INTRODUCTION indemnity

Contract of Indemnity is a contract, express or implied to keep a person, who has entered into or who
is about to enter into, a contract
or incur any other liability, indemnified against loss, independent of the question whether a third
person makes a default
Indemnity is protection against possible damages. Deriving from a Latin word, indemnis, which stands
for ‘unhurt’ or ‘free from loss’. In its broadest sense, it means to compensate for any loss that a person
has incurred. The liability or the duty to pay arises out of different reasons such as an agreement or
from obligations arising out of the relations between the concerned parties or by statute.

DEFINITION

Contract of indemnity meaning is a special kind of contract. The term ‘indemnity’

literally means “security or protection against a loss” or compensation. According
to Section 124 of the Indian Contract Act, 1872 “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.”

Example: P contracts to indemnify Q against the consequences of any

proceedings which R may take against Q in respect of a certain sum of money.

PARTIES TO THE CONTRACT OF INDEMNITY

A contract of indemnity has two parties.
1. The promisor or indemnifier
2. The promisee or the indemnified or indemnity-holder
The promisor or indemnifier: He is the person who promises to bear the loss.
The promisee or the indemnified or indemnity-holder: He is the person whose
loss is covered or who are compensated.
In the above-stated example,
 P is the indemnifier or promisor as he promises to bear the loss of Q.
 Q is the promisee or the indemnified or indemnity-holder as his loss is covered by
P.
ESSENTIALS OF CONTRACT OF INDEMNITY
1. PARTIES TO A CONTRACT: There must be two parties, namely, promisor or
indemnifier and the promisee or indemnified or indemnity-holder.
2. PROTECTION OF LOSS: A contract of indemnity is entered into for the purpose of
protecting the promisee from the loss. The loss may be caused due to the
conduct of the promisor or any other person.
3. EXPRESS OR IMPLIED: The contract of indemnity may be express (i.e. made by
words spoken or written) or implied (i.e. inferred from the conduct of the parties
or circumstances of the particular case).
 4. ESSENTIALS OF A VALID CONTRACT: A contract of indemnity is a special
kind of contract. The principles of the general law of contract contained in
Section 1 to 75 of the Indian Contract Act, 1872 are applicable to them.
Therefore, it must possess all the essentials of a valid contract.

 NUMBER OF CONTRACTS: In a contract of Indemnity, there is only one

contract that is between the Indemnifier and the Indemnified.
 RIGHTS OF PROMISEE/ THE INDEMNIFIED/ INDEMNITY HOLDER

As per Section 125 of the Indian Contract Act, 1872 the following rights are
available to the promisee/ the indemnified/ indemnity-holder against the promisor/
indemnifier, provided he has acted within the scope of his authority.

1. RIGHT TO RECOVER DAMAGES PAID IN A SUIT [SECTION 125(1)]: An

indemnity-holder has the right to recover from the indemnifier all damages
which he may be compelled to pay in any suit in respect of any matter to
which the contract of indemnity applies.
2. RIGHT TO RECOVER COSTS INCURRED IN DEFENDING A SUIT [SECTION
125(2)]: An indemnity-holder has the right
3. to recover from the indemnifier all costs which he may be
4. compelled to pay in any such suit if, in bringing or defending it, he did not
contravene the orders 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
promisor authorized him to bring or defend the suit.
5. RIGHT TO RECOVER SUMS PAID UNDER COMPROMISE [SECTION 125(3)]: An
indemnity-holder also has the right to recover from the indemnifier 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.

COMMENCEMENT OF LIABILITY OF PROMISOR/ INDEMNIFIER

Indian Contract Act, 1872 does not provide the time of the commencement of the
indemnifier’s liability under the contract of indemnity. But different High Courts in
India have held the following rules in this regard:

 Indemnifier is not liable until the indemnified has suffered the loss.
 Indemnified can compel the indemnifier to make good his loss although he
has not discharged his liability.

CASE LAW:
In the leading case of Gajanan Moreshwar vs. Moreshwar Madan(1942), an
observation was made by the judge that “ If the indemnified has incurred a
 liability and the liability is absolute, he is entitled to call upon the indemnifier to
save him from the liability and pay it off”.
CONCLUSION :
Thus, Contract of Indemnity is a special contract in which one party to a contract
(i.e. the indemnifier) promises to save the other (i.e. the indemnified) from loss
caused to him by the conduct of the promisor himself, or by the conduct of any
other person. Section 124 and 125 of the Indian Contract Act, 1872 these types of
contracts.
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Rights of Indemnifier
Contract Act is silent about the rights of Indemnifier. In Jaswant Singh vs The State on 15 July 1965, it was
held that the rights of indemnifier are the same as the rights of surety. After paying all damages the indemnifier
takes the position of indemnity holder and has right over the property. He is required to indemnify promisee up
to the amount of losses as mentioned in terms and conditions of the contract. He takes the position of the
creditor after settling all his claims.
 Right to sue the third party.
As soon as the indemnifier has indemnified the indemnity-holder against the damages and amount of the
property, he is entitled to have full rights over the property and has the right to sue the third party for that
property too. Before paying damages to the indemnity holder, he cannot sue the third party.

For example- A has promised B to indemnify him in case he suffers damage to his car because of C.
Afterwards when B suffers the damage because of C and asks for money from A, A indemnifies him and gets
the right over the car. Now A has a right to sue C and claim damage.
 Compensate losses which are covered in the deed.
The indemnifier has a right to pay for only those losses which are covered in the contract of indemnity.
In Ramaswami Vs Muthukrishna High Court ordered the indemnifier to pay the plaintiffs only for a sum of Rs.
1236/- which was the actual loss suffered by him. The further appeal filed in Supreme Court to recover more
amount from the defendant was dismissed.
 Right under Doctrine of Subrogation.
According to surety’s subrogation rights, after settling the claims of the former creditor, the surety steps into the
shoes of the creditor and in certain cases is entitled to receive the whole amount from the debtor. Similarly,
indemnifier also has rights in some cases to recover the money or possession.

LIABILITIES

1) The indemnifier will have to pay damages which the indemnity holder will claim in a suit.

2) The indemnity holder can even compel the indemnifier to pay the costs he incurs in the suit

. 3) If the parties agree to legally compromise the suit, the indemnifier has to pay the compromise amount.

Duties of Indemnifier

The duties of indemnifier are the rights of indemnity-holder. Section 125, states the rights of indemnifier when
sued by the third party to recover the damages, cost and all the sums as payable by him in any suit of any matter
in which indemnifier promised him to indemnify him and he acted same as he was expected to act in case of
absence of a contract of indemnity. The indemnifier has duties against indemnity holder to:
 Indemnify promisee for all damages.
 It is the duty of indemnifier to pay for all damages which he has promised to indemnify in any suit in respect of
any of the matter. The promisee should prove that he was compelled by law to pay damages (Duffield v. Scott).
There is no need to prove that the loss incurred is direct or indirect in nature.
In Nallappa Reddi vs Vridhachala Reddi And Anr. the court ordered that it’s the duty of the indemnifier to
provide the damages to the promisee. The duty arises as soon as the decree is passed against the promisee.
In Gokuldas vs. Gulabrao, the court said that the indemnifier cannot request that he was not the party to the suit
and has the liability to indemnify the promisee.
In Toplis v. Grane, the court observed that when the act is done with the lawful objective by the promisee and
the act violates the rights of any other person, the indemnifier has to indemnify the plaintiff against the
consequences of the act thereof.
 Indemnify promisee against all the costs.
It is the duty of the Indemnifier to pay all the costs which indemnity-holder is compelled to pay in a suit where
he did not have breached the orders of the promisor. The indemnity-holder is entitled to recover reasonably
incurred costs that arise while reducing or ascertaining or resisting the claims. The promisee is entitled to
receive all expenditure which he has incurred during the case proceedings.

In Adamson V. Jarvis, Jarvis gave his cattle to Adamson for auction. Adamson didn’t know that Jarvis was not
the real owner of cattle. As soon as the owner came to know about the auction, he claimed his cattle and
Adamson had to pay the amount of money to the real owner. Adamson suffered damage and sued Jarvis. Court-
ordered latter to pay Adamson the amount of damage he suffered and also the cost as he was unaware of the fact
that Jarvis was not the real owner of cattle and thought that Jarvis had an implied authority.
 Indemnify for the amount payable by the promisee in case of compromise.
If the promisee did not act contrary to the orders of the promisor and has paid all sums under the terms of
compromise in a suit, he is entitled to receive the money from the indemnifier.

In Kali Charan vs Durga Kunwar And Ors. Court ordered to recover the amount paid as a compromise from the
indemnified. In Venkatarangayya Appa Rao Vs Varaprasada Rao Naidu court said that the indemnity holder is
entitled to receive all of the sums in case of compromise if certain conditions are being fulfilled that is the
compromise should have been done in a bona fide manner, there should be no collusion in the process of
settlement and it should not have been charged as an immoral bargain
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Introduction
Black laws dictionary defines the term guarantee as the assurance that a legal contract
will be duly enforced. A contract of guarantee is governed by the Indian Contract
Act,1872 and includes 3 parties in which one of the parties acts as the surety in case the
defaulting party fails to fulfill his obligations. Contracts of guarantee are mostly required
in cases when a party requires a loan, goods or employment. The guarantor in such
contracts assures the creditor that the person in need may be trusted and in case of any
default, he shall undertake the responsibility to pay. Thus we can say contract of
guarantee is invisible security given to the creditor and shall be discussed further
What is a contract of guarantee?
Section 126 of the Indian contract act defines a contract of guarantee as a contract to
perform the promise or discharge the liability of the defaulting party in case he fails to
fulfill his promise.
Thus here we can infer that there the 3 parties to the contract
Principal Debtor – The one who borrows or is liable to pay and on whose default the
guarantee is given
Creditor – The party who has given something of value to borrow and stands to receive
the payment for such a thing and to whom the guarantee is given

Surety/Guarantor – The person who gives the guarantee to pay in case of default of
the principal debtor

Also, we can understand that a contract of guarantee is a secondary contract that

emerges from a primary contract between the creditor and the principal debtor.

Illustration

Ankita advances a loan of INR 70000 to Pallav. Srishti who is the boss of Pallav promises
that in case Pallav fails to repay the loan, then she will repay the same. In this case of a
contract of guarantee, Ankita is the Creditor, Pallav the principal debtor and Srishti is
the Surety.

