Class Notes on Contract II – Unit IV (2nd Sem / 3 year LL.B)

Indian Partnership Act

The Indian Partnership Act, 1932 is an act enacted by the Parliament of India to regulate partnership firms in India. It received the assent of the Governor-General on 8 April 1932 and came into force on 1 October 1932. Before the enactment of this act, partnerships were governed by the provisions of the Indian Contract Act. The act is administered through the Ministry of Corporate Affairs. The act is not applicable to Limited Liability Partnerships, since they are governed by the Limited liability Partnership Act, 2008.

Definition

Section 2 of the act defines,

(a) an “act of a firm” means any act or omission by all the partners, or by any partner or agent of the firm which gives rise to a right enforceable by or against the firm;
(b) “business” includes every trade, occupation and profession;
(c) “prescribed” means prescribed by rules made under this Act; (c-1) “Registrar” means the Registrar of Firms appointed under sub-section (1) of section 57 and includes the Deputy Registrar of Firms and Assistant Registrar of Firms appointed under sub-section (2) of that section;
(d) “third party” used in relation to a firm or to a partner therein means any person who is not a partner in the firm; and
(e) expressions used but not defined in this Act and defined in the Indian Contract Act, 1872, shall have the meanings assigned to them in that Act.

Partnership refers to an agreement between persons to share their profits or losses arising on account of actions carried by all or one of them acting on behalf of all. The persons who have entered such an agreement are called partners and give their collective business a name, which is necessarily their firm-name. This relation between partners arises out of a contract or an agreement, which means a husband and wife carrying on a business or members of a Hindu undivided family re not into partnership. The share of profits received by any individual from the firm, money received by a lender of money, salary received by a worker or a servant, annuity received by a widow or a child of a deceased partner, does not make them a partner of the firm.

Nature, Mode of determining the existence of Partnership

  • Partnership not created by status
    The relation of partnership arises from contract and not from status;
    and, in particular, the members of a Hindu undivided family carrying on a family business as such, or a Burmese Buddhist husband and wife carrying business as such, are not partners in such business.
  • Mode of determining existence of partnership – In determining whether a group of persons is or is not a firm, or whether a person is or is not a partner in a firm, regard shall be had to the real relation between the parties, as shown by all relevant facts taken together. [section 6].

    MUTUAL AGENCY IS THE REAL TEST – The real test of ‘partnership firm’ is ‘mutual agency’, i.e. whether a partner can bind the firm by his act, i.e. whether he can act as agent of all other partners.

  • Partnership at will – Where no provision is made by contract between the partners for the duration of their partnership, or for the determination of their partnership, the partnership is “partnership at will”. [section 7]. – – Partnership ‘at will’ means any partner can dissolve a firm by giving notice to other partners (or he may express his intention to retire from partnership) – – Partnership deed may provide about duration of partnership (say 10 years) or how partnership will be brought to end. In absence of any such term, the partnership is ‘at will’. – – In case of ‘particular partnership’, the partnership comes to end when the venture for which it was formed comes to end.
  • Particular partnership
    A person may become a partner with another person in particular adventures or undertakings.

Relation of Partner to one another

General Duties of partners

section 9  of Indian Partnership Act, 1932 deals with General duties of partners.

Partners are bound to carry on the business of the firm to the greatest common advantage,

to be just and faithful to each other, and to render true accounts and full information of all things affecting the firm to

any partner or his legal representative.

Duty to indemnify for loss caused by fraud
Section 10 of Indian Partnership Act, 1932 deals with Duty to indemnify for loss caused by fraud.
Every partner shall indemnify the firm for any loss caused to it by his fraud in the conduct of the business of the firm.

Determination of rights and duties of partners by contract between the partners

 Section 11 of Indian Partnership Act, 1932 deals with Determination of rights and duties of partners by contract   between the partners.

Subject to the provisions of this Act, the mutual rights and duties of the partners of a firm may be determined by contract between the partners, and such contract may be expressed or may be implied by a course of dealing.

Such contract may be varied by consent of all the partners, and such consent may be expressed or may be implied by a course of dealing.

(2) Agreements in restraint of trade. Notwithstanding anything contained in section 27 of the Indian Contract Act, 1872, (9 of 1872) such contracts may provide that a partner shall not carry on any busi- ness other than that of the firm while he is a partner.

The conduct of the business

section 12 of Indian Partnership Act, 1932 deals with The conduct of the business.

Subject to contract between the partners-

(a) every partner has a right to take part in the conduct of the business;

(b) every partner is bound to attend diligently to his duties in the conduct of the business;

(c) any difference arising as to ordinary matters connected with the business may be decided by a majority of the partners, and every partner shall have the right to express his opinion before the matter is decided, but no change may be made in the nature of the business without the consent of all the partners ; and

(d) every partner has a right to have access to and to inspect and copy any of the books of the firm.

Mutual rights and liabilities

Section 13 of Indian Partnership Act, 1932 deals with Mutual rights and liabilities.

Subject to contract between the partners-

(a) a partner is not entitled to receive remuneration for taking part in the conduct of the business;

(b) the partners are entitled to share equally in the profits earned, and shall contribute equally to the losses sustained by the firm ;

(c) where a partner is entitled to interest on the capital subscribed by him such interest shall be payable only out of profits ;

(d) a partner making, for the purposes of the business, any payment or advance beyond the amount of capital he has agreed to subscribe, is entitled to interest thereon at the rate of six per cent. per annum ;

(e) the firm shall indemnify a partner in respect of payments made and liabilities incurred by him-

(i) in the ordinary and proper conduct of the business, and

(ii) in doing such act, in an emergency, for the purpose of protecting the firm from loss, as would be done by a person of ordinary prudence, in his own case, under similar circumstances ; and

(f) a partner shall indemnify the firm for any loss caused to it by his wilful neglect in the conduct of the business of the firm.

The property of the firm

Section 14 of Indian Partnership Act, 1932 deals with The property of the firm.

Subject to contract between the partners, the property of the firm includes all property and rights and interests in property originally brought into the stock of the firm, or acquired, by purchase or otherwise, by or for the firm, or for the purposes and in the course of the business of the firm, and includes also the goodwill of the business.

Unless the contrary intention appears, property and rights and interests in property acquired with money belonging to the firm are deemed to have been acquired for the firm.

Application of the property of the firm

Subject to the contract between the partners, the property of the firm shall be held
and used by the partners exclusively for the purposes of the business.

Personal profits named by partners

section 16 of Indian Partnership Act, 1932 deals with Personal profits earned by partners.

Subject to contract between the partners,-

(a) if a partner derives any profit for himself from any transaction of the firm, or from the use of the property or business connection of the firm or the firm name, he shall account for that profit and pay it to the firm;

(b) if a partner carries on any business of the same nature as and competing with that of the firm, he shall account for and pay to the firm all profits made by him in that business.

Right and duties of partners

Section 17 of Indian Partnership Act, 1932 deals with Rights and duties of partners.

Subject to contract between the partners,-

(a) after a change in the firm, Where a change occurs in the constitution of a firm, the mutual rights and duties of the partners in the reconstituted firm remain the same as they were immediately before the change, as far as may be;
(b) after the expity of the term of the firm, and. Where a firm constituted for a fixed term continues to carry on business after the expiry of that term, the mutual rights and duties of the partners remain the same as they were before the expiry, so far as they may be consistent with the incidents of partnership at will ; and

(c) where additional undertakings are carried out. where a firm constituted to carry out one or more adventures or undertakings carries out other adventures or undertakings, the mutual rights and duties of the partners in respect of the other adventures or undertakings are the same as those in respect of the original adventures or undertakings.

  • after a change in the firm
  • after the expiry of the term of the firm
  • where additional undertakings are carried out

