a partner, other than the partner suing, has become in any way permanently
incapable of performing his duties as partner;
(c) thai a partner, other than the partner suing, is guilty of conduct which is likely to
affect prejudicially the carrying on of the business, regard being has to the nature
of the business;
(d) that a partner, other than the partner suing wilfully or persistently commits breach
of agreements relating to the management of the affairs of the firm or the conduct
of its business, or otherwise so conducts himself in matters relating to the business
that it is not reasonably practicable for the other partners to carry on the business
in partnership with him;
(e) that a partner, other than the partner suing, has in any way transferred the whole
of his interest in the firm to a third party, or has allowed his share to be charged
under the provisions of rule 49 of Order XXI of the First Schedule to the Code of
Civil Procedure, 1908 (V of 1908), or has allowed it to be sold in the recovery of
arrears of land-revenue or of any duties recoverable as arrears of land-revenue due
by the partner;
(I) that the business of the firm cannot be carried on save at a loss; or
(g) on any other ground which renders it just and equitable that the firm should be
dissolved.
45. Liability for acts or partners oone atter üissoiutiun.
1. Notwithstanding the dissolution of a firm, the partners continue to be liable as
such to third parties for any act done by any of them which would have been an act of
the firm if done before the dissolution, until public notice is given of the dissolution:
Provided that the estate of a partner who dies, or who is adjudicated an insolvent
or of a partner who, no.t having been known to the person dealing with the firm to be a
partner, retires from the firm is not liable under this section for acts done after the date
on which he ceased to be a partner.
2. Notices under Sub-Sec. (1) may be given by any partner.
46. Right of partners to have business wound up after dissolution—On the
dissolution of a firm every partner or his representative is entitled, as against all the other
partners or their representatives, to have the property of the firm applied in payment of
the debts and liabilities of the firm, and to have the surplus distributed among the partners
or their representatives according to their rights.
47. Continuing authority of partners for purposes of winding up— After the
dissolution of a firm the authority of each partner to bind the firm, and the other mutual
rights and obligations of the partners, continue notwithstanding the dissolution, so far
as may be necessary to wind up the affairs of the firm and to complete transactions begun
but unfinished at the time of the dissolution, but not otherwise:
 TIlE U'.'DIAN PARTNERSHIP ACT, 1932 681

Provided that the firm is in no case bound by the act of a partner who has been
adjudicated insolvent; but this proviso does not affect the liability of any person who has
after the adjudication represented himself or knowingly permitted himself to be repre-
sented as a partner of the insolvent.
48. Mode of settlement of accounts between partners—In settling the accounts
of a firm after dissolution, the following rules shall, subject to agreement by the
partners, be observed:—
(a) Losses, including deficiencies of capital, shall be paid first out of profits, next
out of capital, and, lastly, if necessary, by the partners individually in the proportion in
which they were entitled to share profits.
(b) The assets of the firm, including any sums contributed by the partners to make
up deficiencies of capital, shall be applied in the following manner and order:-
(i) in paying the debts of the firm to third parties;
(ii) in paying to each partner rateably what is due to him from the firm for advances
as distinguished from capital:
(iii) in paying to each partner rateably what is due to him on account of capital; and
(iv) the residue, if any, shall be divided among the partners in the proportions in which
they were entitled to share profit.
49. Payment of firm debts and of separate debts— Where there are joint debts
due from the firm, and also separate debts due from any partner, the property of the firm
shall be applied in the first instance in payment of the debts of the firm, and if there is
any surplus, then the share of each partner shall be applied in payment of his separate
debts or paid to him. The separate property of any partner shall be applied first in the
payment of his separate (lehis and the surplus (if any) in the payment of the debts of the
firm.
50. Personal profits earned after dissolution—Subject to contract between the
partners, the provisions of clause (a) of Sec. 16 shall apply to transactions by any
surviving partner or by the representatives of a deceased partner, undertaken after the
firm is dissolved on account of the death of a partner and before its affairs have been
completely wound up:
Provided that where any partner or his representative has bought the goodwill of
the firm, nothing in this section shall affect his right to use the firm name.
51. Return of premium on premature dissolution—Where a partner has paid
a premium on entering into partnership for a fixed term, and the firm is dissolved before
the expiration of that term otherwise than by the death of a partner, he shall be entitled
to repayment of the premium or of such part thereof as may be reasonable, regard being
had to the terms upon which he became a partner and to the length of time during which
he was a partner, unless–.--
(a) the dissolution is mainly due to his own misconduct, or
(h) the dissolution is in pursuance of an agreement containing no provision for the
return of the prcmiliumn or any part of it.
52. Rights where partnership contract is rescinded for fraud or misrepresen-
tation—Where a contract creating partnership is rescinded on the ground of the fraud
or inisrepresentationof any of the parties thereto, the party entitled to rescind is, without
prejudice to any other right, entitled—
(a) to a lien orc, or a right of retention of, the surplus or the assets of the firm remaining
after ilft debts of the firm have been paid, or any sum paid by hint for the purchase
of a share in the firm and for any capital contributed by him;


682 MERCANTILE LAW

(b) to rank as a creditor of the firm in respect of any payment made by him towards
the debts of the firm; and
(c) to be indemnified by the partner or partners guilty of the fraud or misrepresentation
against all the debts of the firm.
53. Right to restrain from use of firm name or firm property—After a firm i&
dissolved, every partner or his representative may, in the absence of a contract between
the partners to the contrary, restrain any other partner or his representative from carrying
on a similar business in the firm name or from using any of the property of the firm for
his own benefit until the affairs of the firm have been completely wound up:
Provided that where any partner or his representative has bought the goodwill of
the firm, nothing in this section shall affect his right to use the firm name.
54. Agreements in restraint of trade—Partners may, upon or in anticipation of
the dissolution of the finn, make an agreement that some or all of them will not carry on
a business similar to that of the firm within a specified period or within specified local
limits; and notwithstanding anything contained in Sec. 27 of the Indian Contract Act,
1872 (IX of 1872), such agreement shall be valid if the restrictions imposed are
reasonable.
55. Sale of goodwill after dissolution.
1. In settling the accounts of a firm after dissolution, goodwill shall, subject to
contract between the partners, be included in the assets, and it may be sold either
separately or along with other property of the firm.
2. Rights of buyer and seller of goodwill—Where.the goodwill of a firm is sold
after dissolution, a partner may carry on a business competing with that of the buyer and
he may advertise such business, but subject to agreement between him and the buyer,
he may not—
(a) use the firm name,
(b) represent himself as carrying on the business of the firm, or
(c) solicit the custom of persons who were dealing with the firm before its dissolution.
3. Agreements in restraint of trade Any partner may, upon the sale of
goodwill of a firm, make an agreement with the buyer that such partner will not carry
on any nosiness similar iu LiiaL of die 110(1 within a SpeciiieU pci iou iii WIUIII( ILCU
local limits, and notwithstanding anything contained in Sec. 27 of the Indian Contract
Act, 1872 (IX of 1872), such agreement shall be valid-if the restrictions imposed are
reasonable.

CHAPTER VII

Registration of firms

56. Power to exempt from application of this Chapter—The State Govern-

ment of any State may, by notification in the Official Gazette, direct that the provisions
of this Chapter shall not apply to that State or to any part thereof specified in the
notification.
57. Appointment of Registrars.
I. The State Government may appoint Registrars of Finns for the purposes of this
Act, and may define the areas within which they shall exercise their powers and
perform their duties.
2. Every Registar shall be deemed to be a public servant within the meaning of Sec.
21 of the Indian Penal Code (XLV of 1860).
 Tiffi INDIAN PARTNERShIP ACT, 1932 683

58. Application for registration.

1. The registration of a firm may be effected at any time by sending 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, a statement in the prescribed form and
accompanied by the prescribed fee, stating—
(a) the firm name,
(b) the place or principal place of business of the firm,
(c) the names of any other places where the firm carries on business,
(d) the date when each partner joined the firm,
(e) the names in full and permanent address of the partners, and
(f) the djration of the firm.
The statement shall be signed by all the partners, or by their agents specially
authorised in this behalf,
2. Each person signing the statement shall also verify it in the manner prescribed.
3. A firm name shall but contain any of the following words, namely:—
"Crown", "Emperor'', "Empress", "Empire". ''Imperial", "King", "Queen",
"Royal", or words expressing or implying the sanction, approval or patronage
of1................ ........... except 3 when the (State) Government signifies 5 its consent to the
use of su..h words as part of the firm name by order in writing.6
59. Registration—When the Registrar is satisfied that the provisions of Sec. 58
have 'been duly complied with, he shall record an entry of the statement in a register
called the Register of Firms, and shall file the statement.
60. Recording of alterations in firm name and principal place of business.
1. When an alteration is made in the firm name or in the location of the principal
place of business of a registered firm, a statement may be sent to the Registrar
accompanied by the prescribed fee, specifying the alteration and signed and verified in
the manner required under Sec. 58,
2. When the Registrar is satisfied that the provisions of Sub-Sec. (1) have been
duly complied with, he shall amend the entry relating to the firm in the Register of Firms
in accordance with the statement, and shall file it along with the statement relating to the
firm filed under Sec. 59,
61. Noting of closing and opening or branches—When a registered firm
discontinues business at anyplace or begins to carry on business at anyplace, such place
not being its principal place of business, any partner or agent of the firm may send
intimation thereof to the Registrar, who shall make a note of such intimation in the entry
relating to the firm in the Register of Firms, and shall file the intimation along with the
statement relating to the firm filed under Sec. 59.

1. The words "the Crown or the Central Government or any Provincial Government" rep. by
the A.O. 1950.
2. The words "or the Crown Representative" rep. by the A.P. 1948.
3. Subs, by the A.O. 1937 for' 'when the G.G. in C."
4. Subs, by time A.O. I 950 Tor "Provincial".
5. Subs, by the A. 0. 1937 for "his".
6. The words "under the hand of one of the Secretaries of the Government of India", rep. by the
A. 0. 1937..
 MERCANI1LE LAW
684

and addresses of partners—When any partner

62. Noting or changes in name
in a registered firm alters his name or permanent address, an intimation of the alteratiofl
may be sent by any partner or agent of the firm to the Registrar, who shall deal with it
in the manner provided in Sec. 61.
of a firm.
63. Recording of changes in and dissolution
i tution of a registered firm any incoming,
1. When a change occurs in the const
continuing or outgoing paltuci, and when a registered firm is dissolved any person who
was a partner immediately before the dissolution, or the agent of any such partner or
person specially authorised in this behalf, may give notice to the Registrar of such
change or dissolution, specifying the date thereof; and the Registrar shall make a record
of the notice in the entry relating to the firm in the Register of Firms, and shall file the
notice along with the statement relating to the firm filed under Sec. 59.
Recording of withdrawal of a minor—When a minor who has been admitted
2.
to the benefits of partnership in a finn attains majority and elects to become or not to
become a partner, and the firm is then a registered firm, he, or his agent specially
authorised in this behalf, may give notice to the Registrar that he has or has not become
a partner, and the Registrar shall deal with the notice in the manner provided in Sub-Sec.
M.
64. Rectification or mistakes.
The Registrar shall have power at all times to rectify any mistake in order to
1.
bring the entry in the Register of Firms relating to any firm into conformity with the
documents relating to that firm filed under the Chapter.
2. On application made by all the parties who have signed any document relating
to a firm filed under this Chapter, the Registrar may rectify any mistake in such
document or in the record or note thereof made in the Register of Firms.
court deciding any matter
65. Amendment or Register by order of Court—A
relating to a registered firm may direct that the Registrar shall make any amendment in
the entry in the Register of Firms relating to such firm which is consequential upon its
decision; and the Registrar shall amend the entry accordingly.
66. Inspection or Register and Filed documents.
The Register of Firms shall be open to inspection by any person on payment of
1.
such fee as may be prescribed.
All statements, notices and intimations, filed under this Chapter shall be open to
2.
inspection, subject to such conditions and on payment of such fee as may be
prescribed.
of copies—The Registrar shall on application furnish to any person,
67. Grant
on payment of such fee as may be prescribed a copy, certified under his hand, of any
entry or portion thereof in the Register of Firms.
6. Rules of evidence.
Any statement, intimation or notice recorded or noted in the Register of Firms
1.
shall, as against any person by whom or on whose behalf such statement, intimation or
notice was signed, be conclusive proof of any fact therein stated.
A certified copy of an entry relating to a firm in the Register of Firms may be
2.
produced in proof of the fact of the registration of such firm, and of the contents of any
statement, intimation or notice recorded or noted therein.
69. Effect of non -registration.
1. No suit to enforce a right arising from a contract or conferred by this Act shall
be instituted in any Court by or on behalf of any person suing as a partner in a firm against
 THE tNDIAN PARTNERSHIP ACT, 1932

the firm or any person alleged to be or to have been a partner in the firm unless the firm
is registered and the person suing is or has been shown in the Register of Firms as a
jartner in the firm.
2. No suit to enforce a right arising from a contract shall be instituted in any Court
by or on behalf of a firm against any third party unless the firm is registered and the
persons suing are or have been shown in the Register of Firms as partners in the firm.
3. The provisions of Sub-Sees (I) and (2) shall apply also to a claim of set-off or
other proceeding to enforce a right arising from a contract, but shall not affect—
(a) the enforcement of any right to sue for the dissolution of a firm or for accounts of
a dissolved finn, or any right or power to realise the property of a dissolved firm,
or
(b) the powers of an official assignee, receiver or Court under the Presidency-towns
Insolvency Act, 19()9 (II of 1909), or the Provincial !nsulvenccy Act. 1920 (V of
1920), to realise the property of an insolvent partner.
4. This section shall not apply—
(a) to firms or to partners in firms which have no place of business in the territories
to which this Act extends, or whose places of business in the said territories are
situated in areas to which, by notification under Sec. 56. this Chapter does not
apply, or
(h) to any suit or claim of set-off not exceeding one hundred rupees in value which,
in the Presidency-towns, is not of a kind specified iii Sec. 19 of the Presidency
Small Cause Courts Act, 1882 (XV of 1882), or outside the Presidency-towns, is
not of a kindspccified :n the Second Schedule to the Provincial Small Cause Courts
Acts, 1887 (LX of 1887). or Loany proceeding in execution or other proceeding
incidental to or arising from any such suit or claim.
70, Penalty for furnishing false particulars—Any person who signs any state-
ment, amending statement, notice or intimation under this Chapter containing any
particular which he knows to be false or does not believe to be true, or containing
particulars which he knows to be incomplete or does not believe to be complete, shall
be punishable with imprisonment which may extend to three months, or with fine, or
with both,
71. Power to make rules.
1. The State Government may make rules prescribing the fees which shall
accompany documents sent to the Registrar of Firms, or which shall he payable for the
inspection of documents in the custody of the Registrar of Firms, or for copies from the
Register of Firms
Provided that such fees shall not exceed the maximum fees specified in Schedule
1.
2. The State Government may also make roles—
(a) prescribing the form of statements submitted under Sec. 58, and of the verification
thereof;
(h) requiring statements, intimations and notices under Secs 60, 61, 62 and 63 to be
in prescribed form, and prescribing the fori,n thereof;
(c) prescribing the form of the Register of Firms, and the mode in which entries
relating to firms are to be made therein, and the mode in which such entries are to
be amended or notes made therein:
(d) regulating the procedure of the Registrar when disputes arise;

686 MERCAN11LE LAW

(e) regulating the filing of documents received by the Registrar;

(f) prescribing conditions for the inspection of original dAcumcnts;
(g) regulating the grant of copies;
(h) regulating the elimination of registers and documents;
(1) providing for the maintenance and form of an index to the Register of Firms; and
(j) generally to carry out the purposes of this section shall be subject to the condition
of previous publication.
CHAPTER VIII

Supplemental

72. Mode of giving public notice —A public notice under this Act is given—
(a) where it relates to the retirement or expulsion of a partner from a registered firm,
or to the dissolution of a registered firm or to the election to become or not to
become a partner in a registered firm by a person attaining majority who was
admitted as a minor to the benefits of partnership, by notice to the Registrar of
Firms under Sec. 63, and by Publication in the Official Gazette and in at least one
vernacular newspaper circulating in the district where the firm to which it relates
has its place or principal place of business, and
(h) in any other case, by publication in the Official Gazette and in at least one
vernacular newspaper circulating in the district where the firm to which it relates
has its place or principal place of business.
73. (Repeals] Rep. by the Repealing Act, 1938 (I of 1938), Sec. 2 and
Schedule.
74. Savings---Nothing in this Act or any repeal effected thereby shall affect or be
deemed to affect—
(a) any right, title, interest, obligation or liability already acquired, accrued or incurred
before the commencement of this Act, or
(b) any legal proceeding or remedy in respect of any such right, title, interest,
obligation or liability, or anything done or suffered before the commenceincnt of
this Act, or
(c) anything done or suffered before the commencement of this Act, or
(d) any enactment relating to partnership not expressly repealed by this Act, or
(e) any rule of insolvency relating to partnership, or
(1) any rule of law not inconsistent with this Act.

