LEGAL ASPECTS OF BUSINESS UNIT I LESSON 1: INTRODUCTION TO LAW AND THE MEANING AND ESSENTIALS OF CONTRACT Learning Outcomes

At the end of this chapter, you will be able to know: The meaning of law The main sources of mercantile law The meaning of contract The essential elements of valid contract Introduction Business laws are essential for the students of management to understand the legal rules and aspects of business. Just like any other study even business management is incomplete without a proper study of its laws. Any form of business needs legal sanction. Therefore, it is imperative that a manager understands the various ways in which businesses can be organized. This subject introduces some of the common forms of business organizations, including some forms unique to India like the Joint Hindu Undivided Family firm. Different types of organizations like Sole Ownership, Partnership, Private Limited Company, Public Limited Company, Joint Stock Company along with the rationale for adopting these forms are explored. What form of business organization is the best under a particular set of conditions? What advantage or disadvantage does it have over other forms of business? Formalities to be gone through and some the quasi-legal processes required for starting a business will be discussed in detail in this subject. For the proper working of the society, there must exist a code of conduct. As you all know, in the ancient times the society was not organized. The rights of the individuals were not recognized. Gradually, the society evolved and the state came into being. As we all know, to regulate the state, there should be a specific code of conduct, which should be followed by everyone. As a result of which law evolved as a system of rights and obligations including all the rules and principles, which regulate our relations with other persons and with the state. These rules and regulations took the form of statutes. To enforce the law and to resolve the conflicts arising there from, courts of law were setup by the state. Laws were made to govern almost every walk of life. You all must know that criminal laws were made to control criminal activities in the society like Indian Penal Code, which enumerates which activities are considered criminal and what will be the punishment for committing a crime. Likewise, mercantile law was evolved to govern and regulate trade and commerce. Hence, the term mercantile law can be defined as that branch of law, which comprises laws concerning trade, industry and commerce. It is an ever-growing branch of law with the changing circumstances of trade and commerce.

Now the question arises as to what are the sources of mercantile law in India. The answer is The Indian statutes on mercantile law English/ Foreign law Precedents(previous judgments of the courts.) Customs and usage I must tell you that most of the Indian Mercantile Law is contained in the statutes. The prime legislation is the Indian Contract Act 1872 but it is not exhaustive to deal with all kinds of contracts. In addition to this there are the Sale of Goods Act, 1930, The Indian Partnership Act 1932, The Negotiable Instruments Act 1881 etc. wherever the Indian Contract Act is silent, the Indian courts may apply the principles of the English Common Law. It is interesting to know that in England there is no English Contract Act in the form of a statute. It has been derived from common law, the usage of merchants and traders in different spheres of trade, substantiated or ratified by decisions in the court of law. The judicial precedents are an important source of law. Sometimes, there is no provision, which can answer a particular question of law. In such cases the court will look into the previous decisions on similar matters to find the relevant law. Custom and usage of a trade play an important role in business dealings of that trade. To have a binding force, the custom or usage must be certain, reasonable and well known. Now it is more than a century that that the mercantile laws are governing trade and commerce. The law of contract is the foundation upon which the superstructure of modern business is built. It is common knowledge that in business transactions quite often promises are made at one time and the performance follows later. In such a situation if either of the parties were free to go back on its promise without incurring any liability, there would be endless complications and it would be impossible to carry on trade and commerce. Hence the law of contract was enacted which lays down the legal rules relating to promises, their formation, their performance, and their enforceability. Explaining the object of the law of contract Sir William Anson observes. The law of contract is intended to ensure that what a man has been led to expect shall come to pass, that what has been promised to him shall be performed . The law of contract is applicable not only to the business community but also to others. Every one of us enters into a number of contracts almost everyday, and most of the time we do so without even realizing what we are doing from the point of law. A person seldom realizes that when he entrusts his scooter to the mechanic for repairs, he is entering into a contract of bailment; or when he buys a packet of cigarettes, he is making a contract of the sale of good; or again when he goes to the cinema to see a movie, he is making yet another contract; and so on.

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Besides, the law of contract furnishes the basis for the other branches of mercantile law. The enactments relating to sale of goods, negotiable instruments, insurance, partnership and insolvency are all founded upon the general principles of contract law. That is why the study of the law of contract precedes the study of all other sub-division of mercantile law. The Indian contract act was enacted from the 1st day of September; 1872.it is applicable to the whole of India except the state of Jammu and Kashmir. There may be some occasions where Indian law disagrees with the English laws. In such cases, the Indian law will prevail. Now we will move on to the definition and concept of the contract. The Indian Contract Act, 1972 The law of contract in India is contained in the Indian Contract Act 1872. This Act is based mainly on English common law, which is to a large extent made up of judicial precedents. (there being a separate contract act in England). It extends to the whole of India except the state of Jammu and Kashmir and came into force on the first day of September 1872(Sec.1 Indian Contract Act 1872). The act is not exhaustive. It does not deal with all the branches of the law of contract. There are separate acts, which deal with contracts relating to negotiable instruments, transfer of property, sale of goods, partnership, insurance, etc. Again the act does not affect any usage or custom of trade (Sec.1). Scheme of the Act. The scheme of the Act may be divided into two main groups. 1. General principles of the law of contract (Secs. 1-75). 2. Specific kinds of contracts, Viz; (a) Contracts of indemnity and Guarantee (Secs. 124-147). (b) Contracts of Bailment and pledge (Secs. 148-181). (c) Contracts of Agency (Secs. 182-238). Before 1930 the Act also contained provisions relating to contracts of sale of goods and partnership. Sections 76-123 relating to sale of goods were repealed in 1930 and a relating to partnership were repealed in 1932 when the Indian separate Act called the Sale of Goods Act was enacted. Similarly, sections 239-266 partnership Act was passed. But we will not study the specific kinds of contracts for the time being but only concentrate on contracts generally. Before we take up the discussion of the various provisions of the Indian contract Act. It will be proper to see some of the basic assumptions underlying the Act. Definition of contract According to section 2(h) of the Indian Contract Act: An

agreement enforceable by law is a contract. A contract therefore, is an agreement the object of which is to create a legal obligation i.e., a duty enforceable by law. From the above definition, we find that a contract essentially consists of two elements: (1) An agreement and (2) Legal obligation i.e., a duty enforceable by law. We shall now examine these elements detail. 1. Agreement. As per section 2 (e): Every promise and every set of promises, forming the consideration for each other, is an agreement. Thus it is clear from this definition that a promise is an agreement. What is a promise ? the answer to this question is contained in section 2 (b) which defines the term. 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. An agreement, therefore, comes into existence only when one party makes a proposal or offer to the other party and that other party signifies his assent (i.e., gives his acceptance) thereto. In short, an agreement is the sum total of offer and acceptance . On analyzing the above definition the following characteristics of an agreement become evident: (a) At least two persons. There must be two or more persons to make an agreement because one person cannot inter into an agreement with himself. (b) Consensus-ad-idem. Both the parties to an agreement must agree about the subject matter of the agreement in the same sense and at the same time. 2. Legal obligation. As stated above, an agreement to become a contract must give rise to a legal obligation i.e., a duty enforceable by law. If an agreement is incapable of creating a duty enforceable by law. It is not a contract. Thus an agreement is a wider term than a contract. All contracts are agreements but all agreements are not contracts, Agreements of moral, religious or social nature e.g., a promise to lunch together at a friend s house or to take a walk together are not contracts because they are not likely to create a duty enforceable by law for the simple reason that the parties never intended that they should be attended by legal consequences. I shall give you a very simple example to explain this point. An agreement to sell a car may be a contract but an agreement to go for lunch may be a mere agreement not enforceable by law. Thus all agreements are not contracts. In business agreements the presumption is usually that the parties intend to create legal relations. Thus an agreement to buy certain specific goods at an agreed price e.g., 200 bags of rice at Rs.100 per bag is a contract because it gives rise to a duty enforceable by law, and in case of default through a court provided other essential elements of a contract was made by free consent of the parties competent to contract, for a lawful consideration and with a lawful object .

Thus it may be concluded that the Act restricts the use of the word contract to only those agreements, which give, rise to legal obligations between the parties. It will be appropriate to point out here that the law of contract deals only with such legal obligations which arise form agreements, obligations which are not contractual in nature are outside the purview of the law of contract. Before moving further we must know the conditions which must be satisfied for the contract to become valid. LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 2 11.555

Essential Elements of a Valid Contract A contract has been defined in section 2(h) as an agreement enforceable by law. To be enforceable by law, an agreement must possess the essential elements of a valid contract as contained in sections 10, 29 and 56. According to section 10, all agreements are contracts if they are made by the free consent of the parties, competent to contract, for a lawful consideration, with a lawful object, are not expressly declared by the Act to be void, and where necessary, satisfy the requirements of any law as to writing or attention or registration. As the details of these essentials form the subject matter of our subsequent chapters, we propose to discuss them in brief here. The essential elements of a valid contract are as follows. 1. Offer and acceptance. There must a lawful offer and a lawful acceptance of the offer, thus resulting in an agreement. The adjective lawful implies that the offer and acceptance must satisfy the requirements of the contract act in relation thereto. 2. Intention to create legal relations. There must be an intention among the parties that the agreement should be attached by legal consequences and create legal obligations. Agreements of a social or domestic nature do not contemplate legal relations, and as such they do not give rise to a contract. An agreement to dine at a friend s house in not an agreement intended to create legal relations and therefore is not a contract. Agreements between husband and wife also lack the intention to create legal relationship and thus do not result in contracts. Try to work out the solution in the following cases and then go to the answer. Illustrations. (a) M promises his wife N to get her a necklace if she will sing a song. N sang the song M did not bring the necklace for her. (b) The defendant was a civil servant in Ceylon. He and his wife were enjoying leave in England. When the defendant was due to return to Ceylon, his wife could not accompany him because of her health. The defendant agreed to send her 30 a month as maintenance expenses during the time they were thus forced to live apart. She sued for breach of this agreement. Answers (a) N cannot bring an action in a court to enforce the agreement as it lacked the intention to create legal relations. (b) Her action was dismissed on the ground that no legal relations had been contemplated and therefore there was no contract.(Balfour vs. Balfour) In commercial agreements an intention to create legal relations is presumed. Thus, an agreement to buy and sell goods intends

to create legal relationship hence is a contract, provided other requisites of a valid contract are present. But if the parties are under a legal obligation, even a business agreement does not amount to a contract. The case of Rose & Frank co, vs. Crompton & Brothers Ltd. Provides a good illustration on the point. Illustration In the above case R Company entered into an agreement with C Company. By means of which the former was appointed as the agent of the latter. One clause of the agreement was as follows. This arrangement is not entered into as a formal or legal agreement. And shall not be subject to legal jurisdiction in the law courts. It was held that there was no intention to create legal relations on the part of parties to the agreement and hence there was no contract. Now let us go to the third essential of a contract i.e. 3. Lawful consideration. The third essential element of a valid contract is the presence of consideration . Consideration has been defined as the price paid by one party for the promise of the other. An agreement is legally enforceable only when each of the parties to it gives something and gets something. The something given or obtained is the price for the promise and is called consideration subject to certain exceptions; gratuitous promises are not enforceable at law. The consideration may be an act (doing something) or forbearance (not doing something) or a promise to do or not to do something. It may be past, present or future. But only those considerations are valid which are lawful . The consideration is lawful . unless it is forbidden by law; or is of such a nature that, if permitted it would defeat The provisions of any law; or is fraudulent; or involves or implies injury to the person or property of another; or is immoral; or is opposed to public policy (sec.23). 4. Capacity of parties. The parties to an agreement must be competent to contract. But the question that arises now is that what parties are competent and what are not. The contracting parties must be of the age of majority and of sound mind and must not be disqualified by any law to which they are subject (sec.11). If any of the parties to the agreement suffers form minority, lunacy, idiocy, drunkenness etc. The agreement is not enforceable at law, except in some special cases e.g., in the case of necessaries supplied to a minor or lunatic, the supplier of goods is entitled to be reimbursed from their estate (sec 68). 5. Free consent. Free consent of all the parties to an agreement is another essential element. This concept has two aspects.(1) consent should be made and (2) it should be free of any pressure or misunderstanding. Consent means that the parties must have agreed upon the same thing in the same sense (sec. 13). There is absence of free consent, if the agreement is induced by (i)coercion, (ii) undue influence, (iii) fraud, (iv) mis-representation, or (v)

mistake (sec. 14). If the agreement is vitiated by any of the first four factors, the contract would be voidable and cannot be enforced by the party guilty of coercion, undue influence etc. The other party (i.e., the aggrieved party) can either reject the contract or accept it, subject to the rules laid down in the act. If the agreement is induced by mutual mistake which is material to the agreement, it would be void (sec. 20) LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 3

6. Lawful object. For the formation of a valid contract it is also necessary that the parties to an agreement must agree for a lawful object. The object for which the agreement has been entered into must not be fraudulent or illegal or immoral or opposed to public policy or must mot imply injury to the person or the other of the reasons mentioned above the agreement is void. Thus, when a landlord knowingly lets a house to a prostitute to carry on prostitution, he cannot recover the rent through a court of law or a contract for committing a murder is a void contract and unenforceable by law. 7. Writing and registration. According to the Indian contract Act, a contract to be valid, must be in writing and registered. For example, it requires that an agreement to pay a time barred debt must be in writing and an agreement to make a gift for natural love and affection must be in writing and registered to make the agreement enforceable by law which must be observed. 8. Certainty. Section 29 of the contract Act provides that Agreements, the meaning of which is not certain or capable of being made certain, are void. In order to give rise to a valid contract the terms of the agreement must not be vague or uncertain. It must be possible to ascertain the meaning of the agreement, for otherwise, it cannot be enforced Illustation. A, agrees to sell B a hundred ton of oil there is nothing whatever to show what kind of oil was intended. The agreement is void for uncertainly. 9. Possibility of performance. Yet another essential feature of a valid contract is that it must be capable of performance. Section 56 lays down that An agreement to do an act impossible in itself is void . If the act is impossible in itself, physically or legally, the agreement cannot be enforced at law. Illustration. A agrees with B, to discover treasure by magic. The agreement is not enforceable. 10. Not expressly declared void. The agreement must not have been expressly declared to be void under the Act. Sections 24-30 specify certain types of agreements that have been expressly declared to be void. For example, an agreement in restraint of marriage, an agreement in restraint of trade, and an agreement by way of wager have been expressly declared void under sections 26, 27 and 30 respectively. Before dealing with the various essentials of a valid contract one by one in detail, it will be appropriate to discuss the kinds of contracts . First, because we shall be using the terms like voidable contract , void contract , void agreement , etc. very often in the course of our discussion. Here we end our discussion on essentials of a valid contract. Now attempt the following questions for a better understanding:

1. Comment that the all contracts are agreements but all agreements are not contract. 2. What are the essential elements of a valid contract? 3. A invites B to see a picture with him. B accepts the offer. A purchase a ticket for B and waits for him outside the cinema hall. B does not turn up has A any cause of action against B. [Hint: No] 4. A agrees with B to murder C for Rs. 10,000. Is this a valid contract? [Hint: No] 5. X agrees to pay Y Rs. 1000 if Y writes 100 pages for him in one minute. Is it a valid contract? [Hint: No] 6. State whether there is any valid contract in the following cases? 7. (i) X boards a DTC bus at Mayur Vihar for Shalimar Bagh. (ii) X and Y agree to go for fishing (iii) X buys an evening paper (iv) X a minor borrows Rs. 5000 from Yand agreed to repay back the same within a week. References Kapoor, N.D. (2003), Elements of Mercantile Law, Sultan Chand and Sons, New Delhi. http://www.indialawinfo.com/bareacts/soga.html M.C. Kucchal ( 2002), Business Law , Vikas Publishing House Pvt. Ltd, Delhi. P.C. Tulsian (2002), Pvt. Ltd, Delhi. Notes: Business Law , Tata Mc. Graw Hill

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LESSON 2 KINDS OF CONTRACTS Learning Outcomes other circumstances under which a contract becomes By the end of the lecture we should be able to answer the following questions: The different types of contracts with respect to performance, enforceability, validity and formation Introduction First of all we will study [I] Kinds of contracts from the point of view of Enforceability Valid contract Voidable contract. Void contract Unenforceable contract Illegal or unlawful contract From the point of view of enforceability a contract may be valid, voidable, void, unenforceable or illegal. 1. Valid contract. According to section 2(i), it is an agreement enforceable by law , an agreement becomes enforceable by law when all the essential elements of a valid contract as were enumerated in the last lesson are present. If one or more of these elements is/are missing the contract is either void, voidable, illegal or unenforceable. 2. Voidable contract. According to section 2(i), an agreement which is enforceable by law at the option of one or more of the parties thereto, but not at the option of the other or others, is a voidable contract. Thus, a voidable contract is one which is enforceable by law at the option of one of the parties only. Until it is avoided or rescinded by the party entitled to do so by exercising his option in that behalf, it is a valid contract. Usually a contract becomes voidable when the consent of one of the parties to the contract is obtained by coercion, undue influence, misrepresentation or fraud. Such a contract is voidable at the option of the aggrieved party i.e., the party whose consent was so caused (secs. 19 and 19A). but the aggrieved party must exercise his option of rejecting the contract (i) within a reasonable time, and (ii) before the rights of third parties intervene, otherwise the contract cannot be repudiated. Illustration.

(a) A : threatens to shoot B if he does not sell his new Bajaj scooter to A for Rs. 2,000. B agrees. The contract has been brought about by coercion and is voidable at the option of B. (b) A. intending to deceive B. falsely represents that five hundred quintals of indigo are made annually at A s factory, and thereby induces B to buy the factory. The contract has been caused by fraud and is voidable at the option of B. voidable. The Indian contract act has laid down certain other situations also under which a contract becomes voidable. For example. (i) When a contract contains reciprocal promises, and one party to the contract prevents the other from performing his promises, then the contract becomes voidable at the option at the party so prevented (sec. 53). Illustration. A. Contracts with B that A shall whitewash B s house for Rs. 100. A. is ready and willing to execute the work accordingly, but B prevents him from doing so. The contract becomes voidable at the option of A. (ii) When a party to the contract promises to do a certain thing within a specified time, but fails to do it, then the contract becomes voidable at the option of the promisee. If the intention of the parties was that time should be of the essence of the contract. (sec.55) Illustration. X Agrees to sell and deliver 10 bags of wheat to Y for Rs. 2,5000 within one week. But X does not supply the wheat within the specified time. The contract becomes voidable at the option of Y. Consequences of rescission of voidable contract. Section 64 lays down the rights and obligations of the parties to a voidable contract after it is rescinded. The section states that when a person at whose option a contract has become has received any benefit from another party to such contract, he must restore such benefit. If an amount has been received as a security for the due performance of the contract, such earnest money deposit is not to be returned if the contract becomes voidable under section 55 on account of the promisor s failure to complete the contract at the time agreed and has been rescinded by the promisee because it is not a benefit received under the contract. 3. Void contract. Literally the word void means not binding in law . Accordingly the term. void contract implies a useless contract which has no legal effect at all. Such a contract is a nullity, as for there has been no contract at all. Section 2(j) defines: A contract which ceases to be enforceable by law becomes void, when it ceases to be enforceable. It follows form the definition that a void contract is not void from its inception and that it is valid and binding on the parties when originally entered but subsequent to its formation it becomes invalid and destitute of legal effect because of certain reasons. The reasons which transform a valid contract into a void

contract, as given in the contract Act. Are as follows. (a) Supervening impossibility (sec. 56) A contract becomes void by impossibility of performance after the formation of the of contract for example, A and B contract to marry LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 5

each other. Before the time fixed for the marriage, A goes mad. The contract to marry becomes void. (b) Subsequent illegality (sec, 56) A contract also becomes void by subsequent illegality. For example, A agrees to sell B 100 hags of wheat at Rs. 650 per bag. Before delivery the government bans private trading in wheat. The contract becomes void. (c) Repudiation of a voidable contract. A voidable contract becomes void, when the party, whose consent is not free, repudiates the contract. For example, M by threatening to murder B s son, makes B agree to sell his car worth Rs. 30,000 for a sum of Rs. 10,000 only. The contract, being the result or coercion, is voidable at the option of B. B may either affirm or reject the contract. In case B decides to rescind the contract, it becomes void. (d) In the case of a contract contingent on the happening of an uncertain future event, if that event becomes impossible. A contingent contract to do or not to do something on the happening of an uncertain future event, becomes void, when the event becomes impossible (sec.32). for example, A contracts to give Rs. 1,000 as loan to B marries C. C dies without being married to B. the contract becomes void. Void agreement- An agreement not enforceable by law is said to be void [sec.2 (g)]. Thus, a void agreement does not give rise to any legal consequences and is void agreement does not give rise to any legal consequences and is void ab-initio. In the eye of law such an agreement is no agreement at all from its very inception. There is absence of one or more essential elements of a valid contract, except that of free consent, in the case of a void agreement. Thus, an agreement with a minor is void abinitio as against him, because a minor lacks the capacity to contract. Similarly, an agreement without consideration is void ab-initio, of course with certain exceptions as laid down in section 25. Certain agreements have been expressly declared void in the contract act e.g., agreements which are in restraint of trade or of marriage or of legal proceedings or which are by way or wager. A void agreement should be distinguished from a void contract . A void agreement never amounts to a contract as it is void ab-initio. A void contract is valid when it is entered into, but subsequent to its formation something happens which makes it unenforceable by law, notice that a contract cannot be void ab-initio and only an agreement can be void abinitio. Obligation of person who has received advantage under void agreement or contract that becomes void. In this connection section 65 lays down that when an agreement is discovered to be void or when a contract becomes void, any person who has received any advantage under such agreement or contract is bound to restore it. Thus, this section provides for restitution of the benefit received. Thus both parties may stand uneffected by the transaction in the following two cases.

