Business Law

Business Law

1.1

INTRODUCTION

The Indian Contract Act, 1872is the most important branch of law. It talks about the creation of contracts in business and commercial tractions. It says that the promises made by the parties are legally binding on them. A contract creates rights and obligations between the parties entering into a contract. A contract is the law of those agreements which create obligations, and those obligations which have their sources in agreements. The Indian Contract Act of 1872 is the most important part of business or Mercantile Law because every business or commercial transaction basically starts from an agreement, the Indian Contract Act of 1872 which came into force from 1st day of September 1872 and it extends to the whole of India except the State of Jammu and Kashmir. 1.2

DEFINITION AND MEANING OF CONTRACT

1.

Requirement of a Contract Section 2 (h) of Indian Contract Act, 1872 defines a contract as "an agreement enforceable by law is a contract." From these definitions of the term 'Contract', we come to know that every contract is the result of the combination of two important elements, that is, agreement and obligation. A contract creates rights and obligations between the parties entering into ^contract. Refusal by any one party to a contract to honour a contracted obligation gives a right of action to another party. Following are the essential requirements of a contract: (a) Two parties: For formation of a contract, there must be two parties, that is, promisor and promisee. The person who makes the proposal is called the promisor, and the person to whom the proposal is made called the promisee. As a matter of fact, in a contract, each party is a promisor as well as a promisee. Suppose X promises to sell his motor-cycle to Y for Rs. 50007- X is the promisor as he has given the promise to sell his motor-cycle to Y. But at the same time, he is also the promisee as there is a promise from Y to pay the price of the motor cycle to him. This is applicable to Y too. (b) An agreement: According to Section 2 (e) of the Indian Contract Act, every promise and every set of promises, forming the consideration for each other is an agreement. And when, at the desire of the promisor, the promisee or any other person has done or abstained from doing something, such act or abstinence or promise is called consideration for the promise [Section 2 (e)].

Unit 1

Indian Contract Act, 1872 - Part I

An agreement implies an offer and its acceptance. When an offer is accepted, it becomes an agreement. Suppose Mr. X tells Mr. Y that he is willing to sell his motor-cycle to Mr. Y for Rs. 5000/-. It is nothing but an offer made by Mr. X to Mr. Y. If Mr. Y agrees to the offer and gives his-assent to the offer made by Mr. X, it is said that Mr. Y has accepted the offer, and there is the agreement between Mr. X and Mr. Y. Of course, an agreement is a much wider concept than a contract. It is not necessary that every agreement must give rise to legal obligation. If an agreement does not create any legal obligation, there cannot be any contract. Agreements which are not binding on the parties do not constitute a contract. Thus, all agreements are not contracts. For example, if Mr. X agrees to go to Mr. Y's house for a lunch at Y's request, there is an agreement, but this is not a contract as it does not carry any legal obligation. (c) Legal Obligation: As a matter of fact, for formation of any contract, an agreement should give rise to a legal obligation and the obligation must be enforceable by law. Thus, here an obligation means the legal duty to do or abstain from doing something. The agreements which give rise to only religious, social and/or domestic obligations cannot be termed as contracts. For example, X agrees to sell his motor cycle to Mr. Y for Rs. 5,0007-. Here, legal obligations have been created i.e. Mr. X must sell his motor cycle to Y for Rs. 5,0007- and Mr. Y must pay the price of motor cycle to Mr. X. But a moral, religious or social obligation has no such monetary value. Promises such as taking of a lunch, going for a walk are not contracts as they do not create any duty or obligation enforceable by law. Thus, as all agreements are not contracts, all obligations also do not constitute contracts. Sir John S almond aptly puts it as, "The law ofcpntract is not the whole law of agreements nor it is the whole law of obligations. It is the law of those agreements which create obligations, and those obligations which have their sources in agreements."

Contract

, 2.

Distinction between an Agreement and a

An agreement and a contract are the same thing. The important points of distinction between them are stated in Table 1.1.

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vT'

Table 1.1 : Distinction between an Agreement and a Contract Contract Agreement

1.

2.

Every promise and every set of promises, forming the consideration for each other is an agreement. [Section 2 (e)]. For constituting an agreement, an offer by one party and its acceptance by other party are required. In other words an offer and its acceptance together constitutean agreement. Thus, Agreement = Offer + its acceptance.

1. An agreement enforceable by law is a contract [Section 2 (h)]. Merely an agreement is not a contract but its enforceability at law together constitute a contract. Thus, Contract=Agreement + its enforceability by law.

r

An agreement becomes a contract only when such agreement fulfills all the legal conditions of a contract e.g. formation of legal relationship, free consent, lawful object etc.

For constituting an agreement, a promise or sets of promise forming consideration for each other are required.

3.

An agreement is a wider concept than that of a contract.

4.

It is not necessary that every agreement 4. must create a legal obligation because all agreements do not go to constitute contracts.

5. 5.

An agreement cannot be concluded or

A contract is a specie of an agreement and as such a narrower concept. Therefore, it is said that every contract is an agreement but every agreement is not necessarily a contract. f- •—— ----- • -------Every contract necessarily creates a legal obligation because every contract is basically an agreement.

A contract is always concluding and binding on the concerned parties.

binding^l fir^^r^ <$ TJ ^ *— ~ i 3. Essential Elements of Valid Contracts Section 10 of the Indian Contract Act, 1872 states that all agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object and are not hereby expressly declared to be void. Thus, an agreement must possess certain elements in order to constitute/form a contract.

Unit


Following are the essential elements of a valid contract. (a) There must be an agreement: An agreement is very essefitial condition of a contract. Every promise and every set of promises forming the consideration for each other, is an agreement. At least, there must be two parties to an agreement. One party makes a proposal or an offer, and the other party accepts or rejects the same. If he rejects, no question of entering into a contract arises. A proposal from the side of the party making it do or abstain from doing a particular act and its acceptance by the other party are the two very essential conditions of an agreement. The proposal as well as acceptance should be definite. The acceptance of the proposal must also be in the mode prescribed and it must be communicated to the offerer. Moreover, the intention of making an agreement should be to create legal relationship with clear and certain terms. An agreement not enforceable by law is said to be void [Section 2 (g)] whereas an agreement enforceable by law is a contract [Section 2 (h)]. An agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of the other or others, is a voidable contract [Section 2 (i)].

(b)

Parties to a contract must be competent : As already mentioned that there must be at least two parties for every contract and parties to a valid contract must be competent. Every person (i) who is of the age of majority according to law to which he is subject, and (ii) who is sound mind; and (iii) who is not disqualified from contracting by any law to which he is subject [Section 11] is competent to contract.

(c)

There should be an intention to create a legal relationship: If there is no intention to create any legal relationship, the contract is not valid. Agreements of social, moral, religious nature do not contemplate legal relations. Creation of a legal relationship implies the desire of the parties to the contract to seek for the help of Court in the case of breach of a contract. Thus, if Mr. Nilesh Keniya agrees to Mr. Munde's offer to dine with him tonight, there is no intention of Mr. Munde to enforce this agreement in the court of law in case Mr. Nilesh Keniya fails to dine. This agreement is not entered into to create any legal relationship and, hence, it is not a contract in the eyes of the law. But any agreement to buy or sell goods, or purchase and sell a building is an agreement intended to create legal relationship and is, therefore, a contract, provided the other essential elements are present.

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(d) There should be free consent of parties to the agreement: For the purpose of creating a valid contract, the consent of the parties of the agreement must be free. The term 'consent' is defined in Section 13 which states that two or more persons are said to have consent when they agree upon the same thing in the same sense. Thus, the parties to an agreement must be of the same mind upon the same subject. 'Ad idem'. (same mind) The consent is said to be free when it is not caused by: (i)

Coercion (Section 15),

(ii)

Undue influence (Section 16),

(iii)

Fraud (Section 17),

^

(iv) Misrepresentation (Section 18), (v)

Mistake (Section 20, 21 & 22).

(e) Lawful consideration: Consideration is an act done or to be done at the request of the promisor by the promisee or by any other person. For a valid contract, such consideration must be lawful. Consideration is really an essence of a bargain. The agreement is enforceable legally only when both the parties to it give something and receive something in return. Consideration need not be necessarily in cash or kind, but it can be an act or even abstinence or refraining from doing something or promise to do or not to do something. (f) Legal or lawful object: The object of the agreement must be legal. The agreement to be entered into, must relate to a thing which must not be contrary to the provisions of any law in existence. (g) Agreement not expressly declared void by law: The agreement to be entered into must not have been expressly declared void by any law in force in the country, as, for example, agreements in restraint of marriage (Section 26), agreements in restraint of trade (Section 27), agreement in restraint of proceedings (Section 28), agreements having uncertain meaning (Section 29), Wagering agreements (Section 30) etc. (h) Compliance with legal formalities: It is not necessary that a contract must be in writing. It can be made by word of mouth. However, in the interest of the parties to a contract, it should be in writing. Of course, there are certain formalities to be complied with in order to make an agreement legally enforceable. For example,


Unit

certain documents are required to be stamped properly; certain documents are required to be registered, and in such cases, the contracts must be in writing. (i)

Certainty and Possibility of Performance (A) Certainty of performance: Section 29 of the Act states, "Agreements, the meaning of which is not certain, or capable of being made certain, are voids". Suppose Mr. X agrees to sell to Mr. Y some nails but there nothing is said about types of, quantity and quality of nails. The agreement is silent about these points and, therefore, such agreement is void. For a valid contract, the agreement to be made must be certain. If it is vague, uncertain, it cannot be enforced. Even an agreement to agree in future is not a contract. There is also no contract if a material is not settled or not implied by law and the document contains no machinery to ascertain it. In Loftus Roberts [(1902) 1 8 T.L.R. 532] , an actress was engaged for a tour and the agreement provided that if the performance was given to London, she would be engaged at a salary to be mutually agreed upon. It was held in this case that there was no contract. (B) Possibility of Performance: Section 56 states that an agreement to do an act impossible is itself void. Even a contract to do an act which after the contract is entered into, becomes impossible or by reason of some event which the promisor could not prevent, becomes void when the said act becomes unlawful or impossible. Thus, an agreement must be such of nature that it becomes capable of being performed. This is based on the wellknown maxim 'lex non cogit ad impossibilia' which means that the law does not compel in any way to do what is impossible. For example, if Mr. Nana Paygude agrees to bring gold from the Sun by driving a car, obviously this agreement is void as it is impossible for Mr. Nana Paygude to do so.

Activity A : Mr. Jignesh agrees to sell Mr. Damodhar Gaud one thousand tons of rice. There is nothing to show what quality of rice is intended. Is the agreement void or valid?

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Activity B : Mr. Peter had a beautiful horse, which died of illness. Mr. Lacxi agrees with Mr. Peter to put life into his dead horse for Rs. 50,000/-. Is it a valid agreement?

4.

Classification of Contracts (A) On the basis of mode of formation or creation; L Express contracts, ii. Implied contracts, iii. Quasi contracts. (B) On the basis of extent of execution or performance, i.

Executed contracts,

ii.

Executory contracts,

iii. Unilateral contracts, iv. Bilateral contracts. (C) On the basis of the form of contracts L

Formal

contracts,

ii.

Simple Contracts. (D) On the basis of validity or enforceability. i.

Valid contracts,

ii.

Void contracts,

iii. Voidable contracts, iv. Illegal contracts, v.

Unenforceable contracts

Now let us discuss each of the above types of contracts.

Unit


(A) Types on the basis of mode of formation or creation of contracts: Contracts may be express contracts, implied contracts or quasi contracts. Express contracts : When contracts are made by the parties thereto in writing or by word of mouth, they are called express contracts. Section 9 of the Act says that when the proposal or acceptance is made in words (written or spoken), the promise is said to be express. For example, if Mr. X makes a proposal to sell his house to Mr. Y for Rs. 50,000, and Mr. Y accepts this offer, the contract entered into by Mr. X and Mr. Y is called an express contract. Implied contracts : In so far as the proposal or acceptance is made otherwise than in words, the promise is said to be implied \Section 91. Contracts which are the outcome of any act or conduct of the parties to the contract are called implied contracts. If Mr. X gets into a bus and occupies a seat, there is an implied contract that he will pay for his ticket. Quasi contracts : There is yet anotheptype of contract known as quasi-contract. Such type of contract is created bylaw. It stands on the ground of equity that a person will not be allowed to enrich himself unjustly at the expense of someone. The quasi contract is actually a constructive contract. In the real sense, it is not a contract at all. Suppose, Mr. X who is businessman, forgot some articles he sells at Mr. Y's residence. Mr. Y utilized the articles as if owned by himself. Here Mr. Y must pay to Mr. X for the articles he utilized. This is nothing but the quasi contract.

JS$ Activity C: Mr. Zaveri took a taxi and asked the driver to drop him at the Grand Hotel. He entered the hotel and ordered for a cup of tea. What type of contract Mr. Zavri entered into with the taxi driver and in the hotel?

An express promise results in an express contract whereas an implied promise results in an implied contract.

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(B) Types on the basis of extent of execution or performance "X**-

r

Executed contracts: When both the_parties to the contract

respective p.fulfilTtheir obligations, such contract is called an executed contract. Suppose, Mr. X agrees to sell his motor-cycle to Mr. Y for Rs. 5,000 and Mr. Y accepts the proposal, and accordingly Mr. Y pays Rs. 5,000 to Mr. X and purchases his motor-cycle. Here both the parties have performed their respective obligations and hence, this is an executed contract. In an executed contract, all parties fulfill their promises and nothing isjeft to be done.^ S^ ^ Executory contracts: When one or both tMe parties to the contract do not perform their obligations fully and something is remained to be done, such contracts are called executory contracts. For example, in the above example if Mr. Y agrees to pay Rs. 5,0007- towards the price of themotor-cycle jmdMr. X also agrees to sell the same at this agreed price of Rs. 5,0007- but Mr. Y has yet to pay the price of the motor-cycle and Mr. X has yet to hand over the motor-cycle to Mr. Y, the contract is said to be executory. Partly executed and partly executory contracts: Contracts may be partly executed and partly executory. In such contracts, certain parties perform theinjbligations while othgrsjiave yet to perform their part. Suppose there is a contract entered into between Mr. X and Mr. Y to paint Mr. X's house. Mr. X in consideration pays Rs. 3,0007- to Mr. Y. The contract is executed as regards Mr. X but executory as regards Mr. Y. Unilateral and Bilateral contracts: Contracts can also be classified as unilateral contracts and bilateral contracts. Unilateral Contracts: It is one where one party performs its obligations either before the contract comes into existence or at the time when it comes into existence, and the obligation of the other party remains to be fulfilled at the time of formation of the contract. If Mr. X, a coolie, puts Mr. Y's hold-all in his vehicles, the contract comes into existence on putting Y's hold-all in his vehicle by Mr. X. Now Y's obligation will be complete on paying coolie charges to Mr. X. This is a unilateral contract. Such contracts are also called as one-sided contracts or contracts with executed consideration. Bilateral Contracts: A contract is said to be bilateral when the obligations ofboth dTe_rjarties remain outstanding at the time of the formation of the contract. Bilateral contractsUre very similar to that ol executory contracts and therefore they are also called as contracts with executory consideration. If Mr. Y promises Mr. X that he will

10

i

Indian Contract Act, 1872-Part I

purchase X's house after 10 months, and Mr. X also promises to pay the value of Y's house to Mr. Y sale-deed. This contract is bilateral because the performances of the obligations of Mr. X and Mr. Y, who are the parties of the contract, are outstanding at the time of formation of the contract. vC) Types on the basis of the form of contracts

According to this classification of contracts, contracts can be formal or simple. Formal contracts: Formalcontracts have beenigcognised under the English Law. The Indian Law does not recognise this type of contracts. The validity of formal contracts depends upon their form only and no consideration is required in such contracts. In order to be valid and binding, these contracts are required to satisfy certain legal formalities. Simple contracts: All contracts other than formal contracts are termed as simple contracts. They are valid only when they are supported by consideration and are made by words, spoken or written. The Indian law recognises simple contracts which are supported by consideration except in circumstances specifically laid down in the Act. 1D) Types of contracts on the basis of validity of enforceability

Valid contracts: All contracts which satisfy all the essential elements (see 1.1,3), ire enforceable in a court of law are termed as a valid contracts. When any one or more of the essential elements are missing, the contract becomes either void, voidable, illegal or unenforceable. c * v-

g,-'

Void contracts: A contract which ceases tS be enforceable by law becomes void. Section 2 (j)]. A contract may be valid at the time when it was originally entered into tut it may subsequently become void, because of either impossibility of its performance Jue to outbreak of war or any natural calamity or change of law or any other reason. When a contract becomes void, it ceases to have any legal effect. \ contract becomes void in the following cases. 0 When a contract contains reciprocal promises, and any one party to the contract prevents the other party from performing his promise, then the contract becomes voidable at the option of the party so prevented [Section 53]. Suppose X and Y enter into a contract and, accordingly, Yis to transport X's luggage from one place to another for Rs. 2007- Y is ready to do so but X prevents Y from doing 11

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so. Here the contract is voidable at the option of Y. If Y decides to rescind the contract, he is entitled to recover compensation from X for any loss caused to him because of non-performance of the contract. (b) When a party to contract promises to do a certain thing at or before a specified time, or certain things at or before specified times, but fails to do so, then the contract becomes voidable at the option of the promisee, provided that at the time of entering into contract, the intention of the parties was to keep the time as the essence of the contract [Section 55]. Suppose X enters into a contract with Y that X will make available goods required by Y within fifteen days, but X has not sent the same within the specified time. Here the contract is voidable at the option of Y. (c) If the consent given to the contract is not free, that is, if it is caused by coercion, misrepresentation, undue influence or fraud, the contract is voidable at the option of the party whose consent has been so obtained. It must be remembered that a voidable contract continues to be enforceable till it is rescinded by the party who is entitled to do so. For example, X agrees to sell his horse to Y for Rs. 5,000. Here if Y's consent is obtained by undue influence, then contract is voidable at the option of Y who may elect to be bound by the contract or may rescind or avoid the same.

Illegal or unlawful contracts The word 'illegal' means contrary to law and the term contract refers to an agreement which is enforceable by law. An illegal agreement is one which is against the law enforceable in India. Illegal agreement has a wider import or conception than void agreement. All illegal agreements are definitely void but all void agreements are not necessarily illegal. For Example, an agreement entered into with a minor is void but not illegal; wageîngagreement is not only void but illegal. An illegal agreement is illegal ab initio [that isl from the very beginning] but a contract may become void subsequently on happening of a particular event which may make it illegal. . -

Difference between illegal and void agreements (1) All illegal agreements are void but all void agreements are not illegal.

-^x

(2) Illegal agreements are void ab initio but a contract may become void subsequently. (3) There is no punishment to the parties to a void agreement but parties to illegal agreements are punished as provided in the law. 12


(4) Agreements which are collateral to void agreements are valid but to illegal agreements are void ab initio.

Unenforceable contracts Certain contracts cannot be enforced in a court of law because of some technical defect such as lack of attestation, registration or affixing of certain amount of court fee stamps or absence of writing or where the remedy has been barred by the lapse of time etc. Such contracts are called as unenforceable contracts. Of course, if the technical defect is removed, the contracts can be enforced. For example, if a document which embodies a contract is understamped, the contract is not enforceable, but if the requisite stamp is allowed to be affixed, the contract becomes enforceable.

1.3

OFFER AND ACCEPTANCE

1.

Offer or proposal - definition, meaning and types An offer involves the making of a proposal. A proposal is called an offer. These words are synonymous and are used interchangeably. Every contract is made by the process of a lawful offer by one party and the lawful acceptance of the offer or proposal by the another party. Mr. Damodar Gaud says to Mr. Nilesh Keniya, "Will you buy my flat for Rs. Ten lakh?" This is nothing but an offer made by Mr. Damodar Gaud. If Mr. Nilesh Keniya says, "Yes, I will buy your flat for Rs. Ten lakh", then the offer is said to be accepted and a contract is formed. But statements such as "We are prepared to die for our country" or "We should like to serve your" are not proposals as they are not made with the view of obtaining the assent of other party to whom they are addressed.

Definition of a proposal Section 2 (a) of the Indian Contract Act, 1872 defines a proposal as follows: ''When one person signifies to another his willingness to do or to abstain from doing anything with a view to obtaining the assent of thatother to such an act or abstinence, he is said to make a proposal." When the person to whom the proposal is made signifies his assent to the proposal it is said to be accepted. A proposal when accepted becomes a promise [Section 2 (b)]. The person making the proposal is called the promisor. He is also called offerer or proposer. The person who accepts the proposal or offer is called the promisee or the offeree or proposee or acceptor of the proposal.

1 3

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An offer or a proposal consists of two parts as follows: (a) A promise by the promisor to do or to abstain from doing something, and. (b) A request to the promisee for giving his acceptance. Until and unless the promisee accepts the promise unconditionally, the promisor is not bound by his promise. To become for an offer to be a lawful offer, the following three conditions must be fulfilled: (1) There must be at least two persons or parties who are competent to contract, (2) One of them must express or signify his willingness to another to do or to abstain from doing a particular thing, (3) The another person or party expressing willingness must have an intention to get the consent of the person to such act or abstinence. For example, X offers to sell his motor car to Y for Rs. 1 lakh. This is nothing but a proposal, X is the promisor or the offerer, and Y is the offeree. When Y accepts the proposal and agrees to purchase the car at the price quoted by X, Y becomes the promisee or the acceptor, and the contract is said to be entered into between X and Y. Here all the three conditions are fulfilled and hence an offer of X to sell his motor car to Y for Rs. 1 lakh is a lawful offer.

2.

Types of Proposals or Offers An offer may be express or implied and specific or general. When an offer is made by express words, written or spoken, it is called as an express offer. For example, if X says to Y, "Will you purchase my car for Rs. One lakh?" there is an express offer. When an offer is implied from the conduct of a person or persons or from the circumstances of the case, it is known as an implied offer. For example, a transport company runs buses on particular routes. There is always an offer by the company to carry passengers at scheduled time and fares. The acceptance of the offer is complete as soon as a passenger gets into the bus. A specific offer refers to an offer made by an offerer to a definite person or a definite class of persons. When the offer is made to the world at large, it is termed as a general offer. " — • ------ >

14

Unit

Indian Contract Act. 1872 - Part I

JS$ Activity D: Mr. Thomas purchased a new flat and he wanted to sell his old furniture. Mr. Thomas offered Mr. Nadkarni the furniture at a price of Rs. 7500/-. Mr. Nadkarni accepted the offer of purchasing the furniture of Mr. Thomas at the said price. What kind of offer is this?

When two parties make identical offers to each other, not knowing about each others' offers, such offers are called cross offers. In such cases the court does not construe one offer as the other offer and the other as the acceptance and as such there cannot be any concluded contract. [Tinn V. Hoffmann (1873) 29 LT 271 ].

& Activity E: My uncle runs a transport company in the name of Lakhan Singh Transport Company. The buses runs from Pune to Mumbai, and Pune to Akola. There is always a general offer by the company to carry passengers at scheduled times and fares. State when the acceptance of the offer is complete.

3.

Essentials or rules of a valid offer The Indian Contract Act, 1872 contains certain legal rules or essentials regarding proposals or offers which are as under: Terms of an offer must be clear, specific or definite, certain and not loose or vague: The terms of an offer made must be clear and specific and must not be based on the condition which is not certain or not capable of performance, e.g. a promise to purchase one more lucky-stone if the previously bought lucky-stone proves lucky, cannot be binding and therefore enforceable for being vague and also loose. An offer must create legal relationship: An offer must be such that it would create a valid contract, if accepted. An offer to perform social, moral or religious acts, without any intention to create legal relations will not be a valid offer. 15

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>gT Activity F; My friend Pratibha invited me for a cultural programme at Kala Mandir and for a dinner in a hotel. Evaluate whether is it a offer or acceptance.

An offer must be communicated to the person to whom it is made: An offer made by the proposer must be communicated to the proposee. Unless it is communicated, there can be no acceptance of the offer and it will not confer any right on the acceptor. An offer may be communicated to the offeree by word of mouth, by writing or even by conduct. Intention of offer must be to obtain the consent or assent: The offer must be made with a view to secure the assent of the party to which the offer is made and its intention should not be mere to disclose particular thing. Offer may be express or implied; general or specific. It may also be positive or negative: As already noted, an offer may be expressed by words spoken or written or may be implied by conduct. When it is made only to a particular person or persons, it is a specific offer and when made to the world at large, it is called a general offer. When a person expresses his willingness to do something or to abstain from doing something it is termed as a positive or negative offer as the case may be. An offer should not include any term or terms of noncompliance which may be assumed to lead to acceptances: We have already seen that an offer must be certain and unambiguous and not loose or vague. It should not contain any term because of which it may be assumed to amount to acceptance. Thus, it should not include a term that if the acceptance is not communicated within a certain period, the offer would be considered as accepted. For example, X informs Y by a letter that "I will sell my car to you for Rs. 50,000; and if you don't reply within ten days, I will assume that you have accepted this offer," is obvious that there cannot be any contract if Y does not reply. Statement of price is not an offer: In the case of Harvey Facey, it was held that a mere statement or quotation of price is not construed as an offer to sell. In that case, Harvey sent a telegram to Facey, enquiring "Will you sell us Bumper Hall Pen? 16

unit


Telegraph lowest cash price." Facey replied, "Lowest price for Bumper Hall pen is $900." Harvey, on receipt of the telegram from Facey, sent a telegram again, "We agree to buy Bumper Hall Pen for $900 asked by you". Facey neither replied the telegram nor supplied the Bumper Hall Pen. Harvey filed a suit in the court of law for non-delivery of the Pen. It was held that there was no contract between the parties as Facey only stated the price of the Pen and replied the inquiry made by Harvey, but did not state anything regarding the offer. There was only a proposal or offer but no acceptance of the same. Thus, mere answer to a question or query or an inquiry is not an offer. An offer is different from an invitation to an offer: Mere invitation to an offer is not an offer. Quotations, catalogues of goods to be sold, advertisements for tenders, a prospectus of a company, advertisements inviting applications for various jobs, display of goods with printed price thereon are mere invitations to offer and not actual offers. Newspaper advertisements are also not offers. There is an exception to this rule. When a general offer of reward to the public is made by giving an advertisement in a newspaper, it amounts to an offer in the eyes of law. Thus, when somebody advertises in the newspaper that he would give some prize to any person who finds and returns the lost commodity to the owner, obviously this is the offer made to the first person who acts on it with the knowledge of the offer of the prize and agreements get created. When a tender is submitted in response to an invitation of submitting a tender and it becomes an offer. Such an offer or a tender can be of two types: (i) A definite offer, and (ii) A standing offer. (1) A definite offer: Many times, tenders are invited for the supply of certain or specified goods and/or services. Each such tender submitted in response is considered as an offer. But if the concerned party accepts any tender, it becomes a binding contract. & Activity G; Ramesh, a bank manager, invited tenders for the supply of 200 computers. Pravin, Arvind, Rama and Govinda submitted their tenders in response to the invitation. But Ramesh accepts the tender submitted by Rama rejecting other tenders. Rama, was to supply, 200 computers to the bank manager Mr. Ramesh. But Rama, fails to supply the computers to Mr. Ramesh. Therefore, Mr. Rama could not fulfill the contract with the bank. Is the contract binding on Rama?

17

Business Law

(ii) Standing Offer: A standing offer is a continuing offer as tenders are invited for the supply of goods or services over a certain period of time on the condition that the goods or services will be supplied as and when required. Therefore, an order is placed with the supplier of goods or services whose tender was accepted, whenever goods or services are required, and each time a separate contract is entered into. In Great Northern Railway Company vs. Witham Case [1873, LR 9 C.P. 16], the railway company accepted the tender submitted by Witham for supplying certain goods which the company might require over a period of year. Accordingly he supplied goods to the company as per orders placed by the company for some months. But later on, he refused to supply the goods as per orders placed during the remaining period of the tender. It was held in that case that Witham could not so refuse to supply the goods. Thus, it was binding on him to supply the goods as per contract during the currency of the tender. Two identical cross-offers do not constitute a contract: When identical offers are made by two parties to one another without knowing anything about each other's offer, such offers are called cross-offers. Suppose X offers B to sell him his building for Rs. 2 lakh on 1 st August, 1999 by dropping a letter and on the same day, B also writes a letter to X and offers to buy X's building for Rs. 2 lakh. They do not know anything about each other's offer. The offers by X and B are cross-offers. An offer can be made subject to any terms and conditions: An offerer is always at the liberty to state his own terms and conditions while making an offer. Even he may prescribe the mode of accepting the offer. Unless the offeree accepts all the terms and conditions stipulated by the offerer, there can not be a valid acceptance. According to Section 7 of the Indian Contract Act, 1872, in order to convert a proposal into a promise, the acceptance must be absolute and unqualified. Section 7 further states that, "If the proposal prescribes a manner in which it is to be accepted and the acceptance is not made in such manner, the proposer may insist that his proposal shall be accepted in the prescribed manner." Suppose Mr. Ritesh agrees to buy books from Mr. Jignesh and signs an order form given by Mr. Jignesh containing a number of clauses in small print without reading them. All the clauses are binding on Mr. Ritesh. This implies that if the contracting party signs a document without reading the clauses, terms etc., he is bound by its terms or clauses. This is known as the rule in L'E strange vs. Graucob Ltd. [1934 All. E. R. 16]. In L'E strange vs. Graucob Ltd., a buyer signed on an agreement for buying a cigarette vending machine without reading the terms of the agreement. There was a term in the agreement which excluded the liability for all kinds of defects in the

18


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said machine. The machine which was supplied to the buyer was defective one. It was held in that case the supplier was not liable. However, if it is proved that an acceptor does not know that the document contains certain terms of contract and reasonable notice of such terms are not given to him, he is not bound by such terms. In Richardson vs. Rowntree [(1894) A.C. 217], R, a passenger who booked her passage on a ship and received a ticket folded and stamped across it in red ink in such a way that no writing was visible. As she suffered injuries, she filed a suit against the steamship company. The court held that the passenger did not know about the printed conditions as they were not clearly visible and her suit for damages was allowed. Thus, when all the above mentioned essentials or legal rules are satisfied, an offer or a proposal is said to be valid. 4.

Lapse of an offer Many times an offer lapses and therefore, becomes invalid under various circumstances. Following are some of such circumstances in which an offer lapses and becomes invalid.

An offer lapses if not accepted in the mode prescribed by an offer: If an offeree does not accept the offer according to the mode prescribed by an offerer, it may lapse. However, it does not lapse automatically. If an offerer does not insist that the offer made by him must be accepted in a particular manner or mode, the offer does not lapse. Suppose, the offerer asks to accept the offer by sending a telegram and the offeree accepts the same by sending him a letter, the offeror may reject that acceptance by giving the offeree due notice within a reasonable time. But if he does not do so, he is deemed to have accepted the deviated acceptance. An offer lapses after stipulated or reasonable time: If an acceptance is not communicated, it is obvious that the offer has lapsed. But such an acceptance must be communicated within the time prescribed in the offer by the offeror and, if no such time is prescribed, then it must be communicated within a reasonable time. Of course, what is a reasonable time is always a question of fact and depends upon the circumstances of each case. An offer lapses by revocation: Section 6 (I), (3) and (4) of the Indian Contract Act, 1872, makes provisions so far as the lapse of an offer by revocation. A proposal is lapsed on account of following reasons. 1.

If the proposer communicates or gives the notice of revocation of an offer to the party concerned, the offer is lapsed. [Section 6 (1)]. But if it is agreed to keep 19

Business Law

the offer open for a particular period, it can be lapsed only after the expiry of such period. 2. If the offeree or acceptor fails to fulfil conditions, if any, precedent to acceptance, the offer stands lapsed. [Section 6 (3)]. Suppose Milind offers to sell his flat to Suresh for Rs. 2 lakh on the condition that Suresh will donate Rs. 50,000 to the Relief Fund within a week. If Suresh does not donate Rs. 50,000 to that fund within a week, the offer is lapsed. 3 . In the case of the death or insanity of the proposer, if the fact of his death or insanity comes to the knowledge of the acceptor before acceptance, the offer is lapsed. [Section 6 (4)]. An offer lapses because of subsequence illegality or destruction of subject matter: It is obvious that if an offer, becomes illegal after it is made but before it is accepted either because of passing new enactment or other such reason or even because of the destruction of subject matter, such offers lapses. Suppose, Madhav offers to sell his flat to Milind for Rs. 2 lakhs. But before Milind accepts the offer, there was earthquake and the fiat is destroyed or the Government bans the sale of the flat, the offer automatically lapses. Lapse of an offer by rejection: If the offeree himself neglects the offer, it is lapsed. Even if the offeree makes any counter offer or conditional one, the offer made by the offerer is lapsed. In Hyde V/s Wrench case, H offered to sell his farm for £1000 which was rejected by W. but W offered £950 for the same. This was not accepted by H. Subsequently W agreed to pay £1000 to H for the farm. In that case, the court held that H was not bound by such acceptance. Thus the original offer lapses on account of either its rejection or because of counter offer.

Activity H : Suresh offers to buy Milind's flat for Rs. 2 lakh on the condition that Suresh will pay the price of the flat to Milind within one month, and if Milind agrees to it, Milind cannot revoke the offer before the expiry of prescribed / fixed period. Can Milind be sued for the breach of condition of the contract?

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5.

Acceptance

Acceptance of a proposal is an important stage in the formation of a contract. Acceptance is a consent given by the promisee or proposee of the proposal and it has the effect of converting the proposal into promise. Section 2 (b) of the Indian Contract Act, 1872, states, "When the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. A proposal, when accepted, becomes a promise." While Section 2 (e) states, "Every promise and every set of promises, forming the consideration for each other, is an agreement,'' and' 'An agreement enforceable by law is a contract" [Section 2 (h)]. Thus, a contract emerges from the acceptance of an offer and an acceptance is nothing but an expression by the acceptor or offeree of his willingness to be bound by the terms of the offer. Who can accept an offerl

An offer can be accepted by the person or persons to whom it is made. If it is accepted by someone else, the acceptance is not valid. Of course, when an offer is made to the world at large, it can be accepted by any person and when it is made to a particular group of persons, anyone from the group is entitled to accept the offer. In one case, X sold his business to Y without giving notice to his customers. M, the customer of X, placed an order for purchasing the goods to X by name. Y received the same and acted accordingly. ft was held in the case that there was no contract between Y and M as M never made any offer to Y. [Boulton vs. Jonnes (1857) ER 232]. £$ Activity I:

Mr. Sudhanshu makes a proposal of selling his car to Mr. Yasin for Rs. 50,0007- and Mr. Yasin accepts the same. Has an agreement been formed between Mr. Sudhanshu and Mr. Yasin regarding the sale of Mr. Sudhanshu's car to Mr. Yasin for Rs. 50,000? Is it binding upon both the parties?

1.4 LEGAL RULES OR ESSENTIALS OF A VALID ACCEPTANCE ________

Following are the essentials of a valid acceptance. Acceptance must be qualified: Section 7 (i) of the Indian Contract Act, 1872 states that in order to convert a proposal into a promise, the acceptance must be absolute and unqualified, Conditional acceptance is no acceptance and will not give 21

Business Law

rise to any contract. A proposal must be accepted as it is and unconditionally. For example, X makes a proposal to sell his factory to Y for Rs. One lakh. Y accepts the proposal but is ready to pay Rs. 75,0007-. This is not acceptance of the proposal. As a matter of fact it is a counter proposal made by Y which X may refuse to accept. Acceptance may be express or implied: Acceptance can be express or implied. When an acceptance is communicated by words spoken or written or performing certain act, it is called express. It is implied when it is to be inferred from the conduct or behaviour of the party or parties or from the circumstances. For example, in an auction sale, if someone gives the highest bid and the auctioneer accepts his offer by striking the hammer, it is an implied acceptance. Acceptance must be communicated to the offeror: An acceptance of an offer must be communicated to the offeror in the same perceptible form so that a binding contract may be created. Mere mental acceptance is no acceptance in the eyes of law but it must be expressed or implied. Acceptance cannot be implied from the silence of an offeree. In Felthouse vs. Bindley [(1862) IIC. B. N. S. 869], F offered to buy N's horse for £30, saying, "If I hear no more about him, I shall consider that the horse is mine at £30." He agreed but did not reply to the offer and the horse was sold to somebody else by mistake. F filed a suit in the court of law. It was held that there was no communication of acceptance. Mere mental acceptance is not enough.

Acceptance may be given for the offer which has been communicated: Acceptance cannot precede an offer. A person not knowing anything about the offer cannot be said to have accepted the same merely because he acted just by chance in the manner prescribed by the offerer. Counter offers made in ignorance of each other's offer do not amount to acceptance. Thus, in the eyes of law, that acceptance is valid which is given for the offer which is communicated. Acceptance must be in the mode prescribed or usual and reasonable mode: Section 7 (2) of the Indian Contract Act, 1872, states, "In order to convert a proposal into a promise, the acceptance must be expressed in some usual and reasonable manner unless the proposal prescribes the manner in which it is to be accepted. If the proposal prescribed a manner in which it is to be accepted and the acceptance is not made in such manner, the proposer may, within a reasonable time after the acceptance is communicated to him, insist that his proposal shall be accepted in the prescribed manner, and not otherwise; but if he fails to do so, he accepts the acceptance." 22


Acceptance must be communicated within a reasonable time'. If for accepting the proposal, certain time limit is specified, the acceptance must be communicated within that period. If no such time limit is prescribed, it must be communicated within a reasonable time. What is reasonable time will depend upon the circumstances and facts of each case. Prolonged delay will lapse the offer. In Ramsgate Victoria Hotel Company vs. Monteflore [(1886) L. R. 1 Ex. log], M offered to take shares in R company on 8th June and he received the letter of allotment that is, acceptance on 23rd November. But M refused to take the shares as his offer lapsed by delay in acceptance. It clearly shows that if no time limit is specified, the acceptance must be given within a reasonable time. Silence is not considered as a mode of acceptance: Acceptance cannot be implied from silence. For example, X makes a proposal of selling his car to Y at Rs. 50,0007 - by writing a letter to him and writes further, "If I do not hear anything from you regarding the purchase of my car for Rs. 50,0007- within ten days, I will assume that you have accepted my proposal." If Y does not reply at all, there can be no contract. Acceptance of the proposal means acceptance of all terms of the offer made by the proposer. If a principal makes a proposal through his agent, it is enough if the acceptance is communicated to the agent. For example, X who is the businessman, sends the offer to Y through his agent M. If Y communicates his acceptance to M, the acceptance is complete. Acceptance must be communicated before the offer lapses or before it is withdrawn. Acceptance must always be given by the party or parties to whom the offer is made. Acceptance must make clear an intention on the part of the promisee to fulfill the terms of the promise given. An acceptance to do something which a person (promisee) has no intention to perform is not a valid acceptance. If an acceptance is given by a person which is subject to certain condition as, for instance, subject to formal contract or subject to contract to be approved by Solicitors or subjects to contract, no contract can be formed till a formal contract is entered into with a permission of the concerned persons is obtained.

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Business Law

1.5 PROVISIONS OF CONTRACT ACT REGARDING COMMUNICATION OF OFFER (PROPOSAL); ACCEPTANCE AND REVOCATION _______ A proposal, an acceptance of a proposal and their revocation to be complete, must be communicated properly, as per the provisions made in law. These provisions are contained in Sections 3 to 6 of the Indian Contract Act 1872. 1.

Communication, acceptance and revocation of proposals Communication of proposals, their acceptance, revocation and acceptance, respectively, are deemed to be made by an act or omission of the party proposing, accepting or revoking, by which that the party intends to communicate such proposals, acceptance or revocation or which has the effect of communicating it [Section 3]. Thus a proposal, its acceptance or revocation may be communicated by conduct or by words written or spoken.

2.

Completion of communication of a proposal, acceptance and revocation Communication of a proposal: The communication of a proposal is complete when it comes to the knowledge of the person to whom it is made [Section 4 (part 4)]. For example, X proposes, by writing a letter to Y, to sell his factory for Rs. 2 lakh. The letter is posted on 1 st June, 1999. The letter reaches Y on 4th June, 1999. The communication of the proposal in this case is complete when Y receives the letter sent by X, that is, on 4th June, 1999. Thus when a proposal is communicated by post, it is complete when the letter of the proposal is received by the proposee and not mere posting of the letter does not make the communication complete. Communication of an acceptance: The communication of an acceptance is complete as against the proposer, when it is put in a course of transmission to him, as to be out of the control of the acceptor, and as against the acceptor, when it comes to the knowledge of the proposer [Section 4 (para. 2)]. Suppose in the above case, Y accepts the proposal made by X by sending a letter on 4th June, 1999. X receives the letter of acceptance by Y on 6th June, 1999. The communication of acceptance as against X is complete when the letter is posted by Y on 4th June, 1999 and as against Y when X receives the same on 6th June, 1999. Communication of a revocation: The communication of a revocation is complete as against the person who make it, when the same is put into a course of transmission to the person to whom it is made, so as to be out of the control

24

Unit I


of the person who makes it; and as against the person to whom it is made, when it comes to his knowledge. [Section 4 (para 3)]. 3.

Revocation of proposals and acceptances [Section 5] A proposal may be revoked at any time before the communication of its acceptance is complete as against the proposer but not afterwards, and the acceptance may be revoked at any time before its communication is complete as against the acceptor but not afterwards. Suppose X proposes to sell his factory to Y by sending a letter by post and Y also sending a letter by post accepts the proposal made by X. X can revoke his proposal at any time before Y posts his letter of acceptance but in no case afterwards. Y is also entitled to revoke his acceptance at any time before his letter of acceptance reaches X but not afterwards.

4.

Revocation of a proposal how made [Section 6] A proposal is revoked in any of the following ways: (1) by the communication of the notice of revocation by the proposer to the other party, (2) by the lapse of time prescribed in such proposal for its acceptance, or if no such time is prescribed, by the lapse of a reasonable time, without communicating the acceptance, (3) by the failure of the acceptor to fulfill a condition precedent to accept. For example, X, the producer of the goods, proposes to sell to Y the goods on the condition that Y pays the price of the goods before a particular date. If Y does not pay the price before that date, the offer stands revoked. (4) by the death or insanity (becoming lunatic) of the proposer, if the fact of his death or insanity comes to the knowledge of the acceptor before his acceptance to the proposal.

£$ Activity J: At an auction sale, Mr. Gaikwad working in Nirali makes the highest bid for Deepak's goods. However, Mr. Gaikwad withdraws his bid before the fall of hammer. Is the right of Mr. Gaikwad of revoking the offer before its acceptance is complete.

I

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Business Law

1.6

CONSIDERATION

Consideration is a very essential element for formation of a valid contract. A contract is| void without consideration subject to certain exceptions. According to Sir Pollock "Consideration is the price for which the promise of the other party is brought." Section 2 (d) of the Indian Contract Act, 1872 defines the term consideration in the* following words. "When, at the desire of the promisor, the promisee or any other person has done or abstained from doing or does or abstains from doing, or promises to do or to , abstain from doing, something, such act or promise is called a consideration for the promise" J and, according to Section 2 (f), "promises which form the consideration or part of; consideration for each other, are called reciprocal promises." | From the definition of consideration, we come to know that consideration is (a) an act of 1 doing something, or (b) an abstinence or forbearance from doing something, or (c) such! act or forbearance may be past, present or future; and (d) there should be a return promise. J Thus, consideration implies some benefit to the promisor and some inconvenience < forbearance to the promisee. For example, X agrees to sell his factory to Y for Rs. 50,000/-. j Here for X's promise, the consideration is the price of his factory of Rs. 50,000/- and forf Y's promise, consideration is X's factory. . Activity K : My father is a builder. He employed many employees for different work. He appointed an architect for preparing plans for different projects. He was appointed on a monthly salary.of j Rs. 10,000/-. For the architect monthly salary is the consideration. What is the consideration j for my father?

Essential Elements of a valid or Lawful Consideration Consideration is nothing but some act or forbearance or promise, suffered or done or made by the promisee for the promise. But every act or forbearance is not a consideration unless it possesses certain essential elements which are noted down below. 26

Unil 1

ck.


Consideration may be an act to do something or abstinence or forbearance of doing something: Consideration does not merely include an act of doing something, but it also includes an abstinence or forbearance from doing something. Moreover such act or forbearance can be past, present or future. For example, if X agrees to sell his motor-car to Y for Rs. 1 lakh. Here for X's promise, the consideration is the price of his motor car and for Y's promise, the consideration is X's motor-car.

the son >rto Ise" tof

Consideration may be past, present or future: Section 2 (d) of the Indian Contract Act, 1872 says that, "When at the desire of the promisor, the promisee or any other person has done or abstained from doing; or does or abstains from doing, or promises to do or to abstain from doing something, such act or abstinence or promise is called a consideration for the promise."

ct of such

Thus, the wording of this Section 2 clearly indicates that consideration may be past (has done or abstained from doing), Present (does or abstains from doing), or future (promises to do or to abstain from doing.) Past Consideration

OO/-.

When a promisee has done something or has suffered before the date of promise, of course, at the desire of the promisor, it is nothing but a past consideration. In other words, where a promisee has already done something or abstained from doing something or given some consideration for the present promise at the request of the pTomisor, suclTCOfisideration is called past consideration. Thus, a past consideration is also sufficient to sustain a valid contract. For example, a lawyer started rendering his services to a landlord at the request of the landlord by giving up his legal practice. Later on, the landlord promised the lawyer to pay a certain amount as a pension. In that case, it was held that there was a good past consideration. (Shivsaran Lai vs. Keshav Prasad AIR 1917 - Pat 92) Present Consideration

>r done

Present consideration is also known as executed consideration in which the consideration is given simultaneously with the promise or at the time of making promise. In other words, in present consideration, consideration moves simultaneoH5iy~with the promise. For example, X promises to render certain services to Y on the promise of Rs. 1,0007- in return. Here, the amount of Rs. 1,0007- is the present consideration for the promise of X to render certain services to Y.

2 7

Business Law

Future Consideration Future consideration is also known as .executory consideration. In the future consideration, the consideration on both the sides is promised to be given at some future date or after a stipulated period. It consists of exchange of promises and each promise is a consideration for the other. In future consideration the promisee promises to do something or abstains from doing something in future. For example, X promises to deliver goods to Y on arrival of the train from Delhi and in turn, Y promises to pay the price of goods against the receipt of the goods. This is an example of future consideration where acts of both parties are to be performed on the arrival of the train from Delhi. | Consideration must be real and not illusory : This is one of the important conditions of lawful consideration. A merely sham consideration that is, one which is not of real value but only of apparent value, is not enough. It must be real and possesjs some value in the eyes of law. In the following cases, it is considered that there is no real consideration. (i) Legal impossibility : A promise to do .something or abstaining from doing which is not legal does not amount to good consideration. (ii) Physical impossibility : A promise to do something which is not physically possible does not form a valid consideration. If A promises B to make his dead son alive and A should pay Rs. 5 lakhs for that or if A promises B to pay Rs. 10 lakh for running at a speed of 2000 kilometers per hour, As promise is .physically impossible of performance and therefore, does not amount to a valid consideration. (iii) Uncertain consideration : A promise to do something or abstain from doing something which is vague and uncertain is no consideration in the eyes of law. If A promises B to pay such salary which shall be "deemed fit or right or reasonable " is not a good consideration on a ground of uncertainty. There is no recognised or correct method to ascertain 'fit' or 'right' or 'reasonable' salary.

rff^

28

ivV Illusory consideration : A consideration is considered to be illusory if it consists 1 of any promise to perform some public duty or to perform some contract already made with the promisor. Illusory consideration can also be called as deceptive, consideration and such consideration does not amount to a valid consideration.


Following illustration makes this point more clear. In Stilk vs. My rick (1809,2 CAMP. 317), two seamen of a ship deserted the ship half-way while the ship was on a voyage. The captain promised the rest of the crew to pay the wages of the two deserters if the others of the crew would work ship home. The agreement was held to be void for want of a good consideration as it was the contractual duty of the mariners on the ship to exert themselves to bring the ship back home and the mariners on the ship could not recover anything as the consideration was illusory. Consideration should move at the desire of the promisor: The important principle involved in consideration is that an act or forbearance which constitutes consideration must have been done at the desire of the promisor. A voluntary act without the desire of the promisor is not covered by the definition of consideration. Thus, in order to constitute a legal consideration, the act or its forbearance forming the consideration for any promise must be done at the desire of the promisor. Here, it must be remembered that consideration need not confer any benefit on the promisor, but if the act is done at the request or desire of the promisor, it is a good consideration. The benefit may accrue even to the third person. For example, X rushes to save Y's building from fire at the request of Y. As X acts at the request of Y, it is a good consideration. But, if X rushes to save Y's building from fire on his own, that is, voluntarily, X cannot demand anything from Y as there is no consideration. Consideration may move from any person including the promisee: Section 2 (d) of the Indian Contract Act, 1872, begins with the wording that, "When, at the desire of the promisor, the promisee or any other person has done..." and it implies that consideration need not move only from the promisor but it can move from the omisee or even from any other person. Thus, even a stranger to the consideration an sue on a contract if he happens to be the party to the contract. There should be consideration for a promise; it is not material who furnishes it. In Chinayya vs. Ramayya (1882,4 Mad. 137), by a Deed of Gift, an old lady gifted certain property to her daughter R and directed R that she should pay an annuity to her relative C. Accordingly the agreement was executed in writing. But later on, R refused to fulfill her promise on the ground of lack of sufficient consideration. The Madras High Court held that the words promisee or any other person in Section 2 (d) show that a stranger to the consideration can maintain the suit. For supporting each independent promise, there must be an independent consideration : If for various promises, there is only one consideration, it becomes mpossible to decide the consideration of each of the promises given as all the promises 29

Business Law

cannot be fulfilled one and the same time. Therefore, for supporting each independent | promise, there must be an independent consideration. Consideration need not be adequate : It is not necessary that the consideration 1 should be adequate. The adequacy of the consideration is for the concerned parties I to consider at the time of making the agreement. As long as consideration exists and! has some real value and the consent is freely obtained, the courts are not concerned ] with the adequacy of consideration. Even the minutest real consideration is enough. ] Suppose X agrees to sell his valuable furniture of Rs. 10,0007- for Rs. 500/-. Of j course, X has given free consent to the agreement. The consideration, though not \ adequate, is valid and the agreement is a contract and will not become void on the | ground of inadequacy of consideration. Consideration is something which the promisor is not already bound to do : A promise to perform some public duty by a public servant is not a good consideration, neither a promise to do something that a person is bound to do under an existing contract or by the operation of law is a good consideration. But when someone undertakes to do something more than what he is bound to do under the existing contract, that something more can be a good consideration for the promise given. Suppose Mr. X is asked by Mr. Y to carry goods of Rs. 10,0007- from Pune to Bombay for which Mr. Y promises to pay Mr. X Rs. 1,5007-. There is a good consideration and Mr. X cannot demand anything more for carrying the goods with maximum care as it is the part of his duty under the contract. But if Mr. Y asks him to carry additional goods and to deliver the same to Mr. N who stays in Kalyan, Mr. X can demand something more than Rs. 1,5007- and that will be a good consideration. (i) Consideration must be valuable in the eyes of law: This point has already been made clear. It is one of the essentials of a valid consideration that consideration must be something to which the law attaches value though it may be inadequate. But there must be free consent. It leaves people to make their own bargain. 2.

Exceptions to the Rule of "No Consideration, No Contract" Consideration is one of the most important conditions of a valid contract. Contracts without consideration are void. According to Salmond and Winfield, "A promise without consideration is a gift and one made by consideration is a bargain." However, under certain circumstances, a contract without consideration is considered as perfectly valid which are included in Section 25 of the Indian Contract Act, 1872.

30


Now let us discuss these exceptions in detail. Promise made on account of love and affection : When an agreement is entered into between the parties who stand in a near relation to each other and, if such agreement is in writing and registered under the law in force, it is enforceable even though there is no consideration. For example, a father promises to give to his son his wealth out of natural love and affection and does so in writing and registers the same, there may not be any consideration and still there is a contract. Promise for compensation of voluntary services : A promise given to pay in whole or in part of past voluntary services is binding and enforceable without consideration. For example, If X finds a gold ring of Y and he returns the same to Y. Y promises to pay Rs. 5007- to X for returning the gold ring. This amounts to valid contract though there is no formal consideration. Promise to pay any time barred debt: If a debtor gives a promise to pay his time-barred debt in writing and under his signature or if the promise is given by his duly authorised agent to pay the time barred debt, no fresh consideration is required. For ample, X owes Y Rs. 5,0007- but the debt is time barred. X promises to pay Rs. 5.OCX) in writing and putting his own signature on account of the debt. The contract is valid without any fresh consideration. Contract of agency : According to Section 185 of this Act, no consideration is necessary for creating an agency. Completed gifts : The rule 'no consideration, no contract' is not applicable to completed gifts. [Explanation 1 to Section 25]. Absence of consideration does not affect the validity of contract as between the donee and donor and any gifts actually en. Gifts once given cannot be recovered on the ground of absence of consideration. Kinds of Consideration There are five kinds of consideration: Present or executed consideration : A present consideration is something which already actually done or for borne or suffered. It is done in response to some promise by promisee. It must be remembered that in present consideration, one party has already performed its part of the promise while the other party has to perform its part of the promise. Past consideration : A past consideration is something that is wholly done, forborne or suffered by the promisee even before making of the agreement. It is always

31

Business Law

supported by a future promise. X was an infant and at his desire, Y provided him certain essential commodities. After attaining majority, X promises Y to compensate for what Y did in the past. This is nothing but the past consideration for which X • makes some promise. C. Future consideration : A consideration is said to be future when it is to be done in future. A future consideration is always a promise to do or forbear or suffer at a future date only. D. Unlawful consideration : Following considerations are unlawful, (i)

When they are forbidden by law,

(ii) When they defeat the provisions of law, (iii) When they are fraudulent, (iv) When they cause inj ury to other persons or their property, (v) When they are opposed to public policy. E.

1.7

Illusory or Unreal consideration : When a consideration subsist in only words and its performance is physically or legally impossible, such consideration is known as illusory or unreal. CAPACITY OF PARTIES _________________________________________

All agreements are contracts provided that (A) They are made by the free consent of parties (B) These parties must be competent to contract (C) The contract must be for a lawful consideration and with a lawful object, and (D) They must not be expressly declared to be void. Thus, any agreement, if it fulfills the above mentioned conditions becomes a contract. The parties who want to enter into a contract must have the capacity to do so. Here 'capacity' refers to competency of the parties to enter into a valid contract. Section 11 of the Indian Contract Act speaks about the competency of the parties to contract. It states that every person is competent to contract who is of the age of majority according to law to which he is subject and who is of sound mind, and is not disqualified from entering into contract by any law to which he is subject.

32


Thus, the Section 11 declares the following persons to be incompetent to enter into a contract: Minors, B> Persons of unsound mind, and C) Persons disqualified from contracting by the law to which they are subject. A) Minors: A person who has not completed his 18th year of age is considered to be minor in the eyes of law [Section 3 of the Indian IvlmorityAct, 1875] and his minority continues in the following two cases: (a) Where a guardian of a minor's person or property is appointed by the Court under the Guardians and Wards Act, 1890, or (b) Where the property of a minor is taken over by the Court of Wards for management under the Court of Wards Act. Agreements with the minors The Indian Contract Act, 1872 protects and safeguards the interest of the minor through special provision. A minor can plead his minority while deciding the validity of contract. He neither incurs any liability/obligations nor is he held responsible for any wrong. Legal action cannot be taken against a minor for false promises or wrong doings. Even guardians or parents cannot be held legally responsible for the contracts entered into by a minor unless one of them acts as an agent. We find following important provisions made in the Indian Contract Act, 1872 regarding the agreements or contracts with a minor. d) Agreement with or by a minor is absolutely void : An agreement with a minor is not voidable but absolutely void ab initio. The Privi Council while interpreting the provisions of Section 11 of the Indian Contract Act stated in the famous case of Mohori Bibi vs. Dharmodas Ghose that a contract with a minor is void and not voidable. In this case of Mohori Bibi vs. Dharmodas Ghose, a minor took a loan of Rs. 8,0007- and mortgaged his own house worth Rs. 20,0007- in favour of a mortgagee who was a money lender. Thereafter the minor sued for setting aside the mortgage on the ground of his minority and the money lender wanted to get his amount of Rs. 8,0007- which he actually paiid to the minor. The Privy Council declared that an agreement with the minor was

33

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void. Hence the mortgage was not valid and hence it was cancelled and therefore the question of refund of the loan did not arise. (ii) No Ratification of Minor's contract: A minor's agreement or contract cannot be ratified by him when he becomes a major. A consideration given by a person when he was a minor is no consideration in the eyes of law and, therefore, a consideration given under earlier contract cannot be implied into the contract which the minor enters on attaining majority. However, a minor can enter into a fresh contract, in case it is necessary, on attaining majority, if supported by a fresh consideration and not by past consideration. For example, X, a minor borrows Rs. 10,0007- from Y for which he executes a promissory note in favour of Y. After becoming a major, X executes a fresh promissory note in settlement of the first promissory note in favour of Y for Rs. 10,0007-. Y cannot bring a suit on the second promissory note as the second note is void for lack of consideration. But if X obtains further loan of Rs. 10,0007- from Y on attaining majority and executes a promissory note of Rs. 20,0007- for both the loans, this will be taken as a new contract entered into by X and he will be liable on the promissory note and the contract will be valid. (iii) A minor can be a promisee : A contract entered into by minor is void but not unlawful. However, if a person on attaining majority pays a debt already incurred during his minority, cannot subsequently file a suit for the purpose of recovering the amount. But a minor can become a beneficiary, for example, payee, endorsee or a promisee. Nothing debars him from entering into a contract as a beneficiary. Thus, if a minor has carried out his obligations on entering into a contract, he gets every right to bring a suit against the other party for the enforcement of the other party's obligation. Suppose a minor delivers some goods under a contract of sale to Mr. X, a purchaser and Mr. X does not pay, the minor is entitled to bring a suit for the recovery of the price of the goods sold. (iv) No restitution in agreements with a minor: If a minor receives any benefit or advantage under an agreement or a contract which is void, he cannot be asked or compelled to pay the amount or compensate any loss caused to the other party to such void contract. For example, suppose a minor gets a loan from a money-lender, by mortgaging his property. Neither the minor nor his property can be held liable for recovering the loan given to him. (v) Minor's Insolvency : A minor cannot be declared as an insolvent because of his or her incapacity to enter into a contract. He cannot be held personally liable even for the supply of basic necessities of life. 34

Unit


(vi) No estoppel in the case of a minor: A minor can always plead his minority and is not bound by his misrepresentation or fraudulent behaviour. The rule of estoppel is not applicable as against a minor. In one case, Sheill who was a minor pretended to be a major and induced Mr. Leslie to lend some amount. Subsequently, Sheill refused to repay the same and therefore Leslie filed a suit against him in the Court of Law. It was held that the contract with Sheill, being a minor, was void and Sheill was not liable to repay the sum. Thus, though the law provides protection to the minors under the Contract Act, it does not give them the liberty to cheat the people. The court can direct the minor to restore money or property to the other party on equitable consideration where a loan or any property is obtained by mispresentation and the agreemenfis set aside. (vii) Minor as a partner : A minor cannot be a partner or he cannot enter into a partnership contract as a partner. However, he can be admitted to the benefit of the partnership firm already in the existence with the prior consent of other partners. Even though he is admitted to the benefit of the partnership firm, he does not get any right to participate in the management of the firm or inspect the books of the firm. (viii) A minor as an agent: Though a minor cannot be admitted as a partner or a contract with a minor is void, he can be appointed as an agent. He can represent his master or principal while dealing with the other party. He can bind his principal by his act without any personal liability. Here, it must be remembered that the principal cannot recover the loss, if caused as a result of any act of a minor who works as his agent. (ix) A person working as a surety for a minor : Any person may stand as a surety for any liability incurred by a minor. Such person is held responsible to a minor' s creditor, but not the minor. (x) Liability of a minor for necessities : If the contracts are entered into for the supply of the necessities of life and other necessary services, all such contracts are valid and a minor is liable to pay out his property for the same. (xi) Responsibility of parents or guardians of a minor : Parents and guardians are not held liable for any contract entered into by a minor; even though the contracts entered into are for the supply of necessities and essential services to a minor. (xii) Liability of a minor for torts (Civil wrong): If a minor is guilty of any civil wrong, he can be held liable. 35

Business Law

Thus, contracts entered into with a minor are void except the contracts for necessities of life etc. Considering the privileges made available to a minor under the Contract Act, it can be said that the minority is a shield that offers necessary protection to minors. It is given to them because the law considers them as immature who can easily be misled or misguided. Activity L : Mr. Khatpat's father died when he was a minor. He had two small brothers. Due to some financial reasons Mr. Khatpat borrowed Rs. 25,0007- from his uncle Mr. Mallo. Mr. Khatpat also executed a promissory note in favour of Mr. Mallo. After becoming a major, Mr. Khatpat executed a fresh promissory note in settlement of the first note in favour of Mr. Mallo for Rs. 25,0007-. Mr. Khatpat could not pay the amount of Rs. 25,0007- due to some financial difficulty. Can Mr. Mallo recover the amount on the second promissory note?

(B) Persons of unsound mind : Drunkards when under the influence of drugs are considered as persons of unsound mind. Section 12 of the Indian Contract Act, 1872 defines the term 'sound mind'. According to Section 12, "A person is said to be of a sound mind for the purpose of making a contract if, at the time when he makes a contract, he is capable of understanding it and of forming a rational judgement as to its effect upon his interest. A person who is usually of an unsound mind; but occasionally of sound mind, may make contract when he is of sound mind. A person usually of sound mind, but occasionally of unsound mind, may not make a contract when he is of unsound mind." Thus, like that of a minor, an agreement or a contract entered into with a person of unsound mind is absolutely void. Unsoundness of mind may result from insanity, idiocy, lunacy, old age, accident, drunkenness or some such other reasons. Aperson under the influence of drugs or drinks is considered temporarily of unsound mind.

-V *—v' £**

Idiots y**—*• ----------

^

'

Ot

Idiots are persons who are devoid of any thinking power and not in a position to take rational judgements. As the idiots cannot understand even ordinary matters, contracts with them are void. In one case, a person agreed to sell his property worth about

36

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Rs. 55,0007- for Rs. 17,0007-. But when it became known to his mother, she filed a case and proved that the person was a congenital idiot and demanded for cancellation of the contract. It was held that the agreement was null and void. There are, in fact, basically two important types of unsoundness of mind: ( 1 ) permanent in nature implying incurable mental diseases, and (2) temporary in nature, the diseases which can be cured. These types are sho Lunatic : A lunatic is a person whose mental powers are deranged because of some mental strain or fatigue. These persons generally suffer from intermittent intervals of sanity and insanity and therefore contracts entered into with such persons during lucid intervals are valid. Lunacy denotes periodical insanity with lucid intervals while idiocy is always permanent. Drunkards : Drunkards stand on the same footing as lunatics when they are under the influence of drugs or alcoholic drinks and, therefore, agreements or contracts made with them during drunkenness are void. (C) Persons disqualified from contracting by the law : Besides minors, idiots, lunatics when they suffer from the attacks, drunkards when they are under the influence of any drug or drink; following persons are also disqualified from contracting by the law to which they are subject. (a) Alien enemies, (b) Foreign sovereigns, their diplomatic staff and accredited representatives, (c) Insolvents, (d) Convicts, (e) Corporations.

1.8

FREE CONSENT

_

_ _ _ _ _

_

_ _

According to Section 10 of the Indian Contract Act, 1872, "All agreements are contracts if they are made by the free consent of the parties competent to contract, for a lawful consideration and with a lawful object and are not hereby expressly declared to be void." Thus, a free consent is one of the essentials of valid contract. Sections 1 3 and 14 define the words 'consent' and 'free consent' respectively. According to Section 13, "Two or more persons are said to consent when they agree upon the same thing in the same sense". Section 14 defines 'Free consent' as follows : Consent is said to be free when it is not caused by :

37

Business Law

(1) Coercion, as defined in Section 15, or (2) Undue influence, as defined in Section 16, or (3) Fraud, as defined in Section 17, or (4) Misrepresentation, as defined in Section 18, or (5) Mistake, subject to the provisions of Sections 20, 21 and 22. If there is no consent, there is no contract. But if there is a consent but not a free consent and is caused by undue influence, coercion, fraud etc. and a contract is entered into, such contract is always voidable at the option of the party whose consent is so obtained. Thus, because of coercion, undue influence, misrepresentation, fraud or mistake, consent is not said to be free.

1.

Coercion

^- t***^/

The definition of coercion is given in Section 15 of the Indian Contract Act, 1872 which is as follows: "'Coercion' is the committing, or threatening to commit, any act forbidden by the Indian Penal Code or the unlawful detaining, or threatening to detain, any property, to the prejudice of any person whatever, with the intention of causing any person to enter into an agreement." It is immaterial whether the Indian Penal Code is or is not in force in the place where the coercion is employed. [Explanation to Section 15]. From the above definition, we come to know the following important characteristics of coercion.

Characteristics of coercion (i) Coercion implies committing or threatening to commit any act forbidden by the Indian Penal Code. For example, X threatens to beat Y if Y does not execute a promissory note of Rs. 10,0007- and Y does so. The threat amounts to coercion. Or in another incident, after giving a good beating to Y, X makes Y agree to sell the goods of Rs. 50,0007- on credit. This beating amounts to coercion. (ii) Coercion also implies unlawful detaining or threatening to detain the property of another person. In one case, an agent refused to hand over books of accounts of the agency business to his principal unless he made the agent free from all the past responsibilities. It was held that the release had been obtained by coercion (iii) The act of coercion must have been performed with the intention of causing any person to enter into an agreement.


is not necessary that the coercion must be applied by a party to the contract. It also an be applied by a stranger. For example, X threatens to kill Y in case Y does not ell his valuable plot to C who is X's friend and therefore, Y agrees to do so and signs the contract accordingly. Y is not bound by this contract as it is induced by coercion. It is not necessary that the Indian Penal Code should be in force at the place where the coercion is applied. For example, A, on board of an English ship on the high seas, uuses B to enter into an agreement by an act amounting to criminal intimidation under the Indian Penal Code, 1 973. Afterwards A sues B for breach of contract at Kolkata. A has employed coercion, although his act is not an offence by the law of Fngland, and although Section 506 of the Indian Penal Code, was not in force at the me when or place where the act was done. Effect of coercion on a contract : Section 19 of the Indian Contract Act, 1872 states that when the consent of a party to an agreement is caused by coercion, the agreement is a contract voidable at the option of the party whose consent was so btained. Thus an aggrieved party may set aside the contract. However, if he so •sires, he may abide by the contract and insist the other party to perform the same. . or example, if X compels Y to execute a transfer bond for his factory in the name of M under the fear of assault, such contract is voidable at the option of Y as his consent obtained by coercion. Of course, the burden of proving that his consent is obtained coercion lies on Y. Section 72 of the Act also provides that a person to whom ivthing has been delivered or any amount is paid under coercion, is bound to return repay for the same. Coercion includes many things such as fear, a threat to beat, •nysical compulsion, menance to goods, a threat to commit suicide etc. i Ranganayakamma vs. Alwar Shetti [1889, 13 Mad 214], a minor girl was »rced to adopt a child by the relatives of her husband who was dead. The relatives ! d not allow to remove the dead body of her husband for cremation until she gave it- consent for the adoption of the child. It was held that as the consent was not free id was induced by coercion, the adoption was set aside and was not binding on her.

Undue Influence •> coercion, the element of physical pressure, some sort of threatening or physical impulsion is present while undue influence results in mental pressure which is put pon the other party to the contract. This may happen when there exists a special nd of relationship between the parties to the contract so that one party is in a isition to exercise undue influence over the other party. Sometimes, undue influence called moral coercions. Section 16 of the Indian Contract Act, 1872 defines the rm'undue influence' 39

Business Law

The above mentioned definition of undue influence reveals following important elements: (A) The relations subsisting between the parties to a contract are such that one of| them is in a position to dominate the will of the other; (B) The dominant party uses his position to obtain an unfair or undue advantage j over the party, (C) The dominant party may hold a real or an apparent authority over the othe party, and contract is entered into by using an undue influence. If, however, a contract is made under statutory compulsion, it cannot be regarded as I entered into under undue influence. In following cases, law presumes a person to be in a position to dominate the will of J the other party [Section 16 (2)]. (i) When any person holds an apparent or a real authority over the other, suchl person can dominate the will of other party. A master, for example, can dominate | the will of his servants, Police Officer can induce an accused to enter into a j contract by undue influence. (ii)

Where a person stands in a fiduciary relationship to the other party. Suchl relationship includes a trustee and a beneficiary, a Solicitor and his Client, a 1 spiritual adviser and his devotee, a doctor and his patient, a creditor and < debtor etc.

Activity M : Mr. Munshi was a patient of Dr. Paranjape. Mr. Munshi was suffering from a chronic, disease.Dr. Paranjape induced Mr. Munshi to agree to pay an unreasonable amount forj the services he rendered. Was the consent of Mr. Munshi free. If no, why not?

(iii) Where a person enters into a contract with other person whose mental capacity! is affected either temporarily or permanently due to old age, illness, bodily orj mental distress. 40

.taee 3th er led as vill oi'

'nil 1


Contracts with pardanashin woman Apardanashin woman is one who observes complete seclusion because of the custom or the usage of the particular community and a contract with such woman is presumed to have been entered by undue influence. Following facts are required to be proved in order to prove that the contract entered into with a pardanashin woman has not been induced by undue influence. (A) The terms of the contract made are reasonable, fair and equitable; (B) The transaction performed is real and bonafide; (C) The deed when executed was fully explained to the pardanashin woman; (D) The woman received an independent and disinterested advice in the regard; (E) The woman had complete knowledge of the nature and the effect of the transaction. The protection which is given to a pardanashin woman is also made available to illiterate and ignorant women who are also exposed to the risk and danger of an unfair deal caused by undue influence. Important points of distinction between Coercion and Undue Influence (a) In coercion, some criminal act is involved while in undue influence, it is not. (b) Coercion is mainly of a physical character whereas undue influence is of a moral character. Therefore, sometimes, undue influence is called moral coercion. (c) In coercion, the consent of an aggrieved party is obtained by commiting or threatening to commit an act forbidden by the Indian Penal Code or detaining or threatening to detain unlawfully. In undue influence, the consent of an aggrieved party is obtained under moral influence. A person obtaining the consent takes the undue advantage of his position. (d) In coercion, the intention is always to induce someone to enter into an agreement. In undue influence, the party which uses its influence uses its position to obtain certain advantage at the cost of other party. (e) In coercion, it is not necessary that there should be some relationship between the promisor and the promisee. But in undue influence, there always exists some sort of relationship between the parties to the agreement. Such relationship can be fiduciary or paternal. 4 1

Business Law

3.

Fraud According to Section 17 of the Indian Contract Act, 1872; "Fraud" means and includes any of the following acts committed by a party to a contract, or with his connivance, or by his agent, with an intent to deceive another party thereto or his agent, or to induce him to enter the contract : (i)

The suggestion, as a fact, of that which is not true, by one who does not believe it to be true,

(ii)

The active concealment of a fact by one having knowledge or belief of the fact,

(iii) A promise made without any intention of performing it, (iv) Any other act fitted to deceive, (v)

Any such act or omission as the law specially declares to be fraudulent.

Does Silence amount to fraud? Mere silence as to facts which may likely to affect the willingness of a person to make a contract is not fraud, unless the circumstances of the case are such that it is the duty of the person observing silence to speak or unless his silence is equivalent to speech [Explanation of Section 17]. Suppose X sells a horse to Y which X knows to be unsound, but X keeps quiet and tells nothing to Y about the unsoundness of the horse. This does not lead to any fraud. But if Y suggests X that "If you do not deny it, I will assume that the horse is sound", X says nothing but keeps silence. Here X's silence is equivalent to speech. Thus in fraud, the intention of the party must be to deceive the other party to enter into a contract. Activity N : Mr. Gopi is a friend of my father. He is a farmer. He has kept two cows for milk. Mr. Gopi once went to a neighbouring village. He saw a black cow in the house of one of the villagers, Mr. Laxman. He liked that cow and decided to purchase. He purchased the cow and said to Mr. Laxman, "If you do not deny it, I shall assume that the cow is sound.' ' Mr. Laxman says nothing. Later, Mr. Gopi found that the cow was unsound. Is the contract a valid contract?

Unit


Essential elements of fraud Following are the essential elements of fraud: There must be a false representation : Representation means a statement of fact made by one of the parties to the contract in the course of the negotiations with a view to induce the other party to enter into a contract. This can be done by words spoken or written or it can be even implied from the acts and conduct of the party and it must relate to some fact which is material to the contract. When a representation is wrongly made with an intention to deceive another party thereto or his agent or to induce him to enter into a contract, it is called a fraud. Thus, to constitute a fraud, there must be a false representation. Itmust be done by the party or his agent: The act must have been done by a party to the contract or by his agent. It should have not been committed by a stranger. The representation must relate to a fact : An opinion is not considered as a representation of a fact. If a Salesman says that the goods he is selling are as good as that of XYZ Company, it is not an intentional misrepresentation but a mere statement of opinion and therefore can not constitute any fraud. So also if he says, "The goods are the best available in the market for the price," it is not a misrepresentation amounting to fraud but a puffing statement. The other party must have been attracted to act upon the representation leading to a fraud: This implies that the assertion should be such that it would invariably influence and attract the other party to enter into a contract. Mere falsehood is not sufficient to give a right of action. In one case [Smith V. Chadwick (1884)], Mr. X purchased some shares on the faith of the prospectus which contained that Mr. Y was one of the directors of the company. But in reality he was not the Director. Subsequently X filed a suit for damages against the company for the false representation made in the prospectus that Y was the director. X's claim for damages was dismissed as X never heard of Y and therefore the concerned statement was not material from the point of view of X, the statement did not luce X to buy shares of the company. The representation intentionally done to commit a fraud must have been done before the conclusion of the contract: The representation should not be merely false, but its intention must be to deceive the other party and that must be done before the conclusion of the contract. The other party must have relied upon the representation intentionally done to commit a fraud and thereby must have been deceived: A mere false representation is 4 3

Business Law

not enough to constitute a fraud but the other party must be actually deceived because of such false representation. Not only this but also the other party which acts on the false representation must have suffered a loss. Fraud without damage or damage without fraud does not give any right to a party who acts on the false representation.

Effects of fraud and remedies The party defrauded can exercise any of the following rights: (i) As a contract induced by fraud is voidable at the option of the party defrauded, he can avoid or rescind the contract but he must do so within a reasonable time. (ii)

The party defrauded can sue for the damages suffered or ask for the restitution.

(iii) The party can insist for the performance of the contract on the condition that the other party shall take necessary steps to put the defrauded party in a position in which it would have been if the representation made had been true. Mr. Suresh fraudulently tells Mr. Ramesh that his flat is completely free from encumbrances. 1 Mr. Ramesh purchases the flat. But subsequently it is found that the flat is mortgaged] Mr. Ramesh may, in this case, insist on mortgage case.

5.

Misrepresentation Section 18 of the Indian Contract Act, 1872 defines the term 'misrepresentation' i follows: (A) The positive assertion, in a manner not warranted by the information of the| person making it, of that which is not true, though he believes it to be true; (B) Any breach of duty which, without an intention to deceive, gains an advantagef to the person committing it, or any one claiming under him, by misleading anoti to his prejudice, or to the prejudice of any one claiming under him; (C) Causing, however innocently, a party to an agreement, to make a mistake as tof the substance of the thing which is the subject of the agreement. From the above definition of misrepresentation, we come to know the followii important essentials of misrepresentation: (a) A mere expression of opinion or any statement, even if it is wrong, does not 1 to mispresentation. It must be a representation of some material fact related tdj the contract.

44

.-mi


(b) It must be made before the concerned party enters into a contract. (c) A person making wrong or false representation must really believe that the representation he is making is true. In other words, it must be innocent or unintentional. (d) Misrepresentation may be committed in any of the following ways: (i)

By positive statement.

(ii)

By breach of duty.

(iii) By causing a mistake by innocent misrepresentation. An aggrieved party suffering any loss as a result of misrepresentation can either rescind or avoid the contract altogether or can accept the contract but insist that he will be placed in such position in which he should have been, if the representation made had been true [Section 19]. However, the aggrieved party loses the right of avoiding the contract for misrepresentation in following circumstances: (a) If the aggrieved party takes any benefit under the contract after becoming aware of the misrepresentation. Thus, the party is not allowed to enjoy any benefit of misrepresentation and also to avoid the contract. (b) If a third party has already purchased the goods or acquired the rights in the subject matter of the contract paying necessary price or value in good faith. (c) If the concerned parties cannot be restored to their original positions. Distinction between fraud and misrepresentation (1) In misrepresentation, there is no intention to deceive or gain any advantage by making a false statement or representation but in fraud, a false statement or representation is deliberately or intentionally made to deceive the other party or to induce him to make a contract. Thus, fraud is intentional or deliberate while misrepresentation is innocent or unintentional.

•d to

2) In fraud and misrepresentation, remedies of restitution and recession are available. But in misrepresentation, a contract is voidable at the option of the aggrieved party while in the case of fraud, besides avoiding the contract, an aggrieved party can claim the damages suffered as result of fraud. 4 5

Business Law

(3) In misrepresentation, a person doing so believes the presentation made by him is true while in a fraud, he purposely and knowingly makes a false statement or gives a false opinion. (4) Fraud leads to a criminal offence and it may not be a case in respect of misrepresentation. 6.

Mistake of Law Mistake is one of the causes because of which the consent is said not be free and it can be defined as an erroneous belief about something. Important provisions related to the mistake are contained in Sections 20, 21 and 22 of the Indian Contract Act, 1872. According to Section 20, "Where both the parties to an agreement are under a mistake as to a matter of fact essential to the agreement, the agreement is void." An erroneous opinion as to the value of the thing which forms the subject matter of the agreement, is not deemed to be a mistake as to a matter of a fact. [Explanation to Section 20]. Suppose X agrees to sell a cow to Y. It is subsequently revealed that cow was dead at the time of bargaining and no one was aware of this fact, the agreement is void. Section 21 states that a contract is not voidable because it was caused by a mistake as to any law in force in India; but a mistake as to a law not in force in India [that is, mistake of law of the foreign country] has the same effect as a mistake of fact. For example, X and Y enter into a contract on the erroneous belief that a particular debt is time-barred by the Indian Law of limitation; the contract entered into is not voidable. Section 22 says that a contract is not voidable merely because it was caused by one of the parties to it being under mistake as to a matter of fact. Mistake of law and mistake of fact From the above mentioned provisions of the Act, we can broadly classify the mistake as (a) Mistake of law and, (b) Mistake of fact. As far as mistake of law is concerned, we have to remember one important maxim which is the well settled rule of law; namely, "Ignorantia juris not excusat". This means ignorance of law is no excuse. A party cannot get any relief on the ground that


he had done a particular thing or performed a particular act in ignorance of law. A contract cannot by avoided merely on the ground of mistake. For example, Mr. Amit buys a watch thinking that it is worth Rs. 1,5007- but its actualprice is Rs. 500/- only. The agreement cannot be avoided only on this ground of mistake. As far as mistake of fact is concerned we must remember the following two principles which are contained in Sections 20 and 22. (i) Where both the parties to an agreement are under a mistake as to a matter of fact essential to an agreement, the agreement is void. Thus, both the parties to an agreement must be under mistake and the mistake must relate to a matter of fact essential to the contract and (ii)

A mistake by one of the parties also does not affect the validity of a contract

Unilateral mistake : Where one of the parties to a contract is at mistake about the value or quality of the subject matter and about understanding the terms and conditions or legal effects of the agreement, such mistake is known as unilateral mistake. Generally, unilateral mistake is not allowed as a defence to avoid contract. For example, X sells his motor car to Y for an intended amount of Rs. 95,0007- but by mistake, he informs Y in writing the price of a car as Rs. 85,0007-. X cannot plead mistake as his defence to avoid the agreement. But in following cases, a unilateral mistake makes the contract void. (a) Mistake as to the identity of the person contracted with. (b) Mistake as to the nature of contract. Bilateral mistake : When _b«th the parties to an agreement are under a mistake, there is said to be the bilateral mistake and if a mistake is bilateral, the agreement is void. For a bilateral mistake, mistake must be mutual and must relate to a matter of fact essential to an agreement. Bilateral mistakes may be mutual mistakes or common mistakes. Bilateral mistakes also can be (a) as to possibility of performance, and (b) as to the subject matter. Mistake as to the possibility of performance : If, for performance of a contract, certain conditions or circumstances are essential to be in the existence and in fact they are not in existence and parties to the contract are also ignorant about that, such 47

Business Law

a contract is void on the ground of mistake. Such impossibility can be a legal impossibility and physical impossibility. For example, G hired a room from B for coronation procession of Edward King. It was not known to G as well as B that the procession was already cancelled and therefore the contract was declared void. Mistakes as to the subject matter: When both the parties to a contract are working under a mistake relating to the subject matter, such contract is void. Mistake as to subject matter may be of the following type: (i) Mistake regarding the existence of the subject matter : When both the parties to a contract believe that the subject matter of the contract is in existence, but in fact at the time of contract it is not so, the contract is void. For example, X purchased from Y a cow which was dead at the time of the contract. (ii) Mistake regarding identity of the subject matter : This happens when one of the parties to an agreement intends to deal in one thing while the other party in another thing. In one case (Raffle vs. Wichel Hans], X agreed to purchase from Y a cargo of certain goods to arrive from Mumbai. In fact there were two ships of the same name sailing about the same time from Mumbai, and both X and Y had a different ship in mind. It was held that there was mutual or bilateral mistake and therefore the contract was void. (iii) Mistake regarding the quantity of the subject matter : An agreement is void, if both the parties are under mistake as to the quantity of the subject matter. For example, X wanted to buy T. V. sets and so he enquired about the price stating that he might purchase eleven. On receipt of the reply to the enquiry, he placed on order to 2 T.V. sets by telegram. The person sending the telegram sent the telegram as "Supply T.V, sets" by mistake. On the basis of this telegram, the seller of the T.V. sets supplied eleven T.V. sets. X accepted only two T.V. sets and returned the remaining. The seller filed a suit against X for non-acceptance of all the T.V, sets. It was held that on account of the mistake of the third party (the person sending the telegram), the loss was caused and X was not responsible for that and therefore there was no contract. (iv) Mistake regarding the quality of the subject matter: When both the parties under mistake regarding the quality of the subject matter, the agreement is void. In Nicholson vs. Smith case, table napkins were sold in an auction sale by describing the same as "With the crest of Charles I and the authentic property of

48

Unit 1


that monarch" but in fact the table napkins were Georgian and both the parties did not know of this. It was held that there was the mistake regarding the quality of the subject matter and, therefore, the agreement was void. (v) Mistake regarding the price of the subject matter : If there is a mutual mistake regarding the price of the subject matter of a contract, the contract is void. For example, X wants to purchase the house of Y. Y quotes the value of his house as Rs. 13 lakh but in the sale-deed by mistake, it is written as Rs. 3 lakh only. The contract is void. (vi) Mistake regarding the title of the subject matter : When a seller sells a commodity which does not belong to him and both the parties to the contract work under the mistake, the contract is void. For example, X agrees to purchase a piece of land from Y. It is not known to X as well as'Y that the piece of land belongs to X and thus there is a mistake as to the title of the subject matter. Therefore the agreement between X and Y is void. i *

& Activity O: Mr. Shamrao Garud, being entitled to an estate for the life of Mr. Dada Kokil agrees to sell Dada's estate to Mr. R. N. Upalekar. But Mr. Dada Kokil was dead at the time of agreement and Mr. Garud as well as Mr. Upalekar was not having the knowledge of the fact. Is this agreement void on the ground of mistake, misrepresentation or fraud?

1.9

SUMMARY

The Indian Contract Act, 1872 is the most important Act in the business world. It deals only with the contracts enforceable by law and does not deal in social agreements. Consideration is the essence of a contract. If there is any flaw in the consent, the agreement will not be enforceable by law. 49

Business Law

1.10 SELF-ASSESSMENT QUESTIONS Q1.

Discuss fully classification of contracts from various points of view.

Q2.

What is a contract? Explain the essential requirements of a contract.

Q3.

State and explain the essential elements of a valid contract.

Q4.

Define and explain the term offer or proposal and discuss the essentials of a valid offer.

Q5.

Define and explain the term acceptance. Who can accept an offer? What are the rules of a valid acceptance?

Q6.

Explain the provisions of Indian Contract Act, 1872 regarding communication of offer, acceptance and revocation.

Q7.

Define consideration. Why is it essential in a contract? Enumerate essential elements of a valid consideration.

Q8.

"A contract without consideration is void". Discuss.

Q9.

Explain the exceptions to the rule of 'No contract, no consideration."

Q10. What do you understand by capacity of parties? Discuss the provisions of the Contract Act relating to a minor' s agreement. Q11. Can a minor be a promisee? Give reasons. Q12. (a) (b)

Discuss the provisions of the Indian Contract Act, 1872 relating to (1) persons of unsound mind and (2) idiots. Who are the persons disqualified from contracting by the law?

Q13. Discuss the circumstances under which a consent is said to be free. Q14. Define coercion and explain its characteristics. Q15. Define undue influence and enumerate its important elements. Ql 6. Under what circumstances does the law presume a person to be in a position to dominate the will of the other party? Q17. Distinguish between coercion and undue influence. Q18. Define 'fraud'. Explain the essential elements of fraud.

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Business Law

2.1

INTRODUCTION

The first unit deals with the creation of a contract, its nature and classification. The second unit states that beside all essential elements, the object of the contract must be lawful. This unit speaks about agreements which are not enforceable by law. Such agreements are called void agreements. Some agreements are dependent on the happening and not happening of an event. The second unit also covers termination of contract by performance and other ways. 2.2

LEGALITY OF OBJECT AND CONSIDERATION ___________________

Besides mutual consent of the competent parties to a contract, it must have a lawful object too. An agreement is not enforceable, if its object is unlawful. Thus consideration for an agreement is lawful but if the purpose of the agreement is not, the agreement is void and, therefore, the object and the consideration of an agreement must be lawful. Section 23 of the Indian Contract Act, 1872 makes clear as to what considerations and objects are lawful and what are not. Section 23 states that "the consideration or an object of an agreement is lawful, unless: 1.

It is forbidden by law; or

2. 3.

It is of such nature that, if permitted, it would defeat the provisions of any law; or S^ ; It is fraudulent; or

4.

It involves or implies injury to the person or property of another; or

5.

The court regards it as immoral; or

6.

The court regards it as opposed to public policy.

1.

The object or consideration of an agreement is unlawful if it is forbidden by law Any object or consideration is considered to be forbidden by the law if it is punishable under any Act of the country for the time being in force e.g., if X agrees to provide an employment to Y in the public service provided Y pays Rs. 5,0007- to X. This agreement is void because the consideration is not lawful;

54

Indian Contract Act, 1872 - Part II

-gT Activity A: Mr. Lai agrees to sell a motor car to Mr. Campak for Rs. 1 lakh knowing that the car is a tolen one. Is the contract valid or is it void?

The object or consideration of an agreement is unlawful if it would defeat the provisions of any law The object or consideration of an agreement is unlawful if it is of such nature that it would defeat the provisions of any law, if permitted, and, therefore, such agreement ;s void. In one case, X agreed to enter a corporation's services in consideration of a daily wage of Rs. 50/-, and a daily expenses of Rs. 25/-. X and the corporation knew that the expense allowance was the way to evade taxes and also to conceal incomes. The agreement was declared as unlawful as efforts were made to defeat the provisions of the Income Tax Act. The object or consideration of an agreement is considered as unlawful if it is fraudulent If the object of an agreement is to deceive or cheat the other party by concealing any material fact related to an agreement, such agreement is unlawful. For example, X md Y enter into a partnership and decide to acquire certain goods by fraud, and distribute the profits thus earned. The agreement is void as its object is not lawful. The objective or consideration of an agreement is unlawful if it implies injury o any person or property of someone 11" there is an agreement to damage or to cause any damage to the property or cause my harm to any person, such agreement is void. For example, if the owner of a newspaper enters into an agreement with the printer to indemnify him against any •[aim arising from libel printed in the newspaper, such agreement is void. If the court regards a consideration or an object immoral, such agreement is unlawful Following agreements are considered illegal for immorality: Agreements wherein the consideration is an act of sexual immorality. For example, if X agrees to let her relative to Y for concubinage, the agreement entered into for this purpose is void on the ground of immorality.

Business Law

(b) Agreements wherein the object is the furtherance of sexual immorality. For example, if X knowingly agrees to let out his garret for prostitution, the agreement is void because its purpose is not moral. 6.