A contract of guarantee may either be oral or written. It may be express or implied from
the conduct of parties. In P.J. Rajappan v Associated Industries(1983) the guarantor,
having not signed the contract of guarantee, wanted to wriggle out of the situation. He
said that he did not stand as a surety for the performance of the contract. Evidence
showed the involvement of the guarantor in the deal and had promised to sign the
contract later. The Kerala High Court held that a contract of guarantee is a tripartite
agreement, involving the principal debtor, surety and the creditor. In a case where there
is evidence of the involvement of the guarantor, the mere failure on his part in not
signing the agreement is not sufficient to demolish otherwise acceptable evidence of his
involvement in the transaction leading to the conclusion that he guaranteed the due
performance of the contract by the principal debtor. When a court has to decide whether
a person has actually guaranteed the due performance of the contract by the principal
debtor all the circumstances concerning the transactions will have to be necessarily
considered.

Essentials of a Contract of Guarantee

1.Must be made with the agreement of all three parties

All the three parties to the contract i.e the principal debtor, the creditor, and the surety must agree to
make such a contract with the agreement of each other. Here it is important to note that the surety
takes his responsibility to be liable for the debt of the principal debtor only on the request of the
principal debtor. Hence communication either express or implied by the principal debtor to the surety
is necessary. The communication of the surety with the creditor to enter into a contract of guarantee
without the knowledge of the principal debtor will not constitute a contract of guarantee.
Illustration
Sam lends money to Akash. Sam is the creditor and Akash is the principal debtor. Sam approaches
Raghav to act as the surety without any information to Akash. Raghav agrees. This is not valid.
2.Consideration

According to section 127 of the act, anything is done or any promise made for the benefit of the
principal debtor is sufficient consideration to the surety for giving the guarantee. The consideration
must be a fresh consideration given by the creditor and not a past consideration. It is not necessary
that the guarantor must receive any consideration and sometimes even tolerance on the part of the
creditor in case of default is also enough consideration.
In State Bank of India v Premco Saw Mill(1983), the State Bank gave notice to the debtor-defendant
and also threatened legal action against her, but her husband agreed to become surety and
undertook to pay the liability and also executed a promissory note in favor of the State Bank and the
Bank refrained from threatened action. It was held that such patience and acceptance on the bank's
part constituted good consideration for the surety.
3.Liability

In a contract of guarantee, the liability of a surety is secondary. This means that since the primary
contract was between the creditor and principal debtor, the liability to fulfill the terms of the contract
lies primarily with the principal debtor. It is only on the default of the principal debtor that the surety is
liable to repay.
4.Presupposes the existence of a Debt

Swan vs. Bank of Scotland (1836) held that if there is no principal debt, no valid guarantee can exist.
The main function of a contract of guarantee is to secure the payment of the debt taken by the
principal debtor. If no such debt exists then there is nothing left for the surety to secure. Hence in
cases when the debt is time-barred or void, no liability of the surety arises. The House of Lords in the
Scottish case of Swan vs. Bank of Scotland (1836) held that if there is no principal debt, no valid
guarantee can exist.
5.Must contain all the essentials of a valid contract

Since a contract of guarantee is a type of contract, all the essentials of a valid contract will apply in
contracts of guarantee as well. Thus, all the essential requirements of a valid contract such as free
consent, valid consideration offer, and acceptance, intention to create a legal relationship etc are
required to be fulfilled.
6.No Concealment of Facts

The creditor should disclose to the surety the facts that are likely to affect the surety's liability. The
guarantee obtained by the concealment of such facts is invalid. Thus, the guarantee is invalid if the
creditor obtains it by the concealment of material facts.
7.No Misrepresentation

The guarantee should not be obtained by misrepresenting the facts to the surety. Though the contract
of guarantee is not a contract of Uberrima fides i.e., of absolute good faith, and thus, does not require
complete disclosure of all the material facts by the principal debtor or creditor to the surety before he
enters into a contract. But the facts, that are likely to affect the extent of surety's responsibility, must
be truly represented

Rights of Co-surety
The rights of a co-surety are very similar to that of a surety (covered under Section 140-147 of Indian Contract
Act) and those rights are listed as below:

Against the principal debtor

 Each co-surety has the right to claim the money they have paid to the creditor in heed of the
debtor. However, they do not have the right to claim any money other than what is mentioned
in the contract for their portion.
  Each co-surety inherits the rights of the creditor once they pay off the debt for the principal
debtor. The principal debtor has the liability to indemnify the co-sureties.
Against the creditor

 Each co-surety has the right to claim all the securities (materialistic guarantees) from the
creditor once the principal debtor defaults and they pay off the debt – however, if the creditor
has returned the securities back to the debtor, then all the co-sureties are discharged from
their duties to the extent of the value of the security.
For example, if a debtor had given his gold jewellery (valued presumably 2 lakhs) as a security
to the creditor on a loan of about 3 lakhs with two co-sureties and insolvents on the full
amount, the co-sureties are liable to only pay for the 1 lakh that cannot be covered by the
securities if the securities are returned to the debtor by the creditor.
 Any amount that is recoverable by the debtor or any of the co-sureties can be claimed and
accounted as a deduction of the amount to be paid to the creditor.
 If a debtor defaults after paying a portion of their debt, then the co-sureties only owe the
amount left to pay to the creditor as per the contract.
Against other co-sureties

 If any one of the co-sureties receives any security, all the co-sureties have the right to share
the benefit of that surety amongst one another.
 All co-sureties are required to contribute equally until and unless specified otherwise in the
contract.
The examples for the last right would go as follows:

If there are three co-sureties (X and Y and Z) of the principal debtor (D) who took the loan of 9 lakhs from the
creditor (C), upon insolvency of D, the co-sureties X, Y and Z are to pay to the creditors C equally – that is, 3
lakhs each.
However, in the case if the contract specifies the amount each co-surety has to pay, each has to pay the
minimum equal to their limit. For example, if the contract specifies for X to pay 2 lakhs, Y to pay 3 lakhs and Z
to pay the rest of the 4 lakhs upon D’s insolvency, then:
1. If D manages to pay 6 lakhs and the defaults for the rest, all three co-sureties are to pay 1 lakh
each to the creditor for the debtor.
2. If D pays 2 lakhs and defaults, then X has to pay the specified 2 lakhs in the contract while Y and
Z will cover the rest equally – that is, 2.5 lakhs each.
3. If D defaults completely, then each has to pay the specified amount in the contract for their own
liability.

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Difference Between Holder and Holder in Due Course (HDC)

While talking about negotiable instruments such as cheques, bills of exchange and promissory note,
we came across the terms holder and holder in due course, quite commonly. Holder refers to a
person; we mean the payee of the negotiable instrument, who is in possession of it. He/She is
someone who is entitled to receive or recover the amount due on the instrument from the parties
thereto.
On the other hand, the holder in due course i.e. HDC implies a person who obtains the instrument
bonafide for consideration before maturity, without any knowledge of defect in the title of the person
transferring the instrument.

Take a read of this article in which we’ve simplified the differences between holder and holder in due
course.

Content: Holder Vs Holder in Due Course

Comparison Chart
BASIS FOR
HOLDER HOLDER IN DUE COURSE (HDC)
COMPARISON

A holder is a person who legally obtains A holder in due course (HDC) is a person
the negotiable instrument, with his name who acquires the negotiable instrument
Meaning
entitled on it, to receive the payment from bonafide for some consideration, whose
the parties liable. payment is still due.

Consideration Not necessary Necessary

A holder in due course can sue all prior

Right to sue A holder cannot sue all prior parties.
parties.

The instrument may or may not be The instrument must be obtained in good
Good faith
obtained in good faith. faith.

Privileges Comparatively less More

A person can become holder, before or A person can become holder in due
Maturity after the maturity of the negotiable course, only before the maturity of
instrument. negotiable instrument.

Definition of Holder

As per Negotiable Instrument Act, 1881, a holder is a party who is entitled in his own name and has
legally obtained the possession of the negotiable instrument, i.e. bill, note or cheque, from a party
who transferred it, by delivery or endorsement, to recover the amount from the parties liable to meet
it.

The party transferring the negotiable instrument should be legally capable. It does not include the
someone who finds the lost instrument payable to bearer and the one who is in wrongful possession
of the negotiable instrument.

Definition of Holder in Due Course (HDC)

Holder in Due Course is defined as a holder who acquires the negotiable instrument in good faith for
consideration before it becomes due for payment and without any idea of a defective title of the party
who transfers the instrument to him. Therefore, a holder in due course.
 When the instrument is payable to bearer, HDC refers to any person who becomes its possessor for
value, before the amount becomes overdue. On the other hand, when the instrument is payable to
order, HDC may mean any person who became endorsee or payee of the negotiable instrument,
before it matures. Further, in both the cases, the holder in both the cases he must acquire the
instrument, without any notice to believe that there is a defect in the title of the person who negotiated
it.

Conclusion
After reviewing the above points, it is quite clear that a holder and holder in due course are two
different persons. Further, a person needs to be a holder first, to become a holder in due course,
whereas, in the case of a holder, he need not be an HDC first.