(a) When an agreement is discovered to be void. In other words, when an agreement is void being discovered at a later stage. For example, A pays B Rs. 1,000 for B s agreeing to sell his horse to him. It turns out that the horse was dead at the time of the bargain, through neither party was aware of the fact. In this case the agreement is discovered to be void and B must repay to A Rs. 1,000. it should, however, be noted that agreements which are known to be void or illegal, when they are entered into, are excluded from the purview of this section. Thus, if L pays Rs. 10,000 to M to murder Z, the money cannot be recovered. Similarly, nothing can be recovered in the case of expressly declared void agreements, of course, subject to the following exceptions. (i) In the case of an agreement caused by bilateral mistake of essential fact (although it is expressly declared void under section 20) restitution is allowed as it comes under the category of an agreement discovered to be void. (ii) In the case of an agreement with a minor who commits fraud by misrepresenting his age (although agreement with a minor is known to be void.) restoration is allowed in specie on equitable grounds because a minor cannot be allowed to cheat people, and also because the other party has not lost his title to the thing in question. (b) When a contract becomes void, restitution is also allowed in the case of a void contract. For example, A agrees to sell B after one month 10 quintals of wheat at Rs. 625 per quintal and receives Rs. 500 as advance. Soon after the contract, private sales of wheat becomes void but A must return the sum of Rs. 500 to B. Similarly, where after accepting Rs. 1,000 as advance for singing at a convert for B, A is too ill to sing. A is not bound to make compensation to B for the loss of the profits which B would have made if A would have been able to sing, but A must refund to B the 1,000 rupees paid in advance. 4. Unenforceable contract. An unenforceable contract is one which is valid in itself, but is not capable of being enforced in a court of law because of some technical defect such as absence of writing, registration, requisite stamp, etc., or time barred by the law of limitation. For example, an oral arbitration agreement is unenforceable because the law requires an arbitration agreement to be in writing. Similarly, a bill of exchange or promissory note, though valid in itself, becomes unenforceable after three years from the date the bill or note falls due, being time barred under the limitation act. 5. Illegal or unlawful contract. The word illegal means contrary to law and the term contract means an agreement enforceable by law . As such to speak of an illegal contract involves a contradiction in terms, because it means something like this an agreement enforceable by law and contrary to law. There is apparent contradiction in terms. Moreover, being of unlawful nature, such an

agreement can never attain the status of a contract. Thus, it will be proper if we use the term illegal agreement in place of illegal contract an illegal agreement is void ab-initio. Some important comparisons LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 6 11.555

Agreement and Contract agreement with a minor is void as against him but not An agreement is a promise or set of promises (s). Differences Enforceability An agreement may or my not be enforceable at law. For example, social agreements are generally not enforceable while business agreements are enforceable at law. Effect An agreement is not always a binding on the concerned parties. Scope All agreements are not contracts. Agreement Illegal and Void Agreements Similarities These agreements are not enforceable at law. Differences Scope-These agreements are narrower in scope. All illegal ag reements are void. Effect on collateral transaction Collateral transaction of an illegal contract also becomes illegal and contract not be enforced. Punishment Parties may be punished for making illegal agreement. A contract is essentially an agreement, i.e., a promise or set of promise (s). A contract is an agreement which is enforceable at law. A contract is always concluded and binding on the concerned parties, All contracts are agreements. Illegal agreement Void agreement Despite the similarity between an illegal and a void agreement that in either case the agreement is void ab- initio and cannot be enforced by law, I will explain the above points in detail now. (i) An illegal agreement is narrower in scope than a void agreement. all illegal agreements are void but all void agreements are not necessarily illegal. The object or consideration of an agreement way not be contrary to law but may still be void. For example, an agreement may not be contrary to law but may still be void. For example, an illegal. Again, an agreement the terms of which are uncertain is void but such an agreement the

terms of which are uncertain is void an agreement is not illegal. (ii) An illegal agreement is wider in effect in relation to collateral transactions than a void agreement. When an agreement is illegal, other agreement which are Contract incidental or collateral to it are also tainted with illegality, hence void, provided the third parties have the knowledge of the illegal or immoral design of the main transaction. The reason underlying this rule is that no person shall be These agreements are not enforces able at law. These agreements are wider in scope. An agreement may be void because of a reason other than illegality. Collateral transaction of an agreement which is void for a reason other than illegality are enforceable at law. Being void does not make a contract punishable. allowed to invoke the aid of the court if he is himself implicated in the illegality. On the other hand, when an agreement is void (but not illegal), agreements which are collateral to it are not invalidated and remain valid. Illustrations. (a) A engages B to Murder C and borrows Rs. 5,000 from D to pay B. D is aware of the purpose of the loan. Here the agreement between A and B. D is aware of the purpose of the loan. Here the agreement between A and B is illegal and the agreement between A and D is collateral to an illegal agreement. As such the loan transaction is illegal and void and D cannot recover the money. But the position will change if D is not aware of the purpose of the loan. In that case the loan transaction is not collateral to the illegal agreement and is a valid contract. Void and Voidable Contract Void Agreement and Void Contract Similarities Restitution If any benefit is passed between the If any benefit is passed betwee n the parties, it may be parties, it may be restored back. restored back. Differences Definition When a contract ceases to be enforceable It is a contract which is en forceable by law at the at law, it becomes void contract. option of one or more parties thereof, but not at the

option of others. Status A void contract cannot create any legal rights. A voidable contract takes its full It is a total nullity. and proper legal effect unless it is Nature A void contract is valid when it is made. But subsequently it becomes void due to one reason or disputed and set aside by the person the other. entitled to do so. Rights A void contract is valid when it is made. But

A contract may be voidable since very beginning, or subsequently it becomes void due to one reason or may subsequently become voidable. the other. A voidable contract gives rights to the aggrieved party Effect When a contract is void because of illegality,

to rescind the contract, and claim the damages, etc. in its collateral transactions also becomes void. certain cases. A voidable contract does not effect the collateral transactions. LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 7

Similarities A void agreement cannot create any legal rights. It is a A void contract cannot create any legal rights. It is a total nullity. total nullity. Differences It is an agreement. It never takes form of a contract. It is a contract. It is a nullity since very beginning. When it is formed it is perfectly valid. Subsequently it becomes a nullity. Kinds of contracts from the point of view of mode of creation From the point of view of mode of creation a contract may be express or implied or constructive. 1. Express contract. Where both the offer and acceptance constituting an agreement enforceable at law are made in words spoken or written, it is an express contract. For example. A tells B on telephone that he offers to sell his car for Rs. 20,000 and B in reply informs A that he accepts the offer, there is an express contract. 2. Implied contract. Where both the offer and acceptance constituting an agreement enforceable at law are made otherwise than in words i.e., by acts and conduct of the parties, it is an implied contract. Thus, where A, a coolie in uniform takes up the luggage of B to be carried out of the railway station without being asked by B, and B, allows him to do so, then the law implies that B agrees to pay for the services of A, and there comes into existence an implied contract and N is under obligation to pay to M. It is relevant to state in respect of mode of creation, certain contracts may be a mixture of the express and implied types of contracts, that is, where out of the two components of an agreement, namely, offer and acceptance, one is expressed in words and the other is implied from acts and circumstances. Such contracts may be called as contracts of mixed character. For example, A offers to buy B s scooter for Rs. 4,000 and B accepts the offer by sending the scooter itself. Here A s offer is expressed in words and B s acceptance is implied form his conduct. It is a contract of mixed character. 1. Constructive or quasi contract. The term constructive or quasi contract is a misnomer, the cases grouped under this type of contracts have little or affinity with contract. Such a contract does not arise by virtue of any agreement, express or implied between the parties but the law infers or recognizes a contract under certain special circumstances. For example, obligation to finder of lost goods to return them to the true owner or liability or person to whom

money is paid under mistake to repay it back cannot be said to arise out of a consent, but these are very mush conversed under quasi contracts as per sections 71 and 72 respectively. The contract act has rightly named such contracts as certain relations resembling those created by contract . example, and A says to B, If you dig my garden next Sunday, I will pay you Rs. 500. B makes no commitment, but says, I am not sure that I shall be able to, but if I do, I shall be happy to take Rs. 500. This arrangement is not bilateral. A has committed himself to pay Rs. 500 in certain circumstances, but B has made no commitment at all. He is totally free to decide whether he wants to dig A s garden or not. If B does not turn up on Sunday to dig the garden, A cannot do anything about is. If, however, B reaches to A s place on Sunday to do the work, it will amount to his acceptance a contract will be formed where both parties will be bound by their performance. Before I end the discussion on kinds of contracts I would like to discuss another kind of contract called the Standard Form Contract When a large number of contracts have got to be entered into by a person, from a practical point of view and for the sake of convenience, a standard form for the numerous contracts may be used. An insurance policy, shares or a railway ticket are few examples of such standardized contracts. The special terms and conditions become binding as part of the contract only if they are brought to the notice of the acceptor before or at the time of the contract. In view of the unequal bargaining power of the two parties, the courts and the legislature have evolved certain rules to protect the interest of the weaker party: (1) Reasonable notice e.g. by printing on a ticket, For conditions see back , or obtaining signatures on the document containing terms, or otherwise explaining the the terms,. Where an adequate notice is not given the offeree is not bound by the terms. (2) Notice should be contemporaneous with the contract if a party to the contract wants to have exemption from liability he must give a notice about the exemption while the contract is being entered into and not thereafter ( Olley Vs. Marlborough Court. Ltd.) (3) Terms of contract should be reasonable if the terms of the contract are unreasonable and opposed to public policy, they will not be enforced. (4) Fundamental breach of contract no exemption clause is allowed to permit the non-compliance of the basic contractual obligation i.e. obligation which is fundamental or core of the contract. Thus, the dry cleaner has to be answerable , even if the contract contains all sorts of exemption clauses, if the cloth is altogether lost. A quasi contract is based upon the equitable principle that a person shall not be allowed to retain unjust benefit at the expense of another. Sections 68-72 of the contract act describe

the cases which are to be deemed Now we come to

quasi contracts .

(5) Strict construction a strict construction shall be applied to exemption clause, and any ambiguity is to be resolved in favour of the weaker party. (6) Statutory protection The English Unfair Contract Terms Act, 1977 severely limits the right of the contracting parties LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 8 11.555

to exclude or limit their liability through exemption clauses in the agreement. India lacks such an Act. Practical Problems Attempt the following problems, giving reasons for your answers. 1. A invites B to a dinner. B accepts the invitation. A made elaborate arrangement but B failed to turn up. Can A sue B for the loss he has suffered?. [Hint. No, A cannot sue B for the loss he suffered because the agreement was of a social nature and hence lacked the intention to create legal relationship one of the essentials of a valid contract.] 2. M agrees to pay N Rs. 100 and in consideration N agrees in write for him 100 pages within five minutes. Is it a valid contract? [Hint. No, it is not valid contract. It is a void agreement because as per section 56 an agreement to do an act impossible in itself is void. ] 3. C orally offered to pay A, an auto mechanic, Rs.50 for testing a used car which C was about to purchase from D. A agreed and tested the car. C paid A Rs. 50 in cash for his services. Is the agreement between A and C (a) Express or implied (b) Executed or executory (c) Valid, voidable or void 6. A promises to pay B Rs.500 if beats C.B beats C but A refuses to pay. Can B recover the amount? ( Hint : No as the agreement is illegal.) 4. X invites Y to dinner. Y accepts the invitation but fails to turn up. Can X sue Y for the damage? Solution: X cannot claim any damages from Y because the agreement between X and Y is not enforceable by law. It is a social agreement and the usual presumption in such agreement is that the parties do not intend to create legal relationship. 5. X makes a promise to his wife Y to give her pocket money of Rs 1,000 per month. After 6 months, he stops making the payment. Can Y claim damages from X Solution: Y cannot claim any damages from X because the agreement between X and Y is not enforceable by law. It is a social agreement and the usual presumption in such agreement is that the parties do not intend to create legal relationship. 6. X promises Y to give a diamond ring at the time of his marriage. X fails to give the ring. Can Y claim the

ring? Solution: Y cannot claim the diamond ring because there is no consideration from Y. 7. X polished Y s shoes without being asked by Y to do so. Y does not make any attempt to stop X from polishing the shoes. Is Y bound to make payment to X? Solution: Y is bound to pay because he has accepted X s implied offer by conduct (i.e. by not stopping X from polishing the shoes). 9. X agreed to sell a particular horse to Y. Later on, it was discovered that the horse was dead at the time of making the contract. Advise the parties. Solution:. The agreement is void because both the parties were under a mistake of fact regarding existence of the subject matter. 8. X agrees to let his flat to Y for use as a gambling den on a monthly rent of Rs 10,000. After 3 months, Y stops making the payment of rent. Advise X. Solution: X cannot recover anything. The agreement between X and Y is void because the object of the agreement is unlawful. 9. X threatens to kill Y if he does not sell his house to X for Rs 1,00,000. Y agrees. X borrows Rs 1,00,000 from Z who is also aware of the purpose of the loan. What is the nature of the agreement between X and Y, and X and Z? Solution: The contract between X and Y is a contract which is voidable at the option of Y because Y s consent is not free as it has been obtained by coercion. The contract between X and Z is a valid contract because the object of contract (i.e. borrowing for the purchase of a house) is lawful. 10. X agrees to pay Y Rs 1,00,000 if Y kills Z. To pay Y, X borrows Rs 1,00,000 from W who is also aware of the purpose of the loan. Y kills Z but X refuses to pay. X also refuses to repay the loan to W. Advise Y and W. Solution: The agreement between X and Y is an illegal agreement because its object is unlawful. Hence, Y cannot recover anything from X. Since the main agreement between X and Y is illegal, the agreement between X and W which is collateral to the main agreement is also void and hence W cannot recover anything from X. References Kapoor, N.D. (2003), Elements of Mercantile Law, Sultan Chand and Sons, New Delhi. http://www.indialawinfo.com/bareacts/soga.html M.C. Kucchal ( 2002), Business Law , Vikas Publishing

House Pvt. Ltd, Delhi. P.C. Tulsian (2002), Pvt. Ltd, Delhi. Business Law , Tata Mc. Graw Hill

Rohini Aggarwal(2003), Student s Guide To Mercantile And Commercial Laws, Tata Mc. Graw Hill Pvt. Ltd, Delhi. Notes: LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 9

LESSON 3: ACCEPTANCE Learning Outcomes After todays class you should be able to answer the following questions: The meaning of offer and acceptance The communication of offer and acceptance The revocation of offer and acceptance Introduction By now you must be aware of the essentials of a contract. In today s lecture we shall do a detailed study of the concept of offer The four basic elements of a contract are offer, acceptance, consideration and contractual capacity out of which we shall study the first one in this lesson. While discussing the essential elements of a valid contract in the preceding chapter we observed that as a first step in the making of a contract there must be a lawful offer by one party and a lawful acceptance of the offer by the other party, thus where A, offers to sell a wrist watch to B for Rs. 200 and B accepts the offer, a contract comes into being provided other essentials of a valid contract like that of competency of parties to contract, etc. are present. We propose to discuss now the legal rules relating to a lawful offer . The Proposal or Offer The words proposal and offer are synonymous and are used interchangeably. Section 2 (a) of the Indian contract act defines a proposal as, when one person signifies to another his willingness to do or to abstain form doing anything, with a view to obtaining the assent of that other to such act or abstinence, he is said to make a proposal . This definition reveals the following three essentials of a proposal . (i) One person signifies to another; it must be an expression of the willingness to do or to abstain from doing something. According to section 3 to signify means that the proposal must be communicated to the other party. (ii) The expression of willingness to do or to abstain form doing some thing must be to another person. There can be no proposal by a person to himself (iii) The expression of willingness to do or to abstain from doing some-thing must be made with a view to obtaining the assent of the other person to such act or abstinence. Thus a casual enquiry do you intend to sell your motorcycle? is not a proposal . Similarly, a mere statement

of intention I may sell my motorcycle if I can get Rs. 14,000 for it is not a proposal . But if M says to N, will you buy my motorcycle fro Rs. 14,000, or I am willing to sell my motorcycle to you for Rs. 14,000 , we have a proposal as it has been made with the object of obtaining the assent of N. The person making the proposal or offer is called the promisor or offeror , the person to whom the offer is made is called the offeree , and the person accepting the offer is called the promisee or acceptor . Legal Rules Regarding a Valid Offer A valid offer must be in conformity with the following rules: 1. An offer may be express or implied . An offer may be made either by words or by conduct. An offer which is expressed by words, spoken or written is called an express offer and the one which is inferred form the conduct of a person or the circumstances of the case is called an implied offer. Thus stepping into a taxi and consuming eatables at a restaurant both create implied promise to pay for benefits employed. In Upton Rural District Council v Powell, a fire broke out in the defendant s farm . believing that he was entitled to the free service of Upton Fire Brigade (which he was not) he summoned it. Upton claimed compensation for its services. Held services were rendered on an implied promise to pay for them. I will give a few more illustrations in this regard. Illustration (a) M says to N that he is willing to sell his motorcycle to him for Rs. 20,000. this is an express offer. (b) X writes to Y he offers to sell his house to him for Rs. 80,000. there is an express offer. (a) The Delhi Transport Corporation runs omnibuses on different routes to carry passengers at the scheduled fare. This is an implied offer by the D.T.C. (b) A shoe shiner starts shining some one s shoes, without being asked to do so, in such circumstances that any reasonable man could guess that he expects to be paid for this, he makes an implied offer. The second essential of a valid offer is intention. 2. An offer must contemplate to give rise to legal consequences and be capable of creating legal relations. If the offer does not intend to give rise to legal consequences, it is not a valid offer in the eyes of law. An offer to a friend to dine at the offeror s place, or an offer to one s wife to show her a movie is not a valid offer and as such cannot give rise to a binding agreement, even though it is accepted and there is consideration, because in social agreements or domestic arrangements the presumption is that the parties do not intend legal consequences to follow the breach of agreement. But in

the case of agreements regulating business agreements it is taken for granted that parties intend legal consequences to follow. Even in the case of a business agreement if the parties agree that the breach of the agreement would not confer on either of the parties a right to enforce the agreement in a court LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 10 11.555

of law, there is no contract (Rose & Frank Co. vs. Crompton & Brothers Ltd.) 3. The terms of the offer must be certain and not loose or vague. The terms of the offer must be certain and not vague (sec 29). Mangham L.J. has rightly observed: unless all the material terms of the contract are agreed, there is no binding obligation. Thus an agreement to agree in future is not a contract, because the terms of agreement are uncertain as they are yet to be settled. Let us try to work out these problems on our own Illustrations. (a) X purchased a horse form Y and promised to buy another, if the first one proves lucky. X refused to buy the second horse. (b) A offers to B lavish entertainment. If B does a particular work for him. (c) A agrees to sell to B my white horse for Rs. 500 or Rs. 1000 Answers (a) Y could not enforce the agreement, it being loose and vague (Taylor vs. Porting ton) (b) A s offer does not amount to lawful offer being vague and uncertain. (c) There is nothing to show which of the two prices was to be given, thus it is not a valid offer. 3. An invitation to offer is not an offer. An offer must be distinguished form an invitation to receive offer or as it is sometimes expressed in judicial language an invitation to treat. In the case of an invitation to offer the person sending out the invitation does not make an offer but only invites the other party to make an offer. His object is merely to circulate information that he is willing to deal with anybody who, on such information, is willing to open negotiations with him. Such invitations for offers are therefore not offers. In the eyes of law and do not become agreements by their acceptance. We may give some examples of them here. (a) An advertisement for sale of goods by auction does not amount to an offer to hold such sale. It merely invites offers. Actual bids made at the auction are offers , each higher bid superseding the previous one, and when the hammer falls on the higher bid, there is an acceptance and the contract becomes complete. An advertisement for an auction sale does not even bind the auctioneer to hold the auction and the prospective bidders have no legal right to complaint if they have wasted their time and money in coming to the advertised place of the auction sale (Harries vs. Nickerson)

(b) There is a self-service system in a shop. A customer selects the goods and takes them to the cashier for payment of the price. The cashier totals the price and accepts the amount. The contract, in this case in made, not when the customer selects the goods, but when the cashier accepts the offer by accepting the payment. The selection of goods by the customer constitutes an implied offer to buy goods and the acceptance of payment by the cashier constitutes acceptance of the offer. [Pharmaceutical society of Great