SCHEDULE I
Maximum Fees
[See Sub-Sec. (I) of Sec. 71

Document or act in respect of Maximum fee

with the fee is payable

Statement under Sec. 58 Three rupees

Statement under Sec. 60 One rupee.
Intimation under Sec. 61 One Rupee.

THE U'DIAN PARTNERSHIP ACT, 1932 687

Document or act in respect of Maximum fee

with the fee is payable

Intimation under Sec. 62 One Rupee.

Notice under Sec. 63 One Rupee.
Application under Sec. 64 One Rupee.
Inspection of the Register of Firms under Fifty Paise for inspecting one volume
sub-Sec. (1) of Sec. 66 of the Register.
Inspection of documents relating to a Fifty Paise for the inspection of all
firm under Sub-Sec. (2) of Sec. 66 documents relating to one firm.
Copies from the Register of Firms Twenty-five Paise for each hundred
words or part thereof.

SCHEDULE H. [Enactment Repealed.] Rep. by the Repealing Act, 193

(I of 1938), Sec. 2 and Schedule.
 Appendix Ill

The Sale of Goods Act, 1930

(Act No. III of 1930)

An Act to define and amend the law relating to the sale of goods.
Whereas it is expedient to define and amend the law relating to the sale of goods;
it is hereby enacted as follows :-

CHAPTER I

Preliminary

1. Short title, extent and commencement

1. This Act may be called the Indian Sale of Goods Act, 1930.
2. It extends to the whole of India (except the State of Jammu and Kashmir).
3. It shall come into force on the 1st day of July, 1930.
2. Definitions In this Act, unless there is anything repugnant in the subject or
context-
1. "buyer" means a person who buys or agrees to buy goods;
2. "delivery" means voluntary transfer of possession from one person to another;
3. goods are said to he in a -deliverable state" when they are in such ste that
the buyer would under the contract he bound to take delivery of them;
4. 'document of title to goods' includes a bill of lading, dock warrant,
warehouse keeper's certificate, wharfingers' certificate, railway receipt, warrant, or
ordeí for the delivery of goods and any other document used in the ordinary course of
business as proof of the possession or control of goods, authorising or purporting to
authorise, either by endorsement or by delivery, the possessor of the document to
transfer or receive goods thereby represented;
5. 'fault" means wrongful act or default;
(. "future goods" means goods in be manufactured or produced or acquired by
the seller after the making of the contract of sale;
7. "goods" means every kind of movable property other than actionable claims
and money; and includes stock and shares, growing crops, and things attached to or
forming part of the land which are agreed to he severed before sale or under the contract
of sale;
8. a person is said to he "insolvent" who has ceased to pay his debts in the
ordinary course of business, or cannot pay his debts as they become due; whether he has
committed an act of insolvency or not;

688
 THE SALE OF GOODS ACT, 1930 659

9. "mercantile agent" means a mercantile agent having in the customary course

of business as such agent authority either to sell goods, or to consign goods for the
purposes of sale, or to buy goods. or to raise money on the security of goods;
10. ''price" means the money consideration for a sale of goods;
11. "property" means the general property in goods, and not merely a special
property;
12. ''quality of goods" includes their state or condition;
13. "seller" means a person who sells or agrees to sell goods;
14. "specific goods" means goods identified and agreed upon at the time a
contract of sale is made; and
15. expressions used but bot defined in this Act and defined in the Indian Contract
Act. 1872 (LX of 1872), have the meaning assigned to them in the Act.
3. Application of provisions of Act IX of 11172—The unrepealed provisions of
the Indian Contract Act, 1872 (1.X of 1872), save in so far as they are inconsistent with
the express provisions of this Act, shall continue to apply to contracts for the sale of
goods.

CHAPTER II

Formation of the Contract

Contract of Sale

4. Sale and agreement to sell.

1. 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. There may be a contract of sale
between one part—owner and another.
2. A contract of sale may be absolute or conditional.
3. 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.
4. An agreement to sell becomes a sale when the time elapses or the conditions
are fulfilled subject to which the property in the goods is to be transferred.

Formalities of Contract

5. Contract of sale how made.

1. A contract of sale is made by an offer to buy or sell goods for a price and the
acceptance of such offer. The contract may provide for the immediate delivery of the
goods or immediate payment of th price or both, or for the delivery for payment by
instalments or that the delivery or payment or both shall be postponed.
2. Subject to the provisions of any law for the time being in force, a contract of
sale may be made in writing or by word of mouth, or partly in writing and partly by word
of mouth or may be implied from the conduct of the parties.

Subject-matter of Contract

6. Existing or future goods.

The goods which form the subject of contract of sale may oc either existing goods,
owned or possessed by the seller, or future goods.
690 MERCANTU.E LAW

2. There may be a contract for the sale of goods the acquisition of which by the seller
depends upon a contingency which may or may not happen.
3. Where by a contract of sale the seller purports to effect a present sale of future
goods, the contract operates as an agreement to sell the goods.
7. Goods perishing before making of contract—Where there is a contract for
the sale of specific goods, the contract is void if the goods without the knowledge of the
seller have at the time when the wntract was made, perished or become so damaged as
no longer to answer to their description in the contract.
8. Goods perishing before sale but after agreement to sell—Where there is an
agreement to sell specific goods, and subsequently the goods without any fault on the
part of the seller or buyer perish or become so damaged as no longer to answer to their
description in the agreement before the risk passed to the buyer, the agreement is
thereby avoided.
9. Ascertainment of price.
1. The price in a contract of sale may be fixed by the contract or may be left to be
fixed in manner thereby agreed or may be determined by the course of dealing
between the parties.
2. Where the price is not determined in accordance with the foregoing provisions,
the buyer shall pay the seller a reasonable price. What is a reasonable price is a
question of fact dependent on the circumstances of each particular case.
10. Agreement to sell at valuation.
1. Where there is an agreement to sell goods on the terms that the price is to be
fixed by the valuation of a third party and such third party cannot or does not make such
valuation, the agreement is thereby avoided;
Provided that, if the goods or any part thereof have been delivered to, and
appropriated by the buyer, he shall pay a reasonable price thereof.
2. Where such third party is prevented from making the valuation by the fault of
the seller or buyer, the party not in fault may maintain a suit for damages against the
party in fault.

Conditions and Warranties

11. Stipulations as to time.—Unless a different intention appears from the terms

of the contract stipulations as to time of payment are not deemed to be of the essence of
a contract of sale. Whether any other stipulation as to time is of the essence of the
contract or not depends on the terms of the contract.
12. Condition and warranty.
1. A stipulation in a contract of sale with reference to goods which are the subject
thereof may be a condition or a warranty. -
2. 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.
3. 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 a right to reject the goods and
treat the contract as repudiated.
4. Weather 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.
 TIFF. SALE OF GOODS ACT. 1930 691

13. When condition to be treated as warranty.

1. 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 and not as a ground for treating the contract as repudiated.
2. Where a contract of sale is not severable and the buyer has accepted the goods or
part thereof, the breach of any 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 and
treating the contract as repudiated, unless there is a term of the contract, express
or implied, to that effect)
3. Nothing in this section shall affect the case of any condition or warranty fulfilment
of which is excused by law by reason of impossibility or otherwise.
14. Implied undertaking as to title, etc. In a contract of sale, unless the
circumstances of the contract are su ch as to show a different intention there is—
(a) an implied condition on the part of the seller that, in the case of a sale, he has a
right to sell the goods and that, in the case of an agreement to sell, he will have a
right to sell the goods at the time when the property is to pass;
(b) an implied warranty that the buyer shall have and enjoy quiet possession of the
goods;
(c) an implied warranty that 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.
15. Sale by description—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; and, if the sale is by sample as well as by description it is not sufficient that
the bulk of the goods corresponds with the sample if the goods do not also correspond
with the descmiption.
16. Implied condition as to quality or fitness—Subject to the provisions of this
Act and of any other law for the time being in force, there is no warranty or condition
as to the quality or fitness for any particular purpose of goods supplied under a contract
of sale, except as follows:-
1. Where the buyer, expressly or by implication, makes known to the seller the
particular purpose for which the goods are required, so as to show that the buyer relies
on the seller's skill or judgment, and the goods are of a description which it is in the
course of the seller's business to supply (whether he is the manufacturer or producer or
not), there is an implied condition that the goods shall be reasonably fit for such
purpose;
Provided that, in the case of a contract for the sale of a specified article under its
patent or other trade name, there is no implied condition as to its fitness for any
particular purpose.
2. Where goods are bought by description from a seller who deals in goods of
that description (whether he is the manufacturer or producer or not), there is an implied
condition that the goods shall be of merchantable quality:
Provided that, if the buyer has examined the goods, there shall be no implied
condition as regards defects which such examination ought to have revealed.
3. An implied warranty or condition as to quality or fitness for a particular
purpose may be annexed by the usage of trade.

1. Amended by the Sale of Goods (Aniendmcnt)AcI. 1963.

692 MERCANITIL.E LAW

4. An express warranty or condition does not negative a warranty or condition

implied by this Act, unles inconsistent therewith.
17. Sale by sample.
1. 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.
2. In the case of a contract for sale by sample there is an implied condition—
(a) that the hulk shall correspond with the sample in iiiialitv:
(b) that the buyer shall have a reasonable opportunity of comparing the hulk with the
sample:
(c) that the goods shall be free from any defect, rendering them unmerchantahie, which
would not be apparent on reasonable examination of the sample.

CHAPTER III

Effect of the Contract

Transfer of property as between seller and buyer

18. Goods must be ascertained—Where there is a contract for the sale of

unascertained goods, no property in the goods is transferred to the buyer unless and until
the goods are ascertained.
19. Property passes when intended to pass.
I. Where there is a contract for the sale of specific or ascertained goods the property
in them is transferred to the buyer at such time as the parties to the contract intend
it to he transferred.
2. For the purpose of ascertaining the intention of the parties regard shall be had to
terms of the contract, the conduct of the parties and the circumstances of the case.
3. Unless a different intention appears, the rules contained in Sees. 20 (024 are rules
for ascertaining the intention of the parties as to the time at which the property in
the goods is to pass to the buyer.
20. Specific goods in a deliverable slate—Where there is an unconditional
contract for the sale of specific goods in a deliverable state, the property in the goods
passes to the buyer when the contract is made, and it is immaterial whether the time of
payment of the price or the delivery of the goods, or'both, is postponed.
21. Specific goods to be put into a deliverable state— Where there is a contract
for the sale of specific goods and the seller is bound to do something to the goods for
the purpose of putting them into a deliverable state, the property does not pass until such
thing is done and the buyer has notice thereof.
22. Specific goods in a deliverable state, when the seller has to do anything
thereto in order to ascertain price Where there is a contract for the sale of specific
goods in a deliverable state, but the seller is bound to weigh, measure, test or do some
other act or thing with reference to the goods for the purpose of ascertaining the price,
the property does not pass until such act or thing is done and the buyer has notice
thereof.
23. Sale of unascertained goods and appropriation.
I. Where there is a contract for the sale of unascertained or future goods by
description and goods of that description and in a deliverable state are unconditionally
appropriated to the contract, either by the seller with the assent of the buyer or by the
buyer with the assent of the seller, the property in the goods thereupon passes to the
 THE SALE OF GOODS ACT, 1930 693

buyer- Such assent may be expressed or implied and may be given either before or after
the appropriation is made.
2. Delivery to carrier—Where, in pursuance of the contract, the seller delivers
the goods to the buyer or to a carrier or other bailee (whether named by the buyer or not)
for the purpose of transmission to the buyer, and does not reserve the right of disposal,
he is deemed to have unconditionally appropriated the goods to the contract.
24. Goods sent on approval or "on sale or return"—When goods are delivered
to the buyer on approval or "on sale or rcturri"or other similar terms, the property therein
passes to the buyer—
(a) when he signifies his approval or acccptancc.to the seller or clues any other act
adopting the transaction;
(b) if he does not signify his approval for acceptance to the seller but retains the goods
without giving notice of rejection, then, if a time has been fixed for the returnof
the goods, on the expiration of such time, and, if no time has been fixed, on the
expiration of a reasonable time.
25. Reservation of right of disposal.
1. Where there is a contract for the sale of specific goods or where goods are
subsequently appropriated to the contract, the seller may, by the terms of the contract or
appropriation, reserve the right of disposal of the goods until certain conditions are
fulfilled. In such case, notwithstanding the delivery of the goods to a buyer, or to a carrier
or other bailee for the purpose of transaction, to the buyer, the property in the goods does
not pass to the buyer until the conditions imposed by the seller are fulfilled.
2. Where goods are shipped or delivered to a railway administration for carriage
by railway and by the bill of lading or railway receipt, as the case may be; the goods are
deliverable to the order of Ihe seller or his agent, the seller is pr,niafacie deemed to
reserve the right of disposal.
3. Where the seller of goods 'draws on the buyer for the price and transmits to the
buyer the bill of exchange together with the bill of lading or, as the case may be, the
railway receipt, to secure acceptance or payment of the bill of exchange, the buyer is
bound to return the bill of lading or the railway receipt if he does not honour the bill of
exchange and, if he wrongfully retains the bill of lading or the railway receipt, the
property in the goods does not pass to him.
Explanation—In this section, the expression 'railway' and 'railway administra-
tion' shall have the meanings respectively assigned to them under the Indian Railways
Act, 1890,2
26. Risk prima facie passes with property— Unless otherwise agreed, the goods
remain at the seller's risk until the property therein is transferred to the buyer, but when
the property therein is transferred to the buyer, the goods are at the buyer's risk whether
delivery has been made or not:
Provided also that nothing in this section shall affect the duties or liabilities of
either seller or buyer as a bailee of the goods of the other party.