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RIGHTS AND DUTIES OF CO-SURETIES:
Introduction
Contract of Guarantee is an integral part of the Law of Contracts as it deals with the basic premise of promise
and surety guaranteed to the creditor in turn of loaning money to the debtor, or in the case, the principal debtor.
This is one of the basic forms of contract and can be seen very commonly practised by moneylenders,
businesses, firms and even banks.
In these types of contract, there is normally the involvement of three parties – the creditor, the (principal) debtor
and the surety. The creditor is the one who lends the money, the principal debtor is the one who borrows the
money while the surety acts as a guarantee for if the debtor defaults or fails to pay the money they borrowed
from the creditor in due time.
The involvement of three parties causes there to be individual contracts between them as well – one contract
between creditor and debtor, one between the debtor and surety and the last one being in between the creditor
and surety. Each contract is interrelated and binds each party into a different liability with different rights;
however, the terms of the contract should not vary from one to another or the contract will be held as void.
In the case when there is more than one surety in the contract, such persons are known as ‘co-surety’ – and they
are considered one party altogether instead of each co-surety being considered a party individually. Each co-
surety should be appointed from the beginning of the contract and should be contractually liable to the debtor
and creditor rather than to each other. In no case shall a surety be added later into the contract as co-surety
without the contract being altered or remade into a new one completely.
The only difference between surety and co-surety is that their liabilities are divided and cooperated the number
of co-sureties while in case of a surety they have to pay and handle the liabilities alone when the debtor defaults
– otherwise, both the role or surety and co-surety do not arise if the debtor manages to pay back in full.
Rights of Co-surety
The rights of a co-surety are very similar to that of a surety (covered under Section 140-147 of Indian Contract
Act) and those rights are listed as below:
Against the principal debtor
 Each co-surety has the right to claim the money they have paid to the creditor in heed of the debtor. However,
they do not have the right to claim any money other than what is mentioned in the contract for their portion.
 Each co-surety inherits the rights of the creditor once they pay off the debt for the principal debtor. The
principal debtor has the liability to indemnify the co-sureties.
Against the creditor
 Each co-surety has the right to claim all the securities (materialistic guarantees) from the creditor once the
principal debtor defaults and they pay off the debt – however, if the creditor has returned the securities back to
the debtor, then all the co-sureties are discharged from their duties to the extent of the value of the security.
For example, if a debtor had given his gold jewellery (valued presumably 2 lakhs) as a security to the creditor
on a loan of about 3 lakhs with two co-sureties and insolvents on the full amount, the co-sureties are liable to
only pay for the 1 lakh that cannot be covered by the securities if the securities are returned to the debtor by the
creditor.
 Any amount that is recoverable by the debtor or any of the co-sureties can be claimed and accounted as a
deduction of the amount to be paid to the creditor.
 If a debtor defaults after paying a portion of their debt, then the co-sureties only owe the amount left to pay to
the creditor as per the contract.
Against other co-sureties
 If any one of the co-sureties receives any security, all the co-sureties have the right to share the benefit of that
surety amongst one another.
 All co-sureties are required to contribute equally until and unless specified otherwise in the contract.
The examples for the last right would go as follows:
If there are three co-sureties (X and Y and Z) of the principal debtor (D) who took the loan of 9 lakhs from the
creditor (C), upon insolvency of D, the co-sureties X, Y and Z are to pay to the creditors C equally – that is, 3
lakhs each.
However, in the case if the contract specifies the amount each co-surety has to pay, each has to pay the
minimum equal to their limit. For example, if the contract specifies for X to pay 2 lakhs, Y to pay 3 lakhs and Z
to pay the rest of the 4 lakhs upon D’s insolvency, then:
1. If D manages to pay 6 lakhs and the defaults for the rest, all three co-sureties are to pay 1 lakh each to the
creditor for the debtor.
2. If D pays 2 lakhs and defaults, then X has to pay the specified 2 lakhs in the contract while Y and Z will cover
the rest equally – that is, 2.5 lakhs each.
3. If D defaults completely, then each has to pay the specified amount in the contract for their own liability.
Liabilities of Co-surety
Just like the liabilities of surety, the liabilities of each co-surety are coextensive with that of the principal debtor.
That is, since co-sureties, just as sureties, are liable for all the debts taken by the principal debtors up their
default, any interest, damages or any kinds of costs payable by the debtor to the creditor also includes in this.
However, any such extended pay must be mentioned in the contract or else the co-sureties will not be liable to
pay – and if the fact is hidden from the co-sureties or if the facts are misinterpreted, then the co-surety will be
automatically discharged from the contract.
In addition to this, a co-surety’s liability is as limited as mentioned in the contract – they may even fix their own
limit up to which they have to pay in accordance with the other co-sureties. Some conditions can also be
mentioned to limit the liability of the co-sureties or from when they are liable. That is, conditions can be laid
down which, unless met, cannot make the co-sureties liable. However, all the sureties as well as the creditor and
principal debtor should agree with these conditions and limits or else the contract would be void on the ground
of misinterpretation and all the co-sureties would be discharged.

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DIFFERECE BETWEEN GURANTEE AND INDEMNITY

Introduction
The Indian Contact Act, 1872 define the contract of Indemnity and Guarantee in a very wide and different
manner from each other. The Contract of Indemnity is been defined in the section 124 and the Contract of
Guarantee is been defined in the section 126 of Indian Contact Act, 1872. In the following research paper,
definition of indemnity its scope This research paper will further focusses on the differentiation between The
Contract of Indemnity and The Contract of Guarantee. Related case laws and illustrations will be given to
understand the topic in depth.
Contract of Indemnity
The true meaning of Contract of Indemnity is saving someone from a loss. It is special kind of contract.
‘Indemnity’ actually means protection against loss in the form of a promise to pay or compensate. The rise of
this kind of Contract help the parties to overcome against the loss suffered by him, for instance, A contract to
indemnify B against the consequences of any proceedings which C may take against B in respect of a certain
sum of 200 rupees.[1] This is contract of indemnity.
The contract of indemnity includes two parties , the indemnifier, the person who promises to indemnify and the
‘indemnified’ or the ‘ indemnity holder’ in whose favor such a promise is made.
According to section 124 of The Contract Act, 1872 defines 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, is called a contract of indemnity.” [2]
This section defines that the promisor will save the promisee from loss which may be caused either.
 By the conduct of the promisor himself, or,
 By the conduct of any other person[3]
Parties to the contract of Indemnity
In contract of indemnity includes two parties:-
 The indemnifier or the promisor
The one which promises to protect the other party.
 The indemnified or indemnity holder or the promisee
The person in whose favor such a promise is made.
In the above stated example.
A is the indemnifier and B is the indemnity holder and C is the person to whom A has to compensate on behalf
of B.
Contract of Guarantee
It is contract to perform, or promises to discharge someone from his liability is know as Contract of Guarantee.
According to section 126 of the Indian Contract Act, 1872 ‘ 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 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.
This section can be divided into three parts for more clear understanding -:
‘A “Contract of Guarantee” is a contract to perform or discharge the liability, of a third person in case of his
default’.
This section further provides that -:
The surety is the person who gives the guarantee, in respect to whom guarantee is given is the principal debtor
and lastly the guarantee is given to the creditor.
“A guarantee may be either oral or written”.
Distinction between contracts of Indemnity and Guarantee
 In the contract of Indemnity there are only two parties i.e. the indemnifier and the indemnity holder. In
the contract of Guarantee there are three parties, they are the surety, the principal debtor and the creditor.
 There is one contract in the contract of indemnity that is between the indemnifier and the indemnity
holder under which the indemnifier promises to indemnify the indemnity holder. But there are three
contract in the contract of guarantee i.e.one between the principal debtor and the creditor in respect of a
certain promise or obligation to be perform by the principal debtor. The second contract is between the
surety and the principal debtor that if he fails to perform a certain obligation then the surety will
undertake the liability. The third contract is the implied one between the principal debtor and the surety
that whatsoever sum the surety has paid in respect of principal debtor then he is bound to to indemnify
the surety for the sum surety has rightfully paid under the guarantee. It means that after the surety
discharge his obligation, he is invested with all the rights which the creditor had against the principal
debtor.
 The object of contract of guarantee is the security of the creditor and the object of contract of indemnity
is the promise that is given by surety to the principal debtor. It is for the protection of indemnity holder.
 In the contract of guarantee the liability of the surety is the secondary one. This is because it only arises
only when the principal debtor fails to complete its obligation. The liability if the indemnifier in a
contract of indemnity is a primary one. He undertakes to be liable when the contemplated situation is
there.
 In the contract of guarantee the surety takes the place of the principal debtor and then discharge his
liability and paid to the creditor. He then can recover the amount from the principal debtor that has paid
 to the creditor. But in the contract of indemnity the indemnifier cannot recover his amount from the
indemnity holder.
 The contracts of indemnity and guarantee both stand different in England and India. In England the
contract of guarantee should be in writing whereas contract of indemnity can either be oral or written but
in India both the contacts od guarantee and indemnity can either be oral or in witting.
Conclusion
The contract of indemnity is the section 124 and the contract of guarantee is section 126 both of them of the
Indian contract Act,1872. The rights of the indemnity holder and the contracts between the indemnity holder
and the indemnifier are also discussed in this research paper and the contract between the surety, principal
debtor and the creditor.
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What are the types of bailment? What are the rights and liabilities of bailor and
bailee?
What is bailment?
Bailment as defined in section 148 of the Indian contract act 1872 is the delivery of
goods by one person to another for some specific purpose, upon a contract that these
goods are to be returned when the specific purpose is complete. For example, A
delivering his car for Service at the service center is an example of bailment. The
person delivering the goods is known as bailor and the person to whom goods
are delivered is known as bailee. However, if the owner continues to maintain
control over the goods, there is no bailment
Illustration If A gives his car to B his neighbor for 10 days, but at the same time he
keeps one key with himself and during this period of 10 days he used to take the car.
Now this will not be a case of bailment as A is keeping control over the property bailed.
Essentials of Contract of Bailment
1. The existence of a valid contract:- The existence of a valid contract is a
foremost condition in bailment which implies that goods are to be returned when
the purpose is fulfilled. Finder of lost goods is also known as bailee although
there may not be any existing contract between him and the actual owner.
2. Temporary delivery of goods:- The whole concept of bailment revolves
around the fact that the goods are delivered for a temporary period and bailee
cannot have permanent possession. Delivery of goods can be done through
actual delivery or through constructive delivery which means that doing
something which has the effect of putting the goods in possession of bailee or
any other person authorized by him.
3. Return of specific goods:- The bailee is bound to return the goods to bailor
after the purpose for which it was taken is over. If the person is not returning the
goods then it will not be bailment.
Types of Bailments
Deposit:- It is the simple bailment of goods by one man to another for a particular use.
For example, A gives his computer to B for 7 days, it will be a case of a deposit
Hire:- It includes goods delivered to the bailee for hire.
For example, A gives his car to B for 7 days on rent of Rs. 700 per day, it will be a case
of a hire
Pawn/ Pledge:- when goods are delivered to another person by way of security for
money borrowed.
For example, A takes a loan from the Bank and keeps his papers of the house with a
bank as security, it will be a case of pledge

Duties and liabilities of a bailor

1. The bailor is bound to disclose to the bailee, the faults in the goods
bailed. which he knows and if he does not make such disclosures, he is directly
responsible for damage arising to the bailee directly from such faults.
Illustrations:- A delivers a car to B knowing that the brakes of the car very less. Now if
any accident happens A will be liable for the same.
2. Bailor is also responsible to the bailee for any loss which the bailee may
sustain by reason of the fact that bailor was not entitled to make
EXPLAIN
1. To make the bailment
2. To receive the goods
3. To give directions respecting them Section 164
3. Duty to indemnify the bailee:- The bailor is duty bound to make good the loss
suffered by the bailee where he was compelled to return the goods before the expiry of
the period of bailment
4. Duty to claim back the goods:- The bailor is bound to accept the goods upon
being returned by the bailee in accordance with the terms of the agreement. If
he refuses to accept it at a proper time, without any reasonable ground then he
will be liable for any loss which may happen to the goods.
Bailee’s Rights
Lien
Particular lien Section 170 of Indian contracts act 1872
Lien is basically a right in one person to retain the property which is in his possession,
belonging to another, until certain demands are satisfied. It includes those things where
the bailee, in accordance with the purpose of bailment, rendered any service involving
the exercise of labor or skill in respect of the goods bailed.
Illustration: If A gives a piece of cloth to tailor for stitching a suit. Then Taylor is entitled
to keep the suit with him until A pays him for the cost of stitching.