Britain vs. Boots cash Chemists (southern). Ltd.] (c) A notice that goods will be sold by tender does not amount to an offer. It is only an attempt to ascertain whether an offer can be obtained within such a margin as the seller is willing to adopt (Spencer vs. Harding) the tenders to accept them or not. (d) In Mc Pherson vs Appanna it was held that mere statement of the lowest price at which the offerer would sell contains no implied contract to sell at that price. (e) In the case of Harvey vs Facey the plaintiffs telegraphed to the defendants writing; will you sell us Bumper Hall Pen? Telegraph lowest cash price. The defendants replied, also by a telegram: Lowest price for pen, 900 . The plaintiffs immediately sent their last telegram stating: We agree to buy Pen for 900 asked by you . The defendants, however, refused to sell the plot of land at that price. The court observed that the defendants had made no offer. The plaintiffs last telegram was an offer to buy, but that was never accepted by the defendants. 5. An offer may be a specific or general . There are two kinds of offers - general and specific. The specific order is made to a specific person, while a general offer is made to the world or public at large. However, in case of general offers the contract is made only with that person who comes forward and performs the conditions of the proposal as such performance amounts to the acceptance of performance. Such an offer can be accepted only by the person or persons to whom it is made. Thus, where M makes an offer to N to sell his bicycle for Rs. 200, there is a specific offer and N alone can accept it. A general offer on the enter hand is one which is made to the world at large or public in general and may be accepted by and person who fulfils the requisite conditions. The leading case on the subject of general offer is that of Carlill vs Carbolic smoke Ball co, Illustration In the above case the carbolic smoke Ball co. issued an advertisement in which the company offered to pay 100 to any person who contract influenza, after having used their smoke Balls three times daily for two weeks, according to the printed directions. Mrs. Carlill, on the faith of the advertisement, bought and used the Balls according to the directions, but she nevertheless subsequently suffered from influenza. She sued the company for the promised reward. The company was held

liable. Offers of reward made by way of advertisement, addressed to the public at large, for the rendering of certain services, or the restoration of lost article are also examples of general offers. Such offers may be accepted by performance of the conditions by an individual person in order to give rise to a contractual obligation to pay the reward. It is worth noting that there cannot result into a contract until it has been accepted by an ascertained person. If a large number of persons accepted a general offers of continuing nature, as it was in the smoke Ball LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 11

company case discussed above, which can be accepted by number of persons. In case of general offer of reward for some information or restoration of a missing thing, the offer is open for acceptance to only one individual who performs the required condition first of all, and as soon as the condition is first performed the offer is closed. 6. An offer must be communicated to the offeree. The communication of a proposal is complete when it comes to the knowledge of the person to whom it is made (Secn 4). An offer is effective only when it is communicated to the offeree. Until the offer is made known to the offeree, there can be no acceptance and no contract. Doing anything in ignorance of the offer can never be treated as its acceptance, for there was never a consensus of wills. This applies to both specific and general offers. Illustrations (a) A. without knowing that a reward has been offered for the arrest of a particular criminal, catches the criminal and gives the information to the superintendent of police. A cannot recover the reward as he cannot be said to have accepted the offer when he was not at all aware of it. In Lalman Shukla vs. Gauri Datt. the defendant s nephew absconded from home. He sent his servant, the plaintiff, in search of the boy. After the servant had left. The defendant announced a reward of Rs. 501 to anybody giving information relating to the boy. The servant, before seeing the announcement, had traced the boy and informed the defendant. Later, on reading the notice of reward, the servant claimed it. His suit was dismissed on the ground that he could not accept the offer, unless he had knowledge of it. The court observed: where an offer has been accepted with knowledge of the reward the fact that the informer was influenced by motives other than the reward will be immaterial. In Williams vs. Carwardine where information was given about the murderers of her husband of a woman, not so much for reward, but to assuage her feelings, she was allowed to recover. The court further observed that in the case of public advertisements offering a reward, the performance of the act raises an inference of acceptance. But in the case of Lalman Shukla vs Gauri Dutt , the plaintiff being a servant was already under an obligation to do what he did and therefore the performance of act cannot be regarded as a consideration for defendant s promise. 7. Cross offers when two parties make identical offers to each other, in ignorance of each other s offer, the offers are cross offers. Such offers do not constitute acceptance of one s offer by the other and as such there is no completed agreement. For eg. A wrote to B offering to sell him certain goods. On the same day, B wrote to A offering to buy the same goods. The letters crossed in the post. There is no concluded contract between A and B. Let me give you an example so that you can understand it better. Suppose on 15 October, 1989 A wrote to B offering to sell him 100 tons of iron at Rs. 8,800 per ton. On the same day,

B wrote to A offering to buy 100 tons of iron at Rs. 8,800 per ton. The letters crossed in the post. There is no concluded contract between A and B, because the offers were simulta neous. Each being made in ignorance of the other, and there is no acceptance of each other s offer. You all must be thinking about the contracts which are entered into a by large number of people at the same time. These are called standard form contracts we have already discussed them in brief but now I would like to take up a few examples of such contracts. Communication of special terms (Standard Form Contracts) Regarding the communication of the special terms of the contract as contained in a ticket, receipt, or, standard form documents , the more important rules adopted by the courts are as follows. (i) If the acceptor or the promisee had no knowledge of special terms. Before or at the time of the contract, they are not binding upon the acceptor. Illustration In Handerson vs. Stevenson. the plaintiff bought a steamer ticket which bore on its face the words. Dublin to white haven on the back of the ticket certain special terms were printed one of which excluded the liability of the company for loss, injury or delay to the passenger or his luggage. The plaintiff never looked at the back of the ticket bore no reference to the back. The plaintiffs luggage was lost in the shipwreck caused by the fault of the company s servants. He claimed damages for its loss. It was held that the plaintiff was entitled to recover his loss from the company as there was not sufficient communication of the terms and conditions contained on the back of the ticket. (ii) If the acceptor or the promisee had the knowledge or may be presumed to have the knowledge; because a reasonably sufficient notice has been given to him by suitable words on the document; of special terms, before or at the time of the contract, the terms are binding upon the acceptor whether he has read them or not is immaterial. The leading case on the point is Parker vs. South Eastern Railway co. Illustration. in the above case P deposited his bag at the cloak room at a railway station and received a ticket containing on its face the words, see back . On the back of the ticket there was a condition that, the company will not be responsible for any exceeding the value of 10 unless extra charge was paid . A notice to the same effect was hung up in the cloak- room P s bag was lost and he claimed the actual value of the lost bag. 24 sh 10 P, admitted knowledge of the printed matter on the ticket, but denied having read it. It was held that, even though he had not read the exemption clause, he was bound by it. As the defendants had done what was reasonably sufficient to give him notice of its existence, and therefore P was entitle the recover only 10. Again, where the terms are printed in a language which the

acceptor does not understand, he cannot set up this fact as a reason for not being bound by the terms, provided his attention is drawn to them by suitable words on the document. It is the acceptor s duty to ask for a translation of the terms before he actually accepts the offer and if he did not ask, he must suffer for his ignorance (MacKillican vs. the Compagnie Markemas de France.) similarly, the acceptor cannot plead that he was illiterate or blind, provided the notice is reasonably LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 12 11.555

sufficient for the class of persons to which he belongs (Thomp son vs. L.M. & S. Railway co.) It is important to note that the special terms and conditions become binding as part of the contract only if they are brought to the notice of the acceptor before or at the time of contract. A subsequent communication will not bind the contracting party unless he has assented thereto. The facts of Olley vs. Marlborough court LTD. Case provide a good illustration on the point. Illustration. in the above case Olley and her husband hired a room at a hotel and paid for a week s board and lodging in advance. When they went to occupy the room there was a notice on one of the walls which contained the clause. the proprietors will not hold themselves responsible for articles lost or stolen, unless handed to the manageress for safe custody. Owing to the negligence of the hotel staff, a thief entered the room and stole some of their property. The owner of the hotel was held liable since the notice formed no part of the contract as it came to the knowledge of the plaintiff after the contract had been entered into. Again, where the terms are printed in a language which the acceptor does not understand, he cannot set up this fact as defence. He must suffer for his ignorance (Mackillican vs. the companies Marukemas de France) similarly, the acceptor cannot plead that he was illiterate of blind the contracting party unless he has assented thereto. The facts of olley vs. Marlborough court Ltd. Case provide a good illustration on the point. Finally, we must note that even where adequate notice of the terms and conditions in a document has been given, the doctrine of fundamental breach and strict construction protects the contracting party form the unreasonable consequences of wide and sweeping exemption clauses. Thus a dry-cleaner s terms that he will pay only eight times the amount of cleaning charges, for any damage to or loss of garments has been held to be unreasonable (M. siddalingappa vs. T. Nataraj). 7. An offer should not contain a term the non- compliance of which would amount to acceptance. Thus an offeror cannot say that if acceptance is not communicated up to a certain date, the offer would be presumed to have been accepted. If the offeree does not reply, there is no contract, because no obligation to reply can be imposed on him, on the grounds of justice. The question that comes up now is whether any terms or conditions can be attached to an offer: 8. An offer can be made subject to any terms and conditions. An offeror may attach any terms and conditions to the offer he makes. He may even prescribe the mode of acceptance. The offeree will have to accept all the terms of the offer. There is no contract, unless all the terms of the offer are complied with and accepted in the mode

prescribed. As regards mode of acceptance, it must be noted that in case of deviated acceptance, for example, if the offeror asks for sending the acceptance by telegram and the offeree sends the acceptance by post the offeror may decline to treat that acceptance as valid acceptance provided the gives a notice to that effect to the offeree within a reasonable time after the acceptance is communicated to him. If he does not inform the offeree as to this effect, he is deemed to have accepted the deviated acceptance. (sec. 7) Now we come to revocation of the offer Lapse and Revocation of offer An offer lapses and becomes invalid (i.e., comes to an end) in the following circumstances. 1. An offer lapses after stipulated or reasonable time. An offer lapses if acceptance is not communicated within the time prescribed in the offer, or if no time is prescribed, within a reasonable time. [sec. 6 (2)]. What is a reasonable time is a question of fact depending upon the circumstances of each case. for example, an offer made by telegram suggests that a reply is required urgently and if the offeree delays the communication of his acceptance even by a day or two, the offer will be considered to have lapsed. In Ramsgate Victoria Hotel Co. vs. Montefiore. An application for allotment of shares was made on 8 June. The applicant was informed on the 23 November that shares were allotted to him. He refused to accept them. It was held that his offer had lapsed by reason of the delay of the company in notifying their acceptance, and that he was not bound to accept the shares. 2. An offer lapses by not being accepted in the mode prescribed, or if no made is prescribed, in some usual and reasonable manner. But, according to section 7, if the offeree does not accept the offer according to the mode prescribed, the offer does not accept the offer according to the mode prescribed, the offer does not lapse automatically. It is for the offeror to insist that his proposal shall be accepted only in the prescribed offeror to insist that his proposal shall be accepted only in the prescribed manner, and if he fails to do so he is deemed to have accepted the acceptance. 3. An offer lapses by rejection. An offer lapses if it has been rejected by the offeree. The rejection may be express i.e., by words spoken or written, or implied. Implied rejection is one(a) where either the offeree makes a counter offer, or (b) where the offeree gives a conditional acceptance. How about some examples in this context (i) A offered to sell his house to B for Rs. 90,000. B offered Rs.80,000 for which price A refused to sell. Subsequently B offered to purchase the house for Rs.90,000. A, declined to

adhere to his original offer. B filled a suit to obtain specific performance of the alleged contract. Dismissing the suit, the court held that A was justified because no contract had come into existence, as B, by offering Rs. 80,000, has rejected the original offer. Subsequent willingness to pay Rs. 90,000 could be no acceptance of A s offer as there was no offer to accept. The original offer had already come to an end on account of counter ( Hyde vs. wrench). (ii) A offered to sell his motorcar to B for Rs. 25,000. B said that the he accepted the offer if he was offeror. For example, C makes an offer to D by letter. Immediately on receiving the letter D writes a letter rejecting the offer. LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 13

Before the rejection reaches C, D changes his mind hand telephones his acceptance. There would be a contract C and D and the rejection shall not be effective. It is worth noting that a rejection is effective only when it comes to the knowledge of the offeror. For example, C makes an offer to D by letter. Immediately on receiving the letter D writes a letter rejecting the offer. Before the rejection reaches C, D changes his mind and telephones his acceptance. There would be a contract between C and D and the rejection shall not be effective. 4. An offer lapses by the death or insanity of the offeror or the offeree before acceptance. If the offeror dies or becomes insane before acceptance, the offer lapsed provided that the fact of his death or insanity comes to the knowledge of the acceptor before acceptance [sec. 6 (4)]. From the language of the section, it may be inferred that an acceptance in ignorance of the death or insanity of the offeror, is a valid acceptance, and gives rise to a contract. Thus the fact of death or insanity of the offeror would not put an end to the offer until it comes to the notice of the acceptor before acceptance. An offeree s death or insanity before accepting the offer puts an end to offer and his heirs cannot accept for him (Reynolds vs. Atherton). 5. An offer lapses by revocation. An offer is revoked when it is retracted back by the communication of notice of revocation by the offeror to the other party [sec. 6(1). For example, at an auction sale, A makes the highest bid. But he withdraws the bid before the fall of the hammer. There cannot be a concluded contract because the offer has been revoked before acceptance; Further, an offer, agreed to be kept open for a definite period, may be revoked even before the expiry of that period, unless there is some consideration for so keeping it open. The effect of facing a time for acceptance is merely to fix a tie beyond which the offer cannot be accepted. Where no time limit is set, the offer open for a definite period, unsupported by consideration, is regarded as a bare pact, and hence not offer open, supported by consideration, is called an option an option is in effect a separate contract making the promisor liable for breach if he revokes the offer before the expiry o f agreed time. Illustration. M. offers to sell his house to N for Rs. 1,40,000. N says to M that if he agree the offer open for 10 days he (N) will pay him Rs. 1,000. M agrees M cannot revoke the offer before the expiry of 10 days, as N has obtained an option to purchase the house within 10 days. If M revokes the offer before the expiry of 10 days. He can be sued for breach of option contract. Revocation of an offer must be communicated or made known to the offeree, otherwise the revocation does not prevent acceptance. Revocation of a general offer must be made through the same channel by which the original offer was made. Again, revocation must always be express and must be

communicated by the offeror himself or his duly authorized agent to the other party. Revocation of standing offer or tender. Where a person offers to another to supply specific goods, up to a stated quality or in any quality which may be required, at a certain rate, during a fixed period, he makes a standing offer. A standing offer is in the nature of an open or continuing offer. An acceptance of such an offer merely amounts to an intimation that the offer will be accepted from time to time by placing order for specified, quantities. Each successive order given, while the offer remains in force, is an acceptance of the standing offer as to the quantity ordered, and creates a separate contract. In view of this legal position, the offeror is free to revoke the standing offer with regard to further supply, at any time, by giving a notice to the offeree, except where consideration is given for it. 6. Revocation by non- fulfillment of a condition precedent to acceptance. An offer stand revoked if the offeree fails to fulfill a condition precedent to acceptance [sec. 6 (3)]. Thus, where A, offers to sell his scooter to B for Rs. 4,000. if B joins the lions club within a week the offer stands revoked and cannot be accepted be B if B fails to join the lions club.(in default of payment of earnest money.) 7. An offer lapses by subsequent illegality or destruction of subject matter. An offer lapses if it becomes illegal after it is made, and before it is accepted. Thus, where an offer is made to sell 10 bags of wheat for Rs. 6,500 and before it is accepted, a law prohibiting the sale of wheat by private individuals is enacted, the offer comes to an end. In the same manner, an offer may lapse if the thing, which is the subject matter of the offer, is destroyed or substantially impaired before acceptance. Practice Questions I. Comment on the following statements (1) Offer must be communicated to the offeree. (2) Terms of an offer must be certain. (3) An offer must be distinguished from an invitation to offer. (4) A proposal cannot be revoked otherwise than by communication. II. Define the term offer. Explain the legal rules regarding the term offer. III. How does an offer get terminated? IV. Distinguish between (1) General offer and specific offer (2) Offer and an invitation to offer (3) Cross offer and counter offer V. Solve the following problems giving reasons (1) A garment store gave a following advertisement in the

newspaper : Special sale for tomorrow only. Men s nightsuits reduced from Rs.200 to Rs.100 only is it a valid offer or not. (2) A sees a rare book displayed in a shop. It is labelled First Edition Rs.15 . a enters the shop and puts Rs.15 on the counter and asks for the book. The bookseller does not agree to sell saying that the real price of the book is Rs.50and that it had been marked as Rs.50 by mistake. Is the bookseller bound to sell the book for Rs.15? LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 14 11.555

(3) A sent a telegram to B, will you sell your car? Quote lowest price. B sent a reply, lowest price Rs.25000. A sent a second telegram to B, I agree to buy your car at Rs.25000. B thereafter refuses to sell. Can a compel B to do so. Is there a contract between A and B? References: Kapoor, N.D. (2003), Elements of Mercantile Law, Sultan Chand and Sons, New Delhi. http://www.indialawinfo.com/bareacts/soga.html M.C. Kucchal ( 2002), Business Law , Vikas Publishing House Pvt. Ltd, Delhi. P.C. Tulsian (2002), Pvt. Ltd, Delhi. Business Law , Tata Mc. Graw Hill

Rohini Aggarwal(2003), Student s Guide To Mercantile And Commercial Laws, Tata Mc. Graw Hill Pvt. Ltd, Delhi. Notes: LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 15

LESSON 4: ACCEPTANCE OF AN OFFER Learning Outcomes After today s class you should be able to answer the following questions: The meaning of acceptance The essentials elements of acceptance The communication of an acceptance Introduction Today first we will start with the meaning of acceptance A contract as already observed, emerges from the acceptance of an offer. Section 2(b) states that A proposal when accepted becomes a promise and defines acceptance as when the person to whom the proposal is made signifies his assent thereto, the proposal is said to be accepted. Thus, acceptance is the manifestation by the offeree of his assent to the terms of the offer. Thus there are two essential requirements of a valid acceptance Firstly the offeree to the offeror should communicate acceptance. Secondly, acceptance should be absolute and unqualified. Legal Rules Regarding a valid Acceptance A valid acceptance must be in conformity with the following rules. 1. Acceptance must be given only by the person to whom the offer is made. An offer can be accepted only by the person or persons to whom it is made and with whom it imports an intention to contract. It cannot be accepted by another person without the consent of the offeror. The rule of law is clear that if you propose to make a contract with A. then B can t substitute himself for A without your consent. An offer made to a particular person can be validly accepted by him alone. Similarly an offer made to a class of person s (i.e., teachers) can be accepted by any member of that class. An offer made to the world at large can be accepted by any person who has knowledge of the existence of the offer. Let us suppose A sold his business to his manager B without disclosing the fact to his customers. C, a customer, who had a running account with A, sent an order for the supply of goods to A by name. B received the order and executed the same. C refused to pay the price. It was held that there was no contract between B and C because c never made any offer to B and as

such C was not liable to pay the price to B (Boulton vs. Jones). I will give you another example. In Felthouse vs Bindley the nephew intended his uncle to have the horse but had not communicated this to the uncle, instead he told the auctioneer not to sell the horseas it was already sold to his uncle. It was thereby held that the communication to a stranger like the auctioneer in this would not do. A communication to any other person is no communication in the eyes of law. The offeror cannot say that if no answer is received in a certain time the offer is deemed to be accepted. Mere silence is no acceptance of the offer. 2. Acceptance must be absolute and unqualified [sec. 7(1)]. In order to be legally effective it must be an absolute and unqualified acceptance of all the terms of the offer. Even the slightest deviation from the terms of the offer makes the acceptance invalid. In effect a deviated acceptance is regarded as a counter offer in law. Illustration. L offered to M his scooter for Rs. 4,000 M accepted the offer and tendered Rs. 3,900 cash down, promising to pay the balance of Rs. 100 by the evening. There is no contract, as the acceptance was not absolute and unqualified. Other important features that we must know in respect of acceptance would be 3. Acceptance must be expressed in some usual and reasonable manner, unless the proposal prescribes the manner in which it is to be accepted. [sec. 7(2)]. If the offeror prescribes no mode of acceptance, the acceptances must be communicated according to some usual and reasonable mode. The usual modes of communication are by word spoken or written or by conduct, it is called an implied or tacit acceptance. Implied acceptance may be given either by doing some required act, for example, tracing the lost goods for the announced reward, or by accepting some benefit or service, for example, stepping in a public bus by a passenger. If the offeror prescribes a mode of acceptance, the acceptance given accordingly will no doubt be a valid acceptance, even if the prescribed mode is funny. Thus, if an offeror prescribes lighting a match as a mode of acceptance and the offeree accordingly lights the match, the acceptance is effective and complete. But what happens if the offeree deviates from the prescribed mode? The answer to this query is given in section 7(2) itself which states that in cases of deviated acceptances the proposer may, within a reasonable time after the acceptance is communication 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 (deviated) acceptance. For Example If the offeror prescribes acceptance by telegram and the offeree sends acceptance through a messenger, there is no acceptance of the offer, if the offeror informs the offeree that the acceptance is not according to the mode prescribed. But if the offeror fails to do so, it will be presumed that he has accepted the acceptance and a valid contract will arise.

It should be noted that law does not allow an offeror to prescribe silence as the mode of acceptance. Thus, a person cannot say that if within a certain time acceptance is not communicated the offer would be considered as accepted. LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 16 11.555

Similarly, a trader who, of his own without receiving any order, sends goods to some person with a letter saying if I do not hear from you by the next Monday, I shall presume that you have bought the goods , cannot impose a contract on the unwilling recipient. It is so because in the absence of such a rule the offeree s will be at the mercy of offeror s, unless they replay all such offers in negative which will certainly be causing a lot of inconvenience and financial burden to them. Now what about the cases where no acceptance is communi cated although there is an intention of entering into a contract. Mental acceptance ineffectual. Mental acceptance or quiet assent not evidenced by words or conduct does not amount to a valid acceptance, and this is so even where the offeror has said that such a mode of acceptance will suffice. Acceptance must be communicated to the offeror, otherwise it has no effect. Thus, if an oral acceptance is spoken into a telephone after the telephone has gone dead, there is in effect no acceptance. This rule is based on the theory of consensus ad idem or of identity of minds. Unless the acceptance of the offer comes to the knowledge of the offeror, there is no identity of mind and therefore no contract. (a) A person received an offer by letter. In reply he wrote a letter of acceptance. Put the letter in his drawer and forgot all about it. Held, this uncommunicated acceptance did not amount to acceptance and so did not complete the contract. (Brogden vs. Metropolitan Rly co) 4. Acceptance must be communicated by the acceptor. For an acceptance to be made it should be made by the offeree but must also be communicated by, or with the authority of, the offeree (or acceptor) to the offeror. In the landmark case of Powell vs. Lee, P was a candidate for the post of headmaster in a school. The managing committee of the school passed a resolution selecting him for the post. A member of the managing committee, acting in his individual capacity, informed P that he had been selected, but P received no other intimation. Subsequently, the resolution was cancelled, and P was not appointed no other intimation. Subsequently, the resolution was cancelled, and P was not appointed to the post. P filed a suit against the committee for breach of contract. The court held that in the absence of an authorized communication form the committee there was no binding contract. 5. Acceptance must be given within a reasonable time and before the offer lapses and/or is revoked. To be legally effective acceptance must be given within the specified time limit, if any, and if no time is stipulated, acceptance must be given within a reasonable time because an offer cannot be kept open indefinitely (shree Jaya Mahal cooperative Housing society vs. Zenith chemical works pvt. Ltd.) where M applied for certain shares in a company in June but the allotment was made in November and he refused to accept the allotted shares. It was held that the offeror M

could refuse to take shares as the offer stood withdrawn and could not be accepted because the reasonable period during which the offer could be accepted had elapsed (Ramsgate Victoria Hotel co. vs. Monteforte). Again the acceptance must be given before the offer is revoked or lapses by reason of offeree s knowledge of the death or insanity of the offeror. 6. Acceptance must succeed the offer. Acceptance must be given after receiving the offer. It should not precede the offer. In a company shares were allotted to a person who had not applied for them. Subsequently he applied for shares being unaware of the previous allotment. It was held that the allotment of shares previous to the application was invalid. 7. Rejected offers can be accepted only, if renewed. Offer once rejected cannot be accepted again unless a fresh offer is made (Hyde vs. Wrench). Communication of Acceptance and Revocation When the contracting parties are face to face and negotiate in person, there is instantaneous communication of offer and acceptance, and a valid contract comes into existence the moment the offeree gives his absolute and unqualified acceptance to the proposal made by the offeror. The question of revocation of either offer or acceptance does not arise, for, in such cases a definite offer is made and accepted instantly at one and the same time. But where services of the post office are utilized for communi cating among themselves by the contracting parties because they are at a distance form one another, it is not always easy to ascertain the exact time at which an offer or /and an acceptance is made or revoked. In these cases the following rules, as laid down in section 4 and 5, will be applicable; 1. Communication of an offer. The communication of an offer is complete when it comes to the knowledge of the person to whom it is made, i.e., when the letter containing the offer reaches the offeree. 2. Communication of an acceptance. The communication of an acceptance has two aspects, viz., as against the proposer and as agonist the acceptor. The communication of an acceptance is complete (a) as against the proposer, when it is put in a course of transmission to him, so as to be out of power of the acceptor, and (b) as against the acceptor, when it comes to the knowledge of the proposer i.e., when the letter of acceptance is received by the proposer. Illustrations (i) A proposes, by letter, to sell a house to B for Rs. 80,000. the letter is posted, on 6th instant. The letter reaches B on 8th instant. The communication on the offer is complete when B, the offeree, receives the letter i.e., on 8th.