Transfer of Title
27. Sale by person not the owner—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 the consent of
the owner, the buyer acquires no better title to the goods than the seller had unless the

2. Substituted by the Sale of Goods (Amendment) Act, 1963.

694 MERCANTILE LAW

owner of the goods is by his conduct precluded from denying the seller's authority to
sell:
Provided that, where a mercantile agent is, with consent of the owner, in posses-
sion of the goods or of a document of title to the goods, any sale made by him, when
acting in the ordinary course of business of a mercantile agent, shall be as valid as if he
were expressly authorised by the owner of the goods to make the same: provided that
the buyer acts in good faith and has not at the time of the contract of sale notice that the
seller has not authority to sell.
28. Sale by one orjoint owners—If one of 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 not authority to sell.
29. Sale by person in possession under voidable contract—When the seller of
goods has obtained possession thereof under a contract voidable under Sec. 19 or Sec.
19A of the Indian Contract Act. 1872 (IX of 1872), but the contract has not been
rescinded at the time of the sale, the buyer acquires a good title to the goods, provided
he buys them in good faith and without notice of the seller's defect of title.
30. Seller or buyer in possession after sale.
1. Where a person, having sold goods, continues or is in possession of the goods
or of the documents of title to the goods the delivery or transfer by that person or by a
mercantile agent acting for him, of the goods or documents of title under any sale,
pledge or other disposition thereof to any person receiving the same in good faith and
without notice of the previous sale shall have the same effect as if the person making the
delivery or transfer were expressly authorised by the owner of the good to make the
same.
2. Wher, a person, having bought or agreed to buy goods, obtains with the
consent of the seller, possession of the goods or the documents of title to the goods, the
delivery or transfer by that person or by a mercantile agent acting for him, of the goods,
or documents of title under any sale, pledge or other disposition thereof to any person
receiving the same in good faith and without notice of any lien or other right of the
original seller in respect of the goods shall have effect as if such lien or right did not
exist.
CHAPTER IV
Performance of Contract
31. Duties of seller and buyer—It is the duty of the seller to deliver the goods
and of the buyer to accept and pay for them in accordance with the I ms of the contract
of sale.
32. Payment and delivery are concurrent conditions—Unless otherwise
agreed, delivery of the goods and payment of the price are concurrent conditions, that is
to say, the seller shall be ready and willing to give possession of the goods to the buyer
in exchange for the price, and the buyer shall be ready and willing to pay the price in
exchange for possession of the goods.
33. Delivery—Delivery of goods sold may be made by doing anything which the
parties agree shall be treated as delivery or which has the effect of putting the goods in
the possession of buyer or of any person authorised to hold them on his behalf.
34. Effect of part delivery—A delivery of part of goods, in progress of the
delivery of the whole, has the same effect, for the purpose of passing the property in
such goods, as a delivery of the whole; but a delivery of part of the goods, with an
intention of severing it from the whole, does not operate as a delivery of the remainder.
 THE SALE OF GOODS ACT. 1930 695

35. Buyer to apply for delivery—Apart from any express contract, the seller of
goods is not bound to deliver them until the buyer applies for delivery.
36. Rules as to delivery.
1. Whether it is for the buyer to take possession of the goods or for the seller to
send them to the buyer is a question depending in each case on the contract, express or
implied, between the parties. Apart from any such contract, goods sold are to be
delivered at the place at which they are at the time of the sale, and goods agreed to be
sold are to be delivered at the place at which they are at the time of the agreement to sell,
or if not then in existence, at the place at which they are manufactured or produced.
2. Where under the contract of sale the seller is bound to send the goods to the
buyer, but no tune for sending them is fixed, the seller is bound to send them within a
reasonable time.
3. Where the goods at time of sale are in the possession of a third person, there is
no delivery by seller to buyer unless and until such third person acknowledges to the
buyer that he holds the goods on his behalf:
Provided that nothing in this section shall affect the operation of issue or transfer
of any document of title to goods.
4. Demand or tender of delivery may be treated as ineffectual unless made at a
reasonable hour. What is a reasonable hour is a question of fact.
5. Unless otherwise agreed, the expenses of and incidental to putting the goods
into a deliverable state shall be borne by the seller.
37. Delivery of wrong quantity.
1. Where the seller delivers to the buyer a quantity of goods less than he
contracted to sell, the buyer may reject them, but if the buyer accepts the goods so
delivered he shall pay for them at the contract rate.
2. Where the seller delivers to the buyer a quantity of goods larger than he
contracted to sell, the buyer may accept the goods included in the contract and reject the
rest, or he may reject the whole. If the buyer accepts the whole of the goods so delivered,
he shall pay for them at the contract rate.
3. Where the seller delivers to the buyer the good he contracted to sell mixed with
goods of a different description not included in the contract the buyer may accept the
goods which are in accordance with the contract and reject the rest, or may reject the
whole,
4. The provisions of this section are subject to any usage of trade, special
agreement or course of dealing between the parties.
38. Instalment deliveries.
1. Unless otherwise agreed, the buyer of goods is not bound to accept delivery
thereof by instalments.
2. Where there is a contract for the sale of goods to be delivered by stated
instalments which are to be separately paid for, and the seller makes no delivery or
defective delivery in respect of one or more instalments, or the buyer neglects or refuses
to take delivery of or pay for one or more instalments it is a question in each case
depending on the terms of the contract and the circumstance of the case, whether the
breach of contract is a repudiation of the whole contract, or whether it is a severable
breach giving rise to 'a claim for compensation, but not to a fight to treat the whole contract
as repudiated.
39. Delivery to carrier or wbarringer.
1. Where, in pursuance of a contract of sale, seller is authorised or required to send
the goods to the buyer, delivery of the goods to a earner, whether named by the buyer
696 MERCANtiLE LAW

or not, for the purpose of transmission to the buyer, or delivery of the goods to
wharflngcr for safe custody, is prima Jane deemed to be delivery of the goods to the
buyer.
2. Unless otherwise authorised by the buyer, the seller shall make such contract
with the carrier or wharfinger on behalf of the buyer as may be reasonable having regard
to the nature of the goods and the other circumstances of the case. If the seller omits so
to do, and the goods are lost or damaged in course of transit or whilst in the custody of
the wharfinger, the buyer may decline to treat the delivery to the carrier ut wharfinger
as a delivery to himself, or may hold the seller responsible in damages.
3. Unless otherwise agreed, where goods are sent by the seller to the buyer by a
route involving sea transit, in circumstances in which it is unusual to insure, the seller
shall give such notice to the buyer as may enable him to insure thein during their sea
transit, and if the seller fails so to do, the goods shall be deemed to be at his risk during
such sea transit.
40., Risk where goods delivered at distant place—Where the seller of goods
agrees to deliver them at his own risk at a place other than that where they are when sold,
the buyer shall, nevertheless, unless otherwise agreed, take any risk of deterioration in
the goods necessarily incident to the course of transit-
41. Buyer's right or examining the goods.
1. WI -c goods are delivered to the buyer which he has not previously examined,
h" is not de 1cd to have accepted them unless and until he has had a reasonable
ortunity of examining them for the purpose of ascertaining whether they are in
rtnity with the contract.
2. Unless otherwise agreed, when the seller tenders delivery of goods to the buyer,
is bound, on request, to afford the buyer a reasonable opportunity of eYamlmiing the
g ds for the purpose of ascertaining whether they are in conformity with the contract.
tt2 Acceptance—The buyer is deemed to have accepted the goods when lie
int tes to the seller that he has accepted them, or when the goods have been delivered
V rn and he does any act in relation to them which is inconsistent with the ownership
ot' the seller, or when, after the lapse ofa reasonable time, he retains the goods without
intimating to the seller that he has rejected them.
43. Buyer not hound to return rejected goods.—Unless otherwise agreed, where
goods are delivered to the buyer and he refuses to accept them, having the right so to do,
tie is not bound to return them to the seller, but it is sufficient if he intimates to seller
that he refuses to accept them.
44. Liability or buyer for neglecting or refusing delivery of goods—When the
seller is ready and willing to deliver the goods and requests the buyer to take delivery,
and the buyer does not within a reasonable time after such request take delivery of the
goods, he is liable to the seller for any loss occasioned by his neglect or refusal to take
delivery, and also for a reasonable charge for the care and custody of the goods:
Provided that nothing in this section shall affect the rights of the seller where the
neglect or refusal of the buyer to take delivery amounts to a repudiation of the contract.

CHAPTER V
Rights of unpaid seller against the goods
45. "Unpaid seller" deflned.
1. 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;
 THE SALE OF GOODS ACT. 1930 697

(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.
2. In this Chapter, the term 'seller" includes any person who is in the position of
a seller, as, for instance, an agent of the seller to whom the position of lading has been
endorsed, or a consignor or agent who has himself paid, or is directly responsible for,
the price.
46. Unpaid seller's rights.
1. Subject to the provisions of this Act and of any law for the time being in force,
notwithstanding that the property in the goods may have passed to the buyer, the unpaid
seller of goods, as such, has by implication of law—
(a) a lien on the goods for the price while he is in possession of them;
(b) in case of the insolvency of the buyer a right of stopping the goods in transit after
he has parted with the possession of them;
(c) a right of re-sale as limited by this Act.
2. Where the property in goods has not passed to the buyer, the unpaid seller has,
in addition to his other remedies, a right of withholding delivery similar to and
co-extensive with his rights of lien and stoppage in transit where the property has passed
to the buyer.

Unpaid seller's lien

47. Seller's lien.

I. Subject to the provisions of this Act, the unpaid seller of goods who is in
possession of them is entitled to retain possession of thenruntil payment or tender of the
price in the following cases, namely:—
(a) where the goods have been sold without any stipulation as to credit;
(b) where the goods have been sold on credit, but the term of credit has expired;
(c) where the buyer becomes insolvent.
2. The seller may exercise his right of lien notwithstanding that he is in posses-
sion of the goods as agent or bailee for the buyer.
48. Part delivery—Where an unpaid seller has made part delivery of the goods,
he may exercise his right of lien on the remainder, unless such part delivery has been
made under such circumstances as to show an agreement to waive the lien.
49. Termination of lien.
1. The unpaid seller of goods loses his lien thereon—
(a) when he delivers the goods to a carrier or other bailee for the purpose of
transmission to the buyer without reserving the right of disposal of the goods;
(h) when the buyer or his agent lawfully obtains possession of the goods:
(c) by waiver thereof.
2. The unpaid seller of goods, having a lien thereon, does not lose his lien by
reason only that he has obtained a decree for the price of the goods.

Stoppage in transit

50. Riht of stoppage in lransit—Subject to the provisions of this Act, when the
buyer of goods becomes insolvent, the unpaid seller who has pined with the possession
698 MERCANTILE LAW

of the goods has the right of stopping them in transit, that is to say, he may resume
possession of the goods as long as they are in the course of transit, and may retain them
until payment or tender of the price.
51. Duration of transit.
1. Goods are deemed to be in course of transit from the time when they arc delivered
to a carrier or other bailee for the purpose of transmission to the buyer, until the
buyer or his agent in that behalf takes delivery of them from such carrier or other
nadee.
2. If the buyer or his agent in that behalf obtains delivery of the goods before their
arrival at the appointed destination the transit is at an end.
3. If, after the arrival of the goods at the appointed destination, the carrier or other
bailee acknowledges to the buyer or his agent that he holds the goods on his behalf
and continues in possession of them as bailee for the buyer or his agent, the transit
is alan end and it is immaterial that a further destination for the goods may have
been indicated by the buyer.
4. If the goods are rejected by the buyer and the carrier or other bailee continues in
possession of them, the transit is not deemed to be at an end even if the seller has
refused to receive them back.
5. When goods are delivered to a shipchartered by the buyer it is a question depending
upon the circumstances of the particular case, whether they are in the possession
of the master as a carrier or as agent of the buyer.
6. Where the carrier or other bailee wrongfully refuses to deliver the goods to the
buyer or his agent in that behalf, the transit is deemed to be at an end.
7. Where part delivery of the goods has been made to the buyer or his agent in that
behalf, the remainder of the goods may be stopped in transit, unless such part
delivery has been given in such circumstances as to show an agreement to give up
possession of the whole of the goods.
52. How stoppage in transit is effected
1. The unpaid seller may exercise his right of stoppage in transit either by taking
actual possession of the goods or by giving notice of his claim to the carrier or other
bailee in whose possession the goods are. Such notice may be given either to the person
in actual possession of the goods or to his principal. In the latter case the notice, to be
effectual, shall be given at such time and in such circumstances that the pnncipal, by the
exercise of reasonable diligence, may communicate it to his servant or agent in time to
prevent a delivery to the buyer.
2. When notice of stoppage in transit is given by the seller to the carrier or other
bailee in possession of the goods, he shall re-deliver the goods to or according to the
directions of the seller. The expenses of such re-delivery shall be borne by the seller.

Transfer by buyer and seller

53. Effect of sub-sale or pledge by buyer.

I. Subject to the provision of this Act, the unpaid seller's right of lien or stoppage
in transit is not affected by any sale or other disposition of the goods which the buyer
may have made, unless the seller has assented thereto:
Provided that where a document of title to goods has been issued or lawfully
transferred to any person as buyer or owner of the goods, and that person transfers the
document to a person who takes the document in good faith and for consideration, then,
if such last mentioned transfer was by way of sale, the unpaid seller's right of lien or
 THE SALE OF GOODS ACT, 1930 699

stoppage in transit is defeated, and, if such last mentioned transfer was by way of pledge
or other disposition for value, the unpaid seller's right of lien or stoppage in transit can
only be exercised subject to the right of the transferee.
2. Where the transfer is by way of pledge, the unpaid seller may require the
pledgee to have the amount secured by the pledgee satisfied in the first instance, as far
as possible, out of any other goods or securities of the buyer in the hands of the pledgee
and available against the buyer.
54. Sale not generally rescinded by lien or stoppage in transit.
1. Subject to the provisions of this section, a contract of sale is not rescinded by
the mere exercise by an unpaid seller of his right of lien or stoppage in transit.
2. Where the goods are of a perishable nature, or where the unpaid seller who
exercised his right of lien or stoppage in transit gives notice to the buyer of his intention
to re-sell, the unpaid seller may, if the buyer does not within a reasonable time pay Or
tender the price, resell the goods within a reasonable time and recover from the original
buyer damages for any loss occasioned by his breach of contract, but the buyer shall not
be entitled to any profit which may occur on the re-sale. If such notice is not given, the
unpaid seller shall not be entitled to recover such damages and the buyer shall not be
entitled to the profit, if any, on the re-sale.
3. Where an unpaid seller who exercised his right of lien or stoppage in transit
re-sells the goods, the buyer acquires a good title thereto as against the original buyer
notwithstanding that no notice of the re-sale has been given to the original buyer.
4. Where the seller expressly reserves a right of re-sale in case the buyer should
make default, and, on the buyer making default, re-sells the goods, the original contract
of sale is thereby rescinded, but without prejudice to any claim which the seller may
have for damages.

CHAPTER VI

Suits for Breach of the Contract

55. Suit for price.

1. Where under a contract of the sale the property in the goods has passed to the
buyer and the buyer wrongfully neglects or refuses to pay for the goods according to the
terms of the contract, the seller may sue him for the price of the goods.
2. Where under a contract of sale the price is payable on a certain day irrespective
of delivery and the buyer wrongfully neglects or refuses to pay such price, the seller may
sue him for the price although the property in the goods has not passed and the goods
have not been appropriate to the contract.
56. Damages for non-acceptance--Where the buyer wrongfully neglects or
refuses to accept and pay for the goods, the seller may sue him for damages for
non-acceptance.
57. Damages for non-delivery—Where the seller wrongfully neglects or refuses
to deliver the goods to the buyer, the buyer may sue the seller for damages for
non-delivery.
58. Specific performance—Subject to the provisions of Chapter II of the Specific
Relief Act, 1877 (I of 1877), in any suit for breach of contract to deliver specific or
ascertained goods, the Court may, if it thinks fit, on the application of the plaintiff, by
its decree direct that the contract shall be performed specifically, without giving the
defendant the option of retaining the goods on payment of damages. The decree may be
unconditional or upon such terms and conditions as to damages, payment of the price or
otherwise, as the Court may deem just, and the application of the plaintiff may be made
at any time before the decree.
700 MERCANTILE LAW

59. Remedy for breach or warranty.

1. Where there is a breach of warranty by the seller, or where the buyer elects or
is compelled to treat any breach of a condition on the part of the seller as a breach of
warranty, the buyer is not by reason only of such breach of warranty entitled to reject
the goods; but he may—
(a) set up against the seller the breach of warranty in diminution or extinction of the
price; or
(b) sue the seller for damages for breach of warranty.
2. The fact that a buyer has setup a breach of warranty in diminution or extinction
of the price does not prevent him from suing for the same breach of warranty if he has
suffered further damage.
60. Repudiation of contract before due date—Where either party to a contract
of sale repudiates the contract before the date of delivery, the other may either treat the
contract as subsisting and wait till the date of delivery, or he may treat the contract as
rescinded and sue for damages of the breach.
61. interest by way of damages and special damages.
1. Nothing in this Act shall affect the right of the seller or the buyer to recover
interest or special damages in any case where by law interest or special damages may
be recoverable, or to recover the money paid where the consideration for the payment
of it has failed.
2. In the absence of a contract to the contrary, the court may award interest at such
rate as it thinks fit on the amount of the price—
(a) to the seller in a suit by him for the amount of the price—from the dale of the tender
of the goods or from the date on which the price was payable;
(b) to the buyer in a suit by him for the refund of the price in a case of a breach of the
contract on the part of the seller—from the date on which the payment was made.