When the court regards a consideration or an object of an agreement as opposed to public policy, such agreement is unlawful Public policy is that principle of law which states that nobody can lawfully do something or anything which may be injurious to the public or to the public good or public welfare. An agreement is considered to be opposed to public policy when it causes harm to the public welfare or public good. All agreements causing harm to public good are unlawful. Following are some of the agreements which are opposed to the public policy and therefore are void. (A) Agreements to commit crimes are void. If the consideration of an agreement is to commit any crime, such agreement is opposed to the public policy. For example, if X gives a promise to Y to indemnify in consideration of his beating N. This agreement is opposed to public policy. (B) Agreements with enemy are void. If someone enters into an agreement with enemy to trade in goods without prior permission and without obtaining licence from the proper authority of Indian Government, such agreement is void. (C) An agreement barring a right of legal proceedings of any person is void [Section 28]. (D) An agreement in restraint of trade is void. Every person has a right to carry on lawful trade or business or to do any lawful occupation and therefore agreements entered into in restraint of trade are void [Section 27]. (E) Wagering agreements are not only void but also illegal also. This means the agreements to pay money or money's worth dependent upon the happening or non-happening of particular event or events are void. No suit can be filed to recover anything alleged to be won on the wager. (F) Agreements interfering an administration of justice are void. Such agreement may take any of the following forms: (i) Stifling prosecution: Any agreement not to prosecute an offender or criminal is an agreement for stifling prosecution and, therefore, unlawful and void. (ii) Interference with the course of justice: An agreement obstructing or interfering the ordinary process and procedure of justice is unlawful and void. For example, agreements of giving bribes, threatening witnesses, pleaders etc.

56

Unit 2


(G) Agreements by way of champerty and maintenance are not absolutely void. If the object of entering into such agreements is not immoral, they are valid. An agreement whereby one person agrees to assist another in the process of recovering money or any other property and to share the proceeds thus acquired is called champerty. When a person has no legal interest in the subject matter but still he agrees to give some sort of assistance to help the other person to bring a legal action, this is known as maintenance. (H) Agreements tending to create interest opposed to duty are unlawful. If any person enters into an agreement whereby he is supposed to do something which is opposed to his duty, such agreement is void. (I) The agreements not to plead the bar of limitation to claims are void as they defeat the provisions of the law of limitation. (J) Agreements interfering with marital duties are unlawful and therefore void. These agreements include promises by a married person to marry during the lifetime or after the death of their wives, agreements to lend money to women in consideration of their getting divorces and marrying the lenders etc. (K) An agreement which a person promises in return to procure the marriage of another person for some monetary consideration is void as it is opposed to public policy. (L) According to Section 26 of the Act, every agreement in restraint of the marriage of any person, other than a minor, is void as the law considers marriage as the right of every person. £$ Activity B ;

Kalidas and Tulsidas were two good friends. Both of them decided to start a new business together. Thus both of them executed a partnership agreement for their new business of estate agency and both decided to purchase land from the poor villagers on the rate lower than the of market value by making them fool with an idea to earn more money. Is this fagreement is valid or a void agreement?

or

57

Business Law

Unlawful and illegal agreements An unlawful agreement is not enforceable by law and void while an illegal agreement is not only void but the collateral transactions to it become infected with illegality. Every illegal agreement is unlawful but every unlawful agreement may not be necessarily illegal. Illegal acts are those which involve the commission of some sort of crime or may contain an element of obvious moral turpitude. Unlawful acts are those which involve non-criminal breach of law and are disapproved by law on some ground of public policy. Agreements opposed to public policy are unlawful. For example, Y promises to look after X's son and X promises to Y to pay Rs. 5007- per month for that purpose. Here, the promise to each party is the consideration for the promise of other party and hence, they are lawful considerations. J&Z Activity C:

Sharad, Bujang and Ratan are three friends. They are engaged in the business of real estate. During the sale of property situated at the Shanty Nagar, the three friends misappropriated the amount received from the purchaser and decided to share amongst them. Is it a valid agreement? Why?

2.3

VOID AGREEMENTS ________________________________________

All agreements entered into are not enforceable by law. The agreements which are not enforceable by law are said to be void [Section 2 (g)], and such agreements do not give rise to any legal consequences. All agreements which are opposed to public policy are void. Following agreements have been expressly declared to be void by the Indian Contract j Act, 1872. (A) Agreements by incompetent parties [Section 11],

Unil2

Indian Contract Act, 187-2 - Part II

(B) Agreements made under mutual mistake of facts [Section 20], ( C) Agreements where the consideration or obj ect of which is unlawful [Section 23] , (p) Agreements where the consideration or object is partly unlawful [Section 24], (E) Agreements entered into without any consideration [Section 25] , ) Agreements made in restraint of marriages [Section 26] , (G) Agreements made in restraint of trade, business, occupation [Section 27], 1) Agreements in restraint of legal proceedings [Section 28], ) All agreements, the meaning of which is not certain [Section 29] , ( J ) Wagering agreements [Section 30] , \) Agreements contingent on impossible events [Section 36], ' L) Agreements to do an act impossible in itself [Section 56] . here is a difference between a void agreement and a void contract. An agreement not nforceable by law is said to be void [Section 2 (g)] while a contract which ceases to be nforceable by law becomes void [Section 2 (j)]. Thus, an agreement may be void ab : \itio and no contract can be entered into between the parties. A void contract may be erfectly enforceable at law when it is formed but subsequently may become void. ,4

CONTINGENT CONTRACTS

Contracts are of twpjypes : -vft^- Trvtrf^

f

a) Absolute contracts; and b) Contingent Contracts.

^

a an absolute contract, a promisor binds himself to perform an act or whatsoever without my condition or conditions. For example, if X agrees to sell Y his cycle for Rs. 5007- on 5th August 1992 the contract is absolute. In a contingent contract, a promisor agrees to lerform a particular act at the happening of a particular event. If the event does not happen, he contract is not enforceable. 59

Business Law

Activity D : Mr. Pal.contracts to pay Mr. Nath Rs. 1 lakh if Asha's house is destroyed. Is it a contingent contract or waging contract? Give reasons ?

1.

Meaning and the essential characteristics of a contingent contract Provisions related to the contingent contracts are contained in Sections 31 to 36 of the Indian Contract Act, 1872. Section 31 defines a contingent contract as follows: "A contingent contract is a contract to do or not to do something, if some event, collateral to such contract, does or does not happen." Thus following are the essential characteristics of a contingent contract. (A) A contingent contract is a contract. (B) Performance of a contract depends upon happening or not happening of some event in the future. For example, X agrees with Y that X will sell him an automatic machine for Rs. 50,000/- on 15-th August 1992 if X gets the imported automatic machine before that date. Here in this contract, performance of X depends upon a certain future event which may or may not happen. X shall perform the contract if he gets the imported automatic machine, otherwise not. Thus, this dependence on some future event distinguishes a contingent contract from other contracts. (C) The event which is to take place must be uncertain. If the event is certain, contract has got to be performed and then it cannot be termed as a contingent contract. (D) The event must be incidental to the contract. Here an event also includes an act and a collateral event. This means any event which is neither a performance directly promised as a part of a contract, nor is it the whole of the consideration for a promise. The performance of a contingent contract depends upon the happening or non-happening of an event which is collateral to such contract. (E) A promise to pay what a third party shall determine is perfectly valid in a contingent contract. For example, promises to pay under various insurance policies subject to the rules of the L.I.C.; Assurance Companies are valid promises.

60


Rules regarding contingent contracts These rules are contained in Sections 32 to 36 of this Act which are as follows : A) According to Section 32, "Contingent contracts to do or not to do anything if an uncertain future event happens, cannot be enforced by law unless and until that event has happened. If the event becomes impossible, such contracts become void." In the following examples, there is a condition precedent on the happening of which there would arise the liability or responsibility of the promisor. For example, X enters into a contract with Y to purchase his car if X survives N. This contract is not enforceable unless and until N dies during the lifetime of X. B) Section 33 states that "Contingent contracts to do or not to do anything if an uncertain future event does not happen can be enforced when the happening of that event becomes impossible and not before that." This section suggests that there is a condition subsequent on the happening of which there would arise the liability of apromisor. Following examples makes the meaning of this section clear. X promises to pay Y Rs. 5,0007- if certain aeroplane does not arrive at Mumbai. The aero plane crashes when on the way to Mumbai. This contract is enforceable. i C) Section 34 is related to the contract of a person at unspecified time. It states, "If the future event on which the contract is contingent is the way in which a person will act at an unspecified time the event shall be considered to become impossible when such person does anything which renders it impossible that he should so act within any definite time or otherwise than under future contingencies." For example, X promises to pay Y a sum of Rs. 10,0007- if he marries N. N marries W and therefore the marriage of Y with N is not at all possible. The only possibility is that W may die and then only N may marry Y. (D) Section 35 makes clear as to when contracts become void which are contingent on happening of specified event within fixed time. According to Section 35 of the Act,' 'Contingent contracts to do or not to do anything if a specified uncertain event happens within a fixed time, become void if, at the expiration of the time fixed, such event has not happened, or if, before the time fixed, such event becomes impossible." Section 35 further lays down that "Contingent contracts to do or not to do anything if a specified uncertain event does not happen within a fixed time, may be enforced by law when the time fixed has expired and such event has not happened, or, before the time fixed has expired, if it becomes certain that such event will not happen." For example, X promises to pay Y 61

Business Law

Rs. 50,0007-, if a certain ship does not return within six months. The contract is enforceable if the ship is destroyed or sunk or burnt within the period of six months or the ship does not return within six months. (E) Section 36 provides for the agreements contingent on impossible events. Agreements contingent on impossible events are void. Section 36 states that, "Contingent agreements to do or not to do anything, if an impossible event happens, are void, whether the impossibility of the event is known or not known to the parties to the agreement at the time when it is made." For example, X promises to pay Y Rs. 5, 0007- , if two straight lines should enclose a space. The agreement is void on the ground of impossible events.

Activity E : My grandfather is fond of horses. He has already got one good horse for running in the race. Mr. Kate has a horse which has a good record in the race. He wanted to sell his horse due to some financial problem. He already made an offer to Mr. Prashant to buy his horse. My grandfather entered into a contract to buy Mr. Kate's horse at a specified price of Rs. 5,00,0007-, if Mr. Prashant, to whom the horse has been offered, refuses to buy it. Under what circumstances can this contract be enforced by law?

Wagering agreement and Difference between contingent contract and a wagering agreement A contingent contract is a contract to do or not to do something if some event collateral to such contract does or does not happen. While a wager is an agreement between two parties by which one party promises to pay either money or money's worth on happening of some uncertain event in consideration of the promise of the other party to pay, if the event does not happen. X and Y, for example, enter into an agreement which provides that if Indian team wins the international match, X will pay Rs. 5007- to Y and if India loses, Y will pay X Rs. 5007-. It is a wagering agreement. Here X is to win and Y is to lose or vice versa upon the future event which at the time of agreement is of an uncertain nature. Following are the important elements of a wagering agreement, (a) There must be a promise to pay either cash or money's worth. 62

Unit 2


(h) The promise must be conditional one. (c) An event must be uncertain. (d) Each party to an agreement must stand to win or lose under the terms of agreement. (e) There should be no control of any party on the event. ^^ ft) There should not be any proprietary interest in the event. The stake should be the only interest of the parties entering into an agreement and, therefore, a contract of insurance is not considered as a wagering agreement. (g) Agreements by way of wager are void and no suit can be brought of recovering anything alleged to be won on any wager. The important points of distinction between a wagering agreement and a contingent contract are as under: A Wagering Agreement

I. A wagering agreement is an agreement between two parties wherein one party promises to pay money or money's worth on happening of some uncertain event in consideration of other party's promise to pay if that event does not take place [Section 30]. 1 Every wagering agreement is of a contingent nature. A wagering agreement is absolutely void and illegal. Wagering agreements always consist of reciprocal promises. 5. The future event is the sole determining factor in an wagering agreement. 6. Except for winning or losing of money or money's worth, the parties to a wagering agreement have no other interest in the subject matter. 7 In a wagering contract, none of the parties intends to perform the contract itself. They are only interested to pay or receive money or money's worth and therefore a wagering agreement is considered as a game of chance. 4

Contingent Contract It is a contract to do or not to do something, if some event, collateral to such contract, does or does not happen. [Section 31}.

2

Every contingent contract may not be of a wagering nature. 63

Business Law

3.

A contingent contract is valid.

4.

Contingent contracts may not contain reciprocal promises.

5.

In a contingent contract, the future event is collateral.

6.

Parties to a contingent contract have some interest in the subject matter. In the absence of such interest in the subject matter, a contingent contract may turn to be of a wagering nature.

7.

In a contingent contract, parties intend to perform the contract itself.

2.5

PERFORMANCE OF CONTRACT

We know that every contract creates some sort of legal obligation which continues till the contract is either performed or discharged. Performance of the contract is the natural end and usual way of extinguishing an obligation. Performance of a contract implies fulfillment of the terms and conditions or obligation of the contract by the respective parties to the contract within the time and in the manner prescribed. Section 37 para 1 of the Indian Contract Act, 1872 lays down that, "The parties to a contract must either perform or offer to perform their respective promises, unless such performance is dispensed with or excused under the provisions of this Act, or of any other law". Thus, the performance of contract may be (a) actual performance or (b) attempted performance. A party to a contract is said to have actually performed his promise when he has done something that he has undertaken or promise to do. For example, X promises to find out the lost motor car of Y for a sum of Rs. 500/-. Here the nature of contract is such that X should actually perform his part. If X finds out Y's motor car and gives the same in the possession of Y, it is said that X has actually performed his promise and it is Y's responsibility to pay X Rs. 5007- as agreed upon. In some cases, it so happens that the promisor offers to perform his obligation under the contract as per terms of the contract, but the performance is not complete unless the offer of performance is accepted by the promisee. This is known as an attempted performance of tender. An offer to perform one's obligation under a contract is called tender. The nature of a contract decides whether it requires actual performance or attempted performance. In the above paragraph, actual performance is required for fulfilling the; contract. Suppose X agrees to sell ten heavy chairs to Y on 17th August, 1992. It is also agreed that Y will send his servant to take the delivery on that date. This contract requires!

64

Unit 2


that X should first make an offer of performance to Y on 17th August, 1992. If Y (the promisee) refuses to accept a valid offer of performance of the contract made by X (the promisor), X shall be discharged from the responsibility for the non-performance of the contract without prejudicing his rights against Y. Thus, a valid tender of performance if rejected by the other party, is regarded as equivalent to the actual performance of the contract and the person making the valid tender of performance can bring a suit for the breach of the contract against the promisee. Section 38 clearly mentions that where a promisor has made an offer of performance to the promisee, and the offer has not been accepted, the promisor is not responsible for non-performance, nor does he thereby lose his rights under the contract." 2.6

KINDS OF TENDER

Tender or attempted performance is of two kinds : (a) Tender of goods and, (b) Tender of money. A contract involving the delivery of goods is completely discharged by tendering the goods for acceptance as per the terms and conditions of the contract. If the promisee refuses to accept the goods, the promisor need not offer them again and he is discharged. He can institute a suit for non-acceptance or he can defend an action for non-delivery. Tender of money is another way of discharging a contract. But where a sum of money is due, tender by the debtor, if refused by the creditor, does not operate as a discharge. However, interest on debt immediately ceases to accrue from the date of the rejection of a valid tender of money. 1.

Essential conditions of a valid tender Essential conditions or requisites of a valid tender are contained in Section 38 which is as follows: "Where a promisor has made an offer of performance to the promisee, and the offer has not been accepted, the promisor is not responsible for non performance, nor does he thereby lose his rights under the contract. Every such offer must fulfill the following conditions: (A) It must be unconditional; (B) It must be made at a proper time and place, and under such circumstances that the person to whom it is made may have a reasonable opportunity of ascertaining

65

Business Law

that the person by whom it is made is able and willing there and then to do the whole of what he is bound by his promise to do; (C) If the offer is an offer to deliver anything to the promisee, the promisee must have a reasonable opportunity of seeing that the thing offered is the thing which promisor is bound by his promise to delivery. An offer to one of several joint promisee has the same legal consequences as an offer to all of them. Following are the essential requisites or conditions of a valid tender: Tender must be unconditional: A tender coupled with a condition is not a valid tender. It becomes conditional when it is not according to the terms of the contract. Mere demand for the receipt of the amount offered to be paid does not make the tender conditional. For example, X is the debtor and Y is the creditor. X offers to pay Y an amount of Rs. 5,0007- due to her, provided N sells his house at cost to him. This tender cannot be termed as valid as it is a conditional one. Tender must be an offer to perform in full: It is not a valid tender if an offer to perform promise is in part. For example, X, the sugar king, agrees to deliver 1000 quintals of sugar to Y on 20th November, but in fact, offers only 570 quintals of sugar to Y on the due date. This tender is not valid and Y has every right to refuse to accept the delivery in part. Tender for the delivery of goods must be for the quality and quantity as per the terms and conditions of the contract Tender must be made at the proper place as well as at the proper time : A tender of goods or money must be made at the proper place [i.e., where the person concerned generally carries on his business and at the proper time [i.e., during the business hours]. Proper time may mean stipulated times as mentioned in the contract. Suppose X has borrowed Rs. 5,000 from Y payable on 31 st December, 1999 with interest. If X offers to pay Y on 1 st August, 1999 the amount of the loan along with the interest, Y is not bound to accept the same. It is an invalid tender as it is not made at the appointed time. Tender must be made to a proper person : The proper person can be the promisee himself or his duly authorised agent. 6 6

1.

Unit 2


Tender must be in the proper form. Tender must be made by a person who is in a position and is willing to perform the promise. If there are several joint promises, a tender may be made to any one of them. Reasonable opportunity : A promisee or his agent must get sufficient time and a reasonal opportunity for inspecting the goods in case of tender of goods and in case offender of money, tender must be of precise and full amount and also in terms of legal tender money only. 2.7

EFFECT OF REFUSAL OF APARTY TO PERFORM PROMISE WHOLLY

According to Section 39 of this Act, "When a party to a contract has refused to perform, or disabled himself from performing his promise in its entirety, the promisee may put an end to the contract, unless he has signified, by words or conduct, his acquiescence in its continuance." For example, X, a singer, enters into a contract with Y, the manager of a theatre, to sing at his theatre two nights every week during the next two months, and Y engages to pay her 1,000 rupees for each night's performance. On the sixth night, X willfully absents herself from the theatre. Y is at liberty to put an end to the contract.

& Activity F; Nisha, a singer, enters into a contract with John, the manager of a theatre, to sing at his theatre two nights in every week during the next two months, and John engages to pay her at the rate of 1,000 rupees for each night. On the sixth night, Nisha willfully absents herself. With the assent of John, Nisha sings on the seventh night. John has signified his acquiescence in the continuance of the contract. Is John is entitled to compensation for damage sustained by him through Nisha's failure to sing on the sixth night?

le tth itb ide

I.

CONTRACT WHICH NEED NOT BE PERFORMED There are certain contracts which need not be performed:

isee

(A) When performance of a contract become impossible, such contract need not be performed, [Section 56].

6 7

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(B) When there is an agreement between the parties to a contract to substitute a new contract for it or to rescind the old contract or alter it, there is no need to perform the original contract [Section 62]. (C) When every promisee may dispense with or remit, wholly or in part, the performance of the promise made to him, or may extend the time for such performance, or may accept instead of it any satisfaction which he thinks fit, such contract need not be performed [Section 63]. For example, X promises to paint and mount a picture in a frame for Y. If Y forbids X to do so, X is not bound to perform the promise. (D) When a person, at whose option a contract is voidable, rescinds it, the other party thereto need not perform any promise contained therein in which he is promisor. Such contract need not be performed [Section 64]. (E) If any promisee neglects or refuses to afford the promisor reasonable facilities for performance of his promise, the promisor is excused by such neglect or refusal as to non-performance caused thereby. For example, Mr. X enters into contract with Mr. Y to repair Mr. Y's house. If Mr. Y refuses to point out to Mr. X the places which requires repair, Mr. X is excused for non-performance j of the contract.

2.

Who can demand performance? It is only the promisee who is entitled to demand performance of the promise. It is i immaterial whether the promise is for the benefit of the promisee or for any other j person. Even if the promise is made for the benefit of the third party, he cannot j demand performance of the contract. For example, X agrees with Ramesh thaU desired by Ramesh, X will sell his house to Y. If X refuses to fulfill this contra (selling of his house to Y), it is only Ramesh who can bring an action against X.J Suppose M promises N to pay Rs. 1,0007-, to P and M does not pay Rs. 1,0007- to 1 P. It is only N and not P who can take action for not maintaining the promise against | M. But on the death of the promisee, his legal representatives can demand the] performance unless the contract requires personal skill or taste. When the promise is made with two or more promisees jointly and unless a contrary 1 intention appears from the contract made, the right of claiming performance of the | contract rests with all the joint promises jointly. In case of death of any of the joint] promisees, the right to claim performance rests with the legal representatives of sue deceased person jointly and that too with the survivor or survivors. If all the join

68


promisees die, the right to claim of performance rests with the representatives of all promisees jointly.

By whom must contracts be performed? Promisor, Agent, Legal Representative, Third Person, and Joint Promisor can perform the contracts. Promisor [Section 40]: If a particular contract requires personal skill, taste or art and if it appears from the nature of the contract that the promise must be performed by the promisor only, such contract must be performed by the promisor. Suppose X is the renowned painter and he promises to paint a picture for Y. Here X must paint the picture and perform his promise personally. Agent [Section 40]: If for the performance of a contract personal skill, taste is not required, such contract can be performed by an agent appointed by the promisor. If X promises Y that he (X) will make available some furniture, which he possesses, it is not necessary that X should carry the furniture. X may perform his promise by asking N, his manager, to make necessary arrangements to send the goods.

Legal representative [Section 37, 2nd para] : In the event of the death of the promisor, the promisee can compel the legal representative or legal representatives, as the case may be, to perform the promise unless it involves personal skill, taste etc. of the promisor. Of course, the responsibility and liability of the legal representatives to fulfill the contract is not personal but shall be limited only to the extent of the value of the property of the deceased promisor. For example, X promises to deliver goods >f Rs. 5,0007- to Y on 15th August. But before he delivers the goods, he dies. It is the csponsibility of the legal representatives of X to deliver the goods to Y as per the :ontract, and Y is also bound to pay the price which is already determined. But if X >romises to paint a picture for Y for Rs. 5,0007- and if X dies before painting the licture, the contract cannot be enforced either by the representatives of X or by Y as I requires personal skill. Third person [Section 41]: According to Section 41 of this Act, "When a promisee accepts performance of the promise from a third person, he cannot afterwards enforce t against the promisor. In Lata Kapurchand vs. MirNawab, wherein a promisee iccepted a lesser amount from the third party in full settlement of the debt. It was teld that the promisee could not enforce the promise against the promisor. Joint promisors [Section 42 to 44]: There may be agreements of joint promises. The rules regarding joint promises are contained in Sections 42 to 45 of the Indian 69

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Contract Act. Section 42 lays down, "When two or more persons have made a joint promise, unless a contrary intention appears by the contract, then all such persons must jointly fulfill the promise. Upon the death of one of the joint promisors, his liability devolves upon his legal representatives and they become liable to perform the contract jointly with the surviving parties. If all the people die, the liability devolves upon their legal representatives jointly. But the liability of legal representative is not personal and is limited to the assets obtained from the deceased. Moreover the liability for performance of contracts requiring personal skill does not fall on the legal representatives of the deceased. Thus, Section 42 of the Indian Contract Act deals with the voluntary discharge of liabilities of the deceased by the joint promisors. But if they do not discharge their obligations on their own, Section 43 of the Indian Contract Act can be applied. It states three rules regarding the performance of joint promises: Any one of joint promisors may be compelled to perform : When two or more persons make a joint promise, the promisee may, in the absence of express agreement to the contrary, compel any one or more of such joint promisors to perform the whole of the promise [Section 43, para I]. Each promisor may compel contribution : Each of two or more joint promisors may compel every other joint promisor to contribute equally with himself to the performance of the promise, unless a contrary intention appears from the contract [Section 43, para II]. Sharing of loss by default in contribution : If any one of two or more joint promisors makes default in such contribution, the remaining joint promisors must bear the loss arising from such default in equal shares [Section 43, para III]. Nothing in this section shall prevent a surety from recovering, from his principal,; payments made by the surety on behalf of the principal, or entitle the principal to recover anything from the surety on account of payments made by the principal [Explanation to Section 43]. From the provisi ons of Section 43, i t becomes clear that (A) Any one of the joint promisors may be compelled to perform the whole of the promise. This means the liability of joint promisors is joint and several. For example, suppose X, Y, M and N jointly promise to pay Mr. ARs. 5,0()0/-.; Mr. A can compel either X or Y or M or N to pay him the amount due.

70


(B) A joint promisor who is compelled to perform the whole of the promise may claim or compel contribution. For example, X, Y, Z are under a joint promise to pay Rs. 6,0007- to Mr. A. X is compelled to pay the whole amount of Rs. 6,0007- to Mr. A. Now X may recover Rs. 2,0007- each from Y and Z. (C) If any one of two or more joint promisor make/s defaults in such contribution, the remaining joint promisors have to bear the loss arising from such default in equal shares. For example, X, Y and Z are under a joint promise to pay Rs. 8,0007- to Mr. N. X, being insolvent, is unable to pay anything and Y is compelled to pay the whole amount of Rs. 8,0007-. Y is entitled to receive Rs. 4,0007- from Z. 2.8

EFFECT OF RELEASE OF ONE OF THE JOINT PROMISORS [SECTION 44} _____________________________________________

Section 44 of the Indian Contract Act, 1872 states that, "Where two or more persons lave made a joint promise, a release of one of such joint promisors by the promisee dose sot discharge the other joint promisor or joint promisors; neither does it free the joint promisor so released from responsibility to the other joint promisor or joint promisors." Suppose there are three promisors, A, B and C who jointly have to pay Mr. N Rs. 5,0007-. Mr. N releases B from his liability and brings a suit against Aand C in the court of law for he payment of the debt of Rs. 5,0007-. In this case, though Mr. N releases B from the lischarge of the debt, B is not discharged from his liability to Aand C for contribution.

!.

Devolution of joint rights [Section 45} Section 45 of the Indian Contract Act, 1872 states that, "When a person has made a promise to two or more persons jointly, then, unless a contrary intention appears from the contract, the right to claim performance rests, as between him and them, with them during their joint lives, and, after the death of any of them, with the representative of such deceased person jointly with the survivor or survivors, and after the death of the last survivor, with the representatives of all jointly." For example, X promises M and N who jointly have lent X Rs. 30,0007- to repay the amount of debt along with the interest accrued on 15th June N dies. The right to claim performance rests with Y who is N's legal representative jointly with M during N's life and after M's death, with the representatives of N and M jointly.

2.9 -or

RECIPROCAL PROMISES AND RULES REGARDING THEIR PERFORMANCE ______________

According to Section 2 (f) of the Indian Contract Act, 1872, promises which form the consideration or part of the consideration for each other are called reciprocal promises. If 7 1

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X promises to do or not to do something in consideration of Y's promise to do or not to do something, the promises of X and Y are reciprocal. Such promises are mutual promises. Reciprocal promises have been classified by Lord Mansfield in Jones vs. Barkely as follows: (A) Mutual and independent promises: In such cases, each party has to perform his promise without waiting for the performance or willingness to perform by the other party. Suppose X agrees to buy goods and pay its price of 15th August. Y also agrees to supply the goods on 1 Oth August. The promises are independent and mutual. (B) Mutual and concurrent promises : When promises are to be performed simultaneously, they are called mutual and concurrent promises. X promises to sell a car to Y for Rs. 50,0007- and Y is to pay its price to X on delivery. The promises are mutual and concurrent. (C) Conditional and dependent promises : In such cases, one party's performance of promise depends on the prior performance of promise of the other party. X promises to construct a factory for Y and Y also agree to make available the raw materials as and when required for constructing the factory. The promises given in this case are conditional and dependent. If Y does not make available necessary raw materials, X cannot fulfill his promise. Rules regarding performance of reciprocal promises are contained in Section 51 to 54 and 57 of the Indian Contract Act 1872. Accordingly, (A) A Promisor i s not bound to perform his promise unless reciprocal promisee is ready and willing to perform his promise. Section 51 of the Indian Subcontract Act states that 'when a contract consist of reciprocal promises to be simultaneously performed, no promisor need perform his promise unless the promisee is ready and willing to perform his reciprocal promise. For example, X and Y enter into a contract and, accordingly, X is to deliver the goods to Y on the payment of the price by Y on the delivery of goods. It is not necessary for X to deliver the goods unless Y is willing and ready to pay the price of goods on delivery, and Y need not pay for the goods unless X is willing and ready to deliver the goods on the payment of the price of goods. (B) Where the order in which reciprocal promises are to be performed is expressly fixed by the contract, they shall be performed in that order; and where the order is nol expressly fixed by the contract, they shall be performed in that order which the nature of the transaction requires [Section 52]. For example, X and Y enter into the contract. X agrees to construct a factory for Y at a fixed price of Rs. 1 lakh. X's promise to

1

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construct the factory must be performed before Y's promise to make payment of Rs. One lakh for the same. (C) Section 53 makes clear the liability of party preventing an event on which a contract is to take effect. Section 53 is as follows : "When a contract contains reciprocal promises, and one party to the contract prevents the other from performing his promise, the contract becomes voidable at the option of the party so prevented; and he is entitled to compensation from the other party for any loss which he may sustain in consequence of the non-performance of the contract." X and Y con tract that X shall execute certain work for Rs. 2,000/-. Y is ready and also willing to do the work accordingly. But X prevents him to do so. Here, the contract is voidable at the option of Y. If Y elects to rescind the contract, he is entitled to recover compensation from X for the loss incurred by non-performance of the contract. (D) "Where a contract consists of reciprocal promises, such that one of them cannot be performed, or that its performance cannot be claimed till the other has been performed, and the promisor of the promise last mentioned fails to perform it, such promisor cannot claim the performance of the reciprocal promise, and must make compensation to the other party to the contract for any loss which such other party may sustain by the non-performance of the contract" [Section 54]. Thus, when reciprocal promises are of such nature that one of them cannot be performed till the other party has performed his or her promise. If the other party fails to perform his or her promise, the other party cannot claim the performance of the reciprocal promise from the first party. In such a case, the other party has to compensate the first party to the contract any loss incurred as result of non-performance of the contract. For example, Mr. X promises Mr. Y to sell him 1,000 bales of cotton, to be delivered after two days. Mr. Y in return promises to pay Mr. X the price of 1,000 cotton bales within the period of fifteen days. Mr. X does not deliver 1,000 bales of cotton as agreed upon. Mr. Y therefore, need not perform his promise and pay Mr. X the price of cotton Mr. X has to pay the compensation to Mr. Y for non-performance of his promise. (E) Section 57 says,' 'Where persons reciprocally promise, firstly to do certain things which are legal, and secondly, under specified circumstances to do certain other things which are illegal, the first set of promises is a contract, but the second is a void agreement." For example, suppose X and Y agree that X shall purchase Y's house for Rs. 50,0007 - and if X uses the same as a gambling house, he shall pay Rs. 1,00,0007- for it. The first set of promises that is, purchasing of the house for Rs. 50,0007- by X is a contract while the other set of promise (use of the house for gambling) is a void agreement. 73

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2.10 TIME AND PLACE OF PERFORMANCE OF A CONTRACT Time and place of performance of a contract are matters to be decided by the agreement between the parties to the contract. The rules regarding time and place of performance of a contract are contained in Sections 46 to 50 of the Indian Contract Act, 1872. Performance of promise within a reasonable time : Where, by the contract, a promisor is to perform his promise without application by the promisee, and no time for performance is specified, the engagement must be performed within a reasonable time [Section 46]. The question 'what is a reasonable time' is, in each particular case, a question of fact [Explanation to Section 46]. Thus, when no time for performing the contract is specified, a promisor must perform it within a reasonable time. Performance of promise where time and place is specified: When a promise is to be performed on a certain day, and the promisor has undertaken to perform it without application by the promisee, the promisor may perform his promise at any time during the usual hours of business on such day and at the place of which the promise ought to be performed [Section 47]. For example, X promises to deliver goods at Y's shop on 15th August. If X delivers the goods at Y's shop on 15th August during the usual hours of business it is obvious that X has performed his promise. But on 15th August, if X delivers the goods at Y's shop after the usual hours for business, or if he delivers the goods at Y's shop during the usual business hours on 20th August or if X delivers the goods at Y's house on 20th August after the usual business hours, it is clear that X has not performed his promise. Application of performance at proper time and place, that is, on a certain day and at a certain place : "When a promise is to be performed on a certain day, and the promisor has not undertaken to perform it without application by the promisee, it is the duty of the promisee to apply for performance at a proper place and within the usual hours of business" [Section 48]. The question, "What is a proper time and place" is, in each particular case, a question of fact [Explanation to Section 48].

Promisor to apply to the promisee to appoint a place for performance of promise: When a promise is to be performed on a certain day fixed for that purpose, it is the duty or responsibility of the promisor to apply to the promisee to appoint a reasonable place and to perform the promise at that place. Section 49 states that "When a promise is to be performed without application by the promisee and no place is fixed for the performance of the promise, it is the duty of the promisor to apply to the promisee to appoint a reasonable place for the performance of the promise and to perform it at such place." For example, if X promises to Y to deliver 1,000 bales of cotton on affixed day, it is the duty of X to 74

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appoint a reasonable place for the purpose of receiving the same and he must deliver it at that place. Manner or time by promisee to perform a promise : Section 50 lays down that the performance of any promise may be made in any manner or at any time which the promisee prescribes or sanctions, e.g., X owes Y Rs. 3,000/-. Y buys goods worth Rs. 1,0007-from X. The delivery of goods amounts to part payment of debt. 1.

Time of performance of contract The promise must be performed within the specified period. Time is the essence of the contract. A breach of condition as to the time for performance entitles the innocent party to consider the breach as a repudiation of the contract. Section 55 of the Indian Contract Act, 1872 deals with the issues of 'time and the essence of the contract'. It lays down certain rules regarding the effects of failure to perform a contract within the specified time. These rules are given below. (A) Where time is the essence of the contract: In a contract, where time is the essence of the contract and if there is failure to perform the same within the fixed time, the contract becomes voidable at the option of the promisee and he may rescind it and sue for the breach of the contract. But if the promisee accepts the performance after the fixed period, he cannot claim any compensation for the loss incurred by non-performance of the promise at an agreed time. However, at the time of accepting the delayed performance, the promisee can give notice to the promisor or his intention to claim compensation. In a commercial contract, time plays very important role. If the goods are not made available whenever they are required, they may not be sold at a profit or a loss can be incurred. Therefore, in commercial contracts, time is the essence of a contract and must be performed on the date specified or fixed by the parties to the contract. (B) When time is not the essence of the contract: In a contract, where time is not the essence of the contract, failure to perform it within the fixed time does not make the contract voidable, but the promisee is entitled to get compensation for any loss incurred by such failure [Section 55, para 2].

2.11 APPROPRIATION OF PAYMENTS When a debtor has to pay several distinct debts to one and the same creditor and makes payment which is not sufficient to satisfy the whole indebtedness, a question arises as to 75

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which debt or debts, the payment is to be applied. The provisions related to the appropriation of debts are contained in Section 59 to 61 of the Indian Contract Act, 1872. (A) Appropriation by the debtor: Where a debtor, owing several distinct debts to one person, makes a payment to him, either with express intimation, or under circumstances implying, that the payment is to be applied to the discharge of some particular debt, the payment, if accepted, must be applied accordingly [Section 59]. Suppose X owes to Y, the sum of Rs. 5107- among other debts. Y demand the payment of this amount by writing a letter to X and accordingly X makes the payment of Rs. 510/-. This payment, Y must apply to discharge of the debt of which he has demanded the payment. (B) Appropriation by creditor: "Where the debtor has omitted to intimate, and there are no other circumstances indicating to which debt the payment is to be applied, the creditor may apply it as his discretion to any lawful debt actually due and payable to him from the debtor, whether its recovery is or is not barred by the law in force for the time being as to the limitation of suits." [Section 60}. However, a creditor cannot apply the payment made by his debtors to disputed debt or unlawful debt. (C) Appropriation by law : Section 61 clearly states that, where "neither party makes an appropriation, the payment towards debts shall be applied in discharge of debts in order of time, whether they are or are not barred by law in force for the time being as to the limitation of suits. If all the debts are of equal standing, the payment is to be applied in discharge of each of the debts proportionately." (D) Rule regarding the payment of interest and principal when both are due : When the principal amount and interest, both are due, the debtor can stipulate that a particular payment made by him is to be considered as the repayment of the principal amount and the interest remaining due. If the creditor accepts the payment, he has to accept the debtor's appropriation. But if a payment is made without expressly stating its appropriation, it can be applied towards interest first and then the balance to the principal. Assignment of Contract Assignment of contract means the transfer of rights or benefits under a contract in existence. As a matter of fact, there cannot be assignment of contractual liability. But when a promisee agrees to accept performance of a contract from a third party, an original contract is substituted by the new one and the original contract is extinguished along with all its rights

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and obligations. This is technically known as novation. Following important points should be noted in this connection. (1) Contracts which involve personal skill, taste, qualifications cannot be assigned, (2) The liabilities under a contract cannot be transferred, (3) If a contract does not require promisor's personal performance, it may be performed by the agency of a competent person, (4) Rights and benefits under a contract can be assigned, (5) In cases of death, insolvency, assignment by operation of law takes place. 2.11 DISCHARGE OF CONTRACT A contract is said to be discharged, terminated or dissolved when the rights and obligations created by a contract comes to an end. In simple words, discharge of contract means termination of the relationship between the parties to a contract. A contract may be discharged or dissolved in any one of the following ways : (A) By performance of the contract. (B) By agreement. (C) By lapse of time. (D) By operation of law. (E) By breach made by any party to contract. (F) By assignment. (G) By impossibility of performance. (H) By material alteration without the consent of the concerned party. T

he following are the modes of discharging the contracts.

(A) Discharge of a contract by performance : When parties to a contract fulfill their obligations and promises arising under the contract within the specified time and in the manner prescribed, the contract is said to have been performed and discharged. Performance of a contract is the most usual mode of its discharge. Performance may be actual performance or attempted performance. We have already studied the performance of a contract in detail in point No. 1.9. 77

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(B) Discharge of a contract by agreement or consent: Since a contract is created by entering into agreement, it can also be discharged by another agreement between the parties to the contract and such agreement may be express or implied. Eodem mode quo quid constituitur, eodem modo destruitur is the maxim in this regard. It simply means a thing may be destroyed in the same way or manner in which it is created or constituted. This may happen in one of the following ways so far as the discharge of a contract is concerned. (1) Discharge of contract by novation : We have already seen in point 1.9.13 that when a promisee agrees to accept performance of a contract from a third party, an original or old contract is extinguished alongwith all rights and obligations of the old contract. It is technically known as novation. Thus, in other words, novation of contract means a substitution of a new contract in the place of old existing contract. Novation discharges the original contract. New contract can be entered into between the same parties or between different parties but the consideration of the old contract must be mutually discharged. X borrows Rs. 50,0007- from Y under a contract. Thereafter, X, Y and M agree that Y shall henceforth accept M as his debtor and M shall accept Y as his creditor for the payment of X's debt of Rs. 50,0007-. As a result of this new contract, the old debt of X to Y has come to an end and a new debt from M to Y has been contracted. Here one important thing must be noted that novation should take place before the expiry of the time or the performance of the original contract. (2) Discharge of contract by rescission : Rescission simply means cancellation of the contract. It takes place when all or some of the terms and conditions of the contract are cancelled. Thus rescission of a contract may take place in one of the following ways: (a) By the party whose consent is obtained by either fraud or coercion; (b) By the aggrieved party. When any one party to the contract fails to perform his obligation, the other party may rescind the contract without prejudice to his right of claiming compensation of the breach of contract. For example, X promises to purchase napkins from Y who agrees to supply the same on 15th November. But Y does not supply the napkins as agreed upon X may rescind the contract. (c) By the mutual consent of the parties to the contract. For example, X promises to supply Y some fashionable articles one year after the date. If it is found 78


by that time that the articles go out of fashion, they may rescind the contract by consent. (3) Discharge of contract by alternation : Alternation of a contract means change in one or more of the terms and conditions of the contract by mutual consent of the parties to the contract. Alteration and novation are not the one and the same thing. In alternation, there may be a change in one or more conditions of a contract but the parties to the contract remain the same. But in novation, there may be a change of parties also. (4) Discharge of contract by remission : Remission refers to the acceptance of a lesser performance or the fulfillment of the promise made than what was actually contracted for according to Section 63, "Every promisee may dispense with or remit, wholly or in part, the performance of the promise made to him, or may extend the time for such performance, or may accept instead of it any satisfaction which he thinks fit. For example, X borrows Rs. 3,0007- from Y and agrees to repay the loan on 10th August at Y's residence. But X repays Rs. 1,0007instead of Rs. 3,0007- (the full amount of the loan) to Y on 1 Oth August and at Y's residence. Y accepts the amount in full satisfaction of the whole debt. The whole debt, in this case, is discharged by remission. (5) Discharge of contract by waiver: Waiver means the deliberate abandonment of a right by a party to a contract. Sometimes, the parties to a contract decide that they shall not be bound any longer by the contract. This is nothing but the mutual abandonment of rights by the parties to the contract. (6) Discharge of contract by merger: In merger, an inferior right accruing to one of the parties to a contract merges into a superior right accruing to the same party under the same or other contract. For example, X holds a house under a lease. Subsequently if he buys the same, he becomes the owner of the house. His rights as a lessee merge into his rights as an owners. This is a case of merger.

(7) Discharge of contract by owing to the occurrence of an event : If it is agreed that on happening of a particular event, all rights and liabilities should cease and if that event occurs, the contract is discharged. C) Discharge of contract by lapse of time : Every contract must be performed within a specified period or within a reasonable time if the time is not specified. Laps of time discharges the contract. This means after the lapse of time, a contract cannot be enforced in the Court of Law. Thus, if the period of time is lapsed, the contract gets 79

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terminated and the right to bring an action to enforce the contract gets barred under the limitation act. (D) Discharge of contract by operation of law : A contract is terminated by the operation of law in the following cases : (1) Death : In contracts where personal skill or taste or ability is required, the death of the promisor results in termination of contracts. In other contracts where the personal skill or ability is not required, the rights and the liabilities of the deceased person pass on to his legal representative or representatives as the case may be. (2) Insolvency : When a person declared insolvent, he is released from performing his part of the contract by law. Thus, an insolvent is discharged from all liabilities incurred prior to his adjudication. (3) Merger : We have already studied the meaning of merger. It implies that an inferior right accruing to the party to a contract merges into a superior right accruing to the same party under the same or other contract. Thus, inferior rights accruing to a party automatically vanish under an agreement. (4) Complete loss of evidence : If the evidence proving the existence of a contract is lost, it stands terminated.
(5) When the rights and liabilities vest in one and the same person, a contract stands terminated e.g., If a bill of exchange is received by its acceptor, other parties are discharged. (E) Discharge of contract by breach made by one of the parties to a contract : Meaning of breach is failure of a party to a contract to perform his obligations under a contract. Breach of contracts arises in the following ways. (1) Actual Jbreath : It means breach committed by either at the time when the performance of the contract is due or during its performance. Actual breach is also known as present breach. (2) Anticipatory breach : It implies repudiation of an integral part of the contract by the promisor before the actual date of performing the contract [Section 39]. Thus, anticipatory breach takes place when a party to the contract disowns his liability under the contract even before its performance is due [known as anticipatory breach expressely by words spoken or written] or where a party

Unit 2


disables himself from performing the contract by his own act [known as anticipatory breach implied by the conduct of the party]. (F) Discharge of contract by assignment: Assignment of contract is nothing but the transfer of rights or benefits under a contract in existence. (G) Discharge of contract by impossibility of performance : Section 56 of the Indian Contract Act, 1872 recognises very important principle regarding initial impossibility and accordingly "An agreement to do an impossible act in itself is void." For example, If X agrees with Y to bring silver from moon or gold from heaven for Rs. 1 lakh it is void ab initio. Section 46 (para II) further states that, "A contract to do an act which, after contract is made, becomes impossible, or by reason of some event which the promisor could not prevent, unlawful, becomes void when the act become impossible or unlawful." ZImpossibility of performance of a contract may be of one of the followi ng types: (1) Impossibility is known to the parties to the contract at the time of making it. This is known as absolute or initial impossibility. (2) Impossibility unknown to parties when the contract was made. The contract becomes void when such impossibility is discovered. If X agrees to purchase the house belonging to Y for Rs. 5 lacs. But it is unknown to both the parties that the house belonging to Y was already destroyed in earthquake at the time of making the contract. The contract is void on the ground of impossibility unknown to the parties when the contract was made. (3) Supervening impossibility or impossibility which arises subsequent to the formation of the contract. Acontract is discharged by supervening impossibility in following cases: ie is

act '91 his i as atty

(i)

Destruction of subj ect matter,

(ii)

Death or incapaci ty of personal service,

(iii) Non-existence of a particular state of things, (iv) Non-occurrence of a particular state of things, (v)

Out-break of war,

(vi) Change of law.

8 1

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(H) Discharge of contract by material alteration : If the promisee intentionally makes any material alteration in a written contract without the consent of the promisor, the promisor is entitled to regard the contract as rescinded. An alteration is said or considered to be material when it directly or indirectly affects or alters rights and liabilities of the parties to the contract or nature of the contract or operation of the contract or validity of the document pertaining to the contract. Thus, if any alteration is made, the contract is discharged and cannot be enforced.

2.13 REMEDIES FOR BREACH OF A CONTRACT ________________ We have already seen the meaning of the concept of breach. An aggrieved party has certain remedies against the guilty party when there is a breach of contract. These remedies are as follows: (A) Rescission of the contract: Rescission means revocation or setting aside of a contract. When one of the parties to a contract breaks the contract, the other party may sue and refuse further performance. Suppose X contracts to supply 20 tables to Y for Rs. 1,0007 - on 7th June and Y also agrees to pay the price quoted by X after receiving the tables. If X does not supply the tables as per contract, Y is discharged from the liability and is entitled to compensate for damages, if any. Section 75 of the Indian Contract Act, 1872 clearly states that a person who rightfully rescinds a contract is entitled to get compensation for any damage that he has sustained through the non-fulfillment of the contract. (B) Suit for damages: A suit for damages is one of the remedies for breach of a contract. 'Damages' means monetary compensation payable by the defaulting party to the aggrieved or injured party for the loss suffered by the aggrieved party as a result of breach of contract. The aggrieved party may bring an action, for damages. The basic object of providing damages to the aggrieved party is to put him or her in the same position, so far as monetary aspect is concerned, in which he or she would have been, had the contract been performed into. The important types of damages are: (1) Ordinary damages (2) Special damages (3) Nominal damages. (4) Vindictive damages. (5) Damages agreed upon in advance in case of breach of contract. (6) Damages of logs or reputation. 82

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(1) Ordinary damages : Ordinary damages are those which arise in the ordinary course of events from the breach of contract. In other words, ordinary damages arise naturally in the usual course of things from the breach of contract itself. The defendant is held responsible for the reasonable foreseeable consequences of his breach. These damages constitute the direct loss suffered by an aggrieved party. X contracts to sell to Y 100kg wheat at Rs. 107-per kg. on lOthAugust. But X fails to supply 100 kg. wheat on 1 Oth August. The market price of wheat on 1 Oth August was Rs. 15/- per kg. In this case, Y is entitled to receive from X a compensation at the rate of Rs. 51- per kg. Ordinary damages are also known as general damages or compensatory damages. (2) Special damages : Special damages arise from the breach of the contract under some special circumstances. They do not constitute direct loss but constitute some indirect loss to an aggrieved party on account of the breach of contract. Such damages are recoverable only when special circumstances were made known to the other concerned party to the contract. (3) Nominal damages : Where the injured or aggrieved party suffers no loss or very negligible loss the Court may still aw#rd him or her nominal damages in order to recognise his or her right. Thus, such damages merely acknowledge that the aggrieved or injured party has proved his case and won it. (4) Vindictive damages : They are also known as exemplary damages. Such damages are very heavy in amount and are granted in the following cases : (a) Dishonour of customer's cheque by a banker without any proper reason and (b) breach of contract to marry. (5) Damages agreed upon in advance in case of breach of contract: Section 74 of the Indian Contract Act, 1872 states that when a contract has been broken, if a sum is fixed in the contract as the amount to be paid in case of such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby to receive from the party who has broken the contract reasonable compensation not exceeding the amount so fixed or, as the case may be, the penalty stipulated. For example, X enters into contract with Y that if X carries on his practice as a pleader in Pune, he will pay Y Rs. 3,000/-. X practices as a pleader in Pune. Y is entitled to such compensation not exceeding Rs. 3,0007- as the Court considers reasonable. (6) Damages for loss of reputation : Such damages are not generally recoverable except when a bank wrongfully refuses to honour a customer's cheque. 83

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Activity G : Mr. Karodimal is a wholesaler of sugar. Mr. Choradia placed an order to Mr. Karodimal for supply of 5 tons of sugar. Mr. Karodimal promises to supply 5 tons of sugar to Mr. Choradia on 15th of May and Mr. Choradia promised to pay the price on receipt of the sugar. Mr. Karodimal fails to deliver the sugar on the 15 th of May. Is Mr. Choradia responsible for the payment of the price of the sugar and what remedy is available to Mr. Choradia?

(C) Quantum meruit: The literal meaning of the phrase "Quantum Meruit" is 'as much as earned'. It is the another remedy available for an aggrieved or injured party for breach of contract. A right to sue on quantum meruit arises when a contract, partially performed by one of the parties, has become discharged by the breach of the contract by the other party. The first party, therefore, must be compensatedfjor the part he has performed. (D) Suit for specific performance : Award of damages are not considered to be an adequate remedy in certain cases and, therefore, the court of law can direct the party in breach to perform his promise according to the terms and conditions of the contract, In following cases, specific performance may be granted. (1) When the compensation in the form of money for the non-performance of the contract cannot be considered as an adequate relief. (2) Cases wherein accurate standard for ascertaining the actual damage or damages caused by the non-performance of the contract is not available. Specific performance is not granted in the following cases : (1) Where damages are an adequate remedy for breach, (2) Where the contract is in its nature revocable, (3) Where the contract is uncertain, (4) When the contract is entered into by trustees in breach of their trust, (5) Where the contract is inequitable to either party, 84

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(6) Where it is not possible for the Court to supervise the contract, (7) When a Company makes any contract using the powers not conferred on it by its Memorandum of Association. (E)

Suit for injunction : An injunction is an order of the Court asking a person to do or abstain from doing a particular act, which is in fact the subject matter of the contract. For example, X is as renowned teacher who agreed to teach exclusively to Y for the period of two years and no one else. During that period of two years, if X contracts to teach txxany other person, X can be restrained by injunction from doing so.

2.14 QUASI-CONTRACTS

We know that an agreement forms the very basis of a contract. But in certain cases the law imposes certain obligations of contractual nature on one of the parties and confers certain rights in favour of the other party even though there is neither offer nor acceptance, neither any agreement nor any promise. Such contracts are created by law and termed as 'quasi-contracts' or 'constructive contracts', under English Law while the Indian Law calls them as "certain relations resembling those created by contracts." A contract is intentionally entered into between the parties to the contract, but a quasi-contract is created by law. It tests on the^roundof equitylhat^person _is noJâTlowgd to enrich himself unjustly at the expenses of someone and therefore the law of quasi-contracts is known as the law of restitution. Quasi means 'as if. Strictly speaking, a quasi-contract is not a contract at all. Anson makes clear the basis for recognition of quasi-contracts in the following words: 'Circumstances must occur under any system of law in which it becomes necessary to Mold a person to be accountable to another, without any agreement on the part of the former to be so accountable, on the ground that otherwise he would be retaining money or >>ome other benefit which has come into his hands to which the law regards the other oerson as better entitled, or on the ground that without such accountability the other person vould unjustly suffer loss. The law of quasi-contracts exists to provide remedies in nstances of this kind." idian Contract Act, 1 872 contains provisions in Sections 68 to 72 regarding "certain eiations resembling those created by contracts" or 'quasi contracts'. Now, let us study •revisions. !

Kinds of Quasi-contracts

here are five kinds of quasi-contractual obligations which are as follows :

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(A) Supply of necessaries [Section 68]. (B) Reimbursement of payment by an interested person [Section 69]. (C) Liability of payment for non-gratuitous acts [Section 70]. (D) Responsibility of a finder of goods [Section 71].

(E) Payment of money by mistake or coercion [Section 72]. (A) Supply of necessaries : When necessaries of life are supplied to a person who is incompetent to contract (minors, idiots, lunatics etc.) or to some other person who is legally bound to support, the supplier of necessaries is entitled to recover the price from the property of such person. Section 68 of the Indian Contract Act throws the light on this aspect which is as follows : "If a person, incapable of entering into ;• contract or anyone whom he is legally bound to support, is supplied by another person with necessaries suited to his condition in life, the person who has furnished supplies is entitled to be reimbursed from the property of such incapable person". Following illustrations are appended to Section 68. (1) A supplies B, a lunatic, with necessaries suitable to his conditions in life. A i entitled to be reimbursed from B's property. (2) A supplies the wife and children of B, a lunatic, with necessaries suitable to the \ condition in life. A is entitled to be reimbursed from B's property. (B) Reimbursement of payment by an interested person : Section 69 of the Indi;; Contract Act, 1872 states "A person who is interested in the payment of morn which another is bound by law to pay, and who therefore pays it, is entitled to! reimbursed by the other." X holds land in Bengal, on alease granted by Y, the Zamind The revenue payable by X to the Government being in arrears, his land is advertK for sale by the Government. Under the Revenue Law, the consequence of such sali will be the annulment of Y's lease. Y, to prevent the sale and consequent annulment his own lease, pays to the Government the sum due from X. X is bound to m good to Y the amount so paid. Following are the essential requirements of Section 69 of the Indian Contract Act 1872. (I) The payment made should be bonafide. It must be done to protect the interest of the Plaintiff. Here, the term 'interest' includes some sort of fear of loss or inconvenience.


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(II) The payment made must be such as the other party is bound by law to pay. (HI) The payment must be made to another person and it should not be voluntary. (C) Liability of payment for non-gratuitous acts : Section 70 of the Indian Contract Act, 1872 states "Where a person lawfully does anything for another person, or delivers anything to him, not intending to do gratuitously, and such other person enjoys the benefit thereof, the latter is bound to make compensation to the former in respect of, or to restore, the thing so done or delivered." Following illustrations appended to the section help us to understand the meaning of this section. (a) A, a tradesman, leaves goods at B 's house by mistake. B treats the goods as his own. He is bound to pay A for them. (b) A saves B's property from fire. A is not entitled to compensation from B, if the circumstances show that he intended to act gratuitously. Following are the three essential conditions of Section 70. (i) (ii)

A person doing something for another person or delivering something to him should not have any intention to do it gratuitously. The person who enjoys the benefit is bound to make compensation.

(iii) The person must get direct benefit. Thus, the above mentioned three conditions must be satisfied before initiating any right of action under Section 70 of the Indian Contract Act, 1872. ^D) Responsibility of a finder of goods : A person who finds goods belonging to another, and takes them into his custody, is subject to the same responsibility as that-of-a Bailee [Section 71]. Thus, Section 71 of the Indian Contract Act, 1872 speaks in clear terms about the responsibility of a finder of goods. His duties and responsibilities are put at par with that of a Bailee. He is bound to take as much care of the goods found as a man of ordinary prudence would, under similar circumstances, take of his own goods of the same bulk, quality, value of goods found [Section 151]. However a finder of goods cannot be held responsible for the loss, destruction or deterioration of the thing found, if he has taken the amount of care of the goods found as described in the earlier paragraph. 87

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A finder of goods must take necessary steps to trace its owner. So long as the owner of the goods is not found out, the ownership of the property in goods remains with the finder of the goods and he can retain the goods as his own. (E) Payment of money by mistake or coercion : Section 72 of the Act throws light on the liability of person to whom money has been paid, or things delivered, by mistake or under coercion. It says. "A person to whom money has been paid, or anything has been delivered by mistake or under coercion, must repay or return it," X and Y jointly owe Rs. 2,0007- to Mr. M. X alone pays the whole amount to M and Y, not knowing anything about this fact, also pays Rs. 2,0007- over again to M. M is bound to repay this amount to Y. Here one important point must be noted that the word 'coercion' is used in this Section in its general sense that is, forcefully and not as defined in Section 15 of the Act.

2.

3.

Distinction between a Contract and a Quasi-contract Contract 1. An agreement enforceable by law is a contract. [Section 2 (h)]. 2. A contract basically requires an agreement. 3. A contract results from the will of parties expressed with a view to create certain obligation. 4. There are various essential elements required for a valid contract. 5. A contract is always full-fledged and is binding on those who enter into the contract. Quasi-contract 1. Quasi-contract is nothing but certain relations resembling those created by a contract and it is not actually a contract. 2. There is no agreement at all in the quasi-contract. 3. Quasi-contract is itself an obligation resembling those created by a contract. 4. There are no such essential elements required for formation of a quasi contract. 5. A quasi-contract is not full-fledged but it is an implied contract. Strictly speaking, a quasi-contract is not a contract at all. It is a contract not in fact but in law. Distinction between a Contingent Contract and a Quasi-contract Contingent Contract 1.

A contingent contract is a contract to do or not to do something, if some event, collateral to such contract, does or does not happen. [Section 31].

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2.

In a contingent contract, performance of a contract depends upon happening or not happening of some event in the future.

3.

A contingent contract is a contract in fact.

4.

In a contingent contract, there is the responsibility to perform legal obligation.

5.

A contingent contract is a valid contract.

Quasi-contract 1.

Under certain conditions, the law creates and enforces legal rights and obligations when no real contract exists. Such obligations are known as quasi-contract. The Contract Act describes quasi-contracts as certain relations resembling those contracts.

2.

In a quasi-contract, benefit of an act done by one person is taken by some other person. That person acts on his own but expects certain return.

3.

A quasi-contract is a contract by law.

4.

In a quasi-contract, there is always equitable obligation alongwith legal obligation as it rests on the ground of equity.

5.

A quasi-contract in the strict sense is not a contract at all.

2.15 SUMMARY An agreement will not be enforced by the court if its object or the consideration is unlawful. The object and consideration must both be lawful, otherwise the agreement is void. A contingent contract contains a conditional promise. A contract creates legal obligations. ' •'formance of contract means carrying out these obligations. When the obligations created a contract come to an end, the contract is said to be discharged or terminated. 2.16 SFXF-ASSESSMENT QUESTIONS_____________________________ M.

In what cases are the object and consideration of an agreement said to be unlawful under Act the Indian Contract Act, 1872?

_. Discuss the principles of public policy. Give examples of agreements contrary to public policy. i.

Define a contingent contract and explain its characteristics.

>.

Explain the rules regarding contingent contracts.

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Q5.

Define a wagering agreement.

Q6.

Distinguish between a wagering agreements and a contingent contract.

Q7.

What is meant by the term 'performance of a contract' ? State as to who can demand performance of a contract and by whom the contract must be performed?

Q8.

What are the kinds of tender? Explain the essential requisites of a valid tender.

Q9. Enumerate the contracts which must be performed and which need not be performed. Q10. Discuss the rules relating to appropriation of payment made by a debtor to his creditor. Q11. Explain the rules regarding reciprocal promises. Q12. State and discuss the rules as to the time and place for performance of a contract. Q13. What do you understand by discharge of a contract? What are the various ways in which a contract may be discharged? Q14. State the law with regard to discharge of a contract by agreement. Q15. State the law with regard to discharge of a contract by operation of law. Q16. State the law with regard to discharge of a contract by impossibility of performance. Q17. Explain 'breach of contract' as a mode of discharge of contract. Q18. Write notes on the following:

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(A)

Agreements opposed to public policy.

(B)

Unlawful and illegal agreement.

(C)

Void agreements.

(D)

Contingent contracts.

(E)

Wagering agreements.

(F)

Performance of contracts.

(G)

Kinds of tenders.

(H)

Time is the essence of a contract.

(I)

Appropriation of payments.

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(J)


Assignment of a contract. (K)

breach of a contract. (M)

Performance of a contract. (L)

Remedies for

Kinds of Quasi-contracts. Q19. What remedies are available to

an aggrieved party on the breach of a contract? Q20. Explain 'suit for damages' as one of the ways available to an aggrieved party on the breach of a contract. Discuss the types of damages. Q21. Define and explain the following: (a)

Contingent contracts

(d)

Wager

(b)

Assignment of a contract

(e)

Quasi contract

(c)

Reciprocal promises

(f)

Consideration for promise

Q22. Under what circumstances is a party entitled to specific performance? Q23. What are quasi-contracts ? Enumerate and explain the quasi-contracts dealt with under the Indian Contract Act. Q24. Discuss the law relating to supply of necessaries under quasi-contracts. Q25. Discuss the law relating to reimbursement of payment of an interested party under quasi-contracts. Q26. Discuss the rights and obligation of a finder of goods. Q27. "Quasi-contracts rest on the ground of equity that a person shall not be allowed to enrich himself unjustly at the expense of another" Discuss. Q28. "In quasi-contracts, the promise to pay is always in implication of law and not of fact" Explain. Q29. Explain the law relating to liability of payment for non-gratuitous acts.

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3.1

INTRODUCTION

Contract of Indemnity, Contract of Guarantee, Contract of Bailment, Contract of Pledge and Contract of Agency are considered as special contracts. Let us study the nature of these contracts. 3.2

CONTRACT OF INDEMNITY ___________________________________

If you have lost original lorry receipt, or railway receipt, the transporter may ask you to furnish an indemnity bond before he can release the goods to you. You must know the meaning of Indemnity. Insurance service is another example of contract of indemnity. There are two parties in a contract. Indemnifier and Indemnified. Insurance company is the Indemnifier and the policy holder is Indemnified. As per Section 124, a contract by which one party promises to save the other from loss caused to him by the contract of the promisor himself, or by the conduct of any other person, is called a 'contract of indemnity'. As per Section 125, rights of indemnity-holder when sued are as under:The promisee in a contract of indemnity, acting within the scope of his authority, is entitled to recover from the promisor (1) all damages which he may be compelled to pay in any suit in respect of any matter to which the promise to indemnify applies; (2) all costs which he may be compelled to pay in any such suit, if in bringing or defending it, he did not contravene the orders of the promisor, and acted as it would have been prudent for him to act in the absence of any contract of indemnity, or if the promisor authorised him to bring or defend the suit; (3) all sums which he may have paid under the terms of any compromise of any such suit, if the compromise was not contrary to the orders of the promisor, and was one which it would have been prudent for the promisee to make in the absence of any contract of indemnity, or if the promisor authorised him to compromise the suit. The liability under contract of indemnity is considered as contingent liability. It may happen or it may not happen. An insurance company may or may not be required to pay the claim.j As per Section 31, a 'contingent contract' is a contract to do or not to do something, i| some event, collateral to such contract, does or does not happen. 94

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Special Types of Contracts

& Activity A: Collect a format of an Indemnity Bond from a Company for issuing a duplicate Share Certificate. Write your observations pertaining to contract of indemnity.

3.3

CONTRACT OF GUARANTEE

Whenever you approach a bank for loan, you might have heard that the banks ask for a guarantor. If you have applied for any tender with a Government Department, they might ave asked you to furnish a Bank Guarantee. All these requirements make you to understand the meaning of Contract of guarantee. \s per Section 126, a 'contract of guarantee' is a contract to perform the promise, or ascharge the liability, of a third person in case of his default. The person who gives the guarantee is called the 'surety', the person in respect of whose default the guarantee is nven is called the 'principal debtor', and the person to whom the guarantee is given is ailed the 'creditor'. Thus there are three parties in case of a contract of guarantee viz. reditor, Principal Debtor and Surety. Normally a contract without consideration is void. In case of Contract of guarantee, the guarantor does not receive any consideration. Even then the contract of guarantee is , onsidered as valid because of Section No. 127. As per Section 127, anything done, or any promise made, for the benefit of the principal debtor, may be a sufficient consideration to the surety for giving the guarantee. Liabilities of a surety Surety is liable to pay the amount to creditor on demand and on default by principal debtor. As per Section 128 the liability of the surety is co-extensive with that of the principal debtor. It means the Guarantor is liable for the same sum for which the borrower is liable. Here the liability includes not only the principal but also interest and other charges payable by the debtor. As per Section 137 mere forbearance on the part of the creditor to sue the principal debtor or to enforce any other remedy against him, does not discharge the surety. As per Section 138, where there are co-sureties, a release by the creditor of one of them

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does not discharge the others neither does it free the surety so released from his responsibility to the other sureties. Principal Debtor and Guarantors are jointly and severally liable to the Principal Creditor. Creditor can file case against any one or more of them and he may not file case against few others. If you have given guarantee to your friend for a loan taken by him from a bank, the bank can file case only against you without filing case against your Mend. Rights of a Surety a)

Right to information Surety is entitled to all information pertaining to the loan. As per Section 142, any guarantee which has been obtained by means of misrepresentation made by the creditor, or with his knowledge and assent, concerning a material part of the transaction, is invalid. As per Section 143, any guarantee which the creditor has obtained by means of keeping silence as to material circumstances, is invalid

b)

Right of consultation Creditor should consult surety if he wants to change the terms and conditions of the loan. As per Section 133, any variance made without the surety's consent, in the terms of the contract between the principal debtor and the creditor, discharges the surety as to transactions subsequent to the variance. As per Section 134, the surety the principal debtor is released, or by any act or omission of the creditor, the legal consequence of which is the discharge of the principal debtor. As per Section 135, a contract between the creditor and the principal debtor, by which the creditor makes a composition with, or promises to give time to, or not to sue, the principal debtor, discharges the surety, unless the surety assents to such contract.

c)

Right of subrogation After the Surety pays the amount to Creditor he will step into the shoes of the creditor and he will be entitled to all the benefits to which the creditor was entitled. As per Section 140, where a guaranteed debt has become due, or default of the principal debtor to perform a guaranteed duty has taken place, the surety upon payment or performance of all that he is liable for, is invested with all the rights which the creditor had against the principal debtor. As per Section 141, a surety is entitled to the benefit of every security which the creditor has against the principal debtor at the time when the contract of suretyship entered into, whether the surety knows of the existence of

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such security or not; and if the creditor loses, or without the consent of the existence of such security or not; and if the creditor loses, or without the consent of the surety, parts with such security, the surety is discharged to the extent of the value of the security. d)

Right to Indemnity As per Section 145, in every contract of guarantee there is an implied promise by the principal debtor to indemnify the surety, and the surety is entitled to recover from the principal debtor whatever sum he has rightfully paid under the guarantee. As per Section 146, where two or more persons are co-sureties for the same debt or duty, the co-sureties are liable, as between themselves, to pay each an equal share of the whole debt, or of that part of it which remains unpaid by the principal debtor.

If you are a guarantor to a loan taken by your friend along with Mr. X and if you have paid Rs. 10,0007- to the bank, then you can recover R.5,000/- from Mr. X. Continuing guarantee As per Section 129, a guarantee which extends to a series of transaction, is called, a continuing guarantee. If you are guarantor to a cash credit facility availed by your friend then it is a case of continuing guarantee. As per Section 130, a continuing guarantee may be revoked by the surety, as to future transactions, by notice to the creditor. After giving guarantee for your friend in respect of cash credit facility, you may withdraw the guarantee given by you. In that case you will be liable for the debit balance outstanding on that day. You will not be liable fur future withdrawls. You cannot revoke your guarantee given for term loans. 2$ Activity B : Collect a format of a Guarantee Bond from a Bank. Write your observations pertaining to contract of guarantee.

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3.4

CONTRACT OF BAILMENT

As per Section 148 a 'bailment' is the delivery of goods by one person to another for some purpose, upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the directions of the person delivering them. The person delivering the goods is called the 'bailor'. The person to whom they are delivered is called the 'bailee'. Delivery of goods to transport operator is an example of bailment. Storage of goods in a ware house is another example of bailment. In Supply Chain Management, parties repeatedly entered into this contract. As per Section 149, the delivery to the bailee may be made by doing anything which has the effect of putting the goods in the possession of the intended bailee or of any person authorised to hold them on his behalf. As per Section 150, the bailor is bound to disclose to the bailee faults in the goods bailed, of which the bailor is aware, and which materially interfere with the use of them, or expose the bailee to extraordinary risk; and if he does not make such disclosure, he is responsible for damage arising to the bailee directly from such faults. Duties of the Bailee As per Section 151, the bailee is bound to take as much care of the goods bailed to him as a man of ordinary prudence would, under similar circumstances, take of his own goods of the same bulk, quantity and value as the goods bailed. As per Section 160, it is the duty of the bailee to return, or deliver according to the bailor's directions, the goods bailed, without demand, as soon as the time for which they were bailed has expired, or the purpose for which they were bailed has been accomplished. As per Section 161, if by the fault of the bailee, the goods are not returned, delivered or tendered at the proper time, he is responsible to the bailor for any loss, destruction or deterioration of the goods from that time. As per Section 154, if the bailee makes any use of the goods bailed which is not according to the conditions of the bailment, he is liable to make compensation to the bailor for any damage arising to the goods from or during such use of them. Rights of a Bailee As per Section 152, the bailee, in the absence of any special contract, is not responsible for the loss, destruction or deterioration of the thing bailed, if he has taken the amount of care of it As per Section 170, where the bailee has, in accordance with the purpose of the bailment, 98

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rendered any service involving the exercise of labour or skill in respect of the goods bailed he has in the absence of a contract to the contrary, a right to retain such goods until he receives due remuneration for the services he has rendered in respect of them. This is called right of particular lien. If you have delivered some finished goods to Mr. Ashok for packaging, then Mr. Ashok has right of lien on these goods and he may not return the goods to you unless his charges are paid by you. As per Section 171, Bankers, factor, wharfingers, attorneys of a High Court and policy brokers may, in the absence of a contract to the contrary, retain as a security for a general balance of account, any goods bailed to them. If you have Fixed Deposit with a bank and also a loan account and if there is default in loan amount, then the banker can refuse to repay the Fixed Deposit to you and the Banker has right to retain this amount as a security for the loan. This is called Right of General Lien. Lien is an implied Pledge. As per Section 71, a person who finds goods belonging to another, and takes them into his custody, is subject to the same responsibility as a bailee, If a visitor to your office forgets his bag in your office, you will become a bailee.

g$ Activity C: Collect a format of Lorry receipt. Read the printed terms and conditions. Write you )bservations pertaining to contract of bailment.

Contract of Pledge As per Section 172, the bailment of goods as security for payment of a debt or performance of a promise is called 'pledge'. The bailor is in this case called the 'pawnor'. The bailee is called 'pawnee'. Suppose the goods are kept in a warhouse and finance is taken from bank against these goods then this is a case of Pledge. Taking a loan from bank by delivering the gold as security is an other example of pledge. In case of pledge, the banker has the possession of the security even though the ownership is with the borrower. Hence, the banker considers it a comparatively safe loan. In case of Gold loan the possession is actually with the Bank and it is called actual possession. In case of ware house, the goods are in warehouse and the banker has warehouse receipt with him. This is called constructive

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Rights of a Pawnee As per Section 173 the pawnee may retain the goods pledged, not only for payment of the debt or the performance of the promise, but for the interests of the debt, and all necessary expenses incurred by him in respect of the possession or for the preservation of the goods pledged. As per Section 174, the pawnee shall not, in the absence of a contract to that effect, retain the goods pledged for any debt or promise of other than the debt or promise for which they are pledged; but such contract, in the absence of anything to the contrary, shall be presumed in regard to subsequent advances made by the pawnee. Example : You have taken a pledge loan of Rs. 10.00 lacs from Bank of Maharashtra against the security of goods kept in a ware house on 10-7-2007. On 10-8-2007 you took a clean overdraft of Rs.2.00 lacs without offering any security. On 10-12-2007, you paid Rs. 10.00 lacs with interest towards the first loan and requested the bank to release the goods from warehouse. The bank is entitled to retain the goods sufficient to cover the second overdraft of Rs.2.00 lacs and they can release only the proportionate goods. As per Section 175, the pawnee is entitled to receive from the pawnor extraordinary expenses incurred by him for the preservation of the goods pledged. As per Section 176, if the pawnor makes default in payment of the debt, or performance, at the stipulated time, of the promise, in respect of which the goods were pledged, the pawnee may bring a suit against the pawnor upon the debt or promise, and retain the goods pledged as a collateral security; or he may sell the thing pledged, on giving the pawnor reasonable notice of the sale. If the proceeds of such sale are less than the amount due in respect of the debt or promise, the pawnor is still liable to pay the balance. If the proceeds of the sale are greater than the amount so due, the pawnee shall pay over the surplus to the pawnor. If you have sent some goods through a transport operator and the consignee does not take delivery of the goods after reasonable period, the transport operator can auction the goods to recover his transportation charges and demurrages. As per Section 178, where a mercantile agent is, with the consent of the owner, in possession of goods or the documents of title to goods, any pledge made by him, when acting in the ordinary course of business of a mercantile agent, shall be as valid as if he were expressly authorised by the owner of the goods to make the same; provided that the pawnee acts in

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good faith and has not at the time of the pledge notice that the pawnor has no authority to pledge. 3.5

CONTRACT OF AGENCY ____________________________________

"An 'agent' is a person employed to do any act for another, or to represent another or to represent another in dealings with third persons." Section 182 of Indian Contract Act, 1872. The person for whom such act is done or who is represented is called the Principal. An agent may be appointed by the principal by executing general Power of Attorney. Mr. Deepak appoints Mr. Munde to purchase 1000 books on his behalf. Mr. Deepak is the principal while Mr. Munde is his agent and the relationship between them is that of agency. 1.

Who can appoint an agent? "Any person who is of the age of majority according to the Law which is subject, and who is of the sound mind, may employ an agent."-183. But a minor can not be appointed as an agent. An agent acts for and on behalf of his principal with third party and as such an agent does not incur any personal liability.

2.

Who may be an agent? Any person may be an agent, even a minor. A minor acting as an agent can bind the principal to third parties. But a minor is not himself liable to his principal.

3.

The test of agency Agency exists whenever a person can bind another by acts done on his behalf. When this power does not exist the relation is not one of agency. Thus wife is not an agent of the husband except under special circumstances and for special purpose. But the constituted attorney of a person is his agent for the purpose mentioned in the power of attorney. The essential point about an agent's position is his power or authority of making his principal answerable to third parties. The acts done by the agent are binding on the principal. An agent can neither sue or be sued personally in respect of contracts entered by them on behalf of their principal. Thus, in short, it can be said that an agency exists whenever any person, appointed by his principal as an agent can bind the principal by the acts done on behalf of the principal and when this power does not exist, the relationship is not that of agency. 101

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There is distinction between an agent and a servant. Following important points make clear the distinction between an agent and a servant. Agent (1) An agent is appointed by the person known as a principal and he brings his principal into contractual or legal relationship with third parties or he represents his principal in dealings with third parties. (2) An agent has to exercise his authority, according to his principal's instructions. However, he is not subject to his principal's direct control and supervision. An agent has a large discretion while performing his duties. (3) An agent has an authority to bind his principal to third parties. (4) A principal is always liable for the wrongs of his agent done within the scope of agent's authority. (5) An agent's mode of remuneration may vary. It may include some commission besides regular salary. (6) An agent may work for several principals at one and the same time. Servant (1) A servant i s appointed by his master. However, a servant does not generally create contractual or legal relations between his master or employer and the third parties. A servant does not represent his employer in dealings with third parties. A servant is expected to obey the orders of his master or employer. (2) A servant has to act according to the orders of his master in every particular. He acts under the direct control and supervision of his master. He is expected to obey all reasonable orders given to him by his master in course of his employment. (3) A servant has no authority to bind his master to third parties. (4) An employer or a master is liable for the wrongs of his servant if such wrongs are committed in the course of the employment as a servant has to carry out the orders of his master. (5) A servant is generally paid through wages. (6) A whole time servant usually serves only one master. 102

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CREATION OF AGENCY Agency may be created in any one of the following way s : 1.

Agency by express agreement Section 186 of the Indian Contract Act, 1872 states that, "The authority of an agent may be express or implied." Section 187 defines express authority as follows "An authority is said to be express when it is given by words, spoken or written. When an agent is directly appointed by contraction certain authority to him, may it be spoken or written, the authority is said to be expressed and thus an agency is created. The mode of creation of agency in this way is known as 'agency by express agreement'. A contract of agency may be created by express agreement. The agreement may be either oral or written. It is usual in many cases to appoint agents by executing a formal power of attorney on a written and stamped document.

Activity D : My brother is an owner of many ships. He is engaged in the business of ship building. He appointed Mr. Dilip as his agent to carry on his business of ship building. Mr. Dilip purchased timber and other material and hire workmen for the purpose of carrying on the business. What kind of authority does Mr. Dilip have Explain?

2.

Agency by implied agreement An agency agreement may be implied under certain circumstances from the conduct of the parties or the relationship between them. "An authority is said to be inferred from the circumstances of the case, and things spoken or written, or the ordinary course of dealing may be accounted circumstances of the case- Section 187 Agency by estoppel and agency of necessity are cases of implied agency.

£$ Activity E : Mr. Subhash and Mr. Devidas are brothers. Mr. Subhash lives in Mumbai while Mr. Devidas in Pune. Mr. Devidas leases Mr. Subhash's property in Mumbai with his

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knowledge. Mr. Devidas receives the rent of the property leased and remits the same to Mr. Subhash. There is no agreement of appointment of Mr. Devidas as an agent. What is the nature of agency of Mr. Devidas?

3.

Agency by estoppel or by holding out Section 237 states that," When an agent has without authority, done acts or incurred obligations to third person on behalf of his principal, the principal is bound by such acts and obligations, if he has by his words or conduct induced third person to believe that such acts and obligations were within the scope of the agent's authority." It implies that when a man has by his conduct or statements induced others to believe that a certain person is his agent, he is precluded from subsequently denying it. Thus an agency is created by implication of Law. For example, A consigns goods to B for sale and gives him instructions not to sell under a fixed price. C, being ignorant of B's instruction enters into a contract with B to buy the goods at a price Lower than the reserved price. A is bound by the contract.

J£$ Activity F: Mr. Murti appoints Mr. Kaushik as the manager of his shop and authorizes him to sell only the goods. Mr. Kushik orders some goods from the suppliers in the presence of Mr. Murti and Mr. Murti allows him to do so. Is Mr. Kaushik's order to purchase goods valid within the authority by holding out?

4.

Agency by necessity Some times circumstances force a person to act on behalf of another without any express authority from him. In such cases an agency of necessity is said to be created.

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Three conditions must be satisfied before an agency can be created by necessity. (A) It must be impossible to get the principal's instructions. (B) There must be an actual necessity for acting on his behalf. (C) The agent of necessity must act honestly in the interest of the parties concern. For example, X consigns some goods to Y at Mumbai, with directions to send the same immediately to M at Bangalore. Y may sell the goods at Mumbai, if the goods will not bear the journey to Bangalore without spoiling. Husband and Wife A wife is an agent of necessity, having power to pledge her husband's credit for necessaries of life, when she is nof properly provided for by him or when she has been deserted by the husband. But if the husband gives her a sufficient allowance, she has no authority to pledge her credit and can never be the agent of necessity. The general rule is that the wife is not the agent of her husband and the husband is not the agent of his wife. But one of them may be the agent of the other by express appointment, by holding out, by ratification or because of necessity. JS$ Activity G; Mr. Jagat Singh is a trader in domestic items. I went to him and purchased some goods from him on credit of my husband. Does the shopkeeper have a right to recover the price of goods sold to me from my husband?

I

5.

Agency by operation of law Agency can also be created by operation of law and hence, this mode of creating agency is also known as 'agency by statute'. Every partner is an agent of the firm and of his other partners for the purpose of the business of his firm [Section 18 of the Partnership Act]. A partner can bind the firm by acting on behalf of other partners.

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Promoters of a company become its agents when the company is promoted or formed. In the exercise of their express or implied authority, the directors of company act as the agents of their company. However, it must be noted that an individual director is not an agent of the company unless he has been given an authority by the Board of Directors to act for their company. In all such cases, agency is implied by operation of law. 6.

Agency by ratification Ratification is one of the ways of creating agency. (The provisions relating to ratification are treated separately under Section 2.5.)

RATIFICATION If the agent has no authority to contract on behalf of his principal or if he exceeds such authority, the contract thus, entered into by the agent is not binding on the principal. No person can become the agent of another person except by the will of that another person. However, the principal may afterwards confirm and adopt the contract thus, entered into by his agent and may bind himself, if he thinks proper and suitable. This is known as ratification. This is also known as ex-post facto agency or agency arising after the event. In ratification, the principal subsequently adopts the act of a person or an agent which was originally done without instructions or authority. Thus, ratification is a kind of affirmation or approval of a previous unauthorised act or acts of an agent relating to a contract by the principal. 1.

Effect of Ratification Provisions of Section 196 of the Indian Contract Act, 1872 throw light on the effect of ratification and make clear the right of person (principal) as to acts done for him without his authority. Section 196 lays down that, "Where acts are done by one person on behalf of another, but without his knowledge or authority, he may elect to ratify or to disown such acts. If he ratifies them, the same effects will follow as if they had been performed by his authority." This implies that when an agent enters into a contract without any authority or the knowledge of his principal, the principal may either elect to ratify the same or disown the contract. If the principal elects to disown the contract, he is not bound by the contract on the contract. But if he elects to ratify the contract entered into by his agent on his behalf, the effect will be the same as if he had previously authorised his agent to enter into the contract on this behalf and he is thereby bound by the terms of the contract.

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R, without having the authority of M, acts as the agent of M and enters into a contract with Y. If M disowns the contract, the contract will not be binding on M. But if M elects to ratify the contract, it will be binding on M. 2.

Ratification may be express or implied Ratification need not be only express. It can also be implied. According to Section 197 of the Indian Contract Act, 1872, "ratification may be express or may be implied in the conduct of the person on whose behalf the acts are done." A, without B's authority, borrows from C for B. B takes objection to this transaction but afterwards pays interest to C as agreed upon. B's conduct implies a ratification of the loan.

3.

Ratification is tantamount to prior authority As a matter of fact, ratification always relates back to the original making of the contract, where the agency is considered to have come into existence from the moment when the agent acted first in that respect; and from the moment when the principal ratifies the same. In this respect, the rule that every ratification relates back and is equivalent to a previous command or authority is applied and the present act of the agent performed on behalf of his principal is recognised as binding on the principal retrospectively. Thus, the ratification is tantamount to prior authority or is equivalent to an antecedent authority.

>gT Activity H: Mr. Right was the managing director of a Zham Zham Co. He, purporting to act as the agent on company's behalf and without any authority, accepted the offer made by Mr. Yasin.. Subsequently, Mr. Yasin withdrew his offer by giving notice to the company. But in the meanwhile, the company ratified Mr. Right's unauthorised acceptance. Is Mr. Yasin is bound to fulfill the contract?

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4.

Important essentials or requisites of valid ratification Certain conditions are required to be fulfilled in order to make the ratification valid. Following are the important conditions or essentials or requisites of a valid ratification.

(A) Existence of principal The principal must be in existence at the time of the act that is to be ratified. The person ratifying the act must have been not only in contemplation but he must also be in existence at the time of the contract entered into or the act performed by his agent on his behalf. Otherwise, it is obvious that such act or contract cannot be ratified. For example, a company cannot ratify the contracts entered into before its incorporation by its promoters on its behalf after it comes into existence. In such cases, promoters would be held liable on the contract; unless they stipulated that they themselves would not be liable. In short, it implies that since ratification authorises a contract from a back date, the principle must be in existence at the time when the contract was entered into. For example, A hotel company was to be formed and B entered into a contract with K on behalf of the hotel company. However, when the company was duly formed, the contract entered into by B on behalf of the company was ratified. But after sometime, the company went into liquidation and K sued B upon the contract. B pleaded that because of the ratification, the liability of the contract had passed to the hotel company. But it was held in the case that the hotel company was not liable by a mere ratification, the existence of the company was must. Hence, B was held personally liable for the contract [Kelner vs. Baxter -1866 -L. R. 2 C. P. 174]. This illustration implies that ratification can only be done by a person ascertained at the time of the act done or the contract entered into by a person in existence either actually or in contemplation of law.

(B) The capacity of the principal Ratifier must be competent to ratify the act or acts. Since ratification is tentamount to prior or previous authority of the principal, the principal must possesss the contractual capacity at the time of contract as well as at the time of ratification. If the principal had no capacity to enter into contract at the time when the contract was entered into the principal cannot validate the same by ratifying it subsequently at the time when he becomes competent to contract. Thus, a minor on whose behalf a contract was entered into, cannot ratify the same on attaining majority.

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(C) Full knowledge of facts is essential Full knowledge of all the material facts of the case is essential for valid ratification. Section 198 lays down that, "no valid ratification can be made by person whose knowledge of the facts is materially defective." For example, X is the agent appointed by Y and he has been given an authority to purchase goods at the market rate. X buys some goods at a higher rate and Y accepts the purchase. But afterwards Y comes to know that X sold the goods belonging to him. The ratification by Y of the purchase of goods is not binding on Y. However, the principal is at liberty to ratify the acts of the purported agent without full knowledge of the facts. (D) The act must be done for or on behalf of the principal The agent must expressly or avowedly contract as an agent for his principal in contemplation. In other words, the agent must purport to act in the capacity of an agent for his principal who is in contemplation and is identifiable at the time of entering into a contract. The agent must not allow the third party to imagine that he is really the principal. (E)^Kati atification of the whole transaction Ratification must relate to the whole act and not to a part of it. Ratification of a part of the act will not be valid. Section 199 lays down that, "A person ratifying any unauthorised act done on his behalf ratifies the whole of the transaction of which such act formed a part." The principal must ratify the contract as a whole, and he cannot ratify in part and repudiate in part. (F) Unauthorised act injuring third person or party cannot be ratified Ratification cannot be made so as to subject a third person or party to damages, or terminate any of the rights or interest of a third party or person. Section 200 clearly states that, "An act done by one person on behalf of another, without such other person's authority, which, if done with authority, would have the effect of subjecting a third person to damages, or of terminating any right or interest of a third person, cannot, by ratification, be made to have such effect." Thus, there cannot be valid ratification of an act which is prejudicial to a third party or person.

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For example, X, not being authorised thereto by Y, demands on behalf of Y, the delivery of a chattle, the property of Y from M who is in possession of the same. This demand cannot be ratified by Y so as to make M liable for damages for his refusal to deliver. —A,

(G) JPRe act to be ratified must be legal The act to be ratified must be lawful or legal and should not be void or illegal. A principal can ratify only those acts which are lawful. Therefore, the acts or transactions which are illegal, criminal or void ab initio cannot be ratified. Thus, an agreement entered into by a major on behalf of a minor cannot be ratified by the minor even before or after attaining majority as the contracts with minors are void ab initio i.e. absolutely void from the beginning. Thus, in short, it can be said that an act which is a legal nullity cannot be ratified. (H) Ratification can be done by the principal if he has the power to do so Aprincipal, if he has the power, can only ratify the act or acts of his agent. The acts, in other words, which the principal cannot do or is incapable of doing cannot be ratified, e.g. acts or directions of a company which are ultra vires of the power of the company, cannot be ratified so as to bind their company. Y Oc*'' ^ atification must be donewithin a reasonable time

r kP\^

The ratification must take place either within the time fixed for the purpose or within a reasonable time the contract was entered into by the agent. Ratification made after the expiry of time fixed for ratification will not be valid. Where no such time or period is fixed for doing the act, the act must be ratified within a reasonable time. Otherwise, such ratification will not be valid. Of course, what is reasonable time is always a question of fact. ^ * U (J)/Rarffication must be communicated to the concerned par When a transaction depends upon ratification by the principal, it is necessary that the ratification must be communicated to the concerned person or party who is to be bound by the act done by the agent on behalf of the principal. A ratifier must also communicate his ratification to his agent. (K) Ratification relates back to the date of the act of the agent Ratification always relates back to the original making of the contract, so that 110

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the agency is considered to have come into existence from the moment when the agent acted first in that respect; and from the moment when the principal ratifies the same. Here, the rule, "every ratification relates back and is equivalent to a previous command or authority" is applied. As a result, the present act of the agent performed on behalf of his principal is recognised as binding on the principal retrospectively. ^ Activity I: vlr. Xavior who purports to act as an agent on behalf of Yatin without any authority, •.ccepts an offer made by Naresh. Naresh withdraws the offer before his principal Mr. Yatin comes to know about that offer. However, Yatin subsequently ratified Xavior's acceptance. Is there any contract and are Mr. Naresh and Yatin are bound by that contract?