Relation of partners with third parties

  • Partners to be agent of the firm
  • Implied authority of partner as agent of the firm
  • Extension and restriction of partner’s implied authority
  • Partner’s authority in an emergency
  • Mode of doing act to bind firm
  • EFFECT OF ADMISSION BY A PARTNER.
    An admission or representation made by a partner concerning the affairs of the firm
    is evidence against the firm, it is made in the ordinary course of business.
  • EFFECT OF NOTICE TO ACTING PARTNER. Notice to a partner who habitually acts in the business of the firm of any matter
    relating to the affairs of the firm operates as notice to the firm, except in the case of
    a
    fraud on the firm committed by or with the consent of that partner.
  • LIABILITY OF A PARTNER FOR ACTS OF THE FIRM.
    Every partner is liable jointly with all the other partners and also severally, for all
    acts of the firm done while he is a partner
  • LIABILITY OF THE FIRM FOR WRONGFUL ACTS OF A PARTNER.
    Where, by the wrongful act or omission of a partner acting in the ordinary course of
    the business of a firm or with the authority of his partners, loss or injury is caused to
    any third party, or any penalty is incurred, the firm is liable therefor to the same
    extent as the partner.
  • LIABILITY OF FIRM FOR MISAPPLICATION BY PARTNERS.
    Where –
    (a) a partner acting within his apparent authority receives money or property from a
    third party and misapplies it, or
    (b) a firm in the course of its business receives money or property from a third
    party, and the money or property is misapplied by any of the partners while it is in
    the custody of the firm, the firm is liable to make good the loss.
  • HOLDINGOUT.
    (1) Anyone who by words spoken or written or by conduct represent himself, or
    knowingly permits himself to be represented, to be a partner in a firm, is liable as a
    partner in that firm to anyone who has on the faith of any such representation given
    credit to the firm, whether the person representing himself or represented to be a
    partner does or does not know that the representation has reached the person so
    giving credit.
    (2) Where after partner’s death the business continued in the old firm-name, the
    continued use of that name or of the deceased partner’s name as a part thereof shall
    not of itself make his legal representative or his estate liable for any act of the firm
    done after his death.
  • RIGHTS OF TRANSFEREE OF A PARTNER’S INTEREST.
    (1) A transfer by a partner of his interest in the firm, either absolute or by mortgage,
    or, by the creation by him of a charge on such interest, does not entitle the
    transferee, during the continuance of the firm, to interfere in the conduct of the business or to require accounts or to inspect the books of the firm, but entitles the
    transferee only to receive the share of profits of the transferring partner, and the
    transferee shall accept the account of profits agreed to by the partners.
    (2) If the firm is dissolved or if the transferring partner ceases to be a partner, the
    transferee is entitled as against the remaining partners, to receive the share of the
    assets of the firm to which the transferring partner is entitled and, for the purpose of
    ascertaining that share, to an account as from the date of the dissolution.
  • Section30
    MINORS ADMITTED TO THE BENEFITS OF PARTNERSHIP.
    (1) A person who is a minor according to the law to which he is subject may not be a
    partner in a firm, but, with the consent of all the partners for the time being, he may
    be admitted to the benefits of partnership.
    (2) Such minor has a right to such share of the property and of the profits of the firm
    as may be agreed upon, and he may have access to and inspect and copy any of the
    accounts of the firm.
    (3) Such minor’s share is liable for the acts of the firm but the minor is not
    personally liable for any such act.
    (4) Such minor may not sue the partners for an account or payment of his share of
    the property or profits of the firm, save when severing his connection with the firm,
    and in such case the amount of his share shall be determined by a valuation made as
    far as possible in accordance with the rules contained in section 48 :
    Provided that all the partners acting together or any partner entitled to dissolve the
    firm upon notice to other partners may elect in such suit to dissolve the firm, and
    thereupon the Court shall proceed with the suit as one for dissolution and for settling
    accounts between the partners and the amount of the share of the minor shall be
    determined along with the shares of the partners.
    (5) At any time within six months of his attaining majority, or of his obtaining
    knowledge that he had been admitted to the benefits of partnership, whichever date
    is later, such person may give public notice that he has elected to become or that he
    has elected not to become a partner in the firm, and such notice shall determine his
    position as regards the firm :
    Provided that, if he fails to give such notice, he shall become a partner in the firm on
    the expiry of the said six months.
    (6) Where any person has been admitted as a minor to the benefits of partnership in
    a firm, the burden of proving the fact that such person had no knowledge of such
    admission until a particular date after the expiry of six months of his attaining
    majority shall lie on the person asserting that fact.
    (7) Where such person becomes a partner –
    (a) his rights and liabilities as a minor continue upto the date on which he becomes a
    partner, but he also becomes personally liable to third parties for all acts of the firm
    done since he was admitted to the benefits of partnership, and (b) his share in the property and profits of the firm shall be the share to which he
    was entitled as a minor.
    (8) Where such person elects not be to become a partner, –
    (a) his rights and liabilities shall continue to be those of a minor under the section
    upto the date on which he gives public notice;
    (b) his share shall not be liable for any acts for the firm done after the date of the
    notice; and
    (c) he shall be entitled to sue the partners for his share of the property and profits in
    accordance with sub-section (4).
    (9) Nothing in sub-sections (7) and (8) shall affect the provisions of section 28.

Rights and duties of partner

Types of partners

 

Incoming / Admission of partners

INCOMING PARTNERS
No person shall be introduced as a partner into the firm without the consent of all existing partners…
A person who is introduced as a partner into a firm does not thereby become liable for any act of the firm done before he becomes partner…

Outgoing Partners

  • Retirement of a partner
  • EXPULSION OF A PARTNER.
    (1) A partner may not be expelled from a firm by any majority of the partners, save
    in the exercise in good faith or powers conferred by contract between the partners.
    (2) The provisions of sub-sections (2), (3) and (4) of section 32 shall apply to an
    expelled partner as if he were a retired partner.
  • INSOLVENCY OF A PARTNER.
    (1) Where a partner in a firm is adjudicated an insolvent, he ceases to be a partner
    on the date on which the order of adjudication is made, whether or not the firm is
    thereby dissolved.
    (2) Where under a contract between the partners the firm is not dissolved by the
    adjudication of a partner as an insolvent, the estate of a partner so adjudicated is
    not
    liable for any act of the firm and the firm is not liable for any act of the insolvent,
    done after the date on which the order of adjudication is made.
  • LIABILITY OF ESTATE OF DECEASED PARTNER.
    Where under a contract between the partners the firm is not dissolved by the death
    of a partner, the estate of a deceased partner is not liable for any act of the firm
    done after his death.
  • RIGHTS OF OUTGOING PARTNER TO CARRY ON COMPETING BUSINESS.

(1) An outgoing partner may carry on a business competing with that of the firm and
he may advertise such business, but subject, to contract to the contrary, he may not
(a) use the firm-name,
(b) represent himself as carrying on the business of the firm, or
(c) solicit the custom of persons who were dealing with the firm before he ceased to
be a partner.

  •  AGREEMENT IN RESTRAINT OF TRADE.

A partner may make an agreement with his partners that on ceasing to be a partner he will not carry on any business similar to that of the firm within a specified period
or within specified local limits; and, notwithstanding anything contained in section 27
of the Indian Contract Act, 1872, such agreement shall be valid if the restrictions
imposed are reasonable.

  • RIGHT OF OUTGOING PARTNER IN CERTAIN CASES TO SHARE SUBSEQUENT PROFITS.
    Where any member of a firm has died or otherwise ceased to be a partner, and the
    surviving or continuing partners carry on the business of the firm with the property
    of the firm without any final settlement of accounts as between them and the
    outgoing partner or his estate, then, in the absence of a contract to the contrary, the
    outgoing partner or his estate is entitled at the option of himself or his
    representatives to such share of the profits made since he ceased to be a partner as
    may be attributable to the use of his share of the property of the firm or to interest
    at the rate of six per cent. per annum on the amount of his share in the property of
    the firm :
    Provided that where by contract between the partners an option is given to surviving
    or continuing partners to purchase the interest of a deceased or outgoing partner,
    and that option is duly exercised, the estate of the deceased partner, or the outgoing
    partner of his estate, as the case may be, is not entitled to any further or other
    share of profits, but if any partner assuming to act in exercise of the option does not
    in all material respects comply with the terms thereof, he is liable to account under
    the foregoing provisions of this section.
  • REVOCATION OF CONTINUING GUARANTEE BY CHANGE IN FIRM.
    A continuing guarantee given to a firm, or to a third party in respect of the
    transactions of a firm, is in the absence of agreement to the contrary, revoked as to
    future
    transactions from the date of any change in the constitution of the firm.