(ii) B accept A s proposal, in the above case, by a letter sent by post on 9th instant. The letter reaches A on 11th instant. The communication of the acceptance is complete. As against A when the letter is posted i.e., on 9TH, and as against B, when the letter is received by A. i.e., on 11th. 3. Communication of a revocation. The communication of a revocation is complete. (a) as against the person who makes it, when it is put into a course of transmission to the person to whom it is made, so as to be out of the poser of the person revoking, i.e., when the letter of revocation is posted, and (b) as against the person to LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 17

whom it is made, when it comes to his knowledge, I.e., when the letter of revocation is received by him. Illustration (a) In the illustration (i) given above. A revolves his offer by letter on 8th instant. The letter reaches B on 10th instant. The revocation is complete as against A on 8th, when the letter of revocation is received by him. (b) In the illustration (ii) given above, B revokes his acceptance by letter on 10th instant. The letter reaches A on 12th instant. The revocations complete as against B on 10th, the date on which the letter of revocation is posted and as against A on 12th, the date on which the letter reaches him. Time during which an offer or acceptance can be revoked. In the illustrations (a) and (b) given above, there arises a question. Whether the revocation of offer by A is operative or not, or whether the revocation of acceptance by B is operative or not? For answering this question, it is necessary to know the limit of time within which an offer or acceptance can be revoked. Section 5 deals with this question and provides as follows. A proposal may be revoked at any time before the communication of its acceptance is complete as against the proposer, but not afterwards. An acceptance may be revoked at any time before the communication of the acceptance is complete as against the acceptor but not afterwards. Applying section 5 to our illustrations given above. A may revoke his offer at any time before or at the moment when B posts his letter of acceptance i.e., 9th, but not afterwards. B may revoke his acceptance at any time before or at the moment when the letter of acceptance reaches A. i.e., 11th, but not afterwards. While discussing the rule regarding communication of acceptance is complete as against A on the day of posting itself i.e., 9th, A s revocation of his offer, which is complete as against B on 10th is inoperative. B s acceptance is valid and there shall be a binding contract. For the sake of practice of the rules regarding communication of offer, acceptance and revocation discussed above, we take another illustration. Illustration (i) A offers, by letter, to sell his car to B for Rs. 75,000 on 1st August B receives the letter on 3rd august. (ii) B puts the letter of acceptance in post on 4th August, which reaches A on 6th. (iii) A write a letter of revocation of his offer and posts it on 3rd August i.e., which reaches B on 5th August. Rules Applied (i) Communication of offer is compete on 3rd August i.e.,

when it comes to the knowledge of B. (ii) Communication of acceptance is complete as against the proposer i.e.,. A when the letter of acceptance reaches the proposer i.e., on 6th August. (iii) Revocation of offer is complete as against A on 3rd August, when the letter or revocation is posted, and as against B on 5th August, when the letter of revocation is received by him. (iv) As B has put his acceptance into transmission on 4th August and revocation of offer is communicated to him on 5th August, his acceptance is valid and there shall be a binding contract. A cannot revoke his offer after 4th August, when the communication of acceptance is complete as against him. Effect of delay or loss of letter of acceptance in postal transit. So for as the offeror is concerned, he is bound by the acceptance the moment the letter of acceptance is posted. Although the letters delayed or wholly lost through an accident of the post and the letter never in fact reaches him. But in order to bind the offeror, the letter of acceptance must be correctly addressed, properly stamped and actually posted. If the letter of acceptance is misdirected because it has not been addressed correctly, there would in law, be no communication of the acceptance; but if the wrong address is furnished by the offeror himself, he will be bound. So far as the acceptor is concerned. He is not bound by the letter of acceptance till it reaches the offeror, the contract remains voidable at the instance of the acceptor. He can compel the offeror to enforce the contract or he may revoke his acceptance by communicating his revocation at any time before the letter reaches the offeror. Thus the acceptor is at an advantage if the letter is delayed or lost in transit. Accidental formation of contract. There remains yet another query; what happens if both the letter of acceptance and the telegram of revocation of acceptance are delivered to the to the offeror at the same time? In such a situation the formation of contract will depend on a matter of chance. If the offeror reads the letter of acceptance first and then the telegram, a binding contract will arise. But if the offeror reads the telegram of revocation of acceptance first and then the letter of acceptance, there will be no binding contract because the communication of revocation comes to the offeror s notice first than the communication of acceptance. It will be seen that the formation of contract in the aforesaid circumstance depends on a matter of chance and therefore such contracts are called accidental form of contracts, Contracts Over the Telephone External manifestation or overt act The definition clearly require that the assent should be signified, it may be signified or expressed by an act or omission by which the party accepting intends to communicate his assent or which has the effect of communicating it. A very common instance of an act amounting to acceptance is the fall of the hammer in the case of an auction sale. The principle is that there should be some external manifestation of acceptance. A mere mental determination to accept unaccompanied by any external indication will not be sufficient.

Such manifestation may be in the form of express words, written or spoken or may be signified through conduct. An illustration of acceptance by conduct is the decision of the House of Lords in Brogden v. Metropolitan Railway Co. B had been supplying coal to a railway company without any formal agreement. B suggested that a formal agreement should be drawn up. The agents of both the parties met and drew up a draft agreement. It had some blanks when it was sent to B for LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 18 11.555

his approval. He filled up the blanks, including the name of an arbitrator and then returned it to the company. The agent of the company put the draft in his drawer and it remained there without final approval having been dignified. B kept up his supply of coals but on the new terms and also received payment on the new terms. A dispute having arisen B refused to be bound by the agreement. The conduct of the company agent in keeping the agreement in his drawer was an evidence of the fact that he held mentally accepted it. But he had not expressed his mental determination and retention of the agreement was not be sufficient acceptance. But the subsequent conduct of the parties in supplying and accepting coal on the basis of proposed agreement was a conduct that given. Said Lord CAIRNS LC when the company commenced a course of dealing which is referable only to the contract and when that course of dealing was accepted and acted upon by B in the supply of coals. This rule, that the communication of an acceptance is complete as against the proposer when the letter is posted, is probably intended to apply only when the parties are at a distance and they communicate by post. Where, however, the parties are in each other s presence or, though separated in space , they are in direct communication, as, for example, by telephone, no contract will arise until the offer or receives the notification of acceptance. This appears from the speeches delivered in Entores Ltd. v. Miles Far East Corporation. Denning U observed as follows: Let me first consider a case where two people make a contract by word of mouth in the presence of one another. Suppose, for instance, that I shout an offer to a man across a river or a courtyard but I do not hear his reply because it is drowned by an aircraft flying overhead. There is no contract at that moment. It he wishes to make a contract, he must wait till the aircraft is gone and then shout back his acceptance so that I can hear what he says.... Now take a case where two people make a contract by telephone. Suppose, for instance, that I make an offer to a man by telephone and, in the middle of his reply, the line goes dead so that I do not bear his words of acceptance. There is no contract at that moment. The facts of the case were that an offer was made from London by Telex to a party in Holland and it was duly accepted through the Telex, the only question being as to whether the contract was made in Holland or in England. The Court of Appeal held that Telex is a method of instantaneous communication and the rule about instantaneous communications between the parties is different from the rule about the post. The contract is only complete when the acceptance is received by the offer or and the contract is made at the place where the acceptance is received. Where, however, the proposal and acceptance are made by letters, the contract is made at the place where the letter of acceptance is posted. It has been observed by the Supreme Court that authorities in India exhibit a fairly uniform trend that in case of negotiations by post the contract is complete

when acceptance of the offer is put into a course of transmission to the offeror . Thus where a premium due on a life insurance policy was sent by money order, it was held that the policy had revived from the date of the money order and not from the late of its receipt by the company. The assured having died in the mean times widow recovered the proceeds. Whatever merit this rule may have from the point of view of the assured or the offered, it certainly makes the position of the offer or miserable. The current feeling, therefore, is that even in reference to postal communications the principle of consensus or meeting of minds should be adhered to and there should be no contract till the acceptance is received. Thus in Holwell Securities v. Hughes an option to purchase land was exercisable by notice, it was held that the mere posting of the notice which was never delivered was not a valid exercise of the option. Supreme Court approval of Entores case The principle of the Entores case has been endorsed by the Supreme Court in Bhagwandas Goverdhandas Kedia v. Girdharilal Parshottamdas & Co. In this case, the plaintiffs made an offer from Ahmedabad to the defendants at Khamgaon to purchase certain goods and the defendants accepted the offer. The question was whether the conversation resulted in a contract at Khamgaon at Ahmedabad. A majority of the judges preferred to follow the English rule as laid down in the Entores case and saw no reason for extending the post office rule to telephonic communications but section 4 does not imply that the contract is made qua the proposer at one place and qua the acceptor at another place. The contract becomes complete... when the acceptance of offer is intimated to the offeror. It was further contended, that the draftsman of the Indian Contract Act could not have envisaged use of telephone because it had not yet been invented and, therefore, the words of the section should be confined to communications by post. The judge was, on the other hand, convinced that though the law was framed at a time when telephones, wireless, Telstar and Early Bird were not contemplated , the language of Section 4 is flexible enough to cover telephonic communications. The courts should not completely ignore the language of the Act. When the words of acceptance are spoken into -the telephone, they are put into the course of transmission to- the offeror so as to be beyond the power of the acceptor; the acceptor cannot recall them. The communication being instantaneous the contract immediately arises In the case of contracts over the telephone, each contracting party is able to hear the voice of the other. There is instantaneous communication of offer and acceptance, rejection and counter offer. And therefore, the rule which applies to contracts negotiated orally by the parties in the physical presence of each other i.e., the contract is complete only when the acceptance is received by the offeror also applies to contracts made over the telephone. If the acceptance is not in fact communicated to the offeror because the telephone suddenly goes dead there will be no contract ( Entores Ltd. Vs. miles for east corporation). The offeree, therefore must make sure that his acceptance is received

(heard and understood) by the offeror, otherwise there is no binding contract. The observation made by denning, L. J., in Entores case is enlightening in this connection. Now take a case where two people make a contract by telephone. Suppose for instance, that I make an offer to a man by telephone and in the middle of his reply, the line goes dead LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 19

so that I do not hear his words of acceptance. There is no contract at that moment. The other man may not know the precise moment when the line failed. But he will know that the telephonic conversation was abruptly broken off, because people usually say something to signify the end of the conversation. If he wishes to make a contractor, he must, therefore, get through again so as to make sure that I heard. Suppose next that the line doesn t go dead but it is nevertheless so indistinct that I do not catch what he says and I ask him to repeat it. He then repeats it and I hear, but only the second time when in do hear. If he does not repeat it, there is no contract. The contract is only complete when I have his answer accepting the offer. In Kanhialal vs. Dineshchandra it has been so held in India as well that where a contract is effected by telephonic conversation, the contract is not complete till acceptance of the offer by the offeree is clearly heard and understood by the offeror. No question of revocation. When the parties negotiate a contract over telephone, no question of revocation can possibly arise, for in such instantaneous communication, a definite offer is made and accepted at one and the same time. An offer when accepted, explodes into a contract and cannot be revoked. In the words of sir Anson Acceptance is to an offer what a lighted match is to a train of gunpowder. It produces something which cannot be recalled or undone. Here we end our discussion on acceptance of an offer. Test Questions Comment on the following 1. Offer must be communicated to the offeree. 2. Terms of an offer must be certain 3. Counter offer to an offer lapses the offer 4. An invitation to an offer is not an offer Practical Problems Answer the following problems, giving reasons for your answers. 1. Harish says in conversation to suresh that he will give Rs. 10,000 to a person whosoever marries his daughter. Alok marries Harish s daughter and files a suit to recover Rs. 10,000 will he succeed? [Hint. No, Harish has expressed his wish only, and has never made an offer with a view to obtaining the assent of the other party.] 2. X sees a book displayed in a shelf of a book shop with a

price tag of Rs. 85. X tenders Rs. 85 on the counter and asks for the book. The bookseller r3fuses to sell saying that the book has already been sold to someone else and he does not have another copy of that book in the stock. Is the bookseller bound to sell the book to X? [Hint. No. a display of goods with prices marked thereon is only an invitation for offer, and not an offer itself. Hence the bookseller is free to accept the offer or not.] 3. B offered to sell his car to A for Rs. 95,000. A accepts to purchase it for Rs. 94,500. B refused to sell the car Rs. 94,500. subsequently A agree to purchase the car for Rs. 95,000 but B refused to sell the car. A sues B for the specific performance of the contract. Will he succeed? [Hint. No. B s offer comes to an end by the counter offer of A, and there, was no offer available for acceptance subsequently.] 4. P sold his business to Q disclosing this to his customers. M, an old customer sent an order for goods to P by name. Q, the new owner, executed the order. Is M bound to accept the goods? [Hint. No. M is not bound to accept the goods because a specific offer made to P can be accepted only by P and none else (Boulton vs. Jones.] 5. X wrote to Y, his would be son-in-law, that his daughter would have a share of what he left after the death of his wife. Is the letter a valid offer by X to Y? Solution: The letter was a mere statement of intention and not an offer at all. [Farina v. Fickus] 6. A notice that the goods stated in the notice will be sold by tender. Is the notice a valid offer to sell? Solution: The notice was mere a statement of intention and not an offer to seen. [Spencer v. Harding] 7 X and Mrs X hired a room in a hotel for a week. When they entered the room, they found a notice on the wall disclaiming the owner s liability for damages; loss or theft of articles. Some of their items were stolen. Discuss the legal position. Solution: The owner of the hotel was liable because the special terms (i.e. notice) were communicated after the formation of the contract. [Leading case: Olley v. Marlborough Court Ltd.] 8. X sold his business to Y but this fact was not known to an old customer Z. Z placed an order for certain goods to X by name. Y supplied the goods to Z. Is there a valid contract?

Solution: There was no contract at all between Y and Z because Z s offer was a specific offer to X and X alone could accept it. [Leading case: Boulton v. Jones] 9. X offered to sell his .car for Rs 1,00,000 to Y. Y replies I will pay Rs 90,000 for it. X refuses to sell at this price. Y then attempts the original offer but X refuses to sell his car. Discuss the legal position. Solution: Y s first reply is a counter offer and not an acceptance of X s offer and has put an end to the original offer. After having made the counter offer, Y cannot accept the original offer which has already come to an end. Hence, X is not bound to sell his car to Y. [Leading case: Nihal Chand v. Amar Nath] 10. X offered to sell two plots of land to Y at a certain price. Y accepted the offer for one plot. Is there a valid contract? Solution: This is not a contract at all because the acceptance was not valid as it was not for the whole of the offer. [Bhawan v. Sadula] 11. F offered by a letter to buy his nephew s horse for Rs 100 saying If I hear LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 20 11.555

no more about him, I shall consider the horse mine. The nephew sent no reply at all but told B his auctioneer not to sell that particular horse as he intended to sell that horse to F. B sold the horse by mistake. F filed a suit against B. Will he succeed? Solution: F will not succeed because his nephew had not communicated accep-tance to him. [Felt house v. Bindley] References Kapoor, N.D. (2003), Elements of Mercantile Law, Sultan Chand and Sons, New Delhi. http://www.indialawinfo.com/bareacts/soga.html M.C. Kucchal ( 2002), Business Law , Vikas Publishing House Pvt. Ltd, Delhi. P.C. Tulsian (2002), Pvt. Ltd, Delhi. Business Law , Tata Mc. Graw Hill

Rohini Aggarwal(2003), Student s Guide To Mercantile And Commercial Laws, Tata Mc. Graw Hill Pvt. Ltd, Delhi. Notes: LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 21

LESSON 5: CONSIDERATION Learning Outcomes After todays class you should be able to answer the following questions: The meaning of consideration The essentials of consideration The exceptions to the doctrine of consideration Introduction By now you all must have understood the concept and definition of contract and its essentials. Our next topic of study shall be consideration. Consideration constitutes the very foundation of the contract. As you all know that as per section 10 of the Indian Contract Act there must be a consideration for an agreement to become a contract and that consideration must also be lawful. An agreement not supported by consideration is void. Consideration is one of the essential elements of a valid contract (Sec. 10). The fact. of its existence serves to distinguish those promises by which the promisor intends to be legally bound from those which are not seriously meant. In the words of Blackstone: A consideration of some sort or other is so necessary to the forming of a contract, that a nudum pactum, or agreement to do or pay something on one side, without any compensation on the other, will not at law support an action; and a man cannot be compelled to perform it. The law supplies no means nor affords any rem-edy to compel the performance of an agreement made without consideration. If I promise a man 100 for nothing, he neither doing nor promising anything in return or to compensate me for my money, my promise has no force in law. Anson said that the offer and acceptance bring the parties together and constitute the outward semblance of a contract but most systems of law require some further evidence of the intention of the parties, which is provided by consideration and form. It may be noted that consideration is a cardinal necessity for the formation of a contract., but no consideraion is necessary for the discharge or modification of a contract. The breach of a gratuitous promise cannot be redressed by legal remedies. It is only when a promise is made in return of something from the promisee, that such promise can be enforced by law against the promisor. This something in return is the consideration for the promise. In the language of purchase and sale Pollock has observed: Consideration is the price for which the promise of the other is bought . Anson said that an offer and acceptance bring the parties together and constitute the outward semblance of a contract.