For exercising this particular lien following factors are to be considered:

1. The bailee must have rendered some service involving labor or skill
2. The service must be in accordance with the purpose of the bailment.
3. This service must be with regard to the thing bailed.
4. There must be no contract to the contrary

.
General lien

Section 171 of the Indian contract act 1872 deals with the general lien. A general lien is
the right to retain the property of another for a general balance of accounts. It entitles a
person in possession of goods to retain them until all claims or accounts of the person in
possession against the owner of goods are satisfied.

An example of general lien can be Banker who is entitled to retain the goods until the
person satisfies his debt with the bank.

Right against wrongful deprivation of or injury to goods Section 180–181

A bailee is having a definite right if he suffers an injury with respect to goods bailed from
bailor. Moreover, if a third person wrongfully deprives the bailee of the use or possession
of goods bailed he is entitled to such remedies as the owner might have in such a
situation.
Bailee’s Liabilities
Care to be taken by the bailee –(Section 151 and 152)
The bailee is bound to take as much care of goods bailed to him as a man of ordinary
prudence would have under similar circumstances and therefore he will not be liable for
any loss, destruction or deterioration of the thing bailed if he has taken care. In the case
of Calcutta Credit Corporation Ltd v. Prince Peter of Greece, it was held by Calcutta high
court that the defendant has not taken reasonable care to prevent plaintiffs car from
burning.
The duty of the bailee to return the bailed goods (Section 160 and 161)
Bailee is under the duty to return or deliver goods according to the bailor’s direction as
soon as the time for which goods were bailed has expired.
Bailee’s duty to deliver increase profit from the bailed goods to the bailor
In the absence of any agreement, bailee is bound to deliver to the bailor any increase in
profit or any benefit which may have accrued from the goods bailed ( Section 161). In
the case of Standard Chartered Bank v. Custodian, it was held by Supreme court that
if Shares and debentures are pledged, bonus shares and dividend are also regarded
as Part of it.

CONTRACT OF PLEDGE
Contract of pledge is a subset of a contract of bailment. Here, the goods bailed are kept as a security for a debt
or a performance of a promise. Pledge is defined in Section 172 of the Indian Contract Act,1872 as “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 ‘pawnee’.” It is covered under Chapter IX (Section 172-
Section 181) of the Indian Contract Act, 1872.

DUTIES OF THE PAWNOR AND THE PAWNEE

Duties of the pawnor:
1. To compensate expenses
The pawnor has the responsibility to compensate the pawnee for all the ordinary and extraordinary expenses
made by the pawnee in order to ensure the well-being of the pledged goods.
2. To repay the entire amount due along with interest

The pawnor has to repay the amount which is due to the pawnee. This amount is the total of the principal
amount as well as any interest accrued on that amount during the course of the contract.
3. To disclose all the faults in the goods
The pawnor before entering into a contract has to disclose all the faults in the goods to the pawnee. If the
pawnee incurs any loss later due to those faults, the pawnor will be liable for those.
Duties of the pawnee:
1. To take reasonable care of the goods

It is the pawnee’s responsibility to take care of the goods that are pledged. The care taken by the pawnee must
be just, fair and reasonable. It should be as the pawnee took care of his personal belongings. If due to
negligence of the pawnee, the goods are damaged, he will be liable to compensate the pawnor.
For example: If ‘A’ pledges his watch with ‘B’ for a sum of Rs. 100. Then ‘B’ must take reasonable care of A’s
watch as if it is B’s own watch. The condition of the watch should not deteriorate or be worse than at the time
when it was pledged.
2. To use the goods only for authorised purpose

The pawnee can use the goods pledged if only it is authorised by the pawnor. If the goods are used for any
purpose that is not authorised, the pawnee will have to compensate the pawnor against the same.
For example: ‘A’ pledges his car with ‘B’. ‘A’ authorises ‘B’ to use the car for his personal use. ‘B’ allows his
cousin ‘C’ to drive the car and the car then gets damaged. ‘B’ will have to compensate ‘A’ for the damages
3. To return the goods

As per the contract, once the amount against which the goods are pledged is repaid, the goods must be returned
to the pawnor. This return must be as mentioned in the contract or as per the pawnor’s directions.
4. To return any profits arised from the goods
If at any time during the contract, the pawnee earns profit from the pledged goods, the same shall be returned to
the pawnor during the termination of the contract.
Example: ‘X’ pledged his property with ‘Y’. The property was given on rent to ‘Z’. The rent received on the
property must be returned to ‘X’.
5. To keep the goods separate

It is the pawnee’s duty to keep the pledged goods separate from his own goods. If he mixes the pledged goods,
all expenses to separate them will be borne by the pawnee. If separating is not possible, the pawnee will be
liable for all the damages.
RIGHTS OF THE PAWNOR AND THE PAWNEE
Rights of the pawnor:
1. To redeem the goods
As per Section 177 of the Act, ”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.”
For example: ‘A’ gave his watch to ‘B’ as a security against INR 800 that is due. They agreed that the amount
should be repaid within 1 month. If ‘A’ fails to do so, he can redeem his watch even after the expiry of the
contract given that ‘B’ has not yet sold the watch. However, if ‘B’ had to incur any expenses to safekeep that
watch, the same will have to be paid by ‘A’.
2. To get the goods back
Once the pawnor pays back the amount due along with the interest to the pawnee, he has the right to get the
goods back. After clearing the entire due against which the goods were held as security, the pawnee cannot
retain the pledged goods.
Rights of the pawnee:
1. To retain the goods
The pawnee has the right to retain the goods until the amount owed by the pawnor is paid in full or the promise
is completely performed. This amount includes the expenses incurred by the
pawnee as well as any interest accrued on that amount. This is mentioned in Section 173 of the Act.
For example: ‘A’ pledged his house with a bank for a loan of INR 2,50,000. The interest on the same was INR
10,000. The bank can retain the pledged house until ‘A’ repays the entire amount along with the interest i.e.
INR 2,60,000.
As per Section 174,”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.’”
2. To get compensation for extraordinary expenses
It is implied that the pawnor will be liable to pay for all the necessary expenses needed for the safekeeping of
the goods. As per Section 175, if any extraordinary expenses arise, the pawnor will only be liable for the same
as well. However, the pawnee cannot retain the goods for non-payment of such expenses.
As mentioned in Section 176, “If the pawnor makes default in payment of the debt, or performance; at the
stipulated time or 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.” It is important to note that the pawnor must
be given proper and enough notice before selling the goods. It is further mentioned, “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.
If the proceeds of the sale are greater than the amount so due, the pawnee shall pay over the surplus to the
pawnor.”
For example: ‘X’ pledged his watch with ‘Y’ as security against INR 10,000. ‘X’ defaulted the payment even
after enough notices. ‘Y’ went to sell his watch. If the watch is sold above INR 10,000, the surplus amount must
be returned to ‘Y’. However, if the watch is sold for less, ‘X’ will still be liable for the difference.

RELEVANT CASE LAWS

Lallan Prasad v. Rahmat Ali and Anr., 1996
In this case, the plaintiff advanced INR 20,000 to the defendant against a promissory note and a receipt. An
agreement was signed by both the parties where the defendant agreed to pledge his aeroscapes as collateral
against his debt. As per their agreement, the defendant had to deliver the aeroscapes to the appellant and the
goods would remain in his custody.
The plaintiff filed a lawsuit claiming that the above-mentioned goods were never delivered to be in his custody
and therefore, this agreement cannot be considered as a contract of pledge. He claimed that he was entitled to
recover the amount loaned by him.
The judgement was in the favour of the defendant. It was held by the Supreme Court that the pledged goods
were delivered to the plaintiff. This meant that this agreement did ripen into a contract of pledge. The Court also
stated that the plaintiff was not entitled to any compensation on his stance that the goods were never pledged to
him.
Discuss the mode of creation of an agency. What are the types of agency? . Discuss the rights and duties of
agent.

AGENCY
When one party (principal) employs another party (agent) to represent him or work on his behalf, as in dealings
with the third person. This relationship between them is known as agency.
The law of agency is based on the Latin maxim “qui facit per alium, facit per se,” which means, “he who acts
through another is deemed in law to do it himself“.
Agency as it is a well-settled legal concept which is employed by the Court when it becomes necessary to
explain and resolve the problems created by certain fact or situation. The act of the agent binds the principal in
the same manner in which he would be bound if he does that act himself.
The agent must be expressly authorized to do an act on behalf of the principal. An agent here is a person who is
employed to do an act for another party or to represent that party in front of third party. And principal on the
other hand is a person for whom an act is done.
Section 182 of the Indian Contract Act, 1872 states that “an “agent” is a person employed to do any act for
another or to represent another in dealings with third person. The person for whom such act is done or who is
so represented is called the “principal”.

Types of Agency
Depending upon the kind of authority given to the agent to act on behalf of the principal, the agents are of
various kinds. These are-
Auctioneers
An auctioneer is an agent whose business is to sell goods or other property by an auction i.e. by open sale. The
authority vested in him is to sell the goods only and not to give warranties on behalf of the seller, unless
expressly authorized in that behalf. He is a mercantile agent within the meaning of Section 2(9) of the Sale of
Goods Act.
If the owner of the goods puts him in possession of the goods, although the authority to sell has not been
conferred in him, a buyer in good faith from such an auctioneer will get a good title in respect of the goods.
Thus, if he has been authorized to sell the goods only subject to a reserved price but he sells the same to an
innocent and bona fide buyer below the reserved price, the buyer will get a good title in respect of such goods.
Factors
 A factor is a mercantile agent who is entrusted with the possession of the goods for the purpose of sale. He has
also the power to sell goods on credit and also to receive the price from the buyer. If the owner has put a factor
in possession of the goods or the document of title but without authorizing him to sell the goods, the sale of
goods by him will convey a good title to a bona fide buyer.
According to Section 171 of the Indian Contract Act, a factor has right of general lien over the goods
belonging to his principal, which are in his possession for the general balance of account.
Brokers
A broker is an agent who has an authority to negotiate the sale or purchase of goods on behalf of his principal,
with a third person. Unlike a factor, he himself has no possession of the goods. He gets his commission
whenever any transaction materializes through his efforts.
Del Credere Agents
Generally, the function of an agent is over after a contract is established between his principal and a third
person. He is not answerable to his principal for the failure of the third person to perform the contract. A del
credere agent constitutes an exception to this rule. He is a mercantile agent who on the payment of some extra
commission known as del credere commission, guarantees the performance of contract by the third person.
Banker Agent
It acts as the agent of the customer on behalf of his customers. He collects cheques, drafts, bills or buys that too
on behalf of his customers. He has a general lien in respect of the general balance of account.