Dissolution of Firm

  • DISSOLUTION BY AGREEMENT.
    A firm may be dissolved with the consent of all the partners or in accordance with a
    contract between the partners.
    Section41
    COMPULSORY DISSOLUTION.
    A firm is dissolved
    (a) by the adjudication of all the partners or of all the partners but one as insolvent,
    or (b) by the happening of any event which makes it unlawful for the business of the
    firm to be carried on or for the partners to carry it on in partnership :
    Provided that, where more than one separate adventure or undertaking is carried on
    by the firm, the illegality of one or more shall not of itself cause the dissolution of the
    firm in respect of its lawful adventures and undertakings
    Section42
    DISSOLUTION ON THE HAPPENING OF CERTAIN CONTINGENCIES.
    Subject to contract between the partners a firm is dissolved
    (a) if constituted for a fixed term, by the expiry of that term;
    (b) if constituted to carry out one or more adventures or undertakings, by the
    completion thereof;
    (c) by the death of a partner; and
    (d) by the adjudication of a partner as an insolvent.
    Section43
    DISSOLUTION BY NOTICE OF PARTNERSHIP AT WILL.
    (1) Where the partnership is at will, the firm may be dissolved by any partner giving
    notice in writing to all the other partners of his intention to dissolve the firm.
    (2) The firm is dissolved as from the date mentioned in the notice as the date of
    dissolution or, if no date is so mentioned, as from the date of the communication of
    the notice.
    Section44
    DISSOLUTION BY THE COURT.
    At the suit of a partner, the Court may dissolve a firm on any of the following
    grounds, namely :-
    (a) that a partner has become of unsound mind, in which case the suit may be
    brought as well by the next friend of the partner who has become of unsound mind
    as by any other partner;
    (b) that a partner, other than the partner suing, has become in any way permanently
    incapable of performing his duties as partner;
    (c) that a partner, other than the partner suing, is guilty of conduct which is likely to
    affect prejudicially the carrying on of the business regard being had to the nature
    of the business;
    (d) that a partner, other than the partner suing, wilfully or persistently commits
    breach of agreements relating to the management of the affairs of the firm of the
    conduct of its business; or otherwise so conducts himself in matters relating to the
    business that it is not reasonably practicable for the other partners to carry on the business in partnership with him;
    (e) that a partner, other than the partner suing, has in any way transferred the
    whole of his interest in the firm to a third party, or has allowed his share to be
    charged under the provisions of rule 49 of Order XXI of the First Schedule to the
    Code of Civil Procedure, 1908, or has allowed it to be sold in the recovery of arrears
    of land revenue or of any dues recoverable as arrears of land revenue due by the
    partner;
    (f) that the business of the firm cannot be carried on save at a loss; or
    (g) on any other ground which renders it just and equitable that the firm should be
    dissolved.
    Section45
    LIABILITY FOR ACTS OF PARTNERS DONE AFTER DISSOLUTION.
    (1) Notwithstanding the dissolution of a firm, the partners continue to be liable as
    such to third parties for any act done by any of them which would have been an act
    of the firm, if done before the dissolution, until public notice is given of the
    dissolution :
    Provided that the estate of a partner who dies, or who is adjudicated an insolvent, or
    of a partner who, not having been known to the person dealing with the firm to be a
    partner, retires from the firm, is not liable under this section for acts done after the
    date on which he ceases to be a partner.
    (2) Notices under sub-section (1) may be given by any partner.
    Section46
    RIGHT OF PARTNERS TO HAVE BUSINESS WOUND UP AFTER DISSOLUTION.
    On the dissolution of a firm every partner or his representative is entitled, as against
    all the other partners or their representatives, to have the property of the firm
    applied in payment of the debts and liabilities of the firm, and to have the surplus
    distributed among the partners or which representatives according to their rights.
    Section47
    CONTINUING AUTHORITY OF PARTNERS FOR PURPOSES OF WINDING UP.
    After the dissolution of a firm the authority of each partner to bind the firm, and the
    other mutual rights and obligations of the partners, continue notwithstanding the
    dissolution, so far as may be necessary to wind up the affairs of the firm and to
    complete transactions begun but unfinished at the time of the dissolution, but not
    otherwise :
    Provided that the firm is in no case bound by the acts of a partner who had been
    adjudicated insolvent, but this proviso does not affect the liability of any person who
    has after the adjudication represented himself or knowingly permitted himself to be
    represented as a partner of the insolvent.
    Section48
    MODE OF SETTLEMENT OF ACCOUNTS BETWEEN PARTNERS. In settling the accounts of a firm after dissolution, the following rules shall, subject
    to agreement by the partners, be observed :
    (a) Losses, including deficiencies of capital, shall be paid first out of profits, next out
    of capital, and, lastly, if necessary, by the partners individually in the proportions
    in which they were entitled to share profits;
    (b) the assets of the firm, including any sums contributed by the partners to make
    up deficiencies of capital, shall be applied in the following manner and order :
    (i) in paying the debts of the firm to third parties;
    (ii) in paying to each partner rateably what is due to him from the firm for advances
    as distinguished from capital;
    (iii) in paying to each partner rateably what is due to him on account of capital; and
    (iv) the residue, if any, shall be divided among the partners in the proportions in
    which they were entitled to share profits.
    Section49
    PAYMENT OF FIRM’S DEBTS AND OF SEPARATE DEBTS.
    Where there are joint debts due from the firm, and also separate debts due from any
    partner, the property of the firm shall be applied in the first instance in payment of
    the debts of the firm, and, if there is any surplus, then the share of each partner
    shall be applied in payment of his separate debts or paid to him. The separate
    property of any partner shall he applied first in the payment of his separate debts,
    and the surplus (if any) in payment of the debts of the firm.
    Section50
    PERSONAL PROFITS EARNED AFTER DISSOLUTION.
    Subject to contract between the partners, the provisions of clause (a) of section 16
    shall apply to transactions by any surviving partner or by the representatives of
    deceased partner, undertaken after the firm is dissolved on account of the death of a
    partner and before its affairs have been completely wound up :
    Provided that where any partner or his representative has bought the good will of the
    firm, nothing in the section shall affect his right to use the firm-name.
    Section51
    RETURN OF PREMIUM ON PREMATURE DISSOLUTION.
    Where a partner has paid a premium on entering into partnership for a fixed term,
    and the firm is dissolved before the expiration of that term otherwise than by the
    death of a partner, he shall be entitled to repayment of the premium or of such part
    thereof as may be reasonable, regard being had to the terms upon which he became
    a partner, and to the length of time during which he was a partner, unless –
    (a) the dissolution is mainly due to his own misconduct, or (b) the dissolution is in pursuance of an agreement containing no provision for the
    return of the premium or any part of it.
    Section52
    RIGHTS WHERE PARTNERSHIP CONTRACT IS RESCINDED FOR FRAUD OR
    MISREPRESENTATION.
    Where a contract creating partnership is rescinded on the ground of fraud or
    misrepresentation of any of the parties thereto, the party entitled to rescind is,
    without prejudice to any other right, entitle –
    (a) to a lien on, or right of retention of, the surplus of the assets of the firm
    remaining after the debts of the firm have been paid, for any sum paid by him for
    the purchase of a share in the firm and for any capital contributed by him;
    (b) to rank as a creditor of the firm in respect of any payment made by him towards
    the debts of the firm; and
    (c) to he indemnified by the partner or partners guilty of fraud or misrepresentation
    against all the debts of the firm.
    Section53
    RIGHT TO RESTRAIN FROM USE OF FIRM-NAME OR FIRM-PROPERTY.
    After a firm is dissolved, every partner or his representative may, in the absence of a
    contract between the partners to the contrary, restrain any other partner or his
    representative from carrying on a similar business in the firm-name or from using
    any of the property of the firm for his own benefit, until the affairs of the firm have
    been completely wound up :
    Provided that where any partner or his representative has brought the goodwill of
    the firm, nothing in this section shall affect his right to use the firm-name.
    Section54
    AGREEMENTS IN RESTRAINT OF TRADE.
    Partners may, upon or in anticipation of the dissolution of the firm, make an
    agreement that some or all of them will not carry on a business similar to that of the
    firm within a specified period or within specified local limits and notwithstanding
    anything contained in section 27, of the Indian Contract Act, 1872, such agreement
    shall be valid if the restrictions imposed are reasonable.
    Section55
    SALE OF GOODWILL AFTER DISSOLUTION.
    (1) In settling the accounts of a firm after dissolution, the goodwill shall, subject to
    contract between the partners, be included in the assets, and it may be sold
    either separately or along with other property of the firm.
    (2) RIGHTS OF BUYER AND SELLER OF GOODWILL.
    Where the goodwill of a firm is sold after dissolution, a partner may carry on a
    business competing with that of the buyer and he may advertise such business, but, subject to agreement between him and the buyer, he may not
    (a) use the firm-name,
    (b) represent himself as carrying on the business of the firm, or
    (c) solicit the custom of persons who were dealing with the firm before its
    dissolution.
    (3) AGREEMENTS IN RESTRAINT OF TRADE.
    Any partner may upon the sale of the goodwill of a firm, make an agreement with
    the buyer that such partner will not carry on any business similar to that of the firm
    within a specified period or within specified local limits, and, notwithstanding
    anything contained in section 27 of the Indian Contract Act, 1872 such agreement
    shall be valid if the restrictions are reasonable.

 