Definition Section 2(d) of the Indian Contract Act defines consideration as follows 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. An analysis of the above definition will show that it consists of the following four components: (a) The act or abstinence or promise which forms the consideration for the promise, must be done at the desire of the promisor: (b) It must be done by the promisee or any other person (c) Tt may have been already executed or is in the process of being done or may be still executory; (d) Tt must be something to which the law attaches a value. The concept of consideration will become more clear to you after reading these illustrations. Illustrations (i) A agrees to sell his house to B for Rs 10,000. Here B s promise to pay the sum of Rs10,000 is the consideration for A s promise to sell the house, and A s promise to sell the house is the consideration for B s promise to pay the sum of Rs10,000. (ii) A promises to maintain B s child and B promises to pay A Rs 1,000 yearly for the purpose. Here the promise of each party is the consideration for the promise of the other party. (iii) A promises to pay B Rs 1,000 at the end of six months, if C, who owes that sum to B, fails to pay it. B promises to grant time to C accordingly. Here the promise of each party is the consideration for the promise of the other party. (iv) A promises his debtor B not to file a suit against him for one year on B s agreeing to pay him Rs.100 more. The abstinence of A is the consideration for B s promise to pay. (v) A promises to type the manuscript of B s book, and in return B promises to teach A s son for a month. The promise to each party is the consideration for the promise of the other party. (vi) A person had a. daughter to marry and in order to raise funds for her marriage he intended to sell a property. His son promised that if the father would forbear to sell, he would pay the father Rs. 50,000. The father accordingly forbore. The abstinence of the father is the consideration for son s promise to pay. Essentials of Valid Consideration The four component parts of the definition of consideration

(given above) may well be described as the essentials of valid consideration. We shall now discuss these essentials one by one in detail. LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 22 11.555

1. Consideration must move at the desire of the promisor. In order to constitute legal consideration the act or abstinance forming the consideration for the promise must be done at the desire or request of the promi-sor. Thus acts done or services rendered voluntarily, or at the desire of the third party, will not amount to valid consideration so as to support a contract. The logic for this may be found in the worry and expense to which every one might be subjected, if he were obliged to pay for services, which he does not need or require. We shall study some more examples to make this concept clearer Illustrations (a) A sees B s house on fire and helps in extinguishing it. He cannot demand payment for his services because B never asked him to come for help. (b) D had built, at his own expense, a market at the request of the Collector of the District. The shopkeepers in the market promised to pay D a commission on the articles sold by them in the market. When D sued the shopkeepers for the commission, it was held that the promise to pay commission did not amount to a contract for want of consideration, because D (the promisee) had constructed the market not at the desire of the shopkeepers (the promisors) but at the desire of the Collector to please him (Durga Prasad vs Baldeo) It must be noted that this essential does not require that the considera-tion must confer some benefit on the promisor. It would be enough if the act or forbearance or promise constituting the consideration was done or given at the promisor s request, the benefit may accrue to a third party. We call this concept Privity of Consideration For Example (a) B requests A to sell and deliver to him goods on credit. A agrees to do so, provided C will guarantee the payment of the price of the goods. C promises to guarantee the payment. The contract between A and C is a contract of guarantee and is perfectly valid though the benefit which A confers in return of C s guarantee is conferred not on C but on B (in the shape of sale of goods on credit). A s promise to deliver the goods is the consideration for C s promise of guarantee. (Illustration appended to Section 127). (b) A, who owed Rs 20,000 to B, persuaded C to pass a promissory note for the amount in favour of B. C promised B that he would pay the amount (by passing on a promissory note), and B credited the amount to A s Account in his books. The discharge of A s Account was consideration for C s promise (though C the promisor had received no benefit) (National Bank afUpper India vs Bansidhar). 2. Consideration may move from the promisee or any other

person. The second essential of valid consideration, as contained in the definition of consideration in Section 2 (d), is that consideration need not move from the promisee alone but may proceed from a third person. Thus, as long as there is a consideration for a promise, it is immaterial who has furnished it. It may move from the promisee or from any other person. This means that even a stranger to the consideration can sue on a contract, provided he is a party to the contract. This is sometimes called as Doctrine of Constructive Consideration . Under English law, however there is privity of consideration i.e. consideration must move from the promisee and promisor only, a stranger cannot furnish consideration. The leading case of Chinayya vs Ramayya provides a good illustration the point. Let me tell you the facts of that case now. Illustration in the. above case A, an old lady, by a deed of gift, made over certain property to her daughter R, with a direction that the daughter should pay an annuity to A s sister C, as has been done by A. Accordingly, on the same day R, the daughter, executed a writing in favour of her maternal aunt C agreeing to pay the annuity. Afterwards she declined to fulfill her promise saying that no consideration had moved from her maternal aunt i.e., the promisee. It was held that the words the promisee or any other person in Section 2 (d) clearly show that a stranger to consideration may maintain a suit. Hence the maternal aunt, though a stranger to the consideration (as the consideration indirectly moved from her sister) was entitled to maintain the suit. Another important illustration that would make you understand the concept better is the case of Dutton vs Poole, a person intended to sell wood in order to provide his daughter a marriage portion. His son(defendant) promised that if he abstains from selling he would pay the daughter 1,000. The father accordingly forebore but the defendant did not pay. The daughter and her husband (plaintiffs) sued the defendants for the same. Held that .as the consideration moved indirectly from the plaintiff to the defendant and the action of the defendant operated to shut out the plaintiff from a certain benefit, the plaintiff can sue. It is a legal common place that if a promise causes some loss to a promisee, that is sufficient consideration for the promise. A stranger to a contract cannot sue. A person may be a stranger to the consideration but he should not be a stranger to the contract because privities of contract is essential for enforcing any of the rights arising out of the contract. It being a fundamental principle of the law of contracts that a stranger to a contract cannot sue only a person who is a party to a contract can sue on it. Thus, where A mortgages his property to B in consideration of B s promise to A to pay A s debt to C, C cannot file a suit against B to enforce his promise, C being no party to the contract between A and B (Iswaram Pillai vs Sonnivaveru). Exceptions to the Privity rule

In the course of time, the courts have introduced a number of exceptions in which the rule of privity of contract does not prevent a person from enforcing a contract, which has been made for his benefit but without he being a party to it. The different exceptions are as follows: LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 23

Trust or Charge Marriage settlement, partition or other Family arrangements Acknowledgement or Estoppel Covenants running with land Agency Assignment Now let me discuss them in detail (i) Where an express or implied trust is created. A trust is the property held and managed by one or more persons for another s benefit as in Chinnaya case. In case of a trust, the beneficiary can sue in his own right to enforce his rights under the trust, though he was not a party to the contract between the settler and the trustees. Illustrations (a) A transfers certain properties to B to be held by B in trust for the benefit of M. M can enforce the agreement i.e., trust (M.K.Rapai vs John). (b) An addressee of an insured article is entitled to sue the. Post Office in case V- of loss, as on receipt of such article, the Post Office becomes in law a constructive trustee for the addressee (Amir ullah vs. Central Govt). (c) In Khwaja Mohammad Khan vs Hussaini Begum, there was an agreement between the lady s father in law and her father that in consideration of her marriage with his son, he would pay to her Rs.500 per month in perpetuity for the betel leaf expnses. Some immovable property was specifically charged for this purpose. A suit by the wife (not a party to the agreement ) for the recovery of arrears of annuity was upheld. (ii) Family settlement. Where a provision is made in a partition or family arrangement for maintenance or marriage expenses of female mem-bers; such members, though not parties to the agreement, can sue on the footing of the arrangement. Illustration. A daughter along with her husband entered into a contract with her father whereby it was agreed that she will maintain her mother and the property of the father will be conveyed to them. The daughter subsequently refused to maintain the mother. On a suit it was held that the mother was entitled to require her daughter to maintain her, though she was a stranger to the contract (Veeramma vs Appayya). Where a girl s father entered into an agreement for her marriage with the defendant, it was held that the girl could sue the defendant for damages for the breach of the promiseof marriage even though she was not a party to the agreement. (Rose vs Joseph) (iii) When the defendant constitutes himself, as the agent of

the third party/ Acknowledgement or Estoppel. Whereby the terms of a contract a party is required to make a payment to a third person (viz. while making a part payment), a binding obligation is thereby incurred towards him.. acknowledgement can be express or implied. Thus if A receives some money from B to be paid over to C and he admits of this receipt to C, then C can recover this amount from A who shall be regarded. as the agent of C (Surjan vs Nanat) (iv) In case of agency. Where a contract is entered into by an agent, the principal can sue on it. (v) In case of assignment of rights under a contract in favour of a third party either voluntarily or by operation of law, the assignee can enforce the benefits of the contract, e.g., the assignee of an insurance policy or the official assignee on the insolvency of a person can sue on the contract even though originally they were not parties to it (vi) Covenants running with land. A person who purchases a land with notice that the owner of the land is bound by certain duties created by an agreement or covenant affecting the land, shall be bound by them although he was not a party to the agreement. Now we shall discuss the third essential of consideration i.e. 3. Consideration may be past, present or future. The words, has done or abstained from doing; or does or has abstained from doing; or promises to do or to abstain from doing, used in the definition of consideration clearly indicate, that the consideration may consist of either something done. or not done in the past, or done or not done in the present, or promised to be done or not done in the future, To put it briefly, consideration may consist of past, present, or future act or abstinence, Consideration may consist of an act or abstinence. Consideration may consist of either a positive act or abstinence i.e. a negative act. Thus, an agreement between B and A, under which B; on failing to pay the debt amount on the due date to A; promises to raise the rate of interest from 9 per cent to 12 per cent in consideration of A promising not to file a suit against him for another one year, is a valid contract; A s abstinence being the consideration for B s promise. Now the question that comes up is that what do we mean by past, present or future consideration. Past consideration. When something is done or suffered before the date of the agreement, at the desire of the promisor, it is called past considera-tion. It must be noted that past consideration is good consideration only if it is given by the promisee, at the desire of the promisor. Under English law, past consideration is no consideration. In India sec 25(2) adequately covers a past voluntary service. Let us discuss some examples of this.

Illustrations (a) A teaches the son of B at B s request in the month of January, and in February B promises to pay A a sum of Rs 200 for his services. The services of A will be past consideration. (b) A lawyer, gave up his practice and served as manager of a landlord at the latter s request in lieu of which the landlord subsequently promised a pension. It was held that there was good past consideration. (Shiv Saran vs Kesho Prasad) LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 24 11.555

Present consideration. Consideration which moves simultaneously with the promise, is called present consideration or executed consideration . For example, A sells and delivers a book to B, upon B s promise to pay for it at a future date. The consideration waiting from A is present or executed consideration since A has done his act of delivering the book simultaneously. with the promise of B. It should, however, be noted that it is said to be . present consideration when at the time of the agreement it is executed on one side and executory on the other. If both parties have done their part under the contract, e.g., where A sells a book to B and B pays its price immediately, it is a case of executed contract (where nothing remains to be done) and not of executed or present consideration. Future consideration. When the consideration on both sides is to move at a future date, it is called future consideration or executory considera-tion . It consists of an exchange of promises and each promise is a consid-eration for the other. For example, X promises to sell and deliver 10 bags of wheat to Y for Rs 6,500 after a week, upon Y s promise to pay the agreed price at the time of delivery. The promise ofX is supported by promise of Y and the consideration is executory on both ides. It is to be observed that in an executed consideration , the liability is outstanding against only one side whereas in an executory consideration it is outstanding on both ends. 4. Consideration must be of something The fourth and last essential of valid consideration is that it must be something to which the law attaches a value. The consideration need not be adequate to the promise for the validity of an agreement. The law only insists on the presence of consideration and not on the adequacy of it. It leaves the people free to make their own bargains. Thus, where A agrees to sell his motorcar worth Rs 20,000 for Rs 1,000 only and his consent is free, the agreement is a valid contract, notwithstanding the inadequacy of the consideration. However, if the consideration be grossly or shockingly inadequate, and if one of the parties to the contract alleges that his consent was obtained by fraud, coer-cion Or undue influence, the court will treat inadequacy .of consideration as an evidence in support of such allegation and. will declare the contract void. Inadequacy of consideration being no bar to a valid contract, unless it is an evidence of un free consent, it has been correctly observed that in many cases, the doctrine of consideration is a mere technicality irreconcil-able either with business expediency or common sense: Consideration must be real Though consideration need not be ade-quate, it must be of some value in the eye of law, i.e., it must be real and competent. Where consideration is physically impossible, illegal, uncertain or illusory, it is not real and therefore shall not be a valid consideration. (i) Physically impossible. A promise to do something which is physi-cally impossible, e.g., to make a dead man alive or to

run at a speed of 100 kilometres per hour, does not form valid consideration. (ii) Legally impossible A promise to do something which. is illegal, e.g., a promise for illegal cohabitation, does not amount to good considera-tion. (iii) Uncertain consideration. A promise to do something which is too vague and uncertain, e.g., a promise to pay such remuneration as shall be deemed right, is no consideration in the eye of law. ( iv) Illusory consideration Again, an illusory or deceptive consideration does not amount to a valid consideration. Consideration is illusory if it consists in a promise to perform a public duty, or to perform a contract already made with the promisor. Illustrations (a) C (the plaintiff) received a subpoena (a kind of sum-mon) to appear at a trial as a witness on behalf of G (the defendant). G promised him a sum of money for his trouble. On default by G, C filed the suit for the recovery of the promised sum. It was held that C being under a public duty to attend and give evidence, there was no. consideration for the promise and hence the promise is unenforceable. (Collins vs Godefroy) (b) Two of the crew of a ship deserted it half way while the ship was on a voyage from London to the Baltic and back. The captain, being unable to supply their place, promised the rest of the crew that, if they would work the vessel home, the wages of the two deserters should be equally divided amongst them. The agree-ment was held to be void for want of consideration because it was the contractual duty of the mariners who remained with the ship to exert themselves utmost in any emergency of the voyage to bring the ship in safety to her destined port. The desertion of a part of the crew is to be considered an emergency of the voyage as much as their death. (Stilk vs Myrick) Performance of Existing Duties (1) Performance of Legal obligation in order to constitute proper consideration there should be a promise to do something more than what a person is already bound to do. Doing of something, which a person is already legally bound to do, is no consideration. For instance, where a person having received summons to give evidence in a case; a promise to pay such a person for appearing in case is o consideration. Similarly, a promise to pay a sum of money to a police officer for investigating into the crime will be without consideration. However, where the police authority provides a special form of protection outside the scope of their public duty (e.g. performing an extraordinary act) they may demand payment of it. (2) Performance of Contractual Obligations (a) Pre existing contract with promisor - If A is already bound to perform a particular contractual duty owed to B, B s promise to pay something additional for the

same promise is no consideration. Likewise, a promise to pay a special reward to a pleader (apart from usual fee) if the suit decided in the promisor s favour, does LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 25

not constitute consideration. I am sure you all must be familiar with the Lalman Shukla s case. On the same principle, a promise to pay less than what is due under a contract cannot be regarded as a consideration. However, there are certain exceptions to this rule. Thus, part payment by a third party may be good consideration for the discharge of the whole debt. In India the promisee may accept in satisfaction of the whole debt an amount smaller than that. No consideration is needed for such a promise. (b) Pre existing contract with third party Where a person has contracted to do an act, and a third person promises to pay him a sum of money if he would go ahead with the performance, is there a consideration for the promise? In Shadwell vs Shadwell, the plaintiff A had already promised to marry one Miss Nicholl. A s uncle sent him a letter; I am glad to hear of your starting intended marriage with Nicholl; and as I promised to assist you at starting , I will pay to you 150 yearly during my life thereafter A married Nicholl. The majority judgement was that there is a sufficient consideration for the promise. The promise of the annuity might ve intended as an inducement to the marriage. Exceptions to the Rule, No Consideration, No Contract Consideration being one of the essential elements of a valid contract the general rule is that an agreement made without consideration is void. But there are a few exceptions to the rule, where an agreement without consideration will be perfectly valid and binding. These exceptions are as follows: Agreement made on account of natural love and affection [Sec. 25 (1)]: An agreement made without consideration is enforceable. If it is (i) Expressed in writing (ii) Registered under the law for the time being in force for the registration of documents (iii) Is made on account of natural love and affection (iv) Between parties standing in a near relation to each other. Thus there are four essential requirements which must be complied with to enforce an agreement made without consideration, as per Section 25 (1). Let us now study some some illustrations in this behalf (a) A promises, for no consideration, to give to B Rs 1,000. This is a void agrpement (b) A for natural love and affection, promises to give his son B, Rs 1,000. A puts his promise to B into writing and registers it This is a contract. (c)

A registered agreement, whereby an elder brother, on account of natural love and affection, promised to a the debts of his younger brother, was held to be valid and binding an the younger brother cause the elder brother in the event of his not carrying out the agreement (Venkatasamy vs Rangasami) It should, however, be noted that mere existence of a near relation between the parties does not necessarily import natural love and affection. Thus where a Hindu husband, after referring to quarrels and disagreement between him and his wife, executed a registered document in favour of his wife, agreeing to pay for separate residence and maintenance, it was held that the agreement was void for want of consideration because it was not merely out of natural love, and affection. (Rajlakhi Devi vs Bhootnath) 2. Agreement to compensate for past voluntary service (Sec.25 (2)]. A promise made without consideration is also valid, if it is a promise to compensate, wholly or in part, a person who has already voluntarily done something for the promisor, or done something which the promisor was legally compellable to do. Illustrations (a) A finds B s purse and gives it to him. B promises to give A Rs 50. This is a contract. (b) A supports B s infant son. B promises to pay A s expenses in so doing. This is a contract. (Note that B was legally bound to support his infant son). (c) A rescued B from drowning in the river, and B, appreciating the service that had been rendered, promises to pay Rs 1,000 to A. There is a contract between A and B. In order to attract this exception, the following points should be noted: (i) The service should have been rendered voluntarily for the promisor. If it is not voluntary but rendered at the desire of the promisor, then it is covered under past consideration [as per Sec. 2(d) and not under this exception]. (ii) The promisor must be in existance at the time the service was, rendered. Thus where services were rendered by a promoter for a company not then in existence, a subsequent promise by the company to pay for them could not be brought within the exception. (Ahmedabad Jubilee Spinning Co. vs Chhotalal). (iii) The promise must be to compensate a person who has himself done something for the promisor and not to a person who has done nothing for the promisor. Thus, where B treated A during his illness but refused to accept payment from A; they being friends; and A in gratitude promises to pay Rs 1,000 to B s son D, the agreement between A and D is void for want. of consideration as it is not covered under the exception.

(iv) The intention of the promisor ought to be to compensate the promisee. A promise given for any motive other than the desire to compensate the promisee would not fall within the exception. (Abdulla Khan vs Parshottam) (v) The promisor to whom the service has been rendered needed competence to contract at the time the service was rendered. Thus a promise- made after attaining majority to pay for goods supplied voluntarily to the promisor during his minority has been held valid and the promisee could enforce it ,(Karam Chand vs Basant Kaur). The court in LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 26 11.555

that case ob-served that they failed to see how an agreement made by a person of full age to compensate wholly or in part a promisee, who had already volun-tarily done something for the promisor, even at a time when the promisor was a minor, did not fall within the purview of Sec. 25(2) of the Contract Act. The reasoning of the court is, that at the time the thing was done the minor was unable to contract, and therefore the person who did. it for the minor must in law be taken to have done it voluntarily. In their opinion the provisions of Sec. 25(2) applied equally to a contract by a major, as well as by a minor, to pay for past services. In this connection it is important to note that this exception does not cover a promise by a person on attaining majority to repay the money borrowed during his minority because such a promise cannot be said to be a promise to compensate a person who has already voluntarily (without any promise of compensation) done something for the promisor. Advancing money as a loan necessarily implies a promise to compensate (i.e., a promise to repay the loan) on the part of the borrower, Thus a promise made by a minor after attaining majority to repay money advanced during his minority has been held invalid and beyond the purview of Section 25(2) of the Contract Act (Indran Ramaswami vs Anthappa). (vi) The service rendered must also be legal. Thus past cohabitation will not make a promise to pay for it enforceable under this exception (Sabava vs Yamanappa). 3. Agreement to pay a time-barred debt (Sec. 25 (3)]. Where there is an agreement, made in writing and signed by the debtor or by his au-thorised agent, to pay wholly or in part a debt barred by the law of limi-tation, the agreement is valid even though It is not supported by any consideration. A time barred debt cannot be recovered and therefore a promise to repay such a debt is without consideration, hence the importance of the present exception. But before the exception can apply, it is necessary that: (i) The debt must be such of which the creditor might have enforced payment but for the law for the limitation of suits. (ii) The promisor himself must be liable for the debt. So a promissory note executed by a widow in her personal capacity in payment of time- barred debt of her husband cannot be brought within the exception (Pestonji vs Maherbai28); (iii) There must be an express promise to pay a time barred debt as distinguished from a mere acknowledgement of a liability in respect of a debt. Thus. a debtor s letter to his creditor, I owe you Rs. 1,000 on account of my timebarred promissory note is not a contract. There must be a distinct promise to pay; and (iv) The promise must be in writing and signed by the debtor or his agent. An oral. promise to pay a time-barred debt is unenforceable.

The logic behind this exception is that by lapse of time the debt is not destroyed but only the remedy is lost. The remedy is revived by a new promise under the exception. Illustration. A owes B Rs 1,000, but the debt is barred by the Limitation Act. A signs a written promise to pay BRs 500 on account of the debt. This is Ii contract (Appended to Sec. 25). 4. Completed gift. A gift (which is not an agreement) does not require consideration in order to be valid As between the donor and the done any lift actually made will be valid I and binding even though without consideration [Explanation 1, to Section 25]. In order to attract this excep-tion there need not be natural love and affection or nearness of relationship between the donor and done. The gift must, however, be complete. 5. Contract of agency. Section 185 of the Contract Act lays down that no consideration is necessary to create an agency. 6. Remission by the promisee, of performance of the promise (Sec. 63). For compromising a due debt, i.e., agreeing to accept less than what is due, no consideration is necessary. In other words, a creditor can agree to give up a part of his claim and. there need be no consideration for such an agreement. Similarly, an agreement to extend time for performances of a contract need not be supported by consideration (Sec.63). 7. Contribution to charities. A promise to contribute to charity, though gratuitous, would be enforceable, if on the faith of the promised subscrip-tion, the promisee takes definite steps in furtherance of the object and undertakes a liability, to the extent of liability incurred, not exceeding the promised amount of subscription. In Kedar Nath vs Ghorie Mohammad, the defendant had agreed to subscribe Rs 100 towards the construction of a Town Hall at Howrah. The plaintiff (secretary of the Town Hall) on the faith of the promise entrusted the work to a contractor and undertook liability to pay him. The defendant was held liable. But where the promisee had done nothing on the faith on the promise, a promised subscription is not legally recoverable. Accordingly, in Abdul Aziz vs Masum Ali, the defendant promised to subscribe Rs 500 to a fund started for building, a Mosque but steps had been take to carry out the repairs. The defendant was held not liable and the suit was dismissed. Comment on the following 1. For every valid agreement there should be a consideration 2. A stranger to a consideration can sue 3. Consideration can be past, present and future. Practical Problems Attempt the following problems, giving reasons for your answers:

1. M offered a reward to anyone who would rescue his wife dead or alive from a burning building. A fireman risking his life brought out the wife s dead body. Is he entitled to recovery of the reward? [Hint. Yes. In the instant case the fireman took an extra risk of endangering his life, which does not fall in his normal duties in LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 27

connection with rescue opera-tions. As such the consideration s is not illusory and the fireman is entitled to reward.] 2. A and B are friends. B treats A during A s illness. B does not accept payment from A for the treatment and A promises B s son, X, to pay him Rs 1,000. A being in poor circumstances, is unable to pay. X sues A for the money. Can X recover? [Hint. No, X cannot recover the money from A. The agreement between X and A is not a contract in the absence of consideration. In this case X s father, B, voluntarily treats A during his illness. Apparently it is not a valid consideration because it is voluntary, whereas consideration to be valid must be given at the desire of the promisor-vide Section 2(d). The question now is whether this case is cov-ered by the exception given in Section 25(2) which inter-alia provides: If it is a promise to compensate a person who has already voluntarily done something for the promisor... Thus as per the exception the promise must be to compensate a person who has himself done something for the promisor and not to a person who has done nothing for the promisor. As B s son, X, to whom the promise was made, did nothing for A, so A s promise is not enforceable even under the exception.] 3. X, a social reformer, promised Y a reward of Rs 1,000 if he refrained from smoking for two years does so. Is he entitled to the reward? [Hint. Yes, Y is entitled to the reward from X. In the instant case, Y at the desire of X refrained from smoking for two years. This is a valid consideration in the form of an act of abstinencevide Section 2(d).] 4. A writes to B, at the risk of your own life, you saved me from a serious motor accident. I promise to pay you Rs 1,000. A does not pay. Advise B as to his legal rights. [Hint. B is advised, to file a suit for recovery for Rs 1,000. Under Section 25 (2) of the Contract Act, a promise to compensate for voluntary acts done in the past is valid even though without consideration. As the instant case is fully covered by the above Section, A cannot avoid his liability later on.] 5. For a valid consideration from B, A makes a promise to B to render some service to C. C sues A on the promise. Discuss whether he can succeed? [Hint. C cannot succeed. The general rule of law is that a stranger to a contract cannot sue. ; In the instant case, C is not a party to the contract and therefore he cannot enforce the promise.] 6. X gifted Rs 50,000 to Y his neighbor s wife by executing a registered gift deed without any consideration. There is no near relation between X and Y. Is this gift valid?