(L) The act ratified must relate to an existing thing The act which is to be ratified must relate to an existing thing, otherwise that ratification cannot be valid. Thus, when the tenancy has ceased, there is no meaning in ratifying the same. In other words, when a period is fixed in a contract for performing a particular act or acts, the ratification must be effected before the expiry of that period, otherwise such ratification is not considered valid. I -imitations to the principle of ratification There are certain limitations to the principle of ratification. There cannot be ratification or ratification cannot be valid (i)

(ii)

When the existence of a principal is not there at the time of the act which is to be ratified, Where the principal is incompetent to enter into a

contract, Uii) Where the act is not done for or on behalf of the principal,

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(iv) Where the principal does not have full knowledge of the fact, (v)

When ratification is not done of the whole transaction,

(vi) Where unauthorised agent acts injuring the third party or person is/are ratified, (vii) Where the act to be ratified is illegal or void, (viii) When the ratification is done of the acts which the principal has no power to do, (ix) Where the ratification is not communicated to the concerned party, (x)

3.6

Where the ratification is not done within a reasonable time,

TYPES OF AGENTS_________________________________________

Agents can be classified-in various ways according to the point of view adopted. From the view point of the authority, they can be classified as special agents, general agents and universal agents. They are also classified as mercantile or commercial agents and non-mercantile or non-commercial agents. Factors, brokers, auctioneers, commission agents etc are the types or kinds of mercantile or commercial agents while solicitors, attorneys, wife, etc. are examples of various types of kinds of agents.

(A) Special Agents A special agent is also known as a specific or particular agent. Such agent is appointed to perform a particular work or to represent his principal in particular transaction only. A speciaTagencylasts for a specific period or for a particular type of job or work. As soon as the said period lapses or the said job or work is finished, the agency stands terminated. Specific agents has a limited authority.. A special agent cannot bind his principal in any act other than that for which he is specially appointed. If he does anything outside his authority, his principal cannot be bound by it. The third parties who deal with a special agent must ascertain the extent of the authority he has.

(B) General Agents This type of agent enjoys 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. A manager of a branch shop or of branch office of a firm or a commission agent is instances of general agents. Sufficiently wide powers are vested in him to effects the business deal, enter into trade bargains, to make purchases and also payments of the purchases, 112

Business Law

(iv) Where the principal does not have full knowledge of the fact, (v)

When ratification i s not done of the whole transaction,

(vi) Where unauthorised agent acts injuring the third party or person is/are ratified,

Unit 3


to receive money on behalf of his principal to settle terms and conditions of business and to hold negotiations with third parties etc. Such authority of a general agent continues till it is terminated. (C) 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 provided such act is legal and is agreeable to the law of land. Strictly speaking, there is no such agency and a universal agent is none other than a general agent with very extensive powers. However, in personal life, wife, son or a very close friend may act as a universal agent. For example, when a person leaves his country for a long time, he may appoint his son, wife or a friend as his universal agent to act on his behalf in his absence. (D) Co-agents

When a principal appoints twojorjriore personsjis agents jointly or severally, or jointly and severally, such agents are known as co-agents. Their authority is joint —wRerThothing 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 or unless circumstances reveal any intention to the contrary. But when their authority is several, any one of the co-agents can act without the concurrence of other. (E) Substituted Agents

Sections 194 and 195 deal with substituted agents. Section 194 throws light on the, nature of substituted agent and accordingly, when an agent holding on express or implied authority to name another person to act for and on behalf of his principal in his business, such agent is known as substituted agent. The substituted agent is taken as the agent of his principal for such part of the work as is entrusted to him. There is always a direct privity of contract between the principal and substituted agent. Sometimes, a substituted agent is also known as co-agent. £$ Activity .T:

A solicitor and Mr. Mitra direct Namesh to sell his estate by auction and also instruct to employ an auctioneer for that purpose. Namesh names Yatendra who is an auctioneer to conduct the sale. Yatendra is a sub-agent or a substituted agent.

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[14

Section 195 deals with the responsibility of the agent appointed by the principal. It states that, "In selecting such agent [substituted agent] for his principal, an agent is bound to exercise the same amount of discretion as a man of ordinary prudence would exercise in his own case, and if he does this, he is not responsible to the principal for the acts or negligence of the agent so selected." Thus, if due care is taken by the agent in selecting substituted agent, such agent is not held liable or responsible to his principal for the acts of negligence performed by the substituted agent. For example, M appoints N to buy a ship for him. N in turn, employs Y, a ship surveyor having a good reputation to select a ship for M. But Y makes the choice of the ship negligently and the ship turns out to be useless and unseaworthy and is lost. Here, Y the surveyor, is responsible to M and not to N. (F) Sub-Agents Section 191 defines a sub-agent as, "a person employed and acting under the control ofthe original agent in the business of agency." This implies that aûb-agent is tne~agerit < 'ofthe original agenT wherethe subâgenfls"properly appointed, the principal is, so far as regards third persons, represented by the sub-agent and is bound by and responsible for his acts as if he were an agent originally appointed by the principal. Hence, the agent is responsible to the principal for the acts of sub-agent. Section 193 makes clear agent's responsibility for sub-agents appointed without authority. It states that, "Where an agent, without having authority to do so, has appointed a person to act as a sub-agent, the agent stands towards such person in relation of a principal to an agent, and is responsible for his act both to a principal and to third person.. Distinction between a sub-agent and substituted agent Following are the points of distinction between a sub-agent and a substituted agent. (i)

A substituted agent acts under the direct control of his principal while a sub-agent works under the control ofthe agent who appoints him.

(ii) The agent does not delegate any part of his tasks or duties to a substituted

Unit 3


agent. But so far as a sub-agent is concerned, the agent not only appoints a sub-agent but also delegates to him a part of his own duties. (iii) In case of a substituted agent, there is always a privity of contract between the principal and the substituted agent. A substituted agent is directly answerable to his principal. Moreover, both can sue each other. While in case of a sub-agent, there is no privity of contract between the principal and the sub-agent. A sub-agent is not directly answerable to the principal. Neither the principal can sue the sub-agent nor the sub-agent can sue the principal. However, both, the principal and the sub-agent, can sue the agent. (iv) A sub-agent is responsible to the agent alone and he is not generally responsible to the principal. But a substituted agent is responsible to the principal and not to the original agent who appoints him. (v) An agent is responsible to his principal for all the acts of the sub-agent appointed by him. While he is not responsible or liable for the acts of a substituted agent, provided he has taken due care in selecting him. (vi) In the case of a substituted agent, as an agent having an express or implied authority names another person to act as a substituted agent that agent's duty ends once he has named him, but in the case of a sub-agent, the agent, who appoints Jiim, remains answerable for the acts of the sub-agent as long as his sub-agency continues.

(G) Factor Section 2 (g) of the Sale of Goods Act, 1930 defines the term 'Mercantile agent' and accordingly, "Mercantile agent" means a mercantile agent having in the customary course of business as such agent an authority either to sell goods, or to consign goods for the purpose of sale, or to buy goods, or to raise money on the security of goods. However, it should be noted that this definition does not cover all types of mercantile agents. A factor is a best example of a general mercantile agent. If the factor does any act which is beyond his authority, but which is within the scope of his apparent authority, then his principal is bound by such act. According to Section 171, a factor has a general lien on the goods of his principal for a general balance of account between him and his principal. For example, A has his own car which he delivers to a mercantile agent, B, for selling the same at not less than Rs. 1,00,0007-. But B sells the same for Rs. 83,4007- to M.

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of course, M purchases A's car in good faith and without any notice of fraud by B. B appropriates the whole amount of 83,4007-. A sues M to recover the car. Here, as B is in possession of a car as a mercantile agent and that too with the consent of A for the purpose of sale, M gets a good title. Thus, the transaction is binding on A.

(H) Brokers A broker is a special type of mercantile agent who acts as a middleman between the buyer and the seller. Normally, he acts on behalf of the seller as well as the buyer and he generally preserves secrecy in his dealings. Thus, he is employed to bring about contractual relationship between the principal and the third parties. Unlike a factor, a broker has no possession of goods or property to be purchased or to be sold. Since he has no possession of goods or property, he cannot exercise the right of lien.

(I)

Auctioneers An auctioneer is a mercantile agent who is appointed to sell goods on behalf of the principal that is, 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 sell the goods of his principal by private contract or contracts. In Rainbow vs. Hawkins [1904 -2K. B. - 322], for example, H asked his agent, N, to sell his pony by auction at a price of £25, the reserved price. However, N did not disclose that there was the reserve price inadvertently and sold the pony to T at £16. It was held in the case that the sale of pony was binding on H.

(J)

Commission Agents A commission agent is, generally, appointed for selling or buying goods on behalf of hjsjriricigal. Such type of agents beTon^slxrasomewhaTmdeflniteHass of agents. He tries to secure buyers for sellers of goods and sellers for a buyer of goods and receives a commission in return for his work on the actual sale price.

(K) Del Credere Agents A Del Credere Agent is a mercantile agent who is employed to sell goods, on behalf of his principal. He undertakes to guarantee the payment of dues in consideration of an extra commission. Thus, if bad debts arise in respect of the sales made by him, the amounts of bad debts are paid by him to his principal and hence, he charges an extra 116

Unit 3


commission for such guarantee that he provides to his principal. Such extra commission is known as Del Credere Commission. If a customer does not make the payment for goods to him by the Del Credere agent, the Del Credere agent has to make the payment for such goods to his principal from his own pocket. Thus, he serves as an insurer to his principal against bad debts on account of credit sales. Besides this, a Del Credere agent performs other functions which are similar to those of a commission agent. Thus, a Del Credere agent occupies the position of a guarantor as well as that of an agent. (L) Forwarding Agents Forwarding agents render the services ofxollecting goods from their principals and forwarding the same to shipping companies. As foreign trade procedure is more complex than the procedure of home trade, the services of forwarding agents help the producers, exporters to a great extent. (M) Clearing Agents As forwarding agents help the exporters of goods, clearing agents help the importers of goods. They complete various complicated customs and exchange formalities on 'behalfofthe importers who appoint them. (N) Indenting Agents An indenting agent is a commission agent who procures a sale or purchase on behalf of his principal with a merchant abroad for a commission at the rate mentioned in the indent. He is an important mercantile agent who facilitates the distribution of goods at international level. He makes possible the creation of world market for many products. Besides the above mentioned agents, there are other types of agents also such as bankers, insurance agents, underwriters, solicitors, wife, estate agents, etc. They also play an important role and perform various functions for and on behalf of their principals. They are, in fact non-mercantile agents. Though they cannot be classed among mercantile agents, they are also engaged by merchants to conduct certain activities in connection with the business. 3.7

RIGHTS, DUTIES AND LIABILITIES OF AN AGENT

A principal is responsible for the acts of his agent done by him within the scope of his authority. Here, the agent's authority refers to the capacity of the agent to bind his principal.

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If an agent acts within his authority, his principal is bound by all such acts done by his agent. Section 226 lays down that, "Contracts entered into through an agent, and obligations arising from acts done by an agent, may be enforced in the same manner, and will have the same legal consequences, as if the contracts had been entered into and the acts done by the principal in person." For example, M purchases goods from N, knowing that N is an agent for the sale, but not knowing who is his principal. N's principal is entitled to claim from M the price of goods he purchased. M cannot, in a suit by the principal of N, set-off against that claim a debt due to himself from N. Section 188 deals with the extent of agent's authority. It lays down, "An agent, having an authority to do an act, has authority to do every lawful thing which is necessary in order to do such act." It further states, "An agent, having an authority to carry on a business, has the authority to do every lawful thing necessary for the purpose, or usually done in the course of conducting such business." This implies that, when an agent is authorised to carry on the business, he can do every lawful thing or act necessary for that purpose or usually done in the course of conducting such business. X, who lives in Pune, is employed as an agent by Y, residing in Mumbai, to recover a debt due to Y. X has authority to take all necessary actions for the purpose of recovering the debt and he may also give a valid discharge for the same on behalf of his principal. The authority of an agent can be actual authority and authority in emergency. 1. Actual authority of an agent Actual authority of an agent is the authority conferred on him by the principal. Such actual authority is of two kinds, that is, express authority and implied authority. When the authority is conferred by words spoken or written, it is called as express authority [Section 187]. A power of attorney which is a kind of deed, authorises the agent to do certain acts, is an example of express authority. "An authority is said to be implied when it is to be inferred from the circumstances of the case, and things spoken or written or the ordinary course of dealing, may be accounted circumstances of the case" [Section 187]. An estate agent was appointed to sell the property of his principal. He accepted a deposit from the prospective purchaser and misappropriated the same. The principal was held liable as the estate agent had an implied authority to accept a deposit. However, the principal cannot be held liable for the acts of his agent

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which are not authorised. He can only be held liable when his agent does certain acts which are within the scope of his authority and in the course of his employment. This implies that an implied authority of an agent depends on usages and customs of the particular business which must be reasonable and well known. For example, if the principal carries on the money-lending business and appoints the agent for that purpose, the agent has the authority to pledge his principal's credit. Between a wife and husband, the authority can be express or implied or even that of necessity. See 3.5 Creation of Agency. 2.

Apparent or ostensible authority

Ostensible or apparent authority is the authority of an agent as it appears to others. If an agent is employed for a particular business, the persons dealing with him can presume that he has authority to do all such acts as are necessary or incidental to such a business. Thus, when the board of directors of a company appoints any one of them as a managing director, they invest him not only with an implied authority, but also with ostensible authority to do all such acts which fall within the usual scope of his office. Other people who deal with him as a managing director can assume that he has the usual authority of a managing director. 3.

Agent's Authority in an emergency

In fact, an authority of an agent in an emergency is an authority in necessity. When it is not possible for an agent to communicate with his principal and to get necessary permission to do a particular act, emergency exists. Emergency may also exist where goods are perishable. The intention of an agent under such circumstances should be to protect the interest of his principal from loss. Section 198 lays down that "An agent has authority, in an emergency, to do all such acts for the purpose of protecting his principal from loss as would be done by a person of ordinary prudence, in his own case under similar circumstances." For example, an agent for sale has an authority to repair the goods if it is necessary. In an emergency, an agent is authorised to do all such acts in order to protect his principal from loss. X consigns some provisions to B at Mumbai, with directions to send the same immediately Y at Pune. B has an authority in emergency to sell the provisions at Mumbai, if the ovisions will not bear the journey to Pune without spoiling. Rut when an agent does something more than what he is authorised to do and what he =es beyond the scope of his authority cannot be separated from what is within his authority, c principal is not bound to recognise the transaction [Section 228].

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Activity K : Ashish is the owner of a ship and cargo and he authorises Subhash to procure an insurance for Rs. 5,0007- on the ship. Subhash procures an insurance policy for Rs. 5,0007- on the ship. But at the same time, in addition to that, he procures another insurance policy for the like sum on the cargo. Is Ashish bound to pay the premium ship and cargo, or can he repudiate the policy?

DELEGATION OF AUTHORITY BY AGENT

When an agent is appointed, he gets certain authority to do certain acts on behalf of his principal and such acts are binding on his principal. Thus, when the fact of agency is established, it is also established that the agent has some authority. But here arises a question as to whether an agent can delegate his authority. The general principle in this respect is, 'Delegatus non protest delegare', which means a delegate cannot further delegate." Thus, a person to whom authority has been given, he cannot further delegate that authority to another person. This is so because the principal appoints a particular person as his agent to act on his behalf, he relies upon the agent's integrity competence skills, etc. and it would be unfair, if the authority to act is shifted or delegated to another person. This is particularly true when the agent is appointed to perform particular act or task requiring judgment, skill, competence or discretion. But to this general rule, there are certain exceptions. Under certain circumstances, the agent is permitted to delegate his authority by appointing sub-agents. Section 190 also lays down that an agent cannot lawfully employ another person to perform various acts which that agent has expressly or impliedly undertaken to perform personally, unless by the ordinary custom of trade a sub-agent may or from the nature of agency, a sub-agent may be employed. Following are the circumstances in which, an agent can appoint sub-agents. They are the exceptions to the rule "Delegates non protest delegare."

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(a) When the principal expressly permits his agent to delegate the authority and allows his agent to appoint a sub-agent. (b) When the principal is well aware of his intention of his agent to appoint a sub-agent and he does not object to it. (c) Where the custom of trade permits the delegation of authority. (d) Where the nature of authority or work is such that a sub-agency is necessary to complete or carry on the business. (e) When unforeseen emergencies arise, the agent can appoint a sub-agent and delegate his authority in such emergencies. (f) When the acts to be done are purely ministerial and do not involve the confidence or use of discretion as, for example, routine or clerical work. (g) When the power of the agent to delegate his authority can be inferred from the conduct of the principal as well as of the agent. RIGHTS, DUTIES AND LIABILITIES OF AN AGENT TO HIS PRINCIPAL 1.

Rights of an agent

Provisions have been made in different sections of the Indian Contract Act of 1872, which confer certain rights to an agent. Following are some of the important rights of an agent. (A) Agent's rights to do all lawful things A person who is appointed as an agent by giving authority, gets the right to do every lawful thing or act which is necessary for the purpose, or usually done in the course of conducting the business of his principal [Section 188]. This implies that an agent has every right to perform those acts which are necessary for discharging the duties entrusted to him by his principal. (B) Agent's right in emergency In an emergency, an agent has an authority to do all such acts which are necessary for the purpose of protecting his principal from loss as would be done by a person of ordinary prudence, in his own case, under similar circumstances [Section 189].

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(C) Agent's right to appoint sub agent and substitute agent An agent can appoint a sub-agent and substituted agent A sub-agent when appointed by the original agent works under the control of the original agent in the business of agency [Section 191]. Such sub-agent is responsible to the agent for his acts except in cases of fraud or wilful wrong [Section 192]. So far as the substitute agent is concerned, an agent may name another person as the substitute agent to act for his principal in the business of agency where the agent has an express or implied authority [Section 194]. (D) Agent's right to renounce his agency According to the provisions of Section 201, an agent gets the right to renounce his agency by giving a reasonable notice to his principal. (5)

Agent's right to receive remuneration when due : An agent has a right to receive his remuneration at an agreed rate when he has carried out the object of his,agency unless (a) There is any contract to the contrary; or (b) He is guilty of any misconduct in the agency business [Section 219]. Section 219 also provides that in the absence of any special contract, payment for the performance of an act is not due to the agent until such act is completely performed. However, when an agent's act is deemed to be completed, depends upon the terms and conditions of the particular contract. When the remuneration of an agent is payable on the performance of a definite task or undertaking by him, he is entitled to receive his remuneration as soon as he has substantially done all those acts that he undertook to do, even though his principal does not get benefit from his services except where there is an express agreement or special custom to the contrary. H appointed S as his agent to introduce a customer to purchase his property and accordingly, S introduced a customer. As a result, the sale of the property was settled. However, the sale could not be materialised because of the inability of the customer to raise the money required to complete the sell. It was held that S was entitled to receive the commission as agreed upon [Sheikh Farid Baksh vs. Hurgulal Singh] A.I.R.(1937)A1146].

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An agent is entitled to receive the commission as per agreement if an act or a transaction for which he claims his remuneration is direct or indirect result of his efforts or services. In Green vs. Barlett [1863 - 14 C. B. N. S. 681] an agent was appointed to sell a house. The agent held an auction but could not find out a purchaser. However, one of the persons attending the auction approached the principal by obtaining the principal's address from the agent and purchased the house without any intervention of the agent. It was held in the case that the agent was entitled to his commission as the transaction was the result of the efforts of the agent. But, according to the provisions of section 220, an agent is not entitled to any remuneration for his misconduct. Section 220 lays down that, "An agent, who is guilty of misconduct in the business of the agency, is not entitled to any remuneration in respect of that part of the business which he has miconducted." M employs N to recover Rs. 50,0007- from R and to lay it out on good security. N recovers Rs. 50,0007- and lays out Rs, 40,0007- on good security, but he lays out remaining Rs. 10,0007- on security which he ought have known to be bad. Hence, M loses Rs. 1,0007-. Here, N is entitled to the remuneration for recovering Rs. 50,0007 - from R and also for investing Rs. 40,0007-. But he is not entitled to any remuneration for investing Rs. 10,0007- and he must make good the amount of Rs. 1,0007- to M. (F) Agent's right to receive compensation for premature revocation , * Section 205 implies that where there is an express or implied conduct that the agency should be continued for any period of time, the agent has the right to receive compensation from his principal for any previous revocation of the agency without any sufficient cause. (G) Agent's right of retainer According to the provisions of Section 217, an agent has the right to retain, out of any sums received on account of the principal in the business of the agency, all moneys due to himself in respect of advances made or expenses properly incurred by him in conducting or carrying on such business and also such remuneration as may be payable for acting such agent. Thus, where the services rendered by the agent are not voluntary, such agent is entitled to receive the agreed remuneration or if it is not agreed, a reasonable remuneration. 123

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(H) Agent's right of lien on principal's property Section 221 states that, "In the absence of any contract to the contrary, an agent is entitled to retain goods, papers and other property, whether moveable or immovable, of the principal received by him, until the amount due to himself for commission disbursements and services in respect of the same has been paid or accounted to him." Thus, certain classes of agents such as factors who have the goods, property etc. of their principals in their possession have a lien over the goods, property etc. in respect of their dues i.e. remuneration and expenses, liabilities etc. incurred. Generally, such lien is a particular lien and not a general lien. This right of lien is lost by his parting with the possession of goods or property as the case may be or the agent waiving his right oflien. However, by a special contract, an agent can have a general lien extending to all his claims which arise out of his agency business.

(I)

Agent's right of indemnification against the consequences of lawful or legal act/acts An agent represents his principal and as such, the agent has every right to be indemnified by his principal against all charges, expenses, liabilities etc. if properly incurred by the agent in the course of his agency business. Section 222 lays down, "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." X, at Mumbai, under instructions from Y, his principal living in Pune, contracts with M to deliver certain goods to him. Y does not send the goods to X and hence, he could not deliver the same to M. Therefore, M sues Y for the breach of contract. X informs Y about the suit filed by M for the breach of contract. Y authorises X to defend the suit and hence, X defends the suit. X is compelled to pay damages, costs and has to incur expenses. Y is liable to X for the damages, cost and expenses.

(J) Agent's right to be indemnified against the consequences of all the acts done in good faith An agent has a right to be indemnified by his principal against the consequences of all acts done by him in good faith. Section 223 lays down that, "Where one person employs another to do an act, and the agent does the act in good faith, the employer

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is liable to indemnify the agent against the consequences of that act, though it causes an inj ury to the right of a third person. X, a decree-holder and entitled to execution of Y's goods, requires the office of the court to seize goods representing them to be the goods of Y. The offer seizes the goods and is sued by A, the true owner of goods. X is liable to indemnify the officer for the sum which he is compelled to pay to A, in consequence of obeying X's directions as he acted in good faith. However, it must be noted that the right of agent to be indemnified does not extend to illegal or unlawful acts or criminal acts though authorised and performed on behalf of his principal. Section 224 provides that, "where one person employs another person to do an act which is criminal, the employer is not liable to the agent, either upon express or an implied promise to indemnify him against the consequences of that act. R employs to beat A and also agrees to indemnify him against all consequences of the act. Thereupon, M beats A, and M has to pay damages to A for doing so. Here, R is not liable to indemnify M for those damages. (K) Agent's right of stoppage in transit The right of stoppage in transit can be acquired by an agent in the following cases. (i) When the agent purchases goods on behalf of his principal either with his own money or by incurring personal liability for the price, he stands towards the principal in the position of an unpaid seller and hence, he possesses the right to stop the goods in transit, if they have been delivered to the carrier for transmission to his principal. Thus, an agent has a right to stoppage in transit against his principal in respect of the amount which he has actually paid or is liable to pay. (ii) When an agent, for example, Del Credere agent is personally liable to his principal for the price of goods sold, he can exercise the unpaid seller's right to stop the goods in transit on the insolvency of the buyer. (L) Agent's right of compensation for injury caused by his principal's neglect or want of skill An agent has every right to be compensated in respect of injury caused to him on account of his principal's neglect or want of skill but not for the injury caused by his own contributory negligence. According to Section 225, "The principal must make

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compensation to his agent in respect of injury caused to such agent by the principal's neglect or want of skill." Suresh employs Ramesh as a bricklayer in building a godown and Suresh puts up the scaffolding himself. However, the scaffolding is unskillfully put up and as a consequence, Ramesh is hurt. Suresh must give compensation to Ramesh.

2.

Duties and liabilities of an agent to his principal

Rights and duties are two sides of the same coin. As an agent has certain rights, he has to perform certain duties for the principal. An agent owes a number of duties to his principal, depending upon the nature of agency. Following are the important duties which an agent is expected to perform for his principal. (A) Agent's duty to conduct principal's business according to his instructions or directions: It is the primary duty of an agent to conduct the business of his principal according to the directions or instructions of the principal. In the absence of any such instructions or directions, an agent is bound to conduct the business of his principal according to custom which prevails in doing the business of the same kind at the same place where the agent conducts such business. When an agents does not act according to the directions, instructions of his principal and as a result, any loss is sustained, the agent is held liable for the same and he has to make that loss good to his principal. If the agent earns some profit because of his acts, he has to account for the same. If the agent's misconduct is material he may lose his remuneration and his agency can be terminated. Section 211 lays down that, "An agent is bound to conduct the business of his principal according to the directions given by the principal, or in the absence of any such directions, according to the customs which prevails in doing business of the same kind at the place where the agent conducts such business. When the agent acts otherwise, if any loss be sustained, he must make it good to his principal, and if any profit accrues, he must account for it." M, an agent, is carrying on a business for N in which it is the custom to invest from time to time, at interest, the moneys, which may be in hand. M forgets to make such investment. M has to make good to N the interest usually obtained by such investments. Of course, when an agent is privileged to protect his own interest, he can neglect the instructions given by his principal. B is a factor and as such, he has a lien on goods

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owned by his principal to the extent of the amount advanced by him to his principal. His principal orders B either to sell or return the goods. Under such circumstances, B is not bound to obey his principal's order until his principal repays all the advances made by B.

(B) Agent's duty on the termination of agency by his principal's death or insanity When an agency is terminated by his principal dying or becoming of unsound mind, it is the duty of the agent to take, on behalf of the representatives of his late principal, all reasonable steps for the protection and preservation of interest entrusted to him [Section 209].

(C) Agent's duty to conduct or carry on the work with reasonable care, skill and diligence It is one of the important duties of an agent to conduct the business of the agency with as much skill as is generally possessed by persons engaged in similar business, unless the principal has notice of his want of skill. The agent is always bound to act with reasonable diligence and to use such skill as he possesses, [Section 212]. What is reasonable care and diligence depends upon the circumstances of each case. But generally the agent is at least expected to exercise the same degree of skill, diligence, care etc. as he would exercise about his own affairs in his own business. Section 212 also states that, "the agent is bound to make compensation to his principal in respect of the direct consequences of his own neglect, want of skill or misconduct, but not in respect of loss or damage which are indirectly or remotely caused by such neglect, want of skill or misconduct." This implies that an agent is not liable for loss, if any, arising out of indirect or remote causes and he can be liable only for loss or losses suffered by his principal as a consequence of his neglect, want of skill or misconduct. For instance, an agent is asked to insure the goods against fire, but the agent fails to do so. If fire breaks out and as a result, his principal suffers the losses, the agent is liable to compensate the losses to his principal for not insuring the goods against fire. Such loss is clearly due to direct consequence of agents negligence to insure goods against fire as directed by his principal. A is appointed as an agent for the sale of goods. He is properly authorised to sell the goods on credit. He sells the goods to M on credit without making proper and usual enquiries as to the solvency of M. At the time of the sale, M is insolvent. Here, A will have to compensate to his principal in respect of loss thereby sustained.

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Activity L : My brother, Mr. Kalcin employed Mr. Joseph to sell a house, On 27lh May 2005, Mr. Joseph received an offer of Rs. 5,00,0007- from Mr. Davis and communicated to my brother. My brother directed him to accept the offer "Subject to condition. "Mr. Joseph also got an offer from Mr. Philips of Rs. 5,50,0007-. But Mr. Joseph did not inform my brother about the same. On 6th June 2005 a written contract was entered between my brother and Mr. Davis. Afterwards my brother came to know about the offer of Mr. Philips. I am an advocate. My brother appointed me to file a civil suit in the court of Law for the difference between the price.

(D) Agent's duty to render accounts properly to his principal Section 213 makes it clear that, "An agent is bound to render proper accounts to his principal on demand." An agent is always under an obligation to keep all his accounts, property etc. separate from those of his principals. It is the duty of an agent to maintain the accounts of various transactions of his principals property. He has not only to tender his principal's account to the principal but also to explain the same to the principal wherever he demand so. If the contract of agency expressly provides that the accounts shall be rendered periodically, it is the duty of the agent to render the accounts periodically. (E) Agent's duty not to delegate his authority Provisions of Section 190 implies that an agent must act in person and it is the duty of an agent not to delegate his authority or employ another person to perform acts which he has expressly or impliedly undertaken to perform personally, unless by the contract of agency, a sub-agent must be employed. (F) Agent's duly to communicate with principal in cases of difficulty Section 214 clearly states that, "It is the duty of an agent, in cases of difficulty, to use all reasonable diligence in communicating with his principal, and in seeking to obtain 128

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his instructions." But, when an agent cannot communicate with his principal in emergency, he has an authority to take every necessary step and to do all such acts for protecting his principal from loss or losses as would be done by a person of ordinary prudence [Section 189].

(G) Agent's duly not do deal on his own account in the business of agency It is the duty of an agent not to deal on his own account in his agency business without the prior consent of his principal and without acquainting with material circumstances. If an agent deals in his agency business on his own account without the knowledge of his principal, the principal has an authority to repudiate the transaction, if the case shows that the agent has concealed any material fact dishonestly from his principal or that the agent's dealings have been disadvantageous to the principal [Section 215]. Following illustrations make this point more clear. (i) M directs N to sell M's property. However, N purchases M's property for himself in the name of R. M. on discovering this material fact, has the right to repudiate the sale provided that he can prove that N has dishonestly concealed the material fact or the sale has been disadvantageous to him. (ii) Prasad directs Satish to sell Prasad's estate. On looking over the estate before selling it, Satish finds a valuable mine on the estate which is not known to Prasad. Satish informs Prasad that he wants to purchase the said estate for himself; but conceals the fact of the discovery of the mine. Prasad allows Satish to purchase the same, in ignorance of the existence of the mine. Prasad, on discovering that Satish knew about the mine when he purchased the estate, can either repudiate the sale of his estate or adopt the sale at his option. If an agent deals, without the knowledge of his principal, in the business of agency on his own account instead of an account of his principal, the principal is entitled to claim from the agent any benefit which may have resulted to him from the transaction [Section 216]. R directs M, who is R's agent, to purchase a certain flat for R. M informs R that it cannot be purchased. But M buys the same for himself. On discovering that M has purchased the flat, R may compel M to sell the same to R at the price at which the flat was purchased.

(H) Agent's duty not to earn or make secret profit from agency business The provisions of Section 216 imply that an agent shall not earn or make any secret 129

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profits from his agency business beyond the agreed remuneration or commission as the case may be. As an agent occupies a fiduciary position, which requires utmost good faith in the conduct of the agency business, he must not earn any profit secretly and if he earns any secret profit, it is the duty of the agent to account for it to the principal. In Andrews vs. Ramsay and Company [1903 - 2 K. B. 635], A was appointed as an auctioneer to sell goods. A received some additional commission over and above what his principal paid to him from the buyer. It was held that A was bound to pay the total commission he received to his principal. When an agent earns some extra amount over and above his commission as agreed upon, either by way of secret profit or bribe, in his agency business, his principal can (a) Recover the amount of secret profit earned from his agent, (b) Refuse to pay his agent his remuneration or commission as the case may, (c) Terminate the agency without any notice, (d) To repudiate the contract entered into by his agent with the third party, and (e) File a suit against his agent and also against the third party for loss or damages suffered by him in the transaction with the third party. (I)

Agent's duty not to use the information obtained in the course of the agency business against his principal When an agent obtains any information in the course of agency, it is the duty of the agent not to use such information on any account against the interest of his principal. If he does so, he must compensate his principal for loss, if any, suffered by him. His principal can also stop the agent from using such information by injunction order.

(J)

Agent's duty to pay sums received for the principal It is the duty of the agent to pay to his principal all sums received on account of the principal, subject to certain deductions [Section 218]. If an agent deals on his own account in the agency business, he is not entitled to receive any commission or remuneration from his principal. However, an agent may retain, out of any sums received on account of the principal in the business of the agency.

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(a) All sums due to himself in respect of advances, or (b) Expenses properly incurred by him in conducting the business of agency, or (c) Such remuneration as may be payable to him for acting as the agent [Section 217].

(K) Agent's duty not to set up an advance adverse title When an agent receives from his principal or from other sources connected with the agency business, for and on behalf of his principal, in the capacity of an agent, it is the duty of the agent not to set up an adverse title that is, his own title or the title of third parties to the goods. If an agent does so, he is held liable for such conversion.

(L) Agent's duty in naming an agent for his principal According to Section 195, in selecting an agent for his principal, an agent is bound to exercise the same amount of discretion as a man of ordinary prudence would exercise in his own case. However, if the agent does so, he is not held responsible to his principal for the acts or negligence of the agent so selected.

(M) Agent's liability in respect of damages and misconduct An agent is held liable to pay damages for breach of contract committed by him. An agent who is guilty of misconduct in the business of the agency, is not entitled to any remuneration in respect of that part of the business which he has misconducted [Section 220]. X employs Y to recover Rs. 5,0007- from R. Through Y's misconduct, the amount is not recovered. Y is entitled to no remuneration for his services and he must make good the loss to X.

N) Personal liability of an agent where fixed by trade custom or usage Where the personal liability of an agent is fixed by trade custom or usage in his agency business, as in mercantile transactions that is, promissory notes, bills of exchange, the agent is held personally liable for his wrongful acts unless there is any contract to the contrary.

0) When an agent agrees expressly to be liable When a contract expressly lays down that the agent shall be held personally liable in case of breach of contract, then the agent can be held personally liable for that.

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(P) Agent's liability for his wrongful acts When an agent acts beyond his authority and commits fraud or misrepresentation in his agency business, such agent is personally held liable to the principal for such acts or such contracts (Section 238). (Q) Liability of an agent for the acts of sub-agents Section 193 fixes the agent's responsibility for sub-agent's appointment without authority. It states that "where an agent, without having authority to do so, has appointed a person to act as a sub-agent, the agent stands towards such person in the relation of a principal to an agent, and is responsible for his act both to the principal and to third person." 3.8

RIGHTS, DUTIES AND LIABILITIES OF PRINCIPAL 1.

Rights of principal against his agent The duties of an agent and the rights of a principal coincide with each other. In fact there are as many duties of an agent are, in fact, the rights of his principal. The principal can enforce various duties of his agent which are as per the provisions of the sections relating to the agency of contract, and as per the contract entered into by the principal and his agent. Thus, the principal has various rights to enforce all the duties of his agent. Following are the important rights of principal against his agent. (A) Principal's right to demand accounts (Section 213): Principal has a right to demand proper accounts from his agent. (B) Principal's right to repudiate the contract when agent deals in the business of agency on his own account [Section 215]: When an agent deals in his agency business on his own account, without obtaining prior consent or permission / knowledge of his principal and acquainting with him all material circumstances which have come to his own knowledge on the subject, his principal has the right to repudiate such transaction or contract. If the principal proves that any material or fact which has been dishonestly concealed from him by his agent or such dealings of his agent have been disadvantageous to him the principal gets following rights:

Ji.

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(i) (ii)

He can repudiate the transaction, He may affirm such transaction and claim the benefits accrued from such transaction,

(iii) He may claim damages for loss, if any, caused to him. (C) Principal's right to benefits gained by his agent dealing on his own account in the business of agency [Section 216] If an agent deals in the agency business on his own account instead of on account of his principal, without the knowledge of the principal, the principal has a right to claim from his agent any benefit which may have resulted to him from the transaction. Thus, if an agent makes any secret profits out of his agency business, without the knowledge and prior consent of his principal, the principal has the right to recover the same from his agent. Moreover, the agent also forfeits his right to any commission or remuneration, as the case may be, in respect of such transaction. Where an agent makes any secret profit, the contract with the third party is not rendered void. As the position of an agent is fiduciary in character, he cannot conflict his personal interest with his duty to his principal. (D) Principal's right to recover damages [Section 211 and 212] The principal has a right to claim compensation for any loss sustained by him or to any profits accrued and to recover damages (1) When the agent acts contrary to the instruction or directions given by his principal, or (2) When loss is caused as a result of his agent's neglect, want of skill or misconduct, or

H i si

(3) When the agent does not follow the trade custom in the absence of his principal's direction. (E) Principal's right to refuse remuneration to his agent when he is guilty of misconduct [Section 220] The principal has the right to refuse remuneration to the agent who is guilty of misconduct in his agency business. If the principal can prove that his agent has acted as principal himself and not merely as an agent, the principal has the right to resist the agent's claim for indemnity against any liability incurred by the agent in such transaction. 133

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(F) Principals right to revoke agent's authority [Section 203] The principal has the right to revoke his agent's authority by giving a reasonable notice of revocation at any time but before the authority has been exercised so as to bind the principal. R For examples, authorises M to purchase goods on account of R and to pay the price of such goods out of R's money remaining in M's hand. M purchases some goods from X in R's name so as not to render himself personally liable for the price. Here, R has the right to revoke M's authority to pay the price of goods. R also can revoke M's authority to purchase goods before M purchases the goods on R's account. However, the principal cannot revoke the authority given to his agent after the authority has been partly exercised, so far as regards such acts and obligations as arise from acts already done in the agency [Section 204]. R authorises M to purchase goods on account of R and also to pay the price of such goods out of R's money remaining in M's hand. M purchases some goods from X on his own credit so as to make himself personally liable for the price. R cannot revoke M' s authority so far as regards the payment for the goods.

(G) Principal's right to ratify or disown his agent's acts [Section 196] Where acts are done by the agent on behalf of the principal but without knowledge of the principal or without any authority, the principal has the right to ratify or disown such acts.

2.

Duties and liabilities of principal to his agent:

The duties and liabilities of principal to his agents are explained below:

(A) Principal's duty to pay remuneration and dues to his agent [Section 217] It is the right of an agent to receive from his principal his remuneration and dues, if any, for the functions he performs for his principal. This implies that it is the duty of the principal to pay his agent such remuneration as may be payable to him for acting as agent and also all sums due to his agent in respect of advances made and/or expenses properly incurred in carrying on principal's business.

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(B) Principal's duty to indemnify his agent against the consequences of all legal or lawful acts [Section 222] It is the duty of the principal to indemnify his agent against the consequences of all legal or lawful acts done by such agent in exercise of the authority conferred upon him. X orders his agent, Y, to contract with R for the purchase of some goods for X. But afterwards, X refuses to take the delivery of goods sent by R. Hence, R files a suit against Y. Y informs R who repudiates the contract altogether. Y defends the suit but he has to pay damages and costs. As Y acts in exercise of the authority conferred upon him properly by X, it is the duty of X to indemnity his agent and he is liable for costs and damages paid by his agent.

(C) Principal's duty towards his agent to indemnify him against the consequences of all acts done in good faith [Section 223] The principal is bound to indemnify his agent against the consequences of the acts done by his agent in good faith so far so the agency business is concerned. Section 223 clearly lays down that, "Where one person employs another person to do an act and the agent does the act in the good faith, the employer is liable to indemnify the agent against the consequences of that act, though it causes injury to the right of a third per son." 0 is appointed as an agent by P who asks 0 to sell the goods in the possession of P, though P had no right to dispose of the goods. 0, not knowing this fact, sells the goods and hands over the proceeds of the sale to P. Afterwards, X, the true owner of the goods, files a suit against 0 for selling the goods owned by Y. 0 has to pay the value of the goods and costs incurred in this connection. P is liable to indemnify 0 for what he has been compelled to pay to X and for O's own expenses, as 0 has acted in good faith on behalf of his principal, P. Thus, it is the duty of the principal to indemnify the agent not only against the lawful acts but also against the acts done by him in good faith. However, it should be noted that an agent cannot claim indemnity for acts which he knows to be illegal or unlawful. Section 224 says that, "where one person employs another to do an act which is criminal, the employer is not liable to the agent, either upon express or upon implied promise to indemnify him against the consequences of the act." This provision imply that an agent can refuse to carry out the directions or instructions of his principal to do criminal acts. 135

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(D) Principal's duty to compensate his agent for injury caused [Section 225] Section 225 states that, "The principal must make compensation to his agent in respect of injury caused to such agent by the principal's neglect or want of skill." However, it should be noted that if the injury is due to agent's own contributory negligence, the principal cannot be held responsible for compensating the agent for such negligence. X employs N as a bricklayer in building a house, but puts up the scaffolding (a platform to support the workmen while building) himself. The scaffolding is unskillfully put up and as a result, N is hurt. X is liable not to make compensation to N.

(E) Liability of the principal in respect of contracts entered by his agent with third parties [Section 226] Principal is held liable for the contracts entered into through his agent and also obligations arising from acts done by his agent. Such contracts may be enforced in the same manner and will have the same legal consequences as if they had been entered into and the acts done by the principal in person. This implies that the principal is bound by acts of his agent with all its results. However, such acts to bind the principal should fall within the authority of his agent. If the agent exceeds his authority and the third party knows that, the principal cannot be held liable for such acts of his agent. [Section 227].

(F) Liability of the principal when the notice is properly given to his agent [Section 229] Notice properly given to the principal is an ascribed or imputed notice to the principal and any notice given to or information obtained by the agent, provided it is given or obtained in the course of business transacted by him for his principal, as between the principal and the third parties, shall have the same legal consequences as if it had been given to or obtained by the principal.

(G) Liability of the principal when he induces third parties or persons to believe that his agents unauthorised acts were authorised [Section 237] Provisions of Section 23 7 imply that when an agent has done acts or incurred some obligations to a third party or person on behalf of his principal without any authority and, if his principal has by his or conduct induced the third party or person to believe that such acts and obligations were within the scope of his agent's authority, under such circumstances, the principal is liable for such acts or obligations. Thus, the principal is stopped from denying his agent's authority. 136


(H) Principal's liability on account of agent's misrepresentation or fraud [Section 238] If misrepresentation made or frauds committed by agents acting — (i) in the course of their agency business and for their principals and, (ii) within the scope of their authority, they have the same effect on agreements made by such agents as it such misrepresentations or/and frauds had been made or committed by their principals. However, misrepresentations made or frauds committed by agent and if they do not fall within the agent's authority, his principal cannot be held liable for such misrepresentations and/or frauds. Thus, an agent receives some amount from a third party by fraud or misrepresentation and his principal is not aware of the fact, the principal cannot be liable for such fraud or misrepresentation and the third party cannot compel the principal to repay that amount.

3.9

TERMINATION OF AGENCY

Agency may be terminated in the same manner as any other contract, namely, (a) by the acl of the parties to the agency, or (b) by operation of law. Sections 201 To 210 of the Indian Contract Act, 1872 deals with the various modes of terminating a contract of agency. Section 201 describes various modes of terminating a contract of agency but the section is not comprehensive. Section 201 lays down that, "An agency is terminated by the principal revoking his authority, or by the agent renouncing the business of agency, or by the business of agency being completed; or by either the principal or agent dying or becoming of unsound mind; or by the principal being adjudicated an insolvent under the provisions of any Act for ihe time being in force for the relief of insolvent debtors." The list of the modes of termination of agency is not complete and besides the modes of termination of agency mentioned in section, there are some other modes also. Moreover, it should be noted that the agency is irrevocable in certain cases. Various important modes of the termination of agency are shown in the chart and explained thereafter.

(I)

Termination of agency by act of the parties to the contract of agency As agency is created by a contract, either express or implied, entered into between principal and his agent, it may also come to an end either on account of the act of the principal or his agent or both. Thus, an agency may be terminated a)

By agreement between principal and his agent; or ~Y^y*^\ / \=\ "£>\,

b) By revocationjaf agency by the principal; or c) By renunciation of business by the agent. 137

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(A) Termination of agency by agreement between principal and his agent Sometimes, a contract of agency may itself contain the provision relating to the termination of agency. Such contract or agreement may be express or implied. Thus, agency can be terminated at any time and at any stage by the mutual agreement between the principal and his agent. However, they may enter into a fresh agreement by terminating or replacing the earlier contract. (B) Termination of agency by revocation of agency by the principal Revocation by the principal is one of the important modes of termination of agency. Sections 203 to 208 and Section 210 of the Indian Contract Act, 1872 deals with the revocation of agent's authority by the principal and provide as to how and under what circumstances a principal can or cannot revoke his agent's authority. Let us consider in brief various provisions of the Indian Contract Act, 1872 relating to revocation of agent's authority. (1) When principal may revoke agent's authority? The principal may revoke i.e cancel or withdraw his agent's authority at any time before the agent has exercised it so as to bind the principal unless the agency is irrevocable [Section 201 and 203]. When agent has acted so as to bind his principal, the authority is said to be exercised by the agent. Therefore, the principal may revoke agent's authority before contractual relations have been created by the agent on behalf of his principal so as to bind the principal with the third party. Section 207 implies that revocation of agent's authority either may be express or may be implied in the conduct of the principal. (i) When X empowers Y to let X's house, but afterwards X himself lets it to M. This is an implied revocation of Y's authority. (ii) InAzam Khan vs. S. Sattar [A.I.R. 1978. A.P. 422], S was appointed as an agent to carry on the business and to do all necessary acts on behalf of A in his absence from India. Naturally, when he returned to India, S's agency was impliedly revoked. (2) Compensation for revocation of agent's authority by principal: According to Section 205, "Where there is an express or implied contract 138

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that the agency should be continued for any particular period of time, the principal must make compensation to the agent for any previous revocation of agency without any sufficient cause." Thus, the principal is held liable to pay compensation to his agent only where there is an express or implied contract that the agency shall be continued for a particular period of time and, if the principal revokes his agents authority before the expiry of that agreed period of time without any sufficient cause. In the absence of any special term in the contract of agency or in the absence of any express of implied contract, there is no implied obligation on the principal to continue with the agency and hence, agent cannot demand any compensation. (3) Reasonable notice of revocation to the agent by his principal: Section 206 expressly provides that reasonable notice must be given of revocation of agency to the agent by his principal, otherwise the damages thereby resulting to the agent are required to be made good to him by the principal. What is reasonable notice will depend on the facts and circumstances of each case. Thus, where there is no stipulation as to the duration of the agency, such agency can be terminated by giving reasonable notice to the agent. But if such notice is not served on the agent, the agent is entitled to claim the damages. Where the agency is continuous one, reasonable notice of termination of the agency is required to be given to the agent as well as to the third parties. Notice to the agent is also necessary when the agency is for a fixed period. (4) Irrevocable agency: The principal is not entitled to revoke his agent's authority in the following circumstances: (a)

Where the agency is coupled with interest,

(b)

Where authority has been partly exercised by the agent and

(c)

Where an agent has incurred personal liability.

<*

Now, let us consider these circumstances in which agency cannot be revoked, by the principal.

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(II) Agency, cannot be revoked (A) Agency coupled with interest An agency where the agent is interested in the property which is the subject matter of agency is said to be the agency coupled with interest. Section 202 of the Indian Contract Act of 1872 lays down that, "Where the agent has himself an interest in the property which forms the subject-matter of the agency, the agency cannot, in the absence of an express contract, be terminated to the prejudice of such interest." Thus, the provisions of Section 202 makes it clear that an authority of agent coupled with interest is not revocable if the effect of such revocations would be to prejudice the agent's interest in the subject matter of agency or would cause any loss to the agent. Even the death or insanity of the principal will not terminate the agency under such circumstances. Of course, any express agreement / terms between the principal and his agent may provide for an exception to this general rule. But an authority of agent coupled with interest is generally irrecoverable. Following illustrations show whether agent has an interest in the transactions. (i) M gives authority to N to sell M's land and to pay himself out of the proceeds the debts due to him from M. M cannot revoke this authority, nor can it be terminated by his insanity or death of M. (ii) R consigns some goods to K, who has made advances to him on such goods. R desires K to sell the goods and repay himself out of the price of goods the amount of his own advances. R cannot revoke K's authority, nor is it terminated by his insanity or death. (iii) Keshav is appointed by Harshvardhan to recover certain amount due by Ratnakar to Harshvardhan and to pay himself, out of the amount so recovered, debts due to him from Harshvardhan. Here, Harshvardhan cannot revoke Keshav's agency as Keshav has an interest in the subject matter of agency. (iv) In Smart vs. Sunders [1848 -75-R. R. 849], where S consigned certain goods to M for sale. Subsequently, M gave some advance to S. It was held in the case that the subsequent advance could not convert the agency into the agency coupled with interest.

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Interest should be infered from the language of the document and from the course of dealing with the concerned parties. Interest in the property may include interest by way of security, lien or any other special right. Interest of the agent must exist at the time of creation of the agency. To constitute an agency coupled with interest, it is necessary that (i) Interest of an agent must be in existence at the time of creation of an agency. (ii) Such interest of the agent in the subject-matter of the agency contract ought to be substantial. Mere prospects of remuneration alone is not considered as an interest within the meaning of Section 202.

(B) Where authority has been partly exercised by the agent The principal cannot revoke the authority of his agent in such a way so as to damage the interest of the third party as well as that of the agent. Section 204 lays down that "The principal cannot revoke the authority given to his agency after the authority has been partly exercised, so far as regards such acts and obligations as arise from acts already done in the agency." Section 222 says that "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."

(C) Where an agent has incurred personal liability When the agent enters into contracts in his personal name on behalf of his principal and makes himself personally liable, the principal cannot revoke agent's authority. In other words, when an agent incurs any personal liability, the agency becomes irrevocable, for the principal cannot expose his agent to risk or liability or obligations he has incurred by revoking his agency.

3.

When revocation or termination of agency takes effect ? As a matter of fact, revocation of authority terminates the agents authority. Section 208 provides for as to when the termination of agent's authority takes effect as to agent and as to third persons. Section 208 lays down that, "the termination of the authority of an agent does not, so far as regards the agent, take effect before it becomes known to him, or so far as regards third persons, before it becomes known to them." Thus, in short, the termination of the authority takes effect (i) as regards the 141

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agent, after it becomes known to him and (ii) as regards third persons, termination of agency takes effect after it becomes known to them. The revocation of agency as regards the agent and the third party may take effect at different points of time. As regards the agent and third parties termination of agency by revocation is effective not from the moment, the revocation is made by the principal, but from the time of knowledge of the agent or the third parties of such revocation. Hence, if an agent knowingly enters into a contract with a third party or person after revocation of his agency, the third party or person who deals with him bonafide i.e. without knowing that the agent's authority has been terminated, the contract thus, entered into is binding on the principal as against the third party. X is the principal and Y is his agent. X directs Y to sell goods and agrees to pay him the commission at the rate of 10% on the value of goods sold. Afterwards, X revokes Y's authority by letter. After the letter is sent, but before it is received by Y, Y sells the goods of Rs. One lacs. The sale in binding on X and Y is entitled to his commission at the rate of 10%.

4.

Termination of sub-agency and substituted agency The sub-agency is automatically terminated as soon as the main agency is terminated. Section 210 lays down that, "the termination of the authority of an agent causes the termination of the authority of all sub-agents appointed by him." But the authority of the substituted agent is not automatically terminated if the main agency is terminated.

5.

Termination of agency by renunciation of business by the agent As a principal has the right to revoke the agent's authority subject to the provisions of various sections of the Indian Contract Act of 1872, an agent also can renounce the business of agency in the same manner. An agent can renounce the contract of agency after giving a reasonable notice of his intention of such renunciation of agency; for he cannot be compelled to continue as agent against his will. If an agency is for a fixed period and the agent wants to renounce the same before the time so fixed without any sufficient cause, the agent is liable to pay compensation to his principal. Section 201 and Sections 205 to 207 of the Indian Contract Act, 1872 deal with the renunciation of the agency business by the agent. Now let us consider the provisions of these sections relating to the renunciation of the agency by the agent.

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(i) Renunciation of agency by the agent: Section 201 deals with various modes of termination of agency. It includes that an agency can be terminated by renouncing the business of the agency by the agent. (ii) Renunciation of agency may be expressed or implied: Section 207 makes the provisions that renunciation of agency business by the agent may be express or may be implied in the conduct of the agent. (iii) Compensation for renunciation by an agent: An agent can be held liable for premature renunciation. Section 205 makes the provisions for compensation to be paid to principal for renunciation by his agent. According to Section 205, when there is an express or implied contract that the agency should be continued for any period of time, the agent must make compensation to his principal for any premature renunciation of the agency without any sufficient cause. (iv) Provision of reasonable notice of renunciation by the agent to his principal: It is provided in Section 206 that reasonable notice is required to be given to the principal on the renunciation of agency by the agent. If such notice is not given, the agent is held liable to pay compensation for the damages or losses thereby resulting to the principal.

7.

Termination of agency by operation of law: In Section 201, certain modes of termination of agency are given. Some of them are related to the termination of agency because of the acts of parties which others are related to the termination of agency because of operation of law. Now let us consider important modes of termination of agency by operation of law.

(A) Completion of the agency business This is the most obvious way of putting an end to the agency. When a person is appointed as an agent to do a particular work and when that work is completed, the agency is automatically terminated. Thus, when the agency is created for accomplishing any particular object, it is terminated when such object is accomplished or when the accomplishment of the object becomes impossible.

(B) Expiry of period of time Agency can be terminated on the expiration of the period fixed for the contract ofagenoy. 143

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Where the agent is appointed for a fixed period of time by giving him authority, such authority comes to an end on the expiry of the period fixed even if the business of agency or the work entrusted to the agent is not completed. This implies that the quantity of work done is immaterial. The agent, whose authority is thus terminated, gets no right to represent his principal after the fixed period is over and his agency is terminated.

(C) Destruction of the subject-matter Agency is terminated when the subject-matter of the contract of agency itself is destructed. When the agency is created to deal with a certain subject matter and if such subject matter is destroyed, the agency stands terminated. Suppose, an agent is appointed to affect an insurance on a particular property. Such agency stands automatically terminated if the property is destroyed by earthquake or by fire before the insurance is affected.

8.

Insolvency of the principal and in some cases, that of the agent Insolvency or bankruptcy of the principal terminates the agency [Section 201]. So far as the agent is concerned, the contract of agency comes to an end when his principal becomes insolvent and the fact of his insolvency comes to his knowledge. As against third parties, the agency is terminated when the fact of principal's insolvency comes to their knowledge. Though nothing has been mentioned in Section 201 about the termination of agency because of agent's insolvency, it is also accepted that the insolvency of agent also leads to the termination of agency contract unless the acts to be done by the agent are merely formal acts.

9.

Death of principal If the principal dies, the agency is terminated [Section 201]. However, mere death of the principal does not put an end to the agency, unless the fact of the death comes to the knowledge of the agent. If the agent comes to know about the death of his principal and still he enters into contracts with third parties, such contracts or transactions are considered invalid. Even if the third party knows about the principal's death, and if it allows the agent to perform some acts, such acts are invalid. When an agency is terminated because of the death of the principal, it is the duty of his agent to take all reasonable steps for the protection and prevention of interest entrusted to him on behalf of the representatives of his late principal [Section 209].

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On dissolution of a company or a partnership firm the authority of its agents is terminated. 10. Death of an agent The death of an agent also causes the termination of agency [Section 210]. 11. Insanity of either party When the principal or the agent becomes of unsound mind or insane, the agency is terminated. As a lunatic cannot enter into valid contracts, he cannot appoint any person as his agent. The agency is terminated on the principal becoming insane. But in such case, his agent is required to do everything for the protection and preservation of his principal's interests. If the agent becomes insane during the agency, the agency is terminated as soon as he becomes insane. 12. Principal becoming an alien enemy Where principal or his agent belong to different countries and if any war breaks between these countries and they become alien enemies, the agency is terminated. 13. Object of agency becoming illegal or unlawful When any event happens which renders the agency or its object or objects illegal or unlawful, it is obvious that such agency is automatically terminated. 14. Incapacity of principal or agent If a principal or his agent becomes incompetent to enter into valid contract because of any disqualification essential to a contract, the agency is terminated. 15. Termination of sub-agent's authority According to provisions of Section 210, the termination of the authority of an agent causes the termination of the authority of all sub-agents appointed by him. The sub-agency is terminated as soon as the main agency is terminated. 3.10 SUMMARY An agent is a person who represents another person. The person for whom such act is done is called the principal. An agent may be appointed by the principal executing general

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power of attorney by which the agent is given authority to do certain objectives. The functions of an agent are to bring about contractual relation between the principal and third party. Agents are appointed with specific instructions and authorities to act within the scope of their instructions. The act of an agent is an act of the principal. Agency exists whenever a person can bind another by acts done on his behalf. Any person who is the age of majority, sound mind may employ an agent. A minor acting as an agent can bind the principal to third parties but a minor is not himself liable to his principal. Several principals can jointly appoint one agent. No consideration is necessary to create an agency. Different classes of agent depend on the relationship between the principal and agents. Agency may be created by implied or express agreement. Sometimes circumstances force a person to act for another in necessity. But a wife is not an agent in necessity. Principal may elect to ratify or to disown the acts of an agent done for him without his knowledge or authority. The authority of an agent may be express or implied. An agency may be terminated by act of parties or by operation of law. 3.11 SELF-ASSESSMENT QUESTION ________________________________ Q1.

What is a contract of agency? How is it made?

Q2.

Define 'principal' and 'agent'. What are the essentials of relationship of agency?

Q3.

a.

Explain the terms, principal and agent?

b.

In which ways can an agency be created?

Q4. Who may appoint an agent? Explain the essential elements of relationship of agency? Q5. (a) What is the test of agency? (b) Q6.

"Consideration is not necessary for a contract of agency". How far is it true?

What is the test to determine agency? How is an agency created? Q7.

various modes of creating an agency. Q8. acting." Comment. Q9.

"He who acts through an agent is himself

What is ratification? Explain the effects of ratification. Q10.

Explain the essentials or requisites of valid ratification.

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Explain

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Q11. Classify and explain different types of agents. Q12. What do you mean by "agent's authority"? Explain the nature of agent's authority. Q13. Explain the meaning of a.

Agency of necessity.

b.

Agency by estoppel

c.

Agency by ratification.

Q14. Explain an agent's authority in emergency. Q15. Explain the exceptions to the rule Delegates non protest delegere. Q16. Explain the rights, duties and liabilities of an agent to his principal. Q17. When is an agent personally bound by contracts entered into by him on behalf of the principal? Q18. What are the different modes in which the authority of an agent may be terminated? When is agency irrevocable? Q19. Explain rights, duties and liabilities of principal towards his agent. Q20. "Ratification is tantamount to prior authority." Explain. Q21. Explain different modes of termination of agency. Q22. Explain the effects of death, insanity and insolvency of principal or agent on the contract of agency. Q23 State the distinction between a sub-agent and a substituted agent. Discuss the rights and liabilities following such appointment? Q24 State the respective rights and duties, of a principal and agent, when the principal is undisclosed? Q25 Explain the instances when an agent can be made personally liable in respect of contracts entered into by him on behalf of the principal?

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Q26 When is a principal bound by the unauthorized acts of his agent? Q27. Write notes on the following: (i)

Essential elements of relationship of agency

(ii)

The test of agency

(iii)

Agency by operation of law and by ratification

(iv) Categories of an implied agency (v)

Essentials of agency by estoppel

(vi) Effects of ratification (vii) Authority of an agent (viii) Kinds of agents (ix) Termination of agency by acts of parties to the contract of agency (x)

Irrevocable agency

(xi) Termination of agency by operation of law. Q28. What are the provisions of Indian Contract Act regarding Contract of Indemnity? Q29. What are the provisions of Indian Contract Act regarding Contract of Guarantee? Q3 0. What are the provisions of Indian Contract Act regarding Contract of Bailment?

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4.1

INTRODUCTION

The Indian Partnership Act, 1932 (Act IX of 1932) applies to partnerships created by agreement between parties. The Act is not retrospective; it does not effect any right, title, interest, obligation or liability acquired or incurred before the Act came into operation in 1932. (Section 74). The Act is not exhaustive. It does not apply to join Hindu Family Firms. In this unit, the Indian Partnership Act, 1932 has been referred to as IPA. 4.2

DEFINITIONS

Section 2 of the IPA defines certain terms which are used in the Act and definitions of these terms are as under: 1.

An Act of Firm 'An act of firm means any act or omission by all partners or by any partner or an agent of the firm which gives rise to a right enforceable by or against the firm' [Section 2 (a)]. In order to prove that an act of a partner or partners of the firm or of an agent or agents of the firm is an act of the partnership firm, certain conditions must be satisfied which are as follows : (A) This act must have been done in the name and on behalf of the firm. If the act is done in the personal capacity, that can not be considered as the act of the firm; (B) Such act must be done in the ordinary course of the business of the partnership firm; and (C) It must be related to the business of the firm and not to other activities of the partners or agent or agents of such organisation.

2.

Business According to Section 2 (b), 'business' includes every trade, occupation and profession. Obviously, such business must be lawful or legal.

3.

Third Party Section 2 (d) states that the term third party used in relation to a firm or a partner therein means any person who is not a partner in the firm. From this definition of the

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Partnership Act, 1932

term 'third party' it is clear that any partner of the partnership firm cannot be a third party. Any person, who is an outsider, having contracts or trade relationships with the firm is calledITthird party. ~~~~ ------------- • -----------Section 2 (e) makes it clear that expressions used but not defined in this Act and defined in the Indian Contract Act. 1872, shall have the same meanings assigned to them in that Act. (i.e., ICA, 1872)

1.

Definitions of Partnership, Partner etc.: Section 4 of the Indian Partnership Act of 1932 defines 'partnership', 'partner', 'firm' and 'firm name' as follows: Partnership is the relationship between persons who have agreed to share the profits of a business carried on by all or any one of them acting for all. Partnership is an association of two or more persons formed to run the business and share the profits earned in the business. It has always more than one co-owner. These co-owners are called partners and the association is known as partnership firm. In fact, a partnership is not a legal person and therefore does not enjoy any separate rights and incur liabilities independent of its partners. Hence, when apartnerdies or becomes insolvent, the firm is also dissolved. As the assets of the firm are joint property of the partners, the partners are held individually and collectively responsible or liable for all the business obligations of the firm. "Persons who have entered into partnership with one another are called individually 'partners' and collectively 'a firm', and the name under which their business is carried on is called 'firm name'.

4.3 1.

THE ESSENTIAL ELEMENTS OR MAIN FEATURES OF A PARTNERSHIP Who can be partners? As a matter of fact, a partnership is one of the types of contract and as such every person who is competent to enter into a contract, may enter into a contract of partnership. Section 11 of the Indian Contract Act, 1872, lays down that, 'every person is competent to contract^whgjs-otthe age of majority according to the law to which he is subject and who is of ôund minp and is not disqualified from contracting by any law to which he is subject.' therefore, it can be said to become a partner, a person must be of sound mind and must have attained the age of majority and moreover he should not be disqualified from contracting by any law. A married or unmarried person, whether Hindu or of any other community can enter into a contract of partnership. 153

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However following persons are not partners [Sections 5 and 6]: y\) A Burmese Budhist husband and wife carrying on business. B) The members of a Hindu Undivided Family carrying on a Family Business. (C) Any of the following persons receiving a share of the profits of a business or of a payment contingent upon the carrying of profits or varying with the profits earned by a business does not become a partner merely because he receives such share or certain payment. (i) A lender of money to persons engaged or about to engage in any business. (ii) A servant or an agent engaged in the business who receives certain remuneration. (iii) The widow or child of a deceased partner receiving certain portion of the profits as annuity. (iv) A part owner or a previous owner of the business receiving a certain amount as consideration for the sale of the goodwill or a certain portion of the profits. (v) Any joint or co-owners of the property sharing profits resulting of the transactions relating to joint property. Now, let us examine certain other specific cases such as minor, alien enemy, lunatic etc. in order to know whether such persons can be partners or not. Minor: A minor cannot become a partner in a firm. However, he may be admitted as a: partner to the benefits of partnership with the consent of all other partners. Alien Enemy : Any alien enemy cannot enter into a contract of partnership with an Indian subject. However, an alien friend can enter into partnership with an Indian subject. Lunatic : A lunatic or any person of unsound mind is not competent to enter into a partnership contract. 2.

Definition and characteristics Section 4 of the IPA defines a partnership as follows- "Partnership is the relation between persons who have agreed to share the profit of a business carried on by all

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pr any of them acting for all". A partnership, defined in the Act, must have three essential elements: (A^There must be an agreement entered by two or more persons,

^y (B) The agreement must be to share the profit of a business, business must be carried on byall or any of them acting for aJL 1. Voluntary Agreement: The first element shows the voluntary contractual nature of partnership. A partnership can only arise as a result of an agreement, express or implied, between two or more persons. Where there is no agreement there is no partnership. But a partnership cannot be formed with more then ten persons in banking and twenty persons in other types of business. Apartnership with persons exceeding the above limits must be registered under the Companies Act. Section 5 states that, "The relationship of partnership arises from contract and not from status." In particular the members of a Hindu undivided family carrying on a family business, as such, are not partners in such business.

Jl5 Activity A: My uncle was sole proprietor of his firm M/s. Hirachand and sons. He died leaving a number of heks. The hek inherit the stock in trade of the business including goodwill of the business. Will the heirs of my uncle become the partners of the firm?

2.

Sharing of profit of a business: The second element states the motive underlying the formation of a partnership. It also lays down that the existence of the business is essential to a partnership. Business includes any trade, occupation or profession. If two or more persons join together to form a music club it is not a partnership because there is no business in this case. But if two or more persons join together to give musical performance to the public with a view to earning profit, there is business and a partnership is formed.

3.

Mutual agency: The third element is the most important feature of the partnership. It states that the persons carrying on business in partnership are agents as well 155

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as principals. The business of a firm is carried on by all or by any one or more of them on behalf of all. Every partner has the authority to act on behalf of all and can by his actions, bind all the partners of the firm. Each partner is the agent of the others in all matters connected with the business of the partnership. The Law of partnership has therefore been called a branch of the Law of agency, according to the ordinary usage of trade. 3.

Corporation or Company or Partnership Concern/Firm A Company or a Corporation is an artificial person and has legal entity and as such, it cannot become a partner nor can it enter into a partnership agreement. Even two partnership firms cannot enter into a partnership agreement as the term 'person' as used in Section 4 does not include a firm because it does not possess a legal entity separate from its partners. Activity B ;

Mr. Raj and Mr. Kunal are joint owners of a ship. They do not do any business together. Does ownership create any partnership between them?

4.4

TEST OF PARTNERSHIP _______________________

______

We have discussed so far the various essential elements or main features of partnership. Any one particular element or feature alone does not imply the true test of partnership. For example, as association of two or more persons entering into a contract or an agreement to share profits may not necessarily lead to the formation of partnership. Moreover sharing of profits may exist between joint or co-owners of property which, thus, does not determine the exi stence of partnership. A person holds out himself to be a partner but is not a partner in the eyes of law and still he may be liable to third parties. Then, arise a question as to what is the true test of partnership? For finding out the answer of the questions mentioned above, we have to take into^ consideration the provisions made in Section 5 and 6 of the IPA. 156

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Section 5 states, that, "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 husband and wife carrying on business as such are not partners in such business. While according to Section 6, '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. In explanation I of Section 6, it is made clear that, 'the sharing of profits or of gross returns arising from property by persons holding a joint or common interest in that property does not itself make such persons partners. Moreover, the receipt by a person of a share of profits of a business or of a payment contingent upon the earning of profits or varying with the profits earned by a business does not of itself make him a partner with person or persons carrying on the business and in particular the receipt of such share or payment by a lender of money to persons, engaged or about to engage in any business, or by a servant or agent as remuneration, or by the widow or a child of a deceased partner as annuity or by a previous owner or part owner of the business as consideration for the sale of the goodwill or share thereof, does not of itself make the receiver a partner with the person carrying on the business [Explanation II to the Section 6]. i From these provisions, it seems that whether a genuine partnership exists or not is really a mixed question of law and fact. The sharing of profits is a prima facie evidence of partnership hut in fact sharing of profits between some persons does not automatically make all such persons partners [Section 6 explanation II]. Again joint owners of property, sharing profits or gross returns arising from property need not be partners [Explanation I to Section 6]. While Section 5 makes it clear that the members of a Hindu Undivided family carrying as Family business and a Burmese husband and wife carrying as business are not partners. Thus, the true test of determining the partnership seems to be mutual agency and authority and the existence of partnership has to be determined with reference to the intention of the fners which must be gathered from the facts and surrounding circumstances. Various essential elements of partnership should co-exist in order to constitute a partnership and if "v relation of principal and agent exists between the parties to the contract, formed with iew to earn and share profits of a business, the presumption about the existence of tnership definitely becomes strong and conclusive.

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Activity C : Mr. Ravi and Mr. Bajaj buy 100 bales of cotton, agreeing to share, between them. Are Mr. Ravi and Mr. Bajaj are partners as per the partnership Act?

4.5

TYPES OF PARTNERSHIP AND

PARTNERS 1.

Types of partnership

Partners are free to fix the duration of the partnership at the time of formation of partnership or they may remain silent on the point of duration of partnership. From the view point of duration, there are three kinds of partnership which are as follows:

(A) Partnership for fixed term Where the partners agree to carry on the business for a definite period of time, the partnership is said to be for a fixed period. In this type of partnership, when the fixed period of partnership is over, the partnership automatically comes to an end. However, the partners can, if they so choose, continue to carry on the business even after the expiry of the fixed period. Thus, where the partners continue to carry on the business even after the expiry of the fixed period already decided, the partnership ipso facto gets converted into partnership at will and their rights and duties continue to be the same unless changed by mutual agreement or are inconsistent with a partnership-at-will. These provisions are found in Section 17 (b) which is as follows. "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 partners remain the same as they were before the expiry, so far as they may be consistent with the incidents of partnership-at-will." 158

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«. £$

£ (B) Partnership at will

Section 7 states that, 'where no provision is made by contract between the|>
In the partnership at will, the partners do not make any provision for duration for their partnership,

2.

Neither they make any provision for determination or termination of the partnership.

3.

Partnership at will is a partnership for an indefinite period and the partners are always free to break their relationship at their will.

But a partnership at will can be dissolved by any partner by giving due notice to that effect to all the other partners. Provisions relating to the dissolution of partnership at will are made in Section 43 which is reproduced below. "Where the partnership is at will, the firm may be dissolved by partner giving notice in writing to all the other partners of his intention to dissolve the firm [Section 43 (i)]. The firm is dissolved as from the date mentioned in the notice as the date of the dissolution or, if no date is so mentioned as from the date of the communication of the notice [Section 43 (2)]". However, if the freedom to dissolve the firm at will is curtailed by any agreement, for example, if it is provided in the partnership agreement that the partnership can only be dissolved by mutual consent of all the partners the partnership, then it is not a partnership at will. A partnership at will can be dissolved by filing a suit for dissolution. (C) Particular Partnership

When two or more persons agree to carry on business in particular adventure of understanding, such a partnership is called a 'particular partnership..' Section 8 clearly lays down that 'a person may become a partner with another person in particular adventures or undertaking.' The nature of particular partnership can be made more clear with the help of illustrations. 159

Business Law

X and Y enter into a partnership agreement for constructing a building. Since its objective is to construct a building, it is formed for particular adventure. Immediately on the completion of the building, it can be dissolved. However, it can be continued with the mutual consent of X and Y. The particular partnership automatically comes to an end on the completion of the venture or at the expiry of the fixed term. Before such time or before completing the adventure undertaken, the partnership would not be dissolved unless all partners agree to such dissolution. If partners agree to continue such a partnership even after the completion of the adventure, the partnership becomes a partnership at will. Section 17 (c) states that, ' subject to contract between partners, 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." 2.

Types of Partners T

'

There are various types of partners. Important types of partners are as follows : (A) Active or actual partner s the name suggests, an active partner takes an active part in the conduct and management of the business of the partnership. Therefore, it can be said that a person who becomes a partner by entering into a partnership agreement and is actually engaged in the conduct and management of the partnership business is known as an actual or an active or an ostensible partner. Such partner functions as the agent of other partners in the ordinary course of business and has an authority to bind him and other partners. Active partner is a full fledged partner in the real sense of the term. (B) Nominal partner When a person who onlyVlends-his-aaaa^to the partnership firm but does not invest any capital in the firm neither takes any interest in the affairs or management of the firm, such person is called as a nominal partner. He does not share the profits of the firm but he is held liable alongwith the other partners to the outsiders for all the acts and debts of the firm. (C) Sleeping or dormant partner A sleeping or dormant partner is one who jinvesjs capital/and gets share in the profits as per agreement but doginflttake any active parFin the managemeHtesônduct of 160

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the business of the partnership firm. His existence in the firm is kept secret from the outside worlcLHe is like an undisclosed principal. However he is equally liable to the third parties along with other partners for all the acts and debts of the partnership firm. As he is not known to the world, it is not necessary for him to give a public notice of his retirement from the firm. He is not held responsible and liable for any act of the firm done after his retirement. Sub-partners

When partners agree to share the profits of the partnership firm with any outsider, such an outsider is known as a sub-partner. A sub-partner does not get any right againsUhe firm nor he represents the firm. He cannot be held responsible for the acts of the firm nor liable for the debts and liabilities of the firm. As he is in no way connected with the firm. r in profits only hen as a result of partnership agreement, a partner becomes entitled to receive a of profits only without-being liable for any jnsses^such a partner is known as a partner in profits only. Normally, such partners do not take active part in the conduct of the partnership business. However, his liabilityv/5-a-v/.s' to the thkdjjarties remains unlimited. In other words, he remains liable for all acts and debts of the firm to the third parties since under the Indian Partnership Act 1 872, the liability of partners is joint and several and at the same time unlimited. But when with the consent of all the partners, a minor is admitted to the benefit of the partnership [Section 30 ( 1 )] , he can be only a promisee or beneficiary and cannot be held liable for the debts of the partnership firm. He can be only the sharer in profits. Here it must be remembered that a new partnership cannot be formed with a minor as a partner nor minors can form partnership among themselves as they are not capable to enter into any contract. •^ Activity D :

!r. Dugal and Mr. Waghmare agree to work together as carpenters. It was agreed between oth that Mr. Dughal shall receive all profits and shall pay wagers to Mr. Waghmare. Are Mr. Dugal and Mr. Waghmare partners of each other?

16 1

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(F) Partner by estoppel or holding out I 'When a person represents to the , outside world eithej'bj^wmdsjpoken/written or by Miisôwnônducts^r_even bvdending his name^that he is a partner in that particular paTfriership firmer business, he is known as a partner by estoppel or byjiolding out/) On§e he does so, helslhereafter estoppel from denying being a partner and is held liable individually and personally for all debts and liabilities of the firm as if he were a partner. Such a partner also can be called as 'quasi or nominal partner' as he is not a full-fledged partner in the full implications of the term; only in the eyes of third parties or outside world, he is considered as a partner. For example, suppose A represents to B that he is a partner in KRS firm though actually he is not a partner. B gives a loan of Rs. 5 lakh and also some credit to the KRS firm on the representation of A. Subsequently, the KRS firm becomes insolvent. B can make A liable on the basis of his holding out and A then will be estoppel from denying that he is a partner in the KRS firm.

Activity E; Mr. Rajiv is the owner of firm named M/s. Rajiv and associates. Mr. Rahul represents Mr. Dubey as a partner of M/s. Rajiv and associates. Mr. Rahul is actually not a partner. Mr. Dubey gives a loan of Rs. 5 lakh and also some credit to M/s Rajiv and associates firm on the representation of Mr. Rahul. Subsequently M/s Rajiv and associates become insolvent. Will Mr. Rahul be liable or he will take advantage of estoppel?

4.6

FORMATION OF PARTNERSHIP AND REGISTRATION OF FIRM

1.

Formation of partnership We have already seen that a partnership is based on agreement and can be formed by oral or by written agreement or it can even be inferred from the conduct of the parties. However, all essential elements of a valid contract must be present. The persons forming the partnership firm must be competent to contract and their consent must be free. The object of carrying on the business of the partnership firm must be lawful and other various legal formalities must also be compiled with. Thus, following three important points must be noted so far as the formation of the partnership is concerned.

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(A) As the basis of partnership is a partnership agreement or contract, all the essential elements of a valid contract must be present and various legal formalities are required to be compiled with. (B) It is in the best interest of the partners to get their partnership firm registered with the Registrar of Firms of the area. If the partnership firm is not registered, it cannot enforce its legal remedies against outsiders. (C) Before the partnership is actually started, it is very essential for the partners to draft properly the partnership deed as it contains the mutual rights and obligations of the partners.

2.

Registration of firms The registration of a partnership firm is not compulsory. Therefore an unregistered firm is not an illegal association. But an unregistered firm suffers from certain disabilities and therefore registration is necessary for carrying on business. (A) Provisions relating to 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 [Section 65]. (B) Penalty for false particulars Provisions have been made regarding the penalty for furnishing false particulars in Section 70 of the Indian Partnership Act of 1932 which are as follows: "Any person who signs any statement, amending statement, notice of intimation under the Chapter (VII) containing any particular which he knows to be false or does not heHgveJn he true, or containing particulars which he knows to be incomplete orjoesjiotbelie_ye tohejx)mplete. shall be punishable with imrjrisorirnent which may extend to three months or with fine or both. (C) Time for registration A firm may be registered at any time. But an unregistered firm can not file certain suits. A firm must be registered before it can file suits or claim set - off. A firm can be registered even after the partners have decided to dissolve the firm.

16 3

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(D) Consequences of Non-registration (Sec. 69) An unregistered firm and the partners thereof suffer from certain disabilities. (i) A partner of an unregistered firm can not file a suit (against the firm or any partner thereof) for the purpose of enforcing a rigit arising from contract or a right conferred by the partnership Act. (Ii) No suit can be filed on behalf of an unregistered firm against any third party for the ourpose of enforcing a right arising from a contract. (iii) An unregistered firm cannot claim a set- off in a suit. [ set-off means a claim by the defendant which would reduce the amount of money payable by him to the plaintiff. The effect of Section 69 is (a) To bar all suits by an unregistered firm against third parties for the enforcement of rights arising from contracts, and (b) to bar all suits between partners inter se fro the enforcement of partnership rights. The section does not bar suits in respect of torts, that is, civil suits for damages for the violation of a right. (E) Exceptions There are certain exceptions to the rules stated above. (i) A partner of an unregistered firm can file a suit for the dissolution of the firm and for accounts. (ii) Suits can be filed for the realisation of the properties of a dissolved firm even though it was unregistered. (iii) The official assignee or receiver can realize the properties of an insolvent partner of an unregistered firm. (iv) There is no bar to suits by unregistered firms and by the partners thereof in areas where the provisions relating the registration of firms do not apply by notification of a state government under section 56. (v) An unregistered firm can file a suit (or claim a set off) for a sum not exceeding Rs. 100 in value, provided the suit is of such a nature that it has to be filed in the small causes court. Proceedings incidental to such suits, for example, execution of decrees, are also allowed. (vi) An unregistered firm suffers from certain disabilities but it is not an illegal association. Therefore registration of a firm is optional. 164

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4.7

RIGHTS, DUTIES AND LIABILITIES OF PARTNERS : _ 1.

Rights As already stated partners can themselves determine their rights by contract. But subject to their contract, the Partnership Act confers certain rights upon the partners of a firm as follows : (a)

Right to take part in the conduct or management of the partnership business : Subject to the contract between partners, every partner has a right to Jake part in the conduct of the business (Section 12 (9)]. As partnership business is a common business of all the partners, every partner of a firm must have the right to take part in the management and conduct of the business.

(b)

Right to be consulted and right to take decisions by majority : Every partner has a right to be consulted and to express his opinion before the matter is decided. So far as ordinary matters connected with business are concerned, the partners have the right to take decisions by majority. So far as important or fundamental matters concerning the partnership business is concerned, no change is allowed to be made without the consent of all the partners.

(c) Right to have access to boj)ksj)£lhejirm : Subject to contract between the partners, every partner has a right to have access to and to inspect and copy any of the books of the firm [Section 12 (d)]. (d) Right to have equal share in the profits : Subject to any contract to the contrary between the partners, the partners are entitled to share equally in the profits earned and shall contribute equally to the losses sustained by the firm. (e)

Right to receive interest on capital: If the partnership deed provides that a partner bringing in the business certain amount as a capital is entitled to receive an interest on it at a certain rate, such interest, subject to the contract between the partners, shall be payable only out of profits [Section 13 (c)].

(t)

Right to receive interest on_advajices :' Subject to contract between the partners, 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 receive interest thereon at the rate of six percent per annum. [Section 13 (d)].

(fr (g)

£

Right to be indemnified : A partner can perform all such acts for protecting his firm from losses as would be performed by any person of ordinary prudence 16 5

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\>Jftl for acting under similar circumstances and conditions and as consequences of such acts, if the partner incurs any liability or losses, he has every right to be indemnified. A partner shall indemnify the firm for any loss caused to it by his willful neglect in the conduct of the business of the firm. Right to perform acts in emergency : A partner has every right and authority, in an emergency, to do all such acts for protecting the firm from losses as would be done by a person of ordinary prudence, in his own case, acting under similar circumstances and all such acts bind the firm [Section 21].

(J.

(i) Right to apply property of the firm for the purposes of the business of the firm : Subject to contract between the partners, every partner, has a right to apply and use the property of partnership firm exclusively for the purposes of the business of the firm. [Section 15]. (j) Right to function as an agent of the firm : Subject to the provisions of this Act, a partner has a right to functTonasthe agent of the firm for the purpose of the business of the firm [Section 18} and thereby he can bind the firm. (k)

Right to prevent introduction of a new partner : Section 31 (1) implies that every partner has a right to prevent the introduction of any new partner without his consejjt. No person can be introduced or admitted as a partner into a firm without the consent of all the existing partners.

(1) Right to retire : According to Section 32 (I), a partner has the righ^ro retire with the consent of all the partners, or in accordance with an expressâgreement by all the partners, or where the partnership is at will, by giving due notice in writing to all the other partners of his intention to retire. (m) Right not to be expelled : Section 33 (1 ) states that, "a partner may not be expelled from a firm by any majority of the partners save in the exercise in good faith of powers conferred by contract between the partners." Thus, it implies that a partner has a right not be expelled by any maj ority of the partners from the firm without any just and equitable cause. (n) Rights of an outgoing partner to carry on competing business : An outgoing partner has every right to carry on a business competing with that of the firm and he has also the right to advertise such businesses, but subject to the contract to the contrary, he may not use the firm name, represent himself as carrying on the business of the firm or solicit the custom of persons who were dealing with the firm before he ceased to be a partner [Section 36 (1)]. 166

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(o) :

Right of outgoing partner in certain cases to share subsequent profit Where any partner of a firm dies or otherwise ceases 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, then in the absence of any contract to the contrary, the outgoing partner 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 ier annum as the amount of his share in the property of the firm. [Section 37]. Duties and liabilities of partners :

Qualified duties are embodied in Section 12, 13, 15 and 16. Now, let us consider important duties and liabilities of partners.

(A) General Duties of Partners Section 9 provides for the general duties of partners. It states that, "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." Thus, from these provisions made in Section 9, we come to know-the following important duties of partner. (i) Duties to carry on the business to the common advantage: It implies that every partner must use his skill, efficiency, knowledge for the benefit of his firm. It is his duty to conduct the business of his firm with best of his abilities and secure maximum benefits for his firm. (ii) Duty to be just and faithful to other partners of his firm : Partners are expected to be just and faithful to each other because a partnership is always based on the principle of mutual trust and confidence. (iii) Duty to render true accounts: It implies that no partner should make a secret profit at the expenses of partnership firm. It is the important duty on the part of each partner to render true and proper accounts to other partners. (iv) Duty to provide full information: It is the duty of every partner to provide full information of various transactions, dealings etc. affecting the business of the firm to the other partners of his firm. A partner works as an agent of other 16 7

Business Law

partners and therefore, nothing should be concealed affecting the affairs of firm from other partners. (B) Duty to Indemnify for loss caused by fraud According to Section 10, "Every partner shall indemnify the firm any loss caused to it by his fraud in the conduct of the business of the firm. This is an absolute duty of every partner to indemnify for loss caused by a fraud and no partner can contract himself out. When the loss is caused by a fraud committed against a third party by a partner, that must be recovered from that partner only who commits it and that loss cannot be shared among all partners. The partners who are not at fault are also liable to the third parties for the fraud of any of the partners, but they can proceed to claim damages against that partner who has committed the fraud. The object of this provision to discourage partners to deal fraudulently in the conduct of the partnership business. (C) Duty to attend deligently to his duties Section 12 (b) states that, "subject to contract between the partners, every partner is bound to attend deligently to his duties in the conduct of the business. It is also expected that he must use his skill, knowledge to the common advantage of all partners. (D) Duty to work without remuneration Subject to contract between the partners, a partner is not entitled to receive any remuneration for taking part in the conduct and management of the partnership business [Section 13 (a) ]. If it is provided in an agreement, working partners can get some remuneration then they are entitled to get the same. In one case [G Krishna vs. Mukhi -16 - C.W.N. 299], where apardanashin lady was a partner; it was held that working partners must get some allowance for the trouble they took in running the business. (E) Duty to contribute to the losses According to Section 31 (b), the partners are entitled to share equally in the profits earned and shall contribute equally to the losses sustained by the firm. Thus, this section implies that it is the duty of every partner, subject to contract between the partners, to contribute to the losses, equally sustained by the firm; irrespective of the amount of capital contributed by each one of them. (F) Duty to indemnify for willful neglect It is the duty of every partner to indemnify his firm for any loss caused to it by his willful neglect in the conduct of the business of the firm [Section 12 (/)]. The expression

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'willful neglect' implies 'culpable negligence' or the failure to perform the duty intentionally and deliberately which ought to have performed. Any act done in good faith or mere error of judgment cannot be termed as willful neglect. (G) Duty to hold and use partnership property exclusively for the partnership firm

Section 15 provides that it is the duty of every partner to apply or to use the property of the firm exclusively for the purpose of the business of the firm and not to usfr-fee. âme for his personal benefit. (H) Duty to account for personal or private profits

The relationship between partners is a fiduciary relationship and partners are not allowed to make any personal profits out of the partnership business. Section 16 (a) implies that if a partner derives any profits for himself from any transaction of the firm or from the use of the property or business connection of the firm or firm name, it is his duty to account for that profit and pay the same to the firm. ( \ ) Duty not to compete with the business or the partnership firm

Subject to contract between the partners not to carry on any business which is of similar nature or which is likely to compete with the business of his partnership firm and if a partner carries on any business of the same nature as and competing with that of the firm, it is his duty to account for and pay to the firm all profits earned by him out of that business [Section 16 (b)]. But if any of the partners carries on a non-competing business, he can retain the profits earned in that business. ' 1 1 Duty to act within authority US

Partners are bound to act within the limits of their actual or implied authority. If they exceed their authority and as a result if any loss is caused to their firm, they have to make that loss good and compensate the firm. (K) Duty of partner not to assign his rights

HIS

ion

It is the duty and the responsibility of a partner not to assign his rights and interests in the firm to any outsider so as to constitute such outsider the partner of the firm. But he can assign his share of profits and share in the assets of the firm to outsiders. [Section 29]. 16 9

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4.8

LIABILITIES OF PARTNERS TO THIRD PARTY

Provisions relating to these liabilities of partners and their firm to third parties are made in Sections 25, 26 and 27 of the Indian Partnership Act of 1932. Now let us consider these provisions in brief.

1.

Liability of partners for acts of the firm 'Every partner is liable jointly with all the other partners and severally, for all acts of the firm done while he is a partner.' [Section 25]. The liability of all partners is unlimited. Moreover, as liability of partners is joint and several, the third party can either elect to sue all partners together or can sue them separately. Any partner, paying something more than that of his share, can claim contribution from other partners as per terms and conditions of the partnership agreement.

2.

Liability of the firm for wrongful acts of its partners In this regard, Section 26 states that 'Where by the wrongful act or ornTssion of a p_artner 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 of any penalty is incurred, the firm is liable thereof, to the same extent as the partner." Thus, from these provisions it becomes clear that the partnership firm is liable even for the wrongful acts of its partners performed by them in the ordinary course of the partnership business. The wrongful acts include fraud, negligence or tort.

J&) Activity F: In a coalmine, there was no proper fencing around the open pit as required by law. A worker fell in the open pit and was injured. Who is liable for the injury; the worker or the firm.

3.