Creation of Agency
The following are different modes of creation of agency.
1.Agency by Express agreement.
2.Agency by Operation of law.
3.Agency by Ratification.
4.Agency by Implied authority.
1. Agency by Express agreement:Number of agency contract come into force under this method. It may be
Oral or documentary or through power of attorney.
2. Agency by operation of law:At times contract of agency comes into operation by virtue of law.
For example: According to partnership act, every partner is agent of the firm as well as other parties. It is
implied agency. On account of such implied agency only a partner can bind over firm as well as other partners,
to his activities. In the same way according to companies act promoters are regarded as agents to the company
3. Agency by Ratification: Ratification means subsequent adoption of an activity. Soon after ratification
principal – agent relations will come into operation. The person who has done the activity will become agent
and the person who has given ratification will become principal.
 Ratification can be express or implied. In case where adoption of activity is made by means of expression, it is
called express ratification. For example: Without A`s direction, B has purchased goods for the sake of A. There
after A has given his support (adoption) to B`s activity, it is called Ratification. Now A is Principal and B is
agent.
 The ratification where there is no expression is called implied ratification. For example: Mr. Q has P`s money
with him. Without P`s direction Q has lent that money to R. There after R has paid interest directly to P.
Without any debate P has taken that amount from R. It implies that P has given his support to Q`s activity. It is
implied ratification.
4.Agency by implied authority:This type of agency comes into force by virtue of relationship between parties
or by conduct of parties.
For example: A and B are brothers, A has got settled in foreign country without any request from A, B has
handed over A`s agricultural land on these basis to a farmer and B is collecting and remitting the amount of rent
to A. Here automatically A becomes principal and B becomes his agent. Agency by implied authority is of three
types as shown below;
 Agency by Necessity
 Agency by Estoppel
 Agency by Holding out.
Conclusion
Those contracts are very common in business law who establish a relationship of agency. An agency is created
when a person delegates his authority to another person as it appoints them to do specific work. The principal-
agent relationship confers certain rights and duties upon both the parties. Examples of such types of agency are:
Insurance agency, travel agency, brokers etc
Rights Of An Agent
1. Right to remuneration– an agent is entitled to get an agreed remuneration as per the contract. If nothing is
mentioned in the contract about remuneration, then he is entitled to a reasonable remuneration. But an agent is
not entitled for any remuneration if he is guilty of misconduct in the business of agency.
2. Right of retainer– an agent has the right to hold his principal’s money till the time his claims, if any, of
remuneration or advances are made or expenses occurred during his ordinary course of business as agency are
paid.
3. Right of lien– an agent has the right to hold back or retain goods or other property of the principal received
by him, till the time his dues or other payments are made.
4. Right to indemnity– an agent has the right to indemnity extending to all expenses and losses incurred while
conducting his course of business as agency.
5. Right to compensation– an agent has the right to be compensated for any injury suffered by him due to the
negligence of the principal or lack of skill.

Duties of Agent
These are the nine duties of an agent in a contract of agency:
1. Duty Not to Delegate His Authority
An agent must not delegate his authority to a sub-agent. Section 190 of the
Indian Contract Act is based on the maxim, Delegatus non-protest delegare,
which means, a delegate cannot further delegate.
An agent appointed to work on a specific task cannot delegate that task to
another because the principal chooses as an agent a particular person. After all,
he responds to trust and confidence in such a person.
Imagine going to a good restaurant because you heard their food is great. Now,
you don’t want this good restaurant to bring food from another restaurant and
serve you. Right?
2. Duty to Protect and Preserve the Interest
Under section 209 of the Indian Contract Act, when the principal’s death or
unsoundness causes the termination of the agency, the agent must protect and
preserve the interests entrusted to him on behalf of the representative of the
deceased principal.
3. Duty to Execute the Mandate
Section 211 of the Indian Contract Act bounds an agent to conduct the business
of his principal according to the principal’s directions or in the principal’s
absence, according to the custom of trade.
In Pannalal Jankidas vs Mohanlal (1950), the Supreme Court held the agent liable
to compensate the principal. Here, the principal told the agent to get the goods
insured. The agent charged the premium from the principal but never got the
insurance.
4. Duty to Act With Care and Skill
 Section 212 of the Indian Contract Act covers another role of the agent. This law
requires an agent to conduct agency business with due care and caution.
In Jayabharathi Corporation vs PN Rajesekara Nadar (1991), the court said that
where the agent misinforms the principal, and the loss occurs because of his
misconduct, he is liable to the principal.
For example, X, an agent for the sale of goods, having authority to sell on credit,
sells on credit to Z without making the proper inquiries regarding the solvency of
Z. Z, is insolvent at the time of this sale. X must make compensation to his
principal regarding any loss sustained.
5. Duty to Render Proper Account
Section 213 of the Indian Contract Act defines the next role. On-demand, the
agent should show the relevant accounts to the principal. It also binds the agent
to keep the money and property of the principal separate from his own. The agent
is responsible for maintaining accurate records of the property he receives as
part of his duties and providing those records to the principal on request.
6. Duty to Communicate With the Principal
As per section 214 of the Indian Contract Act, in cases of difficulty, it is the
agent’s duty to use all reasonable diligence in communication with his principal
and seeking to get his instructions.
7. Duty Not to Deal on His Account
If the principal wishes to deal on his behalf in the agency’s business, the agent
must disclose all material circumstances that have come to his knowledge. He
must also get consent from the principal. Non-observance of this duty may lead
to:

 Under section 215 of the Contract Act, the principal may repudiate the

transaction and disclaim all losses.

 Under section 216 of the Contract Act, the principal may claim from the agent

any benefit which may have resulted in him from the transaction.

For example, A employed B, a broker, to purchase a house for him. B

sold his house to A without disclosing that the house belonged to him. Here, A

can end the contract and reject the house.

8. Duty Not to Make a Secret Profit
The relationship between the agent and the principal is of mutual trust and
confidence. If an agent makes a secret profit from its agency, the principal can
demand all the profits from the agent. As per section 216 of the Indian Contract
Act, agents should not make any profit or acquire any benefit in the course of
their agency without their principals’ knowledge and consent. Such profit is
called secret profit. It is the agent’s responsibility to account to the principal for
secret profits.
9. Duty to Pay Sums Received
As per section 218 of the Indian Contract Act, the agent must pay his principal
all sums received on his account after retaining all money due to him regarding
advances made or expenses properly incurred by him while conducting the
business.
In a case, the court said, if an agent is receiving money on behalf of his principal
under the void contract, he simply cannot use the illegality to withhold the
payment of his principal, which is illegal.
Conclusion
The busyness of everyday life can sometimes make it difficult to do everything
yourself, so it becomes necessary to hire people to accomplish our tasks. At this
juncture, the contract of agency plays its role. The contract of agency is a
contract of fiduciary relationship. It is a contract of trust and confidence between
the principal and his agent. The principal is all responsible for the acts done by
the agent during the agency’s contract.
Contracts establishing a relationship of the agency are very common in business
law. These can be express or implied. An agency is created when a person
delegates his authority to another person, that is, appoints them to do some
specific job or a number of them in specified areas of work. Establishment of a
Principal-Agent relationship confers rights and duties upon both the parties.
There are various examples of such a relationship: Insurance agency, advertising
agency, travel agency, factors, brokers, del credere agents, etc.

Who is an Unpaid Seller?

As stated in Section 45 of the Sale of Goods Act, 1930, when the whole amount has still not been
collected, and the Seller has an urgent right to take action for the payment, the Seller is said to be an
unpaid seller.
When an initial payment is made using a bill of exchange or another negotiable instrument, the
precondition is not satisfied because the device has been dishonoured or for another reason.
As a seller, such as an agent or consignor who has already paid the amount or is accountable for it, is
likewise considered a seller.
The following situations give rise to lien rights:
 The vendor sold the products without any credit restriction.
 The products were sold with a credit agreement whose period is now over.
 The product's purchaser is now bankrupt. Even if the products were sold on credit and the
credit period hasn't ended, the Seller can still enforce his right of lien in this situation.
Under Section 47, the unpaid Seller may utilise his lien privileges while still possessing the goods by
serving as the buyer's agent or bailee. As long as the Seller is in charge of the items, he may utilise
this possessory lien.
Lien for Part Delivery of Goods:
An unpaid vendor may utilise his right of lien on the remaining items if he has only partially delivered
the products. Only if there is no contract to the contrary releasing the Seller's lien in the event of
partial delivery of the products; are the unpaid Seller's entitlements against the buyer relevant.
Lien Termination
 Suppose the products have been given to a carrier for distribution to the purchaser without
maintaining the right to dispose of the commodities. In that case, an unpaid seller loses his
claim over the products.
 When the purchaser or his representative takes possession of the items legally.
 If the lien rights are waived.
According to Section 49, the unpaid Seller may still pursue his lien rights even if he has been granted
the purchase price of the sold items.
Right of the Seller Against the Buyer in Stoppage of Goods in Transit:
In addition to the right of lien, the supplier of the goods may exercise the right to halt the items while
they are en route. Until the customer pays, he may reclaim ownership of the items and keep them.
The Seller can exercise this right:
 Suppose the purchaser goes bankrupt while the items are being transported. The Seller may
request that the transporter deliver the items back to him.
 The products are en route, and neither the Seller, the buyer, nor the buyer's representative,
has possession of them. The items must be with the transporter as the middleman in this
situation. This carrier cannot represent either the buyer or the vendor.
Duration of Transit
When the Seller gives items to the carrier for delivery to the customer or his representative, the period
of transit begins. The products' transit comes to an end when:
 The buyer or his representative accepts delivery of the goods before they arrive at their
destination.
 The transporter notifies the purchaser or his representative that the items have arrived at their
location and are in his possession.
 It is not the end of the transport if the buyer rejects the items and the Seller refuses to accept
them.
 If products are delivered to a vessel the buyer has chartered, it must be decided whether the
commander serves as the products' agent or carrier.
 The transit is deemed to have ended if the carrier or consignee erroneously declines to hand
over the product to the buyer or his representative.
 If only a few portions of the products are delivered, the unpaid Seller has the right to halt
shipment of the remaining goods.
 And if there is no contract to transfer ownership of all the items, the remaining products' transit
will stop.
Rights of an Unpaid Seller
Unpaid sellers have sold products to another individual but have not received full payment or
payment in part. An unpaid seller is one who has acquired a negotiable document, such as a bill of
exchange, that has been dishonoured, following section 45 of the Sale of Goods Act.
Rights Against the Goods
The vendor has the following rights over the products when the buyer has not paid in full or in part for
the commodities provided to him.
1. Rights of lien
A lien is a legal right that is used to keep ownership of goods until the amount owed is settled. If the
Seller of goods did not receive the payment and the request of the products has been passed to the
buyer, but the items are still in the Seller's possession, the Seller does have the right to keep the
goods.
The Seller is entitled to this right when the products were not sold on credit, when the client has gone
bankrupt or when the money has not been received by the due date.
Termination of Lien
The lien of an unpaid seller expires under the following condition.
 When the vendor hands over the products to a carrier, they may be sent to the customer.
 When the Seller has discharged the goods from his lien.
2. Rights of Stopping of Goods in Transit
In the following situations, the vendor has the authority to stop the shipment of goods:
 The Seller must be unpaid.
 When the items are being transported.
The carrier may hold the goods-
  As the Seller's agent, since the Seller's lien covers the products, there is no transit in this
instance.
 As the buyer's agent, since the buyer has taken possession in this situation, the Seller cannot
assert his right to halt in transit.
 As an independent contractor, the products don't have to be in transit for the Seller to exercise
the right of halting in this situation.
3. Rights of Resale
The authority to resell the goods belongs to the Seller who has not received payment. The principal
rules are as follows:
 If the products are perishable, the unpaid vendor may resell them.
 When the unpaid Seller has secured custody of the items through a lien or a halt in shipping
and has notified the buyer of his plan to resell after not being paid.