Solution: Section to which the given problem relates: Explanation I to Section 25. Decision: The gift is valid. Reason: A completed gift needs no consideration. and need not be a result of natural love and affection or near relation. 7. X promises to make a gift of Rs 50,000 to Y, his neighbors wife. Is this promise valid? Solution: Section to which the given problem relates: Explana tion 1 to Section 25. Decision: A promise to gift is not valid. Reason: This agreement is void for want of consideration and at the same time, there is only a promise to gift and not a completed gift. 8. X who was badly in need of money offered to sell his car worth Rs 1,00,000 to Y for Rs 10,000. Before the car was delivered, X received an offer of Rs 20,000 and refused to carry out the contract on the ground of inadequacy of consideration. Is X liable to Y for damages? Solution: Section to which the given problem relates: Explanation 2 to Section 25. Decision: X is liable to Y for damages. Reason: An agreement to which the consent of the party is freely given is not void merely because the consideration is inadequate. True or False 1. An act constituting consideration must be done by the promisee only. 3. Consideration must result in a benefit to both parties. (False) 2. Consideration must result in a detriment to both parties. (True) 3. Consideration must result in a benefit to the promisor and detriments to promisee.( F) 4. Past consideration is no consideration in India. (F) 5. Consideration must be adequate. (F) 6. An agreement to which the consent of the promisor is freely given is not void merely because the consideration is inadequate. (T) 7. The inadequacy of the consideration may be taken into account by the Court in determining the question whether the consent of the promisor was freely given.( T) 8. Consideration must be something, which a promisor is not already bound to do. (T) 9.

A stranger to consideration can sue. (T) 10. A stranger to a contract cannot sue. (T) 11. In case of trusts, the beneficiary being a stranger to a contract cannot sue. (F) 12. An assignee cannot enforce the contract because he is a stranger to a contract. (F) 13. Nearness of relation by itself does not necessarily import natural love and affection.(T) 14. Natural love and affection by itself does not necessarily in nearness of relation. (T) 15. A promise made without consideration to compensate the person who has already done something voluntarily is valid if it is made in writing. (F) 16. A verbal promise to pay a time barred debt is valid. (F) 17. Completed gifts need no consideration. (T) 18. Completed gifts without consideration are valid only if they are out of natural love and affection, and near relation. -(F) LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 28 11.555

19. A promise to gift to wife is valid. (F) 20. No consideration is required to create an agency.(T) References Kapoor, N.D. (2003), Elements of Mercantile Law, Sultan Chand and Sons, New Delhi. http://www.indialawinfo.com/bareacts/soga.html M.C. Kucchal ( 2002), Business Law , Vikas Publishing House Pvt. Ltd, Delhi. P.C. Tulsian (2002), Pvt. Ltd, Delhi. Business Law , Tata Mc. Graw Hill

Rohini Aggarwal(2003), Student s Guide To Mercantile And Commercial Laws, Tata Mc. Graw Hill Pvt. Ltd, Delhi. Notes: LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 29

LESSON 7 CAPACITY OF PARTIES Learning Outcomes In today s lecture we shall study about capacity of a party to a contract. In particular we shall do today Nature of minor s agreement Effects of minor agreement Persons of unsound mind Other persons incompetent to contract Intoduction Today we will discuss what exactly is meant by competence to enter into a contract According to section 10 an essential ingredient of a valid contract is that the contracting parties must be competent to contract . Section 11 lays down that Every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is of sound mind, and is not disqualified from contracting by any law to which he is subject. Thus the section declares that a person is incompetent to contract under the following circumstances: If he is a minor according to the law to which he is subject, If he is of unsound mind, and If he is disqualified from contracting by any law to which he is subject. Thus minors, persons of unsound mind and persons disqualified by law are incompetent to contract. We shall now discuss them one by one in detail. I. Minor First of all let us understand who is a minor According to section 3 of the Indian majority Act 1875, a person domiciled in India, who is under 18 years of age is a minor. Accordingly every person who has completed the age of 18 years becomes a major. But minors of whose person or property or both a guardian is appointed by a court, and minors of whose property superintendence has been assumed by a court of wards, attain majority at the age of 21 years. However, by an amendment in 1999 in the Indian Majority Act1875, the age of majority is fixed as 18 years for every person (irrespective of the fact of appointment of a guardian.)

Section 11 expressly provides that the age of majority of a person is to be determined according to the law to which he is subject. The courts of law used to decide the age of majority (competency to contract) by the law of domicile and not by the law of the place where the contract is entered into (Kashiba Vs Shripat). But the later trend of law for determining the age of majority is: In the case of contracts relating to ordinary mercantile transactions, the age of majority is to be determined by the law of the place where the contract is made, and In the case of contracts relating to land, the age of majority is to be determined by the law of the place where the land is situated. Thus, where a person aged 18 years, domiciled in India, endorsed certain negotiable instrument in Ceylon, by the laws of which he was a minor, he was held not to be liable as an endorser. Minor s Agreements The law regarding minor s agreements may be summed up as under: An agreement by a minor is absolutely void and inoperative as against him. Law acts as the guardian of minors and protects their rights, because their mental faculties are not mature they don t possess the capacity to judge what is good and what is bad for them. Accordingly, where a minor is charged with obligations and the other contracting party seeks to enforce those obligations against minors, the agreement is deemed as void ab-initio. In the leading case of Mohiri Bibi Vs Dharmo Das Ghosh, a minor executed a mortgage for Rs. 20,000 and received Rs. 8,000 from the mortgage. The mortgage filed a suit for the recovery of his mortgage money and for sale of the property in case of default. The Privy Council held that an agreement by a minor was absolutely void as against him and therefore the mortgagee could not recover the mortgage money nor could he have the minor s property sold under his mortgage. No restitution except in certain cases. A minor cannot be ordered to make compensation for a benefit obtained under a void agreement, because sections 64 and 65 of the contract Act, which deal with restitution, apply only to contracts between competent parties and are not applicable to case where there is not and could not have been any contract at all. The court may, however, in certain cases, while ordering for the cancellation of an instrument, at the instance of a minor, require the minor plaintiff to make compensation to the other party to the instrument. This is so as per section 33 of the Specific Relief Act, 1963 which states as follows: On adjudging the cancellation of an instrument, the court may require the party to whom such relief is granted, to restore, so far as may be, any benefit which he may have received from the other party and to make any compensation to him which justice may require.

Thus, the court will compel restitution by a minor when he is a plaintiff. For example, if a minor sells a house for Rs.50,000 and later on files a suit to set aside the sale on the ground of minority, he may be directed by the court to refund the purchase money received by him before he can recover possession of the LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 31

property sold. It may be emphasized that section 33 of the Specific Relief Act, 1963 is framed so as to afford relief only in a case where the minor himself as plaintiff seeks the assistance of court and the section is inapplicable if he happens to be merely a defendant in a suit by the person who dealt with him when he was a minor. This section is based on the well known principle that he who seeks equity must do equity Beneficial Contracts The meaning of the proposition that an infant is incompetent to contract or that his contract is void is that the law will not enforce any contractual obligation of an infant. The decision in Mohiribibi case is confined to cases is confined to cases where a minor is charged with obligations and the other contracting party seeks to enforce those obligations agreements against him. Accordingly, a minor is allowed to enforce a contract, which is of some benefit to himand under which he is required to bear ni obligation. A minor will have the option of retiring from a beneficial contract on attaining majority. Beneficial agreements are valid contracts. The decision in Mohiribi case as observed earlier, the court protects the rights of minors. Accordingly, any agreement, which is of some benefit to the minor and under which he is required to bear no obligation, is valid. In other works, a minor can be a beneficiary e.g. a payee, an endorsee or a promisee under a contract. Thus money advanced by a minor can be recovered by him by a suit because he can take benefit under a contract. The Hindu Minority and Guardianship Act, 1956, also provides to the same effect, namely, a natural guardian is empowered to enter into a contract on behalf of the minor and the contract would be binding and enforceable if the contract is for the benefit of the minor. Illustrations (a) A duly executed transfer by way of sale or mortgage in favor of a minor, who has paid the whole of the consideration money. The contract is enforceable by him or by any other person on his behalf. (b) Where a minor as a purchaser of immovable property was, subsequent to his purchase, dispossessed by a third party, it was held that the minor could recover from his vendor the sum which he has paid as purchase money. (c) A minor purchaser of immovable property was held entitled to recover possession of property purchased from his vendor, when refused by vendor. (d) A promissory note executed in favor of a minor is valid and can be enforced in a court. (e) Where a minor had performed his part of the agreement and delivered the goods, he was held entitled to maintain a suit for the recovery of their price. (f) A contract for marriage of a minor is also prima facie for hos or her benefit. While a contract of marriage could be

enforced against the other contracting party at the instance of the minor, it can not be enforced against the minor. (g) A lease to a minor is void. (h) A minor can also be supplied with necessaries suited to his conditions in life(e.g. food, lodging, education)and the supplier of such necessaries is entitled to be reimbursed from the property of the minor. Contracts of apprenticeship and service by a minor. A contract of apprenticeship stands on a different footing than an agreement of service by a minor. A contract of apprenticeship is valid and binding upon a minor because such a contract is protected by the Apprentices Act, 1961 provided the case falls within the terms of that act. The act inter alia, provides that the minor must not be less than fourteen years of age and the contract must be entered into on behalf of the minor by his guardian. The act was passed with a view to enabling children to learn trades, crafts and employments, by which, when they come to full age, they may gain a livelihood. So far as an agreement of service by a minor is concerned it is void because a minor s promise to serve would supply no consideration for the promise of the defendant to pay him/her a salary. In that case the court said that the contract of apprenticeship entered into by the guardian is protected by the apprentices act provided the case falls within the terms of that act, but no such exception is made in the case of contracts of service of course, where a minor has already served under a contract of service, he is entitled to enforce the contract not by virtue of the contract but by reason of the relationship resembling those created by the contract under section 70 of the contract Act. No ratification on attaining the age of majority. Ratification means the subsequent adoption and acceptance of an act or agreement. A minor s agreement being a nullity and void abinitio has no existence in the eye of law. It cannot be ratified by the minor on attaining the age of majority, for, an agreement void ab initio cannot be made valid by subsequent ratification. Thus, if an advance is made to a minor during his minority, a promise to pay for such amount after he attains majority would not be enforceable. the consideration which passed under the earlier contract cannot be implied into the contract into which the minor enters on attaining majority . In Arumugam Chetti vs Duraisings Tevar, it was held that there can be no ratification of a transaction which is void owing to the provisory possessing no contractual capacity at the time. Nor can a void deed form a good consideration for a fresh contract made by the m inor on attaining m ajority. Sim ilarly, in Suraj Narain Vs Sukhu Ahir, where a minor borrowed a sum of money by executing a promissory note, and after attaining majority executed a second bond in respect of the original loan, the court held that a suit upon the second bond was not

maintainable as that bond was without consideration. Since ratification relates back to the date when the contract was originally made, it is necessary for a valid ratification that the person who purports to ratify must be competent to contract at the time of the contract. But if services are rendered or an advance is made to a minor during his minority and the services are continued or a further advance is made after he attains majority, a promise to pay for such services or amount as a whole would be valid and enforceable. Let us now discuss the liabilities of a minor under different circumstances LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 32 11.555

No Estoppel Against A Minor The rule of estoppel does not apply to a minor. Section 115 of the Indian Evidence act explains Estoppel as follows: Where one person has, by his declaration, act or omission, intentionally caused or permitted another person to believe a thing to be true and to act upon such belief, neither he nor his representatives shall be allowed, in any suit or proceeding between himself and such person or his representative, to deny the truth of that thing. In the words of Lord Halsbury: Estoppel arises when you are precluded from denying the truth of anything, which you have represented as a fact, although it is not a fact. The rule of estoppels does not apply to a minor i.e. a minor is not a fact. The rule of estoppels Does not apply to a minor i.e. a minor is not stopped from pleading his infancy in order to avoid a contract, even if he has entered into an agreement by falsely representing that he was of full age. In other words, where an infant represents fraudulently or otherwise that he is of full age and thereby induces another to enter into a contract with him them in an action founded on the contract, the infant is not estopped from setting up infancy. But if any thing is traceable in the hands of minor, out of the proceeds of the contract made by fraudulently representing that he was of full age, the court, may direct the minor to restore that thing to the other pary, on equitable considerations, for minors can have no privilege to cheat man .Whenever the infant is still in possession of any property in specie which he has obtained by his fraud, he will be made to restore it to its former owner. But I think that it is incorrect to say that he can be made to repay money which he has spent, merely because he received it under a contract induced by his fraud . Similarly, the infant will be made to restore to the person deceived, any property purchased out of, or money received as a result of, sale proceeds of the goods obtained by his fraud. Thus if a minor obtains a loan by fraudulent representation and purchases a motorcar out of that, although the loan transaction is invalid, the court may direct the minor to restore the motorcar to the lender. But once the identity of the property of money has been lost because it has been spent wastefully, it is no longer possible to invoke the aid of the equitable doctrine of restitution . Again, it may be noted that restoration is allowed only when a minor commits fraud by misrepresenting his age because section 65 expressly prohibits restoration in cases which are known to be void. Minor s Liability for Necessaries. The case of necessaries supplied to minor is governed by section 68 of the contract act which provides that if a person incapable of entering into a contract, or any one 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 such supplies is entitled to be reimbursed from the property of such incapable person.

Illustrations (a) A supplies B, a lunatic, with necessaries suitable to his condition in life. A is entitled to be reimbursed from B s property. (b) A supplies the wife and children of B, a lunatic, with necessaries suitable to their condition in life. A is entitled to be reimbursed from B s property. Thus section 68 confers a quasi-contractual right on the supplier of necessaries to a person incapable of entering into a contract, or to any one whom he is legally bound to support. But a minor is not personally liable, it is his property only which is liable. Therefore. If a minor owns no property, the supplier will lose the price of necessaries. Even where a minor owns property, the supplier will get a reasonable price and not the price agreed to by the minor. Now let us discuss as to what is a necessary article, This is to be determined with reference to the status and circumstances of the particular minor. Objects of mere luxury are not necessaries, nor are objects, which though of real use, are excessively costly. Food and clothing may be taken as simple examples of necessaries. The necessaries would also includes the infant s lodging expense, medical attendance, cost of defending a minor in civil and criminal proceedings. Loans taken by a minor to obtain necessaries also bind him. But where a minor is engaged in trade, contracts entered into by him for trading purposes are not for necessaries and are not binding on him. Specific Performance. Specific performance means the actual carrying out of the contract as agreed. Since an agreement by a minor is absolutely void the court will never direct specific performance of such an agreement by him. But a contract entered into on behalf of a minor, by his guardian or by the manager of his estate, is binding on the minor and can be specifically enforced by or against the minor, provided: (a) The contract is within the authority of the guardian or managers; and (b) It is for the benefit of the minor. Thus it was held in Gujoba Tulasiram vs Nilkanth, that a contract of sale of immovable property by the guardian of minor, for the minor benefit, may be specifically enforced by either party to the contract. Similarly, in Ramalingam vs Babanambal, it was held that a Hindu minor is bound by a contract entered into by his mother as his guardian for sale of his property, however a guardian has no power to bind the minor: (i) by a contract, for the purchase of immovable property (Mir Sarwarjan vs Fakruddin) and (ii) By a Contract of service on his behalf (

Raj Rani vs Prem Adib), and therefore such contracts cannot be specifically enforced by or against the minor. Minor Partner. A minor being incompetent to contract cannot be a partner in a partnership firm, but under section 30 of the Indian partnership act he can be admitted to the benefits of partnership with the consent of all the partners by an agreement executed LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 33

through his lawful guardian with the other partners. Such a minor will have a right to such share if the property or profits of the firm as may be agreed upon and he would have access to and inspect and copy any of the accounts of the firm. The minor cannot participate in the management of the business and shall not share losses except when liability to third parties has arisen but then too up to his share in the partnership assets. He cannot be made personally liable for any obligations of the firm, although he may after attaining majority accept those obligations if he thinks fit to do so. Minor Agent A minor can be an agent. He shall bind the principal by his acts done in the course of such an agency, but he cannot be held personally liable for negligence or breach of duty. Thus in appointing a minor as an agent, the principal runs a great risk. Minor and Insolvency A minor cannot be adjudicated an insolvent, for, he is incapable of contracting debts. Even for necessaries supplied to him, he is not personally liable, only is property is liable Contract by minor and adult jointly. Where a minor and an adult jointly enter into an agreement with another person, the minor has no liability but the contracts as a whole can be enforced the contract against the major vendee. Surety for a Minor When in a contract of guarantee, an adult stands surety for a minor the adult is liable under the contract, although the minor is not (as for three is a direct contract between the surety and the third party). In fact in such a case there cannot be a contract of guarantee in true sense. The Bombay high court considered the question in Manju Mahadeo vs Shivappa Manju, and held that if a minor could not default, the liability of the guarantor being secondary, does not arise at all . Similar decision has been given by Madras High Court in Edvavan Nambiar vs Moolaki Raman. Position of Minor s Parents. The parents of a minor are not liable for agreements made by a minor, whether the agreement is for the purchase of necessaries or not. The parents can be held liable only when the child is contracting as an agent for the parents. Minor Shareholder. A minor, being incompetent to contract, cannot be a shareholder of the company. A company can also refuse to register transfer or transmission of shares in favor of a minor unless the shares are fully paid. It follows from it that a minor, acting through his lawful guardian, may become a shareholder of the company, in case of transfer or transmission of fully paid shares to him. Logically also, if a minor could legally hold property in his name, it would be wrong to debar him from holding fully

paid up shares in his own name. Minor s Liability in Tort. First of all let me tell you what is a tort? A tort is a civil wrong (not having its genesis in contractual or equitable relationship) for which the ordinary remedy is damages. A minor is liable for his tort, unless the tort is in reality a breach of contract. Thus where a minor hired a horse for riding and injured it by overriding, he was not held liable. The court observed in that case, if an infant in the course of doing what he is entitled to do under the contract is guilty of negligence, he cannot be made liable in tort if he is not liable on the contract. But if the wrongful action is of a kind not contemplated by the contract, the minor may be held liable for tort. Thus, where a minor hired a horse for riding under express instructions not to jump, he was held liable when he lent the horse to one of his friends who jumped it, whereby it was held liable when he lent the horse to one of his friends who jumped it, whereby it was injured and ultimately died. The court observed, it was a bare trespass, not within the object and purpose of the hiring, for which the defendant was liable II. Persons of Unsound Mind As stated earlier, as per section 11 of the contract Act for a valid contract, it is necessary that each party to it must have a sound mind. What is a sound mind ? Section 12 of the contract act defines the term sound mind as follows: A person is said to be of sound mind for the purpose of making a contract, if at the time when he makes it, he is capable of understanding it and of forming a rational judgment as to its effects upon his interests. According to this section, therefore, the person entering into the contract must be a person who understands what he is doing and is able to form a rational judgment as to whether what he is about to so is to his interest or not. The section further states that: A person who is usually of unsound mind, but occasionally of sound mind, may make a contract when he is of sound mind. Thus a patient in a lunatic asylum, who is at intervals of sound mind, may contract during those intervals. A person who is usually of sound mind, but occasionally of unsound mind, may not make a contract when he is of unsound mind. Thus, a sane man, who is delirious from fever, or who is so drunk that he cannot understand the terms of a contract, or from a rational judgment as to its effect on his interest, cannot contract whilst such delirium or drunkenness lasts. In Halsbury s Lawa of England, it is stated: The general theory of the law in regard to acts done, contracts made by parties affecting their rights and interests, is that in all cases there must be a free and full consent to bind the parties, consent is an act

of reason accompanied by deliberate consent that the conveyance and contracts of unsound mind are generally deemed to be invalid; or in other works, (subject to exceptions), there cannot be a contract by a person of unsound mind. Unsoundness of mind may arise from: (a) Idiocy it is god given and permanent, with no intervals of saneness. The mental powers of an idiot are completely absent because of lack of development of the brain; (b) Lunacy or Insanity it is a disease of the brain. A lunatic loses the use of his reason due to some metal strain or disease. Of course he may have lucid intervals of sanity; LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 34 11.555