Liability of the firm for wrongful acts of a partner Where(a)

170

a partner acting within his apparent authority receives money of property from third party and misapplies it, or

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(b)

a firm in the course of its business received 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 - Sec. 27. 4. Provisions relating to liability for holding out An outsider or a stranger who holds himself out or represents himself to be a partner of the partnership firm and induces outsider to give credit to the firm is called 'a partner by holding out' or 'a partner by estoppel.' SuchlTperson is held liable personally under certain circumstances for debts of a firm. In one case [Lake V. Duke of Argyll 11-1844 - 6 Q. B. 477], a retired businessman having reputation, accepted the honorary president ship of the business of a group of some persons on their request. Some persons gave credit to the group of person because of credit-worthiness of the retired businessman. It was held in the case that the retired businessman was liable for the debts of the firm to those who granted credit the firm believing that he was a partner. "The principle underlying the rule of estoppel is that it would be most inequitable and unjust if a person, who by representation had induced another to act as he would not have otherwise done, were to be allowed to deny the effect of his former statement to the loss and injury of the person who acted upon it. It should be clearly understood that such a person cannot claim any rights in the partnership. He only incurs liability to the third parties who acted on the faith that he was the partner of the firm." This doctrine in incorporated in Section 28 of the Indian Partnership Act of 1932 which is as follows: "Any one who by words spoken or written by conduct represents himself, or knowingly permits himself to be represented, to be a partner in a firm, is liable as a partner in that firm, to any one who has on the faith of any such representation given credit to the firm whether the person representing himself or represented to be a partner does or does not know that the representation has reached the person so giving credit. [Section 28 (I)]." Where after a partner's death, the business is continued in the old firm name, the ontinued 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. [Section 28 (2) 1. i his Section 28 also makes clear the essential conditions for the liability of holding 171

Business Law

(a) In order to render any person liable as a partner on the ground of holding out, a person must have represented himself as a partner by his conduct or by spoken or written words and other person must have acted on the faith of such representation. In Bevan V. The National Bank Ltd. case [(1906)2 TLR 65], one Mr. XY was the manager of partnership firm. The business was carried under the name "XY & Co.". It was held in the case that as Mr. XY allowed XY and Co. to use his name, he made a representation that he was a partner and hence, he was liable to creditors of the firm. (b) For rendering any person liable as a partner, the person seeking to hold another person liable by holding out, must have given actual credit on the faith of representation. But no one can be held liable by holding out for the crime, tort or wrongful conduct of a partner because such liability has no concern to the fact of representation. (c) If a partner retires and such retiring partner does not give any public notice of his retirement, he can be held liable by holding out to those creditors who have given the credit without the knowledge of the retirement of such partner. But in such a case, the creditor is entitled to sue either the old firm or new one as reconstituted after the retirement of the partner and not both. There were two partners, S and R. S retired and B joined the firm. But the business was carried in the old name of the firm and no notice of retirement of S and reconstitution of firm was given. J was the supplier of goods to the firm and he continued the supply of goods to the firm after its reconstitution and he had no knowledge of reconstitution. The firm failed to pay J for the goods supplied by I. J filed a suit against the new firm for recovery of his dues but the firm went bankrupt. Then J filed a suit against S, the retired partner of the firm. It was held in that case J had lost the right to proceed against the retired partner, as he already filed the suit against reconstituted firm and thereby lost the right to sue the old firm praying for the same relief or same cause or action. Exceptions: The principal of holding out on retirement of any partner without giving any public notice does not apply to the cases mentioned below : _vtfv CJw^-— ^&CP"

__»•*

(i) Deceased partner: The estate of a deceased partner or the legal representatives of a deceased partner cannot be held liable for any act of the firm, performed or done after his death, even if the partnership business is carried on by the surviving partners in the old name of the firm. Death of any partner itself, is a notice. [Section 28 (2)]. 172

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(ii)

Insolvency of a partner: When a partner is declared as insolvent, his liability is terminated after his insolvency. When a person ceases to be a partner, from the date of insolvency, he and his estate is no longer held to be liable for any act of the partnership firm done after his insolvency whether the notice of his insolvency has been given or not [Section 45}.

(Hi) Dormant partner : As dormant partner does not take any part in the conduct or management of the firm and his existence as a partner is not reflected by the name of the firm, he is not known to the person concerned retires from a firm, no public notice is necessary to terminate his liability. But when his presence in the firm comes to the notice of some customers of the firm, the notice of such dormant partner's retirement is required to be given to them otherwise he can be held liable for holding out.

?

5.

Liability of firm to third party for misappropriation

'=•

Where a partner acting within his apparent authority receives money or property from a third party and misapplies it or, a firm in the course of its business receives money or property from a third party, and the money or property is misapplied by any of the partners while it is in the custody of the firm, the firm is liable to make good the loss. [Section 27] Thus, it is obvious from these provisions of Section 27, that if any partner misappropriate funds or property which he might have received either as a repayment of loan or on account of deposits or as a loan on the account of the partnership firm, the third party can compel any partner of the firm or the firm liable for that. The liability for misapplication of funds, property etc. by a partner arises when such funds, property etc. are received either by the firm in the course of the business or by any partner acting within his authority. In one case, a partnership firm accepted certain securities for safe custody but disposed off the securities. It was held that the firm was liable for this misapplication of securities. coo a Le » 4.9 MUTUAL RElXTIONS QF PARTNERS X

, ^ ° /°t 6

*,^ ~

Mutual relations of partners become clear from their rights and duties and are generally determined by the deed of partnership entered into by all the partners of a firm. Partners ire at liberty to amend the terms of their agreement for carrying on partnership business hut it must be done with the unanimous consent of the partners. Persons forming partnership and agreeing to carry on business in partnership should have utmost mutual trust and confidence and as such determination of their rights and duties assumes great importance. Section 11 of the Indian Partnership Act of 1932 throws light 173

Business Law

on the determination of rights and duties of partners and accordingly rights and duties of partners can be determined by contract between them. Section 11 (1) states that, "subject to the provisions of this act, the mutual rights and duties of the partners of a firm may be determined by contract between the partners and such contract may be expressed or may be implied by a course of dealing. Such contract may be carried by consent of all the partners and such consent may be expressed or may be implied by a course of dealing." While Section 11 (2) makes it clear that "not withstanding anything contained in Section 27 of the Indian Contract Act of 1 872, such contracts may provide that a partner shall not carry on any business other than that of the firm while he is a partner." Thus, the partners get freedom to decide any terms and provide for their mutual rights and duties except in case where the Indian Partnership Act of 1932, makes some mandatory provision. Further, where there is no specific agreement or where the agreement is silent at any particular point, the mutual relations regarding rights, liabilities, duties etc. are governed by the provisions made in Sections 9 to 17 of the Indian Partnership Act of 1 932.

4.10 THE AUTHORITY OF A PARTNER AND LIABILITY TO THIRD PARTY 1. Authority of a partner (A) Express and Implied authority of a partner The authority of a partner means the capacity of a partner to bind the firm by his act. A partner can bind the firm and make other partners or the firm liable towards the third party only if he acts within the scope of his authority and such authority can be expressed or implied. When a partnership agreement expressly authorises a partner to do certain acts on behalf of other partners of the firm, it is called express authority of a partner. When a partner does certain acts in the usual way in order to carry on the business of the firm and binds the firm and nothing is provided in the partnership agreement or the partnership agreement is silent regarding such acts, that is known as an implied authority. Such authority is founded on the principle of agency and flows from the legal relations of the partners.

(B) Implied authority of a partner and third parties Sections 19 (1) and22 make clear the implied authority of partner as an agent of his firm and mode of doing Act to bind the firm.

(C) Implied authority of partner as agent of the firm Subject to the provision of Sec. 22, the act of a partner which is done to carry on, in |, the usual way, business of the kind carried on by the firm, binds the firm. The authority '' 174

Unit 4


of a partner to bind the firm conferred by this Section is called his 'implied authority.' [Section 19(1)}.

(D) Partner's authority in an emergency A partner has the authority, in an emergency; to do all such acts for the purpose of protecting the firm from loss as would be done by a person of ordinary prudence, in his own case, acting under similar circumstances, and such acts bind the firm [Section 21].

(E) Effect of admissions by a partner ' 'An admission or representation made by a partner concerning the affairs of the firm is evidence against the firm, if it is made in the ordinary course of business." [Section 23]. Thus, if a partner makes any admission concerning the business of the firm in the ordinary course of business is considered as the sufficient evidence against the firm and that binds the firm.

(F) Notice to a 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 of the firm, except in the case of the fraud on the firm committed by or with the consent of that partner. Sec-24. From the above it follows that a notice to a dormant partner is not notice to the firm. 4.11 PROVISIONS RELATING TO MINOR PARTNERS AND PROPERTY OF THE FIRM

A minor cannot enter into a contract of partnership because an agreement by a minor is void. But if all the partners agree, a minor may be admitted to the benefits of an existing firm. The rights and liabilities of such a minor partner are governed by the following rule. (Sec 30) (A) The minor has a right to such share of the property and of the profits of the firm as may be agreed upon by the partners. 175

Business Law

(B) The minor may have access to and inspect and copy and of the accounts of the firm. (C) The share of the minor in the profits and in the assets of the firm are liable for the acts of the firm but the minor is not personally liable for any such act. (His personal properties are not liable.) (D) So long as the minor continues to be a member of the firm, he can not file a suit against the other partners for an account or for the payment of his share of the property or profits of the firm. He can file such a suit only when he wants to sever his connection with the firm. [If the minor files such a suit, the minor's share shall be determined by valuation in accordance, as far as possible, with the procedure laid down in Sec. 48 of the Act for taking accounts of a dissolved partnership]. (E) At any time withinjdx months of his attaining majority, or of his obtaining knowledge that he had been admitted to the benefits of partnership, which ever date is later, the minor may give public notice that he has elected to become or that he has elected not to become a partner in the firm. Such notice shall determine his positions as regards the firm. If he gives no notice, he shall become a partner of the firm on the expiry of the said six months. "Public Notice" - The mode of giving public notice is laid down in sec. 72 of the Act. In the case of a registered firm: (i)

a copy of the notice is to be sent to the registrar of firms, and

(ii) a copy must be published in the local official gazette and in at least one vernacular newspaper circulating in the district where the firm has its place or principal place of business. In the case of unregistered firms, only (ii) is necessary. (F) If the minor wants to take advantage of the fact that he had no knowledge of being admitted into the benefits of a partnership, the burden of proving such lack of knowledge is upon him. (G) The following rules apply when a minor elects to become a partner or becomes a partner by failing to notify otherwise. (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 the partnership. (b) His share in the property and profits of the firm shall be the share to which he was entitled as a minor. 176

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(H) The following rules apply when the minor elects not to become a partner: (a) His rights and liabilities continue to be those of a minor up to the date on which he gives public notice. (b) His share is not liable for any acts of the firm done after the date of the notic. (c) He is entitled to sue the partners for his share of the property and profits of the firm. For carrying on the partnership businesses, a firm has to acquire certain property which may consist of money, shops, factory buildings and other types of wealth. Partners are at liberty to determine by agreement amongst themselves as to what shall be the property of their partnership firm. Certain provisions have been made in Sections 14 and 15 regarding the property of the firm and its application which run as follows: 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 business of the firm, and also includes 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." [Section 14].

& Activity G: Ali, one of the partners of a partnership firm, purchased some railway shares in his own name but with the money of the partnership firm. Are the shares purchased the property of Mr. Ali or the firm.

177

Business Law

4.12 RECONSTITUTION OF A FIRM 1.

Incoming and outgoing partners The constitution of a firm may be changed by the introduction of a new partner; death, retirement, insolvency and expulsion of a partner; or transfer of a partner's share to an outsider. All these are included within the Reconstitution of the firm. Upon reconstitution, the rights and liabilities of the incoming and outgoing partners have to be determined. The provisions of the Partnership Act regarding such cases are given below. Introduction of new partner (Sec. 3): Anew partner can be introduced only with the consent of all the partners. The share of the profits which a new partner is entitled to get is fixed at the time he becomes a partner. He is liable for all the debts of the firm after the date of his admission but he is not responsible for any act of the firm done before he became a partner, unless otherwise agreed. These rules do not apply to a minor becoming partner under sec. 30. Retirement of a partner: A partner may retire a.

with the consent of all the other partners

b.

in accordance with the terms of the agreement of partnership, or

c.

where the partnership is at will, by giving notice in writing to all the other partners of his intention to retire.

A retiring partner may be discharged from any liability to any third party for acts of the firm done before his retirement if it is so agreed with the third party and the partners of the reconstituted firm. Such agreement may be implied from the course of dealing between the firm and the third party after he had knowledge of the retirement. The retired partner continues to remain liable to third parties for all acts of the firm until the public is given of the retirement. Such many times, certain changes such as admi ssion of a new person or persons as a partner or partners, some of the partners retire or may become insolvent, death of partner take place and when a partnership continues carrying on its business even after such changes take place, the partnership firm is said to be reconstituted. Provisions relating to the reconstitution or such changes are done in Chapter V [Section 31 to 38] of the Indian Partnership Act of 1932. Now, let us study in brief these provisions relating to incoming and outgoing partners. 178

Unit 4


Admission of a partner: A new partner, that is, incoming partner can be admitted into a partnership firm provided all the partners give their consent to such admission. Section 31 (1) implies that "subject to the contract between the partners and subject to the provisions of Section 30 which deals with the admission of a minor as a partner to the benefits of partnership, no person shall be introduced as a partner into a firm without the consent of all existing partners." Any person including a heir of the deceased partner, son or other relative of existing partner as per agreement can be admitted into partnership with the express or implied consent of all existing partners. In one case [Byrne V. Reid (1902) 2 Ch. 35], there were two partners B and R. They unanimously decided that B could introduce into their firm as a partner any of B's sons when he would attain the majority. According to this term of agreement, when B's sons attained the age of 21, he proposed him a partner. But R did not accept his proposal and did not give consent. In that case, it was held that R could not do so, as the partnership deed being a contract provided for the admission of any of B's sons as a partner. Liability of a new or incoming partner: Section 31 (2) provides for the liability of a new partner. It lays down that, " subject to the provisions of Section 30, a person who is introduced as a partner into a firm does not thereby become liable for any act of the firm done before he becomes a partner." Thus, the liability of a new partner commences only from the date of his admission as a partner into the partnership firm. However, the new partner can be made liable to the creditors for the existing debts under the following situations: (a) If the new partner of the reconstituted firm after his admission has agreed to take over the liability for past debts of the old firm, the newly admitted partner can be held liable for such debts and, (b) The creditors must agree to accept new reconstituted firm as their debtor by discharging the old firm from the liability of their debts. So far as a minor partner is concerned, on attaining majority, if he elects to become a partner of the firm, unless there is any agreement to the contrary, he becomes liable for all the acts of the firm since he was admitted into the partnership firm to the benefits of the partnership. Liability of outgoing partners: When any of the partners ceases to be a partner in the firm because of any one reason of the following, such a partner is called as an outgoing partner. When any partner enters or goes out because of one or the other reason and the partnership is continued, the partnership firm is said to be re constituted. 179

Business Law

2.

Retirement of a partner

/

A partner is said to retire when other partners continue to carry on the partnership business and that partner who retires ceases to be a partner. There are three modes of retirement of a partner which are as follows: (a) Any partner may retire at any time with the consent of aUrjartners. (b) When the partnership deed expressly provides for the retirement of a partner; a partner may retire according to the term sofagreement between the partners, and ^^ (c) Where the partnership is at will, by giving notice in writing to all the other partners of his intention to retire [Section 32(1)]. * Liability of a retired partner : A retired partner is held liable to the debts of his firm and for all the acts of the firm done before and upto the date of his retirement. However, a retiring partner may be discharged from his liability to any third party for the acts of his firm done before his retirement by entering into agreement with such third party and partners of the reconstituted firm. Such third party and partners of the reconstituted firm. Such agreement may be implied by a course of dealing between such third party and the reconstituted firm after he had knowledge of retirement. [Section 32(2)]. Thus, a third party should recognise the reconstituted firm as its debtor in order to free the retiring partner from his liability. Moreover, if a new partner is admitted into partnership firm and he agrees to take over the liabilities of the retiring partner with the consent of all the parties concerned that is, creditors or third parties, partners of reconstituted firms, the retiring partner is discharged from all the liabilities for the acts of the firm done before his retirement. Suppose, in ABC firm, there are three partners A, B, and C and of them, B, retires and M is admitted into the partnership firm as a partner. Creditors of ABC firm accept M as the new partner and the reconstituted firm as their debtor. In this case B is discharged of all liabilities of the firm incurred before the date of his retirement. If a partner retires without giving necessary public notice, he continues to be liable as a partner by holding out. Of course, if a dormant partner retires without giving any public notice, he cannot be held liable as a partner by holding out. If no notice of retirement of a partner is given to the third parties and, if they continue to supply goods or funds to the reconstituted firm, they can either hold the old firm or the new firm liable. They cannot hold both the firms - old and new - liable for their debts. 180


Public notice regarding the retirement of the partner may be given by the retired partner or by other partner of the reconstituted firm [Section [32 (4)]. Proviso to Section 32 (3) implies that a retired partner is not liable to any third party who deals with the firm without Imowing that he was a partner. Expulsion of a partner

'A partner may not be expelled from a firm by any majority of partners, save in the exercise in good faith of powers conferred by contract between the partners [Section 33(])]. Any partner of a partnership firm, thus, can be expelled subject to the following conditions: (a) There should be an express agreement between the partners which must confer on them the power to expell a partner, f h) Thus, power given to expel any partner must be exercised by the majority of the partners in the good faith and in the best interest of the partnership. This implies that the important tests of good faith which are as follows: (i)

The power of expulsion must be exercised in the interest of the partnership firm and for justifiable reasons only.

(ii) A notice of intention to expel must be given to the concerned partner, and (iii) A reasonable opportunity should be given to the concerned partner for being heard. If a partner is expelled without giving him proper notice and reasonable opportunity to be heard and without fulfilling the conditions mentioned in Section 33 (1), that expulsion becomes irregular and inoperative. In that case, the expelled partner continues to be the partner of the partnership firm. The partner who is illegally expelled may claim re-instatement as a partner or he may sue the firm for the refund of his share in the capital as well as profits. Section 33 (2) says that the provisions of Sub-Sections (2), (3) and (4) of Section 32 shall apply to an expeled partner as if he were a retired partner. This means the rights and the liabilities of an expelled partner are exactly the same as that of a retiring partner.

4ev
Business Law

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 of 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 [Section 34 (2)]. Thus, from the provisions of Section 34 (1) & (2), we come to know certain effects of the insolvency of a partner which are as follows: (a) When a partner becomes insolvent, he ceases to be a partner from the date on which the order of adjudication is made of his insolvency. (b) The partnership firm is automatically dissolved on the insolvency of any of its partners unless there is any agreement to the contrary [Section 42 (d)]. (c) If there is any contract between the partners that their firm is not dissolved by adjudication of a partner as an insolvent, the estate of a partner so adjudicated is not held liable for any act of the firm and the firm is held liable for any act of the insolvent partner done after the date on which the order of adjudication is made. When the partner is declared insolvent, his share in the firm vests in the official assignee who gets the right to ask for an account. But the official assignee does not get any right in the management of the partnership business. No public notice is required to be given to the effect that a partner has been adjudicated insolvent in order to absolve or to set free himself from all liabilities for the future acts of partnership firm.

5.

Death of partner If a contract between the partners does not provide for any thing so far as the death of anyaSf the partners is concerned, a firm is dissolved by the death of a partner. [Section 42 (c)]. But if the surviving partners decide to continue the partnership business as per contract between them, the estate of a deceased partner is not held liable for any act of the firm after the death of that partner [Section 35]. Thus, it must be remembered that whether the firm is dissolved or not after the death of a partner, the estate of the deceased partner is not held liable for any act done after his death. No notice of the death of a partner is required to be given in order to relieve the deceased partner's estate from future liabilities of the firm. In Bagel vs. Miller case [1903, 3K. B. 212], M was one of the partners. When he was alive, his firm placed an order for goods but the delivery of the goods was made after his death. It was held in the case that M's estate could not be held liable for the value of goods as debt was accrued in respect of the goods before his death.

182

Unit 4

6.


Transfer of partners interest The provisions relating to the transfer of partner's interest have been made in Section 29 of the Indian Partnership Act of 1932 which runs as follows: "A transfer by a partner of his interest in the firm, either absolute or by mortgage or by the creation by him a charge on such interest, does not entitle the transferee, during the continuance of the firm, to interfere in the conduct of a business, or to require accounts, or to inspect the books of the firm, but entitles the transferee only to receive the share of profits of the transferring partner, and the transferee shall accept the account of profit agreed to by the partners, and 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 from the date of dissolution. Thus, a partner has a right to transfer his interest in the partnership firm to an outsider and such transfer of his interest can be absolute or by mortgage or by creating a charge on such interest. A transferee gets the rights to receive the share of profits of a transferring partner during the continuance of partnership. But such a transferee is not entitled either to interfering in the conduct and management of the partnership or to inspect the books of the firm requiring accounts of the firm. But after the dissolution of a partnership or if a transferring partner ceases to be a partner, the transferee is entitled to receive the share of the assets of the partnership firm to which the transferring partner is entitled and for the purpose of ascertaining such share, he is entitled to an account as from the date of dissolution.

7.

Rights of an outgoing partner Sections 36(1) and 3 7 deal with the rights of an outgoing partner to carry a competing business and in certain-cases to share subsequent profits while Section 36 (2) deals with the agreements in restraint of trade. These Sections are given below : Rights of outgoing partner to carry on competing business : As outgoing partner may carry on a business competing with that of the firm and he may advertise such business. But subject to contract to the contrary he may not (a) use the firm name, (b) represent himself as carrying on the business of the firm, (c) solicit the custom of persons who were dealing with the firm before he ceased to be a partner [Section 36 (1)]. 183

Business Law

/Jtight of outgoing partner to carry on competing business subsequent profit: Where any member of a firm has died or otherwise ceased to be a partner, and the surviving or continuing partner 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 the option is duty 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 aspects comply with the terms thereof, he is liable to account under the foregoing provisions of this Section [Sec. 37]. Agreements 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 Sec. 2 7 of the Indian Contract Act, 1872 (IX of 1872), such agreement shall be valid if the restrictions imposed are reasonable [Section 36 (2)]. 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 transaction from the date of any change in the constitution of the firm [Section 38]. The provisions of Section 38 are made to protect the surety's interest. Any change in the constitution of the firm may expose the surety to new kinds of risk and, therefore, it is made clear that, unless there is any agreement to the contrary, a continuing guarantee given to a firm or to any third party in respect of the transactions of the firm is revoked as to the future transactions from the date of a change in its constitution. In one case, the conduct of the cashier of the firm was guaranteed. But subsequently the firm was reconstituted and its name was also changed. It was held that the surety was not liable for any misconduct of the cashier after the reconstitution and change in the name of the partnership [N.C. Mukharjee vs. B. D. Mukharjee, (1901) 28 Calcutta 597]. 184

nit 4

Partnersjiip Act, 1932 D'

4.14 DISSOLUTION OF A FIRM

When a partnership firm cease's to exist, the partnership firm is said to be dissolved. Section 9 lays down that, "The dissolution of partnership between all partners of a firm is called the uissolution of the firm." There is a difference between dissolution of a firm and dissolution of rartnership. Dissolution of partnership involves a change in relationship of partners. When ne or more partners cease to be the partners of the firm because of one or the other reason isd other partners continue the partnership business, it is nothing but the dissolution of irtnership and not of the firm. Thus, the firm can be reconstituted without any dissolution. >ut, in the dissolution of partnership firm, there is complete breakdown or extinction of the lationsnip of partnership between all the partners of the partnership firm. Modes of dissolution of a firm

Partnership firms may be dissolved in different ways which are as follows: (A) Dissolution by voluntary act of partners which includes the following modes : (i)

Dissolution by consenJX'"'

(ii)

Dissolution by agreement i/ /'

(iii)

Dissolution by notice. l //

(B) Dissolution by operation of law which includes compulsory dissolution and dissolution as happening of certain contingencies Compulsory dissolution takes place because of any of the following events: (i)

Insolvency of partners,

(ii)

Certain events making the business of partnership fcnlawfuj.

Dissolution of a partnership firm on happening of certain contingencies which are as follows: (i)

By expiry of term

(ii)

By Death of partner

(iii)

By completion of undertakings or ventures.

i C) Dissolution by the order of the court at the suit of a partner on any of the following grounds: (i)

Insanity of a partner. 185

B u s i n e s s L a w

( i i )

P e r m a n e n t

i n c a p a c i t

y

o f

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p a r t n e r . ( i i i )

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p a r t n e r . ( i v )

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b r e a c h

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a g r e e m e n t

b

y

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p a r t n e r . ( v )

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o f

i n t

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b y

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p a r t n e r . ( v i )

B u s i n e s

s

c a r r i e d

o n

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a

l o s s . ( v i i )

A n

y

o t h e r

j u s t

a n d

e q u i t a b l e

g r o u

n d .

( A ) D i s s o l u t i o n o f p a r t n e r s h i p f i r m b y v o l u

n t a r y a c t s o f p a r t n e r s S e c t i o n 4 0 p r o v i d e s f o r d i

s s o l u t i o n o f a f i r m b y v o l u n t a r y a c t s o f t h e p a r t

n e r s . I t l a y s d o w n t h a t , ' ' a f i r m m a y b e d i s s o l v

e d w i t h t h e c o n s e n t o f a l l t h e p a r t n e r s o r i n a c c

o r d a n c e w i t h a c o n t r a c t b e t w e e n t h e p a r t n e r s . "

' £

D i s s o l u t i o n b y c o n s e n t : I f a l l t h e p a r t n e r s g i v e

c o n s e n t t o t h e d i s s o l u t i o n o f t h e i r i f i r m , t h e

f i r m m a y b e d i s s o l v e d a t a n y t i m e . D i s s o l u t i o n b y

a g r e e m e n t : T h e p a r t n e r s h i p d e e d i t s e l f m a y p r o v

i d e f o r t h e , d i s s o l u t i o n o f t h e f i r m . T h u s , a p a

r t n e r s h i p f i r m m a y b e d i s s o l v e d i n a c c o r d a n c e w i t

h t a c o n t r a c t b e t w e e n p a r t n e r s . A s i t i s c r e a t e d

b y c o n t r a c t , i t c a n a l s o b e t e r m i n a t e d b y c o n t r a

c t . T h o u g h t h e a b o v e m e n t i o n e d t w o m o d e s o f d i s s o l

u t i o n o f f i r m i . e . d i s s o l u t i o n b y c o n s e n t a n d b y c

o n t r a c t , a r e p r o v i d e d i n S e c t i o n 4 0 , t h e r e i s a d i

f f e r e n c e b e t w e e n j t h e m . P a r t n e r s c a n g i v e c o n s e n t

t o a d i s s o l u t i o n o f t h e i r f i r m i r r e s p e c t i v e o f t h

e i r p r e v i o u s a g r e e m e n t o r c o n t r a c t . B u t i n d i s s o l u

t i o n b y c o n t r a c t , p a r t n e r s a r e r e q u i r e d !

t o f o l l o

w t h e i r a g r e e m e n t , w h e t h e r a l l t h e p a r t n e r s s h o u l d

g i v e t h e i r c o n s e n t o r n o t . D i s s o l u t i o n b y n o t i c e

: A c c o r d i n g t o S e c t i o n 4 3 ( I ) , " W h e r e t h e p a r t n e

r s h i p i s a t ' w i l l t h e f i r m m a y b e d i s s o l v e d b y a

n y p a r t n e r g i v i n g n o t i c e i n w r i t i n g t o a l l t h e o t

h e r p a r t n e r s o f h i s i n t e n t i o n t o d i s s o l v e t h e f i r

m . " S e c t i o n 4 3 ( 2 ) f u r t h e r s t a t e s t h a t , " T h e f i r m

i s d i s s o l v e d a s f r o m t h e d a t e m e n t i o n e d i n t h e n

o t i c e a s t h e d a t e o f d i s s o l u t i o n o r , i f n o d a t e i

s s o m e n t i o n e d , a s f r o m t h e d a t e o f t h e c o m m u n i c a

t i o n o f t h e n o t i c e . " T h u s , w h e r e a p a r t n e r s h i p i s

a t w i l l , t h e f i r m m a y b e d i s s o l v e d b y a p a r t n e r

g i v i n g > n o t i c e o f h i s i n t e n t i o n t o d i s s o l v e t h e

f i r m t o a l l o t h e r p a r t n e r s . S u c h n o t i c e m u s t b e •

e x p l i c i t , f i n a l , i n w r i t i n g a n d s i g n e d b y t h e p a

r t n e r . A n o t i c e o f d i s s o l u t i o n o n c e g i v e n f c a n n o t

b e w i t h d r a w n w i t h o u t t h e c o n s e n t o f a l l o t h e r p a

r t n e r s . H o w e v e r , i f p a r t n e r s h i p |

1 8 6

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is not at will, such partnership cannot be dissolved by giving notice. In one case [Uduman vs. Aslum, AIR 1991 SC 1020 : 1991, SSC - 412], partnership deed clearly provided that the partnership would continue so long as there were at least two partners. In that case, the supreme court held that the partnership and its continuation was not dependent upon the will of any partner and as such, partner had no right to dissolve it by giving notice in writing to others. (B) Dissolution by operation of law Compulsory dissolution : Section 41 provides for the compulsory dissolution of a firm. It states that, "a firm is dissolved (a) by the adjudication to 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. Thus, a firm is compulsorily dissolved on the happening of any of the events mentioned below. (i)

Insolvency of partners.

(ii)

Certain events making partnership business unlawful.

(i) Insolvency of Partners : When a partner in a firm is adjudicated insolvent, he ceases to be a partner on the date on which the order of adjudication is made [Section 34 (1)] and the firm can be dissolved. If all the partners are adjudicated insolvent, obviously, the firm is dissolved. Again, if all the partners except one are adjudicated insolvent, the firm ceases to exist as the minimum number of partners for the firm to be in existence must be two. (ii) Certain events making partnership business unlawful: When any particular event happens and because of happening of that event, carrying on the partnership business becomes unlawful and the partnership itself becomes unlawful and the firm is compulsorily dissolved e.g. out-break of war. Suppose there are two persons X and Y who have entered into partnership business and started their firm. X and Y are citizens of India and China respectively. If afterwards a war breaks out between the two countries, the partnership business becomes unlawful and as a result, their partnership will be automatically dissolved on the out-break of the war. 187

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A partnership firm is formed to carry on particular business which is quite lawful but if subsequently it is prohibited, the firm is dissolved. For example, X and Y carry on a lottery business which is lawful and not prohibited at the time of formation of their firm. But it is subsequently prohibited. The firm, in that case, is dissolved. However, where more than one separate adventure, undertaking, business is carried on by the firm, the illegality of one or more shall not by itself cause the dissolution of the firm in respect of lawful adventures, undertakings etc. of the firm. Of course, if the partnership business itself is unlawful since its formation, such partnership is void ab-initio and question of dissolution will not arise in respect of such firm. Dissolution of partnership firm on happening of certain contingencies . partnership firm can be dissolved on happening of certain contingencies. Such contingencies are made clear in Section 42 which lays down that, 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 adj udication of a partner as an insolvent. However, it can be provided in the partnership agreement that the firm will not be dissolved in any of the circumstances mentioned above and if such provision is made in thp agreement, that is considered valid. Dissolution by the order pf Court We have considered so far various modes of dissolving the partnership firms where in court's intervention are not required. But the court may order the dissolution of a firm at the suit of a partner on various grounds which are mentioned in Section 44. Section 44 lays down that, "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 unsoundjnind, 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.

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(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 as to the nature of the business; (d) that a partner, other than the partner suing wilfully or persistently commits breach of agreements relating to the management of the affairs of the firm or the conduct of ita business, or otherwise so conducts himself in matters relating to the business that it is not reasonably practicable for the other partners to carry on the business in partnership with him. (e) that a partner, other than the partner suing, has in any way transferred the whole of his interest in the firm to a third party, or has allowed his share to be charged under the provisions of Rule 49 of Order XXI of the First Schedule to the Code of Civil Procedure, 1908 (V of 1908), or has allowed it to be sold in the recovery of arrears of land-revenue or of any duties recoverable as arrears of land-revenue due by the partner. (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. Thus, intervention of court is required for the dissolution of the partnership firms for various reasons. Section 44 which is reproduced above enumerates various grounds on which a petition can be made to the Court for the purpose of the dissolution of the firm. Let us discuss each of such grounds in brief. Insanity of a partner [Section 44 (a)} : When any of the partners becomes insane or a person of unsound mind., any other partner or partners or any friend of the insane partner may apply tome Court for the dissolution of the firm. If the Court is sati sfied regarding the incapacity of the insane partner to perform his part of the contract, the order is made to dissolve the firm. Thus, the insanity of a partner is a good ground for the dissolution of the firm. But, if a partner who has become insane is dormant, the Court may refuse the dissolution of the firm on the ground of the insanity of the partner as such partner does not take active part in the day-to-day business of the firm. Permanent Incapacity of a partner [Section 44 (b)] : Where a partner, other than the partnerûingThas become permanently incapable of performing his duties, the Court may order to dissolve the firm. The incapacity may be due to illness and such illness may be either physical or mental or both. But if incapacity of a partner on 189

Business Law

medical evidence is found to be curable, the Court does not order the dissolution of firm. In [Whitewell vs. Arthus 35 Bear 140 : (1865) 147 RR 73 55 R 848], one of the partners suffered from an attack of paralysis, a good ground to demand dissolution. But it was medically proved that the attack was not permanent and the partner showed the signs of improvement because of medical aid. Misconduct of a partner : [Section 44 (c)] : When a partner, other than suing, is gtrilty of misconduct which may affect the partnership business prejudically, the Court may order dissolution of the firm. Such misconduct need not be related with the partnership business, but should affect the business prospects of the partnership firm badly. Gambling by a partner, persistent refusal to attend to the partnership business, fraudulent breach of trust by a partner, taking away books of the firm by a partner, negligence on the part of a partner to attend to the partnership business, conviction of a partner for travelling without ticket, adulterous relations etc. have been held to be sufficient ing the misconduct of a partner for dissolution of a firm. Uful or persistent breaches of agreement [Section 44 (d)] : A partner who is not guilty of breach of agreement may file a suit for dis solution if any other partner persistently commits breach of agreement relating to the management of the affairs of the conduct of the business or otherwise has so conducted the business himself that it is not reasonably practicable for other partners to carry on the business of the partnership firm. Under such circumstances, the Court may order the dissolution of the firm. Any conduct which is harmful and destructive to mutual confidence between the partners is considered as sufficient for making the order of dissolution. Keeping erroneous accounts, and not recording the transactions, continued quarreling between partners, refusal to meet on business matters, fabrication of accounts, misappropriation of income etc. have been held sufficient grounds to justify the dissolution of the firm. Transfer of interest by a partner [Section 44 (e)] : Section 44 (e) makes it clear that transfer of the whole of the interest by any partner to the third party or any partner has allowed his share to be charged or to be sold in the recovery of land-revenue arrears, provides a good ground to other partners to bring a suit for the dissolution of their firm. The Court, at the instance of any other partner, may order the dissolution if satisfied. Business carried on at lo&s [Section 44 (/)] : When the partnership business •cantsjVtre Ccrrhefr on proTrta\)iy and: mere are continuous losses, the court may order to dissolve the. Cvtm.. 190

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Sharing of profits is one of the essential elements of partnership and if the partnership business cannot be carried on except at a base, there are no business prospects. Therefore, at suit of a partner, the Court may, if think fit, dissolve the firm. Any other just an equitable ground [Section 44 (8)]: The Court has power to dissolve the firm, at a suit by any of the partners, on any just and equitable ground. This Section 44 (g) really gives very wide discretionary power to dissolve a firm. Dead-lock in the management, if partners are not on the speaking term, want of cooperation, lack of mutual confidence etc. have been considered as equitable and just grounds by the Courts to dissolve the partnership firm.

(C) Rights of a partner on the dissolution of his firm Partner's rights on the dissolution of firm are made clear in Sections 46, 49, 50, 51, 52 and 53. (a) Right of a partner to have business wound up after dissolution : Section 46 lays down that,' 'On the dissolution of a firm every partner or his representative is entitled, as against all the other partners or their representatives, to have the property of the firm applied in payment of the debts and liabilities of the firm, and to have the surplus distributed among the partners or their representatives according to their rights. Thus on the dissolution of a firm, every partner or his representative has a right to an equitable lien i.e. to deal with the goods, property etc., of the firm. (b) Right of a partner to bind the firm : Section 47 states that, "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." Section 47 further provides that 'the firm is in no case bound by the act of a partner who has been adjudicated insolvent; but this provision 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." [Proviso to Section 47]. Thus, even after the dissolution of the firm, the right or authority of a partner to bind his firm and other mutual rights continue to wide up the affairs of the firm. Such authority operates till unfinished transactions are completed and not otherwise. 191

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(c) Right of a partner to settle the debts of the firm out of the property of the firm : The provisions relating to the right of a partner to settle the debts of the firm out of the property of the firm have been made in Section 49 which runs as follows. Payment of firm's debts and of separate debts : Where there are point debts due from the firm, and also separate debts due from any partner, the property of the firm shall be applied in the first instance in payment of the debts of the firm, and if there is any surplus, then the share of each partner shall be applied in payment of his separate debts or paid to him. The separate property of any partner shall be applied first in the payment of his separate debts and the surplus (if any) in the payment of the debts of the firm. Thus, when a firm is dissolved, its debts are settled first out of its property and if there is surplus, the same is utilised for paying the private debts of the partners or if there are no private debts of the partners, the surplus is distributed amongst the partners. If there are any private debts of the partners, their private estate is first utilised to pay off their respective private debts and after that, if there be any need and any surplus, it is applied towards the settlement of the firm's debts. (d) Right relating to the use of firm name after the dissolution of the firm : The provision of Section 50 throws light on the use of the firm name. It implies that when a partner or his representative has bought the goodwill of the firm on its dissolution, such partner gets every right to use the firm name. (e) Right of a partner to receive the amount of premium paid, if any, on premature dissolution : A partner paying a premium is entitled to repayment of such premium or of such part thereof as may be reasonable on the premature dissolution of his firm. Section 51 of the Indian Partnership Act of 1932 states that, "where a partner has paid a premium on entering into partnership fora 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 (i) (ii)

192

the dissolution is mainly due to his own misconduct, or the dissolution is in pursuance of an agreement containing no provision for the return of the premium or any part of it.

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Thus, when a partner is entitled for the repayment of the premium he has paid on entering into partnership for fixed term [if the partnership is at will, these provisions are not applicable] if his firm is dissolved before that fixed term. While paying the sum of premium agreed upon, regard shall be had to the terms upon which he became the partner and the length of the period during which he was a partner. But a partner is not entitled to premium if the premature dissolution of the firms is due to the death of a partner or such dissolution is due to the misconduct of the partner paying such premium or where the dissolution of the firm is in pursuance of an agreement containing no provision for the return of the premium or any part thereof. (f) Rights of a partner where partnership contract is rescinded for fraud or misrepresentation : Section 52 states that, 'Where a contract creating partnership is rescinded on the ground of the fraud or misrepresentation of any of the parties thereto, the party entitled to rescind is, without prejudice to any other right, entitled (a) to a lien on, or a right of retention of, the surplus or the assets of the firm remaining after the debts of the firm have been paid, or 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 be indemnified by the partner or partners guilty of the fraud or misrepresentation against all the debts of the firm." Thus, a partner gets certain rights i.e. right of lien of subrogation and to be indemnified if a contract creating partnership rescinded on the ground of fraud or misrepresentation by any of the partners. A partner gets the right of lien on the surplus assets after all the debts of the firm have been paid for any amount spent by such partner for the purchase of his share in his partnership firm and also for the capital, if any, contributed by him. He also gets a right of subrogation. Thus, if he pays off the creditors, if any, of the firm from his own funds, he steps into the shoes of the creditors of the firm and can recover that amount from the firm. Further, he also gets the right to be indemnified by his co-partners who are guilty of misrepresentation or fraud against the debts of the firm. (g) Right of a partner to restrain other partners from using firm name and property of the firm : Section 53 makes the provisions that after a firm is dissolved, every partner or his representative has a right, in the absence of a contract between partners to the contrary, to restrain any other partner or his representative from carrying on a similar business in the name of the firm or from using the property of the firm for his own benefit until all the affairs of the firm 193

Business Law

have been completed wound up. But it is also provided that where any partner or his representative has brought the goodwill of the firm, nothing in this Section 53 shall affect his right to use the firm name. Thus, it implies that one who has brought the goodwill, such partner has a right to use the firm name.

(D) Liabilities of a partner on the dissolution of his firm As a partner has certain rights on the dissolution of his firm, he incurs certain liabilities which are discussed below. (a) Continuing Liability of a partner after dissolution : Section 45 states that "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 ceased to be a partner." Thus, until a public notice of the dissolution of the firm is given according to the provisions of Section 72, the partners continue to be liable to third parties for any act done by any of them even after dissolution. In order to get rid of such liability, the notice can be given by the firm or by any one of the partners. X, Y and Z are partners in XYZ firm, engaged in trading activities. They execute a deed for the dissolution of the firm, as from 1 st September, 1999 but do not give a public notice of such dissolution. Thereafter, on 1st October 1999, Y borrows Rs. One lakh from Mr. M in the name of their firm. All the partners are liable to Mr. M for the loan taken from him in the name of the firm. However, in the absence of public notice, giving the knowledge of the dissolution of the firm, the estate of a deceased partner, or the insolvent partner or a retiring dormant partner is not held liable for any act of the firm after the dissolution. (b) Liability on account of holding out: The authority of each partner to bind the firm by his own acts continues in the following two cases even after the dissolution of the partnership firm. (i) (ii)

194

to wind up the affairs of the firm and to complete the transactions begun but unfinished at the time of dissolution [Section 47}. As an insolvent partner cannot bind the firm, the firm cannot

(I 4


be held liable for his acts in the two cases mentioned above. However, if a partner represents himself or knowingly allows himself to represent as a partner of an insolvent partner such partner or the firm can be held liable on the ground of holding out. (c) Liability of a partner to share personal profits : Section 50 states that "subject to contract between the partners, the provisions of clause (a) of Sec. 16 shall apply to transactions by any surviving partner or by the representatives of a deceased partner, undertaken after the firm is dissolved on account of the death of a partner and before its affairs have been completely wound up. Provided that where any partner or his representative has bought the goodwill of the firm, nothing in this Section shall affect his right to use the firm name. Section 16 is reproduced below for the benefit of the students. Personal profits earned by partners

Subject to contract between the partners (i) if a partner deserves any profits 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 the profit and pay it to the firm;

)t Y

(ii) 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. Thus, if any of the partners makes any profit from the transaction or transactions connected with the business of the partnership firm after its dissolution, he make share of the same with his co-partners and legal representatives of deceased partners. i Provisions relating settlement of accounts on dissolution of a firm

the

Generally, a partnership agreement provides for the settlement of accounts between the partners on the dissolution of their firm. In the absence of any such agreement the provisions of Sections 48, 49 and 55 of the Indian Partnership Act of 1932 are applied for settling the accounts between the partners on the dissolution. Now, let us consider these provisions. (a) Provisions relating to losses : Losses, including deficiencies of capital, shall be paid first out of profits, next out of capital, and lastly, if necessary, by the partners individually in the proportion in which they were entitled to share profits. [Section 48 (9)]. 19 5

Business Law

have been completed wound up. But it is also provided that where any partner or his representative has brought the goodwill of the firm, nothing in this Section 53 shall affect his right to use the firm name. Thus, it implies that one who has brought the goodwill, such partner has a right to use the firm name. (D) Liabilities of a partner on the dissolution of his firm As a partner has certain rights on the dissolution of his firm, he incurs certain liabilities which are discussed below. (a) Continuing Liability of a partner after dissolution : Section 45 states that "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 ceased to be a partner." Thus, until a public notice of the dissolution of the firm is given according to the provisions of Section 72, the partners continue to be liable to third parties for any act done by any of them even after dissolution. In order to get rid of such liability, the notice can be given by the firm or by any one of the partners. X, Y and Z are partners in XYZ firm, engaged in trading activities. They execute a deed for the dissolution of the firm, as from 1st September, 1999 but do not give a public notice of such dissolution. Thereafter, on 1 st October 1999, Y borrows Rs. One lakh from Mr. M in the name of their firm. All the partners are liable to Mr. M for the loan taken from him in the name of the firm. However, in the absence of public notice, giving the knowledge of the dissolution of the firm, the estate of a deceased partner, or the insolvent partner or a retiring dormant partner is not held liable for any act of the firm after the dissolution. (b) Liability on account of holding out: The authority of each partner to bind the firm by his own acts continues in the following two cases even after the dissolution of the partnership firm. (i) (ii)

194

to wind up the affairs of the firm and to complete the transactions begun but unfinished at the time of dissolution [Section 47]. As an insolvent partner cannot bind the firm, the firm cannot

Unit 4


be held liable for his acts in the two cases mentioned above. However, if a partner represents himself or knowingly allows himself to represent as a partner of an insolvent partner such partner or the firm can be held liable on the ground of holding out. (c) Liability of a partner to share personal profits : Section 50 states that "subject to contract between the partners, the provisions of clause (a) of Sec. 16 shall apply to transactions by any surviving partner or by the representatives of a deceased partner, undertaken after the firm is dissolved on account of the death of a partner and before its affairs have been completely wound up. Provided that where any partner or his representative has bought the goodwill of the firm, nothing in this Section shall affect his right to use the firm name. Section 16 is reproduced below for the benefit of the students. Personal profits earned by partners Subject to contract between the partners (i) if a partner deserves any profits 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 the profit and pay it to the firm; (ii) 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. Thus, if any of the partners makes any profit from the transaction or transactions connected with the business of the partnership firm after its dissolution, he make share of the same with his co-partners and legal representatives of deceased partners. (E) Provisions relating settlement of accounts on dissolution of a firm Generally, a partnership agreement provides for the settlement of accounts between the partners on the dissolution of their firm. In the absence of any such agreement the provisions of Sections 48, 49 and 55 of the Indian Partnership Act of 1932 are applied for settling the accounts between the partners on the dissolution. Now, let us consider these provisions. (a) Provisions relating to losses : Losses, including deficiencies of capital, shall be paid first out of profits, next out of capital, and lastly, if necessary, by the partners individually in the proportion in which they were entitled to share profits. [Section 48 (9)]. 195

Business Law

XYZ is a partnership firm and these three partners' contributions towards capital are Rs. 40,0007-, Rs, 20,0007- and Rs. 2,0007- respectively. They agree amongst themselves to share the profits and losses equally. On dissolution and on finalisation of accounts, it is found that the realisable assets are of Rs. 58,0007- while debts payable are of Rs. 29,0007-. Thus, after paying all the debts, the assets available for partners are of Rs. 29,0007- only, and therefore, the capital deficiency amounts to Rs. 33,0007- [Rs. 62,0007- total capital - assets available for partners Rs. 29,0007-]. This capital deficiency of Rs. 33,0007-, must be contributed by these three partners equally, that is, Rs. 11,0007- each. (b) Provisions relating to application of assets : The assets of the firm, including any sums contributed by the partners to make up deficiencies of capital, shall be applied in the following manner and order. (i)

in paying the debts of the firm to third parties;

(ii) in paying to each partner rateably what is due to him from the firm for advances as distinguished from capital. (iii) in paying to each partner rateably what is due to him on account of capital; and (iv) the residue, if any, shall be divided among the partners in the proportions in which they were entitled to share profit [Section 48 (b)]. (c) Provisions relating to firm's debts and private debts, when both exist: When there are joint debts due from the firm and also separate debts due from any partner then (i) The property of the firm shall be applied in the first instance in the payment of the debts of the firm and after such debts are paid, if there is any surplus, the share of each partner shall be applied in payment of his separate debt, if any or else paid to him. (ii) The separate property of any partner shall be applied first in the payment of his separate debts and the surplus, if any, can then be applied in the payment of the debts of the firm [Section 49]. (d) Provisions relating to the insolvency of one of the partners : Where one of the partners becomes insolvent or he otherwise cannot pay his share of contribution, the capital of the solvent partners cannot be returned in full and

196

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they have to share the available assets rateably. In other words, this means that the available assets should be distributed among the solvent partners in the proportion to their original capital. Garner Vs. Murray [1904 - 73 L. J. C. H. 66:1 Ch. 57] a leading insurance case, established this principle. (e) Provisions relating to sale of goodwill on dissolution : Provisions relating to sale of goodwill on dissolution of a firm are embodied in Section 55 which are as follows: (i) While settling the accounts of a firm after dissolution, goodwill shall subject to contract, between partners, be included in the assets and it may be sold either separately or along with other property of the partnership firm [Section 55(1)}. (ii) Where the goodwill of a firm is sold after the dissolution of the firm, a partner may carry on any business competing with that of a buyer and he may advertise such business. However, subject to an agreement between him and the buyer, he may not use the firm name represent himself as carrying on the business of the firm or solicit the custom of persons who were dealing with the firm before the dissolution of the firm [Section 55 (2) ]. (iii) Any partner upon the sale of the goodwill of the firm, may enter into an agreement with the buyer that such partner will not carry on any business which is similar to that of the firm within a specified period or within a specified local limits, and notwithstanding anything contained in Section 27 of the Indian Contract Act of 1872, such agreement shall be valid if the restrictions imposed are reasonable. 4.15 PROVISIONS RELATING TO PUBLIC NOTICE Provisions relating to public notice have been made in Section 72 of the Indian Partnership Act, 1934. According to Section 72 (a), a public notice is required to be given 1.

On the retirement or expulsion of any of the partners of a registered firm. In the case of expulsion or retirement of a dormant partner, no such notice is required;

2.

On the dissolution of a firm which is registered and;

3.

On attaining majority, minor's election to become or not to become a partner of a registered firm. 197

Business Law

Section 72 (a) notice must be given to the Registrar of the firms. [Section 72 (b) says that in any other case, if the public notice is required to be given, it is given by publishing in the official Gazette and by publication in at least one vernacular (local) news-paper circulating in the district where the firm has its place of business or principal place of business. Consequences of not giving a public notice Following are the important consequences, if public notice is not given in certain circumstances. (a) Aminor, who is admitted to the benefits of partnership, must give a public notice within six months on attaining majority or of obtaining knowledge that he had been admitted to the benefits of partnership, which date is later, declaring his decision as to become or not to become a partner in the firm; If no such notice is given, he becomes a partner of the firm at the expiry of six months and is held liable as a partner of the firm. [Section 30 (5)]. (b) If a partner retiring from his firm fails to give a public notice of his retirement, he along with other partners continue to be liable to third parties as partners for the acts performed [Section 32 (3)]. A partner who is expelled must also give a public notice otherwise he also continues to be liable as the other partners for the acts of the firm [Section 33 (2)]. (c) In the case of dissolution of a registered firm, on its dissolution, a public notice is required to be given. If no such public notice is given, the partners of such registered firm continue to be liable to third parties as before for the acts done by any of the partners [Section 45].

4.16 DISTINCTION BETWEEN PARTNERSHIP AND SOME OTHER FORMS OF ORGANISATION Partnership is one of the forms of business organisation. Sole trading concern, Company etc. are the other forms of business organisations. Other forms of organisation can be distinguished from partnership on various grounds such as formation, membership etc. 1.

Distinction' between Partnership and Company 1. Partnership is a form of business organisation and is the relation between persons who have agreed to share the profits of business carried on by all or any of them acting for all [Section 4 of the Indian Partnership Act of 1932] while a company is also a form of business organisation and the Companies Act of 1956, Section 3 (1) (i) defines it as a company formed and registered under the Companies Act.

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2.

Partnership firms are governed according to the provisions of the Indian Partnership Act of 1932 whereas companies are governed according to the provisions of the Companies Act of 1956.

3.

Registration of a partnership firm is not compulsory under the partnership act though a partnership firm can be registered at any time while registration of a company is made compulsory under the Companies Act.

4.

A partnership does not possess any separate legal entity distinct from its partners. On the other hand, a company has a separate legal existence of its own and is considered to be a separate person from its members.

5.

In case of partnership, minimum two persons are required to constitute a partnership while the maximum number in case of partnership carrying on banking business is ten and for any other business is it twenty persons. So far as a company is concerned, minimum two persons may constitute a private limited company, but total number of members must not exceed fifty. In respect of a public limited company minimum number of members required for constituting a company is seven while no such maximum number is fixed.

6.

Asa partnership firm is not a legal entity a partner cannot enter into a contract with his firm. But the shareholder can enter into a contract with the company of which he is a member.

7.

Partners are the collective owners of the property of their partnership firm while the property of a company belongs to the company only and not to its members that is, shareholders.

8.

A partner cannot transfer his interest in the partnership firm to other person without the consent of all other partners. In company, any shareholder can transfer his shares subject to the provisions of the a Articles of the company. Thus, a transferee can become a shareholder if he acquires the share or shares without the consent of other shareholders. Shares of a company are freely transferable.

9.

All partners work as the mutual agents of other partners of the firm but in a company, a shareholder is not considered as an agent of other shareholders.

10. Management of a partnership firm vests in the hands of partners. Only dormant partners do not participate in the management. But in the case of companies, management vests in the Board of Directors elected by the shareholders. 199

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11. Partnership has no perpetual existence while a company has perpetual existence. In the case of a partnership firm, death or insolvency of any of its partners results in its dissolution unless there is any contract to the contrary. But in the case of a company, death or insolvency of any of its shareholders does not result in its dissolution. 12. A partnership has less statutory obligations while a company is regulated according to the provisions of Companies Act of 1956. 13. Creditors of a firm are also the creditors of its partners individually while creditors of a company are the creditors of the company only and not of the individual shareholders. 14. It is not compulsory for the partnership firms to get their accounts audited by the auditors while the accounts of companies are required to be audited as per provisions of the Companies Act of 1956. 15. Any partner can dispose off the property of hi s firm while a shareholder of a company cannot dispose off the property of his company. 16. Each partner has an impl ied authority to bind other partners by acts done within the ordinary course of business. But so far as a company is concerned, its shareholders possess no such authority. 17. Sharing of profits and losses can be determined by the partners by entering into agreement at the time of the formation of partnership, but in the case of companies, this is not the case. Shareholders cannot decide or fix the rate of dividends at the time of the inception of their company. 18. Partnership firm can be wound up at any time by anyone of partners, if it is at will. In the case of company, no individual shareholder can require his company ^ aJ to be wound up at will. Moreover, winding up of a company involves rigorous legal formalities. . / («<-*« » (g^dJi'^-^/^ *^v Distinction between Partnership andUoinjtiinduJEamily Business^ ^ Q7?m%J/

V

When any ancestral business depends on the members of a Hindu Undivided Family or when the members of a Hindu undivided family start a common business out of the joint funds, at any time, after the death of the ancestor, such a business is called as joint family business. Membership of joint family is a result of status. A person gets a right to share in the joint family business by birth or by adoption. A member of joint 200

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family business is a joint- owner of the business and not a partner. Such joint-ownership is the result of personal law and is governed by Hindu Law. A joint family carrying on business has certain features common with partnership but it is not partnership. Section 5 of the Indian Partnership Act of 1932 implies that the relation of partnership arises from contract and not from status. The members of a joint Hindu undivided family which carries on any business as such are not partners but joint owners. As Joint Hindu Undivided family is not a legal entity distinct from its members, it cannot enter into a contract of partnership with other person or persons. Only the karta of a Joint Hindu Family can enter into a partnership contract with other person or persons. The important points on which Joint Hindu Family business and partnership differ are mentioned below. 1.

Partnership always springs from an agreement between persons who are known as partners while Joint Hindu Family business or firm is created not by agreement or contract but by status or by operation of law.

2.

A partnership is governed by the provisions of the Indian Partnership Act of 1932, while a Joint Hindu Family business is governed by Hindu Law.

3.

In partnership, a person cannot acquire interest or become a partner by birth. A person is admitted into partnership if only all existing partners consent. But in a Joint Hindu Family business a person becomes its member, acquires an interests and gets a share in assets and profits by mere fact of his birth.

4.

Registration of partnership is not compulsory. But it has been indirectly made compulsory because an unregistered firm suffers from certain important disabilities. No registration is required for a Joint Hindu Family business.

5.

For the formation of a partnership minimum members must be two. For a firm carrying on banking business, the number of partners must not exceed ten and in other cases twenty. But in the case of a Joint Hindu Family business no minimum and maximum limits on number of members are fixed.

6.

A minor cannot be admitted into partnership except with the consent of all the existing partners and he can only be admitted to the benefits of partnership. A minor of a Joint Hindu Family becomes a member of the Joint Hindu Family business or firm from the date of his birth.

7.

Partners are mutual agents but the members of a Joint Hindu Family are not the mutual agents. The karta of such family is the only representative of his family. 201

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8.

As every partner is an agent of the other partners or the firm, he has an unlimited power or capacity to bind the other partners by his acts done in the ordinary course of the business. In a Joint Hindu Family business, as the members of such business are not the mutual agents, they cannot bind others by their acts. It is only the karta of a Joint Hindu Family firm who has an authority to contract debts and pledge credit, property etc. of the Joint Hindu Family for the ordinary purposes of his family business.

9.

In partnership any female except minor can become a full-fledged partner whereas a female does not become a member of a Joint Hindu Family business.

10. In partnership, the liability of the partners is joint, several and unlimited and therefore, even private property is also held liable for the discharge of the liabilities of the partnership firm. In Joint Hindu Family business, Karta is personally liable for the debts of the family to an unlimited extent. But the liability of other members is limited to the extent of their interest in their Joint Hindu Family business. 11. Every partner has a right to have an access to the books of his firm. He can inspect and have a copy of accounts. Even a partner can ask for past accounts on severing his connections with the partnership firm. The members of a Joint Hindu Family have no such right for accounts relating to their family business except when the Karta has misappropriated the property of the family. 12. Subject to contract between the partners, a partnership is dissolved on the death of any of its partners whereas a Joint Hindu Family business is not dissolved on the death of the member of the family that is, of a coparcener. 13. Every partner has a right to sue for dissolution on appropriate grounds whereas a member of a Joint Hindu Family business has no such right. He can sue for partition. 14. Each partner has a right to claim his separate share of profits earned in partnership business, whereas a member of a Joint Hindu Family business has no such right. He can only file a suit for partition. Distinction between Partnership and Co-ownership Co-ownership simply means j oint ownership of some property. If a partnership firm has some assets, such assets are the joint property of the partners. To that extent, the partners, are co-owners also. But co-ownership is not the same thing as partnership. In

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partnership, partners are necessarily the co-owners of the property of the firm, but in co-ownership, the co- owners need not necessarily be partners. Explanation I to Section 6 lays down that,' 'the sharing of profits or gross returns arising from property by persons holding a joint or common interest in that property does not of itself make such persons partners. If two or more persons merely own some property jointly, it does not mean that there exists a partnership between them. The sons of a father who inherit some property are co-owners and not partners even if the property is managed jointly and income from the same is shared. But if they enter into an agreement to carry on some business and share the profits and losses, they become partners on starting the business. The important points of distinction between partnership and co- ownership are mentioned below. 1.

Partnership necessarily springs into existence out of an agreement where as coowner can be created either by an agreement or by law or by virtue of status.

2.

In partnership, the partners are necessarily the co-owners of the property of the partnership firm whereas co-ownership, co-owners need not be the partners.

3.

Partners are agents of one another while a co-owner is not the agent of another co- owner.

4.

Business is essential for the existence of a partnership whereas co-ownership can exist without any business.

5.

A co-owner can sell his share in the property at any time and at his sweet will without the consent of other co-owners but a partner cannot do so without the consent of all other partners.

6.

An agreement to share profits of the partnership business is an essential element of partnership. But co-ownership may exist without carrying on any business and hence sharing of profit is not essential in co-ownership.

7.

In partnership, the number of partners cannot exceed the statutory limit, but in co- ownership, there is no such limit on the number of co-owners.

8.

A partner has a lien on the property of the partnership firm for expenses incurred by the partner on such property on behalf of his firm but a co-owner has no such lien on the property.

9.

Apartner cannot sue for the partition of partnership property. He has the right to sue other partners for dissolution of the partnership firm and accounts. A coowner is entitled to demand the partition of the property or sue for the same. 203

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Business Law

r 4.

L

^

Distinction between partnership and s( club_orasociety 4._, A club or a society is an association of persons formed not for carrying business and earning profits but for performing certain functions. Following are the points which make clear the difference between partnership and a Club or a Society. 1.

Partnership is the result of an agreement entered into between the partners for carrying on business for earning profits and sharing the same amongst the partners. Whereas a club or a society does not carry on any business and is not a profit earning organisation.

2.

Partners are agents, of each other and hence, they can bind each other and their firm by the acts of other and their firm by the acts done in the ordinary course of business. Members of a club or a society are not the agents of each other and as such can not bind each other.

3.

Liability of partners is unlimited while liability of the members of a club or a society is limited to the extent of their unpaid contribution.

4.

Partners are liable to the creditors of the firm while no member of a cl ub or a society is liable to the creditors of a club or a society.

5.

Death or resignation of a partner may lead to the dissolution of partnership but death or resignation of a member of a club or a society does not affect the existence of the club or the society.

4.17 SUMMARY The partnership Act provides rules and regulation to run a partnership business. It also discusses the nature of partnership. It consists of two or more persons. These persons are called partners. Partners are agents of each other. They are responsible for the act and liability of each other. The partners are also liable to the acts and liability towards third party. The partnership is created for sharing profit and loss equally. The purpose of the partnership business is to do business. For creating a partnership business partnership agreement is necessary. The registration of the partnership firm is not compulsory. The partnership firm is registered with the registrar of the firms. Non registration of the partnership firm makes the partnership agreement afu-tile in the court of Law. The dissolution of firm on different counts. Dissolution of a firm rneans the end of the firm by the breakup of the relationship of the partnership between all the partners. It also discusses the mutual relationship of the partners. The mutual rights and duties of the partners may be determined by the express and implied contract between the partners. 204

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4.18 SELF-ASSESSMENT QUESTIONS Q1.

Define partnership and explain its essential elements.

Q2. What do you understand by a 'firm' anda 'firm name'? State the difference between a partnership and a firm. Q3. "Although sharing of profits is an essential element of partnership, it is not the sole test of partnership." Elaborate. Q4. "The law of partnership is nothing but an extension of the law of principal and agent." Explain. Q5. "Partnership is born out of contract and not status." Discuss. Explain the procedure of registration of a partnership firm. Is such registration compulsory in respect of every firm? Can registration of a firm be done at any time during the continuance of the partnership firm? What are the consequences of non- registration of a firm? Q6. 'Mere participation of the profits of a partnership business is' not a conclusive test of the existence of partnership. Is it true? Q7.

A person may share in the profits and yet may not be a partner." Discuss.

Q8.

Write short notes on: (a)

Scope of the Indian Partnership Act, 1932.

(b)

Nature of partnership.

(c)

Main features of partnership.

(d)

Test of partnership.

(e)

Duration and types of partnership.

(f)

Types of partners.

(g)

Contents and importance of partnership deed.

(h)

Registration of firms and procedure of registration of a firm.

(i)

Effects of non-registration.

(j)

Register of firms. (k)

Mutual agency.

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Q9. What are the various kinds of partners? Can a minor be admitted to a partnership? If so, what are the rules governing his rights and liabilities? Q10. Discuss the provisions of Indian Partnership Act, 1932 relating to the rights, duties and obligations of partners interest. Qll. Explain the mutual rights and liabilities of partners in a partnership firm. Q12. "A partner is the agent of the firm for the purposes of the business of the firm." Discuss. Q13 What is the nature and extent of partner's authority to bind the firm by his acts? Q14. "An act of a partner which is done to carry on, in the usual way, the business of the kind carried on by the firm, bind the firm legally." Explain. Q15. State the liabilities (a) of a partner for the acts of his firm, (b) of the firm for wrongful acts of a partner, (c) of the firm for misapplication of money or property by its partner. Ql 6. What is meant by the implied authority of a partner to bind the firm? What is the extent of the implied authority of a partner? Are third parties affected by restrictions placed on such implied authority? Q17. Explain the principle of holding out. Has the principle of holding out any connection with estoppel? State the conditions necessary to make a partner liable by holding out. Q18. What is partnership property? How far is it liable for partner's separate debt. Q19. Explain the circumstance under which a person can nevertheless be made liable as a partner even if he is not a partner. Q20. Explain the provisions relating to the liabilities and rights of incoming and outgoing partners. Q21. Explain the rights and obligations of a retiring partner. Q22. State the provisions of the Indian Partnership Act of 1932 regarding 'expulsion of a partner.' Q23. How can a person be introduced as a partner in a partnership firm? Explain the liability of a newly introduced partner in respect of an act of the firm done before he became a partner'. 206

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Q24. Explain the provisions of the Indian Partnership Act of 1932 regarding death and insolvency of a partner. Q25. What are the rights of a transferee of a partner's in a firm during the continuance of the firm and on dissolution of a firm? Q26. What is meant by dissolution of a firm? Explain various modes of dissolution of a firm. Q27. Explain the difference between the dissolution of a firm and dissolution of partnership and state the grounds on which a firm can be dissolved. Q28. Explain in brief, the rights and liabilities of a partner on dissolution of partnership firm. Q29. When is a firm said to be reconstituted? Who is called as an outgoing partner? What are the liabilities of outgoing partners? Q30. In what circumstances is partnership dissolved? (i)

automatically and

(ii)

compulsorily by Court. Q31. Explain the provisions relating to settlement

of accounts on dissolution of a firm. Q32. When and how should a public notice be given under the Indian Partnership Act of 1932? Explain the consequences if public notice is not given in cases in which it is required to be given under the Indian Partnership Act of 1932. Q33. Distinguish between (a)

Partnership and a Company.

(b)

A Partnership and a Joint Hindu Family Business.

(c)

A partnership and Co-ownership.

(d)

Mutual relations of partners.

(e)

Rights and duties of a partner.

(f)

Express and implied authority of a partner.

(g)

Liabilities of partners to third party,

(h)

Principle of holding out.

(i)

Provision of the Indian Partnership Act relating to minor

partners, (j)

Modes of Dissolution of firm. 207

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5.1

INTRODUCTION

The law relating to sale of movable goods is contained in the Sale of Goods Act, 1 930 (SAG} . This Act extends to the whole of India except the state of Jammu and Kashmir. It was originally known as the Indian Sale of Goods Act, but the word 'Indian ' was dropped in 1 963 by amending the Act properly. The law relating to the sale of goods is now enacted in a separate law, but the general provisions of the Indian Contract Act of 1 872 are applied to contracts for the^lesjjf goods so far as they are not inconsistent with the express provision of the Sale of Goods Act of 1930. The sale of goods is the most common of all commercial contracts. It is very essential for all classes of the society to have the basic knowledge or the main principles and provisions of Sale of Goods Act.

5.2

CONTRACT OF SALE OF GOODS

A contract of sale of goods is a contract whereby the se11ei|transfers)or the property in goods to the buyer for a price. There may be a contract of sale between one part-owner and another [Section 4 (1)]. A contract of sale may be absolute or conditional [Section 4 (2)]. Here property means the general property in goods and not merely a special property [Section 2] The sum total of the above mentioned definition of contract of sale is the transfer of properaty in goods for a price. Thus when goods are sold, the property in goods is passed from the seller to the buyer and as a result, the seller ceases to be owner of goods while the buyer becomes its owner. It must be remembered that this Act is applicable only to the sale of movable goods and not immovable properties. The term 'contract of sale' is a generic term and it includes both (i) a _sale and, also (ii) an agreement to selLUnder a contract of sale, the property in goods is immediately transferred from the seller to the buyer. Suppose that today X has sold 1 00 bags of wheat to Y in consideration of a price of Rs. 7007- per bag, it is a contract of sale since the ownership of 100 bags of wheat has been transferred from X to Y for Rs. 70,0007-.

Unit 5

5.3

Sale of Goods Act, 1930

SALE AND AGREEMENT TO SELL

When under a contract of sale, the property in goods is transferred from the seller to the buyer (at once), the contract is called a sale; but where the transfer of the property in the' goods is to take place at a future time or subject to condition thereafter to be fulfilled, the contract is called an agreement to sell [Section 4 (3)]. An agreement to sell becomes a sale when the time elapses or the conditions are fulfilled subject to which the property in goods is to be transferred [Section 4 (4)]. Thus, where the transfer of any property (movable) in goods is to take place at a future time or subject to certain conditions thereafter to be fulfilled is nothing but an agreement to sell the goods or property. For example, suppose X agrees today with B that he will sell to B his 10 bags of rice on 21 st June for Rs. 2,0007- on the condition that B should pay 50% of the amount immediately and rest on the 21 st June. This is the agreement to sell. ^ Activity A: My father is a farmer. He wanted a haystack. Thus he made an agreement with Mr. Bhairu to buy a haystack on his land with liberty to come on his land to take it away. Is it a sale or an agreement to sale?

1.

Essentials of a contract of sale The following essential elements are necessary to constitute a valid contract of sale. (A) Two parties There should be two parties to the contract of sale of goods and obviously these two parties are -a seller and a buyer. Of course the seller and the buyer must be two different persons because a person cannot buy his own goods. A buyer is a person who buys or agrees to buy [Section 2 (])], and a seller is a person who sells or agrees to sell. [Section 2 (13)]. Thesetwo terms are complimentary. There can be a contract of sale between one part owner and another [Section 4 (1)]. However, there are certain exceptions to this rule. A person may buy his own goods in certain cases like auction sale [Section 64 (3)], execution of a decree etc.

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(B) Goods - the subject matter of a contract The subject matter of the contract of sale must be movable property or goods. Transactions involving purchase and sell of immovable property are out of the purview of the Sale of Goods Act, 1930. All transactions which involve buy ing and selling of immovable property are regulated by the Transfer of Property Act. According to Section 2 (7) of the Sale of Goods Act, 1930, goods means every kind of movable property other than actionable claims and money, and includes stock and shares, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale. Here actionable claims means claims which can be enforced by a legal action or a suit, for example, a debt.

(C) Transfer of property There must be a transfer of general property, that is, ownership and not special property in the goods from the seller to the buyer. Suppose, X owns certain types of goods. He has general property of goods. If he pledges the goods with Y, Y has special property in the goods which he cannot sell. Transfer of property or the agreement to transfer the property is yet another important essential of a contract of sale. But mere transfer of goods from one place to another cannot amount to sale.

(D) Monetary consideration-price When goods are exchanged for goods, that amounts to barter exchange and not a sale of goods. Again where goods are transferred by one person to another without any consideration that is a gift and not a sale. Therefore, the consideration for a contract of sale, called a price, must be money. But where the goods are exchanged partly for goods and partly for money, that will be a contract of sale.

(E) Essential elements of a valid contract In addition to the above mentioned essentials for constituting a valid contract of sale of goods, it must satisfy all the essential elements necessary for the formation of a valid contract, as laid down in Section 10 of the Indian Contract Act, 1872. For example, there must be consideration and mutual assent between the parties of the contract, all parties to a contract must be competent to enter into a contract, an object of a contract must be lawful etc. Of course, it is not necessary that a contract of sale should always be absolute. It may be absolute or conditional. 212

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(F) A contract of sale includes sale as well as an agreement to Sell A contract of sale may either be a sale or an agreement to sell. 2. Formalities of a contract of sale (A) Goods A contract of sale is j ust like any other contract and, therefore, it has to satisfy all essentials of a valid contract which are mentioned above. Offer from one party and acceptance by the other party is necessary for the formation of a contract of sale. It may be verbal or in writing or partly in writing and partly oral [Section 5 (2)]. In a contract of sale, however, the offer and acceptance must be relating to buy or sell movable goods for a price. The immediate delivery of goods or immediate payment of its price or even both is not necessary. The contract of sale may provide for immediate payment or delivery of goods or both shall be postponed [Section 5 (J)]. It is already stated that the subject matter of a contract of sale must always be movable goods as defined in Section 2 (7) of this Act. Goods can be classified into three types, namely : (i)

Existing goods, (ii)

Future goods and (iii) Contingent goods.

Existing goods are those goods which are owned and possessed by the seller atthe timeoFsaleT

(i)

Existingjoods

=

The existing goods may be of three types which are as follows : (1) Specific goods: Those goods which are identified and agreed upon at the time when theôntract of sale is made. °" ' — ^><^/ (2) Ascertained goods : Goods identified or which become ascertained IJuBsequent to the formation of the contract of sale. (3) Unascertained or generic goods: The goods which are not identified and agreed upon at the time of the contract of sale. Such goods are defined 213

Business Law

only by description and may form a part of a lot. An illustration will make the meaning of these three types of existing goods clear. A has twenty chairs. He promises to sell one of them to, B, pointing it out to B at the time of sale. Here the chair (goods) has been identified at the time of sale and hence it is a contract of sale of specific goods. If A only agrees to sell one of the chairs to B, but does not specify which chair he will sell, it is a contract of sale of unascertained goods. The chair will become 'ascertained' only when A makes up his mind as to which chair he will sell to B and B gives his assent thereto. (ii)

Future goods Future goods are those goods which are to bejnanufactured, produced or acquired. A seller does not actually possesses thejuture goods at the time ofthe~contract of sale. A contract of present sale of futurego7)dTpurports to operate as an agreement to sell the goods and not a sale. It is obvious because the ownership of commodity or goods cannot be transferred unless that commodity or goods comes into existence.

(iii) Contingentgoods

*i

Contingent goods are ajyj)e_iiLfjatuje-g^g^. Gdods, the acquisition of which by the"seller, depends upon an uncertain contingency are called contingent goods. For example, X agrees to sell 1000 yards of imported cotton to Y provided the ship which is bringing the same, reaches the port safely. This is an agreement for the sale of contingent goods. The procurement of contingent goods depends upon a contingency and therefore the parties to the contract of sale are discharged on non-acquisition of contingent goods. But in the case of future goods, the parties are not discharged on ndnrproduction or non-acquisition of future goods. Thus all types of movable properties such as goodwill, furniture, trade marks, gas, birds, animals etc. come within the purview of the definition of the term 'goods'. As mentioned earlier, actionable claims and money have been excluded from the definition of the term 'goods'. Money currently in circulation is not included in the term goods but rare and old coins are treated as goods and can be the subject matter of a contract of sale. It must also be remembered that only the things which are owned and possessed can be the subject matter of contract 214

Units


of sale. Animals in a jungle, birds flying in the sky, fish in a sea or a river etc. are not the properties of anyone and so cannot be purchased and sold. Goods which are not in the existence but can be produced in the future can be sold. For example, a farmer may agree to sell all the fruits that may grow on the tree in the coming season or a fisherman may agree to sell all fish which may be caught in his net even before casting his net. Thus, a contract for sale of future goods is always an agreement to sell and hot a contract of actual sale.

(B) Effects of destruction of goodsjoi/perishing of goods [Sections 7 and 8] ~

"

Provisions have been made in Sections 7 and 8 of this Act relating to the x destruction or perishing of goods . Section 7 states that where there is a contract for the sale of specific goods, the contract is void if the goods, without the knowledge of the seller, have, at the time, when the contract was made, perished or become so damaged as no longer to answer to their description in the contract. This provision is based on the ground of impossibility of performance or ofjrmtual mistake. Let us make clear this provision with the help of an illustration. X agrees to sell to Ya specific cargo of goods supposed to be on the way from London to Mumbai. But before tjie day of the bargain, me cargo, was lost and none of the parties to the contract was aware of the loss of cargo. The agreement is obviously wold/ Section 8 states that where there is an agreement to sell specific goods, and subsequently, the goods without any fault on the part of the seller or buyer, perish or so damaged as no longer to answer to their description as the agreement before the risk passes to the buyer, the agreement is thereby avoided. Thus, this section deals with the case where goods perish after the agreement to sell is made. A contract can be avoided on the ground of supervening impossibility of the performance of the contract and for that purpose the following conditions must be satisfied. (a) The contract must be an agreement to sell and not of actual sale. (b) The loss must be specific. (c) The loss is not caused by the wrongful act or default of either buyer or seller. (d) The goods have perished before the risk is passed to the buyer.

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Sections 7 and 8 apply only to specific goods and not to unascertained goods. This means if the agreement is to sell a certain quantity of unascertained goods, the perishing or destruction of even the whole stock of such goods in the possession of the seller will not relieve him of his obligation of delivering the goods.

(C) Ascertainment of price [Sections 9 & 10] According to Section 2 (10), the price in a contracjof salejrieans_tbe-mQney considraiioaiotssieaf^Qfids. Price forms an essential part of a contract of sale of goods. Price must be expressed only in money. It is not necessary that the price must be fixed at the time of sale. Section 9 states that the price in a contract of sale may be fixed by the contract or may be left to be fixed in a manner thereby agreed or may be determined by the course of dealing between the parties. It further states that where the price is not determined in accordance with the foregoing provisions, the buyer shall pay the seller a reasonable price. What is a reasonable price is a question of fact dependent upon the circumstances of each particular case [Section 9(2)]. Section 10 is related to an agreement to sell at valuation and states that where there is an agreement to sell goods on the terms that the price is to be fixed by the valuation of a third party and such third party cannot or does not make such valuation, the agreement is thereby avoided [Section 10(1)]. It is provided that, if the goods or any part thereof have been delivered to and appropriated by the buyer, the buyer shall pay a reasonable price thereof [Proviso to Section 10(1)]. Where such third party is prevented from making the valuation by the fault of the seller or buyer, the party not in fault may maintain a suit for damages against the party in fault [Section 10 (2)]. Suppose X agrees to sell certain goods to Y at a price which is to be fixed by M. If M refuses to value the goods and fix the price of such goods, the agreement is avoided. But if M is ready to value the goods and fix its price and is prevented to do so by a wrongful act of any party to the contract or by the fault of X or Y (the seller and the buyer), the party at fault becomes liable to pay damages to the party not at fault. Thus the aggrieved party is entitled to sue the defaulting party for damages.

3.

Stipulation as to time [Section 11] According to Section 11, unless a different intention appears from the terms of contract, stipulation as to time of payment are not deemed to be of the essence of a contract of

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sale. Whether any other stipulation as to time is of the essence of the contract of sale or not depends on the terms of contract. Stipulations as to time in a contract of sale fall under the following two categories : (a) Stipulations relating to time of payment and (b) Stipulations not relating to time of payment but to other things such as delivery of goods etc. Stipulations relating to time of payment are not the essence of a contract of sale unless a contrary intention appears from the contract of sale. So far as the other stipulations are concerned, time may be the essence of the contract but that depends on the terms of contract. Therefore, if a time is fixed for the delivery of goods, it must be made at a time fixed for that purpose. Otherwise the other party is at a liberty to put an end to the contract of sale. v

A.

-.

>

Sales and agreement to sell Section 4 (1) of this Act defines a contract of sale which includes both the sale and the agreement to sell. But Section 4 (3) makes clear the difference between the two which is as follows: "Where under a contract of sale, the property in the goods is transferred from the seller to the buyer, the contract is a sale, but where the transfer of property in goods is to take place at a future time or subject to some conditions thereafter to be fulfilled, the contract is called an agreement to sell." Thus, a very important point of distinction between the two is that in a sale there is an actual transfer of property from the seller to the buyer whereas in an agreement to sell, it is only agreed to transfer the property in future from the seller to the buyer. It was also held in one Sales Tax Case that the liability to pay sales tax arises only when there is an actual sale of goods and not only on agreement to sell. The other points of distinction are as follows : (i)

Nature of contract: A sale is an executed contract whereas an agreement to sell is an executory contract.

(ii)

Transfer of ownership of property: In a sale, property in goods passes to the buyer immediately so that the seller no more remains the owner of the goods sold. In an agreement to sell, there is no actual transfer of property at the time of contract. Thus, sale is a contract plus conveyance while in 21 7

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agreement to sell, there is only a contract to sell. Conveyance takes place later on. (iii) Types of goods or nature of property transferred: A sale can only be in the case oFeHstmgliiKrsljecirTc goods. An agreement to sell takes place mostly in case of future and contingent goods. / L 0 • n^Jt < ^xLJcXL-*'

(iv) General and particular property : As a sale implies contract plus conveyance of the ownership in the goods, it gives the buyer jus in rem (right against the whole world). The buyer becomes an absolute owner of the goods. But an agreement to sell is a mere contract which secures to the buyer only jus inpersonam (right against the particular individual) and so he can sue the seller for damages.

' onsequences of breach: In a sale, if a buyer fails to pay the price of the goods he purchases or if there is a breach of contract by the buyer, the seller can sue for the price, even though goods are in his possession. In an agreement to sell, if there is any breach of contract by the buyer, the seller can sue for damages only. (vi) Risk of loss : In a sale, a buyer immediately becomes an owner and therefore if the goods are destroyed or damaged, the loss falls on the buyer even if the goods are in the possession of the seller. In an agreement to sell, as the seller remains the owner, he is responsible for all the risks of loss. (vii) Seller's right of reselling the goods: In a sale, as there is an immediate transfer of ownership of property in the name of a buyer, the seller has no right to resell even though the goods are in his possession. If a seller sells goods which are in his possession after a sale, the subsequent buyer cannot acquire a title to the goods thus purchased and the original buyer can recover the goods from the new buyer. There are some exception to this rule. For example, sale by unpaid seller under Section 54 or a sale by a seller after sale under Section 30. In an agreement to sell, as the property in the goods remains with the seller, he can sell the goods to any one and the new buyer gets a good title as he purchases the goods for consideration and without any notice of prior agreement. In such a case, the original buyer can only get a right to sue the seller for damages.

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(viii) Seller's insolvency : In a sale, if the seller becomes insolvent after a contract of sale and the buyer has paid the price, the buyer can claim the goods from the Official Assignee or Receiver. In a sale, if the buyer pays the price of goods purchased and goods are in the possession of the seller and thereafter the seller becomes insolvent, the buyer can claim the goods from the Official Receiver and Assignee. In an agreement to sell, the buyer who has paid the price of the goods finds that the seller has become insolvent; he cannot claim the goods but can only claim a rateable dividend for the price he has paid. (ix) Buyer's insolvency: In a sale, if the buyer becomes insolvent before he pays the price of the goods purchased, the official assignee or receiver can claim the delivery of the goods as the property in goods has been already transferred as a result of a sale. The seller will have to deliver the goods to the official assignee or receiver and he can only claim a rateable dividend for the price of the goods. In an agreement to sell, if the buyer becomes insolvent and has not paid the price of the goods purchased, the seller can refuse to deliver the goods to the official assignee or receiver until he is paid for in full. B. Sale and Hire-Purchase agreement: A hire-purchase agreement is a contract. In such a contract, the seller agrees to transfer the property in the goods to the hire-purchaser on the payment of the certain sum in certain fixed number of instalments. But if the hirer fails to pay any installment, the seller can terminate the contract and can take away the goods sold under the hire-purchase agreement. The instalments already paid are considered to be hire for the use of the goods. Even the hirer may return the goods at any time without any obligation to pay the balance rent. It is not a contract of sale but merely a bailment and the ownership remains with the seller during the continuance of bailment. The nature of Hire-Purchase is just like bailment plus an agreement to sell. Following points make clear the difference between a sale and a hire-purchase agreement. (a) Nature of contract and ownership : As already made clear, a sale is an executed contract in which the ownership in the property is immediately transferred from the seller to the buyer on entering into the contract of sale. In a hire-purchase agreement, the position of hire-purchaser is that of a 219

(V. J< \ txx tv ( ^*mplied cohditio^ts and warranties : A sale is always subject bailee and not of the owner of the goods. Hire-purchaser becomes the owner of the goods in question only when he pays all the agreed number of to the Terminatioiiof a contract : In a sale, the buyer cannot terminate the contract and is bound to pay the price of the goods purchased. The hirepurchaser can terminate the contract at any time and he cannot be compelled to pay the remaining instalments. The instalments already paid are considered as the rent for the use of the goods.^ implied cfihditions and warranties provided under this Act. While hire-lla faey\ purchase agreement is not subject to implied conditions and warranties. ^-— However, it is subject to the implied conditions provided in the hire-purchase agreement. (d) Payment in instalments: In a sale, full payment of the price of the goods is done. But if the payment is allowed to be made in instalments, the amount payable by the buyer is reduced because the instalments paid by the buyer are towards the price of the goods. But the instalments paid under hire-purchase agreement are regarded as hire charge and not as the payment towards the price of goods. (e) Insolvency of the buyer and risk of loss : In a sale, if the price is not paid at the time of a contract of sale and agreed to be paid in future, the seller takes the risk of loss resulting from the insolvency of the buyer. But in hire-purchase agreement, there is no such risk as the seller remains the owner till last installment is paid. (f) A sale is subject to the imposition of sales tax at the time of a contract of sale while sales tax is not leviable on a hire purchase until it is finally converted into a sale.

C.

Sale and bailment

r^pfe

The property in goods is transferred from the seller to the buyer in a contract of sale while in the case of bailment, there is a only transfer of possession of property from the bailor to thebailee. This may be for any one of the objects such as safe custody, carriage from one to another place etc. 220

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In the case of contract of sale, a buyer is at liberty to use the goods purchased in any way he pleases. But in the case of bailment, the bailee can deal with the goods according to the direction of the bailor. D.

Sale and barter exchange In a contract of sale, the property in goods is transferred from the seller to the buyer for a price fixed by them. In barter transactions, goods are exchanged for goods. In both the cases, ownership is transferred from one party to another. Barter transactions are not contracts of sale. Where consideration for goods is partly received in the form of money and partly in the form of goods, it is taken as a contract of sale.

5.4

CONDITIONS AND WARRANTIES ______________________________

Many times a seller makes certain statements about the goods before a contract of sale is concluded. These statements may or may not form a part of a contract of sale depending upon the fact whether the statements made by the seller amount to stipulations or not. A contract of sale may consist of a number of stipulations. All such stipulations may not be of equal importance. Some of them may be so important that non-performance of such stipulations may amount to a breach of contract. Such stipulations are called conditions. There are certain stipulations which are not of vital importance. They are called warranties. Section 12 throws light on the term 'Condition' and 'Warranty'. A stipulation in a contract of sale with reference to goods which are subject thereof may be a condition or warranty [Section 12(1)]. A condition is a stipulation essential to the main purpose of the contract, the breach of which gives rise to a right the contract as repudiated [Section 12 (2)]. A warranty is a stipulation collateral to the main purpose of the contract, the breach of which gives right to a claim for damages, but not a right to reject the goods and treat the contract as repudiated [Section 12 (3)]. Whether a stipulation in a contract of sale is a condition or a warranty depends in each case on the construction >f the contract. A stipulation may be a condition, though called a warranty in the contract Section 12 (4)].

Stipulations in the contracts of sale regarding the quality and quantity of goods, its colour ind design, packing of delicate, valuable and breakable goods etc. are considered as onditions and a seller has to deliver the goods as per conditions. Such conditions are stipulations which are very essential to the main purpose of the contract and the breach of iiich conditions give rise to a right to treat the contract as repudiated. 221

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am stipulations made by a seller which may not be very essential to form j collateral to the main purpose of the contract. They are known as i warranty is a stipulation which is collateral to the main purpose of the of such vital importance as a condition. If there is a breach of a warranty, the aggrieved party can claim for the damages but contract of sale cannot be repudiated. Of course, whether a stipulation in a contract of sale is a condition or a warranty depends entirely on the construction of the contract as a whole. With the help of two illustrations, let us make these two terms more clear. Suppose X goes to Y who is a motor car dealer and requests him that he wants to buy a motor car which can run at a speed of 220 k.m. p.h. Y points out at a particular car and says." This will definitely suit you'' X purchases the car but later on finds that the car can run at the maximum speed of 150 k.m. p.h. There is a breach of condition as the stipulation made by Y, the seller, forms the very basis of the contract of sale. Now suppose X goes to Y and says, "I want a good car". Y, the car dealer, shows him a car and adds, "This car can run at a speed of 220 k.m. p.h." X purchases the car but finds that the car can run only at a speed of 150 k.m. p.h. There is a breach of warranty in this case as the stipulation made by X, the seller, is only a collateral one.

1.

When a condition is treated as a warranty Section 13 of this Act provides that under certain circumstances, a condition may be treated as a warranty. A condition may be reduced to a warranty under the following cases.

(A) Voluntary waiver of condition ---------- ._^ Where a contract of sale is subject to any condition to be fulfilled by the seller, the buyer may (1) waive the condition, or (2) elect to treat the breach of any condition as a breach of warranty [Section 13 (1)]. When a buyer decides to waive the condition, he cannot afterwards insist on the fulfillment. (B) Acceptance of goods by buyer Where a contract of sale is not severable and the buyer has accepted the goods or part thereof, or where the contract is for specific goods, the property in which has passed to the buyer, the breach of any condition to be fulfilled by the seller can only be treated as a breach of warranty and not as a ground for rejecting the goods and treating the contract as repudiated, unless there is a term of the contract, express or implied, to that effect [Section 13(2)]. 222

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According to Section 42 of Sale of Goods Act, the goods are said to have been accepted in the cases mentioned below: (1) When the buyer intimates the seller that he has accepted the goods; or (2) When the goods have been delivered to the buyer and he does any act in relation to goods which is inconsistent with the ownership of the seller, or (3) When after the lapse of a reasonable time, he retains the goods without any intimation to the seller. Suppose, X agrees to purchase from Y100 bags of rice by sample. The rice is delivered to X who pays the price. X, upon examination, finds that the rice sent is not as per sample but uses four bags and sells 50 bags. Now he cannot rescind the contract and recover the price. But X is entitled to get compensation from Y for the loss caused, if any, by way of the breach of warranty. The provisions of Section 13 do not affect the cases where the fulfillment of any condition or warranty is excused by-law by reason of impossibility or otherwise [Section 13 (3)]. 2.