Conclusion:
When the buyer fails to honour the maturity of any bills of exchange or other negotiable instruments
approved by the Seller as a prerequisite, the Seller has either been paid in full or hasn't been paid at
all. If the Seller had used his right of lien or halt in transit, he might resell the items in this scenario
after giving the buyer notice, and the new buyer would have valid title to the commodities. In this
situation, the vendor has the legal authority to file a lien against the buyer for failing to pay the
requisite sum.

Concept of sale:
Sale and Agreement of Sale (Section 4)
A contract is a formal or verbal agreement that is enforceable by law. Every contract must have an agreement
but every agreement is not a contract. The section 4(1) of the Sale of Goods Act, 1930 states that – ‘A contract
of sale of goods is a contract whereby the seller either transfers or agrees to transfer the property in goods to the
buyer for a decided price.’
In Section 4(4) of the Act, it is maintained that for an agreement of sale to become a sale, the time has to elapse
or the conditions have to be fulfilled subject to which the property in the goods is to be is to be transferred.
The point that is to be understood from the above discussion is that a contract for the sale of goods can either be
a sale or an agreement of sale. Let us see both the cases in the light of the Act.

Here the property in goods is transferred at once to the buyer from the seller. The Section 4(3) of the Act says
that “where under a contract of sale the property in the goods is transferred from the
seller to the buyer, the contract is then known as a sale.” A sale is carried out on deliverable goods. Goods are
said to be in a deliverable state when they are in such a condition that the buyer
would, under the contract, be bound to take delivery of them [Section 2(3)].
The transfer of goods may be affected directly, after the fulfillment of a contingency or to a party authorized
by the seller. Agreement To Sell We saw that in a sale the property in the goods is transferred from the seller
to the buyer.
However, in an agreement to sell, the ownership of the property in goods is not transferred immediately. The
objective of the agreement is to transfer the goods at a future date, once some contingent clauses in the
agreement or certain conditions are satisfied.
The Act in Section 4(3), defines what an agreement to sell is. The section 4(3) of the sale of Goods Act defines
it as, “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.”
Thus we see that a contract for the sale of goods may be either sale or agreement to sell. This depends on the
condition whether it postulates an immediate transfer of property from the seller to the buyer or whether it
postulates the transfer to take place at some future date.
ELEMENTS OF A CONTRACT OF SALE
From the Sale of Goods Act, 1930, we see that certain elements must co-exist for a contract of sale to be
constituted. they are as follows:
1. The presence of two parties is a must. As is the case with a contract, there must be at least two parties in
the contract of sale. One shall become the seller and the other a buyer.
2. The clauses therein present in the contract of sale must limit their scope to only the movable property. This
“movable property” may constitute existing goods, goods in the possession or the ownership of the seller or
future goods.
3. One of the important elements is the consideration of price. A price in value (currency and not in kind) has
to be paid or promised. The price consideration or the actual payment could be partly in kind and partly in
money but never in kind alone.
4. The ownership of the property of goods must change from the seller to the buyer. In the contract of sale,
like we saw in the elements of a contract, an offer has to be made and then accepted. The offer is made by a
seller and then accepted by the buyer.
5. The contract of sale may be absolute or conditional.
6. The other essential elements of a contract, that we have already seen must also be present here. The crucial
elements of a contract like competency of parties, the legality of object and consideration etc. have to be
present like in any other contract.