Registration of Firms

  • Section56
    POWER TO EXEMPT FROM APPLICATION OF THIS CHAPTER.
    The State Government of any State may, by notification in the Official Gazette, direct
    that the provisions of this Chapter shall not apply to that State or to any part thereof
    specified in the notification.
    Section57
    APPOINTMENT OF REGISTRAR OF FIRMS AND DEPUTY AND ASSISTANT REGISTRARS
    OF FIRMS.
    (1) The State Government may, by notification in the Official Gazette, appoint a
    Registrar of Firms who shall exercise, perform and discharge the powers, functions
    and duties of the Register under this Act throughout the State of Maharashtra.
    (2) The State Government may likewise appoint one or more Deputy Registrars of
    Firms and Assistant Registrars of Firms who shall exercise, perform and discharge all
    or such of the powers, functions and duties of the Registrar and in such areas as the
    State Government may, by notification in the Official Gazette, specify.
    (3) The officers appointed under sub-section (1) and sub-section (2) shall be deemed
    to be public servants within the meaning of section 21 of the Indian Penal Code.
    Section58
    APPLICATION FOR REGISTRATION.
    (1) Subject to the provisions of sub-section of sub-section (1A), the registration of a
    firm effected by sending by post or delivering to the Registrar of the area in which
    any place of business of the firm is situated or proposed to be situated, a statement
    in the prescribed form and accompanied by the prescribed fee and a true copy of the
    deed of partnership stating :
    (a) the firm-name, (aa) the nature of business of the firm;
    (b) the place or principal place of business of the firm,
    (c) the names of any other places where the firm carries on business,
    (d) the date when each partner joined the firm,
    (e) the names in full and permanent addresses of the partners, and
    (f) the duration of the firm.
    The statement shall be signed by all the partners, or by their agents specially
    authorised in this behalf.
    (1A) The statement under sub-section (1) shall be sent or delivered to the Registrar
    within a period of one year from the date of constitution of the firm :
    Provided that in the case of any firm carrying on business on or before the date of
    commencement of the Indian Partnership (Maharashtra Amendment) Act, 1984, such
    statement shall be sent or delivered to the Registrar within a period of one year firm
    such date.
    (2) Each person signing the statement shall also verify it in the manner prescribed.
    (3) A firm shall not have any of the names or emblems specified in the Schedule to
    the Emblems and Names (Prevention of Improper Use) Act, 1950, or any colourable
    imitation thereof, unless permitted so to do under that Act, or any name which is
    likely to be associated by the public with the name of any other firm on account of
    similarity, or any name which, in the opinion of the Registrar, for reasons to be
    recorded in writing, is undesirable :
    Provided that nothing in this sub-section shall apply to any firm registered under any
    such name before the date of the commencement of the Indian Partnership
    (Maharashtra Amendment) Act, 1984.
    (4) Any person aggrieved by an order of the Registrar under sub-section (3), may,
    within 30 days from the date of communication of such order, appeal to the officer
    not below the rank of Deputy Secretary to Government authorised by the State
    Government in this behalf, in such manner, and on payment of such fee, as may be
    prescribed. On receipt of any such appeal, the authorised officer shall, after giving an
    opportunity of being heard to the appellant, decide the appeal, and his decision shall
    be final.
    Section59
    REGISTRATION.
    (1) When the Registrar is satisfied that the provisions of section 58 have been duly
    complied with, he shall record an entry of the statement in a register called the
    Register of Firms, and shall file the statement. [19 On the date such entry is
    recorded and such statement is filed, the firm shall be deemed to be registered. (2) The firm, which is registered, shall use the brackets and word (Registered)
    immediately after its name.
  • Section60
    RECORDING OF ALTERATIONS IN FIRM-NAME, NATURE OF BUSINESS AND PRINCIPAL
    PLACE OF BUSINESS.
    (1) When an alteration is made in the firm name or in the nature of business of a
    firm or in the location of the principal place of business of a registered firm, a
    statement shall be sent to the Registrar, within a period of 90 days from the date of
    making such alteration, accompanied by the prescribed fee, specifying the alteration
    and signed and verified in the manner required under section 58.
    (2) When the Registrar is satisfied that the provisions of sub-section (1) have been
    duly complied with, he shall amend the entry relating to the firm in the Register of
    Firms in accordance with the statement, and shall file it alongwith the statement
    relating to the firm filed under section 59.
    Section61
    NOTING OF CLOSING AND OPENING OF BRANCHES.
    When a registered firm discontinues business at any place or begins to carry on
    business at any place, such place not being its principal place of business, any
    partner or agent of the firm shall send intimation thereof to the Registrar, within a
    period of 90 days from the date of such discontinuance or, as the case may be, from
    the date on which the firm begins to carry on business at such place. The Registrar
    shall then make a note of such intimation in the entry relating to the firm in the
    Register of Firms, and shall file the intimation alongwith the statement relating to the
    firm filed under section 59.
    Section62
    NOTING OF CHANGES IN NAMES AND ADDRESSES OF PARTNERS. When any partner in a registered firm alters his name or permanent address, an
    intimation of the alteration’ shall be sent, within a period of 90 days from the date of
    making such alteration, by any partner or agent of the firm to the Registrar, who
    shall deal with it in the manner provided in section 61.
    Section63
    RECORDING OF CHANGES IN AND DISSOLUTION OF A FIRM.
    When a change occurs in the constitution of a registered firm, every incoming,
    continuing or outgoing partner, and when a registered firm is dissolved, every person
    who was a partner immediately before the dissolution, or the agent of every such
    partner or person specially authorised in this behalf shall, within a period of 90 days
    from the date of such change or dissolution, given notice to the Registrar of such
    change or dissolution, specifying the date thereof; and the Registrar shall a record of
    the notice in the entry relating to the firm in the Registrar of Firms and shall file the
    notice along with statement relating to the firm filed under section 59.
    (1A) Where a change occurs in the constitution of a registered firm, all persons, who
    after such change are partners of the firm, shall jointly send an intimation of
    such change duly signed by them, to the Registrar, within a period of 90 days from
    the date of occurrence of such change and the Registrar shall deal with it in the
    manner provided by section 61.
    (2) RECORDING OF WITHDRAWAL OF A MINOR.
    When a minor who has been admitted to the benefits of partnership in a firm attains
    majority and elects to become or not to become a partner, and the firm is then a
    registered firm, he, or his agent specially authorised in this behalf, shall within a
    period of 90 days from the date of his election, give notice to the Registrar that he
    has or has not become a partner, and the Registrar shall deal with the notice in the
    manner provided in sub-section (1).
    Section64
    RECTIFICATION OF MISTAKES.
    (1) The Registrar shall have power at all time to rectify any mistake in order to bring
    the entry in the Register of Firms relating to any firm into conformity with into
    documents relating to that firm filed under this Chapter.
    (2) On application made by the all parties who have signed any document relating to
    a firm filed under this Chapter, the Registrar may rectify any mistake in such
    document or in the record of note thereof made in the Register of Firms.
    Section65
    AMENDMENT OF REGISTER BY ORDER OF COURT.
    A Court deciding any matter relating to a registered firm may direct that the
    Registrar shall make any amendment in the entry in the Register of Firms relating to
    such firm which is consequential upon its decision; and the Registrar shall amend the
    entry accordingly. Section66
    INSPECTION OF REGISTER AND FILED DOCUMENTS.
    (1) The Registrar of Firms shall be open to inspection by any person on payment of
    such fee as may be prescribed.
    (2) All statements, notices and intimations filed under this Chapter shall be open to
    inspection, subject to such conditions and on payment of such fee as may be
    prescribed.
    Section67
    GRANT OF COPIES.
    The Registrar shall on application, furnish to any person, on payment of such fee as
    may be prescribed, a copy, certified under his hand, of any entry or portion thereof
    in the Register of Firms.
    Section68
    RULES OF EVIDENCE.
    (1) Any statement, intimation or notice recorded or noted in Register of Firms shall,
    as against any person by whom or on whose behalf such statement, intimation or
    notice was signed, be conclusive proof of any fact therein stated.
    (2) A certified copy of an entry relating to a firm in the Register of Firms may be
    produced in proof of the fact of the registration of such firm, and of the contents of
    any statement, intimation or notice recorded or noted therein.
    Section69
    EFFECT OF NON-REGISTRATION.
    (1) No suit to enforce a right arising from a contract or conferred by this Act shall be
    instituted in any Court by or on a behalf of any persons suing as a partner in a firm
    against the firm or any person alleged to be or to have been a partner in the firm
    unless the firm is registered and the person suing is or has been shown in the
    Register of Firms as a partner in the firm :
    Provided that the requirement of registration of firm under this sub-section shall not
    apply to the suits or proceedings instituted by the heirs or legal representatives of
    the deceased partner of a firm for accounts of the firm or to realise the property of
    the firm.
    (2) No suit to enforce a right arising from a contract shall be instituted in any court
    by or on behalf of a firm against any third party unless the firm is registered and the
    persons suing are or have been shown in the Register of Firms as partners in the
    firm.
    (2A) No suit to enforce any right for the dissolution of a firm or for accounts of a
    dissolved firm or any right or power to realise the property of a dissolved firm shall
    be instituted in any Court by or on behalf of any person suing as a partner in a firm
    against the firm or any person alleged to be or have been a partner in the firm,
    unless the firm is registered and the person suing is or has been shown in the
    Register of Firms as a partner in the firm : Provided that the requirement of registration of firm under this sub-section shall not
    apply to the suits or proceedings instituted by the heirs or legal representatives of
    the deceased partner of a firm for accounts of a dissolved firm or to realise the
    property of a dissolved firm.
    (3) The provisions of sub-sections (1), (2) and (2A) shall apply also to a claim of setoff or other proceedings to enforce a right arising from a contract but shall not affect
    (a) the firms constituted for a duration upto six months or with a capital upto two
    thousand rupees; or;
    (b) the powers of an official assigned, receiver or Court under the Presidency Towns
    Insolvency Act, 1909, or the Provincial Insolvency Act, 1920, to realise the property
    of an insolvent partner.
    (4) This section shall not apply
    (a) to firms or partners in firm which have no place of business in the territories to
    which this Act extends, or whose places of business in the said territories are
    situated in areas to which, by notification under section 56 this Chapter does not
    apply, or
    (b) to any suit or claim of set-off not exceeding one hundred rupees in value which,
    in the presidency towns, is not of a kind specified in section 19 of the Presidency
    Small Cause Courts Act, 1882, or outside the Presidency towns, is not of a kind
    specified in the Second Schedule to the Provincial Small Cause Courts Act, 1887, or
    to any proceeding in execution or other proceeding incidental to or arising from any
    such suit or claim.

Unit – IV Important Case Laws

  • Cooper V.Shepherd,1846 (3) CB 226
  • Chanter V. Hopkins,1838 (51) RR 650
  • State V.Sinha Govindji,AIR 1967 Del.88
  • Whitehom Bros.V.Davison,1911 (1) KB 468
  • Jugar Keshwar V.Kishorlal,AIR 1924 Pat.159

Class Notes on Contract II – Unit III (2nd Sem / 3 year LL.B)

Contracts of Agency

An agent does not act on his own behalf but acts on behalf of his principal. He either represents his principal in transactions with third parties or performs an act for the principal. The question as to whether a particular persons is an agent can be verified by finding out if his acts bind the principal or not.

Definition

Sec 182 of the Indian contract act,1872 defines Agent and Principal as:

  •  Agent: means a person employed to do any act for another or to represent another in dealing with the third persons and
  • The principal: means a person for whom such act is done or who is so represented.

Essentials of Agency

  • Principal is liable for the acts of agent
    • The principal is liable for all the acts of an agent which are lawful and within the scope of agent’s authority.
    • The contracts entered into by the agent on behalf of the principal have the same legal consequences as if these contracts were made by the principal himself.
  •  Who may employ an agent?
    • Any person may employ an agent if –
    • He is of the age of majority; and
    • He is of sound mind.
  •  Who can be an agent?
    • Any person may become an agent.
    • Even a minor or a person of unsound mind can become an agent
  •  Liability of agent
    • Generally an agent is liable to the principal
    • An agent is not liable to the principal if he is a minor or is of unsound mind.
  • Requirement of consideration
    • No consideration is necessary for creating an agency.

Creation of Agency

  • Any person who is of the age of majority and is of sound mind may employ an agent. (Section 183)
  • Between the principal and the third persons,any person may become an agent. But no person who is a minor and of unsound mind can become an agent.(184)
  • No consideration is necessary to create an agency. (Section 185)
  • It is not essential that a contract of agency be entered in to. It is sufficient if a person acts on behalf of another and is accepted by the latter.
  • An agency can be created either in writing or orally. An oral appointment is a valid appointment even though the contract of agency by which agent is authorized has to be in writing.
  • Agency by Ratification
  • Agency by Operation of Law
  • Two types of agreement
    • Express Agreement
    • Implied Agreement

Types Of Implied Agency

  • Agency by Estoppel or Holding out
  • Agency by Necessity
  • Agency in Emergency

Agency by Necessity

  • There was an actual and definite necessity for acting on behalf of the principal.
  • The agent was not in a position to communicate with the principal.
  • The act was done for the purpose of protecting the interest of his principal.
  • The agent has exercised such reasonable care as a man of ordinary prudence would have exercised in his own case.
  • The act was done bonafide.

Agency by Ratification

As per Section 196 of the Indian Contract Act, agency by ratification is said to arise when a person, on whose behalf the acts are done without his knowledge or authority, expressly or impliedly accept such acts.

Essentials of Ratification

  • Full knowledge
  • Whole transaction
  • No damage to 3rd parties
  • Act on behalf of other person
  • Existence of Principal
  • Within reasonable time
  • Lawful acts
  • Acts within Principal’s power
  • Communication

Agency by operation of law

Agency by operation of law arises where the law treats one person as an agent of another.

Kinds of Agents

Agents are classified in various ways according to the point of view adopted. From the viewpoint of the authority they have, they can be classified as special agents, general agents and universal agents. They are classified as mercantile or commercial agents and non-mercantile or non-commercial agents. There are different various types of kind agents are as follows.