CHAPTER VII

Miscellaneous

62. Exclusion of.implied terms and conditions—Where any right, duty or

liability would arise under a contract of sale by implication of law, it may be negatived
or varied by express agreement or by the course of da1ing between the parties or by
usage, if the usage is such as to bind both parties to the contract.
63. Reasonable time a question of fact—Where in this Act reference is made to
a reasonable time, the question what is a reasonable time is a question of fact.
64. Auction Sale—In the case of sale by auction-
1. where goods are put up for sale in lots, each lot is prima fade deemed to be subject
of a separate contract of sale;
2. the sale is complete when the auctioneer announces its completion by the fall of
the hammer or in other customary manner; and, until such announcement is made,
any bidder may retract his bid;
3. a right to bid may be reserved expressly by or on behalf of the seller and where
such right is expressly so reserved, but not otherwise, the seller or any one person
on his behalf may, subject to the provisions hereinafter contained, hid at the
auction;
4, where the sale is not notified to be subject to a right to bid on behalf of the seller,
it shall not be lawful for the seller to hid himself or to employ any person to hid at
 THE SALE OF GOODS ACF, 1930 701

such sale, or for the auctioneer knowingly to take any hid from the seller or any
such person; and any sale contravening this rule may be treated as fraudulent by
the buyer;
5. the sale may be notified to be subject to a reserved or upset price;
6. if the seller makes USC of pretended bidding to raise the price, the sale is voidable
at the option of the buyer.
64-A.3 In contracts of sale amount of increased or decreased duty to be
added or deducted.
1. Unless a different intention appears from the terms of the contract, in the event
of any tax of the nature described in Sub-Sec. (2) being imposed, increased, decreased
or remitted in respect of any goods after the making of any contract for the sale or
purchase of such goods without stipulation as to the payment of tax where tax was not
chargeable at the time of making of the contract, or for the sale or purchase of such
goods tax- paid tax was chargeable at that time,—
(a) if such imposition to increase so takes effect that the tax or increased tax, as the
case may be, or any part of such tax is paid or is payable, the seller may add so
much to the contract price as will be equivalent to the amount paid or payable in
respect of such tax or increase of tax, and he shall be entitled to be paid and to sue
for and recover such addition; and
(b) if such decrease or remission so takes effect that the decreased tax only, or no tax,
as the case may be, is paid or payable, the buyer may deduct so much from the
contract price as will be equivalent to the decrease of tax or remitted tax, and he
shall not he liable to pay, or be sued for, or in respect of, such deduction.
2. The provisions of Sub-Sec. (1) apply to the following taxes, namely:—
(a) any duty of customs or excise on goods;
(b) any tax on the sale or purchase of goods.
65. [Repeal. Rep. by Repealing Act, 1938 (I of 1938), Sec. 2 and Schedule.]
66. Savings.
I. Nothing in this Act, or in any repeal effected thereby shall affect or be deemed
to affect—
(a) any right, title, interest, obligation or liability already acquired, accrued or
incurred before the commencement of this Act, or
(b) any legal proceedings or remedy in respect of any such right, title, interest,
obligation or liability, or
(c) anything done or suffered before the commencement of this Act, or
(d) any enactment relating to the sale of goods which is not expressly repealed by this
Act, or
(e) any rule of law not inconsistent with this Act.
2. The rules of insolvency relating to contracts for the sale of goods shall continue
to apply thereto, notwithstanding anything contained in this Act.
3. The provisions of this Act relating to contracts of sale do not apply to any
transaction in the form of a contract of sale which is intended to operate by way of
mortgage, pledge, charge or other security.

3. Substituted by the Sale of Goods (Amendment)Act 1963.

 Appendix IV

Test Questions

CHAPTER 1

1 What do you understand by the icx rnercalcria ? Discuss fully.

2. Discuss the sourCes of Mercantile Law of England and India.
Comment upon the position of Mercantile Law in India before the passing of the
3.
Contract Act.
What do you undcrstandby Equity ? Explain the causes that led to the development
4.
of Equity.
CHAPTER If
Contract
"An agreement enforceable by law is a contract". Discuss the definition, bringing
out clearly the essentials of a valid contract.
State whether there is any contract made in the following cases
2.
(a) A. having accepted an invitation to dinner, fails to attend.
(h) A. the wife of a minor, buys goods on credit from B.
(c) A takes a scat in an omnibus.
(d) A calls a taxi.
(e) A tells B that C has expressed his willingness to marry her (B).
(f) A bids at a public auction.
(g) A puts a coin in the slot of a weighing machine.
(h A eats a meal at a restaurant.
How is an offer made, revoked, and accepted? What rules apply when an offer is
3.
made through tile Post Office, over the telephone ?
When is communication of (i) offer, (ii) acceptance complete ?
4.
Explain and illustrate the distinction between specific offer, general offer and
5.
invitation to offer.
(a) ''All contracts are agreements, but all agreements are not coitracts"Elucidate.
6.
(h) ''The law of contracts is not the whole law of agreements nor is it the whole
law of obligations." Discuss?
(a) Explain the rule, 'offer determines mode of acceptance.' with special reference
7.
to contract by post.
a mere mental assent.' Explain
(b) 'Acceptance must be something more than
and illustrate.
'A mere mental acceptance not evidenced by words or conduct is in the eye
(c)
of law no acceptance'. Comment.
(d) 'Acceptance is to offer what a lighted match is to a train of gun-powder. It
produces something which cannot be recalled or undone.' Comment.
702
 TEST QUESTIONS 703

8. (a) 'A contract is a contract from the time it is made and not from the time its
performance is due.' Discuss.
(b) Is an agreement to agree in the future a contract?
(c) 'Performance of the condition of a proposal is an acceptance of the proposal'.
Comment.
9. 'The offer and acceptance bring the parties together, but the law requires some
further evidence of their intention to create an obligation'. Elucidate.
10. Who can enter into contracts ? What is the effect on a contract of incompetency
to contract?
11. Discuss fully the law relating to minor's contracts.
12. Explain consideration as an element in a valid contract. State the exceptions to
the rule that an agreement without consideration is void.
13. (a) 'No stranger to the consideration can take advantage of a contract although
made for his benefit'. Explain by comparing English and Indian law.
(b) Should consideration always move from the promisce?
s
(c) A promise against a promise is a good con ideration. Comment.
(d) Consideration is the price for which the promise of the other is bought.
Amplify.
14. (a) Discuss the rule that a stranger to a contract cannot sue and the exceptions, if
any, to that rule.
(b) 'The legal effects of a contract are confined to the contracting parties'.
Discuss.
15. (a) What is (a) free consent, (b) real consent? Discuss the importance of consent
in contracts:
(b) Distinguish between (a) fraud and innocent misrepresentation, (b) coercion
and undue influence.
(c) Consider with reference to agreements the following:
(i) Undue influence as an element vitiating consent,
(ii) mistake as an element excluding consent.
16. Discuss the law relating to the effect of (i)mistake, (ii) undue influence,
(iii) coercion, (iv) fraud, and (v) misrepresentation.
17. (a) What are contracts Uberriniae Fidel? Give at least three examples of such
contracts.
(b) When and to what extent is a party to a contract bound to disclose information
in his possession relating to the subject-matter of the agreeinentor facts within
his knowledge likely to influence the judgment of the other party to the
contract ? What is the effect of non-disclosure of such information on the
contract?
18. Write notes on contracts which law will not enforce on the ground of their being
illegal, immoral and against public policy. Give examples.
19. Distinguish clearly between (i) void and voidable contracts, (ii) void and illegal
agreements.
20. What is an agreement by way of wager? Is such an agreement void or illegal ? Is
a contract of insurance a wagering contract?
21. (a) What elements are essential to make a contract a contingent one
(b) Discuss the la'' relating to assignment of contracts.
22. State the various modes in which a contract is discharged.
23. (a) What are the remedies for breach of contract?.
704 MERCANTIL' '1

(h) Explain fully the principles .n which the court would award damages for a
breach of contract-
(c) Distinguish between liquidated damages and penalty.
(d) 'If a contract is broken, the law will endeavour, so far as money can do it, to
place the injured party in the same position as if the contract has been
performed. Discuss.
24. (a) What do you understand by 'anticipatory breach of contract' ? What are the
rights and liabilities of parties in ease of anticipatoiy b.each of contract?
(b) X agrees to supply 100 tonnes of iron to Y on March, 1991 at Rs. 50 per tonne.
Subsequent to the contract the price of iron rises to Rs. 80 per tonne and on
May 1, 1991, X intimates to that he does not intend to perform his promise.
Y replies that he will hold X to his promise. On June 1, 1991, the Government
in order to check the soaring prices of iron, prohibits the sale of more than 10
tonnes of iron and fixes the price at Rs. 60 per tonne. Discuss, the rights of X
and ion (a) May 1. 1991, and (b) on July 1, 1991.
25. (a) What is a quasi-contract? Enumerate the quasi-contract provided for by the
Contract Act.
(h) What is quantum meruit?
(c) 'A quantum nieruit although it is quasi-contract, arises out of a contract'.
Comment.
(d) What are the rights and obligations of a finder of lost goods?
26. (a) When is an agreement in restraint of trade valid, and when is it void?
(b) Liberty to trade is not an assent which the law will permit a person to barter
away except in special circumstances. Discuss.
27. (a) 'Impossibility of performance is, as a rule, not an excuse for non-performance
of a contract'. Discuss.
(b) 'The doctrine of frustration of contracts is really an aspect or part of the law
of discharge of contract'. Discuss.
28. Comment on the following statements:
(a) An attempt at deceit which does not deceive is not fraud.
(h) Insufficiency of consideration is immaterial, but an agreement without con-
sideration is void.
(c) Undue influence is a subtle form of coercion.
(d) To consummate a contract there must be mutuality as well as a meeting of the
minds of the parties.
(e) Promises bind the representatives of the promisors in case of the death of such
promisors before performance.
(f) The failure to disclose a material fact which might influence the mind of a
prudent contractor does not give the right to avoid the contract, even though
it is obvious that the contractor has a wrong impression that would be removed
by disclosure.
(g) A quasi-contract is not a contract at all. It is an obligation which the law creates.
(h) The sanctity of contract is the foundation of the law of contract and the doctrine
of impossibility cannot be permitted to become a device for destroying this
sanctity.
(1) Damages never do more than restore the injured party to the position he would
have been in, had the promisor performed his promise.
(j) There cannot be a contract to make a contract.
 TEST QUESTIONS 705

29. Attempt the following problems, giving reasons for your answers:
(a) A agreed to let his theatre to B for a show in connection with Mayors' Fund.
Before the date of the show the Hall was destroyed by fire. Advise the parties.
(b) A engaged B to sing at his theatre on July 1, 1991. for Rs. 1,000. B is prevented
from performing (i) by an accident to his taxi-cab on his way to the theatre;
(ii) by a sudden illness caused by an indiscretion in diet. (iii) by A's theatre
being burnt down; (iv) because B went to sing for C. Discuss the rights of A
and B.
(c) To a suit on a pro-note filed by the holder in due course the drawer's defence
is that he signed the pro-note under the impression that it was a release dcc
The Court believes the drawer. How would the court decide the case
(d) A, who is trying to sell an unsound horse, forges s veterinary surgi .,n's
certificate, stating the horse to he sound and pins it on the stable door. B comes
to examine the horse but does not notice the certificate. B buys the horse at a
high price. Subsequently, the horse is found to be unsound. What are the
remedies of B against A, if any?
(e) A contracts to pay a sum of money to B on a day specified. A does not pay
the money on that date. B. in consequence of not receiving the money on that
day, is unable to pay his debts, and is totally ruined. What are the rights of B
in such a case ?
(1) A owes B Rs. 5,000 which he has failed to pay. B promises a rebate of Rs. 1.000
if A will pay at once. A pays Rs. 4,000 in full satisfaction. Subsequently, B
demands the balance of Rs. 1,000. Advise A.
(g) A's son has forged B's name on a promissory note. B, under threat of
prosecuting A's son, obtains a bond from A for the amount of the forged note.
B sues A on the bond. Will he succeed?
(h) M, an old man of feeble sight, endorsed a bill of exchange for Rs. 3,000
thinking it was a guarantee. Is he liable to pay the amount ?
(i) A agrees with B to give a car to B's son in consideration of his marrying A's
daughter. Can B's son sue on the agreement?
CHAPTER III
Indemnity and Guarantee
1. Define and distinguish contract of indemnity and contract of guarantee.
2. What isa continuing guarantee ? When and how is it revoked
3. What is the nature of surety's liability ? When is he discharged from liability ?
4. 'The liability of a surety is secondary. It is co-extensive with that of the principal
debtor', 'The Surety is a favoured debtor'. Discuss these statements.
5. State the rights of a surety against (i) the principal debtor, (ii) the creditor, (iii)
co-sureties.
6. Explain with reference to the provisions of the Contract Act, the rule that between
co-sureties there is equality of the burden and the benefit,
7. (a) State the case, if any, in which the surety will not be discharged in spite of
variance in the contract made without his consent.
(b) Does the release by the creditors of one of the sureties discharge the others?
8. (a) 'A contract of guarantee is not a contract uberrirnaefidci'. Discuss.
(b) Suretyship and partnership are sometimes described as contracts which need
full disclosure of all facts likely to affect the judgment of the intending surety
or partner. Comment.


706 M1:RCANI1LE LAW

'A surety is undoubtedly and not unjustly an object of some favour both at law
and at equity'. Explain and illustrate.
10. Attempt the following problems, giving reasons for your answers:
(a) K contracts to lend Rs.2.000 to L on April 1. 1991. M guarantees repayment.
K pays the amount to Lon March 1, 1991. Is M discharged?
(b) B owes C a debt guaranteed by A. The debt becomes payable. C does not sue
B for a year after the debt has become payable. B then becomes insolvent.
Thereafter. C sues A for the debt. A pleads B's forbearance to sue B for a year
as a defence. Is this a good defence?
(c) A agrees to guarantee the advance of a sum of Rs. 1,00,000 by B to C in the
security of two properties of equal value belonging to C. The txansactiofl, as
finally carried out, was the lending by B of a sum of Rs. 50,000 to C on the
security of one of the properties. To what extent, if any, is A liable to B for
failure by C to discharge his liability to B ?
(d) C advances to B, his tenant, Rs. 200 on the guarantee of A. C has also a
further security for the Rs. 2,000 by a mortgage on B's furniture. C cancels
the mortgage. B becomes insolvent. Has C any claim against A?
(e) A advances to B. a minor Rs. 500 on the guarantee of C. On a demand for
repayment, B pleads minority. Can A recover the amount from C?
(f) A guarantees to B to the extent of Rs. 10,000 that C shall pay all the bills that
B shall draw upon him. B draws upon C and C accepts the bill. A gives notice
of revocation. C dishonours the hil at maturity. Is A liable on-his guarantee?
CHAPTER IV
Bailments
Define 'Bailment' and state the rights and responsibilities of bailor and bailee.
What is a bailee's lien?
2. Define 'pledge', and state the respective rights and duties of pawnor and pawnee.
3. Explain the legal position and rights and duties of a finder of lost goods and those
of a pawnce when the pawnor makes default in repayment of the loan.
4. (a) To what extent is a bailee responsible for loss arising from defective title?
(b) State the rights of bailee against third parties.
5. Attempt the following problems, giving reasons for your answers:
(a) A hires a carriage of B. The carnage is unsafe although B is not aware of it,
and A is injured. Is B responsible to A for the injury?
(b) If a person sells the shares pledged to him without previously givint notice to
the pledger, does the buyer get any title to the shares?
(c) A lends a horse to B for his own riding only. A allows C, a member of his
family, to ride the horse. C rides with care but the horse is injured. Is B liable
for the injury to the horse?
(d) A entered a restaurant to dine. His coat was taken by a waiter and hung on a
hook behind A. While A was dining the Coat was stolen. Is the restaurant
proprietor liable for the loss?
(e) A gives silk to B, a tailor, to make into a coat. B promises to deliver the coat
to A as soon as it is made and to give A three months' credit for the charges.
Is B entitled to retain the coat until the charges are paid?
(I) An elephant is entrusted to railway administration for carriage. It escapes
during the course of the journey and is killed. Is the railway administration
likable to make good the loss?
 TEST QUESTIONS 707

(g) A delivered to B certain gold ornaments for safe custody. B kept the ornaments
in a locked safe and kept the key in a box in the same room. The room was on
the ground floor and was locked from outside, and, therefore, was easily
accessible to burglars. The ornaments were stolen. Is B liable to make good
the loss ?
(h) A hires a car from B to go to Lucknow. A goes to Agra and in the course of
the journey meets with an accident and the car is completely smashed. Is B
entitled to claim compensation from A for the loss of the car?
(i) A delivered books to B to be bound. A pressed B for the return of the books,
but B neglected to do so in spite of repeated demands. A fire accidentally broke
out in B's premises and the books were burnt, though B was not negligent. Is
B liable to compensate A for the loss ?
CHAPTER V
Agency