(c) Drunkenness it produces temporary incapacity, till the drunkard is under the effect of intoxication, provided it is so excessive as to suspend the reason for a time and create impotence of mind; (d) Hypnotism it also produces temporary incapacity, till the person is under the impact of artificially induced sleep; (e) Mental decay on account of old age, etc. In case where the contract is sought to be avoided on any of the above grounds, the burden of proof lies on the party who sets up such a disability; but if unsoundness of mind is once established, the burden of providing a lucid interval is on him, who sets it up (Mohanlal vs Vinayak). Effects of agreements made by persons of unsound mind. An agreement entered into by a person of unsound mind is treated on the same footing as that of minor s, and therefore an agreement by a person of unsound mind is absolutely void and inoperative as against him but he can derive benefit under it(Jugal Kishore vs Cheddu). The property of a person of unsound mind is however, always liable for necessaries supplied to him or to any one whom he is legally bound to support under section68 of the act. III . Disqualified Persons The third type of incompetent persons, as per section 11, are those who are disqualified from contracting by any law to which they are subject. Who are disqualified Persons Alien enemies. An alien (citizen of a foreign country) living in India can enter into contracts with citizens of India during peace time only, and that too subject to any restrictions imposed by the government in that respect. On the declaration of a war between his country and India, he becomes an alien enemy and cannot enter into contracts. Alien friend can contract but an alien enemy can t contract. Contracts entered into before the declaration of the war stand suspended and cannot be performed during the course of war, of course, they can be revived after the war is over provided they have not already become time- barred. Foreign sovereigns and ambassadors. One has to be cautious while entering into contracts with foreign sovereigns and ambassadors, because whereas they can sue others to enforce the contracts entered upon with them, they cannot be sued without obtaining the prior sanction of the central Government. Thus they are in a privileged position and are ordinarily considered incompetent to contract. Convict. A convict is one who is found guilty and is imprisoned. During the period of imprisonment, a convict is incompetent (a) to enter into contracts, and (b) to sue on contracts made before conviction. On the expiry of the sentence, he is at liberty to institute a suit and the law of limitation is held in abeyance during the period of his sentence. Married women. Married women are competent to enter into

contracts with respect to their separate properties provided they are major and are of sound mind. They cannot enter into contracts with respect to their husbamds properties. A married woman can, however, act as an agent of her husband and bind her husband s property for necessaries supplied to her, if he fails to provide her with these. Insolvent. An adjudged insolvent (before an order of discharge ) is competent to enter into certain types of contracts i.e. he can incur debts, purchase property or be an employee but he cannot sell his property which vests in the official receiver. Before discharge he also suffers from certain disqualifications e.g. can t be a magistrate or a director of company or a member of local body but he has the contractual capacity except with respect to his property. After the order of discharge, he is just like an ordinary citizen. Joint-stock company and corporation incorporated under a special act. A company/ corporation is an artificial person created by law. It cannot enter into contracts outside the power conferred upon it by its memorandum of association or by the provisions of its special act, as the case may be. Again being an artificial person(and not a natural person) it cannot enter into contracts of a strictly personal nature e.g. marriage. Practical Problems Attempt the following problems, giving reasons for your answers: 1. A, an infant, obtains a loan from B. Can A be asked to repay the money? [Hint. No, A cannot be asked to repay the money. A minor s agreement is void ab-initio as against him 2. A, a minor lends Rs. 1000 against a promissory note executed in his favor. Is the borrower liable to repay the money? 3. A minor fraudulently represented to a money lender that he was of full age, and obtained a loan of Rs. 500. has the money lender any right of action against the minor for the money lent, or for damages for fraudulent misrepresentation? 4. A, an infant, borrows Rs 2000 form B and executes a promissory note for the amount in favor of B. on his attaining majority, the minor executes another promissory note in lieu of the first which is then cancelled. Is the second promissory note valid? 5. X, a guardian, on behalf of Y, a minor, entered into a contract with Z for the purchase of a movable property for the benefit of the minor. Is the contract valid? Solution: Section to which the given problem relates: Section 10

and Section 11. Decision: This contract is valid provided this contract is within the scope of the authority of guardian. Reason: This contract is for the benefit of minor. [Leading case: Subramanayan v. Subba Rao] 6. X, a minor entered into contract with Y to supply food and clothes to his dependents. Y supplied the same but X refused to pay for the same. Can Y recover anything? Solution: Section to which the given problem relates: Section 68. Decision: Y is entitled to be reimbursed from the property of such minor. LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 35

Reason: A person who has supplied the necessaries to a minor or those who are dependents on him is entitled to be reimbursed from the property of such minor. 7. X, a guardian, on behalf of Y, her minor daughter, entered into a contract with Z whereby Z promised to marry her. Later on Z refused to marry. Can Y sue Z for damages? Solution: Sections to which the given problem relates: Sections 10 and 11. Decision: Y can sue Z for damages. Reason: This contract was for the benefit of minor and a minor can be promisee. [Leading case: Mohari Bibee v. Dharmodas Ghosh] References Kapoor, N.D. (2003), Elements of Mercantile Law, Sultan Chand and Sons, New Delhi. http://www.indialawinfo.com/bareacts/soga.html M.C. Kucchal ( 2002), Business Law , Vikas Publishing House Pvt. Ltd, Delhi. P.C. Tulsian (2002), Pvt. Ltd, Delhi. Business Law , Tata Mc. Graw Hill

Rohini Aggarwal(2003), Student s Guide To Mercantile And Commercial Laws, Tata Mc. Graw Hill Pvt. Ltd, Delhi. Notes: LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 36 11.555

LESSON 8: FREE CONSENT Learning Outcomes After today s class you should be able to answer the following questions: The meaning of consent The various factors vitiating consent Introduction In today s lecture we shall study about another essential element of a contract that is free consent. It has already been pointed out in the earlier lecture that, according to Section 10 free consent of all the parties to an agreement is one of the essential elements of a valid contract. But students do you know what is meant by consent? Consent Defined

Section 13 of the Contract Act defines the term consent and lays down that Two or more persons are said to consent when they agree upon the same thing in the same sense. Thus, consent involves identity of minds or consensus ad-idem i.e., agreeing upon the same thing in the same sense. If, for whatever reason, there is no consensus ad item among the contracting parties, there is no real consent and hence no valid contract. Now we come to free consent Free Consent defined. Section 14 lays down that Consent is said to be free when it is not caused by 1. Coercion, as defined in Section 15, or 2. Undue influence as defined in Section 16, or 3. Misrepresentation as defined in Section 18, or 4. Fraud, as defined in Section 17, or 5. Mistake, subject to the provisions of Section, 20, 21 and 22. Henceforth the various factors which vitiate consent are Coercion, Undue influence

Misrepresentation Fraud Mistake Consent is said to be so caused when it would not have been given but for the existence of such coercion, undue influence, misrepresentation, fraud or mistake (Sec. 14). This means that in order to bring a case within this Section, the party, who alleges that his consent has been caused by any of the above elements which vitiate consent, must show that, but for the vitiating circumstance the agreement would not have been entered into. To put it differently, in order to prove that his consent is not free , the complainant must prove that if he had known the truth, or had not been forced to agree, must prove that if he had known the truth, or had not been forced to agree, he would not have entered into the contract. In the absence of free consent , the contract may turn out to be either voidable or void depending upon the nature of the flaw in consent to an agreement is caused by coercion, undue influence, misrepresentation or fraud, there is no free consent and the contract is voidable at the option of the party whose consent was so caused (Sec. 19 and 19A). But when consent is caused by bilateral mistake as to a matter of fact essential to the agreement, the agreement is void (Sec. 20). In such a case there is no consent at all. The various causes leading to flaw in consent discussed one by one in detail. Coercion Let us first define coersion Definition Section 15 of the Contract Act defines Coercion as follows: will now be

Coercion is the committing or threatening to commit, any act forbidden, any property, to the prejudice of any person whatever, with the intention of causing any person to enter into an agreement. The Explanation to the Section further adds that it is immaterial whether the Indian Penal Code is or is not in force in the place where the coercion is employed, Illustrations (i) A Madrasi gentleman died leaving a young widow. The relatives of the deceased threatened the widow to adopt a boy otherwise they would not allow her to remove the dead body of her husband for cremation. The widow adopted the boy and subsequently applied for cancellation of the adoption. If was held that her consent was not free but induced by coercion, as any person who obstructed a

dead body from being removed for cremation, would be guilty of an offence under Section 297 of the I.P.C. The adoption was set aside (Ranganayakamma vs Alwar Setti). (ii) L threatens to shoot M. if he does not let out his house to him . M agrees to let out his house to L. The consent of M has been induced by coercion. (iii) An agent refused to hand over the account books of the business to the new agent sent in his place, unless the principal released him from all liabilities. The principal had to give a release deed as demanded. Held, that the release deed was voidable at the instance of the Principal who was made to execute the release deed under coercion ( Muthia vs Karuppan). (iv) The Government gave a threat of attachment against the property of A, for the recovery of a fine due from B, the son of A. A, paid the fine. Held, The payment of fine was LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 37

induced by coercion and therefore A was entitled to recover the money paid to remove wrongful attachment (Bansraj vs The Secy of State). 2. The act constituting coercion, may be directed at any person, and not necessarily at the other party to the agreement. Likewise it may proceed even from a stranger to the contract. Illustrations (a) A. threatens to shoot B, a friend of C if C does not let out his house to him. C agrees to do so. The agreement has been brought about by coercion. (b) A. threatens to shoot B if he does not let out his house to C. B agrees to let out his house to C. B s consent has been caused by coercion. 3. It does not matter whether the Indian Penal Code is or is not in force in the place where the coercion is employed . If the suit is filed in India, the above provision ( i.e. Sec. 15) will apply. Illustration (Appended to Sec. 15) A, on board an English ship on the high seas, causes B to enter into an-agreement by an act amounting to criminal intimidation under the Indian Penal Code. A, afterwards sues B for breach of con-tract, at Calcutta. A, has employed coercion, if though his act not an offence by the law of England and although Section 506 of the Indian Penal Code was not in force, at the time or place where, the act, was done. Threat to file a suit. To threaten a criminal or civil prosecution does not constitute coercion because it is not an act forbidden by the Indian Penal Code. But a threat to file a suit of a false charge constitutes coercion, for such an act is forbidden by the I.P.C. (Askari Mirza vs Bibi Jai Kishori) Threat to commit suicide. Neither suicide nor threat to commit suicide is punishable under the Indian Penal Code: Only an attempt to commit suicide is punishable under it. In Chikkam Ammiraju vs Chikkam Seshamma, there arose a question as to whether a threat to commit suicide amounts to coercion, and the Lordships of the Madras High Court answered the question in the affirmative holding that this amounts to coercion. In that case a person, by a threat to commit suicide, induced his wife and son to execute a lease deed, in favor of his brother in respect of certain properties which they claimed as their own. The transaction was set aside on the grounds of coercion. It was stated by the majority footings that though a threat to commit suicide was not punishable under the Indian Penal Code, it must be deemed to be forbidden by that Code as an attempt to commit suicide was punishable under section 09 of that Code. Their Leadership observed The term any act forbidden by the Indian Penal Code is wider than the term punishable by the Indian Penal Code. . S iinp1y because a _an episcopes punishment, it does not follow that the act , is not forbidden by the Penal code. For-example, a lunatic or a minor.

May not be punished. This does not show that their criminal acts are not forbidden by the Penal Code. Duress. The term duress is used in English Law to denote illegal imprisonment or either actual or threatened violence over the person ( body) of another party of his wife or children with a view to obtain the consent of that party to the agreement. In short, for duress the act ,or threat must be aimed at the life or liberty of the other patty to the contract or the members of his family: A threat to destroy or detain property will not amount to duress. Thus the scope of the term coercion, as defined in Section 15, is wider, because it includes threats over property also. Effect of Coercion A contract brought about by coercion is voidable at the option. of the party whose consent was so caused (Sec. 19). This means that the aggrieved party shall either exercise the option to affirm the transaction and hold the other party bound by it, or repudiate the transaction by exercising a right of rescission. As per Section 64, if the aggrieved party opts to rescind a voidable contract, he must restore any benefit received by him under the contract to the other party from whom received. The burden of proof that coercion was used lies on the party who wants to set aside the contract on the plea of coercion. The second factor vitiating consent is Undue Influence Definition Section 16(1) defines the term Undue influence as follows: A contract is said to be induced by undue influence where, (i) the relations subsisting between the. parties are such that one of the parties is in a position to obtain an unfair advantage over the other. The phrase in a position to dominate the will of the other is clarified by the same section under sub-section (2), thus: Under section 16(2) -A person is deemed to be in a position to dominate the will of another( a) Where he holds a real or apparent authority over the other, e.g., the relationship between master and the servant, police officer and the accused; or (b) Where he stands in a fiduciary relation to the other. Fiduciary, relation means a relation of mutual trust and confidence. Such a relationship is supposed to exist in the following cases; father and son, guardian and ward, solicitor and client, doctor and patient, Guru (spiritual adviser).and disciple, trustee and beneficiary, etc: or (c) Where he makes a contract with a person whose mental capacity of is temporarily or penitently affected by reason of age, illness, or mental or bodily distress, e.g., old

illiterate persons. It is to be observed that for proving the use of undue-influence both the elements mentioned above, namely, (i) the other party was in a position to dominate, his will, and (ii) the transaction was an unfair one, must be established. Presumption of Undue Influence Undue influence is presumed to exist under the circumstances men-tioned above in sub-clauses (a), (b) and (c). In other words, for example, where the relationship between the contracting parties is that of master and servant, father and son, doctor and patient, solicitor and client, etc., or where one of the LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 38 11.555

parties to the contract is an old illiterate person, there is no need of proving the use of undue influence by the party whose consent was so caused. Merely status of parties is enough to weave the existence of undue influence in these cases. Presumption of undue influence is also there, in case of a contract by or with a pardanashin woman. There is, however, no presumption of undue influence in the following cases: (i) Husband and wife (In case of persons engaged to marry, the pre-sumption of undue influence will arise) (ii) Mother and daughter (iii) Grandson and grandfather. (iv) Landlord and tenant. (v) Creditor and debtor. In these cases, undue influence shall have to be proved by the party alleging that undue influence existed. Burden of proof and rebutting the presumption. In cases where there is a presumption of undue influence the burden of proving that the person who was in a position to dominate the will of another, did not use his position to obtain an unfair advantage, will lie upon the person who was in a position to dominate the will of the other [Sec.16(3)]. He can rebut or oppose the presumption (i) That disclosure of facts was made, (ii) That the price was adequate, (iii) That the other party was in receipt of competent independent advice and his consent was free Let us study some illustrations in this repect Illustrations (a) A, having advanced money to his son B. obtains, by misuse of parental influence, a bond from B for a greater amount than the sum due in respect of the advance. A employs undue influence. As undue influence is pre-sumed to exist if the relationship between contracting parties is that of father and son, the burden of proof lies on A, the father. It will be for A to prove that he did not employ undue influence, of a suit by B alleging undue influence. (b) A,on 1st Jan enfeebled by disease or age, is induced, by B s influence over him as his medical attendant, to agree to pay B an unreasonable sum for his professional services. B employs undue influence. On a petition by A alleging undue influence, it lies on B, the doctor, to prove that the contract was not induced by undue influ-ence. (c) An old illiterate woman made a gift of almost the whole

of her property to her nephew, who was managing her estate. On a petition by the old lady for setting aside the gift deed on the ground of undue Influence, the onus has on the nephew to prove that the transaction is bona fide, well understood and free from undue influence, because undue influence is presumed in such a case. Effect of Undue Influence When consent to an agreement is caused by undue influence, the agreement is a contract voidable at the option of the. party whose consent was so caused. Any such contract may be set aside either absolutely or, if the party who was entitled to avoid it has received any benefit there under, upon such terms and conditions as the court may seem just. (Sec. 19-A) Illustrations (Appended to Sec. 19-A). (a) A s son has forged B s name to a promissory note. B, under threat of prosecuting A s son, obtains a bond from A for the amount of the forged note. If B sues on this bond, the Court may set the bond aside. (b) A, a money lender, advances Rsl00 to B. an agriculturist, and by undue influence, induces B to execute a bond for Rs200 with interest at 6 percent per month. The Court may set the bond aside, ordering B to repay the Rs100 with such interest as may seem just. Thus, it will be noticed that Section 19-A also declares a contract brought about by undue influence vojdable at the option of the aggrieved party, just as section 19 so declares. In case of a contract brought about by coercion, misrepresentation or fraud, the special feature of Section 19, is that while in the case of rescission of a contract procured by coercion, misrepresentation or fraud, any benefit received by the aggrieved party has to be restored under Section 64 of the Contract Act; under Section19A, if a contract procured by undue influence is set aside, the Court has discretion to direct the aggrieved party for refunding the benefit whether in whole or in part or set aside the contract without any direction for refund of benefit. The following points must also be noted in this, connection: (i) Lack of judgment, lack of knowledge of facts or absence of foresight are generally not by themselves sufficient reasons for setting aside a contract on the ground of undue influence. Persuasion and argument are also not in themselves undue influence. Undue influence implies mental and moral coercion so as to make the consent of one of the parties to the contract without freedom. (ii) Undue influence by a person, who is not a party to the contract, may make the contract voidable in other words, it is not necessary that the person in a position to dominate the will of the other party use himself be benefited. It is sufficient If the third person m whom he is interested is benefited (Chirmamma vs Devenga Sangha). Unconscionable Transactions

Unfair or unreasonable bargains belong to the category of unconscionable transactions. These are such transactions where as between two con-tracting parties, one is in a dominant position and makes an exorbitant profit of the others distress High rate of interest. Unconscionable bargains take place mostly in money lending transactions where moneylenders charge high rates of interest from needy borrower. The presumption of undue influence on the ground of high rate of interest is raised only when the following two things are proved: 1. That the moneylender was in a position to dominate the will of the borrower, and 2. That the bargain is unreasonable i.e., rate of interest is excessive without any valid reason. LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 39

In such cases the law presumes that consent must have been obtained by undue influence and the burden of proving that there was no undue influence lies on the creditor. It must be noted that both the above conditions must be proved for giving rise to a presumption of undue influence. There will be no presumption of undue influence and a transaction will not be set aside on ground of undue influence, merely because the rate of interest is high if both the parties are, on equal footing (i.e. none of the parties is in a position to dominate the, will of the other party) or if there exists valid reason (like tight market conditions) for charging high rate of interest Illustrations (a) A being in debt ,to B, the moneylender of his village, contract a fresh loan on terms which appear to be unconscionable. It .lies on B to prove that the contract was not induced by undue influence [Illustration (c) to Section 16]. (b) A poor Hindu widow borrowed Rs 1,500 ;from a moneylender at 100 per cent per annum rate of interest for the purpose of enabling her to establish her right to maintenance. It lies on the moneylender to prove that there was no undue influ-ence (Rannee Annapurni vs Swaminatha). (c) A, applied to a banker for a loan at the time when there is stringency in the money market. The banker declines to make the loan except at an unusually high, rate of interest. A, accepts the loan on these terms. This is a transaction in the ordinary course of business, and the contract is not induced by undue influence [Illustration (d) to Section 16]. Pardanashin Woman As observed earlier, there is a presumption of undue influence in case of a contract by or with a pardanashin woman . She can avoid any contract entered .by her on the plea of undue influence and it is for the other party to prove that no undue influence was used. For proving the absence of undue influence, the other party will have to satisfy the Court (i) that the terms of the contract were fully explained to her, (ii) that she understood their implications, and was free to have independent advice in the matter, and (iii) that she freely consented to the contract. It may be noted that the term pardanashin here refers to a woman who observes complete seclusion (parda) from contact with people outside her own family, because of the custom of her community, and one does not become pardanashin simply because she lives in some degree of seclusion Shaik Ismail vs Amir Bibi Further note that the protection ranted to ardent in woman is so extended to illiterate and ignorant ladies, who are equally exposed to the danger and risk of an unfair deal (Sonia Parshini vs ,S.M. Baksha). Distinction between Coercion and Undue 1n.i1uence Both, coercion and undue influence, vitiate consent and make

the consent of one of the parties to the contract unfree. following are the points of distinction between the two: 1. In coercion, the consent of the aggrieved party is obtained by committing or threatening to commit an act forbidden by Indian Penal Code or detaining or threatening to detain some property unlawfully. While in undue influence, the consent of the aggrieved party is affected from the domination of the will of one person over another.

But the

2. Coercion is mainly of a physical character involving mostly use of physical or violent force. Whereas undue influence is of moral character involving use of moral force or mental pressure. 3. There is no presumption of coercion by law under any circumstance. The burden of proof that coercion was used lies on the party whose consent was so caused. In the case of undue-influence, however, there is presumption as to the same in the case of certain relationships. In these cases there is no need of proving the use of undue-influence by the party whose consent was so caused. 4. While in the case of rescission of a contract procured by coercion, any benefit received by the aggrieved party has to be restored under Section 64, of the Contract Act; in the case of rescission of a contract procured by I undue influence, as per Section 19-A, the, Court has discretion to direct the aggrieved party for restoring the benefit whether in whole or in part or set aside the contract with any direction for refund of benefit. 5. The party exercising coercion exposes himself to criminal liability under the Indian Penal Code, besides an action on contract. There is no criminal liability case of undueinfluence. Misrepresentation A representation means statement of fact made by one party to the other, either before or at the time of contract, relating to some matter, essential to the formation of the contract, with an intention to induce the other party to enter into the contract. It may be expressed by words spoken or written or implied from the acts or conducts of the parties (e.g., by any half statement of truth). A representation when wrongly made, either innocently or indecently , is termed as a mi-representation. To put in differently, misrepresent- may be either innocent or intentional or deliberate with an intent to deceive the other party. In law, for the former kind, the term misrepresen-tation and for the latter the term fraud is used. Definition According to Section 18 Misrepresentation means and

includes: (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; or (b) Any breach of duty which, without an intent to deceive, gains an advantage to the person committing it, or anyone Claiming under-him, by misleading another to the prejudice or to the prejudice of any one claiming under him; or (c) Causing, however innocently, a party to an agreement, to make a mistake as to the substance of the thing which is the subject of the agreement. LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 40 11.555

Thus, as per Section 18, there is misrepresentation in the following three cases: (a) Positive assertion of unwarranted statements of material facts believing them to be true. If a person makes an explicit statement of fact not warranted by his information (i.e., without any reasonable ground), under an honest belief as to its truth though it is not true, there is misrepresentation. Illustration. A says to B who intends to purchase his land, My land produces 10 quintals of wheat per acre. A, believes the statement to be true, although he did not have sufficient grounds for the belief later on, it transpires! that the land produces only 7 quintals of wheat, per are. This is a misrepresentation. It may be noted that a mere expression of opinion or words of commen-dation for example in a sale of land a mere general statement that the land is fertile, cannot be held to amount to a positive assertion. (b) Breach of duty which brings an advantage to the person committing it by misleading the other to his prejudice. This clause comes those cases where a statement when made was true but subsequently before it was acted upon, it became false to the knowledge of the person making it. In such a case, the person making the statement comes under an obligation to disclose the change in circumstances to the other party, Otherwise he will be guilty of misrepresentation. Illustration A before signing a contract with B for the sale of business, correctly states that the monthly sales are Rs. 50,000. Negotiations lasted for five months, when the contract of sale was signed. During this period the sales dwindled to Rs.5,000 a month. A, unintentionally keeps quite. It was held that there was misrepresentation and B was entitled to rescind the contract ( With vs O Flanagan). Note, that a partial non-disclosure may also constitute a misrepresen-tation, for instance, where a vendor of land told a purchaser that all the farms on the land were fully let, but inadvertently omitted to inform him that the tenants had given notice to quit, he was held guilty of misrepresen-tation (Dimmock vs Hallett). . (c) Causing mistake about subject-matter innocently If one of the parties induces the other, though innocently, to commit a mistake as to the quality or nature of the thing bargained, there is misrepresentation. Illustration. in a contract of sale of 500 bags of wheat , the seller made a representation that no sulphur has been used in the cultivation of wheat. Sulphur, however, had been used in 5 out of 200 acres of land. The buyer would not have purchased the wheat but for the representation. There is a misrepresentation.