Sub-Agent: Sub-agency denotes delegation of power by an agent to a person appointed by him as sub-agent. Incidentally the agent himself is delegate of his principal. The principal is that ‘a delegate cannot delegate’. According to this, a person to whom powers have been delegate cannot delegate them to another. Section 190 of the Act. Contains this principle. Generally, an agent cannot lawfully employ another to perform acts, which he has expressly. But, if by the ordinary custom of trade, a sub-agent may be employed, the agent may to do so.

A sub-agent, according to section 191, is a person whom the original agent employs in the business of the agency and who under the control of the original agent. Thus the relation of the sub-agent to the original agent is, as between themselves, that of the agent and the principal.

(i.) In case of proper appointment: The agent is responsible to the principal for the acts of the sub-agent. Thus, a commission agent for the sale of goods who makes a proper employment of a sub-agent for selling his principal’s goods is liable to the principal for the fraudulent disposition of the goods by sub-agent within the course of his employment.

(ii.) In the case of appointment without authority: In term of Section 193, the principal is not bound by the acts of the sub-agent, nor is the sub-agent liable to the principal. The agent is the principal of the sub-agent both to the principal and the third party.

Substituted Agent: Substituted agents are different from sub-agents. Section 194 provides that substituted agents are not sub-agents but are in fact agents of the principal. Suppose an agent has an implied authority to name another person to act for the principal in the business of the agency, and he has named another person accordingly. In the circumstances, such a named person is not a sub-agent he is an agent of the principal for such part of the business of the agency as has been entrusted to him.

For Example: A directs B who is a solicitor to sell his estate by auction and to employ an auctioneer for the purpose. B names C, an auctioneer, to conduct the sale. In such a situation, C is not sub-agent, but is A’s agent for the sale.

Special Agents: A special agent is also known as a specific or particular agent. Such agent appointed to perform a particular work or to represents his principal in particular transaction only. As soon as the said period lapses, the agency stands terminated. Specific agents have a limited authority and as soon as the entrusted to him is performed, his authority also comes to an end. A special agent cannot bind his principal in any act other than for which he is specially appointed. If he dose anything outside his authority, his principal cannot be bound by it. The third parties that deal with a special agent must ascertain the extent of the authority he has.

General agents: This type of agents has a general authority to do everything in the course of his agency and he has to perform all the acts in the interest of his principal. Thus, a general agent is one that has authority to do all acts connected with the business of his principal. A manager of a branch shop of a firm or a commission agent is instances of general agents. General agents have an implied authority to bind his principal by doing various acts necessary for carrying on the business of his principal. Sufficiently wide powers are vested in him to affect the business deals, enter into trade bargains, to make purchases and also payments of the purchases, to receive money on behalf of his principal.

Universal Agent: A universal agent has a universal or an unlimited power to act on behalf of his principal. A universal agent is one whose authority is unlimited and who can do any act on behalf of his principal provide such act is legal and is agreeable to the law of land. A universal agent is practically substituted for his principal for all those transactions wherein his principal cannot participate.

For Example: When a person leaves his country for a long time, he may appoint his son, wife or friend as his universal agent to act on his behalf in his absence.

Co-Agents: When a principal appoints two or more persons a agents jointly or severally, such agents are known as co-agents. Their authority is joint when nothing is mentioned about the exercise of their authority. It implies that all co-agents concur in the exercise of their authority unless their authority is fixed. But when their authority is several, any one of the co-agents can act without the concurrence of other.

Auctioneers: An auctioneers is a mercantile agent who is appointed to sell goods on behalf of the principal i.e., seller and for this function, an auctioneer get a reward in the form of a commission. An auctioneer conducts auction on behalf of a seller, as he is primarily the agent of the seller. However, after the sale, he also becomes of the purchaser who gives the highest bid. An auctioneer has no authority to self-the goods of his principal by private contract or contracts.

Besides the above mentioned agents, there are other types of agents also such as brokers, bankers, clearing agents, forwarding agents, underwriter, estate agents, etc. They also play an important role and perform various functions for and on behalf of their principals.

Types Of Mercantile Agents

  • Factor
  • Commission agent
  • Del credere Agent
  • Broker
  • Auctioneer

Rights And Duties Of Parties

  • It is duty of an agent in cases of difficulty, to use all reasonable diligence in communicating with his principal and seeking to obtain his instruction (Section 214)
  • An agent should not set up an adverse title to the goods which he receives from the principal as an agent.
  • An agent is duty bond to pay sums received to the principal on his account.
  • An agent must not use confidential information entrusted to him by his principal for his own benefit or against the principal.
  • The agent must not make secret profit from the extract agency. He must disclose any extra profit that he may make.
  • An agent must not allow his interest conflict with his duty. For example, he must not compete with his principal.
  • An agent must not delegate his authority to as ub-agent . This rule is based on the principle ‘Delegatus non protest delegare
  • Delegate cannot further delegate (Section 190).

Distinction between Agent and Servant

Agent: 

  • He has the authority to create commercial relationship between the principal and the third party
  • He may work for several principal at a time
  • He usually get commission

Servant: 

  • He ordinarily has no such authority
  • He ordinarily work for only one master at a time
  • He usually get salary or wages

Rights of Agent

  • The agent has a right to retain any sums received on account of the principal in the business of the agency, all moneys due to himself in respect of his remuneration and advances made or expenses properly incurred by him in conducting such business.
  • The agent has a right to receive remuneration.
  • Right of lien: In the absence of any contract to the contrary, an agent is entitled to retain goods, papers and other property.
  • The employer of an agent is bound to indemnify him against the consequences of all lawful acts done by such agent in exercise of the authority conferred upon him.
  • Where he has bought goods for his principal by incurring a personal liability, he has a right of stoppage in transit against the principal, in respect of the money which he has paid or is liable to pay.
  • Where he is personally liable to the principal for the price of the goods sold, he stands in the position of an unpaid seller towards the buyer and can stop the goods in transit on the insolvency of the buyer.

Duties of an Agent

  • Duty to act according to directions or custom of trade – Sec. 211
  • Duty to act with reasonable care and skill – Sec. 212
  • Duty to render account – Sec. 213
  • Duty to communicate with Principal and to obtain Principal’s instructions – Sec. 214
  • Duties to disclose all material circumstances and to obtain the Principal’s consent in dealings – Sections 215 & 216
  • Duty to pay sum received for Principal – Sections 217 & 218
  • Duty to protect and preserve the interest entrusted to him – Section 219
  • Duty not to delegate – Sec. 190

Rights Of Principal

  • Right to repudiate the Transaction
  • To claim any resulted benefit from Agency
  • Right to Recover Damages
  • To Resist Agent’s claim for Indemnity

Duties Of Principal

  • To indemnify against consequences of all lawful acts of agent
  • To indemnify the agent against consequences of acts done in good faith
  • To pay compensation against agent’s injury
  • To pay the agent the commission or other remuneration agreed.

Liability of Principal to Third Parties For The Acts Of Agent (Sec. 226 to 228)

  • Principal is liable for the acts of agent
  • The principal is liable for all the acts of an agent which are lawful and within the scope of agent’s authority.
  • The contracts entered into by the agent on behalf of the principal have the same legal consequences as if these contracts were made by the principal himself.
  • When agent exceeds his authority: Whether the acts done within the authority are separable from the acts done beyond authority.
  • If yes – The principal is not bound for excess acts done by the agent.
  • If no – The principal is not bound by the transaction and the principal can repudiate the whole transaction.

Delegation

General rule: The general rule is that an agent cannot lawfully employ another act, which he has
expressly or impliedly undertaken to perform personally.

Exceptions

  • There is a custom or usage of trade to that effect.
  • Where power of the agent to delegate can be inferred from the conduct of the both the principle and the agent.
  • When the principal is aware of the intention of the agent to appoint sub agent by the does not object to it.
  • When principle permits appointment of a sub-agent.
  • If the nature of the agency is such that the sub-agent is necessary

Extent of Agents authority

  • Lawful Acts
  • Emergency Authority
  • Ostensible Authority

Personal Liability of an Agent

General Rule – No personal liability [ Sec.230]

In the absence of contract to contrary, an Agent cannot –

  • (a) personally enforce contracts entered into by him, on behalf of his Principal,
  • (b) be held personally liable for them.

This  is  because  the  Agent  merely  acts  on  behalf  of  his  Principal.  Thus,  he  enjoys immunity from being personally sued.

Exceptions, i.e. Agent personally as well as Joint & Severally Liable

The Agent is personally liable in the following cases –

  1. Foreign Principal [Sec.230] : Where the contract is made by an Agent for the sale or purchase of goods for a merchant resident abroad.
  2. Undisclosed Principal [Sec.230]: Where the Agent does not disclose the name of his Principal.
  3. Principal cannot be sued [Sec.230]: Where the Principal, though disclosed, cannot be sued, e.g. Principal becoming of unsound mind, subsequent to appointment of agent.
  4. Acting for a Principal not in existence: Where the Agent acts for a Principal who is not in existence at the time of making contracts, he shall be personally held liable e.g. contracts entered into by Promoters before incorporation of a Company are made in their personal capacity and hence personally liable.
  5. Agency coupled with interest [Sec.202] : Where the Agent has an interest in the subject matter of agency.
  6. Agent guilty of Fraud [Sec.238] : Where an Agent is guilty of fraud or misrepresentation in matters that are outside the scope of his authority, he is personally liable, and do not affect his Principal.
  7. Agent exceeds authority & act not ratified: Where an Agent acts either without any authority or exceeds his authority, he shall be held personally liable when the principal does not ratify his acts.
  8. Agent receives or pays money: Where an Agent receives or pays money by mistake or fraud to a third party, he shall be personally liable to such third party. Also ha can personally sue the third party if the fraud or mistake is accountable to such third party.
  9. Express Agreement for personal liability: Where an Agent expressly aggress to be personally bound.
  10. Execution of Contract in his own name: Where an Agent executes a contract in his own name, without disclosing that he is acting as Agent for a Principal, he shall be personally liable, e.g. An Agent signs a Negotiable Instrument without making it clear that he is signing it as an Agent only, he shall be held personally liable on the same. He would be personally liable as Maker of P/N, even though he may be described as Agent.
  11. Trade custom or usage: Where trade usage or custom makes an Agent personally liable.
  12. Agent with special interest: An Agent with special interest   or with a beneficial interest, e.g. a Factor or Auctioneer, can sue and be sued personally. [Subramanya vs Narayana]
  13. Action against Agent or Principal [Sec 233] : Where the Agent is personally liable, a person dealing with him may hold  – (a) either him or (b) his Principal or (c) both of them liable. The liability of Principal and Agent is “joint and several”.
  14. Exclusive liability [Sec. 234]
    • Where a person has made a contract with an Agent and –
      • Induces such Agent to act upon it in the belief  that  only  his  principal  would  be held liable,
      • Induces the principal to act upon it in the belief that only his Agent would be held liable.
    • Such Third person cannot later on, shift the liability on to –
      • The Agent, or
      • The principal, respectively.