1. 'No one can become the agent of another person except by the will of that person'.
Comment.
2. Describe the various ways in which the relationship of agent and principal may
arise.
3. An agency by estoppel or holding out is as good as an express agency.
4. What is the effect of agency on contracts with third parties? When is a principal
bound by the unauthorised acts of his agent?
5. Explain the terms 'general agent' and 'special agent'. State the extent of liability
of the principal when he appoints each of the two.
6. What is meant by agency by ratification? State the conditions that must be fulfilled
before that doctrine can apply to an act of an agent.
7. If an agent acts for (a) a disclosed principal, (b) an undisclosed principal, (c) a
concealed principal, state clearly the respective rights of the agent, the principal
and the third parties.
8. In what circumstances may an agent appoint (a) a sub-agent (b) a substituted
agent? Is the principal liable for the acts of such agents ?
9. When is an agent personally bound on contracts entered into by him on behalf of
the principal?
10. Discuss the rights, and duties of an agent. How may a contract of agency be
terminated? When is it irrevocable?
11. Comment on the following statements:
(a) Ratification is tantamount to prior authority;
(b) An apparent or ostensible agency is as effective as an agency deliberately
created. Appearance and reality are one.
(c) A principal has power to revoke the authority of the agent, but he doesn't have
the right to do so.
(d) An agent is invested with the legal power to alter his principal's tcgal relations
with third parties, the principal is under a correlative liability to have his legal
relations altered.
(e) The effect of a contract made by an agent varies according to the circumstances
under which the agent contracted.
12. Attempt the following problems, giving reasons for your answers:
(a) What is meant by 'Warranty of authority?' A indorsed a bill of exchange as
708 MERCANTILE LAW

agent for his fnçnd B. A knew he was not B's agent but intended to do him a
service. Has A any liability for his action and if so, on what ground?
(b) B tells C in the presence of, and within the hearing of, A that he (B) is A's
agent in A's business and A does not contradict the statement. Subsequently,
C enters into a transaction with B bonafide believing that B is A's agent. Is
A liable under that contract even when in fact B is not his agent?
() A enters into a contract with B to sell him 100 bales of cotton and afterwards,
discovers that B was acting as agent for C. Who is liable to pay A the 1niceof
the cotton?
(d) M buys goods from N, knowing that he is an agent for their sale but not
knowing who is the principal who can claim the price of the goods, N or N's
principal? lfN's principal files a suit for the price can NI claim to setoff against
that claim a debt due to him from N ?
(c) C, a broker, was employed by A to buy cotton for him with instructions not
to disclose his name. C's credit was not good enough to contract of his own
responsibility and at plaintiff's request he gave him the name of the principal.
In the notes C was named as the buyer. C was called upon to pay but as he
was unable to pay, the plaintiff sued A. How would you decide the suit?
(f) A makes an offer to sell a machine which B accepts on behalf of C. B had no
authority to accept the offer. A then gives notice to C withdrawing the offer.
Subsequently C ratifies B's acceptance. Is A bound to sell the machine to C?
(g) A OWCS B Rs. 5,000. He sells rice worth Rs. 10,000 to B. C gives a notice to
B that A was merely acting as an agent of C in that transaction and demands
payment from B. Discuss the legal position of A, B and C.
(h) A consigns goods to B, a merchant, for sale. B in due course, employs an
auctioneer in good credit to sell the goods of A and allows the auctioneer to
receive the proceeds of the sale. The auctioneer becomes insolvent without
having accounted for the proceeds. A seeks to hold B responsible for the
proceeds. Can he do so?
CHAPTER VI
Partnership
1. Define partnership and distinguish it from (i) joint Hindu family firm, (ii) en-
ownership, (iii) joint stock company.
2. How far is it true to say that the law of partnership is an extension of the law relating
to principal and agent ? Explain the doctrine of "holding out" in reference to the
relation of partners to third parties.
3. (a) How would you determine whether a group of persons does or does not
constitute a partnership? Discuss fully.
(b) The sharing of profits is only aprirncfacie evidence of partnership. Comme,jt.
4. Explain the position of a partner is regard to (a) liabilities existing (0 prior to the
time of his joining the firm, (ii) at the time of his retirement, and (b) liabilities
incurred by the finn after his retirement.
5. (a) Explain the position and rights of a minor under the law of partnership.
(b) Discuss fully the mutual rights and duties as between partners in a firm.
(c) Explain clearly the nature and extent of the authority of a partner in a firm.
6. (a) 'The Partnership Act has effectively assured the registration of firms without
making it compulsory'. Explain.
(b) What is the effect of non-registration of a firm?
 TEST QUESTIONS 709

7. (a) What is an Act of the Firm? What is the extent of the liability of a partner for
the acts of the firm?
(b) Explain the relations of partners to third parties. C9a firm he liable for the
wrongful act of a partner?
8. (a) What is meant by au implied authority ofapartner? Indicate the cases in which
a partner has no implied authority to bind the firm. Does a partner's authority
in emergency differ in any way from his implied authority?
(b) Explain the legal position of the transferee of a partner's share.
9. How and in what circumstances is (i) a partnership dissolved automatically, (ii) a
trading firm dissolved compulsorily by the court?
10. (a) What are the rights and obligations of partners after dissolution of partner-
ship?
(b) How are accounts settled between partners after dissolution?
(c) Can a partner be excelled from the firm?
11, (a) What is 'Partnership Property' and how far is it liable for a partner's separate
debts?
(b) What do you understand by 'goodwill' of a business 7 What becomes of the
goodwill on dissolution of the firm?
12. Attempt the following problems, giving reasons for your answer.
(a) A and B, who are partners, borrowed money from C. Eventually C sued then
on the loan and obtained a decree which was not satisfied. Subsequently. C
discovered, that D was a partner with A and B at the time of the loan. Discuss
the rights of the parties. Would it make any difference if D were dead and his
estate being administered at the time?
(b) A. B and Care partners in a firm doing business carrying goods in motor trucks.
One of the drivers of a truck, while driving at a high speed on a highway,
knocks down a person who dies on the spot. Are A, B & C liable in damages
to the legal representatives of the deceased?
(c) A, B and C carry on partnership business as bankers. A receives Rs. 5,000
from Don behalf of the partnership firm for the purpose of investing it in good
securities yielding interest at 14 per cent per annum. A does not inform B and
C and appropriates the money for his own use. Is the firm liable for the money?
Would it make any difference to your answer if the partnership firm were a
firm of attorneys?
(d) A, B and C carry on a partnership business as-druggists. A orders on credit
two cases of Kulu apples to be delivered to his married daughter. The order is
sent on the firm's notepaper, and in firm's name, and signed by A as partner.
Is the firm liable to pay for the apples?
(e) A, 13 and C carried on partnership business under an assumed name (X & Co.).
A retired and D. a new partner, joined the firm which carried on the business
in its old name, 'X & Co.' A creditor filed a suit against A, B, C & D. Will he
succeed?
(f) A, B and C are partners. C is a sleeping partner. C retires. Is C liable for the
subsequent debts incurred by A and B?
(g) A, B and C are partners in a trading firm, A, acting on behalf of the firm,
performed the following acts:
(i) accepted a bill of exchange in the firm's name,
(ii) borrowed Rs. 50,000 by pledging the goods of the firm,


710 MERCANtiLE LAW

(iii) Purchased a building property of the value of Rs. one lakh for housing
the retail store,
(iv) withdre a long pending suit filed on behalf of the firm and settled the
matter out of court.
Discuss the validity of A's acts so far as the other partners are concerned.
(h) A and B are partners in a Lidding firm. They execute a deed declaring that the
partnership is dissolved with effect from 31st March, 1991. They do not give
public notice, and continue the business. On April 10, 1991 A indorses a bill
in the partnership name to C who is not aware of the dissolution. Is the firm
liable on the bill?
CHAPTER VII
Sale of (;oods

I. Define the term 'Sale of Goods'. What is the practical importance of knowing the
exact moment when the properly in goods passes from the seller to the buyer 7
Slate and illustrate the rules which determine such moment.
2. (a) 'The contract of sale is consensual, bilateral and cumulative'. Elucidate.
(b) Distinguish between 'Sale' and agreement to sell'. Give examples.
3. Ia What is meant by (i) ascertained and unaseertained goods. (ii) specific and
generic goods, (ii) existing and future goods?
(h) In a contract for the sale of goods, state when the property in goods sold passes
from the seller to the buyer.
4. What is the difference between condition and warranty in relation to sale of goods?
V hat is meant by an implied condition ? What is the ru l d of caveat e,Piptar, and
how far is it modified by implied conditions 7
5. Explin and ilustraLe the implied conditions and warrantees, in asale and stale the
consequences )f a breach in each cae,
6. When may a seller give a better title to the buyer than he himself has in the goods
cold 7 What is the rule of Market Overt ? Does it apply in India
7. When is a seller deemed to be an 'unpaid seller"? What are his rights against (I)
the goods, (ii) the buyer personally 7
8. When is a bu y er jeerred to have accepted the goods ? What is (i) an F.O.B.
contract. (ii) C.I.F. contract? Is it correct to say that a C.I.F. contract is only a sale
of docuimicnt-s?
9. State the exception, if any, to the rule that there is no implied condition as to the
quality or fitness for any particular purpose of goods supplied under the contract
of sale.
10. State the law which governs the sale of goods by auction.
11. Attempt the following problems, giving reasons for your answer:
(a) A of Agra ordered certain goods from of Bombay. B sends some goods, not
ordered, al !igwith them. What should A do?
(b) A contracts to sell to H a piece of silk. B thinks that it is Assam silk. A knows
that B thinks so, but knows that it is not Assam silk. A does not correct B's
impression. B afterwards discovers that it is not Assam silk. Can A repudiate
the contract?
(c) A sells a horse to H. When B goes with the horse he is 'r-rested by tM police
on the charge of keeping stolen property as the horse belongs to C. Is B entitled
to sue A. if so. on what basis, and what damages can he recover?
 TEST QUESTIONS 711

(d) A se!ls a horse to B. The horse will be delivered to B next week and B will
pay .the price on delivery. A instructs his servant to keep the horse separate
from other horses. The horse dies before it is delivered and before the price IS
paid. Who should suffer the loss?
(e) In January. 1991 C contracts to sell to D all the mangoes in C's garden during
the 1991 season (1st April to 31st August), for sum of Rs. 10,000. Discuss
whether the contract is a sale or agreement to sell.
(1) P makes a contract with B to sell him Java Sugar as per sample shown by P to
B. Thereafter, P delivers the agreed quantity of sugar to B which corresponds
to sample but is not Java Sugar. What are B's rights, if any?
(g) M sells and consigns certain goods to N. M being still unpaid, N becomes
insolvent. While the goods are in transit, N assigns the bill of lading for cash
to S who knows that N is insolvent. Can M stop the goods in transit ?
(h) A purchased tinned salmon from B, a grocer and provision merchant. The
Salmon was poisonous and A and his wife who ate it fell ill. A recovered from
his illness, but his wife died from the effects of the poison. A claimed damages
against B both for his illness and for the death of tis wife, which deprived him
of services rendered by her. How would you decide?
(i) A bids Rs.1.000 for a costly vase at an auction sale. The auctioneer purports
to accept the bid by striking the hammer, but accidentally strikes the vase
which breaks into picks. Who is to bear the loss?
(j) H entered into a hire-purchase agreement which B in relation to a piano on the
condition that on paying 12 instalments of Rs. 1.000 each the property should
be the properly of B. After paying 10 instalments. B pawned the piano with
M, who took it in good faith. A claims the piano from M. Will he succeed?
(k) M asked for a bottle of Stone's Ginger Wine afF's shop, which was licensed
for the sale of wine. While M was drawing the cork, the bottle broke and M
was injured. Can M claim damages for the injury?
(1) A sold a quality of seed to B who paid by cheque, which was dishonoured
upon presentment. A gave a delivery order to B for the goods and B re-sold
the goods to C, indorsing the delivery order to him. A refused to deliver the
goods to C on the plea of non-receipt of the price. Advise C.
(m) A placed an order with B & Co., requesting them to send the goods by sea. B
& Co. took a bill of lading in the name of A and sent it to their own agent. The
goods were, however, destroyed in the course of the voyage. Examine the
position of the buyer and the seller.
(n) The plaintiffs ordered goods from an English company and paid for them in
advance. The goods were to be sent F.O.B. destination Bombay. The English
company packed the goods into cases marked them with the buyer's name,
registered them for consignment and ordered shipping space in a flamed ship.
Before the goods were sent to the part, a receiver was appointed by the
debenture- holders of the English company and he refused to deliver the goods.
The plaintiffs claimed the goods, alleging that property in the goods had passed
to them. Would you allow their claim?
CHAPTER VIII, LX AND X
Insurance
Explairthe nature of a contract of insurance. Distinguish between life insurance
and other kinds of insurance.
712 MERCANTILE LAW

2. Explain and illustrate the fundamental principles of insurance.

3. What do you understand by insurable interest in connection with life, fire and
marine insurance ? When must it subsist in the case of each ? Enumerate the
different kinds of insurable interest recognised by law.
4. Explain the terms in connection with insurance : Contribution, re-insurance,
double insurance, premium and its return, surrender value, Causa Proxima, sub-
rogation, perils of the sea, cover note, bottomry and responditia.
5. (a) Discuss fully the 'implied warranties' in a contract of marine insurance.
(b). What is meant by deviation and change of voyage ? When is deviation
excused?
6. Discuss the various kinds of losses under a marine policy bringing out clearly the
circumstances in which the underwriter may be liable for each.
7. What is the meaning of Fire in a fire policy? Is loss caused in extinguishing a fire
recoverable as a loss covered by lire? If goods, insured against fire, are sold and
sulsequent to the sale are destroyed by fire, to whom is the insurer liable?
8. (a) Is the contract of life insurance a contract of indemnity? Is it a wagering
contract?
(b) Can the insurer avoid liability on the ground that
(1) the assured committ"i suicide,
(ii) the age of the assured is not correct?
(c) Can an underwriter avoid a policy on the ground of material misrepresentation
if the loss is unconnected with the fact misrepresented?
9. 'Average in fire policies is quite a different thing from average in marine policies'
Explain and illustrate.
10. Discuss the law relating assignability of insurance policies, and give the procedure
in cases where it is assignable.
II. Comment on the following:
(a) Indemnity is the controlling principle of insurance law, but all insurance
contracts are not perfect contracts of indemnity.
(b) A contract of insurance is not merely a gainble on an uncertain future.
(c) Insurance is a contract on speculation.
(d) Insurance is sometimes called an aleatory contract; it is not, however, a
wagering contract.
(e) The use of the term 'warranty' in a contract of insurance should be distin-
guished from its use in other branches of the law of contracts.
(f) A motor insurance policy, or a fire or burglary policy is a contract of personal
indemnity.
12. Attempt the following problems, giving reasons for your answers:
(a) A takes a policy on his wife's life and divorces her. She dies. Can A recover
the amount of the policy?
(b) If a theft is committed during the confusion following an outbreak of fire, is
the insurer liable on a fire policy to make good the loss by theft?
(c) A. B and C are three contiguous houses insured against fire. An earthquake
caused A to fall and as a consequence fire broke out and spread to B where an
explosion occurred whereby C was wrecked. Is the insurer liable for the loss
caused to C?
(d) A. who has a policy on his life, nominates B as his nominee. B dies during A's
life time. After A's death B's heirs claim the policy money. Discuss the rights


TEST QLJESTIONS 713

of B's heirs. Will it make any difference to your answer if A had assigned the
policy to B?
(c) X, a Delhi professor, insures his household goods against risk of lire. While
smoking in his bed X falls asleep and the goods catch fire. X escapes with a
few burns. Can X recover under the policy?
(f) A insured his house against loss by fire. Later, while insane, he killed his wife,
severely injured his only son, set lire to the house and died in the lire. The son
survives and sues the insurer for the lire loss. Is he entitled to recover?
(g) A fire broke out on board a ship and caused damage to some cargo belonging
to A. In putting out the fire by water some cargo of B was damaged. Discuss
if A or B can claim general average contribution from the owners of the other
interests in the ship and cargo.
CHAPTER XI
Negotiable Instruments