Difference between a condition and a warranty (A) Purpose: A condition is a stipulation which is essential to the main purpose of the contract of sale. A warranty is a stipulation which is only collateral (subsidiary) to the main purpose of the contract of sale. (B) Difference as to breach: If there is breach of a condition, the aggrieved party gets a right to sue for damages as well as a right to repudiate the contract. A breach of a warranty gives the aggrieved party the right to sue for damages. The contract cannot be repudiated. (C) Difference as to treatment: A breach of a condition may be treated as a breach of a warranty. But a breach of a warranty cannot be treated as a breach of condition. (D) Essence of the contract of sale : A condition goes direct to the root or substance of the contract. It is of a fundamental nature. The main purpose of the contract of sale cannot be fulfilled without the prior fulfilment of this stipulation. A warranty does not go direct to the root of the contract. It is of subsidiary or inferior character. Fulfilment of the contract does not depend upon the fulfilment of a warranty. 223

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(E) Damages : If there is a breach of condition, a buyer has an option to claim damages, instead of repudiating the contract. But if there is a breach of a warranty, buyer can in no case repudiate the contract, he can only claim for the damages. 3.

Express and implied conditions and warranties In a contract of sale, conditions and warranties can be express or implied. Express conditions and warranties are those which have been expressly agreed upon by the parties at the time of the contract of sale and are expressly provided in the contract. Implied conditions and warranties contained in the Sections 14 to 17 are those which the law incorporates into the contract unless the parties stipulate to the contrary. These implied conditions and warranties may be cancelled or varied by an express agreement or by the course of dealings or by usage and customs. Section 62 of this Act clearly provides that where any right, duty or liability would arise under a contract of sale by implication of law, it may be navigate or varied by express agreement or by the course of dealing between the parties, or by usage, if the usage is such as to bind both parties to the contract. Thus, Section 62 recognizes the following two maxims. (A) 'Expressum facit ceassare taciturn' which means that what is expressed makes what is implied to cease; and (B) 'Modus et conventio vincent legem' which means that the customs and agreement overrule law.

4.

Implied conditions in a contract of sale Conditions implied by law are contained in Sections 14 to 17 of this Act. They are as follows: (A) Condition as to title [Section 14 (a)] : According to Section 14 (a), "In a contract of sale, unless the circumstances of the contract are such as to show different intention, (i) there, is an implied condition on the part of the seller that, in the case of sale, he has a right to sell the goods, and (ii) that, in the case of an agreement to sell, he will have a right to sell the goods at the time when the property is to pass. Thus in every contract of sale, that the seller has a right to sell is an implied condition. If he does not possess any right to sell and sells the goods to a buyer,

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the transaction will be illegal. If a buyer has to return the goods to the true owner, the seller who does not have any right to sell, has to pay the price to the buyer. If the title of the seller is defective, the buyer has the right to reject the goods. & Activity B : My sister purchased a motorcar from Mr. Daniel. My sister used it for four months. After four months my sister came to know that Mr. Daniel was not the true owner. She was forced to return the purchased money notwithstanding the fact that she used it for four months. Is this a breach of condition express or implied?

(B) Condition as to sale by description [Section 15]: Section 15 lays down the condition which is implied by law in a sale by description. Section 15 says. "Where there is a contract for the sale of goods by description, there is an implied condition that the goods shall correspond with the description." The term 'correspond to description' as used in Section 15 means the buyer must get the article or goods that was described in the contract. The protection to the buyer is given under this section subject to the following two conditions: (a) A sale should be by description, and (b) The goods sold must correspond to the description. Lord Blackburn stated the general principle contained in Section 15 in the following words, "If you contract to sell peas, you cannot oblige a party to take beans. If the description of the article tendered is different in any respect, it is not the article bargained for, and the other party is not bound to take it." [Bowes vs. Shand]. The term 'Sale of goods by description' may include the following situations: (1)

Where the buyer has not seen the goods and relies on the description given by the seller; 225

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(2) Where the buyer has seen the goods but he relies not on what he has seen but what was stated to him and the deviation of the goods from the description is not apparent For example, in one case, a car was advertised for sale as a white 1961 model. The buyer saw the car before purchasing the same. But later on it was discovered that while the rear part of the car was the part of 1961 model, the front half was a part of much earlier model. It was held in that case that the buyer could return the car. (3) Sometimes packing of goods may be the part of description. (C) Condition as to sale by description as well as by sample : Section 15 also provides that if the sale is by sample as well as by description, it is not sufficient that the bulk of the goods corresponds with the sample if the goods do not also correspond with the description. This simply means that the goods must correspond with sample and with the description also. (D) Condition as to sale by sample [Section 1 7} : Section 1 7 which deals with sale by sample provides, 'A contract of sale is a contract of sale by sample where there is a term in the contract, express implied, to that effect [Section 1 7 In the case of a contract for sale by sample, there is an implied condition : (a) that the bulk shall correspond with the sample in quality : (b) that the buyer shall have a reasonable opportunity of comparing the bulk with the sample; (c) that the goods shall be free from any defect, rendering them unmerchantable, which would not be apparent on reasonable examination of the sample [Section 17(2)].

(E)

Condition as to quality or fitness [Section 16 (1)] : In a contract of sale, normally there is no implied condition as to quality or fitness of those goods for any particular purpose. The buyer has to examine and satisfy himself whether the goods or article will be suitable for the purpose for which he requires the same. In this connection, the following important point must be noted: Where a buyer, expressly or by implication, makes known to the seller the particular purpose for which the goods are required, so as to show that the . buyer relies on the sellers' skill or judgement, and the goods are of a description

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which it is in the course of the sellers' business to supply (whether he is the manufacturer or producer or not), there is an implied condition that the goods shall be reasonably fit for such purpose [Section 17 (1)]. It is provided that in the case of a contract for a sale of the specified article under its patent or other trade name, there is no implied condition as to its fitness for any particular purpose [ Proviso to Section 17(1)]. (F) Condition as to merchantability [ Section 16(2)]: Section 16 (2) of this Act speaks of the merchantable quality of the goods. It reads : "Where goods are bought by description from a seller who deals in goods of that description [whether he is the manufacturer or producer or not), there is an implied condition that the goods shall be of merchantable quality" Provided tljat if the buyer has examined the goods, there shall be no implied condition as regards the defects which such examination ought to have revealed [Proviso to Section 16 (2)]. Merchantable quality implies that the goods should be of such quality and in such condition that they are commercially saleable under the description by which they are known in the market. If the goods are of such quality and in such condition that a reasonable person would purchase the same after having examined them properly, they are of merchantable quality. Goods will be unmerchantable if they have defect or defects which will makes them unfit for ordinary use or are such that any reasonable person knowing of their condition would not purchase them. Thus a pen or a pencil that will not write, a watch that will not keep time, a rubber that will not help to erase, tobacco that will not smoke, cannot be considered as merchantable under such names. (G) Condition as to wholesomeness : In case of eatables or foodstuffs and provisions, in addition to the implied condition that the goods shall be wholesome, pure, unadulterated and also suitable for consumption at the time of sale. For example, A purchased milk from B who was a milk dealer. The milk contained typhoid germs. A's wife took the milk and got infection and as a result she died. It was held in that case that A was entitled to recover damages. (H) Condition implied by custom [Section 16 (3)]: Section 16 (3) states that an implied condition as to quality of fitness for a particular purpose may be annexed by the usage of trade. 227

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Many times, the purpose for which the goods are required can be ascertained from the conduct, acts etc. of the buyers. For example, if a bottle of milk, a perambulator, a swing, a hot water bag is purchased, the purpose for which it is purchased in obvious or implied in the thing itself. In such a case, it is not necessary that the buyer should explain the purpose to the seller for which he buys the goods. In one case, a hot water bottle was purchased by A from B who was a retail chemist. After a few days' use, the hot bottle burst and A was injured. It was held that B was liable for a breach of implied condition as A made known the use for which he required the hot bottle to B. Implied Warranties in a Contract of Sale Subject to the contract to the contrary, following are the implied warranties in a contract of sale. (1) Implied warranty of quiet possession [Section 14 (b)] •& In a contract of sale, unless contrary intention appears, there is an implied warranty that the buyer shall have and shall enjoy quiet possession of the goods. This simply means that, if the right of possession of the buyer is disturbed either by the seller or by any person, the buyer has the right to sue the seller for the damages. (2) Implied warranty of freedom from encumbrance [Section 14 (c)] In addition to the warranty of quiet possession, the buyer is entitled to a further warranty that the goods he purchases are not subject to any charge or encumbrance in favour of any third party not declared or known to the buyer before or at the time when the contract is made. If the possession of the buyer is disturbed in any way by reason by the existence of any charge of encumbrance as the goods in favour of any third party, the buyer gets the right to claim damages for breach of this warranty. But the buyer shall have no right of action if the seller had, at the time of the contract of sale, disclosed the charge or encumbrance. (3) Implied warranty as to quality or fitness by usage of trade [Section 16 (3)] Besides the above mentioned two implied warranties, another implied warranty is covered by the Section 16 (3) which is as follows : An implied warranty (or even condition) as to quality or fitness for a particular purpose may be annexed by the usage of trade.

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(4)


Implied warranty to disclose dangerous nature of goods Where the goods be sold are dangerous and the seller knows that the buyer is ignorant about the dangerous nature of the goods, it is the duty of the seller to warn the buyer about the probable danger, otherwise the seller will be liable for damages to the buyer for the injury, if any, caused to the buyer because of the dangerous quality of the goods. In one case, X sold a tin of disinfectant powder to Y. X knew about the dangerous nature of the powder and he also knew that the tin was to be opened with special care otherwise it might prove to be very dangerous. He also knew that Y was ignorant about it and still he did not warn Y about the dangerous nature of the goods and special care required to be taken while opening the tin. Y opened the tin and his eyes were injured by the powder. In that case, X was held liable to pay damages to Y as he should have warned Y about the probable danger.

Inclusion of express conditions and warranties Section 16(4) provides that an express condition or warranty does not negative a warranty or a condition implied by this Act. The parties to the contract of sale may include a number of warranties and conditions in their contract.

Exclusion of Implied conditions and warranties in a contract of sale Implied conditions and warranties in a contract of sale may be negatived or varied by: (i) express agreement between the parties to the contract; or (ii)

the course of dealing

between them; or the custom or usage of trade.

OF "CAVEATEMPTOR'

I >,/-~ The meaning of the term Caveat Emptor is let the buyer beware. A seller is under no duty to reveal unflattered truths about the goods sold and therefore, whenever a buyer buys the goods, he must exercise necessary care in his own interest. A buyer, in a contract of sale of specific goods, purchases the goods at his own risk as regards the quality, price of the goods except in the case of the fraud or where any condition to that effect is laid down in the contract. A buyer cannot hold the seller responsible and liable, if the goods turn out to defective or do not prove to be useful for the purpose for which they are purchased or he buyer makes any mistake in assessing the quality of goods purchased. Thus it is for 22

9

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the buyer to ensure himself only at the time of purchase that the goods confirm his own requirements. In one case, A sent some pigs to market to be sold by auction. B purchased all the pigs with all faults and errors of description. Aknew that his pigs were suffering from some fever but he did not disclose the same to B. It was held in the case that there was no implied warranty by Aand the sale was good and A was not liable for any damages. [Ward vs. Hobbs}. Section 16 of this Act has enunciated this rule or principle of Caveat Emptor in the following words: "Subject to the provisions of this Act and of any other law for the time being in force, there is no implied warranty or condition as to the quality or fitness for any particular purpose of goods supplied under a contract of sale..." When a seller sells his goods, he only warrants that his goods shall be fit for some purpose or purposes but he does not give any gurantee that they will be fit for any particular purpose. The buyer, unless otherwise agreed upon, cannot reject the goods purchased on the basis of any latent defects unless they render the goods unmerchantable of the seller purposely concealed the defects. The doctrine of Caveat Emptor has certain exceptions which are as follows: (a) Implied condition as to quality or fitness for buyers' purpose [Section 16 (1)] Where the buyer makes known to the seller, expressly or by implication, the purpose for which he requires the goods and fully depends upon the skill and the judgement of the seller, and the goods are of a description which it is in the course of the sellers' business to supply, it is the responsibility of the seller to supply the goods which shall be fit for any particular purpose. However this condition is not applicable in those cases where the goods are sold under a patent mark or trade name. In such cases, there is no implied condition that the goods shall be reasonably fit for any particular purpose. [Proviso to Section 16(1)]. (b) Merchantable quality or sale of goods by description [Section 16 (2)] Where goods are purchased by description from a seller who deals in goods of the description only, there is an implied condition, which the goods shall be of merchantable quality [Section 16 (2)]. But if the buyer has examined the goods, there shall be no implied condition as regards defects which such examination ought to have revealed. [Proviso to Section 16 (2)].

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(c) Usage by trade [Section 16 (3)] An implied warranty or condition as to the quality or fitness for a particular purpose may be annexed by the usage of trade. (d) Consent by fraud The principle of Caveat Emptor is not applicable to all those cases wherein the consent of the buyer is obtained by the seller by fraud or where the seller purposely conceals the defects which could not be discovered or found out on a reasonable examination. A seller who is guilty of fraud or who purposely hides the defects shall have no protection of the principle of Caveat Emptor. Activity C ; Mr. Nadkarni is a shopkeeper. He agreed to sell to Mr. James some kind of oil described as "foreign refined rape on warranted only equal to sample." The samples contained an admixture of hemp oil and the oil delivered was adulterated in the same way. After purchasing, Mr. James found that the oil was not rape oil. What is the right of Mr. James as a Purchaser?

5.6

TRANSFER OF PROPERTY OR OWNERSHIP_____________________

A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer property in goods to the buyer for a price. Transfer of property is the essence of a contract of sale of goods. There are three stages in the performance of a contract of sale by the seller which are as follows: i)

transfer of property in goods;

' b) delivery of goods or transfer of possession of goods; and c)

the passing of the risk.

n a contract of sale, transfer of property in goods is a very important object. Property in loods and possession of goods are two different things. X may be the owner of the article 231

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but it may not be in his possession while Y may be in the possession of that article although he is not its owner. Thus the term property in goods denotes the ownership, whereas possession of goods refers to the custody of goods. It is very important to know the exact moment of time as to when the ownership or property in goods passes from the seller to the buyer for the following reasons: (i) Risks of the property : If property in goods is transferred from the seller to the buyer, the buyer becomes the owner and the risk of property is also transferred to the buyer. Unless otherwise agreed upon, the risk follows the ownership is the principle. The risk of loss lies on the owner. When the property in goods is transferred to the buyer, the goods are always at the risk of the buyer, may they be in the possession of the seller. The risk and property in goods go together. (ii) Insolvency: In the event of insolvency of either the buyer or the seller, the question whether the Official Receiver or Assignee can take over the goods or otherwise depends upon whether the property in goods has been passed from the seller to the buyer or not. (iii) Damages : In case of damages to the goods by a third party, only the owner can take action and, therefore, it is very essential to know the ownership of the goods. (iv) Suit for price: The seller can file a suit against the buyer for the price of the goods only after the property in goods is transferred to the buyer. 1.

Passing of property from seller to the buyer Section 18 of the Act states that where there is a contract for the sale of unascertained goods, no property in the goods is transferred to the buyer, unless and until the goods are ascertained.

2.

Passing of property in a contract for sale of specific or ascertained goods (A) Intention of the parties [Section 19]: With regard to the passing of property in goods in the case of specific or ascertained goods, Section 19 (1) of the Act says, "Where there is contract for the sale of specific or ascertained goods, the property in them is transferred to the buyer at such time as the parties to the contract intend it to be transferred." Thus this sub-section I of the Section 19 leaves everything to the intention of the parties to the contract in the case of specific or ascertained goods. Section 19 (2) further states that for the purpose of ascertaining the intention of the parties, regard shall be had to the terms of the

232

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contract, the conduct of the parties and the circumstances of the case. And unless a different intention appears, the rules contained in Sections 20 to 24 are rules for ascertaining the intention of the parties as to the time when the property in the goods is to pass to the buyer [Section 19 (3) ]. Now let us consider the sections from 20 to 24. (B) Passing of the property at the time of contract [ Section 20 ] : Where there is an unconditional contract for the sale of specific goods in the deliverable state, the property in the goods passes to the buyer when the contract is made, and it is immaterial whether the time of payment of the price or the time of delivery of the goods or both, is postponed. According to Section 2 (3) of this Act, deliverable state means goods are in such a state that the buyer would, under the contract, is bound to take the delivery of the goods. (C) Passing of property in the case of specific goods where the goods are to be put into deliverable state [Section 21]: Where there is a contract for the sale of specific goods and the seller is bound to do something to the goods for the purpose of putting them into a deliverable state, the property does not pass until such thing is done and the buyer has a notice thereof. In one case, the contract was entered into for the sale of machine which was to be embeded in a concrete floor. A pan of the machine was destroyed while being removed. The buyer refused to take the delivery of the machine. It was held that the buyer was entitled to refuse to buy the machine as it was not in a deliverable state. (D) Passing of property in the case of specific goods when the price is to be ascertained by weighing etc. [Section 22] : Section 22 states that where there is a contract for the sale of specific goods in a deliverable state, but the seller is bound to weigh, measure, test or do some other act or thing with reference to the goods for the purpose of ascertaining the price the property does not pass until such act or thing is done and the buyer has notice thereof. Thus X sold a pile of grain to Y at a certain price per ton. The pile of grain was to be weighed by the agents of the seller and the buyer. A pan of the pile of grain was weighed and given to Y's agent, but a flood washed out the remainder. It was held that the ownership of the residue was not transferred to Y and therefore X had to suffer the loss. 3.

Passing of property in the contract for sale of unascertained goods [Section 23] Where there is a contract for the sale of unascertained goods, the property in the goods does not pass to the buyer until the goods are ascertained [Section 18]. This 233

Business Law

simply means that no property can pass from the seller to the buyer in the case of unascertained goods until they are ascertained and until the goods are ascertained, there can be only an agreement to sell. Section 23 (1) provides that where there is a contract for sale of unascertained or future goods by description and goods of that description and in deliverable .state are unconditionally appropriated to the contract, either by seller with the assent of the buyer or by the buyer with the assent of the seller, the property in goods thereupon passes to the buyer. Such assent may be expressed or implied, and may be given either before or afler the appropriation is made. From the above it becomes clear that the ascertainment of the goods and their unconditional appropriation to the contract are the two very important preconditions for transferring the property from the seller to the buyer in the case of unascertained goods. Appropriation of goods can be done in any of the following ways: (A) By separating the quantity contracted from the other goods or bulk. (B) By putting the quantity contracted for in suitable containers or receptacles. (C) By delivery of goods contracted to carrier. So far as the delivery of the goods to a carrier is concerned, Section 23 (2) of the Act states that where in pursuance of the contract, the seller delivers the goods to the buyer or to a carrier or to other bailee (whether named by the buyer or not) for the purpose of transmission to the buyer, and does not reserve the right of disposal, he is deemed to have unconditionally appropriated the goods to the contract. In one case, Mr. X sold some tins of vanaspati to Mr. Y who paid the price of the vanaspati he purchased. The tins were in the possession of Mr. X who subsequently sent the same to Mr. Y by railway and endorsed and delivered the Railway Receipt to Mr. Y. After the endorsement of the railway receipt to Mr. Y, the tins in transit got burnt. It was held that Mr. Y must bear the loss as the property in tins of vanaspati had passed to him. 4. Passing of the property in goods sent on approval or 'on sale or return' [Section 24] When goods are delivered in the 'buyer on approval' or 'on sale or return" or other similar terms, the property therein passes to the buyer: (A) When he signifies his approval or acceptance to the seller or does any other act adopting the transaction [Section 24 (a)]. 234

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(B) If he does not signify his approval or acceptance to the seller, but retains the goods without giving notice of rejection, then, if a time has been fixed for the return of the goods, on the expiration of such time, and, if not time has been fixed, on the expiration of a reasonable time. [Section 24 (b)]. Of course, the question as to what is a 'reasonable time' is a question of fact [Section 63]. Thus when a buyer purchases goods and signifies his approval or does any act which denotes the adoptation of the transaction, the property thereby passes from the seller to the buyer. If the seller sells the goods on sale or return basis, the goods remains the property of the seller until settled or paid for the same. In one case, Mr. X delivered a horse to Mr. Yon the condition of sale orreturn within lOdays. The horse died within that period. It was held that the horse was the property of Mr. X and had to suffer a loss. If the buyer purchases the goods and does not signify his approval to the seller but retains the goods without giving any notice of rejection beyond the time fixed for the rejection or if no such time is fixed, beyond a reasonable time, the property in the goods passes to the buyer. In one case, Activity D : Mr. Shrikant sold a machine to Mr. Lalu on approval basis without fixing any period within which Mr. Lalu must approve the machine. Mr. Lalu used it for six months and then he wanted to return the machine. Mr. Shrikant refused to take it back and a suit was filed. Does Mr. Lalu have a right to return the machine?

5.

Reservation of right of disposal [Section 25] The property in the goods, whether specific or appropriated subsequently to the contract, does not pass to the buyer, if the seller of the goods reserves the right to dispose the goods until certain conditions are fulfilled. Section 25 makes provisions in this respect. Section 25 is given below : "Where there is a contract for the sale of specific goods or where goods are subsequently appropriated to the contract, the seller may, by the terms of the contract or appropriation, reserve the right of disposal of the goods until certain conditions are

235

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fulfilled. In such case, notwithstanding the delivery of the goods to a buyer, or to a carrier or other bailee for the purpose of transmission to the buyer, the property in the goods does not pass to the buyer until the conditions imposed by the seller are fulfilled. [Section 25 (1)]. Where goods are shipped or delivered to a railway administration for carriage by railway and by the bill of lading or railway receipt, as the case may be, the goods are deliverable to the order of the seller or his agent, the seller is prima facie deemed to reserve the right of the disposal. [Section 25 (2)]. Where the seller of goods draws on the buyer for the price and transmits to the buyer the bill of exchange together with the bill of lading or, as the case may be, the railway receipt, to secure acceptance of payment of the bill of exchange, the buyer is bound to return the bill of lading or the railway receipt if he does not honour the bill of exchange; and if he wrongfully retains the bill of lading or the railway receipt, the property in the goods does not pass to him. [Section 25 (3)]. In this section, the expressions 'railway' and 'railway administration' shall have the meanings respectively assigned to them under the Indian Railways Act, 1890. [Explanation to Section 25]."

6.

Passing of risk [Section 26] The moment of the property in goods vests with the buyer, the goods are at the buyer's risk. The delivery of goods is immaterial. This is made clear in section 26 of the Act which is as follows: "Unless otherwise agreed, the goods remain at the seller's risk until the property therein is transferred to the buyer, but when the property therein is transferred to the buyer, the goods are at the buyer's risk whether delivery has been made or not. Provided that where the delivery has been delayed through the fault of either buyer or seller, the goods are at the risk of the party in fault as regards any loss which might not have occurred but for such fault [Proviso to Section 26]. It is further provided that nothing in this section shall affect the duties or liabilities of either seller or buyer as a bailee of the goods of the other party."

7.

Transfer of title by non-owners We have considered so far the rules regarding the transfer of ownership in the property and all these rules are based on the presumption hat the seller is either the absolute owner of the goods or is fully authorised to sell the goods. The general rule is that,

236

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"Nemo dat quod non habet" which means no one can give something which he does not possess. If the seller has no title to the goods which are sold, the buyer of such goods also does not acquire the title though he has purchased the goods and acted honestly. Section 27 of the Sale of Goods Act also provides that when a person (seller) who is not the owner of the goods but sells the same without the consent of the true owner of the goods or without proper authority, the buyer also cannot acquire better title to the goods than the seller had. Section 27 of the Act lays down that, "subject to the provisions of this Act and of any other law for the time being in force, where goods are sold by a person who is not the owner thereof and who does not sell them under the authority or with the consent of the owner, the buyer acquires no better title lo the goods than the seller had, unless the owner of the goods is by his conduct precluded from denying the seller's authority to sell. Provided that where a mercantile agent is, with the consent of the owner, in possession of the goods or of a document of title to the goods, any sale made by him when acting in ordinary course of business of a mercantile agent, shall be as valid as if he were expressly authorised by the owner of the goods to make the same provided that the buyer acts in good faith and has not, at the time of the contract of sale, notice that the seller has no authority to sell. Following are the exceptions to the general rule that a seller cannot convey a better title to the buyer than he himself has. In the following case, the non-owners can convey a better title to the bonafide buyer of the goods for value. (A) Sale by a person not the owner or title by estoppel: Where the true owner by his words or conduct causes the buyer to believe that the seller is the owner of the goods and induces him to buy goods, he shall be estopped from denying the fact and in such case, the buyer gets a better title than that of the seller. (B) Sale by a mercantile agent: The buyer gets a good title if he buys the goods from a mercantile agent who has no authority to sell if: (i)

the mercantile agent possesses the goods or documents of title to goods with the consent of the owner;

(ii)

the agent sells the goods while acting as an agent;

(iii)

the buyer acts in good faith, and

(iv) at the time of sale, the buyer has not in known of the fact that the seller has no authority to sell. 237

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(C) Sale by one of joint owners: If any one of the joint owners, in the possession of goods, sells the goods with the permission of the other joint owners, the buyer gets a good title to the goods. (D) Sale by a person in possession under voidable contract: If the seller sells the goods acquired under a voidable contract, but the contract of sale has not been rescinded at the time of sale and the buyer purchases them in good faith without the notice of the seller's defective title, such buyer acquires a good title to the goods. (E) Sale by the buyer or the seller as possession after sale : Section 30 (I) of the Act provides that where a person, having a sold goods continues or is in possession of the goods or of the documents of title to the goods, the delivery or transfer by that person or by a mercantile agent acting for him, of the goods or documents of title under any sale, pledge or other disposition thereof to any person receiving the same in good faith and without notice of the previous sale shall have the same effect as if the person making the delivery or transfer were expressly authorised by the owner of the goods to make the same. And Section 30 (2) states that where a person, having bought or agreed to buy goods, obtains, with the consent of the seller, possession of the goods or the documents of 'title to the goods, the delivery or transfer by that person or by a mercantile agent acting for him, of the goods or documents of tide under any sale, pledge or other disposition thereof to any person receiving the same in good faith and without notice of any lien or other right of the original seller in respect of die goods shall have effect as if such.lien or right did not exist. (F) Sale by unpaid seller: When an unpaid seller who has exercised his right of lien or stoppage in transit, re-sells the goods, the buyer acquires a good title to the goods as against the original buyer. [Section 54 (3) ]. (G) Exceptions in other acts: In all the cases mentioned below, if the seller sells the goods, even though he is not the owner of the goods, the buyer gets a good tide to die good. (i)

238

Sale by an Official Assignee or Liquidator of a companies;

(ii)

Sale by a person who finds the lost goods under certain circumstances [Section 169 of the Contract Act].

(iii)

Sale by a pawnee of pledge under certain circumstances [Section 176 of Contract Act].

Unit 5

5.7


PERFORMANCE OF CONTRACT OF SALE

As regards the seller, performance of the contract of sale means the delivery of goods to the buyer. As regards the buyer, it means the acceptance of the delivery of goods and to make the necessary payment of the goods, he purchases according to the terms and conditions of the contract of sale. A contract of sale involves reciprocal promises. The seller promises to deliver the goods while the buyer promises to pay for the goods and to accept the delivery of goods. Section 31 makes clear that it is the duty of the seller to deliver the goods and of the buyer to accept and pay for them, in accordance with the terms of the contract of sale. It is provided in Section 32 that unless otherwise agreed, delivery of goods and payment of the price are concurrent conditions, that is to say the seller shall be ready and willing lo give possession of the goods to the buyer in exchange for the price and the buyer shall be ready and willing to pay the price in exchange for possession of the goods.

1.

Delivery of goods Delivery means voluntary transfer of possession of goods from one person to another [Section 2 (2)]. Thus it is the voluntary transfer of the possession of goods from seller to buyer. If the transfer of possession of goods is not voluntary, there is no delivery. Delivery may be of the following types •

r>
(A) Actual delivery : It is also called physical delivery of the goods. When goods are actually or physically handed over to the buyer by either the seller or his authorised agent, the delivery is said to be actual. (B) Symbolic delivery : When it is very difficult to hand over the goods physically to the buyer because of the bulky nature of the goods, the goods are delivered in a symbolic manner. Handing oveFthe key ofagodown, warehouse or a Railway Receipt or a bill of lading etc. to the buyer is a symbolic delivery and it is as effective as actual delivery. In symbolic delivery, there may not be any change so far as possession of goods is concerned. p CJ^ «4

VMa

'»~/"

/O//M c

(C) Constructive delivery or delivery by attornment : Delivery is said to be constructive where the person, having the physical and actual custody of the goods sold, acknowledges or agrees to the buyer to hold the goods on behalf of the buyer. This may happen in the following cases: (i)

When the buyer is in possession of the goods and the seller agrees to the buyer's holding the goods as their owner. 239

Business Law

(ii) Where the seller in actual possession of the goods agrees to hold the goods on behalf of the buyer. (iii) Where any third party such as a bailee may actually hold the goods sold but acknowledges the buyer that he (the third party) holds the goods on behalf of the buyer. For example, Mr. M buys 1 00 bags of wheat from Mr. N and the bags are in X's godown. Mr. N gives an order to X, asking him to transfer the 100 bags of wheat to Mr. M. Mr. X accepts the order and transfers the bags of wheat by making entry in his books of a/cs. instead of actually delivering the same. This is nothing but a delivery by allotment. 2.

Rules regarding delivery of goods

^r (XtH

<

^^ The rules regarding delivery of goods are discussed below. (A) Mode of delivery [Section 33] : Delivery of goods must have the effect of putting the goods in the possession of the buyer or his authorised agent as the case may be. Delivery of goods may be (i) actual, (ii) constructive ; or (iii) symbolic. ' ~.

(B) Delivery of goods and payment of price are ^concurrent conditions [Section 32] : Unless otherwise agreed, delivery of goods and payment of price are concurrent conditions. The seller must be ready and willing to give the possession of goods to the buyer and the buyer must also be willing to take delivery of goods and to pay the price in exchange of the goods purchased. Delivery of goods and payment of price must be according to the terms of the contract of sale. (C) Effect of part delivery of goods [Section 34] : A delivery of part of goods in progress of the delivery of the whole, has the same effect, for the purpose of passing the property in such goods, as a delivery of the whole; but a delivery of part of the goods with an intention of severing it from the whole, does not operate as a delivery of the remainder. This section does not apply to money or currency notes. In one case, Mr. A purchased ten bags from Mr. Y and received three bags and he also paid for the same. Thereafter he refused to accept remaining seven bags. It was held that it amounted to part delivery. Yet in another case where Mr. X asked his godownkeeper to deliver goods lying in his godown to Y as Y purchased the goods. Y weighed the goods and took away some part of the goods thus purchased. It was held that the delivery of a part of the goods had the same effect as the delivery of the whole. I 240

Units


(D) Buyer to apply for delivery [Section 35]: Apart from any express contract, the seller of the goods is not bound to deliver them until the buyer applies for delivery [Section 35]. Where the goods are to be acquired by the seller, his duty ends when he gives notice of the same to the buyer that the goods have been acquired. But it is the duty of the buyer to apply for the delivery. Unless otherwise agreed, the buyer has no cause of action against the seller if he does not apply for delivery. (E) Place of delivery of goods : The rules relating to the place of delivery are as follows: i. When the place at which the goods must be delivered is specified in the contract of sale, the goods must be delivered at the place only during the business hours on a working day. ii. The seller is not bound to carry goods to the place of the business of the buyer or at his residence unless otherwise agreed upon. The seller should only place the goods at the disposal of the buyer. Where there is no specific agreement in the contract of sale as to place, the goods sold are to be delivered at the place at which they are at the time of sale. iii. In the case of the agreement to sell the goods, the goods are to be delivered at the place at which they are at the time of agreement to sell. If goods are not in existence (not produced at the time of agreement to sell), the goods are to be delivered at the place at which they are manufactured or produced, in case there is no contract to the contrary [Section 36(1)]. (F) Risk of delivery [Section 40]: Where the seller of the goods agrees to deliver goods at his own risk at a place other than that where they are when sold, the buyer shall, nevertheless unless otherwise agreed, take any risk of deterioration in the goods necessarily incident to the course of transit J\ (G) Time of delivery [Section 36 (2) and (4)]: Where under the contract of sale, the seller is bound to send the goods to the buyer, but no time for sending them is fixed, the seller is bound to send them within a reasonable time [ Section 36 (2) ] and further Section 36 (4) states that demand or tender of delivery may be treated as ineffectual unless made at a reasonable hour. What is a reasonable hour is a question of fact which vary from case to case. 241

Business Law

(H) Goods in possession of a third person or party [ Section 36 (3) ]: Where the goods at the time of sale are in the possession of a third person, there is no delivery by the seller to the buyer unless and until such third person acknowledges to the buyer that he holds the goods on his behalf: Provided that nothing in this section shall affect the operation of issue or transfer of any document of title to goods. (I) Cost of delivery of goods [Section 36 (5)]: Unless otherwise agreed, the expenses of and incidental to putting the goods into a deliverable state shall be borne by the seller. However all expenses of and incidental to obtaining the delivery of goods are expected to be borne by the buyer. (J)

Delivery of wrong quantity [Section 37] (i) Delivery of goods less than contracted for: Where the seller delivers to the buyer a quantity of goods less than the contracted to sell, the buyer may reject them. But if the buyer accepts the goods so delivered, he shall pay for them at the contract rate [Section 73 (1)]. (ii) Delivery of goods in excess of the quantity contracted for: Where the seller delivers to the buyer a quantity of goods larger than he contracted to sell, the buyer may accept the goods included in the contract and reject the rest, or he may reject the whole. If the buyer accepts the whole of the goods so delivered, he shall pay for them at the contract rate [Section 37 (2)1. (iii) Delivery of goods contracted for mixed with other goods : Where the seller delivers to the buyer the goods he contracted to sell mixed with goods of a different description not included in the contract, the buyer may accept the goods which are in accordance with the contract and reject the rest or may reject the whole [Section 37 (3)]. The provision of this section are subject to any usage of trade, special agreement or course of dealing between the parties [Section 37 (4)].

(K) Installment deliveries of goods [Section 38]: Unless otherwise agreed, the buyer of goods is not bound to accept delivery thereof by instalments [Section 38(1)]. 242

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Where there is a contract for the sale of goods to be delivered by stated instalments whickare to^^praTteV? paiifor, and fhe seller makes no delivery or defective delivery in respect of one or more instalments, or the buyer neglects or refuses to take delivery of or pay for one or more instalments, it is a question in each case depending on the terms of the contract and the circumstances of the case, whether the breach of contract is a repudiation of the whole contract, or whether it is severable breach giving rise to a claim for compensation, but not to a right to treat the whole contract as repudiated [Section 38 (2)]. (L) Delivery to carrier or wharfinger [Section 39]: Where, in pursuance of a contract of sale, the seller is authorised or required to send the goods to the buyer, delivery of the goods to a carrier, whether named by the buyer or not, for the purpose of transmission to the buyer, or delivery of the goods to a wharfinger for sale custody, is prima facie deemed to be delivery of the goods to the buyer [Section 39 (1)]. Unless otherwise authorised by the buyer, the seller shall make such contract with the carrier or wharfinger on behalf of the buyer as may be reasonable having regard to the nature of the goods and the other circumstances of the case. If the seller omits so to do, and the goods are lost or damaged in course of transit or whilst in the custody of the wharfinger, the buyer may decline to treat the delivery to the carrier or wharfinger, as a delivery to himself, or may hold the seller responsible in damages [Section 39 (2)]. Unless otherwise agreed, where goods are sent by the seller to the buyer by a route involving sea transit, in circumstances in which it is usual to insure, the seller shall give such notice to the buyer as may enable him to ensure them during their sea transit, and if the seller fails so to do, the goods shall be deemed to be at his risk during such sea transit [Section 39 (3)]. (M) When an acceptance is complete on delivery of goods [Section 42]: The buyer is deemed to have accepted the goods, (i) when he intimates to the seller that he has accepted them, or (ii) when the goods have been delivered to him and he does any act in relation to them which is inconsistent with the ownership of the seller, or (iii) when, after the lapse of reasonable time, he retains the goods without intimating to the seller that he has rejected the goods. (N) Buyer not bound to return rejected goods [Section 43]: Unless otherwise agreed, where goods are delivered to the buyer and he refuses to accept them, having the right so to do, he is not bound to return them to the seller, but it is sufficient if he intimates to the seller that he refuses to accept them. 243

Business Law

(O) Liability of a buyer for neglecting or refusing delivery of goods [Section 44]: When the seller is ready and willing to deliver the goods and requests the buyer to take delivery, and the buyer does not, within a reasonable time after such request, take delivery of the goods, he is liable to the seller for any loss occasioned by his negligence or refusal to take delivery, and also for a reasonable charge for the care and custody of the goods. It is provided that nothing in this section shall affect the rights of the seller where the neglect or refusal of the buyer to take delivery amounts to a repudiation of the contract [Proviso to Section 44].

GHTS OF UNPAID SELLER AND REMEDIAL MEASURES

A seller is deemed to be an unpaid seller within the meaning of this Act, when (a) the whole of the price has not been paid or tendered, (b) the bill of exchange or other negotiable instrument has been received as conditional payment, and the condition on which it was received has not been fulfilled by reason of the dishonour of the instrument or otherwise. [Section 45(1)]. The term 'seller' here means not only the actual seller, but it also includes any person who is in the position of a seller, as for instance, an agent of the seller to whom a bill of lading has been endorsed, or a consignor or agent who has himself paid for the goods or is directly responsible for the price [Section 45 (2) ]. The conditions mentioned below must be fulfilled before a seller can be deemed to be an unpaid seller. (a) He must have sold goods against cash and the price must be due. (b) He must be unpaid either wholly or partly. (c) He must have an immediate right of action for the price. (d) He must have not refused payment when tendered. (e) A bill of exchange or any other negotiable instrument was received but dishonoured. 1. Rights of an unpaid seller and remedial measures Under the Sale of Goods Act, the unpaid seller gets certain rights which can be broadly classified under the following two heads: 244

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(A) RightfigainsLgoods: and (B) Rights Against the buyer personally.

(A) Rights of unpaid seller against the goods sold (i)

Where the property in the goods sold has been passed, he has the following rights. [Section46(J)]. (a) Right of Lien, [Sections 47 to 49, (b) Right of stoppage of goods in transit. [Sections 50 to 52], (c) Right of resale [Section 54].

(ii)

Where the property in the goods has not been transferred, he gets the following two rights [Section 42 (2)]. (a) Withholding the delivery of goods and (b) Stoppage in transit.

(B) Rights against the buyer personally Following four rights, the unpaid seller gets against the buyer: (i) Suit for price [Section 55], (ii) Suit for damages [Section 56], (iii) Repudiation of contract [Section 60], (iv) Suit for interest [Section 61].

Rights of. an Unpaid Seller 2.

Rights of an unpaid seller against the goods (A) Right of lien [Sections 47 to 49] A lien is a right to retain the possession of goods until the payment of the price of such goods. If the seller loses the possession of the goods, he also loses the right of lien. Right of lien is available to the unpaid seller who is in possession of goods where (a) the goods have been sold without any stipulation as to credit, (to) the goods have been already sold on credit but the term of credit is expired, (c) the buyer has become insolvent. According to Section 47 (2), the seller may exercise his right of lien not withstanding that he is in possession of the goods as a bailee or as an agent for the buyer. The lien depends on actual possession of the goods and not on title of the goods. 245

Business Law

Here it must be remembered that the possession of the goods by the seller must not expressly exclude the right of lien and moreover the lien can be exercised by the unpaid seller only for getting the price and not for any other charges such as dock charges, godown or warehouse charges. Where the unpaid seller has made the part delivery, he may exercise the right of lien on the remainder of goods . However, where a part of the goods is delivered under such circumstances so as to show an agreement to waive the lien, the seller cannot retain the remainder of the goods .

L \ (i) TenninationomJen [Section 49]

—

:

^t

The unpaid seller loses his lien on the goods sold : (a) when he delivers the goods to a carrier or other bailee for the purpose of transmission to the buyer without reserving the right of disposal of the goods; (b) when the buyer or his agent lawfully obtains possession of the goods ; (c) by waiver of his lien. This means that the unpaid seller loses his lien on the goods when the seller voluntarily abandons his right of lien on the goods. He may do this either expressely or impliedly. &Z Activity E ;N . My uncle owns a shop of building material. My uncle sold goods to Mr. Nikam on 1st September on the condition that the price is to bepaid on 1st October on his request. My uncle was ready and willing to give him the possession of the goods. Therefore, my uncle many times called Mr. Nikam to take the delivery of his goods, purchased. But Mr. Nikam did not take the delivery of the goods. My uncle was in possession of the goods till 1st Oct. Mr. Nikam came on 1st Oct and asked for the delivery of the goods. My uncle was not paid the price of the goods. Does my uncle have a right to refuse to part with possession till the price is paid?

246

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(ii)

Right of stoppage ojj*oods in transit The right of stoppage of goods in transit is an extention of the right of lien. It arises only on the insolvency of the buyer and the goods are in transit. It is the right of stopping the goods in transit after the unpaid seller has parted the possession of the goods. Section 50 of this Act throws more light on the right of stoppage in transit. Section 50 states that "subject to the provisions of this Act, when the buyer of goods becomes insolvent, the unpaid seller who has parted with the possession of the goods has the right of stopping them in transit, that is to say, he may resume possession of the goods as long as they are in the course of transit, and may retain them until payment or tender of the price.

(iii) Duration of transit [Section 51]: Goods are deemed to be in course of transit from the time when they are delivered to a carrier or other bailee for the purpose of transmission to the buyer, until the buyer or his agent in that behalf takes delivery of them from such carrier or other bailee. Section 51 (2) : If the buyer or his agent in that behalf obtains delivery of the goods before the arrival at the appointed destination, the transit is at an end. Section 51 (3) : If, after the arrival of the goods at the appointed destination, the carrier or other bailee acknowledges to the buyer or his agent that he holds the goods on his behalf and continues in possession of them as bailee for the buyer or his agent, the transit is at an end, and it is immaterial that a further destination for the goods may have been indicated by the buyer. Section 51 (4) : If the goods are rejected by the buyer, and the carrier or other bailee continues in possession of them, the transit is not deemed to be at an end, even if the seller has refused lo receive them back.

Section 57 (5): When goods are delivered to a ship chartered by the buyer, it is a question depending on the circumstances of the particular case, whether they are in the possession of the master as a carrier or as agent of the buyer. Section 51 (6): Where the carrier or other bailee wrongfully refuses to deliver the goods to the buyer or his agent in that behalf, the transit is deemed to be at the end. Section 51 (7) : Where part delivery of the goods has been made to the buyer or his agent in that behalf, the remainder of the goods may be stopped in transit, unless such part delivery has been given in such circumstances as to show an agreement to give up possession of the whole of the goods. 247

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(iv) How stoppage in transit is affected [Section 52] The unpaid seller may exercise his right of stoppage in transit either by taking actual possession of the goods or by giving notice of his claim to the carrier or other bailee in whose possession the goods are. Such notice may be given either to the person in actual possession of the goods or to his principal. In the latter case, the notice, to be effectual, shall be given at such time and in such circumstances that the principal, by the exercise of reasonable diligence, may communicate it to his servant or agent, as the case may be, in time to present a delivery to the buyer [Section 52(1)]. When the notice of stoppage in transit is given by the seller to the carrier or any other bailee in the possession of goods, the latter must redeliver the goods to the seller or according to the direction of the seller [Section 52 (2)].

Table 5.1 Distinction between right of lien and right of stoppage in transit Right of lien

Right of stoppage in transit

(1) The right of lien is exercised by the unpaid seller when the goods are in his possession, actual or constructive. If he loses the possession, he loses the right of lien.

(1) The right of stoppage in transit can be exercised when goods are in transit or may be in the possession of the middleman.

(2) The right of lien is exercised when the buyer is able to pay but does not pay.

(2) The unpaid seller's right to stop the goods in transit arises only when the buyer is insolvent.

(3)

(3) Right of stoppage in transit commences whwen the seller loses the possession of the goods sold and it continues until the buyer acquires their possession.

(4)

248

Right of lien comes to an end when the seller loses the possession of goods.

In the right of lien, the possession is retained by the seller.

(4) In the right of stoppage the goods in transit, possession is regained.

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Effect of i

Subject to the provisions of this Act, the unpaid seller right of lien or stoppage in transit is not affected by any sale of goods or their deposition in any other way which the buyer may have made unless the seller has assented thereto. [Section 53 (1)], Of course, it is provided that where a document or title of goods has been issued or transferred legally to any other person as a buyer or owner of the goods, and that person transfers the document to a person who takes the documents in good faith and for consideration, then, if such last mentioned transfer was made by way of sale, the unpaid seller's right of either lien or stoppage in transit is defeated, and, if such last-mentioned transfer was by the way of pledge or other deposition for value, the unpaid sellers' right of lien or stoppage in transit can only be exercised subject to the rights of transferee [Proviso to Section 53 (1)]. Where the transfer is by way of pledge, the unpaid seller may require the pledge to have the amount secured by the pledge satisfied in the first instance, as far as possible, out of any other goods or securities of the buyer in the hands of the pledge and available against the buyer [Section 53 (2)]. (C) flight of resale ^Section 54] \ The unpaid seller can exercise the right of resale of goods (a) where the goods are perishable, (b) where he gives the notice to the buyer of his intention to resell the goods in his possession and the buyer does not pay the price within a reasonable time, and (c) where the seller expressly reserves a right of resale in case the buyer makes default. If there are losses to the seller, on a resale, the seller can claim the same from the buyer as damages for breach of contract. But when there is a surplus on the re-sale, the seller is not bound to hand over the same to the buyer. If no notice of re-sale is given to the buyer, the unpaid seller is not entitled: (i) to recover any loss on re-sale of the goods; and (ii)

to retain surplus, if

any on the resale. A contract of sale is not generally rescinded by the mere exercise of an unpaid seller of exercising his rights of lien or stoppage in transit. [Section 54 (])]. However, it is subject to other provisions relating to the unpaid seller's right to resell contained in Section 54. 249

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(D) Right to withhold the deliver of goods [Section 46 (2)] Where the property in goods has not passed to the buyer, the unpaid seller has, in addition to other remedies, a right of withholding delivery similar to and co extensive with this right of lien and stoppage in transit where the property has passed to the buyer [Section 45 (2)]. Thus, if the property in the goods has not passed to the buyer, the unpaid sell cannot exercise his right of lien but can exercise the right of withholding the delivery of goods, similar to and co-extensive with lien. _______________________________ __ ,—_ ^~.

Ughtsofanjmpaid seller against the buyer personally The unpaid seller has the following four rights available against the buyer personally: (A) Right to sue for prices,

(B) Right to sue for damages for non acceptance,

(C) Right to repudiate the contract,

(D) Right to sue for interest.

The above mentioned rights can be exercised by the unpaid seller against the buyer personally and therefore they are called the rights in personal as against the rights in remedial that is, in rights against the goods. Now let us discuss these remedial measures of the unpaid seller.

(A) Right to sue for price : Where the property in goods has passed to the buyer: Where under a contract of sale, the property in the goods has passed to the buyer and the buyer wrongfully neglects or refuses to pay for the goods according to the terms of the contract, the seller may sue him for the price of the goods. [Section 55(1)]. Where the property in goods has not passed to the buyer : Where under a contract of sale, the price is payable on a certain day irrespective of delivery and the buyer wrongfully neglects or refuses to pay such price, the seller may sue him for the price although the property in the goods has not yet passed and the goods have not been appropriated to the contract. [Section 55 (2)].

(B) Right to sue for damages for non-acceptance Where the buyer wrongfully neglects or refuses to accept and pay for the goods, the seller may sue him for damages for non-acceptance. [Section 56]. 250

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(C) Right to repudiate the contract before due date Where the buyer repudiates the contract of sale of goods before the date of delivery, the seller may either treat the contract as subsisting or wait till the date of delivery or he may treat the contract rescinded and sue for damages for the breach of the contract of sale of goods. [Section 60]. (D) Right to sue for interest Provision has been made in Section 61 regarding the interest to be paid for damages and special damages. The gist of Section 61 is narrated below: Where there is any specific agreement between the seller and the buyer as to paying of the interest on the amount of price of the goods from the date on which the payment becomes due, the seller has the right to recover the interest from the buyer. But if there is no specific agreement to this effect, the seller may charge interest on the amount of the price of the goods when it becomes due from such date as he may notify the same to the buyer. In the absence of a contract to the contrary, the Court may award interest at such rate as it thinks proper on the amount of the price from the date of the tender of the goods or from the date on which the price of the goods was payable. 4.

Sale by Auction [Section 64] Sale by an auction is a public sale where different (various) buyers try to buy the goods by outbidding each other. Goods are sold to that buyer who gives the highest bid. The rules related to an auction sale are contained in Section 64 of this Act which is stated below: In the case of a sale by auction (A) Where goods are put up for sale in lots, each lot is prima facie deemed to be the subject of a separate contract of sale; (B) The sale is complete when the auctioneer announces its completion by the fall of the hammer or in any other customary manner; and, until such announcement is made, any bidder may retract his bid; (C) A right to bid may be reserved expressly by or on behalf of the seller, and where such right is expressly so.reserved, but not otherwise, the seller or anyone person on his behalf, may subject to the provisions hereinafter contained, bid at the auction; 25 1

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(D) Where the sale is not notified to be subject to a right to bid on behalf of the seller, it shall not be lawful for the seller to bid himself or to employ any person to bid at such sale or for the auctioneer knowingly to take any bid from the seller or any such person; and any sale contravening this rule may be treated as fraudulent by the buyer; (E) The sale may be notified to be subject to a reserved or upset price; (F) If the seller makes use of pretended bidding to raise the price, the sale is voidable at the option of the buyer.

5.9 SUMMARY The Law relating to the sale of moveable goods is contained in the Sale of Goods Act, 1930. There must be two different parties for the sale of goods. The buyer and the seller must be different persons. A sale is a bilateral contract. The contract must be for the sale of exchange of movable goods for money. A contract of sale is made by an offer to buy or to sell goods for a price, and the acceptance of such offer. The parties may agree upon any term concerning the time, place and mode of delivery. For a valid sale, the parties must be competent to contract, there must be free consent, there must be consideration, the object must be lawful etc. The very important aspect of the sale is the transfer of property in the goods i.e. the ownership and in agreement to sale the transfer of ownership is to take place at a future time. The agreement to sell becomes sale when the prescribed time is elapsed or the condition to which the property in goods is to be transferred is fulfilled. This Act makes the buyer aware of their right. It says that a buyer must buy goods after satisfying himself of their quality and fitness. The Act also provides remedies such as right for resale, suit for the price, seller's lien etc. to the unpaid seller. 5.10 SELF-ASSESSMENT QUESTIONS Q1.

Q2.

252

S tate the rights of a buyer in case of (A)

Short delivery,

(B)

Delivery in excess of contract goods and

(C)

Delivery of contract goods together with other goods.

What is the meaning of vendor's lien? How does it arise and how is it lost? Has a vendor any power over goods which have passed from his possession?

Unit 5

Q3.


Define vendor's lien. Distinguish between, vendor's lien' and 'stoppage in transit'.

Q4. Write a note on the remedies of the buyer of goods where there is a breach of warranty by the seller? Q5.

State the consequences of re-sale without giving notice to the original buyer?

Q6. Under the sale of goods Act, what remedies are available in the event of a breach of contract? Q7. Explain the nature of a contract of sale. Bring out clearly the distinction between a sale and an agreement to sell. To what extent may an agreement commonly known as a hire purchase agreement be regarded as a contract of sale of goods? Q8.

Explain fully the essentials of a contract of sale of goods.

Q9.

Examine the formalities of a contract of sale of goods.

Q10. Explain the rules regarding ascertainment of a price in a contract of sale of goods. Q11. Define goods. What are the types of goods purchased or sold under a contract of sale of goods? Q12. Explain the effects of destruction of goods in a contract of a sale. Q13. Distinguish between a sale and a hire-purchase agreement. Q14. Define the concepts of condition and warranty. What conditions and warranties are implied in a contract of sale? Q15. Distinguish between a condition and a warranty. When does a condition sink to the level of a warranty ? Q16. Explain the doctrine of Caveat Emptor and state the exception to it. Q17. Explain the rule of Caveat Emptor and explain how far it is modified by implied conditions. Q18. State the conditions implied in a contract of sale of goods (i) by description, (ii) by sample; (iii) required for a particular purpose. Q19. Explain the implied conditions in a contract of sale. 253

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Q20. In a contract of sale of goods, state when (i) the property, (ii) the risk, in the goods sold passes from the seller to the buyer. Q21. What is the exact moment at which the transfer of property take place? What is its importance? Q22. Explain fully rules as to the passing, the property from the seller to the buyer in a contract of sale (a) of specific or ascertained goods and (b) of unascertained goods. Q23. Explain the rules of passing of the property in goods sent on approval or on sale or return. Q24. Explain the provisions made in the Sale of Goods Act for transferring the title by non-owners of the goods. Q25. Explain the general rule that no one can give a better title than he himself has. How does this principle apply in the case of sale of goods? State and discuss the exceptions to this rule. Q26. Explain the meaning of the performance of the contract of sale of goods in the Sale of Goods Act. Q27. Define delivery as used in a contract of sale and explain its types. Q28. Explain the rules regarding the delivery of goods under the Sale of Goods Act, 1930. Q29. Explain the term delivery as used in a contract of sale and state the rules regarding the valid delivery of goods. Q30. Who is an unpaid seller? Explain the various rights given to an unpaid seller under the Sale of Goods Act, 1930? Has he any remedy against the buyer personally? Q31. Compare and contrast the unpaid sellers' right of lien and stoppage in transit. Do you agree with the view that the right of stoppage in transit is an extension to the right of the lien? Q32. Explain the remedial measures available to an unpaid seller under the Sale of Goods Act, 1930.

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Q33. What do you understand by stoppage in transit? In what circumstances has the unpaid seller the right to sell and right to recover the damages for loss? Q34. What is an auction sale? State the rules regarding sale by auction. Q35. Write notes on: (A)

Contract of sale of goods.

(B)

Essentials of a contract of sale.

(C)

Types of goods.

(D)

Formalities of a contract of sale.

(E)

Sale and Agreement to sell.

(F)

Sale and Hire-purchase Agreement.

(G)

Sale and Bailment.

(H) Conditions and Warranties in the Sale of Goods Act, 1930. (I)

Doctrine of Caveat Emptor.

(J)

Transfer of ownership.

(K) Reservation of a right of disposal. (L) Transfer of title by non-owners. (M) Performance of a contract of sale. (N) Delivery of goods. (O) Rules regarding the delivery of goods. (P) Rights of an unpaid seller. (Q)

Remedial measures available to an unpaid seller under the Sale of Goods Act, 1930.

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6.1

INTRODUCTION

1881 which applies and extends to the whole of India. Nothing contained in the Act affects the provisions of Section 31 of the Reserve Bank of India Act, 1934 (RBI). The Negotiable Instruments Act of 1881 deals with promissory notes, bills of exchange, cheques and hundies; unless a special local usage is set up and proved. This Act came into force on the first day of March, 1882. The Act has been amended as many as twenty three times as per requirements since its enactment and the latest amendment was done in 2002. This Act as amended by "The Negotiable Instruments (Amendment and Miscellaneous Provisions) Act, 2002 has been made applicable with effect from 6th February, 2003. 6.2 NEGOTIABLE INSTRUMENTS - MEANING AND CHARACTERISTICS The word 'negotiable' means "transferable by delivery" and 'instrument' means "a written document by which a right is created in favour of some person or persons." Thus, the term negotiable inslrument literallymeans a wnttemiocumenTwhich createslmght in favour of somebody and is freely transferable. Free negotiability is an important characteristics of a negotiable instrument. The term 'negotiable instrument' as such is not defined in the Negotiable Instrumets Act of 1881, but Section 13 of the Act gives its meaning. According to Section 13, a negotiable instrument means a promissory note, a bill of exchange or a cheque payable either to order or to bearer. Thus, this Act recognises only three instruments as negotiable instruments i.e. a promissory note, a cheque and a bill of exchange. But it does not prohibit to include other instruments in the category of negotiable instruments which satisfy the conditions of negotiability. These conditions are mentioned below: (a)

The instrument should be freely transferal and delivery; and "^ (b)

: either by delivery or by endorsement

The person, who gets or obtains in good faith and for value, gets it free from all defects and is entitled to recover the money of the instrument in his own name.

Negotiable instruments are a special type of contracts.

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The Negotiable Instruments Act, 1881

Characteristics of Negotiable Instruments Essential characteristics of a negotiable instrument are mentioned below: 1.

Negotiable instruments must be in writing

2.

Free transferability or easy negotiability Negotiable instrument is freely transferable. If the negotiable instrument is payable to the bearer, the property in negotiable instrument passes from one to another person ~the negotiable instrument is payable to the order, the property in negotiable instrument passes from one to another person by endorsement and delivery. Here the property in negotiable instrument means complete right of ownership and not the only right of possessing the instrument.

3.

Title of holder is free from all defects A person who takes negotiable instrument bonafide and for value, he is known as a holder in due course gets the instrument free from all defects in the title. The holder in due course is not affected by defective title of the transferor or of any other party. Here the principle of nemo quod dot habet (no one can give what he does not possess) does not apply to negotiable instrument.

4.

Recovery The holder in due course has the right to sue on the negotiable instrument in his own name for recovering the amount. It is not necessary for him to give any notice of transfer to the party liable for payment on the instrument.

5. Presumptions___ ; < A negotiable instrument is always subject to certain presumptions which are enumerated in Section 118 and 119 of the Act. The presumptions are given below : Section 118 : Presumptions to negotiable instruments Until the contrary is proved, the following presumptions shall be made: (a) of consideration: that every negotiable instrument, was made or drawn for consideration, and that every such instrument, when it has been accepted, endorsed, negotiated or transferred, was accepted, endorsed, negotiated or transferred for consideration; 259

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(b) as to date: that every negotiable instrument bearing a date was made or drawn on such date; (c) as to time of acceptance: that every accepted bill of exchange was accepted within a reasonable time after its date and before its maturity; (d) as to time of transfer : that every transfer of a negotiable instrument was made before its maturity; (e) as to order of endorsements : that the endorsements appearing upon negotiable instrument were made in the order in which they appear thereupon; (f) as to stamps: that a last promissory note, bill of exchange or cheque was duly stamped; (g) as to a holder in due course: that every holder of a negotiable instrument is a holder in due course. Section 119 : As to Proof of protest: In a suit upon a negotiable instrument which has been dishonoured, the court, on the proof of the protest, shall presume that it was dishonoured; until and unless such fact is disproved. The presumptions mentioned above are rebuttable by evidence. If someone challenges any of these presumptions, it is his responsibility to prove his allegation. These presumptions do not arise where an instrument is obtained by fraud, offence or illegal consideration. Jbr

Payment

According to Section 13 (2), "A negotiable instrument may be made payable to two or more payees jointly, or it may be made payable in the alternative to one of two or one or some of several payees." 7.

Payable to order to bearer There are three explanations to Section 13(1) which throw light on the payability of an instrument to bearer or order. These three explanations are as follows: "Explanation I: Apromissory note, bill of exchange or cheque is payable to order which is expressed to be so payable or which is expressed to be payable to a particular

260

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person, and does not contain words prohibiting transfer or indicating an intention that it shall not transferable. Explanation II : A promissory note, bill of exchange or cheque is payable to bearer which is expressed to be so payable or on which the only or last endorsement is an endorsement in blank. Explanation III : Where a promissory note, bill of exchange or cheque, either originally or by endorsement, is expressed to be payable to the order of a specified person, and not to him or his order, it is nevertheless payable to him or his order at his option". From these explanations we come to know that if an instrument is to be a negotiable instrument, it must be made payable in any one of the following ways : (a) "to Mr. A", (b) "to Mr. A or order", (c) "to the order of Mr. A", (d) "to bearer", and (f) "to Mr. A or bearer". Types of negotiable instruments Negotiable instruments are of two types which are as follows : (a) Negotiable instruments recognised by statute : e.g. bills of exchange, cheques and promissory notes. The Negotiable Instruments Act, 1881 mentions in Section 13, these three kinds of negotiable instruments. (b) Negotiable instruments recognised by usage or customs of trade : Bank notes, exchequer bills, share warrants, bearer debentures, dividend warrants, share certificates attached with them blank transfer deeds, etc. are considered in England to be negotiable by custom, of course, the list of negotiable instruments seems to be flexible and other documents, if they possess the qualities of negotiability, can also be included. In India, Government promissory notes, bankers' drafts, pay off orders, delivery orders, hundies, railway receipts andS. T. Receipts for goods etc. have been held to be negotiable by usage or custom of trade. Now, let us consider some of the negotiable instruments. * . , /•->

.1) Bil.of-Exchange[S^n5] "A hill of exchange is an instrument in writing containing an unconditional order, signed by uaker, directing a certain person to pay a certain sum of money only to, or to the order of a certain person or to the bearer of the instrument" [Section 5]. Suppose Mr. X of 261

Business Law

Mumbai purchases goods on credit from Mr. Y of Pune for Rs. 1,0007- to be paid 3 months after date. Mr. Y buys goods from Mr. S of Nagar for Rs. 1,0007- on the same terms and conditions. Here Mr. Y may order Mr. X to pay Rs. 1,0007- (a certain sum) to Mr. S which will be nothing but a bill of exchange. Specimen of Bill of Exchange Rs. 1,0007-

Pune 15th August 2004

Three months after the date pay to Mr. S. of Nagar or order the sum of Rs. ONE THOUSAND, for value received. To

Mr.X

Accepted

Stamp

Signature of

Signature of

Mr.X

Mr.Y

Address

Mumbai

Thus, there are three parties to a bill of exchange viz., drawer, drawee and payee. The person who gives the order to pay or who prepares the bill is called the drawer. In the above example, Mr. 'Y' of Pune is the drawer. The person who is asked or ordered to pay is known as the drawee. Mr. 'X' is the drawee. A drawee accepts the bill of exchange and puts his signature and therefore he is also called the acceptor. The person (Mr. S of Nagar in the above example) to whom the bill is made payable is the payee. The drawer or the payee who is in possession of the bill of exchange is called the holder. When the holder endorses the bill, he is called the endorser and the person to whom the bill is endorsed is called the endorsee. Following are some of the important essential characteristics of a bill of exchange. (1) It must be in writing; (2) It must contain an order to pay and not request; (3) The order must be unconditional; (4) The parties to the bill of exchange i.e., drawer, drawee and payee must be certain; 262

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(5) Bill of exchange must be signed by the drawer and accepted by the drawee; (6) The sum pay able must be certain; (7) Bill of exchange must contain an order to pay money only; (8) Bill of exchange must be stamped properly; (9) Bill of exchange originally drawn cannot be made payable to bearer. Thus, it becomes obvious from the abovementioned important characteristics of a bill of exchange that if certain requirements are not fulfilled, the document is not called a bill of exchange. For example, it is written on the piece of paper that, "Please allow the bearer to receive Rs. One Thousand and oblige" or "I hereby authorise you to pay on my account to the order of Mr. K. R. Shimpi Rs. One Thousand Only". It cannot be called a bill of exchange simply because it is not an order to pay. (2) Promissory Note [Section 4]

w

"A "promissory note" is an instrument in writing (not being a batfK-note or a currency-note) containing an unconditional undertaking, signed by the maker to pay a certain sum of money only to or to the order of a certain person or the bearer of the instrument" [Section 4]. From the following illustrations, we come to know the nature of promissory note. A signs instruments in the following terms: ft) /"I promise to pay D or order Rs. 1,500/-." * acknowledge myself to be indebted to D in Rs. 5,000 to be paid on demand, for value received." "Mr. D, I.O.U. Rs. 10,0007-". (iv) y "I promise to pay D Rs. 1,500/- and all other sums which shall be due to him." (v) y/'I promise to pay D Rs. 5007- first deducting thereout any money which he may owe me."
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"I promise to pay D Rs. 5007- on B 's death, provided B leaves me enough to pay that sum." "I promise to pay D Rs. 5007- and to deliver to him by black horse on 3 1 st January next." The instrument respectively marked (i) and (ii) are promissory notes. The instruments respectively marked (iii), (iv) and (v) (vi), (vii), (viii) are not promissory notes. Bank notes, currency notes, though are similar to promissory notes in all respects, have been expressly excluded. Specimen of a promissory note Rs. 50,0007-

Pune, August 20, 2004

Three months after the date, I promise to pay Mr. X of Mumbai or order a sum of Rupees Fifty Thousand for value received. To Mr. Address Stamp Mumbai

Signature of Mr.Y

Essential characteristics of a Promissory Note : (1) Promissory note is a negotiable instrument. (2) It must be in writing. (3) The promise must be to pay money only. (4) It must be definite. The promise to pay must be definite. (5) It must be unconditional. Undertaking to pay must be unconditional. (6) It must be signed by the maker.

264

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(7) The maker of the promissory note must be a certain person and the payee must also be certain. (8) Amount of the promissory note must be certain. promissory notes but they are not essential in law. ( 10) Promissory note must be properly stamped according to the provisions of the Indian Stamp Act, 1899. (11) From the definition of a promissory note according to Section 4 of the Act, we come to know that Section 4 recognises three kinds of promissory notes i.e. ( 1 ) Apromise to pay a certain sum of money to a certain person, (2) Apromise to pay a certain sum of money to the order of a certain person and, (3) A promise to pay the bearer of the instrument. xgT Activity A : 1 owe Rs. 1000/- to Mr. Lalit. I wrote on a paper that " Mr. Lalit I.O.U Rs. 1000/ -"to acknowledge indebtedness. I.O.U, stands for " I owe you". Is it a Promisory note or Bill of Exchange?

(3)

Cheque [Section 6]

[A] Definition and Meaning of a Cheque By amending the Act in 2002, the definition of a cheque previously given in Section 6 has been modified or revised and now the definition of a cheque with necessary explanations as given in Section 6 of the Act is as follows: "A cheque is a bill of exchange drawn on a specified banker and not expressed to be payableotherwise than ondemand and it includes the electronic image of a truncated cheque and a cheque in the electronic form". The meaning of the terms, "a cheque in electronic form', "a truncated cheque" and "clearing house" which are used in Section 6 is given in the Explanation I and II to Section 6. These explanations, explanation I and explanation II to Section 6 are as follows : 265

Business Law

Explanation I: For the purposes of this Section, the expressions, (a) ' 'a cheque in the electronic form" means a cheque which contains the exact < rnirror image of a paper cheque, and is generated, written and signFfed in a secure system ensuring the minimum safety standards with the use of digital signature (with or without biometrics signature) and asymmetric crypto system. (b) "a truncated cheque" means a cheque which is truncated during the course of clearing cycle, either by the clearing house or by the bank whether paying or receiving payment, immediately on generation of an electronic image for transmission, substituting the further physical movement of the cheque in writing. Explanation II: For the purposes of this section, the expression "clearing house" means the clearing house managed by the Reserve Bank of India or a clearing house recognised as such by the Reserve Bank of India. It is obvious that the basic reason to make amendment in the provisions of this Section 6 is to make provision relating to cheques in the electronic form and truncated cheques.

[B] Essential Characteristic Features of a Cheque ^ From the definition of a cheque mentioned above, it is clear that a cheque must satisfy or fulfil all the essential requirements of a bill of exchange as it is a bill of exchange and a one of the types of negotiable instruments. Other important characteristic features of a cheque are as follows : (a) A cheque is always drawn on a specified banker. (b) It is always payable on demand. (c) A cheque can be bearer, order or crossed. (d) A cheque requires no acceptance in the ordinary course of business as it is intended for immediate payment. (e) In the case of a cheque, a drawee is always a specified bank, a drawer is a person who draws a cheque and who has an account in the bank and payees is a person to whom the amount of cheque is made payable. (f)

266

The drawee i.e. the banker named must honour the cheque by making payment to the payee when the cheque is presented for the payment to the banker at his office during the usual office hours, provided the cheque is properly and validly drawn and the drawer has sufficient funds to this credit.

Unit 6


(g) Banks necessarily provide their customers with printed cheques contained in the cheque book duly numbered. (h) The signature on the cheque must tally with the specimen signature of the concerned drawer. (i) A cheque must be dated". A cheque becomes due for payment on the date specified on it. A cheque drawn with a future date is called "post-dated cheque" and such post-dated cheque is valid but it is payable either on or after the date specified on it. Of course, if there is too much delay in presenting a cheque to a banker after the due date, such cheque is dishonoured by the bank. Such cheques are called stale cheques and usually after six months, a cheque becomes stale. But, many times, its validity regarding period of payment is mentioned on the cheque itself. Printed cheques contained in the cheque books are made available by the banks on demand by their customers. Such cheques are usually printed in English and Hindi and in the forms shown below. Date Pay. ....................................................................... m tii <*<*>!

OR Bearer

Rupees.................................................................. STST g^

Rs.

3\ 7. _______

L.F. ________ Initials

B A N K O F . ............................................... No-123457

35T. *. Code No.

No. X - 125739 BANK OF. ............................................................................................. Date .................... Pay. ................................................................................................................ or BEARER Rs ..................................................................................................

Rs.

A/c No. L.F.

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There is no specific format of a cheque prescribed in the Act. But it is certain that there must be certain particulars written on a cheque such as name of the bank, branch, address, account number, space for the name of the payee, amount - in words and in figures, specimen signature, etc. [C] Different types of Cheques There are two important types of cheques i.e. (1) Bearer or Open Cheques and (2) Crossed Cheques. (1) Bearer or Open Cheques : On presentment to the bank at the counter, the amount of the bearer cheque is paid to such person who presents the cheque. Because of this characteristics, such cheques are called as bearer or open cheques. (2) Crossed Cheques :

^

If a bearer cheque is lost or stolen, the owner of such cheque is put to the loss as a finder or any other person can cash it and hence, cheques should be crossed. Crossing of cheques avoids such contingency and secures the payment. A crossed cheque is one which has two parallel lines drawn on the face of the cheque usually at the left hand corner. The important advantage of crossing the cheque is that it reduces the risk of unauthorised person to get the payment of such cheque as a crossed cheque is only cashed through a bank of which the payee of the crossed cheque is a customer. There are different methods of crossing a cheque. (4)

Trade Billl and Accommodation Bill

A bill when drawn and accepted for a genuine trade transaction is termed as trade bill, while a bill drawn and acepted not for a genuine trade transaction but only to provide financial help or assistance to some party is termed as an accommodation bill. Such bill may be for accommodation of both, the drawer and acceptor. In such a case, they share the proceeds of the bill by discounting the same. >gT Activity B ; Mr. Bhalla desired to have Rs.2000/-. He approached Mr. Singh for the said purpose, Mr. Singh said that he do not have cash in hand but has credit in the market. It is arranged that Mr. Bhalla will draw a bill on Mr. Singh for Rs. 2000/-, payable after three months 268

Unit 6


and Mr. Singh will accept the bill. Mr. Bhalla can negotiate the bill and get the money. Before the maturity of the bill Mr. Bhalla will provide Mr. Singh with funds for three months. What kind of this bill is this?

(5) Fictitious Bill When the name of the payee or drawer or both is fictitious in a bill, such bill is called a fictitious bill. When either payee or drawer is fictitious or both are fictitious, the acceptor is liable to a holder in due course if the holder in due course can show that the signature of the drawer and first endorser (payee) are the same.

(6) Documentary and Clean Bills When documents of title to goods and other necessary documents like invoice, insurance policjetc. are annexed to a bill of exchange, such bill is called a documentary bill. All such (documents are delivered to the buyer on acceptance or payment of the bill. But when no documents relating the goods represented by the bill are annexed to it, such bill is called as clean bill.

(7) Inchoate Instrument According to Section 20 of the Act "where one person signs and delivers to another a paper stamped in accordance with the law relating to negotiable instruments then in force in India, and either wholly blank or having written thereon an incomplete negotiable instrument, he thereby, gives prima facie authority to the holder thereof to make or complete, as the case may be, upon it a negotiable instrument, for any amount specified therein and not exceeding the amount covered by the stamp. The person so signing shall be liable upon such instrument, in the capacity in which he signed the same, to any holder in due course for such amount. Provided that no person Other than holder in due course shall recover from the person delivering the instrument anything in excess of the amount intended by him to be paid thereunder."

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An inchoate instrument is an incomplete instrument in some respect. For example; a bill is drawn, " payable to ............ or order." A holder may write his name as a payee in the blank space and sue upon the instrument. The principle behind an inchoate instrument is essentially a principle of estoppel. It enables persons to lend their credit to others by signing their names on blank instruments which can subsequently be filled in and thus they bind themselves as drawers, makers, acceptors or indorsers. (8) Ambiguous Instruments

Where an instrument owing to its faulty drafting may be interpreted either as a bill of exchange or a promissory note, is called an ambiguous instrument. The holder of such instrument has to elect once for all whether to treat it as a bill or promissory note. Once he does it, he has to abide by his election. The provisions pertaining to ambiguous instruments are made in Section 1 7 and 18 which are as follows : Section 17 .-Ambiguous instruments : "Where an instrument may be construed either as a promissory note or bill of exchange, the holder may at his election treat it as either, and the instrument shall be henceforth treated accordingly". Section 18 : Where amount is stated differently in figures and words : "If the amount undertaken or ordered to be paid is stated differently in figures and in words, the amount stated in words shall be the amount undertaken or ordered to be paid". Following illustrations make the above mentioned provisions more ear : cl (a) If Mr. Jignesh addresses an instrument in the form of a promissory note to Mr. Munde who accepts it. In this case, the holder may treat the instrument as a promissory note or a bill of exchange at his option. (b) If in a bill of exchange "Pay Mr. K. R. Shimpi or order the sum of Rs. Two Thousand and Five Hundred Only" these words are written, but in the margin, the amount in figure is stated is Rs. 250. Obviously, according to the provisions of Section 1 8, the bill is for Two Thousand and Five Hundred. (9) Escrow

When a bill is delivered conditionally, it is called an "Escrow". Such bill is endorsed or deTiverecI to a person subject to tne understanding that it becomes payable only after certain conditions are fulfilled. In other words, the liability of the concerned party delivering the bill does not commence till the happening of the event or the fulfilment of the condition. An escrow may be delivered for a special purpose such as a collateral security. In the case 270

Unit 6


of an escrow, though there is no liability to pay unless the conditions agreed upon are fulfilled, the rights of a holder in due course are not affected. Suppose, Mr. ABC writes a promissory note in favour of his relative employee and hands it over to his trustee who is a solicitor asking the solicitor to keep the promissory note safe in his custody till the death of Mr. ABC and thereafter hand it over to that relative if he continues to be an employee and remains in the service. If this condition is fulfilled and the solicitor hands over the promissory note to the relative, the relative gets the right to claim the amount mentioned in the promissory note. This illustration gives you an idea about the nature of an escrow. (10) Bills in Sets [Section 132 and 133] Sometimes, a bill of exchange is drawn in several parts. All the parts so drawn are referred to as bill drawn in sets. Of course, all parts from one set and the whole set goes to constitute one bill and each of the parts is numbered and contains the reference to the other parts so that it continues to be payable so long as the other parts remain unpaid. The provisions relating to bills in sets have been made in Section 132 and 133 of the Act in Chapter XV of the Act. From the provisions of these sections, we get an idea about the bills in sets. The provisions are as follows: Set of bills : "Bills of exchange may be drawn in parts, each part being numbered and containing a provision that it shall continue payable only so long as the others remain unpaid. All the parts together make a set; but the whole set constitutes only one bill, and is extinguished when one of the parts, if a separate bill, would be extinguished" [Section J32]. Exception : When a person accepts or indorses different parts of the bill in favour of different persons, he and the subsequent indorsers of each part are liable on such part as if it was a separate bill. Holder of first acquired part entitled to all: "As between holders in due course of different parts of the same set, he who first acquired title to his part is entitled to the other parts and the money represented by the bill" [Section 133}. ft is usually found that foreign bills are drawn in sets because of the following important advantages. (1) As foreign bills are sent over long distances and hence, there exists a possibility of loss or delay. In order to reduce the risk of loss in course of transit foreign bills are drawn in sets. (2) In order to facilitate prompt and easy presentment for acceptance as well as payment.

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(11) Inland and Foreign Instruments From the provisions of Sections 11, 12, 104, 134, 136 and 137, we get an idea about meaning, the inland and meaning, protest, etc. of foreign instruments and hence, these sections are given below. Sections from 134 to 137 are included in Chapter XVI of the Act under the heading, "Of International Law". (a) Section 11: Inland Instrument: "A promissoryjioJg. bill of excharige.or cheque drawn or made in India and made payable in, or drawn upon any personreside in India shall be deemed to be an inland instrument''. (b) Section 12 : Foreign Instrument: "Any such instrument not so drawn, made, or made payable shall be deemed to be a foreign instrument". (c) Section 104: Protest of Foreign Bills:' 'Foreign bills of exchange must be protested for dishonour when such protest is required by the law of the place where they are drawn." (d) Section 134: Law governing liability of maker, acceptor or indorser of foreign instrument: "In the absence of a contract to the contrary, the liability of the maker or drawer of a foreign promissory note, bill of exchange or cheque is regulated in all essential matters by the law of the place where he made the instrument, and the respective liabilities of the acceptor and indorser by the law of the place where the instrument is made payable". (e) Section 135: Law of place of payment governs dishonour:' 'Where a promissory note, bill of exchange or cheque is made payable in a different place from that in which it is made or indorsed, the law of the place where it is made payable determines what constitutes dishonour and what notice of dishonour is sufficient". (f) Section 136: Instrument made, etc., out of India, but in accordance with the law of India : "If a negotiable instrument is made, drawn, accepted or indorsed outside India, but in accordance with the law of India the circumstance" that any agreement evidenced by such instrument is invalid according to the law of the country wherein it was entered into does not invalidate any subsequent acceptance or indorsement made thereon within India". (d) Section 137: Presumption as to foreign law : "The law of any foreign country regarding promissory notes, bills of exchange and cheques shall be presumed to be the same as that of India unless and until the contrary is proved".

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(12) Instruments Payable on Demand [Section 19]

There are certain instruments which are payable on demand. Section 19 makes it clear that, "A promissory note or a bill of exchange in which no time for payment is specified and a cheque are payable on demand". Thus, following instruments are payable on demand. (a) Cheques are always payable on demand i.e. when they are presented to the bank in due course of time. (b) Bills, promissory notes which are expressed to be payable on demand or at sight or on presentment [Section 21]. (c) Promissory notes or bills of exchange in respect of which no time limit is specified are also payable on demand. (13) Distinction between a Bill of Exchange and a Promissory Note (a) In abill of exchange there are three parties i.e., the drawer, the drawee and the payee while in a promissory note there are two parties and they are the maker or drawer and the payee. (b) The drawer of the bill is the creditor while the drawer of the promissory note is the debtor. (c) A bill of exchange contains an unconditional order to pay while a promissory note contains an unconditional promise to pay. (d) In a bill of exchange, the acceptance by a drawee is required while the maker of a promissory note is the promiser and is liable to pay. (e) The liability of the drawer of a bill of exchange is secondary and conditional whereas that of a maker of a promissory note is primary and absolute. (f) In a bill of exchange, the drawer and the payee can be one and the same person but a promissory note cannot be made payable to the maker'himself.

ry he

(g) The drawer of a bill of exchange stands in relation with the acceptor and not with the payee but the maker of the promissory note stands in immediate relation with the payee.

27 3

Business Law

(14) Distinction between a Cheque and a Bill of Exchange (i) A cheque is always drawn on a specified banker and therefore a banker/bank is always the drawee. A bill of exchange can be drawn on any person or any bank. (ii) A Cheque is always payable on demand, while a bill, other than a cheque, may be payable on demand or at the expiry of a time. (iii) A cheque requires no acceptance whereas a bill of exchange must be accepted by the drawee before he is called upon to pay the amount of the bill. (iv) In the case of a bill of exchange, three days of grace are allowed unless it is made payable on demand while in the case of a cheque, no such days of grace are allowed and it is always payable on demand. (v)

A cheque can be crossed but not a bill.

(vi) A cheque does not require any stamp to be affixed on it whereas a bill of exchange, except in certain cases, must be stamped. (vii) The payment of a cheque can be countermanded by the drawer whereas the payment of a bill of exchange cannot be countermanded. (viii) The drawer of a cheque is not discharged from his liability if there is any delay in presenting the cheque. A bill of exchange is required to be presented according to the law to the acceptor. (ix) The drawer draws a cheque against his own funds while a bill of exchange may also be drawn to provide the credit to the parties to the bill of exchange. (x) A cheque is not required to be noted or protested for dishonour while a bill, if dishonoured, may be noted or protested. (xi) In the case of cheque, if it is dishonoured, no notice is essential. But in the case of a bill of exchange, the notice of dishonour is essential.

6.3

PARTIES TO A NEGOTIABLE INSTRUMENT __________________

There are various types of negotiable instruments. The parties to some important negotiable instruments are stated below.

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(1) Parties to a Promissory Note (a) Maker r

Maker is the person who promises to pay the certain amount stated in the promissory note. In other words, maker makes or executes the promissory note promissing to pay the amount stated in the promissory note.

(b) Payee Payee is the person to whom the amount of the promissory note is made payable. (c) Holder Holder can be either the payee or the person to whom the promissory note has been endorsed. (d) Endorser and endorsee When the holder of the promissory note indorses the promissory note to somebody else, he becomes the endorser and to whom, it is endorsed, he is known as the endorsee.

(2) Parties to a cheque (j) Drawer : The drawer is a person who draws a cheque on his bank. He is usually the accoiiflt holder of the bank. (ii) Drawee: The drawee is always the bank of the drawer and on that bank, the drawer draws a cheque and orders the bank to pay the amount mentioned therein. (Hi) The payee: The payee is the person to whom the amount is made payable. The payee can be any person or organisation to whom the drawer wants to pay. In Section 7 of the Act the meaning of the payee is given and accordingly "the person named in the instrument, to whom or to whose order the money is by the instrument directed to be paid, is called the "Payee". (iv) Holder: The holder of a cheque can be payee or any other person to whom the cheque has been endorsed.

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(v) Indorser and indorsee: When the holder of cheque endorses the cheque to somebody else, he is called as the endorser and the person to whom it is endorsed, he is known as the endorsee. (3)

Parties to a Bill of Exchange (a) Drawer: The maker of a bill of exchange is called drawer. The drawer i s the person who draws the bill. (b) Drawee: The person on whom the bill is drawn is known as the drawee. "The maker of a bill of exchange or cheque is called the' 'drawer"; the person thereby directed to pay is called the "drawee" [Section 7]. (c) Acceptor: Acceptor is the person who accepts the bill. After a drawee of a bill has put his signature to show his assent upon the bill, he is called the acceptor. Generally the drawee is the acceptor but sometimes a stranger may accept the bill on behalf of the drawee. "After the drawee of a bill has signed his assent upon the bill, or, if there are more parts thereof than one, upon one of such parts, and delivered the same, or given notice of such signing to the holder or to some person on his behalf, he is called the "acceptor" [Section 7]. (d) Payee: Payee is a person to whom the bill is made payable. The drawer or any other person can be the payee. The payee is the real beneficiary under the instrument. (e) Indorser and indorsee: When a holder endorses or transfers the instrument to anybody else, the holder becomes the endorser. The person to whom the bill is endorsed, he is known as an indorsee. (f)

Holder: A person who is legally entitled to the possession of the bill of exchange in his own name and entitled to receive the amount of the bill is called a holder. He is either the original payee or the endorsee. If the bill is payable to the bearer, the bearer is the holder.

(g) Drawee in case of need: Drawee in case of need is a person to whom resort can be had in case of need i.e. when the bill is dishonoured either by non payment or non-acceptance. In such a case, the holder of the bill has to present the same to the drawee in case of need when the original drawee refuses to accept the bill or pay the amount of the bill.' 'When in the bill or in any endorsement thereon, the name of any person is given in addition to the drawee to be restored to in case of need, such person is called a "drawee in case of need" [Section 7]. 276

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The Negotiable Instruments Act,

1881 \

(h) Acceptor for honour: It is permitted that any person may become a party to the bill on his own as an acceptor. When the original drawee refuses to accept the bill or refuses to furnish better security when demanded by the Notary, a person who accepts the bill in order to safeguard the honour of the drawer or any endorser is called the acceptor for honour. "When a bill of exchange has been noted or protested for non-acceptance or for better security, and any person accepts it supra protest for honour of the drawer or any one of the endorsers, such person is called an "acceptor for honour" [Secion 7].

(4)

Capacities of parties to the negotiable instruments According to section 26 of the Act, every person capable of contracting, according to the law to which he is subject, may bind himself and he is bound by making, drawing acceptance, endorsement, delivery and negotiation of a promissory note, bill of exchange or cheque. Any person who is competent to enter into contract can become a party to a negotiable instrument. His capacity to incur liability as a party to a negotiable instrument is coextensive with his capacity to contract. If any party, who makes, accepts, draws, endorses, delivers or negotiate any negotiable instrument, is incompetent to do so, the agreement is void as against that party. But this in no way will diminish the liability of the other competent parties thereto. The different cases of incapacity to incur liability as a party to a negotiable instruments are discussed below. (a) Minor: According to Section 26 of the Act, "a minor may draw, endorse, deliver and negotiate negotiable instruments so as to bind all parties, except himself'. An agreement with a minor is void. He cannot bind himself by becoming a party to"a negotiable instmmentHowever he may draw, endorse, deliver and negotiate a negotiable instrument to bind other parties except himself. The negotiable instrument does not become void merely because a minor is a party to it. (b) Lunatics or persons of unsound mind: Agreements with lunatics, drunkards aBdJdjotsarevoidL Negotiable instrumentsmade or drawn by such persons are void as against these persons provided that they were not capable of forming any rational judgement at the time of execution of the instruments as to the effects of such negotiable instruments. But lunatics may bind themselves by the negotiable instruments if signed by them during lucid intervals. (c) Insolvent: A person, who has been adjudicated as a insolvent, cannot accept 277

Business Law

or endorse a bill. An insolvent cannot sue on an instrument as his property vests in the hands of an official receiver. (d) Agent: Duly authorised agents can draw or accept the negotiable instruments on behalf of their principal. The authority of an agent to draw or to accept or to endorse negotiable instruments must be in clear terms. A secretary, a manager, a director or any such person working as an agent must diclose the name of the firm, company as the case may be on whose behalf such agent signs, endorses or accepts the instrument. The provisions relating to the capacities of an agent are found in Sections 2 7 and 28 which are as follows: Section 27: Agency: "Every person capable of binding himself or of being bound", as mentioned in Section 26, may so bind himself or be bound by a duly authorised agent acting in his name. A general authority to transact business and to receive and discharge debts does not confer upon an agent the power of accepting or indorsing bills of exchange so as to bind his principal. Section 28 : Liability of agent signing: "An agent who signs his name to a promissory note, bill of exchange or cheque without indicating thereon that he signs as agent, or that he does not intend thereby to incur personal responsibility, is liable personally on the instrument, except to those who induced him to, sign upon the belief that the principal only would be held liable." (e) Partnership firm: A partner of a trading firm has an implied authority to draw, /l accept, endorse or negotiate a negotiable instrument. A partner of non-trading firm cannot draw, accept, endorse or negotiate a negotiable instrument unless he gets an express authority to that effect. Of course, in both the cases, liability must be incurred in the name of the firm so as to bind all the partners of the firm. (f)

Joint stock company: A trading j oint stock company has an implied power to draw, accept, endorse or negotiate the bill of exchange. But a non-trading joint stock company has no implied power to deal in promissory notes, bills of exchange etc. A non-trading joint stock company has to obtain his power of drawing, accepting etc. of negotiable instruments by the object clause of the memorandum of association.