Termination of Agency

According to section 201, an agency is terminated by:

  • By an agreement between the parties,
  • By the principal revoking his authority
  • By the agent renouncing the business of agency
  • By the business of agency being completed
  • By either the principal or the agent dying or becoming of unsound mind
  • By the principal being adjudicated an insolvent under the provisions of any Act for the time being in force for relief of insolvent debtors.
  • On expiry of fixed period

Agency May Be Terminated by

  • Agreement
  • Revocation of authority by the principal
  • By operation of Law

Agency Termination By Operation Of Law

  • On performance of the contract. Where an agent is appointed to perform a specified transaction, his authority comes to an end on the completion of the said transaction.
  • On expiry of time.
  • When the agent or the principal dies or becomes of unsound mind. The death of the agent terminates his authority.
  • The death of one of the joint agents will terminate the agency only as far as he is concerned, while it will continue to be valid as regards the other surviving agents in the absence of contrary intention.
  • On the insolvency of the principal
  • On the destruction of the subject matter.
  • On the principal becoming an alien enemy.
  • On the dissolution of a company.
  • On termination of sub-agent’s authority.

Exceptions

  • Irrevocable Agency: When an agency cannot be put an end to, it is said to be irrevocable agency. An agency is irrevocable where the agent himself has an interest in the property which forms the subject-matter of the agency.
  • Time when Termination takes Effect: The termination of the authority of an agent does not, so far as regards the agent, take effect before it becomes known to him. As regards third persons, it terminates when it comes to their notice.

Unit III Important Case Laws

  • Lloyd V.Grace Smith & Co.,1912 AC716
  • M.Kasam V. Commissioner of Income Tax,ILR 1937(2)Cal.160
  • Cox V.Hickman,1860 (11) ER 431
  • C.Ramchand v.V.S.Narayana Swamy,AIR 1982 Mad.326
  • Hurst V.Bryk & Ors.,2000 (2) All ER HL 193
  • Popular Flims V. Nalini Saigal,84 Cal.WN 867

 

Class Notes on Contract II – Unit II (2nd Sem / 3 year LL.B)

Meaning of Contract of Bailment (Sec. 148)

A ‘bailment’ is the delivery of goods by one person to another for some purpose, upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the directions of the person delivering them.

Based on Benefit Based on Reward

Exclusive benefit of Bailor Exclusive benefit of Bailee Mutual Benefit of both Gratuitous
Bailment
Non gratuitous
Bailment
J, neighbour of
K, agrees to look after K’s per while he is out of station. K is benefited.
Z lends a book to
Y for reading. Y
is benefited.
A hires furniture
from B, by payment of hire charges, Both A and B are benefited.
Neither Bailor
nor Bailee gets any
remuneration,
e.g. A lends his book to his are friend.
Bailor or Bailee
gets
remuneration e.g. G gives his television set for repair to H, a technician. H gets paid for the job.

Essentials of a Valid Contract of Bailment (Sec.148)

Contract

  • There must be a contract.
  • The contract may be expressed or implied.

Goods

  • Bailment can be made of goods only.

Delivery

  • There must be delivery of goods by one person to another person.

Purpose of delivery

  • The goods must be delivered for some purpose.
  • The purpose may be expressed or implied.

Return or disposal of goods

  • The delivery of goods must be conditional
  • The condition shall be that the goods shall be –
    • returned (either in original form or in any altered from); or
    • disposed of according to the directions of the bailor, when the purpose is accomplished.

Modes of Delivery (Sec.149)

Actual delivery

  • Transfer of physical possession of goods from one person to another .

Symbolic delivery

  • Physical possession of goods is not actually transferred.
  • A person does some act resulting in transfer of possession to any other person.

Examples:

  • Delivery of keys of a car to a friend
  • Delivery of a railway receipt.

Constructive delivery

If –

  • A person is already in possession of goods of owner.
  • Such person contracts to hold the goods as a bailee for a third person.

Then –

  • Such person becomes the bailee, and the third person becomes the bailor.

Classification of Bailment

Gratuitous bailment: Bailment without any charges or reward, i.e. –

  • No hire charges are paid by bailee; and
  • No custody charges are paid by bailor.

Non – gratuitous bailment: Bailment for some charges or reward, i.e.-

  • Hire charges are paid by bailee; or
  • Custody charges are paid by bailor.

Duties of a Bailor (Sec. 150, 158, 159 and 164)

Disclose faults in goods [Sec. 150]: Bailor is bound to disclose to Bailee, faults in the goods bailed, of which he has knowledge. He should also disclose such information which – (a) materially interferes with the use of goods, or (b) expose the Bailee to extraordinary risk.

Liability for Defects in Goods

In case of Gratuitous bailment In case of Non – Gratuitous Bailment
Bailor is liable only for those losses which arise due to non – disclosed risks. Bailor is liable for damages whether or not he was aware of the existence of faults.

Example: A owning a motorcycle, allows B, his friend, to take it for a joy ride. A knows that its brakes were not proper but does not disclose it to B. B meets with an accident. A is liable to compensate B for damages. But when A had lent the motorcycle on hire, he is liable to B even if he did not know of the failure of his brakes.

Bear expenses [Sec.158]

Expenses of Bailment

In case of Gratuitous bailment In case of Non – Gratuitous Bailment
Bailor shall repay to Bailee, all
necessary expenses incurred by him for the purpose of Bailment.
Bailor is liable to repay only extra –ordinary expenses, and not the ordinary expenses.

Example: M lends his car to N and it runs out of petrol. N can recover the amount paid for refueling (ordinary expenses). If in case, the car suffers a breakdown, N can recover such charges as are paid by him in bringing it back to condition (extra – ordinary expenses). He M hired the car to N, he shall be liable only for the repair charges, being extra ordinary expenses.

Indemnify the bailee for defective title

  • The bailor shall indemnify the bailee for any loss caused to bailee due to defective title of bailor.

Indemnify the bailee for premature termination

If –

  • the bailment is gratuitous ; and
  • for a specific period.

Then –

  • (a) the bailor may compel the bailee to return the goods before expiry of the peiod of bailment; but
  • (b) the bailor shall indemnify the bailee for any loss incurred by the bailee.

Receive back the goods

  • It is the duty of the bailor to receive back the goods, when returned by bailee.
  • If the bailor wrongfully refuses to receive back the goods, he shall be liable to pay ordinary expenses of custody of goods incurred by the bailee.

Duties of a Bailee (Sec.151 to 157)

Take reasonable care

  • The bailee must take such case of goods as a man of ordinary prudence would take care of his own goods.The bailee shall not be liable for any loss or destruction of goods, if –
    • (a) he is not negligent; or
    • (b) the loss was caused due to an act of God or other unavoidable reasons.

Not to make unauthorized use of goods

  • The bailee must not make any unauthorized use of the goods.
  • If the bailee makes any unauthorized use of goods, then –
    • (a) the bailment becomes voidable at the option of the bailor; and(b) the bailee shall be liable for any loss or damage even if such loss is caused due to an act of God or other unavoidable reasons

Not to mix goods

Goods are mixed with bailor’s consent: The parties shall have a proportionate interest in such mixture.

Goods are mixed without bailor’s consent, but the goods are separable

  • The bailee shall pay the expenses of separation.
  • The bailee shall pay damage incurred by the bailor.

Goods are mixed without bailor’s consent, and goods are not separable

  • The bailee shall compensate the bailor for any loss caused to him.

Return the goods

The bailee must return the goods, without waiting for demand from bailor, if –

  • (a) the time specified in the contract has expired ; or
  • (b) the purpose specified in the contract is accomplished.

if the goods are not so returned, then –

  • (a) the goods shall be at the risk of the bailee;
  • (b) the bailee shall be liable for any loss or damage, even if such loss is caused without any fault or negligence of the bailee or due to an act of God or other unavoidable reasons.

Return accretion to goods

  • The bailee must return to the bailor any accretion (i.e., addition) to the goods bailed.

Not to set up an adverse title

  • The bailee has no right to allege that the bailor had no authority to bail the goods.

Rights of a Bailor (Sec. 153, 159, 163, 180, 181)

Terminate the bailment
If –

  • The bailee does any act inconsistent with the terms and conditions of the contract of bailment.

Then –

  • The bailment becomes voidable at the option of the bailor.

Demand back the goods

If –

  • The bailment is gratuitous; and
  • For a specific period.

Then –

  • (a) the bailor may compel the bailee to return the goods before expiry of the period of bailment; and
  • (b) the bailor shall indemnify the bailee for any loss incurred by the bailee.

File suit against wrongdoer

The bailor has the right to sue –

  • A third party who does any damages to the goods; or
  • A third party who deprives the bailee from using the goods

Sue the bailee: The bailor may sue the bailee to enforce his duties.

Rights of a Bailee (Sec. 165, 166, 167, 170, 180)

Right to compensation

The bailee has the right to be indemnified by the bailor, if –

  • The bailor has no title to the goods; and
  • As a consequence, the bailee suffers some loss.

Return the goods

  • It is the duty as well as the right of the bailee to return the goods to the bailor.
  • In case of joint bailor, the goods may be returned to any of joint bailors.