1. Explain the term negotiable instrument State the chief instruments which are at
present regarded as negotiable and discuss the statement 'the list of negotiable
instruments is not closed, it may be added to if the necessary conditions are
fulfilled.'
2. Explain clearly what is meant by 'negotiation.' How is it effected and how does it
differ from an ordinary assignment. Can an overdue instrument be negotiated?
3. (a) Define promissory note and distinguish it from a bill of exchange.
(b) What are thpresumptions ih respect of a'iegoiable instrume .t
4. State the different circumstances in which a holder in due course can regard a
negotiable instrument as dishonoured. What are his rights and obligations in the
event of a dishonour?
5. Explain clearly the following:
(a) Inland instrument; (b) ambiguous instrument;
(c) inchoate instrument; (d) endorsement; (e) acceptance for honour;
(t) drawee in case of need; (g) noting and protesting.
6. (a) Define (I) holder, (ii) holder in due course. State and explain some of the
important privileges of a holder in due course.
(b) In a suit on a pro-note, can the defe ndant set up the plea of total or partial
failure of consideration?
7. State concisely the essential features of an instrument which make it negotiable
and specify the points of difference between the negotiability and assignability of
such instrument.
8. (a) In what respect does an accommodation bill differ from a trade bill?
(b) What is meant by (i) dishonour for non-acceptance, (ii) dishonour for non-
payment ? State the cases in which notice of dishonour is not necessary.
(c) The failure of consideration for a negotiable instrument is material only
between immediate parties to the instrument. Comment-
9. (a) 'Any bill of exchange on which the 'bearer' or 'order' appears is and remains
a negotiable bill and no words prohibiting transfer or indicating an intention
that it should not be transferred have any effect Units negotiability. Comment.
(h) When is payment on a negotiable instrument said to be payment in due course?
10. (a) Hag a holder of a cheque any remedy against the banker for wrongful dishonour
of the cheque?
714 MERCANTILE LAW

(b) Discuss the law relating to crossed cheques with special reference to the
liabilities of the collecting banker in respect thereof.
(c) If a cheque is paid across the counter against a forged indorsement, has the
drawer or true owner a right of action against the banker?
(d) Explain the effect of 'Not Negotiable' crossing. (ii) 'Account Payee only'
crossing.
11. (a) Indicate the cases in which a banker (i) may, (ii) must, refuse to honour a
customer's cheque.
(b) Specify the conditions under which the duty and authority of a banker to pay
a cheque drawn on him by a customer is determined.
12. Indicate the significance and implications of the 'marking' of a cheque as good.
Does 'marking' of a post-dated cheque bind the hanker who certifies it?
13. (a) What are the circumstances in which a party to a negotiable instrument is
discharged ? Discuss the liability of prior parties on a negotiable instrument
to a subsequent holder and amongst themselves.
(b) What are the exceptions to the rule that the effect of a material alteration of a
negotiable instrument is to discharge all panics liable oil at the time of the
alteration ?
14. Attempt the following problems, giving reasons for your answer:
(a) A gives a blank acceptance to one Banerji, who fills it up as a bill payable to
the drawer's order and himself signs it as the drawer and the first indorser in
a fictitious name 'Jogendra Singh'. Is A or Banerji liable to the holder of the
bill?
(h) A bill of exchange is drawn in favour of John Smith or order. At maturity
another person of the same name is in possession of the instrument, endorses
it, and presents it for payment. The acceptor pays him. Is he discharged by
such payment? Would there be any difference if the instrument were a cheque
and was paid by the drawee banker in due course?
(c) A breaks open B's Cupboard and gets hold of B's cheque book. A then forges
B's signature on a cheque and obtains money on it from B's hanker. A then
disappears, who should bear the loss. B or the banker?
(d) Discuss whether any of the following is a valid pro-note:
(i) A promises to pay B or bearer the sum of Rs. 5.000 on 6 months after
date,
(ii) A promises to pay the hearer oil the sum of Rs. 5.000;
(iii) A promises to pay B or order the sum of Rs. 5,000 one month after C's
death;
(iv) A executes a writing in favour of B as follows: '1 acknowledge myself to
be indebted to B in the sum of Rs. 5,000 to be paid on demand for value
received'.
(e) A, B and C are drawer, drawee and payee respectively of a cheque. If, before
the cheque is presented for payment. one of them becomes insolvent, how are
the others prejudiced?
(1) B obtains A's acceptance to a bill by fraud. B indorses it to C who takes it as
a holder in due course. C indorses the bill to D who knows of the fraud. ('an
P recover from A?
(g) A draws a bill of exchange oil payable to C or order. C indorses it in blank
and negotiates it. The bill is thereafter lost and X, who finds it, forges an
 715
TEST QUESTIONS

E. Discuss if E has
indorsement in blank of D and negotiates it by delivery to
any rights on the instrument and, if so, against whom?
B. B indorses it to C, C
(h) A, the holder of a bill, endorses it 'Sans Recourse' to
to D. U to E and E endorses it again to A. Can A recover the amount of the
bill from B, C, D and E or any of them?
(i) A bill was left in the drawee for acceptance. The drawee having written his
acceptance upon it kept it in his possession, and two days after having heard
that the drawer had failed, cancellled the acceptance and returned the bill to
the holder. Was the drawee entitled to do this?
C. a
A promissory not. is executed by A in favour of B in consideration of
relation of B, for bearing to sue on a prior pro-note executed by A in favour
of C. Has the note executed by A in favour of H any lawful consideration?
(k) C, the payee of a bill, indorses it in blank and delivers it to D, who specially
the
indorses it to E, or order. E without indorsement transfers it to F. Consider
rights of F.
CHAPTER XII
Insolvency

I. Describe fully what constitutes Acts of Insolvency.

2. (a) Under what circumstances and at whose instance may a person be adjudicated
all
(b) Who can, (ii) cannot be adjudged an insolvent?
3. (a) What is an order of adjudication ? What are its effects?
(b) 'The object of an adjudication is to free the debtor from the claims of creditors,
which are to be satisfied out of the insolvent's estate, which the Court takes
possession of and distributes among his creditors'. Discuss fully.
4. Write explanatory notes on the following:
(a) Public examination of the insolvent;
(b) Protection order and its effect;
(c) Fraudulent-Preference;
(d) Protected Transactions;
(e) Disclaimer of onerous property;
(f) Doctrine of Relation Bank;
(g) Doctrine of Reputed Ownership;
(h) Preferential debts;
(i) Committee of Inspection.
5. (a) Define insolvent's property. What property of the insolvent (i) is divisible, (ii)
is not divisible among his creditors?
(b) State the duties of an insolvent as to discovery and realisation of property.
6. (a) Whit debts are provable in insolvency? What debts are not provable?
(b) What is the mode of distribution of property of the insolvent?
7. (a) Discuss the effect of insolvency on antecedent transactions.
(h) When may Insolvency Court annul an order of adjudication. State the effect
of the annulment order.
8. What is an order of discharge ? What are its effects ? State the powers of an
Insolvency Court in deciding an insolvent's application for his discharge. What
matters must the Court consider in deciding the application for discharge?
716 MERCANTILE LAW

9. (a) State the cases in which the Court must (1) absolutely refuse the discharge, (ii)
refuse to grant an absolute discharge.
(b) What are the disabilities of an undischarged insolvent?
10. (a) 'In matters of arising out of insolvency the Official Assignee or the Official
Receiver has a higher title then the insolvent.' Discuss.
(b) 'The effect of the doctrine of reputed ownership is to take one man's property
to pay another man's debts.' Discuss the statement, explaining the range and
scope of the doctrine.
11. 'A debtor may not by stipulation with a creditor, provide for a different distribution
of his effects in the event of his insolvency from that 'ihich the law provides'.
Elucidate.
12. Attempt the following problems, giving reasons for your answers:
(a) A gives goods to B. a commission agent, for being sold. The goods remain
unsold with B. who is adjudged an insolvent. Can the Official Assignee claim
the goods ? Would it make any difference to your answer if the goods have
been sold off before adjudication and money had not been received by B form
the buyer?
(b) A, while in a solvent condition, makes gift of his house to his daughter B.
Fifteen months thereafter he suffers heavylosses and within eighteen months
of the date of the gift he is adjudged an insolvent. Can the Official Assignee
get the gift set aside?
(c) A owed a debt to B. A was adjudicated insolvent on his ownpetition. B's claim
was not time barred at the date of the petition but became time barred before
the order of adjudication was made. Is B entitled to prove his claim in
insolvency?
(d) L, the owner of a motor car, lent it to his friend M for his domestic use.
Unknown to L, M used the car in his business, so that Ms customers came to
regard the car to belong to M. On the insolvency of. M, can the Official
Assignee claim a title to the car?
(e) A debtor pays in cash Rs.5,000 which his solicitor requires to defray counsel's
fees and other legal. expenses in opposing a petition for adjudication filed
against him. The petition ends in an order of adjudication. Can the Official
Assignee or Official Receiver compel the solicitor to refund the money?
(f) A trader obtains a loan under an agreement to deliver to the lender the next
day goods of an equivalent value lying in his godown to secure the loan. Both
the borrower and the lender put their own locks on the door of the godown.
The borrower absconds the same night and is subsequently adjudged an
insolvent. The Official Assignee claims the goods. How would you decide?
(g) A sells a patent to B in consideration of B paying royalties to A. At the same
time B advances to A asumof Rs. 1,25,000 as a loan. It is agreed that B should
retain one-half of the royalties as they became payable to A. from time to time,
towards the satisfaction of the debt, provided that if A should become insolvent
B would have the right to retain the whole of the royalties in satisfaction of
the debt. A becomes insolvent before the debt is fully paid. Can B retain the
royalties as stipulated?
(h) On an insolvent's application for discharge, the Insolvency Court ordered: "I
do not grant an absolute discharge, but grant a conditional one, the condition
being that the creditors may recover their dues, if within time, until they
become irrecoverable". Examine the validity of the order.
 TEST QUESTIONS 717

(i) An insolvent was granted aconditional discharge. A, ajudgment creditor, filed

a petition for the execution of a decree which he had obtained prior to
adjudication, by attachment and sale of a house belonging to the insolvent's
wife. Discuss whether A will succeed.
CHAPTER Xffl
Arbitration
1. What is meant by submission to arbitration ? What is the effect of such submission
on an action?
2. What are the different modes of submission ? What can be referred to arbitration?
Who may refer
3. (a) Under what circumstances would the court appoint (i) an arbitrator, (ii) an
unpire?
(b) Discuss the relative advantages of the settlement of a dispute under the
Arbitration Act.
4. (a) What are powers and duties of an arbitrator?
(b) State the presumptions in relation to arbitration.
5. Explain the nature of control the Court exercises over the proceedings of an
arbitrator under the Arbitration Act. When may an arbitrator state a special case
for the opinion of the Court?
6. (a) What powers do the Courts enjoy over awards by an arbitrator?
(b) When may the Court (i) modify or correct, (ii) remit for reconsideration, (iii)
set aside an award?
7. What are the powers of the court where arbitrator is removed or his authority is
revoked?
8. Attempt the following problems giving reasons for your answers;
(a) An arbitrator sends notice by registered post to parties to appear before him
on a certain date. One of the parties fails to appear. The arbitrator records the
evidence of the other party in his absence and makes an award. What are the
remedies open to the party against whom the award has been given in his
absence?
(b) In a suit by P's widow for maintenance provided by P's will all the parties
agreed to appoint K as the sole arbitrator for settling the dispute and to abide
by his decision. The arbitrator examined the defendant in the absence of the
plaintiff and perused the will without letting her have her say. Can the award
be set aside?
(c) In a dispute between A and B for the possession of a certain property, the
arbitrator gave an award on the basis of a draw of lots in favour of B, who took
possession of the property. A challenges the award. Decide.
CHAPTER XIV
Carriage Goods
1. Who is a 'common carrier'? How does he differ from a private carrier? What is
meant by the statement that a common carrier is an insurer of goods. To what extent
can a common carrier reduce his liability by special contract ? Are railways in
India common carriers?
2. What is a contract of affreightment ? What conditions are implied in such a
contract? If any one of these conditions is broken, what is the legal consequence?
715 MERCANTILE LAW

3. Distinguish a Bill of Lading from a Charter Party. What are their respective
functions ? Is bill of Lading negotiable?
4. (a) Explain the functions of bill of lading. How far is it regarded as a negotiable
instrument ?
(b) 'A bill of lading is negotiable only in a popular sense and not in technical
sense. Comment.
State clearly the position of the holder of a bill of lading in respect of goods carried
on a chartered ship (i) when he is both the shipper and charterer,(ii) when lie is a
shipper other than a charterer; (iii) when he is an indorsee from the shipper.
6. Is the indorsee of a bill of lading liable to pay (i) freight, (ii) the loss caused to the
ship owing to the dangerous character of the goods, (iii) the general average
contribution?
7. (a) What are the powers and duties of the master of a ship during voyage ?
(b) Of what facts are (i) Air Waybill, and (ii) a bill of ladingprinrafacieeVidCflCe
Why is it advisable for a carrier of goods by air to insist on an Air Way Bill ?
8. 'The law charges the common earner thus entrusted to carry goods against all
events but Acts of God and of the public enemies'. Comment and state the present
position of the law regarding liabilities of railway administration for loss of or
damage to goods, animal or passengers' luggage.
9. Attempt the following problems, giving reasons for your answers:
(a) Three boxes described to contain stationary and Eversharp fountain pens and
pencils (with nibs, clips and caps of gold) were put in the luggage Van and
receipt obtained by L, who was travelling in a SCOfl(l class compartment from
Bombay to Amritsar. At Delhi, L enquired whether the boxes were there, but
got no information, and was told to inquire at Amritsar. At Amritsar he was
told that the boxes were missing. Can L recover damages from the railways?
(h) A consigned a marble statue valued at Rs. 9,000 wrapped in grass and gunny
bags and did not declare its value at the time of tendering it to the station master.
The statue was damaged in transit. Is the Railway liable?
(c) A carrier issues a bill of lading acknowledging receipt of a box of goods. The
agent for the carrier notes on the bill of lading that the weight, value, contents
and quantity of the goods are known. The shipper transfers the bill of lading
to a bona fide purchaser. When the goods are found not to be the same as
described in the bill of lading the latter brings an action for damages against
the carrier. Will he succeed '?
(d) An agent for a carr'er issues a bill of lading acknowledging receipt of certain
perishable goods. No goods, in fact, were delivered to the carrier. The bill of
lading is transferred to a bonafide purchaser. Thereafter, the purchaser of the
bill of lading sues the carrier for failure to deliver the goods. Is he entitled to
recover damages ?
(e) The goods of disappeared somewhere between Delhi, the point of shipment,
and Bombay, the point of destination. The Railway Administration disclaimed
liability for the loss on the ground that they were stolen by thieves. Was A
entitled to recover
(f) 'One hundred barrels of oil and one hundred and six bales of palm baskets
were shipped under a bill of lading which contained the clause not accountable
for rust, leakage or breakage. Oil two barrels of oil were found to be
ennoty and sixty hales of palm were damaged with oil. The shipper sued the
ship owner for damages on account of the loss suffered.' Decide.
 TEST QtJFS11C)NS 719

CHAPTER XV
Mortgages and Charges

1. Define a mortgage, a charge, and distinguish between them.

2. Briefly described the various kinds of mortgages, bringing out clearly the distin-
guishing features of each.
3. State the rights and liabilities of (i) mortgagor. (ii) mortgagee.
4. Explain fully (I) Equity of Redemption; (ii) Tacking; (iii) Equitable Mortgage; (iv)
Marshalling of Securities; (v) Clog on the Right of Redemption; (vi) 'Once a
mortgage always a mortgage'.
5. Explain and illustrate (i) Contribution (ii) Subrogation, in connection with
mortgages.
6. What is meant by 'Right of Foreclosure'? When and how can a mortgagee exercise
this right? State the cases in which a mortgagee has no right to sue for mortgage
money.
7. Define a Bill of Sale. Distinguish between an absolute and conditional bill of sale.
CHAPTER XVI
Company Law