(g) Legal representatives : A legal representativejias the all rights to all the Dtiable instruments aftertKe deatFof theliolder. He can 278

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recover the amounts of the instruments. Section 29 of the Act states that a legal representative of a deceased person who signs his name to a promissory note, a bill of exchange or a cheque is liable personally thereon unless he expressly limits his liability to the extent of the assets received by him as such. (h) Hindu joint family: As Jcarta or a manager of a Hindu Joint Family represents the family in all dealings with the third parties, he has an implied authority to contract debts and pledge the credit of the family. He can draw, accept, endorse or negotiate the negotiable instruments on behalf of his family members. Even the minor members of his family are equally liable to the extent of their share in the assets of the family, though they are not personally held liable. (D

Holder According to Section 8 of the Act holder of a negotiable instrument means any person (a) who is entitled in his own name to the possession of the negotiable instrument and (b) who has also the right to receive or recover the amount due thereon from the parties thereto. In order to be a holder, a person must satisfy the conditions mentioned below: (a) Possession of instrument The person must be a de jure holder. He must be entitled to possess the instrument in his own name. His possession must be under some legal and valid title. A thief or any person who finds the instrument or an endorsee under a forged endorsement though in possession of the negotiable instrument, is not a holder in the absence of a legal title of it. Even an agent holding a negotiable instrument for his principal is also not a holder though he has a right to receive the payment. (b) Entitled to receive the amount

jini 5 Of

The person must be entitled to receive the amount of the instrument and give a valid discharge to the buyer. A person may be the bearer of an instrument or payee or endorsee of an instrument but he may not be called a holder of instrument if he is prohibited by law from receiving the amount due on the instrument. It must be remembered that no person can sue upon an instrument unless his name appears thereon either as the payee or the endorsee unless the instrument is made payable to bearer. Moreover, even a true owner unless he is a holder cannot maintain a Suit in the Court of Law. 27 9

Business Law

Following persons are considered the holders of the negotiable instruments: (a) A principal whose name appears on an instrument as the holder though it is executed in the name of his agent for him. (b) Where a negotiable instrument is a bearer one, any person who is in the possession of such instrument is the holder. (c) Where a negotiable instrument is in the name of a partner of a firm, it naturally becomes a holder as it is not a separate entity from the partner. (d) The endorsee of a cheque is called a holder. (e) If a holder of a negotiable instrument is dead, the heirs of the deceased holder become the holders. (f)

A principal on whose behalf a pronote is endorsed in blank and is delivered to his agent, he is a holder of the instrument though his name does not appear on the instrument.

However the following persons are not called holders: (i) A thief or a finder of an instrument is not a holder though he is in possession of an instrument. (ii) The word "entitled" used in the definition of a holder shows that the title of the person who claims to be the holder must be acquired in a lawful manner. A person obtaining the instrument under forgery is not a holder. (iii) When the endorsement of a bill is 'for collection only' the endorsee cannot be a holder. The above mentioned lists are not complete. (II) Holder in Due Course , "Holder in due course' means any person who for the consideration becomes the possessor of a promissory note, a bill of exchange or a cheque if payable to bearer, or payee or endorsee thereof, if payable to order, before the amount mentioned in it becomes payable and without having sufficient cause to believe that any defect existed in the title of the person from whom he derived his title [Section 9].

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Following are the essential qualifications of a holder in due course. (a) He must be a holder A holder to be a holder in due course must be entitled to the possession of the instrument in his name under a legal title and he must also be entitled to recover the amount of the instrument from the parties liable thereto. (b) He must be a holder for valuable consideration .To be a holder in due course, a person must be a holder for valuable consideration and the consideration must not be illegal or void. However, consideration may be past, present, adequate or inadequate. A donee acquiring title to the instrument by way of a gift is not a holder in due course because there is no consideration to the contract and therefore he cannot maintain any suit against the donor in the Court of Law. The house hired for illegal purposes and money due on a promissory note, deposited for the security cannot be recovered by a Suit. (c) He must become a holder of the negotiable instrument before the date of maturity If the negotiable instrument is taken after it becomes due, the person taking it gets the rights of immediate transferor against the other parties and therefore, a person who takes a negotiable instalment on the day on which it becomes payable cannot claim rights of a holder in due course. (d) He must become a holder of the negotiable instrument in good faith Here the term 'good faith' implies that he should not accept the instrument after knowing about the defect or defects in the title to the instrument. A thing is done in good faith when it is done honestly. It is the duty of a person (who takes a negotiable instrument) to examine its contents thoroughly. If the negotiable instrument contains any material alteration or if it is incomplete, he will not become a holder in due course. Thus, he must become a holder and must take the negotiable instrument which is complete and regular on its face. From the above discussion, we can come to the conclusion that a holder of a negotiable instrument is not considered to be a holder in due course if

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(a)

he obtains the negotiable instrument after its maturity, or

(b)

he obtains it by way of a gift; or

(c)

he obtains it for any unlawful consideration, or

(d) he obtains it by some illegal method, or (c) he does not obtain it bonafide.

(Ill) Right and Privileges of a Holder in Due Course A holder in due course gets certain rights and special privileges which an ordinary holder of a negotiable instrument cannot possess. Certain defences which can be set up against an ordinary holder claiming as a negotiable instrument cannot be set up against a holder in due course. Moreover, a holder in due course gets a title to a negotiable instrument free from equities. Various rights and privileges of a holder in due course are summarised below.

(a) Liability of prior parties Every prior party to a negotiable instrument is liable thereon to a holder in due course until the instrument is duly satisfied [Section 36]. This means all prior parties to the negotiable instrument i.e. maker, or drawer, acceptor, intervening endorsers remain liable to the holder in due course until the instrument is duly satisfied.

(b) Instalment purged or cleansed of all defects If a negotiable instrument is passed through the hands of a holder in due course, it gets purged of its defects provided the holder is not the party to the fraud or any illegality in some stage of the journey of the instrument. It means any defect in the title of the transferor will not affect the right of holder in due course. It is really like a current coin when it passes through the hands of a holder in due course. It must be noted here that though a holder in due course can purge a defective title, he cannot create any title unless the negotiable instrument happens to be bearer one. Suppose, a bill of exchange payable to bearer is lost. The finder of the bill delivers the same to X who happens to be holder in due course, X can recover the money of the bill from prior parties. Let us take another example to make 282

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the above mentioned point more clear. Mr. Y, a holder in due course, gets a bill of exchange which was originally obtained by fraud from its drawer. Mr. Y endorses the same to Mr. X by way of gift. Mr. X can sue the acceptor for recovering money because he stands onMj, (c) Privilege in case of inchoate stamped instrument not affected The privilege of a holder in due course to recover money is not at all affected even though the negotiable instrument was originally an inchoate stamped instrument and later on transferor completed the same for a sum greater than what was intended by the maker [Section 20]. (d) No effect of conditional delivery or of special delivery When a negotiable instrument is delivered conditionally or for any special purpose and it is negotiated to a holder in due course a valid delivery of the negotiable instrument is presumed conclusively and a holder in due course acquires a good title to the same [Section 46]. Thus, if promissory note or a bill of exchange is negotiated to a holder in due course, the parties to the instrument cannot just avoid the liability on the ground that the delivery of the instrument was conditional or only for a special purpose. (e) No effect of absence of consideration or presence of an unlawful consideration The defenses on the ground of absence of consideration or of unlawful consideration is not available against the holder in due course. The concerned party responsible for making payment will have to make payment [Section 58] (f) Privilege in case of a fictitious bill When a bill of exchange is drawn and made payable to drawer's order in fictitious name and is endorsed in the same hand as drawer's signature, the acceptor cannot avoid the liability to the holder in due course on the ground that the name was fictitious. [Section 42]. (g) Estoppel against denying original validity of instrument The defenses on the ground of original invalidity of the instrument cannot be put forth against the holder in due course. The maker of negotiable instrument and the acceptor of a bill for the honour of the drawer cannot deny, in a suit thereon 283

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by a holder in due course, the validity of the instrument as originally made or drawn. [Section 120] (h)

Estoppel against denying capacity of payee to endorsee The acceptor of a bill payable to order and the maker of a note cannot deny, in a suit filed against them by a holder in due course, payee's capacity on the date of a note or a bill to endorse the same [Section 121].

(i)

Estoppel against endorser to deny capacity of prior parties An endorser, on a suit thereon by the subsequent holder, cannot deny the signature or capacity of any prior party to the instrument because he, by endorsing the instrument, gives guarantee that all previous endorsements are genuine and all the prior parties had capacity to enter into valid contracts.

(IV) Distinction between Holder and Holder in Due Course Holder is different from a holder in due course. A holder in due course enjoys certain rights and privileges. The important points showing the difference between them are mentioned below. (a) A holder can obtain an instrument without consideration while a person cannot be a holder in due course unless he obtains an instrument with consideration and for value. (b) If an instrument is inchoate, a holder of such instrument cannot get good title in the instrument. While holder in due course acquires a good title even if the instrument is inchoate. (c) A holder of an instrument may acquire the instrument if it becomes payable. But the person is not treated as a holder in due course if he acquires an instrument when it becomes payable. (d) A holder need not bother about the defect, if any, in the title of the instrument. But no holder is considered a holder in due course who acquires an instrument knowingly the defect of the title. 6.5

NEGOTIATION AND TYPES OF ENDORSEMENT

One of the important characteristics of a negotiable instrument is its free transferability from one person to another. Such transfer can take place either by negotiating the instrument 284


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or by assigning the same. According to Section 14 of the Act, "When a promissory note, a bill of exchange or a cheque is transferred to any person, so as to constitute that person the holder thereof, the instrument is said to be negotiated." Thus, it is a process of transferring the ownership, right, title, interest of a person in a negotiable instrument to another person so as to give a good title to the transferee and make a transferee a holder of such instrument. Negotiation does not mean a simple transfer. Simpte transfer may not necessarily involve the transfer of property in the negotiable instrument but negotiation implies the transfer of property or ownership. Suppose if Mr. X hands over a cheque to Mr. Y as the payment of goods purchased, here Mr. X has negotiate the instrument. But if he hands over a cheque to Mr. Y asking him to keep the same in his safe custody, the cheque (or instrument) is not negotiated to Mr. Y because thereby Mr. Y does not become its holder but only a bailee. The test for ascertaining whether an instrument has been negotiated or not is to see whether the transferee becomes entitled in his own name to the possession of the instrument as a result of transfer and recover the amount of such instrument. Thus, there are two essential ingredients of negotiation which are mentioned below: (a) There must be transfer of a negotiable instrument to another person; and (b) As a result of such transfer, the transferee must become the holder of the instrument. (I)

Procedure of transfer or modes of negotiation

A negotiable instrument can be transferred to another person in the following two ways-fa)

Negotiation by delivery; and Ch)

Negotiation by endorsement and delivery.

Instruments payable to bearer can be transferred by mere delivery, while instruments payable to the order are transferred by endorsement and delivery.

(a)

Negotiation by delivery Section 46 of the Act throws light on the term 'delivery'. It states that, "The making, acceptance or endorsement of a promissory note, bill of exchange or cheque is completed by delivery, actual or constructive." (a) As between parties standing in immediate relation; delivery to be effectual must be made by the party making, accepting or endorsing the instrument, or by a person authorised by him in that behalf.

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(b) As between such parties and any holder of the instrument other than a holder in due course, it may be shown that the instrument was delivered conditionally or for a special purpose only and not for the purpose of transferring absolutely the property therein. (c) A promissory note, bill of exchange or cheque payable to bearer is negotiable by the delivery thereof. (d) A promissory note, bill of exchange or cheque payable to order is negotiable by the holder by endorsement and delivery thereof. Subject to the provisions of Section 58 of the Act, a negotiable instrument [a promissory note, a bill of exchange or a cheque] payable to bearer is negotiable by delivery thereof [Section 47]. Section 58 states that when a negotiable instrument has been lost, or has been obtained from any maker, acceptor or holder thereof by means of an offence or fraud, or for an unlawful consideration, no possessor or endorsee who claims through the person who found or so obtained the instrument is entitled to receive the amount due thereon from such maker, acceptor or holder, or from any party prior to such holder, unless such possessor or endorsee is, or some person through whom he claims was a holder thereof in due course. Thus, delivery of a negotiable instrument is a voluntary transfer of possession of the negotiable instrument. When an instrument is negotiated by delivery, it is not necessary for a transferor to put his or her signature on the instrument and therefore, there is no privity of any contract between the transferor and any subsequent transferee. Exception: If a promissory note, bill of exchange, or cheque delivered on condition that it is not to take effect except in a certain event, it is not negotiable (except in the hands of a holder in due course without notice of the condition) unless such event happens [exception to Section 47]. Delivery of a negotiable instrument may be actual delivery or constructive delivery. In the actual delivery, the change of the actual possession of the instrument takes place. Thus, actual delivery consists in the physical act of delivering the instrument or handing over the instrument by one person to the another or on his behalf to his agent. In the case of constructive delivery, delivery takes place without passing the actual possession of the instrument. A person is said to have constructive possession of a negotiable instrument when it is in the possession of his agent, servant, clerk or any other person who holds the same on behalf of that person. Suppose Mr. X has endorsed a promissory note in favour of Mr. Y and holds the same on behalf of Mr. Y. There is constructive delivery of the promissory note by Mr. X to Mr. Y. 286

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There is yet another type of delivery known as a conditional delivery. In that case, a negotiable instrument is conditionally delivered or is delivered for some special purpose only. When an instrument is thus delivered with some condition attached thereto, the negotiation is not considered to be valid unless the condition is fulfilled. (b)

Negotiation by endorsement and delivery Subject to the provision of Section 58 [which is stated earlier] , a promissory note, cheque or a bill of exchange payable to order is negotiable by the holder by endorsement and delivery thereof [Section 48]. Thus, the delivery is the common element between the two modes of negotiation i.e. Negotiation by mere delivery and negotiation by endorsement and delivery. Activity C

Mr. Kale , the holder of a negotiable instrument payable to bearer, which is in the hands of Mr. Kale's banker ,who is at the time the banker, of Mr. Jatin,direct the banker to transfer the instrument to Mr. latin's credit in the banker's account with Mr. Jatin. The banker Joes so, and accordingly now possess the instrument as Mr. latin's agent. Whether the instrument is negotiated and what is the legal position of Mr. Jatin?

(II) Types of Endorsement

The literal meaning of the term endorsement is writing on an instrument. But in the Negotiable Instruments Act, it means the writing of person's name on the face or back of a negotiable instalment or on a slip of paper attached thereto which is done for the purpose of negotiation [Section 15]. The person who signs on the back or on the face of the instrument or on the slip attached thereto is called the endorser and the person to whom the instrument is endorsed is called the endorsee. An endorsement can be made by the holder of an instrument or by the maker who signs it otherwise than a maker. A payee or an endorsee may also endorse the instrument if they are holders of the instrument. Endorsement may be of various types which are as follows:

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(a) General or blank endorsement When a endorser signs his name either on the back or face of the instrument the endorsement is said to be blank or general [Section 16(1)]. In a blank endorsement, endorsee is not specified and therefore-the instrument become payable to bearer even though it was made originally payable to order [Section 54]. For example, a bill is made payable to the order of Mr. X who puts his signature on the back of the bill. This is an endorsement in blank by Mr. X and in such case, the property in the bill (negotiable instrument) may pass by mere delivery as if the instrument is payable to the bearer. It should be noted that there is no difference between the negotiable instrument endorsed in blank and one payable to the bearer.

(b) Full or special endorsement When an endorser signs the instrument and adds a direction to pay the amount mentioned therein to or to the order of a specified person, the endorsement is said to be in full [Section 16 (1)]. For example, if an endorsement, "pay to Mr. Y" or "pay to Mr. Y or order" followed by the endorser's signature, it is nothing but the endorsement in full. From this, it becomes clear that there are two essential conditions in the full or special endorsement (i) It should specify the name of the person to whom or to whose order the payment must be made and (ii) Signature of the person who endorses the instrument i.e., endorser. Conversion of instrument in blank into endorsement in full Endorsement in blank can be converted in full. The holder of a negotiable instrument endorsed in blank may, without signing his own name by writing above the endorser's signature a direction to pay to any other person as an endorsee; convert the endorsement in blank into an endorsement in full, and the holder does not thereby incur the responsibility of an endorser [Section 49]. For example, Y is the holder of a bill which is endorsed by X in blank. If Y writes over the signature of X the word "pay to A or order" Y is not liable as an endorser but the writing operates as an endorsement in full from X to A. Once the blank endorsement is converted into endorsement in full, it takes away the 'payable to bearer' character of the instrument. Endorsement in blank followed by an endorsement in full If an endorsement in blank is subsequently endorsed in full, the instrument remains

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payable to bearer and negotiable by delivery as against all parties prior to endorser in full. Such endorser in full cannot be held liable as the instrument except by the endorsee in whose favour such endorsement in full is made or by any party who derives a title through such endorsee in full [Section 55]. For example R is the payee, holder of a bill. He endorses the same in blank and delivers it to S and S, in turn, endorses it in full to D or order. D without endorsement hands over the bill to P. P as the bearer is entitled to receive payment or to sue the drawer of the bill; acceptor or R who endorsed the bill in blank. He cannot sue S or D. (c)

Partial endorsement According to Section 56 of the Act, "No writing on a negotiable instrument is valid for the purpose of negotiation if such writing purports to transfer only a part of the amount appearing to be due on the instrument; but where such amount has been partly paid, a note to that effect may be endorsed on the instrument, which may then be negotiable for the balance." Thus, a partial endorsement is not valid. A negotiable instrument cannot be endorsed for a part of its value. If it is done, it may cause inconvenience to prior parties and also interference with the free circulation of the instrument. However, there is an exception to this rule. Where an instrument has been partly paid up, the fact of the part payment may be endorsed on the instrument and thereafter it can be negotiated for the residue. For example, suppose X is the holder of a note for Rs. 5007- who endorses it to Y and writes on the note 'Pay Rs. 1007- to N'. This is not valid. But if he receives Rs. 2007- and mentions the same on the note and then endorses that 'pay Y or order being unpaid residue of the note'. The endorsement is valid.

£$ Activity D : 1 am a holder of a promissory note for Rs. 10007-. I wrote on it," Pay Mr. Fernandez Rs. 500/-" and 1 endorse the note. Whether the endorsement is invalid for the purpose of negotiation. Explain.

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(d) Restrictive endorsement Restrictive endorsement restricts the further negotiability of the negotiable instrument. Such endorsement entitles that holder of the instrument to receive the amount on the instrument for a specific purpose. The endorsement is restrictive when it contains express words to that effect. Following are some examples of the restrictive endorsement. Pay Mr. R only; pay Mr. Y for my use; Pay Mr. Aon account of B. There are certain effects of the restrictive endorsement. It prohibits or excludes further negotiation or it may merely constitute the endorsee or his agent to endorse the instrument or to receive its contents for the endorser or some other specified person [Section 50]. (e) Conditional endorsement In the conditional endorsement, the liability of the endorser is limited or negative. A conditional endorsement is different from a restrictive endorsement. A conditional endorsement limits or negatives the liability of the endorser while a restrictive endorsement places certain restriction on the negotiability of the instrument. There are various forms of conditional endorsement which are discussed below. (i) Sans Recourse endorsement: In this type of endorsement, the endorser expressly excludes his liability for dishonour of the negotiable instrument towards the endorsee or any other subsequent holder. This can be done by adding the words 'sans recourse' or without recourse to the endorsement after the name of the endorsee. Such endorsement can be done in the following way. 'Pay Mr. X or order without recourse to me' or 'Pay Mr. X or order at his risk' or 'Pay Mr. X or order sans recourse.' If the instrument is dishonoured and the endorsement is sans recourse, the subsequent holder or the endorsee cannot look to the endorser for the payment of the amount of the instrument. Section 52 of the Act clearly states that where an endorser so excludes his liability and afterwards becomes the holder of the instrument, all intermediate endorsers are liable to him. Suppose Mr. X is the payee of the instrument and signs his name, adding the words "Without recourse to me". Upon his endorsement, Mr. X incurs no liability. Now further suppose 290

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that Mr. X, the holder, after adding the words "Without recourse to me and putting his signature, the instrument is transferred to Mr. Y and Mr. Y in turn endorses the same to Mr. N and Mr. N to Mr. M Mr. M again endorses the same to Mr. X Now, Mr. X can recover the amount of the instrument from Mr. Y, Mr. M and Mr. N or any of them. (ii) Facultative endorsement: When an endorser abandons or gives up some rights or increases his own liability under the instrument by express words, the endorsement is said to be facultative. If the endorsement is done by Mr. Y who is the holder of the bill in the following manner, it is said to be facultative endorsement. "Pay Mr. M or his order. Notice of dishonour waived." Here, as a result of this endorsement, the endorsee, Mr. M, is relieved of his duty of giving notice of dishonour to Mr. Y, the endorser and Mr. Y remains liable to the endorsee for the non-payment of the bill even though no notice of dishonour has been given to him. Here, Mr. Yhas given up his right of receiving notice in case of dishonour of the bill. (iii) Sans Frais endorsement: When the endorser of the negotiable instrument does not want the endorsee or any subsequent holder of the instrument to incur any expenses on his account upon the instrument, the endorsement is said to be 'sansfrais' endorsement. (iv) Liability depends upon contingency: In this type of endorsement, an endorser endorses a negotiable instruments in such a manner so that his liability is made dependent upon the happening of a specified event which may happen or may not happen. If the particular event does not take place or becomes impossible to happen, the liability of the endorser will come to an end. Following are the examples of this type of endorsement: (a)

Pay Mr. X or order on the arrival of aeroplane Jayanti

(b)

Pay Mr. Y or order on the marriage of Mr. N

(c)

Pay Mr. N or order on the out break of war

(III) The Duration of Negotiability it should be remembered that payment of a negotiable instrument must be made at or after the maturity of such instrument to stop further negotiability of the instrument. If the instrument

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is paid before its maturity, it is not discharged and can further negotiated. Section 60 of the Act states that, "A negotiable instrument may be negotiated (except by the maker, drawee or acceptor after maturity) until payment or satisfaction thereof by the maker, drawee or acceptor at or after maturity, but not after payment or satisfaction." This implies that if the amount of an instrument has been paid before its maturity by its aceptor or maker, he can reissue the same before its due date. 6.6

DUTIES AND LIABILITIES OF PAYING BANKER

Liability of drawee of cheque i.e. Paying Banker As per Section 31, the drawee of a cheque having sufficient funds of the drawer in his hands properly applicable to the payment of such cheque must pay the cheque when duly required so to do, and, in default of such payment, must compensate the drawer for any loss or damage caused by such default

Example The branch of a bank on whom a cheque is drawn is called a drawee bank or a paying bank. Suppose you have an account with Bank of Maharashtra, Pune branch and you have obtained a cheque book from them. Suppose you issue a cheque for Rs. 1,000/-favouring BSNL. In this case, Bank of Maharashtra, Pune branch is called a drawee bank or a paying bank. If you have balance of more thanRs. 1,0007- in your account, and the cheque is in order in other respects, Bank of Maharashtra, Pune branch must pass this cheque. If the bank returns a cheque unpaid due to a mistake on its part, then it is called wrongful dishonour. In such case, the drawee bank is liable to the drawer. It must be noted that, if the cheque is returned due to a mistake on the part of the bank, the payee will be the immediate sufferer. Yet payee cannot claim compensation from Paying Bank. Right to claim compensation from bank is only with the account holder and not the payee. Protection to Paying Banker As per Section (1), where a cheque payable to order purports to be endorsed by or on behalf of he payee, the drawee is discharged by payment in due course. As per Section (2), where a cheque is originally expressed to be payable to bearer, the drawee is discharged by payment in due course to the bearer thereof, notwithstanding any endorsement whether in full or in blank appearing thereon, and notwithstanding that any such endorsement purports to restrict of exclude further negotiation. 292

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As per Section 85A., where any draft purports to be endorsed by or behalf of the payee, the bank is discharged by payment in due course. This means, it is not the duty of paying banker to verify the genuineness of the endorsement. I Example 1 Mr.Rahul has issued an order cheque to Mr. Marshal. Mr. Rahul has stolen it and forged the signature of Mr. Marshal and endorsed it to Mr. Shankar. Mr.Shankar has presented it to the paying bank. The paying bank does not know that Mr. Rahul has forged the signature of Mr. Marshal on the endorsement. Hence, the paying bank will not beheld liable if it passes the cheque. Material alteration

Material alteration means any major change in the original intention of the parties. Examples of Material alteration. 1.

Converting an order cheque into a bearer cheque

2.

Canceling a crossing

3.

Alteration in Date, Amount or name of the Payee

4.

Converting Full Endorsement in to Blank endorsement

All such alterations require drawer's full signature. Examples of Immaterial alteration. 1.

Converting a bearer cheque into an order cheque

2.

Crossing an uncrossed cheque

1

Converting General crossing into special crossing or not negotiable crossing or Account Payee Crossing.

4. Converting a Blank Endorsement in to a Full endorsement. 5. Writing the date if the date is blank. 6.

Writing the name of the payee, if the space is blank.

7. Writing the amount if the space is blank. Immaterial alterations do not require drawer's signature. 293

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As per Section 87, any material alteration of a negotiable instrument renders the same void as against anyone who is a party thereto at the time of making such alteration and does not consent thereto, unless it was made in order to carry out the common intention of the original parties; Alteration by endorsee:- And any such alteration, if made by an endorsee, discharges his endorser from all liability to him in respect of the consideration thereof. Payment of instrument on which alteration is not apparent As per Section 89(1), where a promissory note, bill of exchange or cheque has been materially altered but does not appear to have been so altered, or where a cheque is presented for payment which does not at the time of presentation appear to be crossed or to have had a crossing which has been obliterated, payment thereof by a person or banker liable to pay an paying the same according to the apparent tenor thereof at the time of payment and otherwise in due course, shall discharge such person or banker liable to pay and paying the same according to the apparent tenor thereof at the time of payment and otherwise in due course, shall discharge such a person or banker from all liability thereon, and such payment shall not be questioned by reasons of the instrument having been altered, or the cheque crossed. As per Section 89 (2), where the cheque is an electronic image of a truncated cheque, any difference in apparent tenor of such electronic image and the truncated cheque shall be a material alteration and it shall be the duty of the bank or the clearing house, as the case may be, to ensure the exactness of the apparent tenor of electronic image of the truncated cheque while truncating and transmitting the image. As per Section 89 (3), any bank or a clearing house which receives a transmitted electronic image of a truncated cheque, shall verify from the party who transmitted the image to it, that the image so transmitted to it and received by it, is exactly the same.

Example Mr. Abhijeet has issued a cheque favouring Mr. Subhas or bearer for Rs.5,000/-. Mr. Rahul has stolen it and altered the payee's name as Mr. Rahul and altered the amount to Rs.50,000/-. Alteration was not visible to naked eyes. Bank paid the amount of Rs.50,000/ - to Mr.Rahul. Mr. Abhijeet claimed from Bank Rs. 45,000/-. Paying Banker is not liable because the alteration is not visible to naked eyes. Normally, Paying banker takes additional precaution of screening the cheque through an Ultra Violet Ray Machine if the amount of cheque is very large or there is some doubt about the genuineness of the cheque. But this is not feasible in case of each and every cheque. 294

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This leads us to a question as to what is 'payment in due course' As per Section 10, 'Payment in due course' means payment in accordance with the apparent tenor of the instrument in good faith and without negligence to any person in possession thereof under circumstances which do not afford a reasonable ground for believing that he is not entitled to receive payment of the amount therein mentioned. The paying banker is entitled to return the cheque in the following cases. 1.

There are no sufficient funds in the account of the drawer.

2.

The cheque is undated, post dated or irregularly dated.

3.

The cheque is stale or out of date, i.e Validity period (6 months) is over

4.

The cheque is not signed.

5.

The signature does not tally with the specimen signature.

6.

Material Alteration is not confirmed with full signature of the drawer.

7.

Endorsements are irregular or faulty.

8.

Amount in words and figures differs.

9.

Hand writing is illegible.

10. In case of joint operation, the cheque is signed by only one person. 11. The drawer has deceased 12. Payment stopped by the drawer H. Refer to Drawer Whenever a bank returns a cheque, he will issue a reason memo. Normally it is a printed format contained the usual reasons for return. They indicate the serial number of the reason.

Crossing To prevent frauds in encashment of cheques, there is a system called Crossing. Crossing is an instruction to paying bank not to make cash payment to payee. Payment should be made only through an account. Even if there is a fraud, the culprit can be traced, because he has an account, he has given photograph, introduction and address proof.

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Types of Crossing: 1.

General Crossing

2.

Special Crossing

3.

Not Negotiable Crossing

4.

Account Payee Crossing

5.

Double Crossing

Cheque crossed generally As per Section 123, where a cheque bears across its face an addition of the words "and company" or any abbreviation thereof, between two parallel transverse lines, that addition shall be deemed a crossing, and the cheque shall be deemed to be crossed generally. Example: Cheque crossed

specially

As per Section 124, where a cheque bears across its face an addition of the name of a banker, either with or without the words "not negotiable", that addition shall be deemed a crossing, and the cheque shall be deemed to be crossed specially, and to be crossed to that banker. Example: Bank of Maharashtra, Pune Branch As per Section 126, where a cheque is crossed generally, the banker on whom it is drawn shall not pay it otherwise than to a banker. Payment of cheque crossed specially.- Where a cheque is crossed specially, the banker on whom it is drawn shall not pay it otherwise than to the banker to whom it is crossed, or his agent for collection.

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Cheque bearing 'not negotiable' As per Section 130, a person taking a cheque crossed generally or specially, bearing in either case the words "not negotiable", shall not have and shall not be capable of giving, a better title to the cheque than that which the person from whom he took it had. Not Negotiable Account Payee Crossing This type of crossing is not defined by Negotiable Instruments Act. It is very much in practice. It increases the safety of a cheque and prevents frauds. It is an instruction to collecting bank to collect the amount of cheque only if the payee is having account with him. If the payee does not have an account with any bank, he cannot encash the cheque. There is no difference between bearer or order once the account payee crossing is done. Account Payee Only Account Payee and Not Negotiable Crossing are used in Combination to have highest safety. Account Payee Only Not Negotiable After combining the cheques payable to bearer or order and crossed and uncrossed we can have the following types of cheques.

s. No. 1

Particulars

Bearer or Crossed or Order Uncrossed

How paid?

Uncrossed Bearer Bearer Cheque

Uncrossed

In cash to any bearer. Normally issued for withdrawing cash for self. Unsafe if issued to others

2

Uncrossed Order Cheque

Uncrossed

In cash to a particular payee/ endorsee. Bank will have to identify the payee/endorsee

3

Crossed Bearer Bearer Cheque

Crossed

Payment through current account of any body or SB account of payee.

Order

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I is

Particulars

Bearer or Crossed or Uncrossed Order

How paid?

4

Crossed Order Cheque

Order

Crossed

Payment through account of particular payee or endorsee. Collecting Bank should have the account of payee or endorsee

5

Account Payee Bearer Cheque

Bearer

Account Payee Crossed

Payment through account of particular payee. Collecting Bank should have the account of payee.

6

Account Payee Order Cheque

Order

Account Payee Crossed

Payment through account of particular payee. Collecting Bank should have the account of payee.

7

Specially Bearer Crossed Bearer Cheque

Specially Crossed Payment through current account to a bank of any body or SB account of payee with the bank named in the crossing. Other banks cannot collect this cheque.

8

Specially Crossed Order Cheque

Order

Specially Crossed Payment through account of to a bank particular payee or endorsee with the bank named in the crossing. Other banks cannot collect this cheque

9

Not negotiable crossed bearer cheque

Bearer

Not negotiable crossed

Payment through current account of any body or SB account of payee. If it is a stolen cheque, the payee will have to refund the amount.

10

Not negotiable crossed Order cheque

Order

Not negotiable crossed

Payment through account of particular payee or endorsee. Collecting Bank should have the account of payee or endorsee. If it is a stolen cheque, the payee will have to refund the amount.

11

Account Payee Order Not Negotiable crossed Order Cheque

Not negotiable crossed and Account Payee crossed

Payment through account of particular payee. Collecting Bank should have the account of payee. If it is a stolen cheque, the payee will have to refund the amount.

s. No.

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Crossing under Serial No. 11 is the safest mode of issuing a cheque.

- M A |. 1MH 4M

** .'* 1f? *»»

/g. 6.7 : Account Payee crossed Cheque Payable to Bearer & Activity E: Collect a copy of a reason memo from a bank and list the reasons which are not given in the above list.

6.7

DUTIES AND LIABILITIES OF COLLECTING BANKER

You have received a cheque from your customer. You deposit in your account with your banker. Then your bank collects it from the paying banker and credits the amount to your account. In this case the bank with which you are having an account is called collecting bank. If you issue a cheque to your supplier then, your bank will be called as a Paying Bank. Hence, one bank can act as both Paying Bank and Collecting Bank. êction 131 gives protection to Collecting Bank

is per Section 131, a banker who has in good faith and without negligence received payment for a customer of a cheque crossed generally or specially to himself shall not, in 299

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case the title to the cheque proves defective, incur any liability to the true owner of the cheque by reason only of having received such payment. Explanation I : A banker receives payment of a crossed cheque for a crossed cheque for a customer within the meaning of his section notwithstanding that he credits his customer's accounts with the amount of the cheque before receiving payment thereof. Explanation II : It shall be the duty of the banker who receives payment based on an electronic image of a truncated cheque held with him, to verify the prima facie genuineness of the cheque to be truncated and any fraud, forgery or tampering apparent on the face of the instrument that can be verified with due diligence and ordinary care. A collecting banker gets protection if he fulfils the following conditions. 1 ) A collecting banker acts in good faith and without negligence 2)

Collects cheque for a customer

3)

Cheque is crossed generally or specially to himself

If the banker does not follow the procedure for opening the account of a customer and if the customer commits fraud, banker will be considered as negligent and he will be held liable for the loss committed by the drawer. Therefore Banks are very strict in following the procedures. These procedures are known as Know Your Customer (KYC) norms. They collect Photographs, PAN Card and Address proof from customer besides taking introduction from an existing account holder.

Activity F : Visit a bank and ask about the precautions that the bank takes before opening the account to prevent the frauds. List the documents to be submitted to the bank for opening a new account.

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6.8


BOUNCING OF A CHEQUE- A CRIMINAL OFFENCE _____________

These provisions were incorporated in the year 1988 with a view to encourage the culture of use of cheques and enhancing the credibility of the instrument. Section 138 deals with dishonour of cheque for insufficiency of funds in the accounts and circumstances under which it can become a criminal liability. Where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge, in whole or in part, of any debt or other liability, is returned by the bank unpaid, either because of the amount of money standing to the credit of that account is insufficient to honour the cheque or that it exceeds the amount arranged to be paid from that account by an agreement made with that bank, such person shall be deemed to have committed an offence and shall without prejudice to any other provisions of this Act, be punished with imprisonment for "a term which may extend to two year", or with fine which may extend to twice the amount of the cheque, or with both: Provided that nothing contained in this section shall apply unless(a) The cheque has been presented to the bank within a period of six months from the date on which it is drawn or within the period of its validity, whichever is earlier. (b) The payee or the holder induce course of the cheque, as the case may be, makes a demand for the payment of the said amount of money by giving a notice, in writing, to the drawer, of the cheque, within thirty days of the receipt of information by him from the bank regarding the return of the cheques as unpaid, and (c) The drawer of such cheque fails to make the payment of the said amount of money to the payee or, as the case may be, to the holder in due course of the cheque, within fifteen days of the receipt of the said notice. Explanation: For the purpose of this section, 'debt or other liability' means a legally enforceable debt or other liability As per Section 139. it shall be presumed, unless the Contrary is proved, that the holder of a cheque received the cheque of the nature referred to in Section 138 for the discharge, in whole or in part, of any debt or other liability. s per Section 140, it shall not be a defence ;n a prosecution of an offence under Section .)8 that the drawer had no reason to believe when he issued the cheque that the cheque may be dishonoured on presentment for the reasons stated in that section. 301

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The following conditions should be fulfilled if the bouncing of a cheque has to become criminal offence. 1.

Cheque should have been issued towards discharge of a debt or other liability. However payee need not prove that there was debt. The burden of proof lies on the drawer to show that there was no debt or liability.

2.

Cheque should have been returned unpaid with the reason 'Funds insufficient'. 'Account Closed', 'Payment stopped by the drawer', 'Exceeds Arrangement', 'Not arranged for' are equivalent to 'Funds insufficient'. If the reason is 'refer To Drawer', it depends whether the balance was there in the account or not.

3.

Cheque should have been presented within its validity period or 6 months from the date appearing on the cheque. The cheque can be presented many times as long as it is within validity period. It is not compulsory for the payee to take criminal action on the first occasion.

4.

Payee/Holder in due course should have been issued notice to drawer within 30 days from the date of intimation of dishonour.

5.

The drawer should have failed to make payment within 15 days from the date of receiving the notice.

6.

Payee/Holder in due course should have been filed a case in the Court within 30 days from the date of expiry of 15 days period available to drawer for payment.

Only if all the above conditions are fulfilled, then it will amount to criminal offence. Punishment in case of bouncing of a cheque Imprisonment up to 2 years. Or Fine up to twice the amount of cheque or both.

Example:

302

a)

Mrs. Swarupa issud a cheque to Mrs. Rajrupa on 1-12-2007 drawn on Bank of Maharashtra, Pune Branch for Rs.5,0007-

b)

Mrs. Rajrupa deposited this cheque with HDFC Bank, Pune Branch on 2-12-2007.

c)

HDFC Bank presented the cheque to Bank of Maharashtra, Pune Branch on 4-122007.

d)

Bank of Maharashtra, Pune Branch returned the cheque to HDFC Bank, Pune Branch with a reason memo "Funds Insufficient" on 6-12-2007.

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e)

HDFC Bank, Pune Branch informed Mrs. Rajrupa that the cheque has been returned unpaid on 7-12-2007.

f)

Mrs. Rajrupa received this intimation on 8-12-2007. Now, Mrs. Rajrupa has two options. 1) To represent the cheque 2) To take action under section 138 of NI Act. Let us assume that Mrs. Rajrupa decided to take action under section 138 of NI Act.

g)

Mrs. Rajrupa dispatched a notice to Mrs. Swarupa on 25-12-2007 demanding the payment of money. (The last day to issue notice was 18-12-2007 + 30 days = 171-2008)

h) Mrs. Swarupa received this notice on 30-12-2007. She has time up to 14-1-2008 (30-12-2007 + 15 days = 14-1-2008) to make the payment and avoid criminal action. This is a chance given to bonafide defaulters to make the payment. Let us assume that Mrs. Swarupa has not paid the amount within 14-1-2008. i) Mrs. Rajrupa filed a case at Judicial Magistrate of the first class on 25-1 -2008. (The last day to file case was 14-1-2008 + 30 days = 13-2-2008)

Format of Notice: From: Mrs. Rajrupa, Anandnagar, Pune To, Mrs. Swarupa, Abhijeetwadi, Pune Dear Madam, (ByRegdADPost) Reg: Sub: Dishonour of cheque issued by you. This is to inform you that the Cheque. No 12345 dated 1-12-2007 issued by you in our favour drawn on Bank of Maharashtra, Pune Branch has been dishonoured by your bank on 6-12-2007. with the reason "Insufficient Funds". Please make the payment of Rs.5,0007- (Rs.Five Thousand only) within 15 days from the date of receipt of this notice. We shall be constrained take criminal action against you under section 138 of NI Act if we do not received the payment from you. Thanking you, Yours Faithfully, Signature 30 3

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Notice should be sent by Registered Post. Even if the drawer refused to take the cheque or the door is closed, it will be deemed that the notice is served on him. It is not necessary to send notice through Advocate.

Offences by Companies As per Section 141 (I), if the person committing an offence under section 138 is a company, every person who, at the time the offence was committed, was in charge of, and was responsible to the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and proceeded against and punished accordingly; Provided that nothing contained in this sub-section shall render any person liable to punishment if he proves that the offence was committed without his knowledge, or that he had exercised all due diligence to prevent the commission of such offence. "Provided further that where a person is nominated as a Director of a company by virtue of his holding any office or employment in the Central Government or State Government or a financial corporation owned or controlled by the Central Government or the State Government, as the case may be, he shall not be liable for prosecution under this Chapter. (2) Notwithstanding anything contained in sub-section (1), where any offence under this Act has been committed by a company and it is proved that the offence has been committed with the consent or connivance of, or is attribute to, any neglect on the part of, any director, Manager, secretary, or other office of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly. Explanation: For the purpose of this section.

Company includes firms also Cognizance of offences As per Section 142, (a) No court shall take cognizance of any offence punishable under Section 138 except upon a complaint, in writing, made by the payee or, as the case may be, the holder in due course of the cheque; (b) Such complaint is made within one month of the date on which the cause of action arises under clause (C) of the proviso to Section 138: ' 'Provided that the cognizance of a complaint may be taken by the Court after the prescribed period, if the complainant satisfies the Court that he had sufficient cause for not making a i complaint within such period. 304

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(c) No court inferior to that of a Magistrate or a Judicial Magistrate of the first class shall try any offence punishable under Section 138]. As per Section 143(1), Judicial Magistrate of the first class or by a Metropolitan Magistrate has power to try cases summarily. The maximum imprisonment will be one year and minimum fine will be Rs.5,0007- in case of summary trial. As per Section 143(2), the trial of a case under this section shall, so far as practicable, consistently with the interests of justice, be continued from day to day until its conclusion, unless the Court finds the adjournment of the trial beyond the following day to be necessary for reasons to be recorded in writing. (3) Every trial under this section shall be conducted as expeditiously as possible and an endeavour shall be made to conclude the trial within six months from the date of filing of the complaint.

Mode of Service of Summons As per Section 144(1), notwithstanding anything contained in the Code of Criminal Procedure, 1973, (2 of 1974) and for the purposes of this Chapter, a Magistrate issuing a summons to an accused or a witness may direct a copy of summons to be served at the place where such accused or witness ordinarily resides or carries on business or personally works for gain, by speed post or by such courier services as are approved by a Court of Session. As per Section 144(2) Where an acknowledgment purporting to be signed by the accused or the witness or an endorsement purported to be made by any person authorised by the postal department or the courier services that the accused or the witness refused to take delivery of summons has been received, the Court issuing the summons may declare that the summons has been duly served.

Evidence on Affidavit As per Section 145 (1) Notwithstanding anything contained in the Code of Criminal Procedure, 1973, (2 of 1974.) the evidence of the complainant may be given by him on affidavit and may, subject to all just exceptions be read in evidence in any enquiry, trial or other proceeding under the said Code. (2) The Court may, if it thinks fit, and shall, on the application of the prosecution or the accused, summon and examine any person giving evidence on affidavit as to the facts contained therein.]

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As per Section 146, the Court shall, in respect of every proceeding under this Chapter, on production of bank's slip or memo having thereon the official mark denoting that the cheque has been dishonoured, presume the fact of dishonour of such cheque, unless and until such fact is disproved. As per Section 147, notwithstanding anything contained in the Code of Criminal Procedure, 1973, (2 of 1974.) every offence punishable under this Act shall be compoundable. JS$ Activity F: Collect a case law from a journal or a book or an advocate pertaining to bouncing of a cheque. Write the issue involved in the case and the decision of the Court.

6.9 SUMMARY

xV

<

Negotiable Instruments are documents of certain type, used in commercial transactions and monetary dealings. The term NegotiaBIe literally means "a document transferable by delivery". Thus in India only three Kinds of instruments are recognised as negotiable Instruments i.e, promissory note, bills of exchange and cheque. The person legally entitled to receive moneyMue on the instrument, is called the holder. A person who obtained the possession of the instruments by illegal means is not a holder. The holder in due courses is a particular kind of a holder. A negotiable Instrument must be in writing and signed. Negotiable Instruments are payable by legal tender money of India. Negotiable Instruments can be transferred from one person to another by a simple process. The holder in due course gets a good title to the instrument even in cases where title of the transferor is defective. Negotiation of Instruments is the process by which the ownership of the instalment is transferred from one person to another. Instrument is payable till the payment or satisfaction. When a Negotiable Instrument is dishonored, the holder becomes entitled to file a suit for the recovery of the amount under Section 138 of the Act. Crossing is an instruction to paying bank not to make cash payment to payee. Payment should be made only through an account. Even if there is a fraud, the culprit can be traced, because he has an account, he has given photograph, introduction and address proof.

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Types of Crossing 1.

General Crossing

2.

Special Crossing

3.

Not Negotiable Crossing

4.

Account Payee Crossing

If a cheque bears across its face two parallel line with or without the words' 'and company'' it is called as General Crossing. If a transferee does not get better title than that of transferor it is called as Not Negotiable Crossing. ' ~~ Direction to the collecting bank to credit the amount to the account of payee is called as Account Payee Crossing. If the cheque is returned due to a mistake on the part of the bank, right to claim compensation from bank is only with the account holder and not the payee. Where a cheque payable to order purports to be endorsed by or on behalf of he payee, the drawee is discharged by payment in due course. A collecting banker gets protection if he fulfils the following conditions. 1)

A collecting banker acts in good faith and without negligence

2)

Collects cheque for a customer

3)

Cheque is crossed generally or specially to himself

The following conditions should be fulfilled if the bouncing of a cheque has to become criminal offence. 1.

Cheque should have been issued towards discharge of a debt or other liability.

2.

Cheque should have been returned unpaid with the reason 'Funds insufficient'.

3.

Cheque should have been presented within its validity period or 6 months from the date appearing on the cheque.

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4.

Payee/Holder in due course should have been issued notice to drawer within 30 days from the date of intimation of dishonour.

5.

The drawer should have failed to make payment within 15 days from the date of receiving the notice.

6.

Payee/Holder in due course should have been filed a case in the Court within 30 days from the date of expiry of 15 days period available to drawer for payment.

Punishment in case of bouncing of a cheque. Imprisonment up to 2 years. Or Fine up to twice the amount of cheque or both. 6.10 SELF-ASSESSMENT QUESTIONS ________________________________ Q1.

What do you mean by a negotiable instrument? What are the characteristics of a negotiable instrument?

Q2.

Define 'negotiable instrument' and explain its types.

Q3.

Define a bill of exchange, a promissory note and a cheque. Explain their important elements.

Q4.

Distinguish between (a) a bill of exchange and promissory note (b) a cheque and a bill of exchange.

Q5. Write note on: (a) Trade bill (b) Accommodation bill (c) Fictitious bill (d) Documentary and Clean bills (e) Inchoate Instrument (f) Ambiguous Instrument. Q6.

What are the parties to the various types of negotiable instruments? Q7.

Examine the capacities of various parties to the negotiable instruments. Q 8. Define a holder and a holder in due course and distinguish between them. Q9.

Who is a holder? What conditions he must satisfy to be a holder of an instrument under this Act?

Q10. Who is a holder in due course? What are the essential qualifications of a holder in due course? Explain the rights and privileges of a holder in due course.

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7.1

INTRODUCTION

About two decades back, United Nations adopted important guidelines for protection of consumer's interest on 9th April, 1985 and all the countries were expected to take suitable legislative measures. Accordingly, the Indian Legislature passed The Consumer Protection Bill, 1986 for better protection of interest of consumers. The 'Consumer Protection Act' came into force in the whole of India except in the State of Jammu and Kashmir on 15th April, 1987. A consumer is one of the important components of an economy as he exhibits his important role both on the demand as well as on the supply side. All economic activities are carried on because of the fundamental existence of consumer's demands. Thus, consumers influence various economic and business activities through their consumption role. Therefore, a consumer is considered as a king in today's market. Many times consumers are cheated and therefore they need some sort of legal protection. For that purpose, certain Acts have been passed and the Consumer Protection Act of 1986 is one of them. The Sale of Goods Act of 1930, which is in existence basically enables the buyers to reject goods not corresponding with their description or which are not fit for their purposes or not of required mercantile quality or which are not according to samples. But it does not make available any special forum for redressal of consumer grievances. The Consumer Protection Act of 1986 provides this forum besides many other things. It must be remembered that the Consumer Protection Act of 1986 makes available certain new remedies leaving the substantive rights of the consumers to be the same as before.

7.2 AIMS AND OBJECTS OF THE ACT In the preamble of the Act, the aims of passing the Act are clearly stated and accordingly the Act is to provide for better protection of the interests of consumers and for that purpose to make provisions for the establishment of consumer councils and other authorities for the settlement of consumers' disputes and for matters connected therewith. Thus from the preamble of the Act, we come to know the aims and objects of the Act which are as follows: (A) The Act is basically passed to protect the interests of the consumers. (B) The Act aims at protecting the interests of the consumers, and to make provisions for establishing necessary consumer councils and other authorities.

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The Consumer Protection Act, 1986

(C) As a matter of fact the Act intends to seek speedy and simple redressal to consumer disputes through a quasi-judicial machinery set up at the District, State and Central levels. The quasi-judicial bodies thus set up not only observe the principles of natural justice but also consider the provisions of the Act and for this purpose they have been empowered to give reliefs of specific nature and also to award compensation to consumers on the basis of the merit of each case. These bodies are also authorized to impose penalties for non-compliance of orders given by them. In Chapter n (Consumer Protection Councils) of the Act, the provision of establishing the Central Consumer Protection Council is made [Section 4], while Section 6 makes clear various objectives of Central Consumer Protection Council to promote and protect the rights of the consumers. Following are the rights, which are enumerated in Section 6 of the Act. (A) A consumer has the right to be protected against the marketing of goods and services which are hazardous to life and property [Section 6 (a)]. This right provides protection to a consumer if he is victimised because of the purchase of goods or the use of services hazardous, dangerous to his life. Such consumer can have a speedy and effective remedy under the redressal machinery set up under this Act. (B) A consumer has the right to be informed about the quality, quantity, potency, purity, standard and price of goods or services as the case may be so as to protect himself against unfair trade practices [Section 6 (b)]. Obviously this right is granted to a consumer in order to protect him from unfair trade practices such as misleading, false descriptions of goods regarding prices, quality, quantity, etc. (C) A consumer has the right to be assured, wherever possible, access to a variety of goods and services at competitive prices [Section 6 (c)]. By virtue of this Section 6 (c), the Central Consumer Protection Council has been empowered to examine whether producers curtail the liberty in selecting and stocking goods of choice through shopkeepers and, if the council finds so, it may liberate the shopkeepers from the burden of producer's ties. Thus consumers can have an access to a variety of goods and services. Thus, efforts have been made to remove the abuses of monopoly power and protect the interest of the consumers. (D) A consumer has the right to be heard and to be assured that consumer's interests will receive due consideration at appropriate forums [Section 6 (d)]. It has been provided in the Act to organise and set up different forums so that the aggrieved consumers can be heard as a matter of their right and receive due consideration through the hands of the appropriate redressal forums. 313

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(E) A consumer has the right to seek redressal against unfair trade practices or restrictive trade practices or unscrupulous exploitation of consumers [Section 6 (e)]. As a matter of fact, this is a very important right given to the consumers. Very often, they are exploited and hence, by making provision in the Act, efforts have been made to protect their interests on account of unfair or restrictive trade practices. (F) Education to consumers is very important. If the consumers are given the knowledge of the availability of legal remedies, the legal system may function properly and consumers can protect their interest in a better way. Therefore, Section 6 (f) provides for the right to consumer education and the Central Consumer Protection Council has been entrusted with the responsibility to educate the people in terms of remedies available under the Act. If the people become aware of their rights and power, they can take necessary actions and find out legal remedies for their grievances in order to protect their own interests. 7.3

DEFINITIONS ______________________________________________

In Section 2 of this Consumer Protection Act of 1986, the definitions of various terms, words are given. Let us consider some definitions as given in the Act. (A) Appropriate Laboratory [Section 2 (1) a] An appropriate laboratory is any such laboratory or organisation established by or under any law for the time being in force, which is maintained, financed or aided by the Central Government or a State Government for carrying out analysis or test of any goods with a view to determining whether such goods suffer from any defect. Rule 2-A of the Consumer Protection Rules, 1987 states that the State Governments are to recognise a laboratory as an appropriate laboratory. (B) Branch Office [Section 2 (1) (aa)] A branch office means (1) any establishment described as a branch by the opposite party or (2) any establishment carrying on either the same or substantially the same activity as that carried on by the head office of the establishment. (C) Consumer [Section 2 (1) (d)] As our wants are unlimited, we purchase and consume many commodities or services for satisfying these wants. But many people purchase the commodities for the purpose

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of trading. Obviously, they cannot be consumers. There is a particular meaning attached to the concept of the consumer in this Act, and therefore, the definition of 'consumer' is given in the Section 2 (1) (d) of the Act which is as follows : A consumer is any person who (i) buys any goods for a consideration which has been paid or promised to pay or partly paid and partly promised to pay or under any system of deferred payment. A consumer also includes any user of such goods other than the person who buys goods for consideration paid or promised to pay or under any other system of deferred payment when such use is made with the approval of such person, but does not include a person who obtains such goods for resale or for any commercial purposes, or (ii) hires or avails of any services for a consideration which has been paid or promised to pay, or partly paid and partly promised to pay or under any other system of deferred payment and he also includes any beneficiary of such services other than the person who hires or avails of the services for consideration paid or promised to pay or partly paid and partly promises to pay or under any other system of deferred payment, when such services are availed of with the approval of the first mentioned person but does not include a person who avails of such services for any commercial purpose. It is further provided in the explanation of Section 2 (I) (d) that for the purpose of sub-clause mentioned above, commercial purpose does not include use by a consumer of goods bought and used by him and services availed by him exclusively for the purpose of earning his livelihood, by means of self-employment. Who is not a consumer? The basic object of the Consumer Protection Act is to provide for better protection of the interests of consumers. The spirit of the Act is to provide protection to persons who really use and consume the goods and services. If the goods are purchased for the purpose of reselling, the Act does not provide any protection to such persons as they are not the consumers. Thus, the people who purchase the goods for trading purposes or use the goods for commercial purposes have been omitted from the purview of the Act. From the substance of the definition of 'consumer' as given in the Section 2 of this Act, we come to know that the following persons are not the consumers for the purposes of this Act. (a) A person purchasing or obtaining goods for the purpose of resale or for any other commercial purpose. 315

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(b) A person buying goods without any consideration. (c) A person who hires or avails of any service or services without any consideration. (d) A person obtaining service under a contract of personal service. (e) A person using goods without the prior approval of the buyer purchasing the goods for consideration. (f)

A person who is beneficiary of services but availing them without.the consent of the person who has hired the same for consideration.

Some cases making clear whether a person is a consumer or not An employee who is a member of Employees Provident Fund Scheme, a nominee under a policy of the life insurance, a railway passengers are all considered as a consumer. A person who purchased a large quantity of rice is not considered as a consumer as such a large quantity was not meant for self-consumption but for resale. A claim for compensation against such advocate for deficiency in service is not maintained, if the advocate renders his services free of charge and without any consideration and compensation. Thus, it becomes clear that to be recognised as a consumer in the eyes of this Act, goods should be purchased for consumption or use and not for resale. There must be a direct connection between the kind of goods bought and sold. When the goods are resold in original condition as bought, it is obviously a resale. Even when goods are not purchased for immediate final consumption but for transfer, it is a resale. In such cases, persons purchasing goods cannot be called consumers. However, the trading purpose or commercial purpose is required to be established. Merely not buying the goods for own use does not necessarily mean that it is buying goods for trading or commercial purposes. If it is proved and the court is satisfied with the fact that there is no large scale commercial activity and goods are bought for consumption or exclusively for the earning of livelihood by means of self-employment, the Act gives the protection under these circumstances to the concerned consumers and such purchases are not treated as the purchases for commercial purposes. In one case [Secretary, Consumer Guidance and Research Society of India vs. M/s. B.P.L. India Ltd. - 1992 (1) CPJ 140 NC], a lady bought a photocopier for whole and sole purpose of earning her livelihood and she never intended to use the same for large scale trading'attivity or commercial purposes. In that case, it was held that the purchase was not for commercial purpose neither for a commercial activity

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and she was a consumer. In another case (Sethuraman vs. Goa, Daman and Diu Industrial Development Corporation - 1992 CPT - 71 (MC)), a cooler was purchased not for his own use, but it was installed at a busstand for the use of public treeTof charge. It was held that case that the purchaser was a consumer. The main 'and importantcriterion of deciding whether it is a commercial purpose is by seeing if the aim of purchasing the goods is to earn profit and as such it includes all business activities only. Another important point which must be remembered in this connection is that during the warranty period and also during the guarantee period, even though the goods might have been purchased for commercial purpose or commercial purposes, the producer or dealer, whoever he may be, has to render free service to the consumer as per the terms of contract. Thus the exception applicable to goods purchased for commercial purposes is not applicable in case of goods regarding rendering of free services during warranty and guarantee period. (Maruti Udyog Ltd. vs. M.S. Hameed, Panaji 1992 (1) CPR - 272). J£*i Activity A:

Mr. Yadav was an Advocate. Mr. Timal engaged Mr. Yadav for his civil matter in the civil court. Since Mr. Yadav and Mr. Timal were friends from their childhood, Mr. Yadav did not ask for the payment of fees. Mr. Yadav contested the matter taking all efforts considering himself a litigant. But the judgement of the court went against Mr. Timal. Mr. Timal got depressed and annoyed with Mr. Yadav, and filed a complainant in the consumer form for the deficiency of services. Will Mr. Timal will succeed in the complaint filed before the consumer form. DiscussT

(D) A Person [Section 2 (1) (m)] According to Section 2 (1) (m) of the Consumer Protection Act, 1986, a person includes (a) A firm whether registered or not; (b) A Hindu Undivided family,

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(c) A Co-operative society; (d) Every other association of persons whether registered under the Societies Registration Act of 1860 or not. From the above definition of a person, it becomes clear that the rights of entities are also protected. This definition of a person is an inclusive one. It not only includes an individual but also a juristic person. Thus, a consumer need not only be an individual to get protection under this Act; but even firms, companies, co-operative societies etc. are also covered to get remedy. (E) Goods [Section 2 (1) (i)] According to Section 2 (1) (i) of the Consumer Protection Act of 1986, goods means goods as defined in the Sale of Goods Act of 1930. This simply means the definition of goods has the same connotation as used in the Sale of Goods Act of 1930. In fact, the law relating to sale of movable goods is contained in the Sale of Goods Act of 1930. The sale of goods is the most common of all commercial contracts. The subjectmatter of the contract of sale must be movable property or goods. Transactions involving the purchase and sale of immovable property are out of the purview of the Sale of Goods Act of 1930. All transactions which involve buying and selling of immovable property are regulated by the Transfer of Property Act. According to Section 2 (7) of the Sale of Goods Act of 1930, goods means every kind of movable property other than actionable claims and money and includes stock and shares, growing crops, grass and things attached to or forming part of the land, which are agreed to be severed before sale or under the contract of sale. Here the term 'Actionable Claims' implies all claims which can be enforced by a legal sanction or a suit e.g. a debt. (F) Service [Section 2 (1) (O)] A very comprehensive definition of the word 'service' is given in Section 2 (1). Section 2 (1) (O) states that "service" means service of any description which is made available to potential users and includes, but not limited to the provision of facilities in connection with banking, financing, insurance, transport, processing, supply of electrical or other energy, boarding or lodging or both, construction of houses, entertainment, amusement or the purveying of news or other information, but it does not include rendering of any service free of charge or under a contract of personal service. From the view point of the Consumer Protection Act, the consumers are of two categories. The first category of consumers i s that of users of goods for consideration

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and the other is that of users of services for consideration. Users of consumer include persons who hire or avail of services which are included in the definition of 'Service' according to Section 2 (I) (O) of the Act. In fact, they are all kinds of professional services. Only free services or personal services under contracts have been excluded from the protective sphere of the Act. It implies that the services must be of commercial nature, that is, they must be rendered on payment. Such payment may be made either in cash or in kind or may be even made either at once or partly at once and partly on credit. Even beneficiaries of the services are included in the category of consumers, though they are not directly hirers provided they use the services with the approval of the concerned consumers. It must be remembered that different types of services that are enumerated in the definition as given in the Section 2(1) (O) of the Act are illustrative in nature. The definition is exhaustive enough to include various types of services which could be contemplated. But the definition is only inclusive and not exclusive. If rendering of a service to a consumer falls within the definition, such consumer is protected under this Act and he gets a right to claim compensation for deficiency in service, if any. Following few examples throw more light on the nature of services covered under the Act. (i) Telephones lying dead or non-working of telephones for unreasonable time, wrong disconnection of telephones etc. are considered as deficiency of service. Aperson using subscriber's telephones with his due permission can also get the right to claim compensation for the period for which his complaint remains unattended. In Mahanagar Telephone Nigam vs. V. V. Karkare (1991 - II CPJ - 655), the person using a subscriber's telephone with his permission was allowed to claim compensation for the period for which his complaint remained unattended. (ii) Services rendered by a doctor to his patient, though a personal service, is a professional and not a personal service. (iii) Services rendered by the Post and Telephone department are also covered by the Act. Any late delivery of telegram is considered as a deficiency of service. (iv) Default or negligence regarding settlement of insurance claims is deficiency of service. However, non-payment of insurance claim for any legal and sufficient reason is not deficiency of service. (v) Grant of overdraft facilities by a bank to its customers, being not without consideration, amounts to providing of service. (Vimal Chandra Grover, vs. Bank of India (A.I.R. 2000 S.C. 218)). 319

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Thus various types of services are bracketed except services under contracts of personal by using the words services 'of any description' in the definition of service. It must be remembered that there is a difference between contract/or service and contract o/service. When a person engages any service of another person and requires him to do something, it is nothing but a contract/or service. A contract of service implies certain relationship of a master and a servant. A servant is required to obey the orders of his master. Activity B : My uncle is a doctor. He examines daily at least 50 patients. He renders very good service to his patients. What is the type of service is tendered by my uncle?

(G) Spurious Goods and Services [Section 2 (1) (OO)] The definition of Spurious Goods and Services has been inserted by the Consumer Protection Amendment) Act of 2002 which is follows: Spurious goods and services mean such goods and services which are claimed to be genuine but they are actually not sorious means false or not genuine. Because of the insertion of the definition of spurious good service by the Consumer Protection (Amendment) Act of 2002, the interest of the consumers can be protected to the great extent. (H) Trader [Section 2 (1) (q)] The definition as given in Section 2 (1) (q) of the Act is quite exhaustive and, if a consumer has any grievance with respect to any goods or service, he can easily come to know as to whom he should catch and pull up in the court. Section 2 (1) (q) states that "trader in relation to any goods means a person who sells or distributes any goods for sale and includes the manufacturer thereof, and where such goods sold or distributed in package form, includes the packer thereof." From the above mentioned definition of a trade, we come to know that in relation to any goods, a person is a trader in the eyes of this Act who:

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1.

sells goods or distributes any goods for sale, or

2.

any manufacturer of goods selling the same, or

3.

any packer who either sells or distributes goods in package form.

But it is implied that any middleman bringing the buyer and seller together and receiving any commission for services rendered by him is not considered as a trader [K.S. Kalva vs. R. Pal - 1993 II CPJ -170 NC]. Thus a consumer having any complaint in relation to any goods can take legal action against the trader under any of the above mentioned categories and seek protection. (I)

Manufacturer [Section 2 (1) (/)] The definition of a manufacturer prior to the Amendment of 2002 was as follows: Manufacturer means a person who (i)

makes or manufactures any goods or parts thereof, or

(ii) does not make or manufacture any goods but assembles parts thereof made or manufactured by others and claims the end-product to be goods manufactured by himself, or (iii) puts or causes to be put his own mark on any goods made or manufactured by any other manufacturer and claims such goods to be goods made or manufactured by himself. In this explanation of the Section 2(1) (j), it is further stated that "where a manufacturer dispatches any goods or part thereof to any branch office maintained by him, such branch office shall not be deemed to be the manufacturer even though the parts so dispatched to it are assembled at such branch office and are sold or distributed from such branch office." But the above mentioned definition of 'Manufacturer' has been substituted by the Consumer Protection (Amendment) Act of 2002 deleting certain words and explanation and has been stated in the following words: ' 'Manufacturer means a person who (i)

makes or manufacture any goods or part thereof, or

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(ii)

does not make or manufacture any goods but assembles parts thereof made or manufactured by others; or

(iii) puts or causes to be put his own mark on any goods made or manufactured by any other manufacturer. (J)

Consumer Dispute [Section 2 (1) (e)] A consumer dispute is very important from the view point of the Consumer Protection Act. If there is any dispute between the consumer and manufacturer or trader, as the case may be, the consumer gets the right to seek remedy or filing the complaint under the Act. The Consumer Redressal Forum is a statutory body under the Consumer Protection Act. But it has no jurisdiction over the matters on which no complaint lies. According to Section 2 (1) (e), consumer dispute means a dispute where the person against whom a complaint has been made and he denies or disputes the allegations contained in such complaint.

(K) Complaint [Section 2 (1) (c)] and Complainant [Section 2 (1) (b)] The word 'complaint' implies allegation or formal accusation. The intention of filing a complaint should be to obtain a relief according to the provisions of the Consumer Protection Act. According to Section 2 (1) (c), a complaint means any allegation in writing made by a complainant that: 1.

An unfair trade practice or a restrictive trade practice has been adopted by any trader.

2.

The goods bought by him or agreed to be brought by him, suffer from one or more defects.

3.

The services hired or availed of or agreed to be hired or availed of by him suffer from deficiency in any respect.

4.

A trader or the service provider, as the case may be, has charged for the goods or for the services mentioned in the complaint, a price in excess of the price (a) fixed by or under any law for the time being in force; (b) displayed on the goods or any package containing such goods; (c) displayed on the price list exhibited by him by or under any law for the time being in force; (d) agreed between the parties.

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5.

Goods which will be hazardous to life and safety, when used, are being offered for sale to public (a) in contravention of any standards, relating to safety of such goods as required to be complied with, by or under any law for the time being in force; (b) if the trader could have known with due diligence that the goods so offered are unsafe to the public.

6.

Services which are hazardous or likely to be hazardous to life and safety of the public when used, are being offered by the service provider which such person could have known with due diligence to injurious to life and safety; with a view to obtaining any relief provided by or under this Act. Certain new clauses have been substituted by the Consumer Protection (Amendment) Act, 2002 and sub-clauses (4), (5) and (6) mentioned above have been newly added and expanded the scope of 'complaint' under this Act.

From the above mentioned definition of 'complaint', we come to know that a complaint may be related to unfair trade practices, restrictive trade practices, defective goods of deficiencies in services, charging of higher or excessive prices etc. for obtaining any relief provided by or under this Act. A consumer or a person seeking redressal of his complaint under this Act has to file his complaint and it should be remembered that separate allegations may form separate disputes requiring separate finding of each of such disputes. Who can be a complainant? In Section 2 of the Consumer Protection Act of 1986, the definition of a complainant is given. A person seeking redressal of his complaint must come within one of the categories mentioned in the definition. If a person not coming under any of the categories as mentioned in the definition given below and files any complaint under this Act, his complaint is liable to be dismissed on the ground that he has no locus standi. According to Section 2 (1) (b), a complainant means and includes (i) (ii)

A consumer, or Any voluntary consumer association registered under the Companies Act of 1956 or under any other law of the time being in force, or

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(iii) the Central Government or any State Government, who or which makes a complaint, (iv) one or more consumers, where there are numerous consumers having the same interest, (v)

in case of death of a consumer, his legal heir or representative, who or which makes a complain.

Thus there are in all five categories of complainants. Not only a consumer can be complainant but the Central or State Government or registered consumer association or a few consumers on behalf of other consumers having common interest can seek redressal by filing their complaints provided there is locus standi. From this point of view, any public cause can be taken by an association in the form of public interest litigation. By amending the Act in 2001, even the legal heir or representative of a dead consumer is given the right to become the complainant.

(L) Restrictive Trade Practice [Section 2 (1) (nnn)] A consumer must be free to purchase any kind of goods considering his needs so that he can get maximum satisfaction from the consumption of such goods. There should be no compulsion in any way on a consumer imposed by a trader to buy, hire or avail of any goods as a condition precedent for buying, hiring or availing of other goods or services. From this point of view, the definition of 'Restrictive Trade Practice' has been revised by the Consumer Protection (Amendment) Act of 2002 and stated in the following words: "Restrictive Trade Practice means a trade practice which tends to bring about manipulation of price or its conditions of delivery or to affect flow of supplies in the market relating to goods or services in such a manner as to impose on the consumers unjustified costs or restrictions and shall include (i) delay beyond the period agreed to by a trader in supply of such goods or in providing the services which has led or is likely to lead to rise in the price; (ii) any trade practice which requires a consumer to buy, hire or avail of any goods or, as the case may be, services as condition precedent to buying, hiring or availing of other goods or services.

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(M) Unfair Trade Practice [Section 2 (1) (r)] The Consumer Protection Act of 1986 is passed to provide for better protection of the interests of consumers and for the settlement of consumers' disputes and any matters connected therewith. Provisions have been also made in the Act to protect the interests of consumers from unfair trade practices relating to both purchases of goods as well as rendering of services. Section 2 (1) (r) defines unfair trade practices as follows: "Unfair trade practice" means a trade practice which for the purpose of promoting the sale, use or supply of any goods or for the provision of any service, adopts any unfair method or unfair or deceptive practice including any of the following practices, namely, (i)

The practice of making any statement, whether orally or in writing or by visible representation which: (a) Falsely, represents that the goods are of a particular standard quality, quantity, grade, composition, style or model; (b) Fal sely represents that the services are of a particular standard, quality or grade; (c) Falsely represents any re-built, second-hand, renovated, reconditioned or old goods as new goods; (d) Represents that the goods or services have sponsorship, approval, performance, characteristics, accessories, uses or benefits which such goods or services do not have; (e) Represents that the seller or the supplier has a sponsorship or approval or affiliation which such seller or supplier does not have; (f)

Makes a false or misleading representation concerning the need for, or the usefulness of any goods or services;

(g) * Gives to the public any warranty or guarantee of the performance, efficacy or length of life of a product or of any goods that is not based on an adequate or proper test thereof. 325

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Provided that where a defence is raised to the effect that such warranty or guarantee is based on adequate or proper test, the burden of proof of such defence lie on the person raising such defence. (h)

Makes to the public a representation in a form that purports to be: (i)

A warranty or guarantee of a product or of any goods or services, or

(ii) A promise to replace, maintain or repair an article or any part thereof or to repeat or continue a service until it has achieved a specified result. If such purported warranty or guarantee or promise is materially misleading or if there is no reasonable prospect that such warranty, guarantee or promise will be carried out; (i) Materially misleads the public concerning the price at which a product or like products or goods or services have been or are, ordinarily sold or provided, and, for this purpose, a representation as to price shall be deemed to refer to the price at which the product or goods or services has or have been sold by sellers or provided by suppliers generally in the relevant market unless it is clearly specified to be the price at which the product has been sold or services have been provided by the person by whom or on whose behalf the representation is made. (J) Gives false or misleading facts disparaging the goods, services or trade of another person. (N) Defect [Section 2 (1) (/)] A consumer has a right to buy the goods of his choice which satisfies his particular want for which he buys th goods. Such goods should not be defective. The word 'defect' is defined in Section 2(])(f) of the Consumer Protection Act of 1986 as follows: "Defect means any fault, imperfection or shortcorrmgy the quality, quantity, purity or standard"whicrT is required to be maintained by or under any law for the time being in force under any contract, express or implied or is claimed by the trader in any manner whatsoever in relation to goods." From the above mentioned definition of the word 'defect', following important points become clear. 326

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(i) Goods sold by a trader or a manufacturer must be of certain standard, quality and should satisfy the wants of the consumers for which they are purchased. If certain goods are to comply with certain standards as laid down by law, there should not be any deviation. But if there is any deviation, it would definitely constitute a defect. Whether such a defect is major or superficial is immaterial. In Ravinder Singh Jamwal vs. Prem Nath Motors Private Limited [1991 ( 1 ) CPR - 336], the car sold was defective and not upto certain standard and quality and, therefore, a complaint was lodged. In that case, the dealer was ordered to repair the car within two months and compelled to give fresh guarantee for a further period of one full year. (ii) If any goods are sold by the trader on the basis of certain special characteristics, quality etc. and if it is found that such characteristics, quality etc. are lacking, this also constitutes a defect. Even failure to deliver full quantity as ordered is also a defect. Thus this definition of 'defect' is sufficiently comprehensive to restrict false or spurious products. Obviously, behind making this provision, the intention is to protect the interest of the consumers. (iii) 'Defect' includes many things such as fault, imperfection, shortcoming in quality, quantity, purity, standard in relation to goods which is required to be maintained by any law. However, it must be remembered that the complainant has to establish that the goods he has purchased and in respect of which, the complaint is filed suffer from any one or more defects.

Activity C : My sister is very fond of using different kinds of lipsticks of different Company. A company called Fashion introduced a new lipstick in the market. My sister heard of the lipstick from her friends and she decided to purchase the said lipstick. She went to a shop and purchased the said lipstick. When she used the lipstick she found the characteristics and quality of the lipstick lacks from the one which she heard and saw in the advertisements. She got aggrieved and decided to file a dispute before the consumer form. What complaint she can file?

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(O) Deficiency [Section 2 (1) (g)] As far as the defects in goods are concerned, a complainant has to establish that the goods mentioned in his complaint suffer from any one or more of the defects which are mentioned in the definition under Section 2 (1) (f). But for making any complaint in respect of a service or services rendered, a complainant has to prove that services suffer from deficiency in any respect. For this purpose, the word 'deficiency' is defined under Section 2(1) (g) of the Consumer Protection Act of 1986 which is as follows: "Deficiency means any fault, imperfection, shortcoming or inadequacy in the quality, nature and manner of performance which is required to be maintained by or under any law for the time being in force or has been undertaken to be performed by a person in pursuance of a contract or otherwise in relation to any service." Many times, consumers suffer because of incompetence, deliberate practices, lethargic dispositions, incompetent handling, negligence of those people who render them services. The consumers have been given protection under this Act from such derelictions of duty, negligence, incompetent handling etc. and those who are responsible for any deficiency in respect of services rendered can be punished according to the provisions of Act. Following cases make clear the concept of deficiency.

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1.

Whenever customers of banks give stop payment instructions to their banks and the banks fail to follow such instructions, it is considered as deficiency in service. In Bank of India vs. M. K. Shukla (19931 - CPJ - 41), the bank failed to follow the stop payment instructions given by its customer, it was treated as deficiency in service.

2.

In publishing the advertisement, the newspaper committed an error, it was held as deficiency in service as in the Enadu Telugu Daily vs. A. R. Kongara 1 (1993) CPJ 428 case.

3.

In N.R. Nair vs. BM.S.B.I - 1992 (2) CPR 472 case, a bank draft of Rs. 90,0007- was purchased and presented to the bank. But it was dishonoured on the ground of disparity of signatures of two officers of the issuing bank. It was held in that case, the bank was guilty for deficiency in service and the complainant was given the compensation.

4.

In Nunes Enterprises, Cochin vs. Office of the Assistant Engineer, Electricity Department, Panaji 1992 (1) CPR - 467 case, the electricity connection of

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the complainant who was running an ice factory was cut off because of arbitrary and excessive billing. It was held to be a deficiency of service and the complainant was awarded compensation of Rs. 50,000/-. 5.

Decision was given in Indian Oil Corporation vs. Venkatraman - II (1993) CPJ 218 - NC that if a gas cylinder is not rechecked at the time of delivery to a consumer, it is a deficiency in service.

6.

The Telecom District Engineer, Sangrur vs. Niranjan Das [1 (1992) CPJ 396], the complainant, though he paid the bills regularly, his phone was disconnected and, therefore, he suffered great inconvenience. It was held that there was deficiency in service and the complainant was awarded compensation.

(P) Members [Section 2 (1) (jj)} "Member" includes the President and a member of the National Commission or a State Commission or a District Forum, as the case may be : According to Section 30 of the Consumer Protection Act of 1986, the Central Government has been empowered to make rules for carrying out the provisions of the Act and, accordingly, the Central Government has made various rules which are contained in 'The Consumer Protection Rules, 1987.' For carrying out the objects and purposes of the Act, a three tier system of Consumer Disputes Redressal Agencies has been envisaged according to the provisions of Section 9 of the Act. Section 9 states that there shall be established for the purpose of this Act, the following agencies, namely: (i) A Consumer Disputes Redressal Forum to be known as the "District Forum" established by the State Government in each District of the State by notifications. Provided that the State Government may, if it deems fit, establish more than one District Forum in a district; (ii) A Consumer Dispute Redressal Commission to be known as the "State Commission" established by the State Government in the State by notification; and (iii) A National Consumer Disputes Redressal Commission established by the Central Government by notification. 329

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From these provisions of Section 9, we come to know that the Act envisages a hierarchy of three redressal agencies, that is, District Forums, State Commissions and National Commission. In the hierarchy, the District Forum is at the base and next comes State Commission. Both these agencies have been constituted in each district. National Consumer Disputes Redressal Commission or National Commission is at the top of hierarchy and it has been established at the Central or National level by the Central Government by notification. 7.4

CONSUMER PROTECTION COUNCILS _________________________

In order to promote and protect the consumer's right, consumer protection councils have been established at two levels, - at the centre, the Central Consumer Protection Councils and at the State level, the various state consumer protection councils. The provisions relating to the establishment, procedure for meetings, objects etc. of the Central Consumer Protection Council have been made in Sections 4 and 8. Let us consider these provisions in brief. 1.

The Central Consumer Protection Council [Sections 4,5, 6] Section 4(1) states that the Central Government shall, by notification, establish with effect from such date as it may specify in such notification, a Council to be known as the Central Consumer Protection Council, hereinafter referred to as the Central Council. The Central Council consists of Chairman and official and non- official members. The chairman will be The Minister-in-charge of the consumer affairs in the Center. According to Section 30 of the Consumer Protection Act of 1986, the Central Government has been empowered to make rules for carrying out the provisions of the Act. The Central Government, in order to carry out the provisions of Section 4, has established the Central Council and this Central Council has been constituted consisting of 150 members, according to the Rule 3 of the Consumer Protection Rules, 1987. The chairman will be The Minister-in-charge of Department of civil supplies. The term of the Central Council is three years. If any member of the Central Council wants to resign from the Council, he may do so by writing a letter under his hand to the Chairman of the Central Council. Vacancies so caused or otherwise, shall be filled from the same category by the Central Government and such person shall hold office as long as the member whose place he fills would have been entitled to hold office, if the vacancy had not occurred.

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A standing Committee is formed for monitoring the implementation of the recommendations of the Central Council under the chairmanship of the member secretary of the Council and shall consist of not exceeding 30 members. The objects of the Central Council are enumerated in Section 6 of the Act. From these objects, we come to know the rights of the consumer, which are given to them in order to protect and promote their interests. The right to be protected against the marketing of goods and services which are hazardous to life and property; to be informed about the quality, quantity, potency, purity, standard and price of goods; wherever possible, access to a variety of goods and services at competitive prices; to be heard and to be assured that consumer's interests will receive due consideration at appropriate forums; to seek redressal against unfair trade practices or restrictive trade practices or unscrupulous exploitation of consumers; and to consumer education. 2.

The State Consumer Protection Councils [Sections 7 and 8]: The provisions relating to the establishment of the State Consumer Protection Councils have been made in Section 7 of the Act. Under Section 7 (1) of the Act, "State Government shall, by notification, establish with effect from such date as it may specify in such notification, a Council, to be known as the 'Consumer Protection Council' which is hereafter referred to as the State Council". The State Consumer Protection Council shall meet as and when necessary but not less than two meetings shall be held every year [Section 7(3)]. It is further provided in sub-section 4 of Section 7 that "the State Council shall meet at such time and place as the Chairman may think fit and shall observe such procedure in regard to the transaction of its business as may be prescribed by the State Government." The State Council shall consist of the Minister in-charge of consumer affairs in the State Government who shall be its Chairman, Such members of other official or non-official members representing such interests as may be prescribed by the State Government. Such number of other official or non-official members, not exceeding ten, may be nominated by the Central Government. The State Council shall meet at such time and place as the Chairman may think fit. Section 8 enumerates that the main object of every State Council must be to promote and protect the rights of the consumers within the state. It is implied that the objects of the State Councils are the same as those of the Central Council which are enumerated in Section 6 of the Act. Section 8 of the Act clearly states that "the objects of every State Council shall be to promote and protect within the State the rights of the consumers laid down in clauses (a) to (f) of Section 6." This Section6is 331

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already reproduced under the heading 'Objects of the Central Council and the statutory rights of the consumers to promote and protect their interests' .

3.

The District Consumer Protection Councils and their objects [Section 8-A and 8-B]

The State Government shall establish for every district, by notification, a council to be known as the District Consumer Protection Council with effect from such date as it may specify in such notification [Section 8-A (1)]. The District Consumer Protection Council (hereinafter referred to as the District Council shall consist of the Collector of the district (by whatever name called), who shall be its Chairman; and such number of other official and non-official members representing such interests as may be prescribed by the State Government [Section 8-A (2)] . The district Council shall meetas and when necessary Mp but not less than two meetings shall be held^very year [Section 8-A] .The objects of It every District Council shall be to promote and protect within the district the rights of the consumers laid down in clauses (a) to (f) of Section 6.

7.5

CONSUMER DISPUTES REDRESSAL AGENCIES

For carrying out the objects and purposes of the Act, a three tier system of Consumer Disputes Redressal Agencies has been envisaged according to the provisions of Section 9 of the Act. Section 9 states that there shall be established for the purposes of this Act, the following agencies, namely : (a) A Consumer Disputes Redressal Forum is to be known as the 'District Forum' established by the State Government in each district of the State by notification provided that the State Government may, if it deems fit, establish more than one District Forum in a district. (b) A Consumer Disputes Redressal Commission is to be known as the 'State Commission' established by the State Government in the State by, notification; and (c) A National Consumer Disputes Redressal Commission established by the Central Government by notification. From these provisions of Section 9, we come to know that the Act envisages a hierarchy of three redressal agencies, namely, District Forums, State Commissions and National Commission. In the hierarchy, the District Forum is at the base and next comes State

332

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The Consumer Protection Act, \ 986

emission. Both these agencies have been constituted in each district. National Consumer sputes Redressal Commission or National Commission is at the top of the hierarchy and it - been established at the Central or National level by the Central Government by notification. ) District Forums (i)

The establishment and composition of the District Forum [Section 10} A Consumer Disputes Redressal Forum is known as the District Forum which has been established by the State Government for the concerned state in its each district. However, if the State Government thinks it fit to establish more than one District Forum in a district, it can do so. Each District Forum consists of a president and other two members. A person who is, or has been, or is qualified to be a District Judge is appointed as a President of District Forum [Section 10 (1) (a)}. Besides, the President, the District Forum consists of other two persons as its members. Section 10 (1) (b) clearly states that "two other members one of whom shall be a woman,

(ii) Jurisdiction of the District Forum under Section 11 The monetary jurisdiction is as follows, "subject to other provisions of the Act, the District Forum shall have jurisdiction to entertain complaints where the value of the goods or services and the compensation, if any, claimed does not exceed rupees twenty lakhs." The Territorial Jurisdiction under Section 11 (2) is as under(a)

At the place where each or all opposite parties reside; or

(b)

They carry on their business; or

(c)

At the place where the cause of action arises.

If the case is in respect of manufactured goods, apart from the place of manufacture, the cause of action also can arise at the place where the product is marketed. Where two or more District Forums have jurisdiction, a complaint can be filed m either of the Forums having jurisdiction. :f the dispute between concerned parties is pending before the Civil Court, the •Consumer Forum has no jurisdiction to entertain such case.

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(iii) Manner of making complaint [Section 12] In Section 12 which is as follows : "A complaint, in relation to any goods sold or delivered or agreed to be sold or delivered or any service provided or agreed to be provided" may be filed with a District Forum by 1. (a) agreed

The consumer to whom such goods are sold or delivered or to be delivered or such service provided or agreed to be provided;

(b) Any recognised consumer association, whether the consumer to whom the goods sold or delivered or agreed to be sold or delivered or service provided or agreed to be provided is a member of such association or not; (c) One or more consumers, where there are numerous consumers having the same interest, with the permission of the District Forum, on behalf of, or for benefit of, all consumers so interested; or (d) Central Government or the State Government, as the case may be, either in its individual capacity or as a representative of interests of the consumers in general [Section 12 (1)]; 2.

Every complaint filed under sub-section (1) shall be accompanied with such amount of fee and payable in such manner as may be prescribed [Section 12 (2)].

3.

On receipt of a complaint made under sub-section (1), the District Forum J may, by order, allow the complaint to be proceeded with or rejected [Section 12 (3)]. It is provided that a complaint shall not be rejected under this sub-section unless an opportunity of being heard has been given to the complaint: It is provided further that the admissibility of the complaint shall ordinarily: be decided within twenty-one days from the date on which the complaint r was received. ~

4.

334

Where a complaint is allowed to be proceeded with under sub-section ( the District Forum may proceed with the complaint in the manner provid under this Act [Section 12 (4)].

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It is provided that where a complaint has been admitted by the District Forum, it shall not be transferred to any other Court or tribunal or any authority set up by or under any other law for the time being in force. It is further provided in the explanation to Section 12 that for the purposes of this section, "recognised consumer association" means any voluntary consumer association registered under the Companies Act, 1956 (1 of 1956) or any other law for the time being in force [Explanation to Section 12].

(iv) Procedure on receipt of Complaint [Section 13] In Section 13, we find the procedure followed by the District Forum on the admission of the complaint. By amending the Act in 2002, certain new subsection, clauses have been inserted which will facilitate quicker disposal of cases and enable complaints to get quick relief where required and also streamline the procedures. For example, because of the amendments in Act in 2002, Section 13 now requires the District Forum to refer a copy of the admitted complaint within twenty one days from the date of its admission to the opposite party to give his version. Further it seeks to make explicit the provision for ex-parte order. Newly inserted sub-section 3-A, 3-B and 7 are also important which have been reproduced below. According to the provisions of Section 13, "The District Forum shall, on admission of a complaint, if it relates to any goods (a) refer a copy of the admitted complaint, within twenty-one days from the date of its admission to the opposite party mentioned in the complaint directing him to give his version of the case within a period of thirty days or such extend period not exceeding fifteen days as may be granted by the District Forum; [Section 13 (1) (a)]. (b) where the opposite party on receipt of a complaint referred to him under clause (a) denies or disputes the allegations contained in the complaint, or omits or fails to take any action to represent his case within the time given by the District Forum, the District Forum shall proceed to settle the consumer dispute in the manner specified in clauses (c) to (g) of Section 13 (1) [Section 13 (1) (b)]. (c) where the complaint alleges a defect in the goods which cannot be determined without proper analysis or test of the goods, the District Forum shall obtain a sample of the goods from the complainant, seal it and 335

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authenticate it in the manner prescribed and refer the samples so sealed to the appropriate laboratory alongwith a direction that such laboratory makes an analysis or test, whichever may be necessary, with a view to finding out whether such goods suffer from any defect alleged in the complaint or from any other defect and to report its findings thereon to the District Forum within a period of fifty-five days of the receipt of the reference or within such extended period as may be granted by the District Forum [Section 13(1 )(c)]. (d)

before any sample of the goods is referred to any appropriate laboratory under clause (c), the District Forum may require the complainant to deposit to the credit of the Forum such fees as may be specified, for payment to the appropriate laboratory for carrying out the necessary analysis or test in relation to the goods in question [Section 13 (1) (d) ].

(e)

the District Forum shall remit the amount deposited to its credit under clause (d) to the appropriate laboratory to enable it to carry out the analysis or test mentioned in clause (c) and on receipt of the report from the appropriate laboratory, the District Forum shall forward of copy of the report alongwith such remarks as the District Forum, may feel appropriate to the opposite party; [Section 13 (1) (e)].

(f)

if any of the parties disputes the correctness of the findings of the appropriate laboratory, or disputes the corrections of the methods of analysis or test adopted by the appropriate laboratory, the District Forum shall require the ; opposite party or the complainant to submit in writing his objections in \ regard to the report made by appropriate laboratory; [Section 13 (1) (f)]. j

(g)

the District Forum shall thereafter give a reasonable opportunity to the j complainant as well as the opposite party of being heard as to the] correctness or otherwise of the report made by the appropriate laboratory! and also as to the objection made in relation thereto under clause (f) an<| issue an appropriate order under Section 14 [Section 13 (1) (g)].