Essentials elements of a Contract of Sale

The following features are essential elements of any contract of sale of goods.
1. There must be at least two parties; one is the buyer, and other is the seller.
2. The subject matter of the sale is the goods.
3. The goods should pass from seller to buyer.
4. Payment should be made in the country’s legal currency.
5. All the necessary conditions of a valid contract should be present like free consent, consideration, a lawful
object, capacity of parties, etc.
1. Two Parties: A contract of sale of goods is bilateral in nature wherein property in the goods has to pass from
one
party to another. One cannot buy one’s own goods.
For example, A is the owner of a grocery shop. If he supplies the goods (from the stock meant for sale) to his
family, it does not amount to a sale and there is no contract of sale. This is so because the seller and buyer must
be
two different parties, as one person cannot be both a seller as well as a buyer. However, there shall be a contract
of
sale between part owners. Suppose A and B jointly own a television set, A may transfer his
ownership in the
television set to B, thereby making B the sole owner of the goods. In the same way, a partner may buy goods
from
the firm in which he is a partner, and vice-versa.However, there is an exception against the general
rule that no
person can buy his own goods. Where a pawnee sells the goods pledged with him/her on non-payment of
his/her
money, the pawnor may buy them in execution of a decree.
2. Goods: The subject matter of a contract of sale must be goods. Every kind of movable property except
actionable
claims and money is regarded as ‘goods. Contracts relating to services are not considered as contract
of sale.
Immovable property is governed by a separate statute, ‘Transfer of Property Act’.
3. Transfer of ownership: Transfer of property in goods is also integral to a contract of sale. The term ‘property
in
goods’ means the ownership of the goods. In every contract of sale, there should be an agreement
between the
buyer and the seller for transfer of ownership. Here property means the general property in goods, and not
merely a
special property.
Thus, it is the general property, which is transferred under a contract of sale as distinguished from special
property,
which is transferred in case of pledge of goods, i.e., possession of goods is transferred to the pledgee or
pawnee
while the ownership rights remain with the pledger. Thus, in a contract of sale there must be an absolute transfer
of
the ownership. It must be noted that the physical delivery of goods is not essential for transferring the
ownership.
4. Price: The buyer must pay some price for goods. The term ‘price’ is ‘the money consideration for a sale of
goods’.
Accordingly, consideration in a contract of sale has necessarily to be in money. Where goods are
offered as
consideration for goods, it will not amount to sale, but it will be called barter or exchange, which was prevalent
in
ancient times.
Similarly, if a person offers the goods to somebody else without consideration, it amounts to a gift or charity
and not
sale. In explicit terms, goods must be sold for a definite amount of money, called the price. However,
the
consideration can be partly in money and partly in valued up goods. Furthermore, payment is not necessary at
the
time of making the contract of sale.
5. All essentials of a Valid contract: A contract of sale is a special type of contract, therefore, to be valid, it must
have
all the essential elements of a valid contract, viz., free consent, consideration, competency of contracting
parties,
lawful object, legal formalities to be completed, etc. A contract of sale will be invalid if important
elements are
missing. For instance, if A agreed to sell his car to B because B forced him to do so by means of undue
influence, this
contract of sale is not valid since there is no free consent on the part of the transferor
Essentials elements of a Contract of Sale
The following features are essential elements of any contract of sale of goods.
1. There must be at least two parties; one is the buyer, and other is the seller.
2. The subject matter of the sale is the goods.
3. The goods should pass from seller to buyer.
4. Payment should be made in the country’s legal currency.
5. All the necessary conditions of a valid contract should be present like free consent, consideration, a lawful
object, capacity of parties, etc.
1. Two Parties: A contract of sale of goods is bilateral in nature wherein property in the goods has to pass from
one
party to another. One cannot buy one’s own goods.
For example, A is the owner of a grocery shop. If he supplies the goods (from the stock meant for sale) to his
family, it does not amount to a sale and there is no contract of sale. This is so because the seller and buyer must
be
two different parties, as one person cannot be both a seller as well as a buyer. However, there shall be a contract
of
sale between part owners. Suppose A and B jointly own a television set, A may transfer his
ownership in the
television set to B, thereby making B the sole owner of the goods. In the same way, a partner may buy goods
from
the firm in which he is a partner, and vice-versa.However, there is an exception against the general
rule that no
person can buy his own goods. Where a pawnee sells the goods pledged with him/her on non-payment of
his/her
money, the pawnor may buy them in execution of a decree.
2. Goods: The subject matter of a contract of sale must be goods. Every kind of movable property except
actionable
claims and money is regarded as ‘goods. Contracts relating to services are not considered as contract
of sale.
Immovable property is governed by a separate statute, ‘Transfer of Property Act’.
3. Transfer of ownership: Transfer of property in goods is also integral to a contract of sale. The term ‘property
in
goods’ means the ownership of the goods. In every contract of sale, there should be an agreement
between the
buyer and the seller for transfer of ownership. Here property means the general property in goods, and not
merely a
special property.
Thus, it is the general property, which is transferred under a contract of sale as distinguished from special
property,
which is transferred in case of pledge of goods, i.e., possession of goods is transferred to the pledgee or
pawnee
while the ownership rights remain with the pledger. Thus, in a contract of sale there must be an absolute transfer
of
the ownership. It must be noted that the physical delivery of goods is not essential for transferring the
ownership.
4. Price: The buyer must pay some price for goods. The term ‘price’ is ‘the money consideration for a sale of
goods’.
Accordingly, consideration in a contract of sale has necessarily to be in money. Where goods are
offered as
consideration for goods, it will not amount to sale, but it will be called barter or exchange, which was prevalent
in
ancient times.
Similarly, if a person offers the goods to somebody else without consideration, it amounts to a gift or charity
and not
sale. In explicit terms, goods must be sold for a definite amount of money, called the price. However,
the
consideration can be partly in money and partly in valued up goods. Furthermore, payment is not necessary at
the
time of making the contract of sale.
5. All essentials of a Valid contract: A contract of sale is a special type of contract, therefore, to be valid, it must
have
all the essential elements of a valid contract, viz., free consent, consideration, competency of contracting
parties,
lawful object, legal formalities to be completed, etc. A contract of sale will be invalid if important
elements are
missing. For instance, if A agreed to sell his car to B because B forced him to do so by means of undue
influence, this
contract of sale is not valid since there is no free consent on the part of the transferor.
Essentials elements of a Contract of Sale
The following features are essential elements of any contract of sale of goods.
1. There must be at least two parties; one is the buyer, and other is the seller.
2. The subject matter of the sale is the goods.
3. The goods should pass from seller to buyer.
4. Payment should be made in the country’s legal currency.
5. All the necessary conditions of a valid contract should be present like free consent, consideration, a lawful
object, capacity of parties, etc.
1. Two Parties: A contract of sale of goods is bilateral in nature wherein property in the goods has to pass from
one
party to another. One cannot buy one’s own goods.
For example, A is the owner of a grocery shop. If he supplies the goods (from the stock meant for sale) to his
family, it does not amount to a sale and there is no contract of sale. This is so because the seller and buyer must
be
two different parties, as one person cannot be both a seller as well as a buyer. However, there shall be a contract
of
sale between part owners. Suppose A and B jointly own a television set, A may transfer his
ownership in the
television set to B, thereby making B the sole owner of the goods. In the same way, a partner may buy goods
from
the firm in which he is a partner, and vice-versa.However, there is an exception against the general
rule that no
person can buy his own goods. Where a pawnee sells the goods pledged with him/her on non-payment of
his/her
money, the pawnor may buy them in execution of a decree.
2. Goods: The subject matter of a contract of sale must be goods. Every kind of movable property except
actionable
claims and money is regarded as ‘goods. Contracts relating to services are not considered as contract
of sale.
Immovable property is governed by a separate statute, ‘Transfer of Property Act’.
3. Transfer of ownership: Transfer of property in goods is also integral to a contract of sale. The term ‘property
in
goods’ means the ownership of the goods. In every contract of sale, there should be an agreement
between the
buyer and the seller for transfer of ownership. Here property means the general property in goods, and not
merely a
special property.
Thus, it is the general property, which is transferred under a contract of sale as distinguished from special
property,
which is transferred in case of pledge of goods, i.e., possession of goods is transferred to the pledgee or
pawnee
while the ownership rights remain with the pledger. Thus, in a contract of sale there must be an absolute transfer
of
the ownership. It must be noted that the physical delivery of goods is not essential for transferring the
ownership.
4. Price: The buyer must pay some price for goods. The term ‘price’ is ‘the money consideration for a sale of
goods’.
Accordingly, consideration in a contract of sale has necessarily to be in money. Where goods are
offered as
consideration for goods, it will not amount to sale, but it will be called barter or exchange, which was prevalent
in
ancient times.
Similarly, if a person offers the goods to somebody else without consideration, it amounts to a gift or charity
and not
sale. In explicit terms, goods must be sold for a definite amount of money, called the price. However,
the
consideration can be partly in money and partly in valued up goods. Furthermore, payment is not necessary at
the
time of making the contract of sale.
5. All essentials of a Valid contract: A contract of sale is a special type of contract, therefore, to be valid, it must
have
all the essential elements of a valid contract, viz., free consent, consideration, competency of contracting
parties,
lawful object, legal formalities to be completed, etc. A contract of sale will be invalid if important
elements are
missing. For instance, if A agreed to sell his car to B because B forced him to do so by means of undue
influence, this
contract of sale is not valid since there is no free consent on the part of the transferor.
Essentials elements of a Contract of Sale
The following features are essential elements of any contract of sale of goods.
1. There must be at least two parties; one is the buyer, and other is the seller.
2. The subject matter of the sale is the goods.
3. The goods should pass from seller to buyer.
4. Payment should be made in the country’s legal currency.
5. All the necessary conditions of a valid contract should be present like free consent, consideration, a lawful
object, capacity of parties, etc.
1. Two Parties: A contract of sale of goods is bilateral in nature wherein property in the goods has to pass from
one
party to another. One cannot buy one’s own goods.
For example, A is the owner of a grocery shop. If he supplies the goods (from the stock meant for sale) to his
family, it does not amount to a sale and there is no contract of sale. This is so because the seller and buyer must
be
two different parties, as one person cannot be both a seller as well as a buyer. However, there shall be a contract
of
sale between part owners. Suppose A and B jointly own a television set, A may transfer his
ownership in the
television set to B, thereby making B the sole owner of the goods. In the same way, a partner may buy goods
from
the firm in which he is a partner, and vice-versa.However, there is an exception against the general
rule that no
person can buy his own goods. Where a pawnee sells the goods pledged with him/her on non-payment of
his/her
money, the pawnor may buy them in execution of a decree.
2. Goods: The subject matter of a contract of sale must be goods. Every kind of movable property except
actionable
claims and money is regarded as ‘goods. Contracts relating to services are not considered as contract
of sale.
Immovable property is governed by a separate statute, ‘Transfer of Property Act’.
3. Transfer of ownership: Transfer of property in goods is also integral to a contract of sale. The term ‘property
in
goods’ means the ownership of the goods. In every contract of sale, there should be an agreement
between the
buyer and the seller for transfer of ownership. Here property means the general property in goods, and not
merely a
special property.
Thus, it is the general property, which is transferred under a contract of sale as distinguished from special
property,
which is transferred in case of pledge of goods, i.e., possession of goods is transferred to the pledgee or
pawnee
while the ownership rights remain with the pledger. Thus, in a contract of sale there must be an absolute transfer
of
the ownership. It must be noted that the physical delivery of goods is not essential for transferring the
ownership.
4. Price: The buyer must pay some price for goods. The term ‘price’ is ‘the money consideration for a sale of
goods’.
Accordingly, consideration in a contract of sale has necessarily to be in money. Where goods are
offered as
consideration for goods, it will not amount to sale, but it will be called barter or exchange, which was prevalent
in
ancient times.
Similarly, if a person offers the goods to somebody else without consideration, it amounts to a gift or charity
and not
sale. In explicit terms, goods must be sold for a definite amount of money, called the price. However,
the
consideration can be partly in money and partly in valued up goods. Furthermore, payment is not necessary at
the
time of making the contract of sale.
5. All essentials of a Valid contract: A contract of sale is a special type of contract, therefore, to be valid, it must
have
all the essential elements of a valid contract, viz., free consent, consideration, competency of contracting
parties,
lawful object, legal formalities to be completed, etc. A contract of sale will be invalid if important
elements are
missing. For instance, if A agreed to sell his car to B because B forced him to do so by means of undue
influence, this
contract of sale is not valid since there is no free consent on the part of the transferor.
Formalities of the contract of sale of goods
Except where specifically mentioned by the law, there is no prescribed form required to
draft a contract of the sale of goods. The agreement between the parties, i.e., the buyer
and the seller may be implied or may be expressed acknowledged by the conduct of the
parties. Section 5 of the Sale of Goods Act, 1930 describes as to how the contract of the
sale of goods can be framed. Therefore, the contract of the sale of goods can be made-
1. By an offer from the buyer to buy and seller to sell goods for a fixed
consideration mentioned in the agreement. Such an offer of buying or selling
must have an acceptance of the opposite party. The delivery of the goods can be
executed in the following manner:
 immediate delivery of the goods; or
 immediate payment of the price or both; or
 by delivery or payment in instalments; or
 the delivery or payment or both to be postponed.
2. Subject to the provisions of any law for the time being in force, a contract of the 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 by the conduct of the parties.
In nutshell, a contract of the sale may be made in any of the following modes:
1. There may be an immediate delivery of the goods; or
2. There may be an immediate payment of a price, but it may be agreed that the
delivery is to be made at some future date; or
3. There may be an immediate delivery of the goods and an immediate payment of
the price; or
4. It may be agreed that the delivery or the payment or both are to be made in
instalments; or
5. It may be agreed that the delivery or the payment or both are to be made at
some future date.

Definition of Negotiable Instruments

Negotiable Instruments refer to a signed document that contains a promise by a person being the payer to pay

a certain amount of money to the specified person or the assignees being the payee either on demand or at a

specified date in the future. The instrument is said to be negotiable since it can be freely transferred from one

person to another, and the transferee of the instrument gets a clear title to the said instrument.

Importance of Negotiable Instruments

Negotiable instruments are issued by parties to fulfill their payment obligations. They serve as a guarantee

that the person making and signing such a document as the payee shall be under an obligation to pay the

specified amount of money to the mentioned person or the assignees, or the holder of the instrument at a

certain future date or at demand. The holder can transfer the document to another person by signing the

endorsement, and such another person shall get the legal title for such an instrument and be entitled to claim
money from the person who had signed in the capacity of the payer. The holders usually make these

endorsements to meet their debt obligations.

Characteristics of Negotiable Instruments

The presence of the following features can characterize negotiable instruments:

 Transferrable: These instruments can be easily transferred by the holder to another person either by

delivery or by making a lawful endorsement. If the payee is not mentioned in the instrument, then the

transfer can be made by mere delivery. If the payee is mentioned, then the transfer has to be made by

endorsement in the name of another person or assignee, or bearer.

 Right to Receive Payment: If the negotiable instrument is not honoured on the specified date and the

holder of the instrument doesn’t get the payment, then the holder becomes entitled to take legal

action against the payer. This applies even if the instrument was not initially issued to the holder but

instead transferred.

 Title of Transferee: The transferee of the negotiable instrument gets a clear title to the instrument and

is known as a “holder in due course”. This means that the title of such a transferee who acquired the

instrument by legal means shall not be affected due to the flaw or illegality in the title on account of

the transferor or any other previous holder.

Types of Negotiable Instruments

Negotiable instruments can be broadly classified into three types, namely promissory notes, cheques, and bills

of exchange.

1. Promissory Notes
These are the instruments that are signed by the payer and contain a promise to pay a certain amount of

money to another person, or his/her order, or to the bearer of the instrument at a certain date. The promise

to pay shall be unconditional, failing which the note shall not be called a promissory note. The person making

the note is known as the maker, and the person to whom the such note is being made is called the payee. For

example, A makes a promissory note in writing to B stating that I shall pay $10,000 to B on 30.11.2020 and

sign the same.

2. Bills of Exchange
Bills of exchange contain a direction or an order made by the maker of the instrument instructing a certain

person to pay a specified amount of money to another person, or his/her order, or to the bearer of the

instrument at a specified date. The person making the instrument is known as a drawer, and the person on

whom the such instrument is drawn is known as the drawee or the acceptor. The payee may or may not be

the drawer. For example, A draws a bill of exchange to B in which it’s written that “Kindly pay to the bearer

$10,000 on 30.11.2020 and oblige”.

3. Cheques
Cheques are the bill of exchanges that are drawn by the person making such cheques on the specific bank,

instructing the bank to pay a certain amount of money to a person mentioned therein on demand. The person

signing the cheque and making an instruction to the bank is known as the drawer, the bank becomes the

drawee, and the person to whom payment is to be made is known as the payee.