I. (a) Explain the concept of corporate personality and the principle of limited
liability.
(h) Elaborate the doctrine of lifting the 'corporate veil'? How far does it ensure
protection to third parties
2. 'The fiindzuncnal attribute of corporate personality is that the corporation is legal
entity distinct and separate from its members.' Discuss fully.
3. Describe the procedure for the incorporation of a company, and name the docu-
ments and statements that must he filed with the Registrar of Companies.
4. Define a private company and distinguish it from a public company.
5. Enumerate the advantages from legal point of view, of converting a partnership
business into a private limited company.
6. Outline the procedure for converting a private company into a public company and
a public company into a private company.
7. Under what circumstances does a private company become a public company ?
. Write explanatory notes on:—
(a) Government Company;
(h) Holding and Subsidiary Companies;
(c) Company Limited by guarantee; -
(d) An association not for profit;
(e) One-man company.
9. (a) I)cfine 'Promoter'. Mention his legal position, functions, duties and liabilities.
(h) Promoter is not a trststec or agent of the company but stands in a fiduciary
position towards it. Discuss.
10 Explain the law iii relation to pre-incorporation contracts, and those entered into
after incorporation but before the company entitled to commence business.
I I (a) What do you understand by (i) Memorandum of Association. (ii) Articles of
Association'? What is the purpose of each ?
(h) Mention iI clauses that a Inemoranditin must contain. Describe the procedure
for altering the memorandum.
720 MERCANTILE LAW

(c) Describe the procedure for altering the articles and state the limitations to such
alteration.
12. What is the effect of memorandum and articles upon members and outsiders?
13. Explain fully and state the limitations to -
(a) the doctrine of ultra vires,
(b) the doctrine of indoor management.
14. How and in what circumstances may a company increase, re-organise and reduce
its share capital?
15. Explain the meaning and importance of Prospectus. What legal consequences flow
from misrepresentation contained in aprospectus in respect of rights and liabilities
of different parties concerned?
16. Define debenture. Explain different kinds of debentures. Distinguish debentures
and debenture Stock. Enumerate the charges requiring registration.
17. Distinguish between fixed charge and floating charge, and explain the nature and
incidence of a floating charge. When does a floating charge become fixed or
crystallise?
18. Distinguish between the various kinds of meetings of a company and different
classes of resolutions.
19. What are the powers of the majority and rights of the minority shareholders?
20. (a) Write explanatory notes on investigations under Sections 235 and 237 of the
Companies Act., 1956.
(b) Explain the provisions of the Companies Act for the prevention of oppression
and mismanagement.
21. State the present position of the law with regard to the appointment and
removal of auditors, as well as the number of companies of which a person can be
an auditor.
22. Discuss the duties and liabilities of an auditor in the light of the dictum that an
auditor is "a watchdog, not a blood hound".
23. Explain the nature of a call. In what circumstances may shares be forfeited and
what is the effect of forfeiture?
24. Explain the present position of the law regarding declaration and payment of
dividend. What is the duty of a company with respect to unpaid or unclaimed
dividends?
25. Discuss the law relating to the appointment, remuneration and removal of directors
of a public company. When does the office of a director become vacant?
26. (a) 'The directors are the mere trustee and agents of the company'. Examine this
statement in the light of the legal position of directors.
(b) 'As fiduciaries, directors must not place themselves in a position in which
there is a conflict between their duties to the company and their iiderests'.
Explain and illustrate by referring to the provisions of the Companies Act.
27. Define and distinguish Managing Director and Manager. State the present position
of the law regarding appointment, and remuneration of Managing Director,
whole-time director and Manager.
28. Discuss the extent of the powers of a company to enter into compromise or scheme
of arrangement for reconstruction or amalgamation and describe the procedure to
be adopted for the purpose.
29. In what circumstances may a company be wound up by the Court? Who are
entitled to petition and whbn? What is the effect of a winding up order?
 TEST QUESTIONS 721

30. Outline the procedure for voluntary winding up. What is a declaration of solven-
cy?
31. Point out the distinction between and special features of (i) a winding up of a
company by the Court, (ii) a voluntary winding up. and (iii) a winding up subject
to the supervision of the Court
32. (a) Who is a contributory ? What is the nature and extent of his liability?
(b) State the constitution, functions and legal position of a Committee of Inspec-
tion.
33. 'An unpaid creditor has a right ex debirejuslitiae to a winding up order'. Elucidate
and explain when a creditor is deemed to be unpaid in order to entitle him to present
a petition for winding up.
34. (a) Explain the powers and duties of (i) Official Liquidator, (ii) Voluntary
Liquidator.
(b) What is the status of a liquidator ? Is he an agent of the company ? Is he a
trustee?
35. What is meant by an 'unregistered company'? What are the circumstances under
which it can be wound up? Can a foreign company or an illegal association be
wound up as an unregistered company?
36. Attempt the following problems, giving reasons for your answers:
(a) A furniture dealer entered upon a contract with a company for furnishing the
offices of the company. The company went into liquidation before it became
entitled to commence business. Can the furniture dealer prove in the winding
up for the price of furniture supplied to the company?
(b) The Managing Director of a company borrowed a sum of Rs. 50,000 by signing
a promissory-note to be payable on 23rd August, 1990. When the pro-note
was presented for payment to the company, it refused to pay on the contention
that the Managing Director was not authorised to borrow without the previous
sanction of the Board of directors, which had not been granted. Would the
contention of the company be upheld?
(c) A shareholder of a company, who sold his shares, executed blank transfer
forms and delivered them alongwith the share certificates to the purchaser. He
wrote to the company that he had sold his shares, but neither he nor the
purchaser deposited the transfer forms with the company, and consequently
the transfer was not registered on the register of members. On the winding up
of the company, who should be placed on the list of contributories?
(d) A, the director of a public limited company borrows money from the com-
pany. Discuss the legality or otherwise of the loan (i) if it is with security, (ii)
if it is without security, (iii) if the company is a banking company.
(c) A company borrows money from X beyond its powers. Has Y. a shareholder,
any remedy against (i) the company, (ii) the directors of the company?
(1) In a winding up the Court makes a call of Rs.5 per equity share. The company
owes Rs. 1,000 to a shareholder, who holds 500 equity shares. How much will
the shareholder have to pay in pursuance of this call ?
CHAPTER XVII
Factories Act

1. Define a factory aind an occupier. When is a worker liable to punishment under the
Factories Act?
2. Enumerate the general duties of (i) the occupier and (ii) the manufacturer.


722 MERCANTILE. LAW

Briefly state the provisions of the Factories Act with regard to health and welfare.
Describe the constitution of the Site Appraisal Committee in relation to the setting
up of a factory involving hazardous processes. Also state the duties of occupier of
such factory.
Examine the provisions of the Factories Act regarding hours of work and leave
with wages.
What restrictions are imposed by the Factories Act in the employment and work
of Women and Young persons?
Attempt the following problems. giving reasons for your answers:
(a) In a factory, women workers were allowed by the occupier to dust and
otherwise regulate their spinning frames for their own satisfaction and comfort
before the fixed time. What action would be taken against the occupier?
(b) The services of a woman worker who had completed e
a period of four months'
continuous service in a factory weie terminated b fore she had completed the
period of twelve months continuous service. To what leave is she entitled '?
Would it make any difference if she were a girl under the age of 15 years ?
(c) A was the owner and B manager of a factory which was sold to C on March
1, 1991. Immediately after possession, C appointed I) as a manager who,
during a check up, discovered that a boy, ten years old, had been working in
the factory since January 1, 1990. 1) reported the fact to the Factory Inspector
and discharged the boy, whereupon prosecution was launched against A, B,
C and D. How would you decide the case?
CHAPTER XVIII
Workmen's Compensalion
Distinguish between total and partial disability (disablement) of a workman under
the Workman's Compensation Act. 1923.
2. When is an employer liable and not liable to pay compensation to a workman for
personal injury ?
3. Explain and illustrate the expression 'arising out of and in the course of
employment'. Where an accident arises out of and in course of employment, can
the employer plead 'common employment'. 'assumed risk' or 'contributory
negligence, in his defence?
4. Discuss whether the employer is liable to pay compensation in the following cases:
(a) A workman went across the road to fetch milk for himself for tea on the
promises and was run over.
(b) An employee left the employer's promises to take meals elsewhere.
(c) A roadman, while working on the road, was killed by lightning.
(d) A worker working in a shed was injured by the fall of a wall which was not
the property of or under the control of the employer.
(e) A miner in the drilling work for releasing gas was forbidden to enter the gas
filled part of the mine. H violated the order and was suffocated.
(f) An electrician in a f4ress had, in the course of his duties frequently to go into
the heating room and from there to a cooling plant where the temperature was
kept considerably low. One night, when he went into the cooling room, he got
pneumonia and died from that disease.
(g) A worker lost his mental balance as a result of an injury by accident and
committed suicide.
 TEST QUESTIONS 723

CHAPTER XIX
Trade Unions
(a) Define Trade Union. State the rights and privileges of a registered u-ads union
and of its members.
(b) Does a suit lie to prevent the office bearers of a registered trade union from
trespassing on the plaintiff's land (accompanied by some armed persons) and
staging demonstrations thereon which are calculated to over,e and in-
timidate the plaintiff and workmen?
2. Describe the procedure for the registration of a trade union and its iissolution.
When may registration be cancelled?
3. When and for what purpose may a trade union create a political fund?
4. What is general fund ? State the purposes for which it is created.
CHAPTER XX AND XXI
Payment of Wages, Industrial Disputes

1. Define wages under the Payment of Wages Act. 1936.

2. (a) Who is responsible for payment of wages?
(b) Explain the provisions regarding time limit for payment of wages.
(c) Is an employer permitted to pay wages in kind?
3. (a) Discuss the nature, conditions and extent of authorised deductions from the
wages of a worker.
(b) What amount of compensation is payable to a worker for wrongful deductions
and delay in payment of wages ?
4. (a) X was employed in an industrial establishment governed by the Payment of
Wages Act, 1936. His total wages per month were Rs. 1200. The employer
deducted from his wages an amount of Rs. 900 during one month. The
deductions included fines, provident fund, water charges, light charges, fes-
tival advance instalment and cooperative society's dues. The worker seeks
your advice. Advise him.
(b) The employer of a worker under the age of 15 years and earning Rs. 300 a
month deducts Rs. 5 by way of fine from his wages for the month and credits
the amount to a fund created for building a temple in the employer's village.
The employee petitions for refund and prays for punishment to the employer.
Will he succeed?
(c) The N. Railway reduced the monthly rate of pay of A, an engine driver, by
Rs. 25 for unsatisfactory work. Advise A.
5. (a) Define and distinguish 'Lay-off' and 'Retrenchment'. What compensation is
payable under each?
(b) Discuss whether the termination of services in the following cases amounts to
retrenchment:
(I) where the date of termination is written in appointment letter itself;
(ii) where services are terminated during the probation period on the ground
of unsuitability.
6. Explain clearly the maci- cry that exists under the Industrial Disputes Act for the
prevention, settlement and adjudication of industrial disputes.
7. Examine the powers and duties of a conciliation officer, and an Industrial Tribunal.
724 MERCANFILE LAW

8. State the provisions relating to voluntary reference of industrial disputes to

arbitration.
9. (a) Distinguish between strike and lockout. When are strikes and lockouts illegal
under the Industrial Disputes Act?
(b) Wh.t are the liabilities of a person inducing or financing an illegal strike?
10. Discuss the consideration taken into account by the Adjudicators or Industrial
Tribunals in deciding the issue of payment of wages during a period of strike or
lockout.
11. Explain the provisions of the Industrial Disputes Act relating to recovery of money
due from an employer to a workman.
12. State the legal implications of the provisions of Section 25FF of the Industrial
Disputes Act relating to transfer of ownership or management of an undertaking
from one employer to another employer.
13. Attempt the following problems giving reasons for your answers:
(a) Some workmen of a transport company were dismissed and retrenched by the
employer. Out of a total of 60 workmen employed by the company, 18
workmen sponsored the cause of dismissed workmen and raised a dispute.
Those who sponsored the cause of dismissed workmen included 13 dismissed
workers of the company. The dispute was referred by the State Government
to the Labour Court. Can the dispute be said to be an industrial dispute so as
to justify a reference by the State Government to Labour Court?
(b) The employees of a bank enter the premises and occupy their respective seats,
but do not pick up the pens to start working. Does this amount to a strike?
(c) As a result of faction between rival trade unions there was a stoppage of work
for twelve days in a colliery, and not a single worker out of a total strength of
2,200 men attended. The employer contended that the cessation of work was
a concerted refusal to work without notice and amounted to an illegal strike.
Decide the case.
CHAPTER XXII
Minimum Wages
I. What is a minimum wage, a living wage ? Describe the procedure for fixing
minimum wages.
2. Discuss the provisions according to which the employer must pay to his employees
a minimum wage. What are the consequences of failure to pay the minimum wage?
When and how can an employer escape liability for an offence committed against
the Act?
3. (a) Enumerate the different kinds of employment in which minimum wages must
be paid.
(b) Is an employer bound to pay the minimum wage even when the business is
running at a loss?
 INDEX
A Ambiguous Instrument, 309
Annual Return, 459
Abandonment, 263 meeting, 475
Acceptance Annulment of Adjudication, 364
of bill of exchange, 326-328 of composition, 365
of goods, 225 Anomalous inorlgage, 420
of offer, 20 Anticipatory Breach, 86
for honour, 328 Appropriation
modes of, 21 of goods, 214
presentment for, 329 of payments, 71
revocation of, 22 Arbitration, 386-399, 502
Accept; who may. 20,329 agreement, 386
Acceptor for honour, 329 award, 394-398
Accident modes of submission to, 389
Insurance, 280 Arbitrator arid Umpire. 390, 392
Accommodation bill, 297 appointment by Court, 392
Accord and Satisfaction, 32,77 duties and powers of, 392
Account Payee, 316 Articles of Association, 447
Accounts alteration of, 448
of company, 480 effect of, 448
of partnership. settlement, 187-189 Ascertained Goods, 202
Acts of Insolvency, 354-355 passing of property in, 213
Act of the Finn, 182 Assignment
Adatia,55 of contract. 77
Adjudication Order, 359 of policy. 261,271.278
Annulment of, 364 Association not for profit, 438
Advisory Commission, 506 Auction Sales, 232
Commmirtee, 506 Auctioneer, 143
Affreightmeni, contract of, 406 Auditor and Audit, 482-485
Agency Average
creation of. 138 carnage of goods in, 411
temsination of, 153-54 clause, in fire insurance, 269
Agent general, in marine insurance, 268
and Principal, defined, 137-138 particular, in marine insurance, 265
authority of. 148 Avoidance of Fraudulent Preference, 362
classes of, 141 Award, 396
personal liability of, 152-153
Agreement. 10-24 B
arbitration, 386
illegal. 49-51 Bailment and Pledge, 124-133
immoral, 52 Banker, 143,301
opposed to public policy, 55 collecting, 304
unlawful, 49 Baisk Draft, 298
Allien Enem y , 37 Bank, marketing of cheques by, 307
Allotment of shares, 460-465 protection of paying. 301
irregular, 462 rights of holders, against, 304
return of, 462 Bearer lnstrunsent, 328
Alteration Bill of Exchange, 296-298
of articles, 448 Bill of Lading, 409-412
of memorandum, 444 Bill of Sale, 426
of negoiable instruments, 338 Bottoniry & Respondentia bond, 270