Recover charges incurred

Extra ordinary expenses

  • The bailor is liable to pay the extraordinary expenses.
  • The bailee may recover the extraordinary expenses paid by him.

Ordinary expenses: If the bailment is gratuitous, the bailor is liable to pay the ordinary necessary expenses, i.e., the bailee has the right to recover the ordinary necessary expenses incurred by him.

Suit for deciding the title: The bailee may apply to the Court for deciding the title to goods, if a person other than the bailor claims that the goods belong to him.

File suit against wrongdoer

The bailee has the right to sue –

  • A third party who does any damages to the goods; or
  • A third party who deprives the bailee from using the goods.

Right of lien: The bailee has the right to retain the goods delivered to him until the charges due to him are paid by the bailor.

Distinction between Bailee’s Particular and General Lien

Basis of distinction

Bailee’s particular lien

Bailee’s general lien

1. Natural of right

Particular lien gives right to retain only such goods in respect of which charges due remain unpaid.

General lien gives right to retain any goods belonging to another person for any amount due from him.

2. Condition for exercising lien Particular lien can be exercised only when some labour or skill has been expended on the goods, resulting in an increase in value of goods. General lien may be exercised even though no labour or skill has been expended on the goods.
3. Right to whom? Every bailee is entitled to particular lien. General lien can be exercised by only such persons as are specified u/s 171. e.g., bankers, factors, wharfingers, Attomeys of High Court, policy brokers. Any other bailee may exercise general lien if there is an agreement to this effect.

Termination of Bailment (Sec.153, 159 and 162)

Situation

Explanation

Example

1. Expiry of specified

When bailment is for specific

Z lends a moped to Y for a

period

period, it terminates on the
expiry of the specified period.

period of 3 months April –
June. The Bailment terminates by the end of June.

2. Accomplishment
of specified purpose

Where bailment is for a specified purpose, it terminates when such purpose is accomplished.

G hires tables and chairs, utensils, etc. from H for organizing his son’s engagement. G shall return
them once the engagement
functions are over.

3. Bailee’s act inconsistent with conditions

When bailee does some act which is inconsistent with the terms and conditions of bailment, the Bailor may terminate the bailment.

J gives his car to K keeping it
in K’s garage. K gives it to his son for racing. J can terminate the bailment.

4. Destruction of
subject matter

When goods bailed are
destroyed, Bailment comes to an end.

K hires a cycle from L. When
the cycle is damaged beyond repair in an accident, bailment ends.

5. Gratuitous
Bailment

• Gratuitous Bailment can
be terminated at any time.
• Also, a Gratuitous
Bailment ends by the
death of either Bailor or
Bailee. (Sec162)

Note: Where premature
termination of bailment by the Bailor, causes loss to the Bailee exceeding the benefits derived by him, the Bailor shall indemnify the Bailee.

Finder of Goods (Sec. 71, 168 and 169)

Finder of lost goods [Sec 71]: A person, who finds goods belonging to another and takes them into his custody, is subject to the same responsibility as a Bailee.

Implied Agreement: There is an agreement, implied by law between finder and owner of goods.

Duties of Finder: A finder of lost goods is treated as Bailee of goods found. His duties are –

  • (a) To take initiative to find the real owner of the goods, (b) To take reasonable care of the goods found,
  • (c) Not to put the goods found for his personal use, and
  • (d) Not to mix the goods found with his own goods.

Rights of Finder:

Suit for specific reward [Sec.168]

Right of Sale [Sec.169]

Finder of goods is not entitled to sue that owner for compensation for trouble and expenses voluntarily incurred in – (a) preserving the goods, or (b) finding out the owner. However, he is entitled to –

If a thing which is commonly the subject of sale is lost, and

• Owner cannot be found with reasonable diligence, [or

• Owner, if found, does not pay the lawful charges of the Finder.

  • (a) Lien: Retain the goods against the owner till he receives such compensation
  • (b) Suit: Sue the owner for payment of any specific reward offered by the owner for the return of goods lost, and retains the goods till payment of such reward.

Then, Finder of Goods is entitled to sell the same when –

  • (a) the thing is in danger of perishing, or
  • (b) the thing is in danger of losing the greater part of its value, or
  • (c) The lawful charges of finder, amount to 2/3rd of the value of the thing lost and found.

PLEDGE

Meaning of ‘Pledge’, ‘Pawnor’, ‘Pawnee’ (Sec.172)

  • ‘Pledge’: The bailment of goods as security for payment of a debt or performance of promise is called ‘pledge’.
  • ‘Pawnor’: The bailor in case of a pledge is called as ‘pawnor’.
  • ‘Pawnee’: The bailee in case of pledge is called as ‘pawnee’.

Essentials of a valid Contract of Pledge (Sec.172)

Contract

  • There must be a contract
  • The contract may be expressed or implied.

Goods:
Pledge can be made of goods only.

Delivery:
There must be delivery of goods by one person to another person.

Purpose of delivery

  • The goods must be delivered for some purpose.
  • The purpose must be to deliver the goods as security for
    • (a) payment of a debt; or
    • (b) performance of a promise.

Return of goods

  • The delivery of goods must be conditional
  • The condition shall be that the goods shall be –
    • – returned (either in original form or in altered form); or
    • – Disposed of according to the directions of the pawnor when the purpose is accomplished.

Rights of Pawnee (Sec.173 and 176)

Right of Retainer [Sec.173]:
Pawnee may retain the goods pledged for –

  • (a) payment of the debt or the performance of promise,
  • (b) any interest due on the debt; and
  • (c) all necessary expenses incurred by him with respect to possession or for preservation of goods pledged.

Retainer for subsequent advances [Sec.174]

  • (a) Where the Pawnee lends money to the Pawnor subsequently, after the date of pledge, it shall be presumed that the he has a right of retainer over the goods already pledged in respect of the subsequent lending also.
  • (b) This presumption can be made invalid only by an expenses provision to that effect.

Reimbursement of Expenses [Sec.175]:
Where the Pawnee incurs extraordinary expenses to preserve the goods pledged with him, he is entitled to receive such amount from the Pawnor.

Rights in case of default by Pawnor [Sec.176]

  • (a) Suit: Pawnee may institute a suit against Pawnor when there is a default in payment of debt or performance of promise at the stipulated time.
  • (b) Retention / Sale of goods: Pawnee may – (a) retain the goods pledged as collateral security, or (b) sell the goods pledged by giving a reasonable notice to the Pawnor.
  • (c) Surplus / Deficit on Sale : When there is a surplus on sale, Pawnee shall pay the excess to the Pawnor. In case of deficit, Pawnor shall be liable for the balance amount.
  • (d) No Notice: Where the Pawnee does not give a reasonable notice to the Pawnor, the sale is valid, but Pawnee is liable to pay damages to Pawnor.

Right against true owner of goods [Sec.178A]

  • (a) Where the Pawnor has acquired possession of pledged goods, under a voidable contract u/s 19 or 19A but contract has not been rescinded at the time of pledge, the Pawnee acquires a good title to the goods, against the true owner.
  • (b) The title of Pawnee is good only where – (a) he had no notice of the Pawnor’s defect in title and (b) he acts in good faith.

Reasonable notice u/s 176 means that a notice of intended sale of the security by the Creditor within a certain date, so as to afford an opportunity to the Debtor to pay the amount within the time mentioned in the notice. Notice of sale is essential and a clause in the agreement excluding the requirement of Notice is inconsistent with the Act & is void and unenforceable.

  • Prabhat Bank Ltd. vs Babu Ram

Duties of a Pawnor
(Sec.175)

Pay the debt: The pawnor is liable to pay the debt or perform his promise as the case may be.

Pay deficit on sale:
If the pawnee sells the goods due to default by the pawnor, the pawnor must pay the deficit.

Pay extra – ordinary expenses:
The pawnor is liable to pay to the pawnee any extraordinary expenses incurred by the pawnee for preservation of goods.

Disclose faults in goods: The pawnor is liable to disclose all the faults which

  • (a) are material for use of the goods; or
  • (b) may put the pawnee to extraordinary risks.

Indemnify the pawnee: If loss is caused to the pawnee due to defect in pawnor’s title to the goods, the pawnor must indemnify the pawnee.

Duties of a Pawnee

  • Not to use the goods
  • The pawnee has no right to use the goods
    However, he may use the goods, if he has been so authorised by the pawnor.

Return the goods: The pawnee must return the goods if the pawnor pays the debt or performs his promise.

Take reasonable care: The pawnee must take such care of goods pledged as a man of ordinary prudence would take care of his own goods.

Not to mix goods: The pawnee must not mix his own goods with the goods pledged.

Return increase in goods: The pawnee must return to the pawnor any accretion to the goods pledged with him.

Rights of a Pawnor (Sec.177)

Redeem the goods pledged

Meaning of redemption: Right to recover back the goods by making payment of the debt or performance of promise.

Time for redemption: Where time of redemption is fixed, the pawnor may exercise redemption –

  • (a) within the time so fixed; or
  • (b) even after expiry of time so fixed, provided –
    • the pawnee has not sold the good; and
    • the pawnee pays the pawnee all expenses arising on account of his default.

Enforce pawnee’s duties: The pawnor has the right to enforce the duties of pawnee, if the pawnee fails to fulfill his duties.

Receive increase in goods: The pawnor has the right to recover from pawnee any increase in goods pledged.

Right to receive notice of sals: In case of default by the pawnor to pay the debt or perform his promise, the pawnee has the right to sell the goods, after giving a reasonable notice to the pawnor. If the pawnee fails to give notice, the pawnor has the right to recover the loss incurred by him.

Basis

Pledge

Bailment

1.

Purpose

Pledge is bailment of goods
for a specific purpose, i.e. to provide a security for a loan or fulfillment of an obligation.

Bailment may be for purpose
other than by way of providing security for a loan or fulfillment of an obligation. It may be for purpose like repairs, safe custody, etc.

2.

Sale of Goods

Pawnee, i.e. Pledgee has a right of sale of goods pledged
on default of Pawnor. He can do so by giving a notice to the pawnor.