Section 13 (2): The District Forum shall, if the complaints admitted by it i Section 12 related to goods in respect of which the procedure specified in sub section (1) cannot be followed, or if the complaint relate:; to any services (a)

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refer a copy of such complaint to the opposite party directing him to giv his version of the case within a period of thirty days or such extend

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period not exceeding fifteen days as may be granted by the District Forum; [Section 13 (2) (a)]. (b) where the opposite party, on receipt of a copy of the complaint referred to him under clause (a) denies or disputes the allegations contained in the complaint, or omits or fails to take any action to represent his case within the time given by the District Forum, the District Forum shall proceed to settle the consumer dispute, (i) on the basis of evidence brought to its notice by the complainant and the opposite party, where the opposite party denies or disputes the allegations contained in the complaint, or (ii) ex pane on the basis of evidence brought to its notice by the complainant where the opposite party omits or fails to take any action to represent his case within the time given by the Forum. [Section 13 (2) (b)]. (c) where the complainant fails to appear on the date of hearing before the District Forum, the District Forum may either dismiss the complaint for default or decide it on merits. [Section 13 (2) (c)]. Section 13 (3) : No proceedings complying with the procedure laid down in sub-section (1) and (2) shall be called in question in any Court on the ground that the principles of natural justice have not been complied with. Section 13 (3-A) : Every complaint shall be heard as expeditiously as possible and endeavour shall be made to decide the complaint within a period of three months from the date of receipt of notice by opposite party where the complaint does not require analysis or testing of commodities and within five months, if it requires analysis or testing of commodities. It is provided that no adjournment shall be ordinarily granted by the District Forum unless sufficient cause is shown and the reasons for grant of adjournment have been recorded in writing by the Forum: It is provided further that the District Forum shall make such orders as to the costs occasioned by the adjournment as may be provided in the regulations made under this Act: It is provided also that in the event of a complaint being disposed of after the period so specified, the District Forum shall record in writing, the reasons for the same at the time of disposing of the said complaint.

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Section 13 (3-B) : Where during the pendency of any proceeding before the District Forum, it appears to be necessary, it may pass such interim order as is just and proper in the facts and circumstances of the case. Section 13 (4) : "For the purposes of this section, the District Forum shall have the same powers as are vested in a civil court under Code of Civil Procedure, 1908 while trying a suit in respect of the following matters, namely; (i)

the summoning and enforcing the attendance of any defendant or witness and examining the witness on oath;

(ii) the discovery and production of any document or other material object producible as evidence; (iii) the reception of evidence on affidavits; (iv) the requisitioning of the report of the concerned analysis or test from the appropriate laboratory or from any other relevant source; (v)

issuing of any commission for the examination of any witness; and

(vi) any other matter which may be prescribed. Section 13 (5) : Every proceeding before the District Forum shall be deemed to be a judicial proceeding within the meaning of Section 193 and 228 of the Indian Penal Code (45 of 1860) and the District Forum shall be deemed to be a civil court for a purposes of Section 195 and Chapter XXVI of the Code of Criminal Procedure, 1973 (2 of 1974). Section 13 (6) : Where the complainant is a consumer referred to in sub-clause (iv) of clause (b) of sub-section (1) of Section 2, the provisions of rule 8 of Order 1 of the First Schedule to the Code of Civil Procedure, 1908 (5 of 1908) shall apply subject to the modification that every reference therein to a suit or decree shall be construed as a reference to a complaint or the order of the District Forum thereon. Section 13 (7) : In the event of the death of a complainant who is a consumer or of the opposite party against whom the complaint has been filed, the provisions of Order XXII of the First Schedule to the Code of Civil Procedure, 1908 (5 of 1908) shall apply subject to the modification that every reference therein to the plaintiff and the defendant shall be construed as reference to a complainant or the opposite party, as the case may be. 338

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From the above reproduced provisions of Section 13, the procedure to be followed by the District Forum on admission of complaint becomes clear. The procedure laid down in Section 13 relates to goods as well as services. In respect of any complaint received by the District Forum under Section 12 relating to goods, the procedure specified in Section 13 (1) is required to be followed. But the same procedure cannot be followed in respect of the complaint admitted relating to the services. The procedure to be followed so far as complaint relating to services is prescribed in Section 13 (2). Though, the provisions relating to the procedure on admission are given above in detail, in order to remember it is given below in brief. 1.

Procedure followed by the District Forum on admission of a complaint relating to goods

The District Forum has to take into consideration the procedure which is laid down in Section 13. Obviously, the first step on receiving a complaint is that the District Forum has to refer a copy of the complaint to the opposite party mentioned in the complaint, if it relates to any goods and then to direct him to give his version of the case within a period of thirty days or such extended period not exceeding fifteen days as may be granted by the District Forum [Section 13(1) (a)]. When the opposite party on receipt of a complaint referred to him under clause (a) denies or disputes the allegations contained in the complaint, or omits or fails to take any action to represent his case within the time given by the District Forum, the District Forum shall proceed to settle the consumer dispute in the manner specified in clauses (c) to (g) of Section 13 (1) which has already been mentioned. After following the preliminary steps, the District Forum has to follow the procedure laid down in reference to goods in clauses (c) to (g) of Section 13(1). The provisions of Section 13 (1) (c) make clear three points. 1.

When the complainant alleges any defect in the goods which cannot be determined without proper analysis for the test of the goods, the District Forum has to obtain a sample of goods from the complainant and seal and authenticate the same.

2.

Thereafter the sealed sample is to be sent to the appropriate laboratory for the purpose of testing or analysis in order to find out whether such goods suffer from any defect. 339

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3. The appropriate laboratory has to make its report regarding the findings on the sample to the District Forum within forty-five days of the receipt of the reference or within such extended period as may be granted by the District Forum. The definition of 'appropriate laboratory' referred in the above mentioned Section 13 (1) (c) is given in Section 2 of the Act which is as follows : "Appropriate laboratory means a laboratory or organisation: (i)

Recognised by the Central Government; or

(ii) Recognised by a State Government, subject to such guidelines as may be prescribed by the Central Government in this behalf; or (iii) Any such laboratory or organisation established by or under any law for the time being in force, which is maintained, financed or aided by the Central Government or a State Government for carrying out analysis or test of any goods with a view to determining whether such goods suffer from any defect [Section 2 (1) (a)]. Before any sample of the goods is referred to any appropriate laboratory under clause (c), the District Forum may require the complainant to deposit to the credit of the Forum such fees as may be specified, for payment to the appropriate laboratory for carrying out the necessary analysis or test in relation to the goods in question. Thus, the complainant is required to deposit necessary fees with the District Forum for making the payment to the appropriate laboratory of analysing or testing the goods in question. But it is required to be done before any sample of goods is referred to the appropriate laboratory. Thereafter, the District Forum remits the amount deposited to its credit under clause (d) to the appropriate laboratory to enable it to carry out the analyis or test mentioned in clause (c) and on receipt of the report from the appropriate laboratory, the District Forum forwards the copy of the report alongwith such remarks as the District Forum may feel appropriate to the opposite party. Thus, the District Forum remits the amount to the appropriate laboratory in order to enable it to carry out the analysis or test as the case may be and on the receipt of the report from the appropriate laboratory, the District Forum sends its copy with the remarks to the opposite party.

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Then, if the findings of the appropriate laboratory are disputed, the party disputing findings submits its objections in writing. If any of the parties disputes the correctness of the findings of the appropriate laboratory, or disputes the correctness of the methods of analysis or test adopted by the appropriate laboratory, the District Forum shall require the opposite party or the complainant to submit in writing his objections in regard to the report made by the appropriate laboratory. The last step in respect of procedure on receipt of any complaint relating to goods according to the provisions of Section 13 (1) is that the District Forum on hearing the parties, issues an appropriate order as per the provisions of Section 13 (I) (g).

2.

Procedure followed by the District Forum on admission of complaint relating to services This procedure is prescribed in Section 13 (2) of the Act. The District Forum, on admission of the complaint relating to any service, refers a copy of such complaint to the opposite party directing him to give his version of the case within a period of thirty days or such extended period not exceeding fifteen days as may be granted by the District Forum. Where the opposite party, on receipt of a copy of the complaint referred to him under clause (a) of Section (13) (2) denies or disputes the allegations contained in the complaint or omits or fails to take any action to represent his case within the time given by the District Forum, the District Forum proceeds to settle the consumer dispute, (i) On the basis of evidence brought to its notice by the complainant and the opposite party, where the opposite party denies or disputes the allegations contained in the complaint, or (ii) On the basis of evidence brought to its notice by the complainant where the opposite party omits or fails to take any action to represent his case within the time given by the Forum. It should be noted that the proceedings of the District Forum for non-compliance of the principles of natural justice cannot be challenged in any court. Section 13 (3) makes this point clear by stating that,' 'no proceedings complying with the procedure laid down in sub-section (1) and (2) shall be called in question in any court on the ground that the principles of natural justice have not been complied with".

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(v)

Power of District Forums Rule 10 (1) of the Consumer Protection Rules, 1987 states that The National Commission, State Commission and the District Forum shall have power to require any person (a) to produce before, and allow to be examined and kept by an officer of the National Commission, the State Commission or the District Forum, as the case may be, specified in this behalf, such books, accounts, documents or commodities in the custody or under the contl of the person so required as may be specified or described in the requisition, if the examination of such books, accounts, documents or commodities are required for the purpose of this Act, [Rule 10 (a)]. (b) to furnish to an officer so specified, such information as may be required for the purpose of this Act. [Rule 10 (b)]. Rule 10 (2) (a) : Where during any proceedings under this Act, the National Commission, the State Commission or the District Forum, as the case may be, has any ground to believe that any book, paper, commodity or document which may be required to be produced in such proceedings, are being or may be, destroyed, mutilated, altered, falsified or secreted, it may, by written order, authorise any officer to exercise the power of entry and search of -any premises. Such authorised officer may also seize such books, papers, documents or commodities as are required for the purpose of this Act. Provided that such seizure shall be communicated to the National Commission, the State Commission or the District Forum, as the case may be, as soon as it is made or within a period not exceeding 72hours of making such seizure after specifying the reasons in writing for ma ing such seizure. Rule 10 (2) (b): The National Commission, the State Commission or the District ( Forum, as the case may be, on examination of such seized documents oc| commodities, as the case may be, may order the retention thereof or may reti it to the party concerned. The District Forum has the power to pass the order of the retention of the j documents, commodities, papers, etc. after their examination or may order the | return of the same to the concerned party or parties.

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(vi) Findings of the District Forum (Section 14) Efforts have been made to provide relief to the complainants if they suffer from the defects specified in their complaints by making necessary provisions in Section 14 (1) which is as follows: If, after the proceeding conducted under Section 13, the District Forum is satisfied that the goods complained against suffer from any of the defects specified in the complaint or that any of the allegations contained in the complaint about the services are proved, it shall issue an order to the opposite party directing him to do one or more of the following things timely: (a) To remove the defect pointed out by the appropriate laboratory from the goods in question; (b) To replace the goods with new goods or similar description which shall be free from any defect; (c) To return to the complainant the price or as the case may be, the charges paid by the complainant; (d) To pay such amount as may be awarded by it as compensation to the consumer for any loss or injury suffered by the consumer due to the negligence of the opposite party. It is provided that the District Forum shall have the power to grant punitive damages in such circumstances as it deems fit; (e) To remove the defects or deficiencies in the services in question; (f)

To discontinue the unfair trade practice or the restrictive trade practice or not to repeat them;

(g) Not to offer the hazardous goods for sale; (h)

To withdraw the hazardous goods from being offered for sale; (ha) To cease manufacture of hazardous goods and to desist from offering serv;ces which are hazardous in nature; (hb) To pay such sum as may be determined by it, it is of the opinion that loss or injury has been suffered by a large number of consumers who

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are not identifiable conveniently. It is provided that the minimum amount of sum so payable shall not be less than five per cent of the value of such defective goods sold or service provided, as the case may be, to such consumers. It is provided further that the amount so obtained shall be credited in favour of such person and utilized in such manner as may be prescribed; (he) To issue corrective advertisement to neutralize the effect of misleading advertisement at the cost of the opposite party responsible for issuing such misleading advertisement; (i)

To provide for adequate costs to parties. Thus, after the proceeding conducted under Section 13, if the District Forum is satisfied that the goods complained against suffer from any of the defects specified in the complaint or any allegations contained in the complaint about the services are proved, the District Forum issues an order to the opposite party and directs him to do one or more things as specified in clauses (a) to (i) mentioned above.

The Direct Forum has also powers to direct payment of compensation to the complainant suffering loss on account of defect or deficiency as-a result of negligence of the supplier besides the powers to direct the opposite party to rectify the defect or to replace the goods etc. as the case may be. ( (vii) Provisions relating to Appeals to the State Commission [Section 15] Provisions to make an appeal against the order passed by the District Forum to the State Commission within the prescribed period have been made in Section 15. Section 15 states that "Any person aggrieved by an order made by the District Forum may prefer an appeal against such order to the State Commission within a period of thirty days from the date of the order, in suchiformand manner asmay beprescnbed. It is further provided that the State Commission may entertain an appeal after the expiry of the said period of thirty days, if it is satisfied that there was sufficient cause for not finding it within that period. It is provided further that no appeal by a person, who is required to pay any amount in terms of an order of the Direct Forum, shall be entertained by the State Commission unless the appellant has deposited in the prescribed manner fifty percent of the amount or twenty-five^, thousandrupees, whichever is less. This new proviso inserted in Section 15 by amending the Act in 2002 is to provide that no appeal by a person who is required 344

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to pay any amount in terms of an order of the District Forum, shall be entertained by the State Commission unless the appellant deposits fifty percent of the amount or twenty-five thousand rupees, whichever is less. 7.6

THE STATE COMMISSION

The District Forums as well as the State Commission are constituted in each state. But the District Forums are at the base level while next in hierarchy is the State Commission. Now, let us consider the provisions made in the Consumer Protection Act of 1986 in respect of the State Commission relating to its composition, jurisdiction, procedure applicable to the State Commissions, etc.

1.

Composition of the State Commission [Section 16] Each State Government is empowered to establish a "Consumer Disputes Redressal Commission" known as 'State Commission' and accordingly each State Government has established in its state "the State Commission". Provisions relating to the composition of the State Commission are made in Section 16 (1) of the Act which are as follows. Each State Commission shall consists of(a) A person who is or has been a Judge of a High Court, appointed by the State Government, who shall be its President, (b) Not less than two, and not more than such number of members, as may be prescribed, and one of who shall be a woman. It is also provided that where the President of the State Commission is, by reason of absence or otherwise, unable to act as Chairman of the Selection Committee, the State Government may refer the matter to the Chief Justice of the High Court for nominating a sitting judge of that High Court to act as Chairman [Proviso to Section J6(l-A)l Section 16 (1-B) states that (i)

The jurisdiction, powers and authority of the State Commission may be exercised by Benches thereof.

(ii)

A Bench may be constituted by the President with one or more members as the President may deem fit. 345

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(iii) If the members of a Bench differ in opinion on any point, the points shall be decided according to the opinion of the majority, if there is a majority, but if the members are equally divided, they shall state the point or points on which they differ, and make a reference to the President who shall either hear the point or points himself or refer the case for hearing on such point or points by one or more or the other members and such point or points shall be decided according to the opinion of the majority of the members who have heard the case, including those who first heard it. It is provided that the appointment of a member on whole-time basis shall be made by the State Government on the recommendation of the President of the State Commission taking into consideration such factors as may be prescribed including the work load of the State Commission [Proviso to Section 16 (2)]. Section 16(3): Every member of the State Commission shall hold office for term of five years or upto the age of sixty-seven years, whichever is earlier. It is provided that a member shall be eligible for re-appointment for another term of five years or upto the age of sixty-seven years, whichever is earlier, subject to the condition that he fulfils the qualifications and other conditions for appointment , mentioned in clause (b) of sub-section (1) and such re-appointment is made on t basis of the recommendation of the Selection Committee [Proviso to Section, (3)1 It is provided further that a person appointed as a President of the State Commission shall also be eligible for re-appointment in the manner provided in clause (a) of sub section (1) of this section [Proviso 2 to Section 16 (3)]. It is provided also that a member may resign his office in writing under his 1 addressed to the State Government and on such resignation being accepted, 1 office shall become vacant and may be filled by appointment of a person posses any of the qualifications mentioned in sub-section (1) in relation to the category ofti member who is required to be appointed under the provisions of sub-section (l-P, in place of the person who has resigned [Proviso 3 to Section 16 (3)]. Section 16 (4) : Notwithstanding anything contained in sub-section (3), aperso appointed as the President or as a member, before the commencement of t Consumer Protection (Amendment) Act, 2002, shall continue to hold such officea President or member, as the case may be, till the completion of his term.

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2.


Jurisdiction of the State Commission (Section 17}: Section 17 (1) provides that "subject to the other provisions of this Act, the State Commission shall have jurisdiction:

(a) To entertain: (i) Complaints where the value of the goods or services and compensation, if any, claimed exceeds rupees twenty lakhs but does not exceed rupees one crore and (ii)

Appeals against the orders of any District Forum within the State; and

(b) To call for the records and pass appropriate orders in any consumer dispute which is pending before or has been decided by any District Forum within the State, where it appears to the State Commission that such District Forum has exercised a jurisdiction not vested in it by law, or has failed to exercise a jurisdiction so vested or has acted in exercise of its jurisdiction illegally or with material irregularity. It should be noted that in each state, the State Commission is the final apex body and, therefore, unless the Supreme Court or the National Commission sets aside the orders, the decisions of the State Commission are binding on the District Forums in its State. Thus, amending the Act in 2002, the monetary jurisdiction of the State Commission has been increased from five lakh rupees to one crore rupees which has helped to reduce the number of complaints filed before the National Commission. A new Section 17 (2) has been inserted by amending the Act in 2002 which is as follows: Section 17(2): A complaint shall be instituted in a State Commission within the limits of whose jurisdiction (a) the opposite party or each of the opposite parties, where there are more than one, at the time of the institution of the complaint, actually and voluntarily resides or carries on business or has a branch office or personally works for gain; or

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(b) any of the opposite parties, where there are more than one, at the time of the institution of the complaint, actually and voluntarily resides, or carries on business or has a branch office or personally works for gain, provided that in such case either the permission of the State Commission is given or the opposite parties who do not reside or carry on business or have a branch office or personally works for gain, as the case may be, acquiesce in such institution; or (c)

The cause of action, wholly or in part, arises. This Section 1 7 (2) makes clear the jurisdiction for a complaint to the instituted.

3.

Provisions of the Act relating to Transfer of Cases [Section 1 7-A) and Circuit Benches (Section 17-B] Section 17- A : Transfer of Cases: "On the application of the complainant or of its own motion, the State Commission may, at any stage of the proceeding, transfer any complaint pending before the District Forum to another District Forum within the State if the interest of Justice so requires."

g$ Activity D : Mrs. Sheela purchased a flat of Rs. 25,00,0007- from Kunal Builders. At the time of purchasing the flat Mrs. Sheela was promised a garden attached to her flat on the ground floor and, accordingly, an agreement was executed. Afterwards the builder sold the said flat to one of his nearest relatives and asked Mrs. Sheela to purchase the flat on the second floor. Since Mrs. Sheela was a heart patient she refused and decided to file a complaint in the consumer form. In which forum can she file her complaint?

4.

Provisions relating to appeals to the National Commission [Section 19] Section 19 of the Act states that "Any person aggrieved by an order made by 1 State Commission in exercise of its powers conferred by sub-clause (i) of clause (| of Section 17 may prefer an appeal against such order to the National Commissifl within a period of thirty days from the date of order in such form and manner as i

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be prescribed. It is further provided that the National Commission may entertain an appeal after expiry of the said period of thirty days if it is satisfied that there was sufficient cause for not filing it within that period." "Provided further that no appeal by a person, who is required to pay any amount in terms of an order of the State Commission, shall be entertained by the National Commission unless the appellant has deposited in the prescribed manner fifty per cent of the amount or rupees thirty-five thousand, whichever is less." 5.

Hearing of appeal [Section 19-A] The main object of inserting this Section 19-A in the Act is to help to dispose of appeals filed before the State Commission or the National Commission with ninety days from the date of admission. It is provided that no adjournment shall be ordinarily granted by the State Commission or the National Commission, as the case may be, unless sufficient cause is shown and the reasons for grant of adjournment have been recorded in writing by such Commission [Proviso to Section 19-A]. It is provided further that the State Commission or the National Commission, as the case may be, shall make such orders as to the costs occasioned by the adjournment as may be provided in the regulations made under this Act [Proviso to Section 19-A]. It is provided also that in the event of an appeal being disposed of after the period so specified, the State Commission or the National Commission, as the case may be, shall record in writing the reasons for the same at the time of disposing of the said appeal [Proviso to Section 19-A].

7,7

THE NATIONAL COMMISSION _________________________________

The National Consumer Disputes Redressal Commission is known as National Commission which has been established according to the provisions of Section 9 (c) of the Act. The National Commission is at the National or Central level and at the top of the hierarchy of <• >nsumer Disputes Redressal Agencies. Certain provisions relating to the composition ol the National Commission, its jurisdiction, powers etc. have been made in the Act. Let .... -nsider these provisions in brief. Composition of the National Commission (Section 20} and Appointment of the President of National Commission [Section 20 (1) (a)]

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The National Commission is composed of the President and other four members. A person who is or has been a Judge of Supreme Court is appointed as the President of the National Commission by the Central Government [Section 20 (1) (a) ]. However, it is provided that such appointed is not done without consulting the Chief Justice of India. 2.

Jurisdiction of the National Commission [Section 21] (i) Monetary Jurisdiction : The National Commission has the jurisdiction to entertain complaints where the value of the goods or services and compensation, if any, claimed exceeds rupees one crore. (ii) Appellate Jurisdiction : So far as the appellate jurisdiction is concerned, the National Commission has the power to entertain appeals against the orders of any State Commission. (iii) Supervisor and Revisional Jurisdiction : The National Commission has the jurisdiction to call for the records and pass appropriate orders in any consumers' dispute which is pending before or has been decided by any State Commission where it appears to the National Commission that such State Commission has exercised a jurisdiction not vested in it by law, or has failed to exercise a jurisdiction so vested, or has acted in the exercise of its jurisdiction illegally or with material irregularity. ^ " "~ "

3.

Powers of and Procedure applicable to the National Commission [Section 22] Section 22 (1) : The provisions of Sections 12,13 and 14 and the rules made there under for the disposal of complaints by the District Forum shall, with such modifications as may be considered necessary by the Commission, be applicable to the disposal ofj disputes by the National Commission. Section 22 (2) : Without prejudice of the provisions contained in sub-section (1) the National Commission shall have the power to review and any order made by ^ when there is an error apparent on the face of record. Section 22 4: Powers to set aside ex part ^ orders : Where an order is passed! the National Commission exparte against opposite party or a complaint, as the ca may be, the aggrieved party may apply to the Commission to set aside the said on in the interest of justice.

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Section 22 B: Transfer of Cases : On the application of the complainant or of its own motion, the National Commission may, at any stage of the proceeding, in the interest or justice, transfer any complaint pending before the District Forum of one State to a District Forum of another State or before one State Commission to another State Commission. Section 22 C: Circuit Benches : The National Commission shall ordinarily function at New Delhi and performs its functions at such other place as the Central Government may, in consultation with the National Commission, notify in the Official Gazette, from time to time. Rule 14 lays down the procedure to be followed by the National Commission which is as follows:

[I]

Contents of a complaint [Rule 14 (1)] The complainant in person or his agent has to present his complaint to the National Commission or such complaint may be sent by registered post, addressed to the National Commission. The contents of a complaint are mentioned below: 1.

The name, description and the address of the complainant.

2.

The name, description and the address of the opposite party or parties, as the case may be; so that they can be ascertained.

3.

The facts relating to the complaint and when and where (that is, time and place) it arose.

4.

Documents in support of the allegations contained in the complaint.

5.

The relief that the complainant claims.

On receipt of the complaint, the National Commissioji follows the same procedures as laid down in Section 13(1) and (2) in relation to the complaint received by the District Forum [Rule 14 (2)].

[II] Appearance of the parties before the National Commission [Rule 14 (3)] It is obligatory on the parties or their agents to appear before the National Commission on the date of hearing fixed or on any other date to which the hearing could be adjourned. 351

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When the complainant or his agents fails to appear before the National Commission on the dates so fixed, the National Commission may be at its discretion either dismiss the complaint for default or decide it on merit and where the opposite party or its agents fails to appear on the date of hearing, the National Commission may decide the complaint ex-parte [Rule 14 (3)].

[III] Time limit for deciding the complaint [Rule 14 (4)] The National Commission may adjourn the hearing of the complaint if it thinks proper, but it shall decide the complaint as far as possible within a period of three months from the date of notice received by the opposite party where the complaint does not require any analysis or testing of commodities in question. Rule 14 (4) says that, "The National Commission may, on such terms as it deems fit and at any stage of the proceedings, adjourn the hearing of the complain but the complaint shall be decided as far as possible within a period of three months from the date of notice received by opposite party where the complaint does not require analysis or testing of commodities and within five months if it requires analysis or testing of commodities."

[IV] Orders by the National Commission [Rule 14 (5)] After conducting the proceedings according to the rules and, if the National Commission is satisfied with the allegations contained in the complaint, it issues orders to the opposite party or parties, as the case may be and directs it or them to take one or more things as mentioned in Section 14 (I). These things have been already mentioned elsewhere. The National Commission has also the power to direct that any order passed by it, where no appeal has been filed in the Supreme Court or where the order of the National Commission has been affirmed by the Supreme Court, be published in the Official Gazette, or through any other media. No legal proceedings shall lie against the National Commission or any media for such publication of any order.

[V] Rule 15 of the Consumer Protection Rule of 1987 relating to the procedure for hearing the appeal by the National Commission Procedure for hearing the appeal by the National Commission is laid down in Rule 15. Memorandum shall be presented by the appellant or his agent to the National Commission in person or be sent by registered post addressed to the ; Commission. It should be in legible handwriting, preferably typed. Each'

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memorandum shall be accompanied by a certified copy of the order of the State Commission appealed against and such of the documents as may be required to support the grounds of objection mentioned in the memorandum.

When the appeal is presented after the expiry of the period of limitation as specified in the Act, the memorandum shall be accompanied by an application supported by an affidavit stating sufficient cause for not preferring the appeal within the period of limitation. The appellant shall submit six copiesjbrthe^ memorandum to the Commission for official purpose On the date of hearing, it is obligatory for the parties or their agents to appear before the National Commission. If the appellant or his agent fails to appear on such date, the National Commission may in its discretion either dismiss the appeal or decide exparte on merits. If the respondent or his agent fails to appear on such date, the National Commission shall proceed exparte and shall decide the appeal on merits of the case. It is provided that the Commission shall not rest in its decision on any other ground other than those specified in the memorandum unless the party who may be affected thereby, has been given an opportunity of being heard by the National Commission. The National Commission, on such terms as it may think fit and at any stage, adjourn the hearing of the appeal, but not more than one adjournment shall ordinarily be given and the appeal should be decided as far as possible, within 90 days from the first date of hearing. The order of the National Commission shall be communicated to the parties concerned, free of cost. [VI] Sitting of the National Commission and Signing of Orders [Rule 5(A)] (1) Every proceeding of the National Commission shall be conducted by the President or the seniormost member authorised under rule 12 and atleast two members thereof sitting together [Rule 15-A (1)]. It is provided that where the member or members for any reason are unable to conduct the proceeding till it is completed, the President or the seniormost member authorised under rule 12 shall conduct such proceeding de-novo [Proviso to Rule 15-A (1)]. (2) Every order made by the National Commission shall be signed by the President or the seniormost member authorised under rule 12 and at least 353

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two members who conducted the proceeding and if there is any difference of opinion among themselves, the opinion of the majority shall be the order of the National Commission [Rule 15-A (2)]. It is provided that where the proceeding is conducted by the President or the seniormost member authorised under rule 12 and three members thereof and they differ on any point or points, they shall state the point or points on which they differ and refer the same to the other members for hearing on such point or points and such point or points shall be decided according to the opinion of the majority of the National Commission [Proviso to Rule 15-A (2)]. 4.

Provisions relating to an appeal to the Supreme Court [Section 23] There is a provision in the Act that any person aggrieved may make an appeal to the Supreme Court against the Order passed by the National Commission within thirty days from the date of the Order. However, if the Supreme Court is satisfied that there was sufficient cause for not filing on appeal within 30 days from the date of order, the Supreme Court may allow such appeal even after the expiry of the said period of thirty days.

7.8 1.

SOME OTHER IMPORTANT PROVISIONS OF THE ACT _________ Finality of orders Every order of a District Forum, the State Commission or the National Commission shall, if no appeal has been preferred against such order under the provisions of this Act, be final [Section 24].

2.

Limitation period The District Forum, the State Commission or the National Commission shall not admit a complaint unless it is filed within two years from the date on which the cause of action has arisen [Section 24 A (1)]. Notwithstanding anything contained in sub-section (1), a complaint may be entertained after the period specified in sub-section (1), if the complaint satisfies the District, Forum, the State Commission or the National Commission, as the case may be, t he had sufficient cause for not filing the complaint within such period [Section 241 (2)}.

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It is also provided that no such complaint shall be entertained unless the District Forum, the State Commission or the National Commission, as the case may be, records its reasons for condoning such delay. 3.

Enforcement of orders by the District Forum, the State Commission or the National Commission [Section 25] By making amendments in Section 25 of the Act in 2002, efforts have been made to provide for the attachment by the District Forums, the State Commission or the National Commission, as the case may be, of the property of a person not complying with an interim order. It also seeks to provide that on application from any person entitled to receive any amount from another person under an order made by a District Forum, State Commission and National Commission which remain due, the District Forum, State Commission and National Commission, as the case may be, may issue a certificate to the Collector for recovery of the amount as arrears of land revenue. These new provisions are expected to overcome the delays and other difficulties faced in execution of orders of the redressal agencies throughout Civil Courts.

4.

Dismissal of vexations or frivolous complaints [Section 26] If any complaint filed before the District Forum, the State Commission or the National Commission, as the case may be, is found to be vexatious or frivolous, it is dismissed for reasons recorded in writing and the concerned Forum or Commission passes an order asking the complainant to pay to the opposite party such cost as may be specified in the order. However, such cost does not exceed Rs. Ten Thousand.

5,

Penalties [Section 27] When a trader or any other person against whom a complaint is made or if the complainant fails or omits to comply with any order passed by the District Forum, the State Commission or the National Commission, as the case may be, such trader, person or complainant is punishable with an imprisonment for a term which shall not be less than one month but which can be extended upto three years or with a fine which shall not be less than Rs. Two Thousand but which can be extended upto Rs. Ten Thousand or with both [Section 27 (1)]. By amending the Act in 2002, Section 27 (2) and (3) has been inserted in the Act in order to empower the District Forum, the State Commission and the National Commission, as the case may be, with the powers of a Judicial Magistrate of the first class for the summary trial of offences under the Act notwithstanding anything contained in the Code of Criminal Procedure. This is considered necessary to clarify that the District Forums or the State 355

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Commissions or the National Commission can themselves try offences under the Act and impose penalty of imprisonment. These two sub-sections, that is, 27 (2) and 27 (3) are given below:

6.

Appeal against the order passed under Section 27 Section 27-A has been inserted in the Act by amending the Act in 2002 and as a result, it has become now possible to make an appeal against the order passed under Section 27 subject to the provisions of Section 27-A. The provisions of Section 27-A are as follows: An appeal under Sec. 27 shall be from the order made by District Forum to the State Commission, the order made by the State Commission to the National Commission and the order made by the National CommissionTo the SupremeTCourt within a period of thirty days from the date of order from the above said forum. It is also provided that the State Commission or the National Commission or the Supreme Court, as the case may be, may~entertain an appeal after the expiry of the said period of thirty days, if, it satisfied that the appellant had sufficient the said period of thirty days, is satisfied that the appellant had sufficient cause for not preferring the appeal within the period of thirty days [Proviso to Section 27-A (3)].

1.

Protection of Action taken in good faith [Section 28} It has been provided in Section 28 of the Act that no suit, prosecution other legal proceedings shall lie against the members of he District Forum, the State Commission or the National Commission or any Officer or person acting under the direction of the District Forum, the State Commission or the National Commission for executing any order made by it or in respect of anything which is done in good faith or intended to be done in good faith by such member, officer or person under this Act or under any rule or order made thereunder.

8.

Service of Notice [Section 28-A] The Section 28-A has been inserted in the Act by amending the Act in 2002. Various important aspects are considered in Section 28-A relating to the service of notice. This is the era of modern technology and new information systems are being evolved. This newly inserted 28-A Section provides that all notices required by this Act now can be served by using modern communication means including speed post, courier services and even FAX messages for helping to quicken the proceedings.

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7.9

SUMMARY

The sole intention of the Act is to make the consumers of the goods and services aware of theinFIght against the marketing of the goods and services. To safe guard the interest of the consumers the Act has provisions of consumer councils and other authorities for the settlement of the consumer disputes and for matters connected with that. The Act provides speedy and simple redressal to consumer dispute and hence there, has been set up a quasi- judicial body at the district, state, and as well as central level. They have been e'mpowered to give relief of a specific nature and award compensation to the consumer.

7 10 SELF-ASSESSMENT QUESTIONS _________________ Q1.

State and explain the definitions of the following: (A)

A trader,

(B)

A manufacturer,

(C)

Restrictive Trade Practice,

(D)

A complaint,

(E)

Goods,

(F)

Service,

(G)

Member,

(H)

An Appropriate Laboratory,

(I)

Branch Office.

)2. State and explain the definitions of a person and a consumer. Is every person a consumer under the Consumer Protection Act of 1986? Explain with reference to a person who is not a consumer under the Act. )3. Define the concept of service under the Consumer Protection Act of 1986. Which services are excluded from the purview of the Act? Define a consumer dispute. Who can file a complaint and under what circumstances?

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Q5. Define 'unfair trade practice'. When is a trader said to have adopted unfair trade practice? Q6.

Write a note on the State Consumer Protection Council.

Q7. What are different Consumer Disputes Redressal agencies? How are they established? Q8.

Explain the composition and jurisdiction of the District Forum.

Q9. Explain the manner of making complaint under Section 12 of the Act to the District Forum. Q10. Explain the procedure on the receipt of the complaint under Section 13 of the Consumer Protection Act of 1986. Q11. Who can file a complaint under the Consumer Protection Act of 1986? Describe the manner in which the complaint can be made to the District Forum and the procedure of the disposal of the complaint. Q12. Explain the various powers given to the District Forum under the Consumer Protection Act of 1986. Q13. Explain the procedure followed by the District Forum where the complaint relates to (i)

The defects in goods and

(ii)

The deficiency in service.

Q14. Where does an appeal lie from the orders of the District Forum? What is the remedy available to an aggrieved party when the District Forum passes an order on a complaint over which it has no jurisdiction? Q15. Explain the composition of jurisdiction of the State Commission. Q16. Explain the composition and jurisdiction of the National Commission.

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Q17. Discuss the procedure applicable to the National Commission in the disposal of a complaint. Explain the provisions of the Act relating to the procedure when the members of the National Commission differ in their opinion. Q18. How is the order passed by the National Commission enforced? Is the order passed by the National Commission final? Q19. Explain the procedure for hearing of an appeal by the National Commission. f Q20. Explain the nature of penalties imposed when an order passed by any of the Consumer Disputes Redressal agencies is not complied with.

Business Law

8.1

INTRODUCTION

The first Indian Act regarding companies was the Joint Stock Companies Act. 1850. This was based upon the English Act of 1844. The Act of 1850 was replaced by anew Act bearing the same name in 1857. In this Act the principle of limited liability was introduced for the first time in India. With the growing popularity of the corporate form of business organization, need was felt for more comprehensive company legislation. Acts relating to companies were passed in I860., 1866,1882,1895,1910 and 1913. The Act of 1913 remained in force up to 1956, though it was extensively amended in 1936 and 1951. In 1950, the Government appointed an expert committee under the chairmanship of Shri C. H. Bhabha to suggest how the Company Law can be reformed. The Companies Act of 1956 (Act 1 of 1956) is based mainly on the recommendations of the committee. The Act of 1956 has been amended in 1960,1963,1965,1969,1971 and 1974. The Companies (Amendments) Act of 1974, was applied from 1st February, 1975.Thereafter based on the recommendations of the Sachar Committee Report, the Companies Act of 1956 was again amended. In the year 1996 a working group was constituted to rewrite the Companies Act in order to facilitate the healthy growth of the Indian corporate sector to make it more competitive under the changing global situations. Many important amendments were introduced in the year 1996,1997,2000, 2001, latest being in December 2002.

8.2

DEFINITION AND MEANING OF A COMPANY __________________

A Company is one of the forms of business organisation. It is a voluntary association of persons and is formed for certain common purposes. Its capital is raised by selling shares and the persons holding such shares are known as shareholders. The liability of shareholders is limited to the extent of the shares they hold. A company is an artificial person with a perpetual succession and a common seal. In Section 3 of the Companies Act of 1956, the definition of a Company is given as j under: "A Company means a Company formed and registered under this Act or an existing Company as defined in Clause (ii)" [Section 3 (1) (i)]. While clause (ii) of Section 3 (I) implies that an existing Company means any Company formed and registered under any of the previous Companies Acts. But this definition in no way helps one to know what a Company is? Neither it reveals the outstanding features of a Company. Therefore, let us consider the definitions stated by Lord Justice Lindley and Haney. 362

|

Unit 8

Companies Act of 1956 - Part I

A company is an artificial person, a mere creation of law and it gets every right to possess or to create assets, to incur liabilities and to carry on the business activities according to the provisions of the law. |l

Section 566 (i) of the Companies Act of 1956 defines a Joint Stock Company as follows. "A joint stock company means a company having a permanentrjaidjiricaîtaj or nominal share capita-l of ftxed amount divided into shares, also of fixed amount, or held and transferable as stock, or divided and held partly in the one way and partly in the other, and formed on the principle of having for its members the holders of those shares or that stock, and no other persons."Section 566 (2) further mentions that "Such a company, when registered with Limited Liability under this Act, shall be deemed to be a company limited by shares." Thus, from the above mentioned definitions of a company, we come to know that a nnpany is a voluntary incorporated body which is an artificial legal person, having a parate legal entity, created by law with limited liability having a common seal and perpetual ccession. If an association is not incorporated under the Companies Act, it neither enjoys •y independent and distinct existence nor does it become a body corporate. It remains isly an illegal association. A company formed possesses a legal personality only when gistered under the Companies Act. This is so because the law confers on a company, on -> registration, a distinct personality and it becomes a totally different person or entity om its members or the individuals composing it. Salomon vs. Salomon and Company Ltd. [1897 A.C. 22], Saloman was engaged in i the production of boots. Later on he formed a company called 'Saloman and Company'. I He himself, his wife, four sons and a daughter were the members of the company. He f transferred all his business of boot manufacturing to the said company. He received the * major portion of shares of the company and secured debentures worth £10,000 as a consideration for the transfer of his business. Subsequently, the company went into liquidation and Saloman claimed the payment of the amount of £ 10,000 out of the assets of the company. The unsecured creditors objected his claim on the ground that the business was owned by only Saloman and as such he should not be allowed to claim that amount as a secured creditor. But the Court held that Saloman as an individual was distinct from Saloman impany and therefore, he could be a secured creditor of the company even though I the majority of shares.

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8.3

MAIN FEATURES OR CHARACTERISTIC OF A COMPANY

Following are the main features or characteristics of a company. (A) Registration: A company comes into existence only after registration under the companies Act. But a statutory corporation is formed and commences business as notified or stated in the Act and as passed in the legislature. In case of partnership, registration is not compulsory. (B) Voluntary Association: Acompany is an association of many persons on a voluntary basis. Therefore a company is formed by the choice and consent of the members. (C) Legal Personality: A company is regarded by Law as a single person. It has a legal personality. This rule applies even in the case of 'One-Man Company'. (D) Contractual capacity: A shareholder of a company, in its individual capacity, can not bind the company in any way. The shareholder of a company can enter into a contract with the company and can be an employee of the company. (E) ^Management : A company is managed by the board of directors, .whole time directors, Managing director or Manager. These persons are selected in the manner provided by the Act. A shareholder, as such can not participate in the management. (F) Permanentjgdstence : The Company has perpetual succession. The death or insolvency of a shareholder does not affect its existence. Acompany comes into end only when it is liquidated according to provisions of the Company Act. (G) Registered office: A company must have a registered office. (H) Common seal: Acompany musthayjyuômmpn seal. (I) LimitedJiability : The liabilities of a shareholder of a company are usually limited. The creditors of a company are not creditors of individual shareholders and a decree obtained against a company can not be executed against any shareholder. It can only be executed against the assets of the company. (J) Transferability: The shareholders of company can transfer its share and ordinarily the transferee becomes a member of the company. (K) Statutory obligations : A company is required to comply with various statutory obligations regarding management. For example, filing balance sheets, maintaining proper account books and registers etc. 364

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(L) Artificial personality : A company is an artificial person, not a natural person. Therefore a company is not a citizen, although it may have a domicile. (M) Residencej A company has a residence (for taxation and other purposes). A company does not possess any fundamental rights. (N) No fundamental rights : Though a company has no fundamental rights, it can challenge a Law, as void, if the Law happens to violate fundamental rights of citizens. In order to, succeed the company must prove that the impugned Law is expropriatory of a citizen's property. It is true that a company has no fundamental right. But the fundamental rights of the shareholders of the company as citizens are not lost when they associate to form a company. The shareholders' rights are equally and necessarily affect, if the rights of the company are. (O) Separate name : Every company must have a specific name which must be registered. OnceJt is registered it must be painted or affixed on the outside of every office or place of business. (P) Number of members : In the case of a private limited company, the minimum number -•— — " - \

• — ""^^ — "^—

of members ^s_two_d'hile the maximum is fifty/ But in the case of a public limited company, the minimum number is fixed at|evenj^hile there is no maximuîjimkon membership. (Q) Shareholders are actual owners : Shareholders contribute towards the capital of the company and they are actual owners of their company. As the owners of their company, they participate in the management of the company directly and indirectly. (R) Raising oiLcapital on thejargejscale : A company can raise the capital on the large scale by selling its shares to the public at large. I S ) Capacity to_sue :~A~company can sue and also be sued in its corporate name as any natural pers5n can. d) Rigidity of objects : The nature of business in which the company would participate is required to be mentioned in the 'Object Clause, 'of the |VIemorandum of Association''. To make necessary changes in the objective clause, thTcompahy haslo follow the provisions of the Companies Act. Without changing the ^rJjectcIausejjio company can take any new business activity.

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(U) Statutory requirements: A company can conduct only that business which is stated in the MemoranduniofAssociatiQn. A company is governed by the provisions of the CompaniesAct. Thus~ a company has to carry on its business according to the statutory requirements which brings some sort of discipline in its management and working. (V) Company is body corporate,: The term 'Body Corporate' or 'Corporation' is used for a company in the Companies Act of 1956. The word 'Corporation' is derived from the Latin word corpus which literally means_abody_. Section 2 (7) states that, "body corporate' or 'corporation' includes a company incorporated outside India but does not include (a) a corporate sole, (b) a co-operative society registered under any law relating to co-operative societies, and (c) any other body corporate, not being a company as defined in this Act which the Cejitr^LGovernment may by notification in the Official Gazette, specify in this behalf. The term 'corporate sole' implies an corporation constituted in a single person who has corporate status in right of some office or function. Perpetual offices such as the president, governors, public trustees, ministers are the examples of corporate sole. (W) An incorporate association: A company is required to be registered and only-after-registration under the Companies Act, it comesjnto existence. In other words, it simply means that a company is to beômpulsorely-registered under the Companies Act. (X) Separate legal entity : A company is a distinct person which possesses its own identity. It has its own independent existence. It has a distinct entity separate from its members. No member can be held liable for the acts of his company even if he holds the entire share capital of the company. He can enter into contracts with his company in the same manner as other individuals. This point clear is made in the case of Salmon vs. Saloman and Company Ltd. (Y) An artificial person but not a citizen : A company is registered as an artificial person as it is created by law and not by natural birth. It has no body, no soul, and no conscience; still it is in a position to exist. It functions through its Board of Directors and like any natural person, it can own property, enter into contracts, purchase or sell its property, appoint persons as its employees, even other members of a company and individuals enter into contracts with the company. However, a company cannot become a citizen as it cannot enjoy the rights under the Indian Constitution. But though it does not possess fundamental rights, it is a person in the eyes of law. (Z) Lifting or Piercing the Corporate Veil: The advantage of incorporation, particularly of separate artificial and distinct entity, is allowed to be enjoyed only by those who 366

Unit 8


do not make dishonest and fraudulent use of their company. But, sometimes, it becomes very essential to lift the veil garbed by the company. The human ingenuity compels the courtsjobrsak through or lift the corporate veil, and punish those people behind the Company who are the beneficiaries of the corporate fiction. Thus, the corporate veil is lifted by the courts when they ignore the companies and concern themselves with the members or the persons running the companies. The corporate veil may be lifted in the following instances. (a) to investigate the real ownership of shares and controlling power over the company. (b) to investigate the affairs of the company when the company is used for evading the taxes or for circumventing tax obligations. (c) to investigate into affairs where there exists a move to establish monopoly. (d) to investigate mismanagement and oppression by the majority. (e) to investigate lawful or unlawfial_objecti ves of the company. (f) Jo investigate the names and members of the company. (g) to investigate whether the comrjcmyjjjicjinâs_an.agf'p<- fnr its members or shareholders. (h) to investigate the affairs of the company whether formed for fraudulent purpose, to defeat the provisions of any law or to defraud its creditors or to avoid valid obligations. (1)

to investigate whether the company is sham.

(j) to investigate whether a company is enemy. If it is so, the Court may examine the character of a person or persons in real control of the company. (k) to investigate whether the doctrine or the principle of corporate veil conflicts with the public policy. In such cases, the courts lift the corporate veil in order to protect the public policy. For example, X was carrying on a Jewellery business. He registered his company and the other shareholder a bank account. X was working as the managing and sale director of the company. The company did not have any assets. H filed a suit and claimed to recover certain amount being the value of jewellery. The firm did not have that much balance to pay to H. X contended that the contract was entered into between H and the company and, therefore, he was not personally liable for paying the amount to H. The court held X personally liable and thus lifts the corporate veil.

367

Business Law

Activity A : Mr. Dayal agreed to sell a piece of land to Mr. Letho. But subsequently he changes his mind and in order to avoid specific performance of the contract, by forming a company with a meager amount of capital and taking one of the clerks of his solicitors as a member, Mr Dayal transferred the piece of land in the name of the his company. Does the court has power to lift the veil? Why?

8.4

IMPORTANT TYPES OF COMPANIES __________________________

Companies can be classified into various types on different basis. 1. Classification of Companies on the basis of Liability (A) Companies Limited by Shares: Companies limited by shares are the most commonly found companies. Section 12 (2) (a) implies that where the liability of the shareholders of a company is limited to the extent of the unpaid amount on the shares held by them, the company is known, as a company limited by shares. In such companies, each share has a fixed nominal or face value which the shareholder is required to pay either at a time or in various installments. Whatever may be the liabilities of a company, shareholders are not bound to pay anything more than the face value of the shares held by them. Thus, the liability of each of the shareholders of such a company is always limited to the extent of the amount unpaid on his shares. It must be noted that a company limited by shares may be a private company or a public company. (B) Companies Limited by Guarantee : Words 'Companies Limited by Guarantee' imply that the liability of members of such company is always limited Jo a fixed amount agreed by its members to contribute towards the^sels-ofJhe. company7^'gcfionT272) (b) states that "a company having the liability of its members limited by the memorandum in such amount as the members may respectively undertake by the memorandum to contribute to the assets of the company in any event of its being wound up, such company in the Act is termed : as a company limited by guarantee while Section 27(2) lays down that, "in the

368

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case of a company limited by guarantee, the articles shall state the number of members with which the company is to be registered.'' Thus, the amount promised to pay by a member of a company limited by guarantee is called the guarantee. Such companies depend for the purpose of running their show on entrance and subscription fees and the amount guaranteed by their members is of the nature of reserve capital. (C) Unlimited Companies : Section 12 provides that any seven or more persons in the case of a public company and two or more persons in the case of a private company may form an incorporated company with limited liability or without limited liability. Any company regjgtered_withput limitedjiability jj^gjowri as anunlirmted cornpany^The liability of the members of such company is unlimited like an ordinary partnership firm and every member of such company is liable for debts of the company in proportion to his interest in the company. An unlimited company may have or may not have a share capital. But if it has a share capital, it may be a public company or a private company. Section 27(1) lays down that in the case of an unlimited company, the articles shall state the number of members with which the company is to be registered and if the company has a share capital, the amount of the share capital with which the company is to be registered.

Classification of'Companies on the basis of mode of Incorporation (A) Chartered companies: Chartered Companies are also known as Royal Charter. Such Companies are incorporated under the Royal (special) fOiarter granted by the King or the Queen. Such companies are given excliJtsive powers, rights and privileges underjhe royal charter andjherefore,!_they have to function in accordance with the terms and conditions of the royal charter. The East India •~

'~~

'

'

""" ___________________________

.- --------~ ________

_

Company, the Bank of England, tne~Chaitered BankoTSustralia are some of the examples of Chartered or Royal companies. However, such Companies find no place in India after her independence, since there is no monarchy in India. (B) Statutpry companies : Companies which are created by special Actsjjf Legislature are known as statutory companies. A statutory company can be defined as a company which is incorporated by a special Act passed by either the Central Legislature or State Legislature and such a company enjoys certain powers, rights, privileges as laid down in the Act. Therefore, such Companies £cto net require hawa MemorandunTgf Association? The Reserve Bank of India, the Life Insurance Corporation of India, the State Bank of India, the Industrial "Finance Corporation of India, the Food Corporation of India, the Unit Trust oF ' India, etc. are tfte examples ot the statutory companies 369

Business Law

(C) Registered companies under the Act : Registered Companies are those Companies which are registered or incorporated with the Registrar of Companies as per the provisions of the Companies Act. At present, in India, almost all Companies are registered under the Companies Act of 1 956.

3.

Classification of Companies based on the Basis of Ownership (A) Private company : Section 3(1) (Hi) defines a private company as follows: "Private company" means a company which has a minimum paid.up carjitalflf, Rupees one lakh or such higher paid up capital as may be prescribed, and by its Articles (a) restricts the right to transfer its shares, if any, - - -

(i)

~ -

persons who are in employment of the company ; and

(ii) persons, who having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased; and (c)

prohibits any invitationtothej of the company.

lie to subscribe for any shares or dejaentures

(d) prohibitsany invitation or acceptance of deposits from persons other than its members, directors or their relatives. This sub-clause has been inserted by the Companies (Amendment) Act of 2000 w.e.f. 13.12.2000. It is also provided that where two or more persons hold one or more shares in a company jointly, they shall, for the purposes of this definition, be treated as a single member. [Proviso to Section 3 (i) (Hi)] (B) Public company: By amending the Companies Act in 2000, by making certain additions in Section 3(1) (iv), the definition of "Public Company" is given in the said section as follows : "Public Company" means a company which (a)

is not a private company;

(b) has a minimum paid-up capital of Five lakh rupees or such higher paid-up capital as may be prescribed; 370

Unit 8


(c)

is a private company.

which is a subsidiary of a company which is not a

Thus, Section 3 (1) (iv) (c) implies that any private company which is a subsidiary of a public company is also treated as a public company as a result of amendments in the Companies Act in 2000. Thus, in short, it can be said that a public company is a company which must have a minimum paid-up capital and which by its articles does not restrict the right to transfer its shares and does not limit the number of its members and further does not prohibit any invitation to the public to subscribe for any shares in or debentures of the company. Any seven or more persons can come together and join hands to form a public company. However, there is no restriction on the maximum number of members. &> Activity B ; The Ding Don Bell Company has a minimum paid-up capital of Rs. Five lakh, having seven numbers of the persons in the company. The Ding Dong Bell Co. also invited the public to subscribe to share capital or to purchase the debenture. Identify the type of company.

(C) Government company: Section 617 of the Companies Act of 1956 defines a 'government company' as follows: "For the purpose of this Act, a government company means any company in which less than fifty one per cent of the paid-up share capital is held by the Central Government, or by any State Government, or Governments or partly by the Central Government and partly by one or more State Governments, and includes a company which is a subsidiary of a Government company as thus defined." In India, there are many companies in which 100% paid-up share capital or morethan 51 % ofthepaid-up share capital is provided by the Central or the State Government.

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4.

Classification of companies based on the jurisdiction of functioning (A) A national company: When the operations of a company are confined only within the boundaries of the country in which the company is registered, such a company is called as a nationalcornpahy. (B) Multinational company : When the operations of a company are extended bevondthejjpundaries of the country wherein it is registered, such a company is cSTIed a multinational or transnational company. (C) Foreign company: In simple words, it can be said that a foreign company is one which is incorporated outside India but has a place of business in India. Section 591 (1) makes clear the meaning of a foreign company and accordingly, 'all foreign companies fall under the following two classes, namely, (a) Companies incorporated outside India which, after the commencement of this Act establish a place of business within India; and (b) Companies incorporated outside India which have, before the commencement of this Act, established a place of business within India and continue to have an established place of business within India at the commencement of this Act."

Classification of companies on the basis of control and or shareholding Companies can be classified on the basis of control as (a) Holding companies and (b) Subsidiary companies. (A) Holding company : Section 4 (4) of the Companies Act of 1956 implies that a1 company is deemed to be a holding company of another if that other is its subsidiary. Thus, a holding company can be defined as a company which has_a_ controLoyer a subsidiaryômp_any through any one of the several methods as explained in Section 4(1). (B) Subsidiary company : A company is a subsidiary of a holding company, if a holding company controls the majority composition of its board of directors, having an object to control the management of the subsidiary or that other company, that is, the holding company holds the majority of its shares or the holding company's subsidiary has its own subsidiary, it becomes the subsidiary of the first mentioned company, on the first holding company. For example, company A is a subsidiary of company B, and company C is a subsidiary of company A, company C is a subsidiary of company B too. Further, if company X is a subsidiary of company C, company X is also the subsidiary of company

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A, and consequently also of company B. Thus, in this example, B is the holding company while A, C, X are the subsidiaries of B.

6. -f

»

Other types of Companies (A) One man company : One man company is usually a private company, wherein one man holds practically the whole of the share capital of the company. If one man company satisfies all the conditions and requirements of incorporation as laid down in the Companies Act, it becomes a legal personality. For example, X and Y register their company as a private company with a share capital of Rs. 7,00,0007- divided into 70,000 shares of Rs. 107- each. Yholds 69,999 shares while X holds only 1 share. This is nothing but a one man company. (B) Associations not for profits : Section 25 (1) lays down that "where it is proved to the satisfaction of the Central Government than an association (i) is about to be formed as a limited company for promoting commerce, art, science, religion, charity or any other useful object, and (ii) intends to apply its profits, if any, or other income in promoting its objects, and to prohibit the payment of any dividend to its members, the Central Government may, by licence, direct that the association may be registered as a company with limited liability without the addition to its name of the word 'Limited' or the words 'Private Limited'. Such associations registered under this Act enjoy all the privileges of limited companies. (C) Existing company : According to Section 3 (1) (ii) 'existing company' means a company formed and registered under any of the previous companies laws^ specified below: (a) any Act or Acts relating to companies in force before the Indian Companies Act, 1866 (10 of 1866) and repealed by that Act; (b) the Indian Companies Act, 1866 (10 of 1866); (c) the Indian Companies Act, 1882 (6 of 1882); (d) the Indian Companies Act, 1913 (7 of 1913); (e) the Registration of Transferred Ordinance, 1942 (54 of 1942); and (f)

any law corresponding to any of the Acts or the Ordinance aforesaid and in force 37 3

Business Law

(1) in the merged territories or in a Part B State (other than the State of Jammu and Kashmir) or any part thereof, before the extension thereto of the Indian Companies Act, 1913 (7 of 1913); or (2) in the State of Jammu and Kashmir, or any part thereof, before the commencement of the Jammu and Kashmir (Extension of Laws) Act, 1956 [in so far as banking, insurance and financial corporations are concerned, and before the commencement of the Central Laws (Extension of Jammu and Kashmir) Act, 1968, in so far as other corporations are concerned; and (g)

7.

the Portuguese Commercial Code, in so far as it relates to" sociedades anonimas."

Difference between private company and public company Private Company 1.

"Private company" means a company which has a minimum paid-up capital of Rs. One lakh or such higher paid-up capital as may be prescribed and by its Articles (a)

restricts the right to transfer its shares, if any;

(b)

limits the number of its members to fifty not including (i)

persons who are in employment of the company; and

(ii) persons, who having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased; and (c) prohibits any invitation to the public to subscribe for any shares in or debentures of the company; (d) prohibits any invitation or acceptance of deposits from persons other than its members, directors or their relatives. This sub-clauses has been inserted by the Companies (Amendment) Act of 2000 w.e.f. 13-12-2000.

374

2.

A private company can be registered with a paid-up capital of Rs. One lakh.

3.

A private company cannot have less than two members and more than fifty members.

Unit 8


4.

A private company cannot invite public to subscribe to its share capital and also cannot invite the people to buy its debentures.

5.

In a private company, the right to transfer its shares is restricted by its Articles. Thus, if a private company has a share capital, it imposes certain restrictions on the right of its members to transfer the shares of the company they hold.

6.

A private company has to add the words "Private Limited" at the end of its name.

7.

A private company must have minimum two directors.

8.

A private company enjoys certain privileges, that is, exemptions from certain provisions of the Companies Act of 1956.

9.

Directors of a private company need not file their consent with the Registrar to Act as director or sign an undertaking to take up qualification shares.

10. Legal controls on private Companies are less. 11. In private companies, restrictions on the managerial remuneration are far less. 12. Directors are allowed to borrow from private companies. 13. In the case of a private company, unless the articles of the company provide for a large number, two members personally present are quorum for a meeting of the company. 14. A private company is not required to file a prospectus or a statement in lieu of prospectus with the registrar [Section 70 (3)]. 15. A private company can commence its business immediately after receiving the certificate of incorporation. 16. A private company cannot accept deposits from the public other than the shareholders, directors and their relatives. Public Company By amending the Companies Act in 2000, by making certain additions in Section 3 (l)(iv), the definition of "Public Company" is given in the said section is as follows: 375

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"Public Company" means a company which (a) is not a private company; (b) has a minimum paid-up capital of Five lakh rupees or such higher paid-up capital as may be prescribed; • (c) is a private company which is a subsidiary of a company which is not a private company." Thus, Section 3 (1) (iv) (c) implies that any private company which is a subsidiary of a public company is also treated as a public company as a result of amendments in the Companies Act in 2000. A public company must have a minimum paid-up capital of Rs. Five lakhs. The minimum number of persons required to form a public company is seven. There is no restriction on the maximum numbers of members in a public company. A public company invite the public to subscribe to share capital or to purchase the debentures. In a public company, its shares are freely transferable. A public company has to use the word 'Limited' at the end of its name. A public company must have minimum three directors. A public company does not enjoy any such privileges. Directors of a public company have to file their consent with the Registrar to act as director or sign an undertaking to take up qualification shares. Legal controls, restrictions on public companies are more and strict. In public companies, there are restrictions on the managerial remuneration. Important provisions relating to the managerial remuneration are made in sections 198,309, 310,311 of the Companies Act of 1956. It cannot be more than 11% of net profits of the company. >^ Directors cannot borrow fromthepublic comganie^. \ • ------------------ • In'the case of public company, unless the Articles of the company provide for a large number, five members personally present are quorum for a meeting of the company. [Section 174(1)]. 376

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Companies Act of 1956-Part I

A public company has to file a prospectus or a statement in lieu of prospectus with the Registrar. A public company can commence its business only after it receives the certificate to commence the business from the Registrar of Companies. A public company is allowed to accept the deposits from the public under the Companies Act subject to the provisions of Sections 58 A, 58 AAA and 58 B.

8.

Prohibition of Associations and Partnerships exceeding certain number "No company, association or partnership consisting of more than ten persons shall be formed for the purpose of carrying on the business of banking unless it is registered as a company under this Act or is formed in pursuance of some other Indian Law." [Section 11 (1)] and "No company, association, or partnership consisting of more than twenty persons shall be formed for the purpose of carrying as any other business that has for its objects the acquisition of gain by the company, association or partnership or by the Individual members thereof, unless it is registered as a company under this Act, or is formed in pursuance of some other Indian law [Section 11 (2)]. Thus, if the number of members in a partnership or an association exceeds the statutory limit as mentioned in Section 11 (1) and (2) and if such a partnership or an association is not registered under the Companies Act, it becomes an illegal association and does not possess, any legal existence. These provisions have been made in order to prevent the mischief from large trading undertakings carried on by large fluctuating bodies. Of course, to the associations registered according to the provisions of Section 25, provisions of Section 11 are not applicable. Provisions of Section 11 also do not apply to a joint family as such carrying on a business and where a business is carried on by two or more joint families. In computing the number of persons for the purposes of sub-section (3) and (2) of Section II, minor members of such families shall be excluded [Section 11 (3)].

* f 9/

Consequences of Illegal Association Every member of a company, association or partnership carrying on business in contravention of Section 11 is personally held liable for all liabilities incurred in such business [Section 11 (4)] and every person who is a member of a company, partnership or association formed in contravention of Section 11 is punishable with fine which may extend to Rs. Ten thousand [Section 11 (5)]. 377

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Such illegal associations are penalized for improper use of words 'Limited' and 'Private Limited', according to the provisions of Section 631. Section 631 lays down that, "If any person or persons or trade carry on business under any name or title of which the word "Limited" or the words "Private Limited" or any contraction or imitation thereof is or are the last word or words, that person or each of those persons shall, unless duly incorporated with limited liability, or unless incorporated as a private company with limited liability, as the case may be, punishable with a fine which may extend to five hundred rupees for every day upon which that name or title has been used." Activity C: My friend opened a company with his other six friends. They have a paid-up capital of Rs. seven lakh. My friend prepared Memorandums, Articles of Association etc. but did not get it registered as per the provisions of this Act. What is the legal position of the company? /Important Stages Involved in the Process of Formation of a Company *4&) Promotion Promotion of a company is obviously the first important preliminary stage wherein ^s necessary steps are taken for the registration and floatation of a company. Definition of a promoter is not given in the Act. However, Section 62 (6) (a) makes clear the meaning of a promoter for the purpose of Section 62 only, and accordingly, "the expression promoter" means a promoter who was a party to the preparation of the prospectus or of the portion thereof containing the untrue statement, but does not include any person by reason of his acting in a professional capacity for person engaged in procuring the formation of a company.'' Promoters enter into contracts on behalf of a company even before it is duly incorporated. The persons who undertake different steps necessary for incorporation of a company are the promoters of the company. They work till the Board of Directors of a company is legally formed as per the provisions of the Act and starts governing the company. 378

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egistration For the purposes of the registration of a company, an application is required to be done to the Registrar of the companies as per the provisions of Section 12.

loatation and raising of capital "VJ

After completing the legal formalities required for registration, a company goes in to the third stage for raising the sufficient capital to commence and carry on its business.

(D) Commencement of business Private companies or companies having no share capital can start their business immediately after they are incorporated. But public companies with share capital are required to obtain the necessary certificate from the registrar of companies to commence the business [Section 149}.

8.5 INCORPORATION OF A COMPANY 1. _ -Mode of forming incorporated company Any seven or more persons, or where the company to be formed will be a private company, any two or more persons, associated for any lawful purpose may, by subscribing their names to a Memorandum of Association and otherwise complying with the requirements of this Act in respect of registration, form an incorporated company. In other words, any seven persons for forming a public company or any two persons for forming a private company may come together and apply to the registrar by giving necessary information in the prescribed form, accompanied by required documents. They can form either a company with unlimited or limited liability, limited by shares or guarantee.

2.

Registration of memorandum and articles For the registration of the company, the following documents , together with the necessary fees, must be submitted to the registrar of companies of the state in which the registred office of the company will be situated. (A) Memorandum : The memorandum of association of a company is very important and fundamental document of the company. It contains the fundamental conditions upon which the company is allowed to be incorporated. It makes 379

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clear the area of operations of the company and also regulates the external affairs of the company in relation to outsiders. No company can be registered unless the memorandum of association is submitted to the registrar. It is required to be prepared according to the provisions of the Companies Act. In the case of a public company, the memorandum must be signed by at least seven persons and if it is a private company, by two persons duly witnessed. (B) Articles of association: The articles of association contain the rules, regulations, bye^laws.etc. for the internal management of the affairs of the'company. Such rules, regulations are framed for carrying out the aims and objects as set out in the memorandum of association. The articles of association is required to be signed by the subscribers of the memorandum of association and registered along with the memorandum. A public company may have its own articles of association. But, if in case, it does not have its own articles, it may adopt Table A as given in schedule-I to the Companies Act of 1956. (C) A letter of approval: An application for availability of name under which the company proposes to be incorporated is required to be submitted to the Registrar of the Companies in prescribed form in the state where the registered office of the company is to be situated. The Registrar issues the letter of approval to that effect that the proposed name of the company has been approved. (D) Declaration : A declaration, as per the provisions of Section 33 (2), making clear that all the requirements of the CompmiiejÂcjrof 195jrrelating to the registration have been complied with. (E) List of directors: A list of persons, duly signed by them along with their consent to act as directors. Such consent must be in writing and accompanied with the signed agreement with every such director to take the number of shares required to qualify himself a director. [Section 266]. However, it is not required in the case of Private Companies and Companies not having a share capital. (F) Sanction of the controller of capital Issues : The sanction of the controller of capital Issues is required, if the capital exceeds Rs. One crore. (G) Challan: A challan showing that the registotionjiees, filing fee have been duly paid as per the provisions of the Companies Act of 1956. Notice of the situation of the registered office of the company is required to be given to the registrar of the companies within thirty days of the date of incorporation of

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companies. On receiving such notice, the Registrar of the Companies records the same. [Section 146(2)}.

3.

Certificate of Incorporation When the documents required for registration are filed with the registrar of companies and, if the registrar is satisfied and convinced that all the statutory requirements regarding the registration have been duly complied with, he registers all necessary documents, that is, memorandum, articles etc. and issues a certificate of incorporation under his hand. A certificate of incorporation is a conclusive evidence that all requirements of the Companies Act of 1956 in the respect of registration of the company.

4.

Effects of incorporation Section 34 states that, "On registration of the memorandum of a company, the registrar shall certify under his hand that the company is incorporated and, in the case of a limited company, from the date of incorporation mentioned in the certificate of incorporation, such of the subscribers of the Memorandum and other persons, as may from time to time be members of the company, shall be a body corporate by the name contained in the memorandum, capable forthwith of exercising all the functions of an incorporated company and having perpetual succession and a common seal, but with such liability on the parts of the members to contribute to the assets of the company in the event of its being wound up." While Section 35 lays down that, "a certificate of incorporation given by the registrar in respect of any association shall be conclusive evidence that all the requirements of this Act have been complied with in respect 'of registration and matters precedent and incidental thereto, and that the association is a company authorized to be registered and duly registered under this Act." Thus, the certificate of incorporation is a conclusive evidence about various matters mentioned below: \) A proof of legal existence of a company: The certificate of incorporation brings the company into existence as a distinct legal person. The legal existence of the company commences from the date written on the certificate of incorporation and such date is conclusive even if wrong.

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Activity D ; My father wanted to register his firm named Jubilee Cotton Mills. The necessary documents were submitted to the registrar of companies for the registration of the company on 6th January. The Registrar issued the certificate of incorporation on 8th January but wrongly dated the certificate 6th January instead of 8th January. Some shares were allotted to Mr. Lewis on the 6th January, that is, on the date of the submission of necessary documents to the registrar and before the issue of the certificate of incorporation. The question arose whether the allotment of shares to Mr. Lewis was void. Examine the validity of allotment of shares to Mr. Lewis.

(B) A proof showing that all the legal requirements have been complied with: The certificate of incorporation is the conclusive evidence that all the requirements of the Companies Act, 1956 have been complied with in respect of matters precedent and incidental thereto and that company is authorised to be registered and is duly registered under the Companies Act of 1956. (C) Certificate of incorporation and pre-incorporation contracts: Sometimes even before a company is duly incorporated, contracts are entered into on behalf of the company. No such pre-incorporation contracts are binding as the company before it is incorporated is a non-entity. If solicitors, chartered accountants prepare certain documents for a company on the instructions of its promoters for getting the company registered, they cannot recover any amount as their remuneration from the company. The company cannot be sued in law for the expenses for the want of existence of the company and ratification is also not possible. Even pre-incorporation contract are not binding on third parties. When the contracts are entered into by the agents on behalf of a company which has not come into existence and, if they do not fall within the scope of the objects of the company stated in the memorandum of association, the agents can be held personally liable for such contracts.
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the company or leave it, but the company continues to be in existence for ever, unless it is wound up. (E) Assets and liabilities of a company: On incorporation, the property, assets etc. acquired in the name of a company become the property, assets of the company and not of its members. The members get only the right to have a share in the profits. Again any liability of the company is not the liability of individual shareholders. 8.6

THE MEMORANDUM OF ASSOCIATION AND ARTICLES OF ASSOCIATION

For the purpose of the incorporation of a company, its promoters have to submit along with an application for registration a copy of memorandum and a copy of Articles of Association. These documents are primary documents. The main provision relating to memorandum of association and articles of association are given in Sections 12 to 54 of the Act. 1.

Memorandum of association The memorandum of association is the most important document. It sets out the constitution of a company arid the foundation on which the structure of a company is based. It defines and also confines the powers of a company. Any act beyond the scope of the memorandum i s ultra vires and hence, unenforceable. In Section 2 (28) of the Companies Act, 1956, the definition of memorandum is given as follows: "Memorandum means the memorandum of association of a company as originally framed or as altered from time to time in pursuance of any previous company's laws or of this Act."

2.

Articles of association Articles of association is another important document and it contains the internal regulations of the company relating to internal affairs and the conduct of its business. It regulates the internal management of the company. As a matter of fact, the memorandum lays down the objects and purposes for which the company is formed while the articles are subordinate to the memorandum and prescribe regulations for the attainment of the objectives of the company. The members of the company have 383

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full control over the Articles of Association and articles can be altered according to the needs. However, necessary care is required to be taken to see that regulations provided for in the Articles of Association do not go beyond the powers of the company as laid down by its memorandum. The definition of 'articles' is given in Section 2 (2) of the Companies Act and accordingly, "articles" means the articles of association of a company as originally framed or as altered from time to time in pursuance of any previous companies law or of this Act, including, so far as they apply to the company, the regulations contained, as the case may be in Table B in the Schedule annexed to Act No. 19 of 1857 or in Table A in the First Schedule annexed to the Indian Companies Act, 1882 (6 of 1882), or in Table A in the First, Schedule annexed to the Indian Companies Act, 1913 (7 of 1913), or in Table A in Schedule I annexed to this Act.

3.

Important Provisions relating to Memorandum of Association, Articles of Association [A] Sections Pertaining to Memorandum of Association:

(1)

Mode of forming incorporated company

Section 12 : (1) Any seven or more persons, or where the company to be formed will be a private company, any two or more persons, associated for any lawful purpose may, by subscribing their names to a memorandum of association and otherwise complying with the requirements of this Act in respect of registration, form an incorporated company, with or without limited liability. (2) Such a company may be either (a) a company having the liability of its members limited by the memorandum to the amount, if any, unpaid on the shares respectively held by them (in this Act termed "a company limited by shares"); (b) a company having the liability of its members limited by the memorandum to such amount as the members may respectively undertake by the memorandum to contribute to the assets of the company in the event of its being wound up (in this Act termed "a company limited by guarantee); or (c) a company not having any limit on the liability of its members (in this Act termed "an unlimited company"). 384

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(ii)

Requirements with respect to memorandum

Section 13 : (1) The memorandum of every company shall state(a) the name of the company with "Limited" as the last word of the name in the case of a "Public Limited" company, and with "Private Limited" as the last words of the name in the case of a private limited company; (b) the State in which the registered office of the company is to be situate, (c) in the case of a company in existence immediately before the commencement of the Companies (Amendment) Act, 1965, the objects of the company. (d) in the case of a company formed after such commencement(i) the main objects of the company to be pursued by the company on its incorporation and objects incidental or ancillary to the attainment of the main objects. (ii)

other objects of the company not included in sub-clause (i); and

(e) in the case of companies (other than trading corporations), with objects not confined to one State, the States to whose territories the objects extend. (2) The memorandum of a company limited by shares or by guarantee shall also state that the liability of its members is limited. (3) The memorandum of a company limited by guarantee shall also state that each member undertakes to contribute to the assets of the company in the event of its being wound up while he is a member or within one year after he ceases to be a member, for payment of the debts and liabilities of the company, or of such debts and liabilities of the company as may have been contracted before he ceases to be a member, as the case may be, and of the costs, charges and expenses of winding up, and for adjustment of the rights of the contributories among themselves, such amount as may be required, not exceeding a specified amount. (4) In the case of a company having a share capital(a) unless the company is an unlimited company, the memorandum shall also state the amount of share capital with which the company is to be registered and the division thereof into shares of a fixed amount; 385

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(b) no subscriber of the memorandum shall take less than one share; and (c) each subscriber of the memorandum shall write opposite to his name the number of shares he takes. (iii) Form of memorandum Section 14: The memorandum of association of a company shall be in such one of the Forms in Tables B, C, D and E in Schedule I as may be applicable to the case of the company, or in a form as near thereto as circumstances admit. (iv) Printing and signature of Memorandum Section 15: The memorandum shall (a) be printed, (b) be divide into paragraphs numbered consecutively, and (c) be signed by each subscriber (who shall add his address, description and occupation, ifany), in the presence of at least one witness who shall attest the signature and shall likewise add his address, description and occupation, ifany. (v)

Alteration of Memorandum

Section 16: (1) A company shall not alter the conditions contained in its memorandum except in the cases, in the mode, and to the extent, for which express provision is made in this Act. (2) Only those provisions which are required by Section 13 or by any other specific provision contained in this Act, to be stated in the memorandum of the company concerned shall be deemed to be conditions contained in its memorandum. (3) Other provisions contained in the memorandum, including those relating to the appointment of a managing director or manager, may be altered in the same manner as the articles of the company, but if there is any express provision in this Act permitting of the alteration of such provisions in any other manner, they may also be altered in such other manner. (4) All references to the articles of a company in this Act shall be construed as including references to the other provisions aforesaid contained in its memorandum. 386

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(vi) Special resolution and confirmation by Company Law Board required for alteration of memorandum: Section 17: (1) A company may, by special resolution, alter the provisions of its memorandum so as to change the place of its registered office from one State to another, or with respect to the objects of the company so far as may be required to enable it (a) to carry on its business more economically or more efficiently; (b) to attain its main purpose by new or improved means; (c) to enlarge or change the local area of its operations; (d) to carry on some business which under existing circumstances may conveniently or advantageously be combined with the business of the company; (e) to restrict or abandon any of the objects specified in the memorandum; (f)

to sell or dispose of the whole, or any part, of the undertaking, or of any of the undertakings, of the company; or

(g) to amalgamate with any other company or body of persons. (2) The alteration of the provisions of memorandum relating to the change of the place of its registered office from one State to another shall not take effect unless it is confirmed by the Company Law Board on petition. (3) Before confirming the alteration, the Company Law Board must be satisfied. (a) that sufficient notice has been given to every holder of the debentures of the company, and to every other person or class of persons whose interests will, in the opinion of the Company Law Board, be affected by the alteration; and (b) that, with respect to every creditor who, in the opinion of the Company Law Board is entitled to object to the alteration, and who signifies his objection in the manner directed by the Company Law Board either his consent to the alteration has been obtained or his debt or claim has been discharged or has determined, or has been secured to the satisfaction of the Company law Board. 387

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Provided that the Company Law Board may, in the case of any person or class of persons, for special reasons, dispense with the notice required by clause (a). (4) The Company Law Board shall cause notice of the petition for confirmation of the alteration to be served on the registrar who shall also be given a reasonable opportunity to appear before the Company Law Board and state his objections and suggestions, if any, with respect to the confirmation of the alteration. (5) The Company Law Board may make an order confirming the alteration on such terms and conditions, if any, as it thinks fit, and may make such order as to costs as it thinks proper. (6) The Company Law Board shall, in exercising its powers and this section, have regard to the rights and interests of the members of the company and to every class of them, as well as to the rights and interests of the creditors of the company and of every class of them. (7) The Company Law Board may, if it thinks fit, adjourn the proceedings in order that an arrangement may be made to the satisfaction of the Company Law Board for the purchase of the interests of the dissentient members; and may give such directions and make such orders as it thinks fit for facilitating or carrying into effect, any such arrangement. It is provided that no part of the capital of the company may be expended in any such purchase. (vii) Change of registered office within a state Section 17A : (1) No company shall change the place of its registered office from one place to another within a State unless such change is confirmed by the Regional Director. (2) The company shall make an application in the prescribed form to the Regional Director for confirmation under sub-section (1). (3) The confirmation referred to in sub-section (1) shall be communicated to the company within four weeks from the date of receipt of application for such change. (4) The company shall file, with the Registrar a certified copy of the confirmation by the Regional Director for change of its registered office under this section, within

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two months from the date of confirmation, together with a printed copy of the memorandum as altered and the Registrar shall register the same and certify the registration under his hand within one month from the date of filing of such document. (5) The certificate shall be the conclusive evidence that all the requirements of this Act with respect to the alteration and confirmation have been complied with and henceforth the memorandum as altered shall be the memorandum of the company. (viii) Alteration to be registered within three months Section 18: (1) A company shall file with the Registrar (a) a special resolution passed by a company in relation to clauses (a) to (g) of sub-section (1) of section 17, within one month from the date of such resolution; or (b) a certified copy of the order of the Company Law B oard made under sub section (5) of that section confirming the alteration, within three months from the date of order, as the case may be, together with a printed copy of the memorandum as altered and the Registrar shall register the same and certify the registration under this hand within one month from the date of filing of such documents. (2) The certificate shall be conclusive evidence that all the requirements of this Act with respect to the alteration and the confirmation thereof have been complied with, and henceforth the memorandum as so altered shall be the memorandum of the company. (3) Where the alteration involves a transfer of the registered office from one State to another, a certified copy of the order confirming the alteration shall be held by the company with the Registrar of each of the States, and the Registrar of each such State shall register the same, and shall certify under his hand the registration thereof; and the Registrar of the State from which such office is transferred shall send to the Registrar of the other State all documents relating to the company registered, recorded or filed in his office. (4) The Company Law Board may, at any time, by order, extend the time for the filing of documents or for the registration of the alteration under this section by such period as it thinks proper. 389

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(ix) Effect of failure to register Section 19 : ( 1 ) No such alteration as is referred to in Section 1 7 shall have any effect until it has been duly registered in accordance with the provisions of Section 1 8 . (2) If the documents required to be filed with the Registrar under Section 1 8 are not filed within the time allowed under that section, such alteration and the order of the Company Law Board made under sub-section (5) of Section 77 and all proceedings connected therewith, shall, at the expiry of such period, become void and inoperative. It is provided that the Company Law Board may, on sufficient cause shown, revive the order on application made within a further period of one month.

Activity E ; I own a company. I wanted some alteration in the memorandum of the company. A special resolution by the company in relation to clauses (a) to (g) of memorandum of the company was passed. Advise me in how many days or months should I file the special resolution with the registrar.

[B] Provisions with respect to names of companies (1)

Companies not to be registered with undesirable names : Section 20 : (1) No company shall be registered by a name which, in the opinion of the Central Government, is undesirable.

(2) Without prejudice to the generality of the foregoing power, a name which is identical with, or too nearly resembles -

390

(i)

the name by which a company in exi stence has been previously registered, or

(ii)

a registered trade mark, or a trade mark which is subject of an application for registration, of any other person under the Trade Marks Act, 1999,

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may be deemed to be undesirable by the Central Government within the meaning of sub-section (1). (3)

(ii)

The Central Government may, before deeming a name as undesirable under clause (ii) of sub-section (2), consult the Registrar of Trade Marks :

Change of Name by Company Section 21: A company may, by special resolution and with the approval of the Central Government signified in writing, change its name. It is also provided that such approval shall be required where the only change in the name of a company is the addition thereto or, as the case may be, the deletion therefore, of the word "Private", consequent on the conversion in accordance with the provisions of this Act of a public company into a private company or a private company into a public company.

(iii) Rectification of Name of Company Section 22 : (1) If, through inadvertence or otherwise, a company on its first registration or on its registration by a new name, is registered by a name which (i) in the opinion of the Central Government, is identical with, or nearly resembles, the name by which a company in existence has been previously registered, whether under this Act or any previous companies law, the first-mentioned company, or (ii) on an application by a regi stered proprietor of a trade mark, is in the opinion of the Central Government identical with, or too nearly resembles, a regi stered trade mark of such proprietor under the Trade Marks Act, 1999, such company (a) may, by ordinary resolution and with the previous approval of the Central Government signified in writing, change its name or new name; and (b) shall, if the Central Government so directs within twelve months of its first registration or registration by its new name, as the case may be, or within twelve months of the commencement of this Act, whichever is later, by ordinary resolution and with the previous approval of the Central Government signified in writing, change its name or new name within a period of three months from the date of the direction or such 391

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longer period as the Central Government may think fit to allow. It is further provided that no application under clause (ii) made by a registered proprietor of a trade mark after five years of coming to notice of registration of the company shall be considered by the Central Government. (2) If a company makes default in complying with any direction given under clause (b) of sub-clause (1), the company, and every officer who is in default, shall be punishable with fine which may extend to one thousand rupees for every day during which the default continues.

(iv) Registration of change of name and effect thereof Section 23 : (1) Where a company changes its name in pursuance of section 21 or 22, the Registrar shall enter the new name on the register in the place of the former name, and shall issue a fresh certificate of incorporation with the necessary alterations embodied therein; and the change of name shall be complete and effective only on the issue of such a certificate. (2) The Registrar shall also make the necessary alterations in the memorandum of association of the company. (3) The change of name shall not affect any rights or obligations of the company, or proceedings render defective any legal proceedings by or against it; and any legal proceedings which might have been continued or commenced by or against the company by its former name may be continued by or against the company by its new name.

(v)

Change of name of existing private limited companies Section 24: (1) In the case of a company which was a private limited company immediately before the commencement of this Act, the Registrar shall enter the word "Private" before the word "Limited" in the name of the company upon the register and shall also make the necessary alterations in the certificate of incorporation issued to the company and in its memorandum of association. (2)

392

Sub-section (3) of section 23 shall apply to a change of name under subsection (i) as it applies to a change of name under section 21.

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(vi) Power to dispense with' 'Limited" in name of charitable or other company Section 25: (1) Where it is proved to the satisfaction of the Central Government that (a) is about to be formed as a limited company for promoting commerce, art, science, religion, charity or any other useful object, and (b) intends to apply its profits, if any, or other income in promoting its objects, and to prohibit the payment of any dividend to its members. the Central Government may, by licence, direct that the association may be registered as a company with limited liability, without the addition to its name or the word "Limited" or the words "Private Limited". (2) The association may thereupon be registered accordingly; and on registration shall enjoy all the privileges, and (subject to the provisions of this section) be subject to all the obligations, of limited companies. (3) Where it is proved to the satisfaction of the Central Government (a) that the objects of a company registered under this Act as a limited company are restricted to those specified in clause (a) of sub-section (l),and (b) that by its constitution the company is required to apply its profits, if any, or other income in promoting its objects and is prohibited from paying any dividend to its members. The Central Government may, by licence, authorise the company by a special resolution to change its name, including or consisting of the omission of the word "Limited" or the words "Private Limited"; and section 23 shall apply t o a change of name under this sub-section as it applies to a change of name under section 21. (4) A firm may be a member of any association or company licensed under the section, but on the dissolution of the firm, its membershiip of the association of company shall cease. (5) A licence may be granted by the Central Government under this section or such conditions and subject to such regulations as it thinks fit, and the conditions and regulations shall be binding on the body to which the licence granted, and where the grant is under sub-section (1), shall, if the Central Government so directs, be inserted in the memorandum, or in the articles if partly in the one and partly in the other. 393

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(6) It shall not be necessary for a body to which a licence is so granted to use the word "Limited" or the words "Private Limited" as any part of its name and unless its articles otherwise provide, such body shall, if the Central Government by general or special order so directs and to the extent specified in the direction be exempt from such of the provisions ofthisActas may be specified thereon. (7) The licence may at any time be revoked by the Central Government, and upon revocation, the Registrar shall enter the word "Limited" or the words "Private Limited" at the end of the name upon the register of the body to which xxxxxx granted; and the body shall cease to enjoy the exemption granted by this section. It is provided that, before a licence is so revoked, the Central Government shall give notice in writing of its entention to the body, and shall afford it an opportunity if being heard in opposition to the revocation. [Proviso to section 25 (7)] (8) (a) shall

A body in respect of which a licence under this section is in force not alter the provisions of its memorandum with respect to its objects except with the previous approval of the Central Government signified in writing.

(b) The Central Government may revoke the licence of such a body if it contravenes the provisions of clause (a). (c) In according the approval referred to in clause (a), the Central Government may vary the licence by making it subject to such conditions and regulations as that Government thinks fit, in lieu of, or in addition to, the conditions and regulations, if any, to which the licence was formerly subject. (d) Where the alteration proposed in the provisions of the memorandum of a body under this sub-section is with respect to the objects of the body so far as may be required to enable it to do any of the things specified in clauses (a) to (g) of sub-section (1) of Section 17, the provisions of this sub-section shall be in addition to, and not in derogation of, the provisions of that section. (9) Upon the revocation of a licence granted under this section to a body the name of which contains the words "Chamber of Commerce", that body shall, within a period of three months from the date of revocation or such longer period as the Central Government may think fit to allow, change its name to a name which does not contain those words; and 394

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(a) the notice to be given under the proviso to sub-section (7) to that body shall include a statement of the effect of the foregoing provisions of this sub-section; and (b) section 23 shall apply to a change of name under thi s sub-section as it applies to a change of name under Section 21. (10) If the body makes default in complying with the requirements of sub-section (9), it shall be punishable with fine which may extend to five thousand rupees for every day during which the default continues. C.

Section Pertaining to Articles of Association: (i)

Articles prescribing regulations Section 26: There may in the case of a public limited by shares, and there shall in the case of an unlimited company or a company limited by guarantee or a private company limited by shares, be registered with the memorandum, articles of association signed by the subscribers of the memorandum, prescribing regulations for the company.

(ii)

Regulations required in case of unlimited company, company limited by guarantee or private company limited by shares Section 27: (1) In the case of an unlimited company, the articles shall state the number of members with which the company is to be registered and, if the company has share capital the amount of share capital with which the company is to be registered. (2) In the case of a company limited by guarantee, the articles shall state the number of members with which the company is to be registered. (3) In the case of a private company having a share capital, the articles shall contain provisions relating to the matters specified in sub-clauses (a), (b) and (c) of clause (iii) of sub-section (1) of section 3; and in the case of any other private company, the articles shall contain provisions relating to the matters specified in the said sub-clauses (b) and (c).

(iii) Adoption and application of Table A in the case of companies limited by shares Section 28: (1) The articles of association of a company limited by shares may adopt all or any of the regulations contained in Table A in Schedule I.

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(2) In the case of any such company which is registered after the commencement of this Act, if articles are not registered, or if articles are registered, in so far as the articles do not exclude or modify the regulations contained in Table A aforesaid, those regulations shall, so far as applicable, be the regulations of the company in the same manner and to the same extent as if they were contained in duly registered articles. (iv) Form of articles in the case of other companies Section 29 : The articles of association of any company, not being a company limited by shares, shall be in such one of the Forms in Tables C, D and E in Schedule 1 as may be applicable, or in a Form as near thereto as circumstances admit: It is provided that nothing in this section shall be deemed to prevent a company from including any additional matters in its articles in so far as they are not inconsistent with the provisions contained in the Form in any of the Tables C, D and E, adopted by the company. (v)

Form and signature of articles Section 30: Articles shall (a) be printed; (b) be divided into paragraphs numbered consequently; and (c) be signed by each subscriber of the memorandum of association (who shall add his address, description and occupation, if any) in the presence of at least one witness who shall attest the signature and shall likewise add his address, description and occupation, if any.

(vi) Alteration of articles by special resolution Section 31 : (1) Subject to the provisions of this Act and to the conditions contained in its memorandum, a company may, by special resolution, alter its articles. It is provided that no alteration made in the articles under this sub-section which has the effect of converting a public company into a private company, shall have effect unless such alteration has been approved by the Central Government.

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(2) Any alteration so made shall, subject to the provisions of this Act, be as valid as if originally contained in the articles and be subject in like manner to alteration by special resolution. (2A) Where any alteration such as is referred to in the proviso to sub-section (1) has been approved by the Central Government, a printed copy of the articles as altered shall be filed by the company with the Registrar within one month of the date of receipt of the order of approval. (3) The power of altering articles under this section shall, in the case of any company formed and registered under Act No. 19 of 1857 and Act No. 7 of 1860 or either of them, extend to altering any provisions in Table B annexed to Act No. 19 of 1857, and shall also, in the case of an unlimited company formed and registered under the said Acts or either of them, extend to altering any regulations relating to the amount of capital or its distribution into shares, notwithstanding that those regulations are contained in the memorandum. D.