725

726 MERCANTILE LAW

Breach of Contract, 85.230 auditors. 484

anticipatory or constructive, 86 balance sheet. 480-82
remedies for, 87 borrowing powers. 469474
Brokers, 142 calls, 467
Buyer. 183 chainrian. 476
acceptance of goods, by, 223 CoflInIencefliCIst of business, 441
duties of. 221 commission, 465
rights of. 231 contracts, preliminary, 439
sale by, 219 debenture and debenture stock, 470
directors, 488-502
C dividends. 467-468
capitalisation of profits, 469
Calls, 469 fixed or floating charge, 471
Capital clause, 443 foreign companies, 437
Carnage, contract of, 400 government companies, 437
by air. 413 416 holding and subsidiary companies, 436
of goods by sea, 406-412 investment company. 437
Carriers, 400 liability of members. 456,470
common, 130,400 liquidators, 512-514
private, 400 manager, 498
railway, as, 402-406 managing agent, 501
Catisa Proxima, 244,263 managing director, 498
Caveat Emptor, 41, 192 meetings. 574-578
Certificate of Incorporation. 439 nsemherslsip, 455-459
('hamperty and Maintenance, 57 mensoranduin of association, 438
Charges, 469 minimum subscription, 461
register of, 472 mortgages, 470
Cliarlerparly, 406 notice of trusts, 457
Cheques, 298-309 preliminary contract, 440
C.I.F. orC.F.i. Contracts, 217 private company, 434
('.l.FCJ. Contracts, 219 prohibition of large partnerships. 438
Coercion, 45 promoter, 440
Commission, agent, 142 prospectus. 451
under Company Law, 465 proxy, 577
Common carrier, 131,400 public company. 434, 436
Common Law, 2 public deposits, 454
Communication, when complete. 15,19 public trustee, 458
Csanpany, 430 quorum. 476
formation of, 439 rectification of register. 457
Company Law, 431-520 relative, 503
accounts of conspany,482 resolutions. 478-480
advisory committee, 506 secretaries and treasurers, 502
allotment of shares, 460-465 shares, 459-460
alteration of allotment of, 460465
articles of association, 448-89 certificate of. 466
Benanti holding, 459 classes of. 460
capital. 445-46 forfeiture of. 467
niensoranduni of association. 438 issue of. at premium or discount, 463,464
annual return, 459 transfer of. 465-469
appointment of auditors. 482485 blank transfer. 466
directors, 504 certification of, 466
managing agents, 501 forged transfer. 466
special audit. 484 surrender of. 467
articles of association, 447 share warrant, 464
 INDEX 727

stock, 461 pledge, 131

underwriting commission, 463 sale of goods. 197
winding up, 507-512 uberrimac fidei, 43
consequences of, 509-511 Corporation, 38. 434
liquidators 512-514 Crossing of Cheques. 305-308
compulsory, 507 Crosswords. 55
under SUL)CrViSiOli, 509
voluntary, 50 ii:
Compensation, Workmen's. 339, 547
Dantages
amount of, 554
buyer's right for. 231
Composition and Scheme, 502 for breach of contract, 88-94
Conditions and Warranties, 207. 254
rules re, 92
Consent. 9 sellers right for. 230
absent, what effect, 38
Dangerous Goods, 402
discharge of contract, by. 75
Debentures. 470
essential in contract. 9
Debenture Holders
flaw in, 3744 appointment of Receiver by. 472
consideration. 25-32
remedies of, 472
accord and satisfaction, 3177
register of, 472
Contracts, 5
l)ebent ure Stock, 470
assigunteIlt of, 74
Debts
bilateral and iiiulateral, 9
priority of. 374. 510
kinds of. 7
in insolvency, 374
otttingent. 68
in winding Up. 5 10
definition of. 5
proof of,
devolutton. 73
in insolvency. 366
discharges of. 67
in windiup.510
essentials of a valid, 9
Del Credere Agents, 143
cot iseilsIts ad ident. 10
Delivery (See Sale of floods). 222. 230
proposal or oiler. 10
Demurrage, 408
acceptance, 20
Deviation, 257
consideration, 24
justifiable. 258
flaws in contracts, 33-38 liabilities, 73
Devolution of joint rights and
void agreements. 35. 64
Director (See Company Law), 488
void and voidable. 803
Dishonour of Bill, 332
flaw in capacity, 33
Dividends. 468
flaw in cotiseitl. 37
l)octriiie of ultra-vires, 443
implied or quasi contracts. 64
Double Insurance, 247
novation, 76
Drunken Persons. 37
teitiedies for breach of. 87-95
unlawful agreements, 51
LO
illegal, 50, 52
illegal and void, SO Equity. 2
immoral, 53 of redemption, 420
op1 sed to public policy. 56 Equity shares, 460
Cool rac' of Equitable Mortgage, 419
agency, 138-141 Estoppel
affreightntent. 406 agency by. 138
bailment, 124 p.-smlners by. 167
carnage. 40)
guarantee, 108-112 F
utdeitinity,,1 07-108
insurance. 241 Factories Act, 521-551
mortgage. 418 certifying surgeon. 523

728 MERCANTILE LAW

del initions, 521 Industrial Disputes Aci,5866l5

emp1oiiseii I of women. 541 auihorities under, 589, 594
of young persons. 542 definitions. 586-592
health. 529-53 1 lay-off, 590,604
inspecting staff. 527-529 procedure under, 586, 600
leave with wages, 545 ret rcnchtuent, 51)1,605
penalties. 550 strikes and lock-outs, 590, 591, 603-604
safety. 531-533 Infants (Sec Minors), 33
welfare, 536 Insolvency, Law of, 352-385
working hours, 537 acts of, 354-355
Findet of goods, 67, 129 Adjudication order, 359
Fire lnsuran'ce, 269-273 after acquired property, 370
Flaws in Contracts, 33-38 antiultuent,
F.O.B. contract, 217 of adjudication order, 360
Foreclosure, 420 of coni JxOit i-n. 365
Foreign Companies, 437 antecedent transactions, 361
Foreign Sovereigns and Ambassadors, 35 avoidance of fraudulent preference, 362
Fraud, 43 avoidance of voluntary transfer, 361
of agent, 152 composition and scheme, 365
of piuliicr. 183 disclaimer, 371
Frustration, 81-86 doctrine of relation back, 360
duties of debtor (P.T.A.), 359
G -d- in solvent, 363
discharge of, 377-380
(;s-xds (See Sale of Goods), 197-240 duties, after, 380
Goisdss ii!, 174 effect of, 379
Govci oment Companies, 420 limitations to
(',r.itiiitiiiis Bailment, 126,129 PITA., 378
Gumrantee, cont ract of, 108 PITA. and P.T.A.. 378
discharge of surety, 116 revocation of (P.T.l.A.),380
distinct ion tw'tween iitdeitinit y and. Ill) V. ho may become .353
kinds of guarantee, 112 insolvent's propeily, 367-369
rights of suRly, 113 insolvent's schedule, 362
Insurance, 241-249
H accident, 280
contract uherrimae fidei. 42, 242
I (ire-Purchase Agreement, 195 definition of. 241
Iloliler, 313 coOt nbut ion, 248, 249
I [older in Due Course, 314 cover note, etc., 246
I biding and subsidiary Comapnies, 436 days of grace, 244
I Inkling out double, 247
as agent, 141 fundunental principles of, 241
as partner. 167 policy, 245
Hundic, 340-342 2'l4
Hypothecation. 145429 re-inauraitce. 246
subrogation. 247, 249
Fidelity Insurance, 282
Implied Conditiojis and Warranties Fire Insurante, 269-273
in marine insurance, 255 Life Insurance, 274-290
in sale of goods, 207 Marine Insurance, 250-268
Implied Contracts, 7 Motor Car Insurance, 282
Inchoate I ustruistent - 3 10 Personal Accident Insurance, 280
Indemnity. cont ract of, 107 Property Insurance, 282
Indorsement (See Neg. Ins.), 320-323 Issue of shares at 11jemium or discount, 464
Interpretation of Couiiract, 95

INDEX 729

Minimum Wages Act, 616 -624

J
Advisory Boards, 619
Jettison, 248 Claims, 621
Joint and Several Liability of Partner, 191 fixiiig of, 617 - 618
Joint Hindu Family Finn, 173,316 interpretation, 616 -617
iniiiiiiium rates of wages, 618
L Minor
age of majority, 33
Law Merchant, 3
as agent, 137
Lays Days, 409
contracts by or with, void, 34
Layoff,
in patinership, 166
Lex Mercatoria, 4
Misrepresentation, 43
Liability, limitation of, 443
by agent, 152
Lien, 429
fraudulent, by minor, 34
agent's, 147
innocent or wilful, 44
auctioneer's, 143
prospectus and, 451
bailee's, 128
Mistake, 38
coitipany's, 456
Mortgage. 418
finder's, 130
charge and, 422
general and particular, 128
kinds of, 419
pawnces, 132
marshalling, 420
seller's, 226
hypothecation 429
stoppage in transit and. 227
pledge. 418
termination of, 227
sub-mortgage. 420
Life lnsuranc,e 274-290
Mortgagee, 421 -22
Limited Partnership, 186
rights and liabilities of, 421
Liquidator
Mortgagor, 420
in compulsory winding up, 512
rights and liahihites of. 420
in voluntary winding up, 513
Losses, 261-268
Loitenes, 55 N
Lunatics, 34 Necessaries, 35
coilt Facts by ui with, 34 Negotiable Ijistrunienis, Law of, 291-351
idiots and, 34, 315 acceptance, 326
for honour, 328
M accoiiuitiodat ion hill, 297
hacker. 321
Ma nitenaitce and clianiperty, 58
bill of exchange. 296-298
Manager of Company. 498
clsei1ucs, 298-309
of factory. 530
hanker, collecting, 304
Managing Agency abolished, 499
Ma ii lie hiscu raiicc, 250-268 banker, liability of. 301
pay, 302
£idi Ki-ifi 'iVCfl,
paying. 303
Master of Ship, 411
rights of holder, against. 304
Mate's Receipt. 413
Matunty, 311 crossing of, 305 ' 308
not negotiable. 306
Meetings, 474-478
Members, 455 bills and, 298
ntaiking of, 306
Meniorandutn of Association, 438
Merchantability, 210 discharge from liability of
parties to. 337
Mercantile Agents. 141
dishonour, 332
sale by. 221
Mercantile Person, I drawnee in case of need, 312
Mergers, 424 holder, 313
Mirk i[111.1111 Subscript ion. 461
holder in due course, 314
73(1 NIERCAN11LE LAW

hundis, 340-342 compuiy and, 172

indorsement. 320-323 Co-Owile t sIt p and. 172
liability of pail es 10. 316 deed of, 170
mailenal alteration ,338 dcl ilitioli and nature of. 163
maturity, 311 dissolution (if, 183
meaning of Neg. list., 291 duration of. 173
Negotiability. 292, 317 effect of non-registration of. 161
negotiation. 317 firm and finn name. 164
noting. 334 goodwill. 174
parties to. 312 II indu Joint Family and. 172
payment for Itociour. 329 pri.rcity of. 173
presenhtuetit. 329 regist tat ion of Ii nIl s. 161
excused. 329. 331 return of preinhiiill. 189
prestlInptiOlts as to. 293 tsi of. 170
promissory note, 293-295 winding rip. 186
bill and. 296 Partnership Limited, ted 190
protest, contents of. 335 Pawn, 130132.4lt)
protesting. 335 Pawnee,
retirement of hill. 339 I'aWuL)r, 131
usances. 309 effect of default by. 131
Notice payment in due course, 302
of abandonment, 269 Payment of Wages Act. 579-585
of dishonour. 333 claim for wrongful deductions, 580-85
of meetings. 476 deductions, 581-584
to agent. 151 definitions. 579 -780
of 'Irusts, 457 responsibility of payment, 580
Novation, 76 wags' periods, 580
Penally and Liquidated Damages, 93
0 Perfoiiiiaiice of Contract. 68
lnipissihility of, 78-88
Offer, Ii mode of, 71
icceptaiicc of. 20 Ol der of, reclpRwal. 70
ttur;ition of. 17 Personation of Sliarellolder. .165
requisites of. 11 Pledge. 130-132
standing, 19 by loll-owners. 132
when lapses. 17 IlolI, 477
specific or general. 17 Power of Attorney, 139
Official Assignee, 367, 371.372 Preference shares, 460
Official Liquidator. 512 Price, 204
Official Receiver. 372 Prititage, 411
Operation of contract. 95 Principal 138
Private Coittpany, 434
P Promoters, 440
I' loll i SsOi) Not s's. 21)4
l'akka Adatia. 55
Proposal. 11
Partners. 166 Prospectus, 451
classes of, 166
Piotesting, 335
duties of. 177
Proxy. 476
implied ari Iii inty of. ISO
Public company, 434-436
joint and several liability of, 181
Public deposits. 459
minor. 165
Public Policy
no implied authority. 181 agreement opposed to, 56
rights of. 175 Public Trustee, 458
sub-partners 168
Purdi Nisitin Woman, 49
Partnership, 161, 170

INDEX 731

perishing of. 203

specific, 202,219
Quantum Meru it, 66 unzisceilained, 202
Quasi Contracts, 64 hire purchase and, 199
Quoiuin, 476 implied conditions. 209
implied warranties, 208
R lien, 226
of unpaid seller, 226
Ratification stoppage in transit and, 227
agency, by. 140 market overt, 222
of contract, by infant. 34 mortgage, pledge, etc.. and, 199
Rectification of register, 457 passing of property, 213
Redemption, right of. 418 by son-owners, 219
Registration of finns. 161 in asceriiised gcKrds. 214
of charges, 72-474 in unascciiained goods. 215,220
Re-Insurance, 246 by appropriation, 215,220
Reputed Ownership, 370 pnce. 204
Repeal of the Industrial Disputes (Appelate addition or deduction of duty from. 205
Tn.) Act, 615
mode of fixing, 204
Respondentia. 268
mode of payment. 205
Restitution, 63
re-sale by unpaid seller, 229
Restraint of
rights of buyer. 231
maniage. 59
rights of seller, 230
parential rights, 59
rights of unpaid seller. 226
personal freedom. 61
risk passes with ownership, 219
trades, 60
stoppage in transit, 228
wisest valid, 60
time factor in sale, 207
Restrictions on share issue. 464
unpaid seller, rights of. 227
Retrenchment, 605
what is sale, 200
Revocation
Salvage, 270
of acceptance, 22
Seaworthiness, 256,407
of agency, by principal, 154
Securities, 418-430
of authority of arbitrator. 391
bill of sale, 426-428
of offer. 19
charge. 424
hypothecation. 429
S her., 430
Sale of Goods, 197-240 mortgage. 418
agency and, 199 pledge, 418
agreement to sell and Sale, 197 Secretary, 503
auction sales, 232 Seller's
bailer and, 198 duties, 222
by description. 209 lien, 226
by sample, 212 rights, 224,226
caveat emptor, 206 Share Certificate, 466
conditions and warranties, 206 Shares, 459-460
express, 207,212 Share \Varraiii, 465
implied. 207.213 Sitiall lissolvencies, 380
contract for work and labour, 200 Special Damages, 91
delivery of goods, 223 Specific Perfonnaitce, 94
duties of seller and buyer, 222 Specific Goods, 204,219
ea nsest or deposit, 206 Standard Form Contracts, 14
gift and, 198 Statement in Lieu of Prospect us, 454
goods, definition. 203 Statutory Meeting and Report, 474
ascertained, 202,215 Statute Law, 4
732 MERCANTILE LAW

aggrements cntrary to. 50 Ownership in, 222

Stock, 461 Unconscionable Transactions, 49
Sto1 iei.Tran sit Underwriting Commission, 465
bSa'eni49 Undisclosed Principal, 151
by buyer of bill cIF lading. 413 Undue Influence, 46
byuniaid sell • 28 Unlawful Agreerilents, 49
Sub-A geuts, 15 Unfair Labour Practices, 592-594
Sub-Mortgage, 417 Unpaid seller. 226
Sub-Partners, 169 Usances, 308
Submission to Arbitration, 386 Usufructuary Mortgage, 419
Subrogation. 247. 249
Substituted Agent, 145 V
Sue and Labour Clause, 259
Void agreements, 61
Surety
Void and Voidable Contracts, 32
definition, 110
Void and Illegal Contract, 50
discharge of, 116
when becomes void, 62
liability of. 110
Voyage, 257
rights of. 113
Surrender of Shares. 467

T Wagering Contracts. 53
Wage, what is, 53
Take-avers, 466,505
Teji nandi transactions, 55 Wagers and Commercial Transactions, 54
Warranty
Tenders, 20
Termination of Agency. 154 agent liable for breach of, 153
implied in sale of goods, 208
Termination of Contracts, 68
Termination of Membership. 456 in marine insurance. 255
Winding Up
Tickets, 14
Trade Unions Act. 573-578 of companies. 507-512
of partnerships. 101
dissolution, 578
Workmen's Compensation Act. 552-572
funds, 576-577
accident, 569
registration of. 573-75
rights, of registered. 575-576 fatal accident, 569
amount of compensation, 562. 63
Transfer of Shares, 467
Transfer of Ownership, 220 employer liable, 554,559
employer not liable, 562
Trust Deed, 471
definitions. 354-558
U
Uberrirnae Fidet Contracts, 43
Zikn Chit, 338
Ultra-vires. doctrine of, 443
Unascertained Goods, 208