There is no right of sale to the
Bailee. Bailee may either – (a) retain goods, or (b) sue the Bailor for non – payment of his dues.

3.

Use of Goods

Pledgee has no right of using goods pledged.

Bailee can use the goods bailed as per terms of contract.

UNIT-II Important Case Laws

  • Mahendra Pratap Singh V.Padam Kumari Devi, AIR 1993 All 182
  • Keighley Maxsted & Co.V.Durant, 1901 AC 240
  • Brook V.Cook, 1871 (6) Ex.89
  • Kashi Ram & anr V. Raj Kumar & Ors., AIR 2000 Raj 405, 406
  • Andrews V.Ramsay, 1903 (2) KB 635

 

Class Notes on Contract II – Unit I (2nd Sem / 3 year LL.B)

Contract of Indemnity

Indemnity Meaning –

  • To make good the loss incurred by another person
  • To compensate the party who has suffered some loss
  • To protect a party from incurring a loss

‘Contract of Indemnity’ Definition

A contract is called as a ‘contract of indemnity’ if –

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.

Modes of contract of indemnity

  • Expressed: When a person expressly promises to compensate the other from loss.
  • Implied: When  the  contract  is  to  be  inferred  from  the  conduct  of  the  parties  or  from  the circumstances of the case.

Essential elements of a contract of indemnity

Contract: All the essentials of a valid contract must also be present in the contract of indemnity

Example:- X asks Y to beat Z and promises to indemnify Y against the consequences. Y beats Z and is fined Rs.1,000. Y cannot claim this amount from X because the object of the agreement was unlawful.

Loss to one party: A person can indemnify another person only if such other person incurs some loss or it has become certain that he will incur some loss.

Indemnity by the Promisor: The purpose of contract of indemnity is to protect the indemnity holder from any loss that may be caused to the indemnity holder.

Reason for loss: The contract of indemnity must specify that indemnity holder shall be protected from the loss caused due to –

  • Action of the promisor himself; or
  • Action of any other person; or
  • Any act, event or accident which is not in the control of the parties.

Rights of indemnity holder

Right to recover damages

The indemnity holder has the right to recover all the damages which he is compelled to pay in any suit in respect of any matter covered by the contract of indemnity.

Right to recover costs

The indemnity holder has the right to recover all the costs which he is compelled to pay in bringing or defending such suit.

Condition: The indemnifier authorised him to bring or defend the suit; or

The indemnity holder did not contravene the orders of the indemnifier; and The indemnity holder acted as it would have been prudent for him to act in the absence of any contract of indemnity.

Right to recover sums paid

  • The indemnity holder has the right to recover all the sums which he has paid under the terms of a compromise of such suit.
  • The indemnifier authorised him to compromise the suit; or
  • The indemnifier holder did not contravene the orders of the indemnifier; and the indemnity holder acted as it would have been prudent for him to act in the absence of any contract of indemnity.

Commencement of the indemnifier’s liability

Contract of Guarantee

Meaning of ‘contract of guarantee’

A ‘contract of guarantee’ is a contract to –

  • Perform the promise; or
  • Discharge the liability, of a third person in case of his default.

Meaning of ‘surety’: The person who gives the guarantee is called as ‘surety’

Meaning of ‘principal debtor’: The person in respect of whose default the guarantee is given is called as ‘principal debtor’.

Meaning of ‘creditor’: The person to whom the guarantee is given is called as ‘creditor’.

guarantee-chart

Difference between contract of indemnity and Guarantee

Essentials of a valid Contract Of Guarantee

Must have all the essentials of a valid contract: All the essentials of a valid contract must be present in the contract of guarantee.

Exceptions:

  • Consideration received by the principal debtor is a sufficient consideration to the surety for giving the guarantee.
  • Even if principal debtor is incompetent to contract, the guarantee is valid. But, if surety is incompetent to contract, the guarantee is void.

Primary liability of some person

  • The principal debtor must be primarily liable. However, even if the principal debtor is incompetent to contract the guarantee is valid.
  • The debt must be legally enforceable.
  • The debt must not be a time barred debt.

The contract must be conditional

  • The liability of surety is secondary and conditional.
  • The liability of surety arises only if the principal debtor makes a default.

No misrepresentation

  • The creditor should disclose all the facts which are likely to affect the surety’s liability.
  • There must not be any concealment of facts.

Form of contract

A contract of guarantee may be either oral or written.

Joining of other co-sureties

The guarantee by a surety is not valid if –

  • A condition is imposed by a surety that some other person must also join as a co-surety; but
  • Such other person does not join as a co-surety.

Nature and Extent of Surety’s Liability

Surety’s liability is coextensive with liability of principal debtor

General rule –

  • Surety is liable for all the debts payable by the principal debtor to the creditor.Accordingly, interest, damages, costs etc. may also be recovered from the surety.

Exception:-

  • The contract of guarantee may provide otherwise.

Commencement of surety’s liability

The liability of surety arises immediately on default by the principal debtor.

The creditor is not required to –

  • (a) first sue the principal debtor; or
  • (b) first give a notice to the principal debtor.

Surety’s liability may be limited

The surety may fix a limit on his liability up to which the guarantee shall remain effective.

Surety’s liability may be continuous

The surety may agree to become liable for a series of transactions of continuous

nature. However, the surety may fix –

  • – a limit on his liability upto which the guarantee shall remain effective;
  • – a time period during which the guarantee shall remain effective.

Surety’s liability may be conditional

The surety may impose certain conditions in the contract of guarantee. Until those conditions are met, the surety shall not be liable.

Continuing Guarantee

Meaning: A guarantee which extends to a series of transactions is called as continuing guarantee.

Revocation (Sec.130):
Continuing guarantee may be revoked, at anytime, by the surety by giving a notice to the creditor. However, revocations shall be effective only in respect of future transactions (i.e. the liability of the surety with regard to previous transactions remains unaffected)

Death of surety (sec. 131): Death of the surety operates as a revocation of a continuing guarantee as to future transaction.

Rights of Surety (Sec.140, 141, 145, 146 and 147)

I. Rights against principal debtor

Right of indemnity

  • There is an implied promise by the principal debtor to indemnity the surety.
  • The surety is entitled to claim from the principal debtor all the sums which he has rightfully paid.
  • The surety cannot recover such sums, which the he has paid wrongfully.

Right of subrogation

  • On payment of a debt, the surety shall be entitled to all the rights which the creditor could claim against the principal debtor.

II. Rights against the creditor

Right of subrogation

  • The surety can claim all the securities which the creditor had at the time of giving of guarantee
  • It is immaterial as to whether the surety had knowledge of such securities or not.
  • If the securities are returned by the creditor to the principal debtor the surety is discharged to the extent of value of the securities so returned.

Right of set off

  • Any amount recoverable by the principal debtor may be claimed as deduction.
  • Any amount recoverable by the surety may be claimed as deduction.

Rights to share reduction

  • If the principal debtor becomes insolvent, the surety may claim proportionate reduction in his liability.

III. Rights against co-sureties

Rights to contribution

General Rule: All the co-sureties shall contribute equally

Exceptions

  • Under the contract of guarantee, the co-sureties may fix limits on their respective liabilities.
  • Even in such a case, the co-sureties shall contribute equally, subject to maximum limit fixed by the co-sureties.
  • The contract of guarantee may provide that the co-sureties shall contribute in some other proportion.

Right to share benefit of securities

  • If one co-surety receives any security, all the other co-sureties are entitled to share the benefit of such security.

Distinction between Indemnity and Guarantee

Basis Contract of indemnity Contract of guarantee
Meaning A contract by which one partypromises to save the other from loss caused to him is called as a contract of indemnity. A contract of guarantee is acontract to perform the promise, or discharge the liability of a third person in case of his default.
Parties There are only two parties, viz, the indemnifier and the indemnity holder. There are three parties, viz., the principal debtor, creditor and the surety.
Nature of liability The liability of the indemnifier is primary and independent. The liability of the surety is secondary and conditional.
Number of contract In a contract of indemnity there is only one contract. In the contract of guarantee, there are three contracts; first between principal debtors and creditor, second between creditor and surety, and third between surety and principal debtor.
Nature of contract The contract of indemnity is for the reimbursement of the loss. The contract of guarantee is for the security of the creditor.

Discharge of Surety from Liability (Sec.130 to 144)

DISCHARGE OF SURETY
Revocation of contract of guarantee Invalidation of contract of guarantee Conduct of Creditor

Notice of revocation by surety

Specific guarantee

A specific guarantee can be revoked only if liability of principal debtor has not
arisen.

Continuing guarantee

A continuing guarantee can be revoked only in respect of future transactions.

Death of surety

In case of death of surety, a continuing guarantee is automatically revoked in respect of future transactions.

Variance in terms If –

  • Any variation is made subsequent to formation of contact of guarantee; and
  • Such variation is made without the consent of surety;

Then –

  • The surety shall be released for such transactions as take place after such variation.

Release or discharge of principal debtor

If –

  • The creditor makes a fresh contract with the principal debtor whereby the principaldebtor is relieved from his liability; or –
  • The creditor does any act or omission resulting in discharge of the principal debtor;

Then –

  • The surety is discharged.

Composition with principal debtor

The surety is discharged if the creditor makes a composition with the principal debtor without obtaining the consent of surety.

Giving extension of time to principal debtor

The surety is discharged if the creditor extends the time for repayment of the debt by the principal debtor without obtaining the consent of the surety.

Loss of security by a creditor

The surety is discharged to the extent of security lost by the creditor.

UNIT – I Important Case Laws

  • Gajanan v Moreshwar,1942 Bom.LR
  • M.S.Anirudhan v.Thomco’s Bank Ltd., AIR 1963 SC74
  • Kalaipermal v.Visalakshmi, AIR 1938 Mad.32
  • Morvi Mercantile Bank v. Union of India, AIR 1965 SC 1954
  • Sunderlal Saraf v.Subhas Chand Jain,AIR 2006 MP 35