Sections pertaining to the change of registration of companies (i)

Registration of unlimited company as limited, etc. Section 32: (1) Subject to the provisions of this section, (a) a company registered as unlimited may register under this Act as a limited company, and (b) a company already registered as a limited company may re-register under this Act. (2) On registration in pursuance of this section, the Registrar shall close the former registration of the company, and may dispense with the delivery to him of copies of any documents with copies of which he was furnished on the occasion of the original registration of the company; but, save as aforesaid, the registration shall take place in the same manner and shall have effect, as if it were registration of the company under this Act. (3) The registration of an unlimited company as a limited company under this section shall not affect any debts, liabilities, obligations or contracts incurred or entered into, by, to, with or on behalf of, the company before the registration, and those debts, liabilities, obligations and contracts may be enforced in the manner provided by Part IX of this Act in the case of a company registered in pursuance of that part. 397

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E.

Sections pertaining to general provisions with respect to memorandum and articles (i)

Registration of memorandum and articles Section 33 : ( \ ) There shall be presented for registration, to the Registrar of the State in which the registered office of the company is stated by the memorandum to be situated a)

the memorandum of the company;

b)

its articles, if any; and

c)

the agreement, if any, which the company proposes to enter into with any individual for appointment as its managing or whole-time director or manager.

(2) A declaration by an advocate of the Supreme Court or of a High Court, an attorney or a pleader entitled to appear before a High Court, or (a secretary, or a chartered accountant, in whole-time practice in India), who is engaged in the formation of a company, or by a person named in the articles as a director, manager or secretary of the company, that all the requirements of this Act and the rules thereunder have been compiled with in respect of registration and matters precedent and incidental thereto, shall be filed with the Registrar; and the Registrar may accept such a declaration as sufficient evidence of such compliance. [Explanation : For the purposes of this sub-section, "chartered accountant in whole-time practice in India" means a chartered accountant within the meaning of clause (b) of sub-section ( 1 ) of Section 2 of the Chartered Accountants Act, 1949 (38 of 1949), who is practicing in India and who is not in full-time employment.] (3) If the Registrar is satisfied that all the requirements aforesaid have been complied with by the company and that it is authorized to be registered under this Act, he shall retain and register the memorandum, the articles, if any, and the agreement referred to in clause (c) of sub-section ( 1 ), if any.

(ii)

Effect of registration Section 34 : (I) On the registration of the memorandum of a company, the Registrar shall certify under his hand that the company is incorporated and. in ; the case of a limited company, that the company is limited.

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(2) From the date of incorporation mentioned in the certificate of incorporation, such of the subscribers of the memorandum and other persons, as may from time to time be members of the company, shall be a body corporate by the name contained in the memorandum, capable forthwith of exercising all the functions of an incorporated company, and having perpetual succession and a common seal, but with such liability on the part of the members to contribute to the assets of the company in the event of its being wound up as is mentioned in this Act.

(iii) Conclusiveness of certificate of incorporation Section 35 : A certificate of incorporation given by the Registrar in respect of any association shall be conclusive evidence that all the requirements of this Act have been complied with in respect of registration and matters precedent and incidental thereto, and that the association is a company authorised to be registered and duly registered under this Act.

(iv) Effect of memorandum and articles Section 36: (1) Subject to the provisions of this Act, the memorandum and articles shall, when registered, bind the company and the members thereof to the same extent as if they respectively had been signed by the company and by each member, and contained covenants on it's and his part to observe all the provisions of the memorandum and of the articles. (2) All money payable by any member to the company under the memorandum or articles shall be a debt due from him to the company.

(v)

Provision as to companies limited by guarantee Section 37: (1) In the case of a company limited by guarantee and not having a share capital, and registered on or after the first day of April, 1914, every provision in the memorandum or articles or in any resolution of the company purporting to give any person a right to participate in the divisible profits of the company otherwise than as a member shall be void. (2) For the purpose of the provisions of this Act relating to the memorandum of a company limited by guarantee and of this section, every provision in the memorandum or articles, or in any resolution, of any company limited by guarantee and registered on or after the first day of April, 1914, purporting

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B I *

to divide the undertaking of the company into shares or interests, shall be treated as a provision for a share capital, notwithstanding that the nominal amount or number of the shares or interests is not specified thereby. (vi) Effect of alteration in memorandum or articles Section 38 : Notwithstanding anything in the memorandum or articles of the company, no member of the company shall be bound by an alteration made in the memorandum or articles after the date on which he became a member, if and so far as the alteration requires him to take or subscribe for more shares than the number held by him at the date on which the alteration is made, or in any way increases his liability as at that date, to contribute to the share capital of or otherwise to pay money to the company. It is provided that this section shall not apply (a) in any case where the member agrees in writing either before or after a particular alteration is made, to be bound by the alteration; or (b) in any case where the company is a club or the company is any other association and the alteration requires the member to pay recurring or periodical subscriptions or charges at a higher rate although he does not agree in writing to be bound by t he alteration. (vii) Copies of memorandum and articles, etc. to be given to members Section 39: (1) A company shall, on being so required by a member, send to him within seven days of the requirement and subject to the payment of a fee of one rupee, a copy of each of the following documents as in force for the time being (a) the memorandum; (b) the articles, if any; and (c) every other agreement and every resolution referred to in section 192, if any in so far as they have not been embodied in the memorandum or articles. (2) If a company makes default in complying with the requirements of this section, the company, and every officer of the company who is in default, shall be punishable for each offence with fine which may extend to five hundred rupees. 400

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(viii) Alteration of memorandum or articles, etc. to be noted in every copy Section 40: (1) Where an alteration is made in the memorandum or articles of a company, or any resolution, referred to in section 192, every copy of the memorandum, articles, agreement or resolution is issued after the date of the alteration shall be in accordance with the alteration. (2) If, at any time, the company issues any copies of the memorandum, articles, resolution or agreement, which are not in accordance with the alteration or alterations made therein before that time, the company, and every officer of the company who is in default, shall be punishable with fine which may extend to one hundred rupees for each copy so issued. F.

Sections pertaining to Membership of Company (i)

Definition of member

Section 41: (1) The subscriber of the memorandum of a company shall be deemed to have agreed to become members of the company, and on its registration, shall be entered as members in its register of members. (2) Every other person agrees in writing to become a member of a company and whose name is entered in its register of members, shall be a member of the company. (3) Every person holding equity share capital of company and whose name is entered as beneficial owner in the records of the depository shall be deemed to be a member of the concerned company. (ii)

Membership of holding company Section 42: (1) Except in the cases mentioned in this section, a body corporate cannot be a member of a company which is its holding company and any allotment or transfer of shares in a company to its subsidiary shall be void. (2)

US ,11

Nothing in this section shall apply (a) where the subsidiary is concerned as the legal representative of a deceased member of the holding company; or (b) where the subsidiary is concerned as trustee, unless the holding company or a subsidiary thereof is beneficially interested under the 401

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trust and is not so interested only by way of security for the purposes of a transaction entered into by it in the ordinary course of a business which includes the lending of money. (3)

This section shall not prevent a subsidiary from continuing to be a member of its holding company if it was a member thereof either at the commencement of this Act or before becoming a subsidiary of the holding company, but except in the cases referred to in sub-section (2), the subsidiary shall have not right to vote at meetings of the holding company or of any class of members thereof.

(4)

Subject to sub-section (2), sub-section ( 1 ) and (3) shall apply in relation to a nominee for a body corporate which is a subsidiary, as if references in the said sub-sections ( 1 ) and (3) to such a body corporate included references to a nominee for it.

(5)

In relation to a holding company which is either a company limited by guarantee or an unlimited company, the reference in this section to shares shall, whether or not the company has a share capital, be construed as including a reference to the interest of its members as such, whatever the form of that interest.

Sections pertaining to private companies (i)

Consequences of default in complying with conditions constituting a company a private company Section 43 : Where the articles of a company include the provisions which, under clause (iii) of sub-section (1) of section 3, are required to be included in the articles of a company in order to constitute it a private company, but default is made in complying with any of those provisions, the company shall cease to be entitled to the privileges and exemptions conferred on private companies by or under this Act, and this Act shall apply to the company as if it were not a private company : It is provided that the Company Law Board on being satisfied that the failure to comply with the conditions was accidental or due to inadvertence or to some other sufficient cause, or that on other grounds it is just and equitable to grant relief, may, on the application of the company or any other person interested and on such terms and conditions as seem to the Company Law Board just and expedient, order that the company be relieved from such consequences as aforesaid.

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(ii)


Private company to become public company in certain cases Section 43 A: (1) Save as otherwise provided in this section, where not less than twenty five per cent of the paid-up share capital of a private company having a share capital, is held by one or more bodies corporate, the private company shall (a) on and from the date on which the aforesaid percentage is first held by such body or bodies corporate, or (b) where the aforesaid percentage has been first so held before the commencement of the Companies (Amendment) Act, 1960, on and from the expiry of the period of three months from the date of such commencement unless within that period the aforesaid percentage is reduced below twenty-five per cent of the paid-up share capital of the private company. Become by virtue of this section a public company It is provided that even after the private company has so become a public company, its articles of association may include provisions relating to the matters specified in clause (iii) of sub-section (1) of Section 3 and the number of its members may be, or may at any time be reduced, below seven: It is provided further that in computing the aforesaid percentage, account shall not be taken of any share in the private company held by a banking company, if, but only if, the following conditions are satisfied in respect of such share, namely, (a) that the share (i) (ii) (iii)

forms part of the subj ect-matter of a trust, has not been set apart for the benefit of any body corporate, and is held by the banking company either as a trustee of that trust or in its own name on behalf of a trustee of that trust; or

(b) that the share (i) (ii)

forms part of the estate of a deceased person, has not been bequeathed by the deceased person by his will to any body corporate, and 403

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(iii) is held by the banking company either as an executor or administrator of the deceased person or in its own name on behalf of an executor or administrator of the deceased person; and the Registrar may, for the purpose of satisfying himself that any share is held in the private company by a banking company as aforesaid, call for at any time from the banking company such books and papers as he considers necessary. (2) Within three months from the date on which a private company becomes a public company by virtue of this section, the company shall inform the Registrar that it has become a public company as aforesaid, and thereupon the Registrar shall delete the word "Private" before the word "Limited" in the name of the company upon the register and shall also make the necessary alterations in the certificate of incorporation issued to the company and in its memorandum of association. (2A) Where a public company referred to in sub-section (2) becomes a private company on or after the commencement of the Companies (Amendment) Act, 2000, such company shall inform the registrar that it has become a private company and thereupon the registrar shall substitute the word "private company" for the word "public company" in the name of the company upon the register and shall also make the necessary alterations in the certificate of incorporation issued to the company and in its memorandum of association within four weeks from the date of application made by the company. (2) Within three months from the date on which a private company becomes a public company by virtue of this section, the company shall inform the registrar that it has become a public company as aforesaid, and thereupon the registrar shall delete the word "Private" before the word "Limited" in the name of the company upon the register and shall also make the necessary alterations in the certificate of incorporation issued to the company and in its memorandum of association. (2A) Where a public company referred to in sub-section (2) becomes a private company on or after the commencement of the Companies (Amendment) Act, 2000, such company shall inform the registrar that it has become a private company and thereupon the registrar shall 404

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substitute the word "private company" for the word "public company" in the name of the company upon the register and shall also make the necessary alterations in the certificate of incorporation issued to the company and in its memorandum of association within four weeks from the date of application made by the company. (3) Sub-section (3) of Section 23 shall apply to a change of name under sub section (2) as it applies to a change of name under section 21. (4) A private company which has become a public company by virtue of this section shall continue to be a public company until it has, with the approval of the Central Government and in accordance with the provisions of this Act, again become a private company. (5) If a company makes default in complying with sub-section (2), the company and every officer of the company who is in default, shall be punishable with fine which may extend to five hundred rupees for every day during which the default continues. Sub-sections 6 and 7 have been omitted w.e.f. 15.6.1988. (6) Every private company having a share capital shall, in addition to the certificate referred to in sub-section (2) of Section 161 file with the Registrar along with the annual return a second certificate signed by both the signatories of the return stating either. (a) that since the date of the annual general meeting with reference to which the last return was submitted, or in the case of a first return, since the date of the incorporation of the private company, no body or bodies corporate has or have held twenty-five per cent or more of its paid-up share capital. (b) (Omitted by the Companies (Amendment) Act, 1988 w.e.f. 15.6.1988). (c) that the private company, irrespective of its paid-up share capital, did not have, during the relevant period, an average annual turnover of such amount as is referred to in sub-section (1 A) or more. (d) that the private company did not accept or renew deposits from the public. 405

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(7) Every private company, having share capital, shall file with the Registrar along with the annual return a certificate signed by both the signatories of the return, stating that since the date of the annual general meeting with reference to which the last return was submitted, or in the case of a first return, since the date of the incorporation of the private company, it did not hold twenty-five per cent or more of the paid up share capital of one or more public companies. (8) Subject to the other provisions of this Act, any reference in this section to accepting, after an invitation is made by an advertisement, or renewing deposits from the public shall be construed as including a reference to accepting after an invitation is made by an advertisement, or renewing deposits from any section of the public and the provision of section 67 shall, so far as may be, apply, as if the reference to invitation to the public to subscribe for shares or debentures occurring in that section, includes a reference to invitation from the public for acceptance of deposits. (9) Nothing contained in this section, except sub-section (2A), shall apply on and after the commencement of the Companies (Amendment) Act, 2000. [in] Prospectus or statement in lieu of prospectus to be field by private company on ceasing to be private company Section 44: (1) If a company, being a private company, alters its articles in such a manner that they no longer include the provisions which, under clause (iii) company in order to constitute it a private company, the company (a) shall, as on the date of the alternation, cease to be a private company; and (b) shall, within a period of 30 (thirty) days after the said date, file with the Registrar either a prospectus or a statement in lieu of prospectus, as specified in sub-section (2). (2) (a) Every prospectus field under sub-section (I) shall state the matters specified in Part I of Schedule II and set out the report specified in Part II of that Schedule, and the said Parts I and II shall have effect subject to the provisions contained in Part III of that Schedule. (b) Every statement in lieu of prospectus field under sub-section (I) shall be in the form and contain the particulars set out in Part I of Schedule IV, and in the cases mentioned in Part II of that Schedule, shall set out

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the reports specified therein and the said Parts I and II shall have effect subject to the provisions contained in Part III of that Schedule. (c) Where the persons making any such report as is referred to in clause (a) or (b) have made therein, or have, without giving the reasons indicated therein, any such adjustments as are mentioned in clause 32 of Schedule II or clause 5 of Schedule IV, as the case may be, the prospectus or statement in lieu of prospectus filed as aforesaid, shall have endorsed thereon or attached thereto, a written statement signed by those persons, setting out the adjustments and giving the reasons therefor. (3) If default is made in complying with sub-section (1) or (2), the company and every officer of the company who is in default, shall be punishable with fine which may extend to five thousand rupees for every day during which default continues. (4) Where any prospectus or statement in lieu of prospectus field under this section includes any untrue statement, any person who authorised the filing of such prospectus or statement shall be punishable with imprisonment for term which may extend to two years, or with a fine which may extend to fifty thousand rupees, or with both, unless he proves either that the statement was immaterial or that he had reasonable ground to believe, and did upto the time of the filing of the prospectus or statement believe, that the statement was true. (5) For the purpose of this section (a) a statement included in a prospectus or a statement in lieu of prospectus shall be deemed to be untrue if it is misleading in the form and context in which it is included; and (b) where the omission from a prospectus or a statement in issue of prospectus of any matter is calculated to mislead, the prospectus or statement in lieu of prospectus shall be deemed, in respect of such omission, to be a prospectus or a statement in lieu of prospectus in which an untrue statement is included. (6) For the purposes of sub-section (4) and clause (a) of sub-section (5) the expression "included" when used with reference to a prospectus or statement in lieu of prospectus, means included in the prospectus or statement in lieu of prospectus itself or contained in any report or memorandum appearing on the face thereof, or by reference incorporated therein.

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H.

Provisions of Section 45 relating to Reduction of Number of Members below Legal Minimum Members severally liable for debts where business carried on with fewer than seven, or in the case of a private company, two members. "If at any time the number of members of a company is reduced, in the case of a public company, below seven, or in the case of a private company, below two, and the company carries on business for more than six months while the number is so reduced, every person who is a member of the company during the time that it so carries on business after those six months and is cognizant of the fact that it is carrying on business with fewer than seven members or two members, as the case may be, shall be severally liable for the payment of the whole debts of the company contracted during that time, and may be severally sued therefore" [Section 45].

4.

Distinction between 'Memorandum of Association' and 'Articles of Association'

Sr. Point of No. Distinction 1.

Meaning

2.

Status

3. Main objects

408

Memorandum of Association Association It contains the constitution and the objects of the company for which it is formed. The Company cannot exceed the powers conferred on it by its memorandum.

Articles of Articles of Association are the internal regulations of the company which help to govern the management of the internal affairs of the company and the conduct of its business.

It is a primary and supreme document. It is a secondary document. Articles are subordinate to and controlled by the memorandum. Memorandum is adopted for controlling external operations of the company. There are the conditions introduced for the benefits of creditors, buyers, debtors, sellers and outside public.

As articles control internal, operations of the company, they govern the relationship between the company and the shareholders, members and amongst the members. Articles are just like the partnership deed in a partnership.

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4.


Scope

(a) Memorandum makes clear the areas beyond which the company's activities cannot go. It lays down the parameters for the articles of association.

Articles are the rules and regulations for internal management of the company and control. They determine how the objectives of the company shall be achieved and the powers exercised as per regulations mentioned therein.

(b) Memorandum cannot include any clause contrary to the provisions of the Companies Act.

The Articles of Association are subsidiary both to the Companies Act and Memorandum of Association.

Registration It is compulsory for all the Unlimited companies, companies companies to file the memorandum limited by guarantee and private with the registrar of companies. companies limited by shares must have articles [Section 28]. A company limited by shares may either frame its own set of articles or may adopt all or any of the regulations contained in table 'A' [Section 28 (1)]. But if it does not register any articles, Table A' applies [Section 28 (2)]. Alteration Memorandum of association can be altered only under certain circumstances and in the manner provided in the Companies Act. It requires the sanction of shareholders and the Central Government or the Company Law Board or the Court as the case may be. The procedureof alteration of memorandum is more difficult.

The procedure of alteration or amendment of articles of association is relatively simple. Articles can be altered by the members by passing a special resolution subject to the provisions of the Companies Act.

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7.

Ultra-Vires Acts

Any act done outside the limits of memorandum is ultra-vires and hence, is void and cannot be ratified even by the whole body of the shareholders.

The acts done by the company beyond the articles can be ratified by the shareholders if such acts are not beyond and memorandum and illegal.

Number of clauses

The number of clauses is limited The number of clauses can be and the Companies Act is specific many according to the needs and the Companies Act is not specific in this respect. in this respect.

^ Activity F: A company selling an electronics item made alterations and amendments in the articles of association. The said articles were altered by the members by passing special resolution subject to the provisions of the Companies Act. Advise the company whether it requires any sanction of the share holder or central government?

8.7 SUMMARY A Company is an association of persons formed for certain common purpose. Registration of companies is necessary under the companies Act 1956. For registration promoters are required to submit memorandum, and articles of association to the registrar and after the incorporation of the company and issuance of certificate of registration the company is considered as registered, the day on which the company is registered is the date of commencement of the business. The purpose of the company must be a legal one. 8.8 SELF-ASSESSMENT QUESTIONS

410

Q1.

Define a company. What are the main features of the company ?

Q2.

"A joint stock company is an artificial person created by Law with a perpetual succession and a common seal.' Explain

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Q3. What is a corporate veil? When is the corporate veil lifted? Q4. What are the different types of companies ? Explain in brief each of them. Q5. Distinguish between a private company and public company. Q6. Explain the procedure of registration of a company. Q7. "A Company is a legal entity distinct from its members." Comment. Q8.

What is Certificate of Incorporation? When and by whom is it issued? What are the effects of incorporation?

Q9.

"A certificate of incorporation is a conclusive evidence that the requirement of the companies Act have boon complied with" Discuss.

Q10. How is a Company formed under the company Act of 1956? What are the documents to be filed with the registrar? Ql 1. "A company can not be a party to a contract before it has come into existence." Comment. Q12. From what date a registered company incorporated? What are the legal effects of the certificate of incorporation? Q13. "The memorandum of association is an unalterable charter of a company." Comment. Q14. What is Memorandum of Association? How can they be altered? Q15. Distinguish between Memorandum of Association and Articles of Association.

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9.1

INTRODUCTION

The second part of the Company Acts deals with the important provisions relating to the functioning of the company. It speaks about the important document like prospectus. It is a very important document which shows the current affairs of the company. It has also explained the need of an auditor its functioning and importance in the functioning of the company. Functioning of the company is an equally important aspect. This unit highlights the guidelines on how to raise funds through shares, accounts and audit, responsibilities of the directors, and governing the company.

9.2

PROSPECTUS

A prospectus has been defined in the Act as "any document described or issued as a prospectus and includes any notice, circular, advertisement or other document inviting deposits from the public or inviting offers from the public for the subscription or purchase of any shares in, or debentures of a body corporate."

I

(A) Characteristics The essential characteristics and the features of the prospectus are the following: (i) It is document described or issued as prospectus. (ii) It includes any notice, circular, advertisement, inviting deposities from from the public or the other documents^ (iii)

it is an invitation to other members of the public. ipany.

(v) The term public does not mean an invitation of very large number of people. It is enough if the invitation is to a section of the public. But invitation to a few friends and relatives or to the customers to the promoter does not institute a prospectus. There must be some degree of publicity, even though it is on a low key. (vi) A prospectus is the document through which the company secures the capital needed for carrying on its business. Any document having this objects, comes within the document of prospectus. But an advertisement for securing business or trade is not a prospectus.

(B) Form and contents of the prospectus Schedule II to the Companies Act specifies a list of particulars which must be included in the prospectus. The principal items are the following: 414

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(i)

Particulars of signatories of the memorandum of the company and shares subscribed by them;

(ii)

Number and classes of shares and extent of interest of holders, and particulars regarding debentures and redeemable preference shares;

(iii) The rights in respect in respect of capital and dividends attached to different classes of shares. (iv) Particulars regarding the directors, managing agents, secretaries and treasurers, etc. and of the contract fixing the remuneration of managing agents etc: (Managing Agency and Secretaries, and treasurers have been abolished). (v)

The minimum amount of subscription and amount payable on application.

(vi) Time of opening of the subscription list. (vii) Preliminary expenses incurred. (viii) Particulars regarding purchase of property. (ix) Details of any premium or under writing commissions paid. (x)

Particulars of reserves including reserves capitalized.

(xi) Nature and extent of interest of every director and promoter. (xii) Names and address of the auditors of the company. (xiii) In case of existing companies, a report by the auditors showing the profit and loss, and assets and liabilities of the company rates of dividend paid for five years preceding issue of prospectus and particulars regarding subsidiaries. (xiv) Whether the prospectus is issued at the time of the formation of the company or subsequently. (xv)

The nature and extent of restrictions upon members at company meetings.

(xvi) Restrictions upon the powers of the directors. (xvii) Voting rights, capitalization of reserves and surplus of revaluation. (xviii) Inspection of balance sheet and profits and loss account. (xix) The following reports are to be annexed to the prospectus. (a) Report by auditor and (b) Report by accountant 415

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(C) The legal requirements of a prospectus (i)

Time: A prospectus is to be issued after the incorporation of the company.

(ii) Particulars: The prospectus must contain all the particulars listed in schedule II to the Companies Act (iii) Date: The prospectus must be dated and this date will be considered to be the date ©f publication unless otherwise proved (Sec-55). (iv) Signature: The prospectus must be signed by every person mentioned therein as a director or a proposed director. (v) Copy of prospectus: Every application form for shares, issued by the company, must be accompanied by a copy of the prospectus. (vi) Statement by expert: A statement relating to a company by an expert can be included in the prospect only if the expert concerned is not engaged or interested in the formation and promotion or the management of the company. The statement of an expert can only be included if he has, in writing, authorized its issue. The term expert includes an engineer, a valuer, an accountant and any other person whose profession gives authority to a statement made by him. (vii) Deposits: Deposits are not to be invited without issuing an advertisement. The Central Government may, in consultation with the Reserve Bank of India prescribe the limit, the manner, and the conditions subject to which deposits may be invited or accepted by a company either from the public or the public or the members. The advertisements must includes a statement showing the companies financial position issued by the company and in such form, or in such manner, as may be prescribed. The rules shall prescribe how the deposit is to be continued or repaid. (viii) Registration : Before a prospectus is issued, it must be registered with the registrar of the companies. No prospectus can be issued more than 90 days after a copy of it is filed for registration. (ix) Terms of contract: The terms of any contract mentioned in the prospectus, cannot be varied after the registration of the prospectus except with the approval of the members in a general meeting. (x) Prospectus by foreign company: A prospectus issued by a foreign company, with a view to selling shares in India must include certain additional particulars. 416

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(xi) Penalty for non compliance: If the aforesaid rules, relating to the matters to be include in the prospectus, are not complied with, any person who is knowingly a party to the issue thereof shall be punishable with fine which may extend to Rs. 5000. (xii) Defence: A person charged with non-compliance of the aforesaid rules will be excuse in the following cases(a) as regards any matter not disclosed, if he proved that he had no knowledge thereof (b) if he proves that non-compliance or contravention arose from an honest mistake of fact on his part. (c) If the non-compliance or contravention was reasonably excused. Âctivity A: Aryan Steel Co. Pvt. Ltd. published its prospectus without registration of the same. State the effect of non registration of the prospectus.

(D) Mistatement in the prospectus al >e .d. he

tus,

(i) Liability for not stating the particulars : The public invests money in the purchase of shares and debentures of the companies on the basis of statement contained in the prospect. Mistatement and false statement in the prospectus are instruments through which dishonest company promoters may practice fraud on the public. To prevent such practices the Law imposes certain duties and finality on all persons responsible for the issuance of the prospectus. (ii) Liability for untrue statement: The authors of the prospectus have to see that the prospectus contains no untrue statement likely to misleads the public. (E) Statement in Lieu of Prospectus [Section 70}

>any, liars.

When the promoters of a public company do not want to approach the public for securing the capital and they are in a position to get subscriptions for shares or 41 7

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debentures from their friends, no prospectus is required to be filed but they have to file 'Statement in Lieu of Prospectus' before they allot shares. This statement must contain the particulars as per the provisions of Section 70. This document is required to be filed with the Registrar at least three days before any allotment of shares or debentures is made. Aprivate company is free from filing either a prospectus or a statement in lieu of prospectus as it is prohibited from offering its shares or debentures to the public. (F) Distinction between a prospectus and a statement in lieu of prospectus The important points making clear the distinction between a prospectus and a statement in lieu of the prospectus are given below: Point of Distinction

Prospectus

Statement in Lieu of Prospectus

1.

It is prepared for filing with the Registrar of companies and publicity.

It is prepared only for filing purpose.

2. Approach

It does publicity and has a selling approach.

It is prepared for fulfilling the legal formality of filing with the Registrar of the companies and has an informative approach.

3. Suitability

Publication of prospectus is necessary for the companies for raising the capital from public.

It is suitable for companies which raise the capital from known sources where shares are not offered to the public for subscription.

Prospectus is necessary when a company wants to raise the capital from the general public.

It is not meant for general public. It is to be filed with the Registrar of the Companies.

Purpose

4. Necessity 9.3

SHARE CAPITAL

(A) Capital The term "capital" in connection with company formation may mean any of the following: 418

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1. Nominal capital or authorized capital: Nominal capital or authorized capital is the total fee value of the shares which the company is authorized to issue by its memorandum of association. The total share capital of a company is also called its registered capital. 2. Issued capital: Issued capital is that part of authorized capital which is actually offered to the public for sale. 3. Subscribed capital: Subscribed capital is that part of issued capital which is taken up and accepted by the public. 4. Paid-up capital: Paid up capital is the amount of money actually paid by the subscribers or credited as so paid. ~~" ~ ' 5. Uncalled capital: The unpaid portion of the subscribed capital is called uncalled ^capital. A limited company may by special resolution determine that a portion of the share capital, which has not been called up, shall not be called up except in case of liquidation. Such uncalled capital is called reserved capital. 6.

Reserved capital: Reserve capital is that part of the uncalled capital which can only be called up at the time of and for the purposes of winding up for the company. This implies that reserve capital is available only for creditors on the winding up of the company.

(B) Shares Definition: The shareholders are the proprietor of the company. Therefore a "Share" may be defined as an interest in the company entitling the owner thereof to receive proportionate part of the profit, if any and of a proportionate part of the assets of the company upon liquidation. A shareholder has certain rights and liabilities. (1)

Features and characteristics : The main characteristics of shares are given below

1.

A share is not a sum of money, but is an interest measured in a sum of money and made up of various rights, contained in the contract.

2.

A share is an interest having a money value and made up of diverse rights specified under the Articles of Association

3.

The holder of a share has certain duties and liabilities as stated in the companies Act and in the Articles of a company.

4.

A share is transferable and heritable subject to regulations framed in the articles of association of the company. 419

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5.

The share or other interest of a member in a company is a movable property, transferable in the manner provided by the articles of the company..

6.

The shares must be numbered so as to distinguish them from one another.

(2) Classification of shares There are only two types of shares : Equity Share Capital and Preference Share Capital. Preference shares : Preference shares are those shares which are given by the articles of the company. Two privileges, namely, (i) priority in the payments of dividends over other shares, and (ii) priority as regards return of the capital in the event of liquidation. The holder of a preference share is entitled to share is entitled to receive dividends (at the rate fixed by the Articles) before any dividend is declared on the other shares. In the event of winding up, if surplus assets are available, the preference shareholders must first be given back the amount which they paid on the share. The balance is available for distribution to the other shareholders. Equity Share Capital: Equity share capital means with reference to any such company, all share capital which is not preference share capital. Stock is a different concept. It is the aggregate of fully paid-up shares, consolidated and dividend for convenient holding into different parts. Without regard to the original face value of the share, stock can be transferred or split up into fractions of any desirable amount. Stock can only be issued when the shares are fully paid. Section 94 (1) (c) implies that a company limited by shares, if properly authorised by its articles of association, can convert all or any of its fully paid up shares into stock and also can reconvert the stock into fully paid up shares of any denomination. Thus, shares can be converted into stock when they are fully paid.

(3) Distinction between Share and Stock Important points making clear the distinction between share and stock are as follows:

420

1.

Share means share in the share capital of a company and it also includes stock except where a distinction between stock and shares is expressed or implied [Section 2 (46)].

2.

A share has a nominal or face value while stock has no such nominal value.

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1.


3.

Shares need not be fully paid-up. They can be partly or fully paid-up while stock is always fully paid-up7Only fully paid-up shares can be converted into stock.

4.

Shares cannot be issued or transferred in fragments while stock can be divided into equal amount and can be issued and transferred in fragments. It is transferable in small fractions also.

5.

All shares are always of equal denomination while stock may be of different denominations or of unequal amounts.

6.

Shares bear distinctive numbers which distinguish them from one other. Fractions of stock do not bear distinctive numbers. Shares are directly issued to the public but stock cannot be so directly issued.

Activity B : Can shares be converted into stock?

(4)

Provisions Relating to "Certificate of Shares" [Section 84} A share is a movable property and transferable in the manner provided by the articles of the company (Section 82) while a certificate of shares is a certificate, under the common seal of the company, specifying any shares held by any member and is a prima facie evidence of the title of the member to such shares [Section 84]. According to Section 84 of the Act. 1]) "A certificate, under the common seal of the company, specifying any shares held by any member, shall be prima facie evidence of the title of the member to such shares [Section 84 (1)]. (2) A certificate may be renewed or a duplicate of a certificate may be issued if such certificate (a) is proved to have been lost or destroyed, or (b) having been defaced or mutilated or torn is surrendered to the company [Section 84 (2)].

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(3) If a company with the intent to defraud renews a certificate or issues a duplicate thereof, the company shall be punishable with fine which may extend to Ten thousand rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to six months, or with fine which may extend to one lakh rupees, or with both [Section 84 (3)]. (4) Notwithstanding anything contained in the articles of association of a company, the manner of issue or renewal of a certificate or issue of a duplicate thereof, the form of a certificate (original or renewed) or of a duplicate thereof, the particulars to be entered in the register of members or in the register of renewed or duplicate certificates, the form of such registers, the fee on payment of which, the terms and conditions, if any (including terms and conditions as to evidence and indemnity and the payment of out-of-pocket expenses incurred by a company in investigating evidence) on which a certificate may be renewed or a duplicate thereof may be issued, shall be such as may be prescribed [Section 84 (4)].

(C) Alteration, increase, revocation of share capital (i)

Alteration in share capital A limited company having a share capital is empowered to alter its share capital subject to the provisions of Section 94 of the Companies Act of 1956. But such a company has to give the notice of alteration in share capital to the Registrar within thirty days of the alteration as per the provisions of sections 95 and 97. According to Section 94, a limited company having a share capital may, if so authorised by its articles of association, alter the conditions of its memorandum.

(ii)

Increase in share capital A limited company having a share capital can further issue its share capital, according to the provisions of Section 81. The Central Government may, in public interest, direct that the debentures or loans or any part thereof shall be converted into shares in the company on certain terms and conditions which the Government thinks reasonable, even if the terms of issue of such debentures or the terms of such loans do not include a term providing for an option for such conversion [Section 81(4)]. Notwithstanding anything contained in this Act, where the Central Government by an order passed under Section 81 (4) directed that any debenture or loan or

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any part thereof shall be converted into shares in a company, the conditions contained in the memorandum of such company shall where such an order has the effect of increasing the nominal share capital of the company, stand altered and the nominal share capital of such a company shall stand increased by an amount equal to the amount of the value of shares into which such debentures or loans or part thereof has been converted (Section 94 - A (1)]. Thus, the above mentioned provisions have been made in the Companies Act of 1956 to increase the share capital of a company. (iii) Reduction of share capital The provisions relating to reduction of share capital have been made in Sections 100 to 105. Section 100 lays down that "subject to the confirmation by the Court, a company limited by shares or a company limited by guarantee and having a share capital, may, if so authorised by its articles, by special resolution, reduce its share capital in any way, and in particular and without prejudice to the generality of the foregoing power, may (i) extinguish or reduce the liability on any of its shares in respect of share capital not paid-up; (ii) either with or without extinguishing or reducing liability on any of its shares, cancel any paid-up share capital which is lost or is unrepresented by available assets; or (iii) either with or without extinguishing or reducing liability on any of its shares, pay of any paid-up share capital which is in excess of the wants of the company; and may, if and so far as is necessary, alter its Memorandum by reducing the amount of its share capital and of its share accordingly." 9.4

ACCOUNTSANDAUDIT

'revisions relating to accounts and audit of the companies have been made in Sections from 209 to 233 of the Companies Act of 1956. Let us consider the important provisions relating to accounts and audit of the companies.

Business Law

(A) Books of Account to be kept by Company [Section 209] Section 209 (1) requires "Every company to keep at its registered office proper books of accounts with respect to (a) all sums of money received and expended by the company and the matters in respect of which the receipt and expenditure take place; (b) all sales and purchases of goods by the company; (c) the assets and liabilities of the company; and (d) in the case of a company pertaining to any class of companies engaged in production, processing, manufacturing or mining activities, such particulars relating to utilisation of material or labour or to other items of cost as may be prescribed, if such class of companies is required by the Central Government to include such particulars in the books of account. It is also provided in the proviso to Section 209 (1) that, "all or any of the books of account aforesaid may be kept at such other place in India as the Board of Directors may decide and when the Board of Directors so decides, the company shall within seven days of the decision, file with the Registrar a notice in writing giving the full address of that other place". While Section 209 (2) states that, "where a company has a branch office, whether in or outside India, the company shall be deemed to have complied with the provisions of sub-section (1), if proper books of account relating to the transactions effected at the branch office are kept at that office and proper summarised returns, made up to dates at intervals of not more than three months, are sent by the branch office to the company at its registered office or the other place referred to in sub-section (1)". Section 209 (3) further provides that proper books of account shall not be deemed to be kept by a company or its branch with respect to the matters specified therein, that is, in Section 209 (1). (a) if these are not kept such books as are necessary to give a true and fair view of the state of affairs of the company or branch office, as the case may be, and to explain its transactions; and (b) if such books are not kept on an accrual basis and according to the double entry system of accounting. 424

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These books of accounts and books and papers must be kept open to inspection by any director during business hours [Section 209 (4)]. Further it is provided in Section 209 (4-A) that, "the books of account of every company relating to a period of not loss than eight years immediately preceding the current year together with the vouchers relevant to any entry in such books of account shall be preserved in good order." It is also provided that in the case of a company incorporated less than eight years before the current year, the books of account for the entire period preceding the current year together with the vouchers relevant to any entry in such books of accounted shall be so preserved [Proviso to Section 209 (4-A)]. Thus, this section 209 (4-A) makes provision for preservation of books of accounts. (B) Persons Responsible for keeping Proper Books of Account and Penalty for Failure to take Necessary steps to Secure Compliance with the requirements of Section 209 (i) Section 209 (5) : "If any of the persons referred to in sub-section (6) fails to take all reasonable steps to secure compliance by the company with the requirements of this section, or has by his own full wilful act been the cause of any default by the company thereunder, he shall, in respect of each offence, be punishable with imprisonment for a term which may extend to six months, or with fine which may extend Ten thousand rupees [Rs. 10,000] or with both". It is provided that in any proceedings against a person in respect of an offence under this section consisting of a failure to take reasonable steps to secure compliance by the company with the requirements of this section, it shall be a defence to prove that a competent and reliable person was charged with the duty of seeing that those requirements were complied with and was in a position to discharge that duty [Proviso to Section 209 (5)]. It is provided further that no person shall be sentenced to imprisonment for any such offence unless it was committed willfully [Proviso 2 to Section 209 (6)]. (ii) Section 209 (6) : In this sub-section 6 of Section 209, the persons referred to in sub- section 5 of section 209 are mentioned and these persons are (a) where the company has a managing director or manager, such managing director or manager and all officers and other employees of the company; and (b) where the company has neither a managing director nor manager, every director of the company. 425

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(iii) Section 209 (7) : "If any person, not being a person referred to in sub-section (6), having been charged by the managing director, manager or Board of Directors, as the case may be, with the duty of seeing that the requirements of this section are complied with, makes a default in doing so, he shall, in respect of each offence, be punishable with imprisonment for a term which may extend to six months, or with fine which may extend to Ten thousand rupees [Rs. 10,000] or with both." (C) Inspection of Books of Account, Other Books and Papers, etc. of Companies [Section 209-A] The provisions relating to the inspection of books of account, other books and papers, etc. of the Companies by the concerned persons i.e. directors, the Registrar of the Companies, officers of the Government and the Securities and Exchange Board of India (SEBI), etc. have been made in Section 209-A of the Companies Act and they are as follows: (1) The books of account and other books and papers of every company shall be open to inspection during business hours (i) (ii)

by the Registrar; or by such officer of the Government as may be authorised by the Central Government in this behalf;

(iii) by such officers of the Securities and Exchange Board of India as may it be authorised by it [Section 209-A (1)]. It is provided that such inspection may be made without giving any previous notice to the company or any officer thereof [Proviso I to Section 209-A (1)]. It is provided further that the inspection by the Securities and Exchange Board of India shall be made in respect of matters covered under sections referred to in section 55A. [Proviso 2 to Section 209-A (1)]. (2) It shall be the duty of every director, other officer or employee of the company to produce to the person making inspection under sub-section (1), all such books of account and other books and papers of the company in his custody or control and to furnish him with any statement, information or explanation relating to the affairs of the company as the said person may require of him within such time and at such place as he may specify [Section 209-A (2)].

426

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(3) It shall also be the duty of every director, other officer or employee of the company to give to the person making inspection under this section all assistance in connection with the inspection which the company may be reasonably expected to give [Section 209-A (3)]. (4), The person making inspection under this section may, during the course of inspection (i)

make or cause to be made copies of books of account and other books and papers, or

(ii)

place or cause-to be placed any marks of identification thereon in token, of the inspection having been made [Section 209-A (4)].

(5) Notwithstanding anything contained in any other law for the time being in force or any contract to the contrary, any person making an inspection under this section shall have the same powers as are vested in a civil court under the Code of Civil Procedure, 1908 (5 of 1908), while trying a suit, in respect of the following matters, namely, (i)

the discovery and production of books of account and other documents, at such place and such time as may be specified by such person;

(ii)

summoning and enforcing the attendance of persons and examining them on oath;

(iii) inspection of any books, registers and other documents of the company at any place [Section 209-A (5)]. (6) Where an inspection of the books of account and other books and papers of the company has been made under this section, the person making the inspection shall make a report to the Central Government or the Securities and Exchange Board of India in respect of inspection made by its officers [Section 209-A (6)]. (7) Any officer authorised to make an inspection under this section, shall have all the powers that a Registrar has under this Act in relation to the making of inquiries [Section 209-A (7)]. (8) If default is made in complying with the provisions of this section, every officer of the company who is in default shall be punishable with fine which shall not be less than thousand rupees, and also with imprisonment for a term not exceeding one year [Section 209-A (8)]. 427

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(9) Where a director or any other officer of a company has been convicted of an offence under this section he shall, on and from the date on which he is so convicted, be deemed to have vacated his office as such and on such vacation of office, shall be disqualified for holding such office in any company, for a period of five years from such date [Section 209- A (9)]. From the provisions of sub-sections 8 and 9 of Section 209-A, we come to know that if any default is made in complying with the provisions of Section 209-A, the concerned officer is punished as provided in sub-sections eight and nine of Section 209-A. Activity C : Where are the books of accounts and other books and papers available for inspection of the public?

(D) Provisions of Section 210 relating to annual accounts and balance sheet (1) At every Annual General Meeting of a company held in pursuance of section 166 the Board of Directors of the company shall lay before the company (a) a Balance Sheet as at the end of the period specified in sub-section (3); and (b) a Profit and Loss Account for that period [Section 210 (1)]. (2) In the case of a company not carrying on business for profit, an Income and Expenditure Account shall be laid before the company at its Annual General Meeting instead of a Profit and Loss Account, and all references to "Profit and Loss Account", "profit" and "loss" in this section and elsewhere in this Act, shall be construed, in relation to such a company, as references, respectively, to the "income and expenditure account", "the excess of Income over Expenditure", and "the excess of expenditure over income" [Section 210 (2)]. (3) The profit and loss account shall relate (a)

428

in the case of the first Annual General Meeting of the company, to the period beginning with the incorporation of the company and ending with a

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day which shall not precede the day of the meeting by more than nine months; and

• I

(b) in the case of any subsequent annual general meeting of the company to the period beginning with the day immediately after the period for which the account was last submitted and ending with a day which shall not precede the day of the meeting by more than six months, or in cases where an extension of time has been granted for holding the meeting under the second proviso to sub-section (1) of section 166, by more than six months and the extension so granted [Section 210 (3)]. (4) The period to which the account aforesaid relates is referred to in this Act as a "Financial Year"; and it may be less or more than a calendar year, but it shall not exceed fifteen months [Section 210 (4)]. It is provided that it may extend to eighteen months where special permission has been granted in that behalf by the Registrar [Proviso to Section 210 (4)]. (5) If any person^being a director of a company, fails to take all reasonable steps to comply with the provisions of this section, he shall, in respect of each offence, be punishable with imprisonment for a term which may extend to six months, or with fine which may extend to Ten Thousand rupees, or with both [Section 210 (5)]. It is provided that in any proceedings against a person in respect of an offence under this section, it shall be a defence to prove that a competent and reliable person was charged with the duty of seeing that the provisions of this section were complied with and was in a position to discharge that duty [Proviso 1 to Section 210 (5)]. It is provided further that no person shall be sentenced to imprisonment for any such offence unless it was committed wilfully [Proviso 2 to Section 210 (5)]. (6) If any person, not being a director of the company, having been charged by the Board of Directors with the duty of seeing that the provisions of this section are complied with, makes default in doing so, he shall, in respect of each offence, be punishable with imprisonment for a term which may extend to six months, or with fine which may extend to six months, or with fine which may extend to Ten thousand rupees or with both [Section 210 (6)]. It is provided that no person shall be sentenced to imprisonment for any such offence unless it was committed willfully [Proviso to Section 210 (6)]. 42 9

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(E) Provisions of Section 217 relating to "Board's Report" 1.

Balance Sheet Section 217 (1) of the Companies Act of 1956 requires that, there shall be attached to every balance sheet laid before a company in general meeting, a report by its Board of Directors, with respect to (a) the state of the company's affairs; (b) the amounts, if any, which it proposes to carry to any reserves in such Balance Sheet; (c) the amount, if any, which it recommends that should be paid by way of dividend; (d) material changes and commitments, if any, affecting the financial position of the company which have occurred between the end of the financial year of the company to which the balance sheet relates and the date of the report; (e) the conservation of energy, technology absorption, foreign exchange earnings and outgo, in such manner as may be prescribed. While sub-section 2 of Section 27 7 makes clear that, "the Board's report shall, so far as is material for the appreciation of the state of the company's affairs by its members and will not in the Board's opinion be harmful to the business of the company or of any of its subsidiaries, deal with any changes which have occurred during the financial year. (a) in the nature of the company's business; (b) in the company's subsidiaries or in the nature of the business carried on by there; and (c) generally in the classes of business in which the company as an interest."

2.

Particulars in respect of Certain Employees [Section 217 (2-A)] Sub-section (2-A) of Section 217 provides that (a)

The Board's report shall also include a statement showing the name of every employee of the company who (i) if employed throughout the financial year, was in receipt of remuneration for that i rear which, in the aggregate, was not less than such sum as may be prescribed; or

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(ii) if employed for a part of the financial year, was in receipt of remuneration for any part of that year, at a rate which, in the aggregate, was not less than such sum per month as may be prescribed; or (iii) if employed throughout the financial year or part thereof, was in receipt of remuneration in that year which, in the aggregate, or as the case may be, at a rate which, in the aggregate, is in excess of that drawn by the managing director or whole-time director or manager and holds by himself or along with his spouse and dependent children, not less than two per cent, of the equity shares of the company. (b)

The statement referred to in clause (a) shall also indicate (i) whether any such employee i s a relative of any director or manager of the company and if so, the name of such director, and (ii)

such other particulars as may be prescribed. 3.

Director's Responsibility Statement [Section 217 (2AA)] The sub-section (2-AA) of Section 217 has been inserted by the Companies (Amendment) Act of 2000 which provides that, "The Board's report shall also include a Director's Responsibility Statement, indicating therein (i) that in the preparation of the annual accounts, the applicable accounting standards had been followed along with proper explanation relating to material departures; (ii) that the directors had selected such accounting policies and applied them consistently and made judgements and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the company at the end of the financial year and of the profit or loss of the company for that period; (iii) that the directors had taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of this Act for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities; (iv) that the directors had prepared the annual accounts on a going concern basis".

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4.

Report must be signed by the chairman, of the Board I Section 217 (4) makes clear that "The board's report and any addendum thereto shall be signed by its chairman if he is authorised in that behalf by the Board; and where he is not so authorsied, shall be signed by such number of directors as are required to sign the balance sheet and profit and loss account of the company by virtue of sub-sections (1) and (2) of section 215."

5.

Punishment for an offence under Section 217 [Section 217 (5)] It is stated in Section 217(5) that "If any person, being a director of a company, fails to take all reasonable steps to comply with the provisions of sub-sections (1) to (3), or being the chairman, signs the Board's report otherwise than in conformity with the provisions of sub-section (4), he shall, in respect of each offence, be punishable with imprisonment for a term which may extend to six months, or with fine which may extend to twenty thousand rupees, or with both." It is also provided that no person shall be sentenced to imprisonment for any such offence unless it was committed willfully [Proviso to Section 217 (5)]. It is provided further that in any proceedings against a person in respect of an offence under sub-section (1), it shall be a defence to prove that a competent and reliable person was charged with the duty of seeing that the provisions of that sub-section were complied with and was in a position to discharge that duty [Proviso 2 to Section 217(5)}. While Section 217(6) states that "If any person, not being a director, having been charged by the Board of Directors with the duty of seeing that the provisions of subsections (1) to (3) are complied with, makes default in doing so, he shall, in respect of each offence be punishable with imprisonment for a term which may extend to six months, or with fine which may extend to Twenty thousand rupees, or with both". It is also provided that no person shall sentence to imprisonment for any such offence unless it was committed willfully [Proviso to Section 217 (6)].

6.

Penalty for improper Issue, circulation or publication of balance sheet or profit and loss account [Section 218] (a)

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If any copy of a balance sheet or profit and loss account which has not been signed as required by section 275 is issued, circulated or published; or


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(b) If any copy of a balance sheet is issued, circulated or published without there being annexed or attached thereto, as the case may be, a copy each of (i) the profit and loss account, (ii) any accounts, reports or statement which, by virtue of Section 212, are required to be attached to the balance sheet, (iii) the auditors' report, and (iv) the Board's report- referred to in Section 217. "The company, and every officer of the company who is in default, shall be punishable with fine which may extend to Five thousand Rupees." (F)

Circulation of Annual Accounts [Section 219] In Section 219 (1), it is stated that, "A copy of every balance sheet (including the profit and loss account, the auditors' report and every other document required by law to be, annexed or attached, as the case may be, to the balance sheet) which is to be laid before a company in general meeting shall, not less than twenty-one days before the date of the meeting, be sent to every member of the company, to every trustee the holders of any debentures issued by the company, whether such member or trustee is or is not entitled to have notices of general meetings of the company sent to him, and to all persons other than such members or trustees, being persons so entitled." The other provisions of Section 279 are as follows. •

Any member or holder of debentures of a company and any person from whom the company has accepted a sum of money by way of deposit shall, on demand, be entitled to be furnished free of cost, with a copy of the last balance sheet of the company and of every document required by law to be annexed or attached thereto, including the profit and loss account and the auditors' report [Section 219 (2)].

•

If default is made in complying with sub-section (1), the company, and every officer of the company who is in default, shall be punishable with fine which may extend to Five Thousand Rupees [Section 219 (3)].

•

If, when any person makes a demand for a copy of any document with which he is entitled to be furnished by virtue of sub-section (2), default is made in complying with the demand within seven days after the making thereof the company, and every officer of the company who is in default, shall be punishable with fine which may extend to five thousand rupees, unless it is proved that person had already made a demand for and been furnished with a copy of the document. The Company Law Board may also, by order, direct that the copy demanded shall forthwith be furnished to the person concerned [Section 219 (4)].

I

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• Sub-sections (1) to (4) shall not apply in relation to a balance sheet of a private company laid before it before the commencement of this Act; and in such a case the right of any person to have sent to him or to be furnished with a copy of the balance sheet, and the liability of the company in respect of a failure to satisfy that right, shall be the same as they would have been if this Act had not been passed [Section 219 (5)].

(G) Filing of Copies of Accounts of a Company with the Registrar of Companies [Section 220] It is provided in sub-section 1 of Section 220 that, "After the balance sheet and the profit and loss account have been laid before a company at an annual general meeting as aforesaid, there shall be filed with the Registrar within thirty days from the date on which the Balance Sheet and the Profit and Loss Account were so laid, or where the annual general meeting of a company for any year has not been held, there shall be filed with the Registrar within thirty days from the latest day on or before which that meeting should have been held in accordance with the provisions of this Act. It further states that, "three copies of the Balance Sheet and the profit and loss account, signed by the managing director, manager or secretary of the company, or if there be none of these, by a director of the company, together with three copies of all documents which are required by this Act to be annexed or attached to such balance sheet or profit and loss accounts." It is made clear the proviso to section 220 that, "In the case of a private company, copies of the Balance Sheet and copies of the Profit and Loss Account shall be filed with the Registrar separately, Section 220 (2) provides that, "If the Annual General Meeting of a company before which a balance sheet is laid as aforesaid does not adopt the balance sheet, or is adjourned without adopting the balance sheet or, if the annual general meeting of a company for any year has not been held, a statement of the fact and of the reasons therefore shall be annexed to the balance sheet and to the copies thereof required to be filed with the Registrar." Provisions of Section 220 (3) makes it clear that, "If default is made in complying with the requirements of sub-sections (1) and (2), the company, and every officer of the company who is in default, shall be liable to the like punishment as is provided by section 162 for a default in complying with provisions of section 159, 160 or 161" that is, a fine which may extend to Rs. Five Hundred for every day during which the default continues. 434

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Companies Act of 1 956 - Part II

Activity D : Briefly write about Balance Sheet of a company?

(H) Appointment and remuneration of auditors [Section 224] (I) Every company shall at each annual general meeting, appoint an auditor or auditors to hold office from the conclusion of that meeting until the conclusion of the next Annual General Meeting and shall, within seven days of the appointment, give intimation thereof to every auditor so appointed [Section 224 (1)]. It is provided that before any appointment or re-appointment of an auditor or auditors is made by any company at any annual general meeting, a written certificate shall be obtained by the company from the auditor or auditors proposed to be appointed to the effect that the appointment or reappointment, if made, will be in accordance with the limits specified in sub-section (IB) [Proviso to Section 224 (1)]. (1 A) Every auditor appointed under sub-section (1) shall within thirty days of the receipt from the company of the intimation of his appointment, inform the Registrar in writing that he has accepted, or refused to accept, the appointment [Section 224 (1-A)]. (IB) On and from the financial year next following the commencement of the Companies (Amendment) Act, 1974, no company or its Board of Directors shall appoint or re-appoint any person who is in full-time employment elsewhere or firm as its auditor if such person or firm is, at the date of such appointment or reappointment, holding appointment as auditor of the specified number of companies or more than the specified number of companies [Section 224 (1-B)]. It is provided that in the case of a firm of auditors', "specified number of companies" shall be construed as the number of companies specified for every partner of the firm who is not in full-time employment elsewhere [Proviso 1 to S. 224 (1-B)].

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It is provided further that where any partner of the firm is also a partner of any other firm or firms of auditors, the number of companies which may be taken into account, by all the firms together, in relation to such partner shall not exceed the specified number in the aggregate [Proviso 2 to S. 224 (I-B)]. It is provided also that where any partner of a firm of auditors is also holding office, in his individual capacity, as the auditor of one or more companies, the number of companies which may be taken into account in his case shall not exceed the specified number in the aggregate [Proviso 3 to S. 224 (1 -B)]. It is provided also that the provisions of this sub-section shall not apply, on and after the commencement of the Companies (Amendment) Act, 2000, to a private company [Proviso 4 to Section 224 (I-B)}. (1C) For the purposes of enabling a company to comply with the provisions of subsection (IB), a person or firm holding, immediately before the commencement of the Companies (Amendment) Act, 1974, appointment as the auditor of a number of companies exceeding the specified number, shall, within sixty days from such commencement, intimate his or its unwillingness to be re-appointed as the auditor from the financial year next following such commencement, to the company or companies of which he or it is not willing to be re-appointed auditor; and shall simultaneously intimate to the Registrar the names of the companies of which he or it is willing to be re-appointed as the auditor and forward a copy of the intimation to each of the companies referred to therein. 7. Provisions of Section 225 as to resolutions for appointing or removing auditors

(i) Special notice shall be required for a resolution at an annual general meeting appointing as auditor a person other than a retiring auditor, or providing expressly that a retiring shall not be re-appointed [Section 225 (1)]. (ii) On receipt of notice of such a resolution, the company shall forthwith send a copy thereof to the retiring auditor [Section 225 (2)]. (iii) Where notice is given of such a resolution and the retiring auditor makes with respect thereto representations in writing to the company (not exceeding a reasonable length) and requests their notification to members of the company, the company shall, unless the representations are received by it too late for it to do so (a)

436

in any notice of the resolution given to members of the company, state the fact of the representations having been made; and

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(b) send a copy of the representations to every member of the company to whom notice of the meeting is sent, whether before or after the receipt of the representations by the company; And if a copy of the representations is not sent as aforesaid because they were received too late or because of the company's default the auditor may (without prejudice to his right to be heard orally) require that the representations shall be read out at the meeting [Section 225 (3)]. It is provided that copies of the representations need not be sent out and the representations need not be read out at the meeting if, on the application either of the company or of any other person who claims to be aggrieved, the Company Law Board satisfied that the rights conferred by this sub-section are being abused to secure needless publicity for defamatory matter; and the Company Law Board may order the company's costs on such an application to be paid in whole or in part by the auditor, notwithstanding that he is not a party to the application [Proviso to Section 225 (3)]. (iv) Sub-sections (2) and (3) shall apply to a resolution to remove the first auditors or any of them under sub-section (5) of section 224 or to the removal of any auditor or auditors under sub-section (7) of that section, as they apply in relation to a resolution that a retiring auditor shall not be reappointed [Section 225 (4)]. 8.

Qualifications and disqualifications of auditors [Section 226]

(1) A person shall not be qualified for appointment as auditor of a company unless he is a chartered accountant within the meaning of the Chartered Accountants Act, 1949 (38 of 1949) (Section 226 (1)]. It is provided that a firm whereof all the partners practising in India are qualified for appointment as aforesaid may be appointed by its firm name to be auditor of a company, in which case any partner so practising may act in the name of the firm [Proviso to Section 226 (1)]. (2) (a) the

Notwithstanding anything contained in sub-section (1), but subject to provisions of any rules made under clause (b), the holder of a certificate granted under a law in force in the whole or any portion of a Part B State immediately before the commencement of the Part B States (Laws) Act, 1951 (3of 1951) or of the Jammu and Kashmir (Extension of Laws) Act, 1956 (62 of 1956), as the case may be, entitling him to act as an auditor of companies [in the territories

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which, immediately before the 1st November, 1956, were comprised] in that State or any portion thereof, shall be entitled to be appointed to act as an auditor of companies registered anywhere in India. (b) The Central Government may, by notification in the Official Gazette, make rules providing for the grant, renewal, suspension or cancellation of auditors' certificates to persons in the territories which, immediately before the 1 st November, 1956, were comprised in Part B States for the purposes of clause (a) and prescribing conditions and restrictions for such grant, renewal, suspension or cancellation [Section 226 (2)]. (3) None of the following persons shall be qualified for appointment as auditor of a company (a) a body corporate; (b) an officer or employee of the company; (c) a person who is a partner, or who is in the employment, of an officer or employee of the company; (d) a person who is indebted to the company for an amount exceeding one thousand rupees, or who has given any guarantee or provided any security in connection with the indebtedness of any third person to the company for an amount exceeding one thousand rupees; (e) a person holding any security of that company after a period of one year from the date of commencement of the Companies (Amendment) Act 2000 [Section 226(3)].

9.

Powers and duties of auditors [Section 227]

(1) Every auditor of a company shall have a right of access at all times to the books and accounts and vouchers of the company, whether kept at the head office, of the company or elsewhere, and shall be entitled to require from the officers of the company such information and explanations as the auditor may think necessary for the performance' of his duties as auditor [Section 227(1)]. (1 A) Without prejudice to the provisions of sub-section (1), the auditor shall inquire (a) whether loans and advances made by the company on the basis of security have been properly secured and whether the terms on which they have 438

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been made are not prejudicial to the interests of the company or its members; (b) whether transactions of the company which are represented merely by book entries are not prejudicial to the interests of the company; (c) where the company is not an investment company within the meaning of section 372 or a banking company, whether so much of the assets of the company as consist of shares, debentures and other securities have been sold at a price less than that at which they were purchased by the company; (d) whether loans and advances made by the company have been shown as deposits; (e) whether personal expenses have been charged to revenue account; (f)

where it is stated in the books and papers of the company that any shares have been allotted for cash, whether cash has actually been received in respect of such allotment, and if no cash has actually been so received, whether the position as stated in the account books and the balance sheet is correct, regular and not misleading [Section 227(1-A)].

(2) The auditor shall make a report to the members of the company on the accounts examined by him, and on every balance sheet and profit and loss account and on every other document declared by this Act to be part of or annexed to the balance sheet or profit and loss account, which are laid before the company in general meeting during his tenure of office, and the report shall state whether, in his opinion and to the best of his information and according to the explanations given to him, the said accounts give the information required by this Act in the manner so required and give a true and fair view. (i)

in the case of the balance sheet, of the state of the company's affairs as at the end of its financial year; and

(ii)

in the case of the profit and loss account, of the profit or loss for its financial year [Section 227 (2)].

(3) The auditors' report shall also state (a)

whether he has obtained all the information and explanations which to the best of his knowledge and belief were necessary for the purposes of his audit;

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(b) whether, in his opinion, proper books of account as required by law have been kept by the company so far as appears from his examination of those books, and proper returns adequate for the purposes of his audit have been received from branches not visited by him; (bb) whether the report on the accounts of any branch office audited under section 228 by a person other than the company's auditor has been forwarded to him as required by clause (c) of sub-section (3) of that section and how he has dealt with the same in preparing the auditor's report; (c) whether the company's balance sheet and profit and loss account dealt with by the report are in agreement with the books of account and returns; (d) whether, in his opinion, the profit and loss account and balance sheet comply with the accounting standards referred to in sub-section (3C) of Section 211; (e) in thick type or in italics the observations or comments of the auditors which have any adverse effect on the functioning of the company; (f)

whether any director is disqualified from being appointed as director under clause (g) of sub-section (1) of section 274 [Section 227 (3)].

(4) Where any of the matters referred to in clauses (i) and (ii) of sub-section (2) or in clauses (a), (b) (bb), (c) and (d) of sub-section (3) is answered in the negative or with a qualification, the auditor's report shall state the reason for the answer [Section 227(4)]. (4A) The Central Government may, by general or special order, direct that, in the case of such class or description of companies as may be specified in the order, the auditor's report shall also include a statement on such matters as may be specified therein [Section 227 (4-A)]. It is provided that before making any such order the Central Government may consult the Institute of Chartered Accountants of India constituted under the Chartered Accountants Act, 1949 (38 of 1949), in regard to the class or description of companies and other ancillary matters proposed to be specified therein unless the Government decides that such consultation is not necessary or expedient in the circumstances of the case [Proviso to Section 227 (4-A)].

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(5) The accounts of a company shall not be deemed as not having been, and the auditor's report shall not state that those accounts have not been, properly drawn up on the ground merely that the company has not di sclosed certain matters if (a) those matters are such as the company is not required to disclose by virtue of any provisions contained in this or any other Act, and (b) those provisions are specified in the balance sheet and profit and loss account of the company [Section 227(5)]. 9.5

PROVISIONS RELATING TO DIRECTORS

Section 2(13) defines a director as "any person occupying the position of director by whatever name called." Section 253 of the companies Act clearly lays down that "no body corporate association 'of firm shall be appointed director of a company and only an individual shall be so appointed." The directors of a company 'are collectively called Board of Directors [Section 252 (3)]. The Board of Directors has a pivotal role to play and as such it occupies very important position in a company. Directors are the mainspring and brain of the company. Every public company must have at least three directors [Section 252 (1) I and every other company must have at least two directors [Section 252 (2)J. Provisions relating to appointment of directors are made in chapter II [Section 252, 254 to 266] of the Companies Act of 1956. (A) Appointment of the first director "In default of and subject to any regulations in the articles of a company, subscribers of the memorandum who are individuals, shall be deemed to be the directors of the company, until the directors are duly appointed in accordance with Section 255." [Section 254} In the articles of association of a company, the names of the first directions are given or the method of appointing the first directors is prescribed. Clause 64 of Table -A states that the number of directors and the names of the first directors shall be determined in writing by the subscribers of the memorandum of association or by a majority of them. While Section 254 of the Companies Act implies that in default of and subject to any regulations in the articles of a company i.e. if the first directors are

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not appointed, the subscribers to the memorandum become the first directors till the directors are duly appointed in the first annual general meeting of the company.

(B) Appointment of directors in the annual general meeting The directors are appointed in the annual general meeting of a company. The provisions relating to appointment of directors, proportions of those directors who are to retire by rotation, ascertainment of directors retiring by rotation and filling of vacancies are made in Section 255 and 256.

(C) Appointment of directors by the board of directors The Board of Directors, if empowered by the articles of association, can appoint additional directors. Such additional directors hold office only up to the date to the next annual general meeting of the company. However, the number of directors and additional directors thus appointed together must not exceed the maximum strength fixed for the Board of Directors by the articles of association of the company [Section 260].

(D) Appointment of directors by the central government Section 408 provides that the Central Government may appoint such number of persons as it may think proper by order in writing as being necessary to effectively safeguard the interest of the shareholders, company or in the public interest to hold the office as directors for such period which will not exceed three years on any occasion. The directors so appointed are not required to have or possess any qualification shares. Such directors can be removed by the Central Government at any time it thinks proper. Such directors are required to present their report to the Central Government from time to time regarding the affairs of the company.

(E) Appointment of directors to be voted on individually At a general meeting of a public company or of a private company which is a subsidiary of a public company, a motion shall not be made for the appointment of two or more persons as directors of the company by a single resolution, unless a resolution that it shall be so made has first been agreed to by the meeting without any vote being given against it [Section 263 (J)]. A resolution moved in contravention of sub-section (1) shall be void, whether or not objection was taken at the time to its being so moved: 442

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Provided that, where a resolution so moved is passed, no provision for the automatic re-appointment of the director retiring by rotation in default of another appointment shall apply. [Section 263 (2)]. For the purpose of this Section, a motion for approving a person's appointment or for nominating a person for appointment is treated as motion for his appointment [Section 263 (3)].

(F)

Restrictions on appointment or advertisement of director [Section 266}

1.

A person shall not be capable of being appointed as a director of a company by the articles, and shall not be named as a director or proposed director of a company in a prospectus issued by or on behalf of the company, or as proposed director of an intended company in a prospectus issued in relation to that intended company, or in a statement in lieu of prospectus filed with the Registrar by or on behalf of a company, unless, before the registration of the articles, the publication of the prospectus, or the filing of the statement in lieu of prospectus, aa the case may be, he has, by himself or by his agent authorised in writing (a) signed and filed with the Registrar a consent in writing to act as such director; and (b) either (i) signed the memorandum for shares not being less in number of value than that of his qualification shares, if any; or (ii) taken his qualification shares, if any, from the company and paid or agreed to pay for them; or (iii) signed and filed with the Registrar an undertaking in writing to take from the company his qualification shares, if any, and pay for them; or (iv) made and filed with the Registrar an affidavit to the effect that shares, not being less in number or value than that of his qualification shares, if any, are registered in his name.

2.

Where a person has signed and filed as aforesaid an undertaking to take and pay for his qualification shares, he shall, as regards those shares, be in the same position as if he had signed the memorandum for shares of that number or value.

3.

References in this Section to the share qualification of a director or proposed director shall be constructed as including only a share qualification required within a period determined by reference to the time of appointment, and reference therein to qualification shares shall be constructed accordingly. 443

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This Section shall not apply to (a) a company not having a share Capital; (b) a private company; (c) a company which was a private company before becoming a public company; or (d) a prospectus issued by or on behalf of a company after the expiry of one year from the date on which the company was entitled to commence business. [Section 266(5)}. (G) Share qualification of directors Share qualification means that certain number of shares must be held by a director to qualify himself as a director. Usually, the articles of association of a company require the directors to hold certain number of shares. If a person becoming a director does not have that required number of shares, he has to obtain his qualification shares within two months after his appointment as director. The nominal value of the qualification shares shall not exceed Rs. Five thousand or the nominal value of one share where the value of such share exceeds Rs. Five thousand. The Companies Act does not prescribe any share qualification. If the articles of association do not provide for any share qualification, holding of certain qualification shares for a director is not necessary. Provisions relating to share qualifications are made in Sections 270, 272 and 273 which are reproduced below. (H) Time within which share qualification is to be obtained and maximum amount thereof Without prejudice to the restrictions imposed by Section 266, it shall be the duty of every director who are required by the articles of the company to hold a specified share qualification and who is not already qualified in that respect, to obtain his qualification within two months after his appointment as director. [Section 270 (1)]. Any provision in the articles of the company (whether made before or after the commencement of this Act) shall be void in so far as it requires a person to hold the qualification shares before his appointment as a director or to obtain them within a shorter time than two months after his appointment as such [Section 270 (2)]. The nominal-value of the qualification shares shall not exceed five thousand rupees, or the nominal value of one share where it exceeds five thousand rupees [Section 270(3)]. 444

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For the purpose of any provision in the articles requiring a director to hold a specified share qualification, the bearer of a share warrant shall not be deemed to be the holder of the shares specified in the warrant. [Section 270 (4)]. (I)

Penalty If, after the expiry of the said period of two months, any person acts as a director of the company when he does not hold the qualification shares referred to in Section 270, he shall be punishable with fine which may extend to fifty rupees for every day between such expiry and the last day on which he acted as a director. [Section 272] Section 273 lays down that, "Sections 270 and 272 shall not apply to a private company unless it is a subsidiary of a public company."

(J)

Restrictions on number of directorship The provisions relating to restrictions on number of directorship have been made in Section 275 to 279. No director is allowed to hold office at the same time as a director in more than twenty companies [Section 2 75] Section 2 77 provides for a choice by person becoming a director of more than twenty companies after commencement of the Act. Section 277 (1) states that "Where a person already holding the office of director in twenty companies is appointed, after the commencement of this Act, as a director of any company, the appointment (a) shall not take effect unless such person has, within fifteen days thereof, effectively vacated his office as director in any of the companies in which he was already a director; and (b) shall become void' immediately on the expiry of the fifteen days if he has not, before such expiry, effectively vacated his office as director in any of the other companies aforesaid." and Section 277 (2) lays down that, "Where a person already holding the office of director in nineteen companies or less is appointed, after the commencement of this Act, as a director of other companies, making the total number of his directorships more than twenty, he shall choose the directorships which he wishes to continue to hold or to accept, so however, that the total number of the directorships, old and new, held by him shall not exceed twenty.

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None of the new appointments of director shall take effect until such choice is made; and all the new appointments shall become void if the choice is not made within fifteen days of the day on which the last of them was made." Exclusion of certain directorship Section 278 implies that in calculating the number of companies of which a person can be a director, the following types of companies are excluded (a) a private company which is neither a subsidiary nor a holding company of a public company; (b) an unlimited company; (c) an association not carrying on business for profits or which prohibits the payment' of a dividend; (d) a company in which such person is only an alternate director, that is to say, director who is only qualified to act as such during the absence or incapacity of some other director. Section 279 lays down that- "Any person who holds office, or acts as a director of more than twenty companies in contravention of the foregoing provisions shall be punishable with fine which may extend to five thousand rupees in respect of each of those companies after the first twenty." K.

Removal of Directors Shareholders, the Central Government and the Company Law Board may remove the directors. Shareholders may remove a director before the expiry of his period of office by passing an ordinary resolution in their general meeting. But a director appointed by the Central' Government cannot be so removed. For removing the director in this manner clear cut 14 days' special notice is required to be given. On receipt of such notice, the company has to inform its shareholders of the proposed resolution, and a copy of the proposed resolution must also be sent to the concerned director. If the director makes any representation, a copy of such representation must be sent to every member by the company and if a copy of the representation is given to the members because of company's fault or because of any other reason, the concerned director may require that his representation shall be read out in the general meeting.

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Any person appointed as a director in the place of removed director has a right to hold office until the date upto which his predecessor would have held office; if he had not been removed. If the vacancy of removed director is not filled, it may be filled by the Board of Directors as a casual vacancy. It is also provided in Section 284 that the director who was removed from office shall not be re-appointed as a director by the Board of Directors [Provision to Section 284 (6)]. The Central Government is also empowered to remove the managerial personnel from office on the recommendation of the Company Law Board. According to Section 388-B, the Central Government may state a case against any director of a company and refer the same to the Company Law Board with a request to inquire into the case and record a decision as to whether or not such person is fit and proper to hold the office of director or any other office connected with the conduct and management of any company. If findings of the Company Law Board are against the director, the Central Government removes the director by order from his office.. The company, thereafter with the previous approval of the Central Government, may appoint another person as a director to the office in the place of the director thus removed. The Company Law Board is also empowered to terminate any director, managing director or manager under certain circumstances i.e. in the cases of oppression or mismanagement. Any member of a company can explain that the affairs of the company are being conducted in a prejudicial manner to public interest or in a manner oppressive to any member or members. On receiving any such application from any member of the company in the cases of oppression according to the provisions made in Section 397 or mismanagement according to the provisions of Section 398, the Company Law Board may terminate, set aside or modify any agreement between the company or a director [Section 402].

L.

Vacation of the office of the director Section 283 (1) of the Companies Act of 1956 lays down that, 'the office of a director shall become vacant if(a) he fails to obtain within the time specified in sub-Section (1) of Section 270 (i.e. within two months of his appointment) or at any time thereafter ceases to hold, the share qualification, if any, required of him by the articles of the company; (b) he is found to be of unsound mind by a court of competent jurisdiction; (c) he applies to be adjudicated as insolvent;

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(d) he is adjudged as insolvent; (e) he is convicted by a Court of any offense involving moral turpitude and sentenced in respect thereof to imprisonment for not less than six months; (f)

he fails to pay any call in respect of shares of the company held by him, whether alone or jointly with others, within six months from the last date fixed for the payment of the call unless the Central Government has, by notification in the Official Gazette, removed the disqualification incurred by such failure.

(g) he absents himself from three consecutive meetings of the Board of Directors, or from all meetings of the Board for a continuous period of three months, whichever is longer, without obtaining leave of absence from the Board. (h) he (whether by himself or by any person for his benefit or on his account) or any firm in which he is a partner or any private company of which he is a director, accepts a loan, or any guarantee or security for a loan, from the company without the approval of the Central Government. (i) he acts in contravention of Section 299; that is, failing to make the disclosure to the board regarding contracts with the company in which he is directly or indirectly interested. (j) he becomes disqualified by an order of Court under Section 203. Section 203 implies that a director is disqualified by the Central Government's order on the ground of having been convicted of any offence in connection with the promotion, formation, management, fraud or mischief relating to winding up proceedings. (k) he is removed in pursuance of Section 284, that is, before the expiry of his period of office by an ordinary resolution in the general meeting of shareholders. (1) having been appointed a director by virtue of hi s holding any office or other employment in the company or as a nominee of the other managing agent of the company, he ceases to hold such office or other employment in the company or as the case may be, the managing agency comes to an end. Notwithstanding anything in clauses (d) (e) and (j) of sub-section (1), the disqualification referred to in those clauses shall not take effect (a)

448

for thirty days from the date of the adjudication; sentence or order;

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(b) where any appeal or petition is preferred within the thirty days aforesaid against the adjudication, sentence or conviction resulting in the sentence, or order until the expiry of seven days from the date on which such appeal or petition is disposed off; or (c) where within the seven days aforesaid, any further appeal or petition is preferred in respect of the adjudication, sentence, conviction, or order, and the appeal or petition, if allowed, would result in the removal of the disqualification, until such further appeal or petition is disposed off [Section 283 (2)]. Subject to the provisions of sub-sections (1) and (2), if a person functions as a director when he knows that the office of director held by him has become vacant on account of any of the disqualifications, specified in the several' clauses of sub-section (1), he shall be punishable with fine which may extend to five hundred rupees for each day on which he so functions as a director [Section 283 (2 A)]. A private company which is not a subsidiary of a public company may, by its articles, provide that the office of director shall be vacated on any grounds in addition to those specified in sub-section (1) [Section 283 (3)]. M. Disqualifications of directors Section 274 (1) states that, "a person shall not be capable of being appointed as a director of a company if (a) he has been found to be of unsound mind by a Court of Competent Jurisdiction and the finding is in force; (b) he is an undischarged insolvent; (c) he has applied to be adjudicated as an insolvent and his application is pending; (d) he has been convicted by a Court of any offence involving moral turpitude and sentenced in respect thereof to imprisonment for not less than six months, and a period of five years has not elapsed from the date of expiry of the sentence. (e) he has not paid any call in respect of shares of the company held by him, whether alone or jointly with others, and six months have elapsed from the last day fixed for the payment of the call; or (f)

an order disqualifying him for appointment as director has been passed by a Court in Pursuance of Section 203 and is in force, unless the leave of the Court has been obtained for his appointment in pursuance of that Section."

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However, the Central Government may, by notification in the Official Gazette, remove (a) The disqualification incurred by any person in virtue of clause (d) of sub-section (1), either generally or in relation to any company or companies specified in the notification; or (b) the disqualification incurred by any person in virtue of clause (e) of sub-section (1). [Section 274 (2)]. A private company which is not a subsidiary of a public company, may by its articles, provide that a person shall be disqualified for appointment as a director on any grounds in addition to those specified in sub-Section (1). [Section 274 (3) ]

N.

Rights and duties of directors Rights of Directors .Directors of a company enjoy the following important rights conferred on them by the Companies Act of 1956. (a) Right to participate in the affairs of the company: A director is entitled to attend the meetings and participate in the affairs of the company so far direction, supervision, control etc. are concerned. However, such director must be validly appointed and must not be disqualified on any legal ground. (b) Right to have remuneration : Every director is entitled to remuneration as fixed either under any contract or under the articles of association of a company. Even if profits are not earned by the company, directors of the company are entitled for their remuneration already fixed. (c) Right to compensation : A managing or whole-time director has the right to receive compensation from his company in case of a premature termination of his service. But he is not entitled to receive any compensation in the following cases:

450

(i)

If premature termination is due to either reconstruction or amalgamation of a company.

(ii)

If his company is wound up.

(iii)

If the director has to vacate his office according to the provisions of the Companies Act of 1956.

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(iv) If a director is found to be guilty of fraud or breach of trust. (v)

O.

If the director is responsible for taking part in bringing about the termination of his office.

Duties of Directors

The important duties of directors of a company are as under: (A) Duty of greatest good faith of fiduciary duties : The directors of a company are fiduciary agents of their company. They must exercise their powers honestly and in the best interest of their company. They should never exploit the business opportunities for their benefits but use them for the prosperity of the company. (B) Duty of reasonable care, skill and diligence: Directors of a company are expected to carry out their duties with such care, skill and diligence as can be reasonable expected from persons of their status, knowledge. If they do not perform their duties with reasonable care, skill and diligence, they are guilty of negligence. Justice Romer remarked in the City Equitable Fire Insurance case that in ascertaining the duties of the director, it is necessary to consider the nature of the company's business and manner in which the work of the company is reasonably, in the circumstances and consistently carried on. In discharging the duties, a director must act honestly, must exercise such degree of skill and diligence as would amount to the reasonable care which an ordinary man might be expected to take in the circumstances on his own behalf. (C) Duty to attend Board Meetings : It is one of the important duties of directors to attend the board meetings. Though it is not compulsory to attend all such meetings, he ought to attend them when reasonably able to do so. (D) Duty to invest Company's money : The directors of a company must always endeavour to invest their company's funds properly and profitably as per the provisions of articles of association; if any, made in this behalf. (E) Duty not to delegate functions : Delegatus non-protest delegare is the Latin maxim which implies that the directors must attend personally to the business of the company in which they are appointed as directors. All the directors should follow this maxim or principle. Thus directors should not delegate their functions to other persons unless they are authorised to do so. (F) Statutory Duties : Directors are bound to perform certain duties as prescribed by the Companies Act of 1956. Such duties are discussed below.

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(i) Directors must see that all money received from applicants for shares are deposited in a scheduled bank (a) until the certificate of commencement of business is obtained under Section 149 or (b) where such certificate has already been obtained, until the entire amount payable on application for shares in respect of the minimum subscription has been received by the company. Where such amount has not been received by the company within the time limit, all money received from applicants for shares must be returned according to the provisions of this Act [Section 69 (4)]. In the event of any contravention of the provisions of Section 69, every promoter, director or other person responsible for such contravention is punishable with fine which may be extend upto five thousand rupees. (ii) It is the duty of the board of directors to call an extra-ordinary general meeting when demanded by a valid-requisition. (iii) Section 210 provides for presenting annual accounts and balance sheet. If any person being a director of a company fails to take all reasonable steps to comply with the provisions of Section 210, he is punishable in respect of each offence with imprisonment which may be extend to six month or with fine which may extend to one thousand rupees or both. [Section 210 (5)]. (iv) It is the duty of the board of directors to forward a statutory report to every member of the company. It must also be filed with the Registrar. The board of directors must also call and hold the statutory meeting. However, it does not apply to a private company. (v) It is the duty of directors to provide and make good any losses in capital before recommending any dividend. (vi) Directors must prepare and place report of the company's affairs with the balance sheet and Profit and Loss Account in the Annual General Meeting. (vii) It is the duty of every director to disclose his interest while entering into any transaction with the company. (viii) Every director has to inform his name, address, occupation, nationality and other information required by the Act for the purpose of entering the same in the register of directors.

452

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(k) Every director has to disclose the number of shares of the company held by him. (x) Every director has to send to the Registrar his consent in writing to the post of director. (xi) Every director has to hold certain qualification shares according to the provisions of the articles of association. (xii) It is the duty of every director not to enter into any contract with the company without the consent of the Board of Directors for the sale, purchase or supply of any goods, materials etc. or for undertaking the subscription of any shares, debentures, bonds of the company. (xiii) No director should place himself in a position in which his personal interest conflicts with his duty. He must not vote as a director on any contract in which he has some interest unless authorised by the articles of association of the company. (xiv) When the company is liquidated, a director must refrain himself from acting on behalf of company except to the extent as authorised by the Court, Liquidator or Shareholders in the general meeting. Actually, directors play pivotal role in the management of a company and as such, they have to perform many other duties besides the duties mentioned above. 9.6

COMPANY MEETINGS

A meeting can be defined as a gathering or an assembly or getting together of a number of persons for transacting a lawful business having certain purpose or purposes. So far as company meetings are concerned, they must be convened and held in perfect compliance with the applicable provisions of the Companies Act of 1956 and the Rules made there under. The meetings of a company are of different types or kinds which are mentioned below. (a) Board meetings. (b) Meetings of the Committees of the B oard, (c) Meetings of debenture holders. (d) Meetings of creditors for the purposes other than winding up and for the purpose of winding up.

Business Law

(e) Meetings of contributories in winding up. (f)

Shareholders meetings i.e. (i)

(ii)

Statutory Meeting,

Annual Genera] Meeting, (iii)

Extra-Ordinary

General Meeting, and (iv) Class Meetings (A) Requisites or Essentials of a Valid Meeting A meeting, whether of directors, or of shareholders or any other meeting of a company must be duly convened, legally constituted and properly conducted without which the decisions taken in the meeting or business conducted in the meeting are not considered as valid. The important requisites of a valid meeting are as follows: (i) Proper authority to convene and hold a company meeting: Every meeting of a company must be properly convened and duly constituted. The proper authority to convene the meeting is the Board of Directors, Shareholders or the Company Law Board. (ii) Notice : Proper and adequate notice of a meeting is required to be given under the Companies Act of 1956 to all those who are entitled to attend the same as per the provisions. For example, for statutory, annual or extra-ordinary meeting, atleast twenty one days' notice is required to be given to all the concerned members. In the notice, the place, day and date, time of holding the meeting are required to be mentioned. (iii) Agenda: Agenda is a statement of items to be discussed at the meeting. The statement must include all material facts concerning each item of business to be conducted. Necessary documents are required to be annexed to the notice of the meeting. (iv) Chairman: There must be a proper person in the chair who may be designated or elected to preside over and conduct the proceedings of a meeting as per the rules. Every meeting must have a chairman.

454

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(v) Quorum: The term 'Quorum' denotes the minimum number of members must be present at a meeting to imitate and conduct the business of the meeting as

required by law or rules. Required reason to maintain the quorum is to avoid the decision being taken at a meeting by a small minority which may be unacceptable to the vast majority of members. There must be atleast two persons to constitute a meeting. However, in the following circumstances, there can be "one man meeting" which forms the quorum. (1)

In the case of class meeting of shareholders when all the shares of a particular class are held by one shareholder only.

(2)

When there is only one creditor or debenture holder, he shall constitute quorum for the concerned meeting.

(vi) Proxy: A proxy is a person who is authorised to attend a meeting on behalf of a member. Proxy can be a member or a non-member. The proxy must be lodged at the company's registered office forty eight hours before the meeting and he cannot be appointed to attend a board meeting. (vii) Ascertainment of sense of meeting : The sense of the meeting should be ascertained by the person in chair through any one of the following methods of voting. (i) Acclamation, (ii) Show of hands, (iii) Ballot, (iv) Voice vote, (v) Division, (vi)Poll. Out of the six methods, first five methods are democratic in nature following the rule "One member one vote" while poll is the capitalistic method of voting with the rule "One share one vote". (viii) Resolutions : Once the motion has been put to the members and they vote in favour of it, it becomes a resolution. Such resolutions can be ordinary resolution, special resolution and resolution requiring special notice. (ix) Minutes: Minutes are the written record of the business transacted at a meeting. The object of minutes is to preserve a clear, concise and accurate written record of the business done and decisions taken in a meeting. The minutes of every meeting are required to be signed as per rules by the Chairman. Section 193 of the Companies Act, 1956 imposes a statutory obligation on every 455

Business Law

company to cause minutes of all proceedings of General Meetings, Board Meetings and Meetings of the Committee of the Board to be recorded in the books kept for that purpose. (B) Statutory Meeting [Section 165] Statutory meeting is held only once during the lifetime of the company. Its main object of the statutory meeting is to enable the members to know the financial position and prospectus of their company at an early date. This meeting has to be called within six months from the date on which the company becomes entitled to commence its business, but it cannot be held within one month from that date. The directors are required to prepare and send to every shareholder a statutory report at least twenty one days before the day on which the meeting is to be held. (C) Annual General Meeting [Section 166] As its name suggests, itis an annual meeting of the body of members. Every company, may it be a public or a private company, having a share capital or not, limited or unlimited, is required to hold the Annual General Meeting. The first AGM must be held within eighteen months from the date of incorporation of a company. However, the gap between two AGMs should not be more than fifteen months (D) Extra-Ordinary General Meeting [Section 169] All general meetings other than the annual general meeting are called as extraordinary general meetings. All business transacted at extraordinary meetings is called special business and hence, every item on the agenda must be accompanied by an explanatory statement in terms of Section 173. An extraordinary general meeting can be called by the Board of Directors of its own accord, or by the Directors on requisition, by the shareholders, or by the requisitions themselves, or by the Company Law Board. 9.7

SUMMARY __________________________________________________

This unit mainly deals with the prospectus, capital and shares of the company. It also speaks about the audit of the company. Section 209 provides that every company shall keep at its registered office proper books of account with respect to all sums of money received and expanded by the company and the matters in respect of which the receipt 456

Unit 9


and expenditure takes place. The corporate system of business organization is essentially democratic in structure. The business of the company is carried on by officials acting i.

J

under the orders of the Board of directors, which is the

nnrl^,- tU~ ~~-> ----------------- r'' ----------------------------------------------- '

"

" "

executive head of the company. _____ ~ , ~ -,-^ct^
H1W VUillJJiU

Also there are many matters which are beyond the powers of the Board of directors to decide and which must be place before the shareholders for decision. 9.8

SELF-ASSESSMENT QUESTIONS

Q1.

Define Prospectus. Explain contents and legal requirements of Prospectus.

Q2.

What is 'statement in lieu of prospectus' and distinguish between prospectus and statement in lieu of prospectus.

Q3.

Explain different kinds of share capital.

Q4.

Explain the provisions of the Companies Act relating to ' Certificate of Shares'.

Q5.

What are the provisions of the Companies Act relating to alteration; increase in share capital and reduction of share capital?

Q6.

Throw light on Books of Accounts to be kept by company?

Q7.

Who are the persons who can inspect the books of accounts as per the provisions of the Act?

Q8.

Explain the provisions regarding Board's Report.

Q9.

What are the provisions of the Companies Act, 1956 relating to authentication, circulation, adoption and filing of the final accounts?

Q10. How is the first auditor of a company appointed? Explain the statutory rights and duties of an auditor. Q11. What are the provisions for appointments, remuneration of auditors? Q12. What are the qualifications and disqualifications of an auditor? Q13. Explain the requisites of a valid meeting.

Business Law

Q14. State provisions of appointment of directors and removal of directors. Q15. Write in short vacation of the office of director and disqualification of directors. Q16. Discuss the rights and duties of directors. Q17. Short Notes

458

1.

Misstatement in the prospectus

2.

Statement in lieu of prospectus

3.

Shares

4.

Types of Shares -

Statutory Meetings

-

Annual General Meeting

-

Extra-ordinary General Meeting

Business Law

460

1)

Indian Contract Act 1872 — D. F. Mulla

2)

Commercial and Industrial Law — A.K. Sen & J.K. Mitra

3)

Mercantile Law — J. Menezes

4)

Mercantile and Industrial Law — S.R. Davar

5)

Legal Aspects of Business — Prof. S.D. Geet

6)

Business Law — Prof. Geet and Prof. Patil

7)

Elements of Mercantile Law — N. D. Kapoor

8)

Mercantile and Industrial Law — Prof. S.D. Geet

9)

Various bare Acts prescribed for the Examination

Business Law

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