Conclusion
Negotiable instruments are vital to the economy and as recognized globally as a medium of payment. They can

be freely transferred from one person to another, which makes them more useful, and parties can use them

to meet their payment obligations. However, due care shall be taken when writing a negotiable instrument,

especially when the same is made payable to a bearer as a person acquiring the same by unfair means can try

to misuse the instrument, and legal actions can take some time thereafter.

What is Partnership?
Introduction
Prior to the Partnership Act, 1932 the law of partnership was covered by the Indian Contract Act, 1872. Due to
rapid growth in trade and commerce and growing industrialization, a need was felt to have a separate law on
partnership. This led to the enactment of the Indian Partnership Act, 1932. It extends to the whole of India. It
came into force on the 1st day of October, 1932, except section 69, which came into force on the 1st day of
October, 1933.
What is Partnership?
Section 4 of the Indian Partnership Act, 1932, lays down that “Partnership is the relation between persons who
have agreed to share the profits of a business carried on by all or any one of them acting for all.”
Partnership v. Firm
 Persons who have entered into partnership with one another are called individually “Partners” and collectively
“a firm”.
 The name under which their business is carried on is called the “firm name”.
 A firm is a collective name of partners. It is a physical unit. It is concrete. While partnership is merely an
abstract legal relation between the partners. Partnership is an invisible tie, which binds the partners together,
and the firm is the visible form of those partners who are thus bound together.
The legal status of a firm: A firm is not a legal entity. It is merely a collective name for the individuals, who
have entered into partnership. It does not have a separate legal entity distinct from the partners who compose it.
As a firm is not a legal entity, there cannot be partnership of firms.

Features of Partnership:
Following are the few features of a partnership:
1.Agreement between Partners: It is an association of two or more individuals, and a partnership
arises from an agreement or a contract. The agreement (accord) becomes the basis of the
association between the partners. Such an agreement is in the written form. An oral agreement is
evenhandedly legitimate. In order to avoid controversies, it is always good, if the partners have a
copy of the written agreement
2. Two or More Persons: In order to manifest a partnership, there should be at least two (2) persons
possessing a common goal. To put it in other words, the minimal number of partners in an enterprise
can be two (2). However, there is a constraint on their maximum number of people.
3. Sharing of Profit: Another significant component of the partnership is, the accord between
partners has to share gains and losses of a trading concern. However, the definition held in the
Partnership Act elucidates – partnership as an association between people who have consented to
share the gains of a business, the sharing of loss is implicit. Hence, sharing of gains and losses is
vital.
4.Business Motive: It is important for a firm to carry some kind of business and should have a profit
gaining motive.
5. Mutual Business: The partners are the owners as well as the agent of their firm. Any act
performed by one partner can affect other partners and the firm. It can be concluded that this point
acts as a test of partnership for all the partners.
6. Unlimited Liability: Every partner in a partnership has unlimited liability.
What are the Essential Elements of Partnership?
All the following elements must be present if an association of persons is to be called a partnership:
1. Association of two or more persons
There must be at least two persons to form a partnership. As far as the maximum number of partners, in a firm
is concerned, the Partnership Act is silent. However, section 464 of the Companies Act, 2013 lays down that
where the firm is carrying any business, the number of partners should not exceed 50 (It can be increased upto
100). If the number of maximum partners exceeds this limit, the partnership becomes an illegal association of
persons.
2. Agreement between persons
According to Section 5 of Partnership Act, the relation of partnership arises from contract and not from status.
Thus, the members of a Hindu Joint Family carrying on a business, or the co-owners of a business are not
‘partners’ because HUF and co-ownership are created by operation of law and not by contract. The agreement
of partnership may be expressed or implied.
3. Business
Partnership can be formed only for the purpose of carrying on some business. Section 2(b) of Partnership Act
says that the term ‘business’ includes every trade, occupation or profession. Thus, an association created
primarily for charitable, religious and social purposes are not regarded as partnership. Similarly, when two or
more persons agree to share the income of a joint property, it does not amount to partnership; such relationship
is termed as co-ownership.
4. Sharing of Profits
The division of profits is an essential condition of the existence of a partnership. The sharing of profits is only
a prima facie evidence of the existence of partnership, and this is not the conclusive test of it.
5. Business carried on by all or any of them acting for all (Mutual Agency)
The underlying or cardinal principle which governs partnership is the mutual agency relationship amongst the
partners. It means each partner is the agent of the firm as well as of the other partners. The business of the firm
may be carried on by all the partners or by any of them acting for all. Thus, a partner is both an agent and a
principal. He can bind the other partners by his acts and is also bound by the acts of the other partners. The law
of partnership is regarded as an extension of the general law of agency

Benefits Associated With a Partnership Firm Registration

The benefits that are associated with a partnership firm are as follows:
1. This sort of business entity is easy to start: Among all the business entities that are present in India, this is the
sort of firm that is easiest to start. The only requirement for the incorporation process for this firm is that the
need of a partnership deed. With this requirement, it can be incorporated and start within the same day.
When you compare this form of firm with the Limited Liability partnership, you would note that compared to
10 to 15 day registration process of LLP, this is just one day.
2. There is no need to pass resolutions: When it comes to any sort of business, the most amount of time it takes
to start a process is with the decision process. The reason for this is the need to pass a resolution. However,
this is one thing that a partnership firm does not need to partake in. To that end, the decision process is fast
and it is reliable.
4. Raising funds: It is far easier for a partnership firm to raise funds when you compare it to the proprietorship
firms. As there are multiple partners available to contribute money. Furthermore, when it comes to loans, it is
easy for a partnership firm to access it as the banks favour this lot more.
5. Equal sense of belonging: Each partner in a partnership firm has a sense of belonging. They both can manage
and indulge with many activities within the company. However, there cause is also a common one. With
ownership, what you have is a higher sense of accountability. The more accountable that the partners feel, the
better is there performance.
However, all is not green in the world of partnership for there are certain drawbacks to this as well.
Drawbacks Associated With Partnership Firm Registration
The drawbacks that are associated with this sort of firma are as follows:
1. The liability is unlimited: When the firm suffers a loss, then each and every partner associated has to bear
them. Furthermore, the liability that one partner creates happens to be one for the other partner as well. In
order to quell this liability, LLP came into existence.
2. The number of members is low: When it comes to the numbers of members that are allowed in such a firm,
the number is limited to 20. To that end, the LLP makes for a much better option in this regard.
3. There is no central figure: While it is commendable that this form of business entity tries to take a lot more
opinions into account, the lack of a central figure when it comes to operations can make the entire endeavour
a bit directionless. Furthermore, there can also be a discrepancy as to how much power is given to the
partner(s). There are times when one partner has more power than the other and this can turn things ugly as
well.
4. The public finds it hard to trust a partnership firm: When it comes to the matters of trust, you should know
that a partnership firm does not require any sort of registration. To that end, there is no need to have structure
of this firm. Now, for something even appears to be directionless, it is quite hard to gather the trust from
anyone, let alone the public.
5. It can be dissolved abruptly: When there is a certain case of “death” of one of the partners of the firm, it
results in the complete dissolution of the firm. This sudden tend to end the business of this firm. With no
protection against dissolution, LLP has become a more desirable option as the death of the partner does not
lead to any such disruptions to operations.

Conclusion:
There are both ups and downs when it comes to a partnership firm. However, some of the benefits and
disadvantages come with any form of business entity. While the lack of a central figure and lack of limited
liability is quite obvious, there is a sense of freedom associated with such a company that still makes it alluring
to traders.

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Dishonor Of Cheque:
[1]According to Section 6. of the Negotiable Instruments Act, the check is defined as the bill of

exchange issued on a particular banker & expressed to be payable other than on demand. Includes the

electronic image of the truncated check & a check in the electronic form.

In the banking scenario, the honored cheque indicates the successful transaction of the amt. cited on the

check to the beneficiary concerned i.e. payee. Conversely, if the Bank refuses to dispense the cheque sum to

the beneficiary, it will be treated as a dishonored cheque so, it refers to a scenario where the Bank refuses to

dispense the check amount to the payee.

If a cheque is dishonoured

When a cheque is dishonoured, the drawee bank immediately issues a ‘Cheque Return Memo’

to the banker of the payee mentioning the reason for non-payment. The payee’s banker then

gives the dishonoured cheque and the memo to the payee. The holder or payee can resubmit the

cheque within three months of the date on it, if he believes it will be honoured the second

time. However, if the cheque issuer fails to make a payment, then the payee has the right to

prosecute the drawer legally.

The payee may legally sue the defaulter / drawer for dishonour of cheque only if the amount

mentioned in the cheque is towards discharge of a debt or any other liability of the defaulter towards
payee.

If the cheque was issued as a gift, towards lending a loan or for unlawful purposes, then the drawer

cannot be prosecuted in such cases.

Legal action

The Negotiable Instruments Act, 1881 is applicable for the cases of dishonour of cheque. This Act

has been amended many times since 1881.

According to Section 138 of the Act, the dishonour of cheque is a criminal offence and is punishable

by imprisonment up to two years or with monetary penalty or with both.

If payee decides to proceed legally, then the drawer should be given a chance of repaying the cheque

amount immediately. Such a chance has to be given only in the form of notice in writing.

The payee has to sent the notice to the drawer with 30 days from the date of receiving “Cheque

Return Memo” from the bank. The notice should mention that the cheque amount has to be paid

to the payee within 15 days from the date of receipt of the notice by the drawer. If the cheque issuer

fails to make a fresh payment within 30 days of receiving the notice, the payee has the right to file a

criminal complaint under Section 138 of the Negotiable Instruments Act.

However, the complaint should be registered in a magistrate’s court within a month of the expiry

of the notice period. It is essential in this case to consult an advocate who is well versed and

experienced in this area of practice to proceed further in the matter.

Fine points: Conditions for prosecution

Legally, certain conditions have to be fulfilled in order to use the provisions of Section 138.

The cheque should have been drawn by the drawer on an account maintained by him.
The cheque should have been returned or dishonoured because of insufficient funds in the drawer's

account.

The cheque is issued towards discharge of a debt or legal liability.

After receiving the notice, if the drawer doesn't make the payment within 30 days from the day of

receiving the notice, then he commits an offence punishable under Section 138 of the Negotiable

Instruments Act.

Punishment & penalty

On receiving the complaint, along with an affidavit and relevant paper trail, the court will issue

summons and hear the matter. If found guilty, the defaulter can be punished with monetary penalty

which may be twice the amount of the cheque or imprisonment for a term which may be extended to

two years or both. The bank also has the right to stop the cheque book facility and close the account

for repeat offences of bounced cheques.

If the drawer makes payment of the cheque amount within 15 days from the date of receipt of the

notice, then drawer does not commit any offence. Otherwise, the payee may proceed to file a

complaint in the court of the jurisdictional magistrate within one month from the date of expiry of 15

days prescribed in the notice.