Let us now understand the essentials of misrepresentation Essentials of misrepresentation. From the foregoing discussion, It follows that for alleging misrepresentation, the following four things are nec-essary (i) There should be a representation; made innocently, with an honest belief as to its truth and without any desire to deceive the other party, either expressly or impliedly. (ii) The representation must relate to facts material to the contract and not to mere opinion or hearsay (iii) The representation must be, or must have become untrue (iv) The representation must have been instrumental in inducing the other party to enter into a contract (As per the Explanation to Section 19). Effects of Misrepresentation In case of misrepresentation, the aggrieved party has two alternative courses open to him (i) He can rescind the contract, treating the contract as voidable; or (ii) He may affirm the contract and insist that he shall be put in the position in which he would have been; if the represen-tation made had been true (Sec. 19). Misrepresentation does not entitle the aggrieved party to claim damages by way of interest or otherwise for expenses occurred. Illustration A, innocently in good faith tells B that his T.V. set is made in Japan. B. thereupon buys the T.V. set. However, it comes out to be an Indian make. A. is guilty of misrepresentation. B. may either avoid the contract or may insist on its being carried out. In the latter case, B may either ask for replacing the set by a Japanese make set or may keep the Indian make set and claim the difference in price between that set and a Japanese make set. Exception. The above remedy is lost, if the party whose consent was caused by misrepresentation, had the means of discovering the truth with ordinary diligence. Illustration A. by a misrepresentation, leads B erroneously to believe that 500 maunds of indigo are made annually at A s factory. B examines the accounts of the factory, which show that only 400 maunds of indigo have been made. After this B buys the factory. The contract is not voidable on account ofA s misrepresen-tation (Illustration ( b) to Section 19]. Fraud The term fraud includes all acts committed by a person with an intention to deceive another person.

Definition According to Section 17, fraud means and includes any of the following acts committed by a party to a contract, or with his connivance, or by his agent,. with intent to deceive or to induce another party thereto or his agent, to enter into the contract: 1. The suggestion that an act is true when it is not true by one who does not believe it to be true. Thus a false statement intentionally made is fraud. An absence of honest belief in the truth of the statement made is essential to constitute fraud. If a representor honestly believes his statement to be true, he cannot be liable in deceit no matter how ill-advised, stupid, or even negligent he may have been. In order to be called fraudulent representation the false statement must be made intentionally. Lord Herschell gave the definition of fraud in LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 41

Derry vs Peep as, a false statement made knowingly or without belief in its truth, or recklessly careless whether it be true or false. 2. The active concealment of a fact by a person who has knowledge or belief of the act. Active concealment of a material fact is taken as much and as if the existence of such fact was expressly denied or the reverse of it expressly stated. Mere nondisclosure is not fraud, where there is no duty to disclose. Caveat Emptor or Buyer Beware is the principle in all contracts of sale of goods. As a rule the seller is not bound to disclose to the buyer the faults in the goods he is selling. Illustrations (a) A, a horse dealer sells a mare to B. A knows that the mare has a cracked hoof which he fills up in such a way as to defy detection or on enquiry from B, A affirms that the mare is sound. The defect is subsequently dis-covered by B. There is fraud on the part of A and the agreement can be avoided by B as his consent has been obtained by. fraud. (b) A, sells by auction, to B a horse, which he knows to be unsound. A says nothing to B about the horse s unsoundness. This is not fraud because A is under no duty to disclose the fact to B. the general rule of law being let the buyer beware [Illustration (a) to Section 17]. 3. A promise made without any intention of performing it. If a man while entering into a contract has no intention to person his promise, there is fraud on his part. Illustrations (a) X purchases certain goods from Y on credit without any intention of paying for them as he was in insolvent circumstances. It is a clear case of fraud from X s side. Note that mere failure to pay, where there was no original dishonest intention, is not fraud. (b) Where a man and a woman went throug a ceremony of marriage without any intention on the part of the husband to regard it as a real marriage, it was held that the consent of the wife was obtained by fraud and that the marriage was mere pretence. (Shireenl vs John J J. Taylor). 4. Any other act fitted to deceive. the fertility of man s invention in devising new schemes of fraud is so great that it would be difficult, if not impossible, to confine fraud within the limits of any exhaustive definition. All surprise, trick, cunning, dissembling and other unfair way that is used to cheat anyone is considered fraud and sub-section (4) is obviously intended to cover all those cases of fraud which cannot appropriately be covered by the other subsections. 5. Any such act or omission as the law specially declares to be fraudulent. This sub-section refers to the provisions in certain Acts which make it obligatory to disclose relevant facts. Thus, for instance under Section 55 of the Transfer of Property Act, the seller of immovable property is

bound to disclose to the buyer all material defects in the property (e.g., the roof has a crack) or in the seller s title (e.g., the property is mortgaged). An omission to make such a disclosure amounts to fraud. Thus, in order to allege fraud, the act complained of must be brought within the scope of the acts enumerated above. A mere expression of opinion or commendatory express is not fraud. The land is very fertile is simply a statement of opinion or fur products are the best in the market is merely a commendatory expression. Such statements do not ordinarily amount to fraud. Can Silence be Fraudulent? The Explanation to Section 17 deals with cases as to when silence is fraudulent or what is sometimes called constructive fraud, The-explanation declares that mere silence as to facts likely to affect the willingness of a person to enter into a contract is not fraud, unless (i) The circumstances of the case are such that, regard being had to them, it is the duty of the person keeping silence to speak, or (ii) Silence is, in itself, equivalent to speech. It therefore follows that 1. As a rule mere silence is not fraud because there is no duty cast by law on a party to a contract to make a disclosure to the other party, of material facts within his knowledge. Illustration A and B, being traders, enter upon a contract. A has private information of a change in prices which would affect B s willingness to proceed with the contract. A is not bound to inform B [Illustration (d) to Section 17]. 2. Silence is fraudulent, if the circumstances of the case are such that it is the duty of the person keeping silence to speak . In other words, silence is fraudulent in contract of utmost good faith i.e contracts unberrimae fides . These are contracts in which the law imposes a duty of abundant disclosure on one of the parties thereto, due to peculiar relationship of the parties or due to the fact that one of the parties has peculiar means of knowledge which are not accessible to the other. The following contract come within the class of unberrimae fides contracts; (a) Fiduciary relationship. When the parties stand in a fiduciary rela-tion to each other, the person in whom confidence is reposed is under a duty to act with utmost good faith and to make a full disclosure of all material facts concerning the transaction known to him. Examples of a fiduciary relationship include those of principal and agent, solicitor and client, guardian and ward, and trustee and beneficiary. Illustrations (i) Where a broker who was employed to buy shares for the client, sold his own shares to the client, without disclosing

this fact to him and without obtaining his consent therefore, it was held that the sale can be avoided by the client (Regier vs Campbell-Stuart). (ii) Where solicitor purchased certain property from his client nominally for his brother, but really for himself; it was held that the sale can be avoided by the client, even if the transaction was perfectly proper one (Macpherson vs Watt). (b) Contract of insurance-In contracts of marine, fire and life insurance, the insurer contracts on the basis that all material facts have been communicated to him; and it is an implied LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 42 11.555

condition of the contract that full disclosure shall be made, and that if there has been non: disclosure he shall be entitled to avoid the contract. The assured, therefore must disclose to the insurer all material facts concerning the risk to be undertaken e.g., disease etc., in case of life insurance. A concealment or misstatement of a material fact will render the contract void (Ratan Lal vs Metropolitan Co.). (c) Contract of marriage engagement . Every material fact must be disclosed by to parties to a contract of marriage otherwise the other party is justified in breaking off the engagement (Haji Ahmed vs Abdul Ganj). (d) Contracts of family settlements. Contracts of family settlements and arrangements also require full disclosure of all material facts within the knowledge of the parties to such contracts. Such a contract is not binding if either party has been misled by the concealment of material facts. (e) Share allotment contract: Promoters and directors, who issue the prospectus of a company to invite the public to subscribe for shares and debentures, possess information which is not available to general public and as such they are required to. disclose all information regarding the company with strict and scrupulous accuracy. 3. Silence is fraudulent where the circumstances are such that silence is, in itself, equivalent to speech. Where, for example, B says to A- If you do not deny it, I shall assume hat the horse is sound. A says nothing. Hence A s silence is equivalent to speech. If the horse is unsound A s silence is fraudulent [Illustration to Section 17]. Effect of Fraud A party who has been induced to enter into a contract by fraud, has the following remedies open to him: 1. He can rescind the contract i.e he can avoid the performance of the contract; contract being voidable at his option (Sec. 19); ,or 2. He can ask for restitution and insist that the contract shall be per-formed, and that he shall be put in the position in which he would have been, if the representation made had been true (Sec. 19). Illustration A, fraudulently informs B that A s estate is free from en-cumbrance. B thereupon buys the estate. The estate is subject to a mortgage. B may either avoid the contract, or may insist on its being carried out and the, mortgage debt of deemed. [Illustration (c)to Section 19]. The aggrieved party can also sue for demand if any. Fraud is a civil wrong hence compensation is payable. For instance, if the party suffers injury because of unsound horse, which was not disclosed despite enquiry, compensation can be demanded. Similarly, where a man was fraudulently induced to buy a house, he was allowed to recover the expense involved in moving into the house as damages (in addition to rescission. of the contract)

[Doyle vs Olby (Ironmongers) Ltd ]. Special points- For giving rise to an action for deceit, the following points deserve special attention: (i) Fraud by a stranger to the contract does not affect contract. It may, be recalled that coercion as undue influence by a stranger to a contract affect the contract. (ii) Fraudulent representation must have been instrumental in inducing the other party to enter into the contract i.e., but for this, the aggrieved party would not have entered into the contract. (iii) The plaintiff must have been actually deceived by fraudulent state-ment. A deceit which does not deceive gives no ground for action. (iv) The plaintiff must be thereby idemnified. Unless the plaintiff has sustained a damage or injury, no action will lie. It is a common saying that there is no fraud without damages. In cases. of fraudulent silence, the contract is not voidable, if the party whose consent was so caused had the means of discovering the truth with ordinary diligence ( Exception to Sec. 19 given in the Act). Note that in other cases of fraud, this is no defence i.e., the contract is voidable even if the fraud could be discovered with ordinary diligence. Distinction Between Fraud and Misrepresentation

The following are the points of distinction between the two: 1. Fraud implies an intention to deceive, it is deliberate or wilful; whereas misrepresentation is innocent, without any intention to deceive. 2. Fraud is a civil wrong which entitles a party to. claim damages in addition to the right of rescinding the contract. Misrepresentation, gives only the right to avoid the contract and there can be no suit for damages 3. In case of misrepresentation, the fact that the aggrieved party had the means to discover the, truth with ordinary diligence will prevent the party from avoiding the contract. But In case of fraud: excepting fraud by silence, the contract is voidable even though the party defrauded had the means of discovering the truth with ordinary diligence, Loss of Right of Rescission We have observed earlier that a contract brought about by coercion, undue influence, misrepresentation or fraud is voidable at the option of the party whose consent was so caused. He has the option either to rescind the contract or to affirm it. But his right of rescission is lost in the following cases: 1. Affirmation. If after becoming aware of his right to rescind, the aggrieved party affirms the transaction either by

express words or by an act which shows an intention to affirm it, the right of rescission is lost. So, for example, if a person, who has purchased shares on the faith of a misleading prospectus, subsequently becomes aware of its falsity, but accepts dividends paid to him, he will not be permitted to avoid the contract. Paying for the goods purchased (if not paid so far), attempting to sell the good are some other examples of implied affirmation. 2. Resestitution not possible. If the party seeking rescission is not in a positiol 1 to restore the benefits he may have obtained under the contract, e.g., where the subject-matter LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 43

of the contract has been consumed or destroyed, the right to rescind the contract cannot be exercised. 3. Lapse of time. It may be treated as evidence of affirmation where the party misled fails to exercise his rights promptly on discovering the representation to be untrue of on becoming aware of the fraud of coercion. As such the right of rescission may also be lost be too long-a-delay 4. Rights of third parties. Since the, contract is valid until rescinded, being a voidable contract, if before the contract is rescinded third parties, bona fide for value, acquire rights in the subject matter of the contract, those rights are valid against the party misled, and the right to rescind will no longer be available.34 Thus where a person obtains goods by fraud and, before the seller rescinds the contract, disposes them off to a bona fide party, the seller cannot then rescind (Phillips vs Brooks Ltd 35). Mistake Mistake may be defined as an erroneous belief concerning something. It may be of two kinds: 1. Mistake of law. 2. Mistake of fact. Mistake of Law Mistake of law may be of two types: (a) Mistake of law of the country; (b) Mistake of foreign law. (a) Mistake of law of the country or Mistake of law. Every one is deemed to be conversant with the law of his country, and hence the maxim ignorance of law is-no excuse. Mistake of law, therefore, is no excuse and It does not give right to the parties to avoid the contract Stating the effect of mistake as to law, Section 21 declares that a contract is not voidable because it was caused by a mistake as to .any law in force in India. Accordingly, no relief can be granted on the ground of mistake of law of the country. Illustration (To Sec. 21). A and B make a contract grounded on the erroneous belief that a particular debt is barred by the Indian Law of Limitation: the contract is not voidable (i.e., the contract is valid). However, if one of the parties makes a mistake of law through the inducement, whether innocent or otherwise, of the other party, the contract may be avoided (b) Mistake of foreign law. Mistake of foreign law stands on the same footing as the mistake of fact . Here the agreement is void in case of bilateral mistake only, as explained under the subsequent heading. Mistake of Fact Mistake of fact may be of two types:

i. Bilateral mistake; or ii. Unilateral mistake. Bilaterial mistake. Where the parties to an agreement misunderstood each other and are at cross purposes, there is a bilateral mistake. Here there is no real correspondence of offer acceptance, each party obviously understanding the contract in a different way. In fact in such cases, there is no agreement at all, there being entire absence of consent. This has been termed by Salmond as error in consensus as distinguished from error in causa (i.e. where consent is not free and is caused by coercion, undue influence, misrepresentation or fraud). In case .of bilateral mistake of essen-tial fact, the agreement is void ab-initio. Section 20 provides that 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 Thus for declaring an agreement void ab-inito under this Section, the following three conditions must be fulfilled (i) Both the parties must be under a mistake i.e., the mistake must be mutual. Both the parties should misunderstand each other so as to nullify consent. Illustration M, having two houses A and B, offers to sell house A, and N not knowing that M has two houses, thinks of house B and agrees to buy it. Here there is no real consent and the agreement is void. (ii) A stake must relate to some fact and not to judgement or opinion etc. An erroneous opinion as to the value of the thing which forms the subject-matter of the agreement is not to be deemed a mistake as to a matter of fact (Explanation to Section 20) Illustration (i) If A buys a motorcar, thinking that it is worth Rs 80,000, and pays Rs. 80,000 for it, when it is only worth Rs 40,000, the contract remains good. A has to blame himself for his ignorance of the true value of the motorcar and he cannot avoid the contract on the ground of mistake. (ii) The fact must be essential to the agreement -i.e., the fact must be- such which goes to the very root to the agreement. On the basis of judicial decisions, the mistakes which may be covered under this condition may broadly be put into the following heads (a) Mistake as to the existence of the subject-matter of the agreement. If at the time of the agreement and unknown to parties, the subject-matter of the agreement has ceased to exist, or if it has never been in existence, then the agreement is void (Bell vs Lever Bros.). Illustrations (a) A agrees to sell to B a specific cargo of goods supposed to be on is way from England to Bombay. it turns out that, before the day of the bargain, the ship conveying

the cargo had been cast away, and the goods lost. Neither party was aware of these facts. The agreement is void. (b) A. agrees to buy from B a certain horse. It turns out that the horse was dead at the time of-the bargain, though neither party was aware of the fact. The agreement is void. (b) Mistake as to the identity of the subject-matter. Where both parties are working under mistake as to the-identity of the - subject-matter i. e., one, party had one thing in mind and the other party had another, the agreement is void for want of consensus-ad-idem LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 44 11.555

Illustration. Where there was a contract of the sale of ascertain quantity of cotton arriving per ex ship Peerless, and there were two ships of that name sailing, and the parties had in mind different ships at the time of entering into the contract, held here was no contract. The Court observed: the defendant meant one peerless and the Plaintiff another. That being so, there was no consensus-adidem and therefore no binding contract. (Reffles vs Wichelaus) (c) Mistake as to the title of the subject-matter. Normally a mistake as to title of the seller does not affect the validity of the contract because Section 14 of the Sale of Goods Act, 1930, imposes an implied condition s to the title of the seller in a contract of sale, unless otherwise agreed. Accordingly, a .seller is taken to warrant his title to the property sold and he may be made liable in damages for breach of the condition, even though both the parties contract under a mistaken belief as to the title of the seller. It is. only in a very special circumstance, where a person agrees to purchase property or goods which unknown to himself and the seller, is his own already, that the agreement is void ab-initio and none of the parties can be made liable in damages. Illustration. (a) A agreed to take a lease of fishery from B, though contrary to the belief of both parties at the time A was tenant for life by inheritance of the fishery and B had no title at all. It was held that the lease agreement was void (Copper vs Phibbs). (d) Mistake as to the quantity of the Subject Matter. If both the parties are working under a mistake as to the quantity of the subject-matter, the agreement is void. Illustration P enquired about the price of rifles from H stating that he may buy as many as 50. H quoted the price. P telegraphed Send three rifles. The telegraph clerk transcribed the message as Send the rifles. H sent 50 rifles. P accepted only three and returned 47. H filed a suit for damages for non-acceptance of 47 rifles. It was held that there was no contract as there was no consent and it made no difference even if the mistake was caused by the negligence of a third party. Of course P must pay the price of three rifles accepted by him (Henkel vs Pope). (e) Mistake as to the quality of the subject matter. If there is a mutual mistake of both the parties as to the quality of the subject-matter I.e., if the subject-matter is something essentially different, from what the parties be- lieved it to be, the agreement is void. Illustrations (a) A set of table-linen was sold at an auction by a with the crest of Charles I and the authentic property of that monarch. In. fact the linen was Georgian and there was a mutual mistake of both description

parties as to the quality of subject-matter. Held . the agreement was void ( Nicholson & I enn. Vs Smith Marriott). (b) A, contracts to sell B a particular horse, which is believed by both the parties to be a race horse. But later on it time out to be a cart horse. The agreement Strictly speaking it is the mistake as to substance of the subject-matter going to the very root of the agreement and affecting .the whole consideration which makes it void and not the mistake as to quality . For, the principle of caveat emptor (let the buyer beware) clearly states that 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 and the buyer must be held to have taken the risk that the goods sold might prove defective or might in some way be different item that which the parties believed it to be, in the absence of any misrepresentation or guarantee by the seller. Illustration. A sold certain seeds to B. Both parties honestly believed that the seeds were two years old. Actually the seeds proved to be only one year eleven months old. The contract cannot be avoided as the mistake does not affect the substance of the transaction. (f) Mistaken assumption going to the root of agreement. Thus, where a man and woman entered into an agreement for separation on the erroneous assumption that their marriage was valid, the agreement was held void as the parties entered into the contract under a false and fundamental assumption that they were lawfully married. (Galloway vs Galloway). 2. Unilateral mistake. Where only cine of the contracting parties is mistaken as to a matter of fact, the mistake is a unilateral mistake. Regard-ing the effect of unilateral mistake .on the validity of a contract, Section 22 provides that a contract is not voidable merely because it was caused by one of the parties to it being under a mistake as to a matter of fact. Accord-ingly, in case unilateral mistake a contract remains valid unless the mistake is caused by misrepresentation or fraud, in which case the contract is voidable at t e option of aggrieved art. n t e basis of judicial deci-sions, however, in certain exceptional cases even an unilateral mistake, whether caused by fraud, misrepresentation, etc., or otherwise, may make an agreement void ab-intio. With a view to elucidating the above mentioned various possibilities regarding the validity of a contract under unilateral mistake, we shall now discuss them in some detail. Contract valid. If a man due to his own negligence or lack of reasonable care does not ascertain what he is contracting about, ,he must ,blame himself and cannot avoid the contract. Thus as rule, an unilateral mistake is, not ,allowed as a defence in avoiding. The contract i. e., it has no effect on the contract and the contract remains valid.

Illustrations (a) Where the government sold by auction the right of fishery and the plaintiff offered the highest bid thinking that the right was sold for three years, when in fact it was for one year only, he could not avoid the contract because it was his unilateral mistake caused by his own negligence. He ought LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 45

to have ascertained the tenure of fishery before bidding at the auction (A.A. Singh vs Unon of India).

(b) X buys rice from Y, by sample under the impression that the rice is old. The rice -is, however, new. X cannot avoid the contract. The rule of caveat emptor (let the buyer beware) of the Sale of Goods Act is generally applicable in such cases of unilateral mistake as to quality of subjectmatter of a contract, and despite the mistake the contract remains valid. Contract voidable. If the unilateral mistake is caused by fraud or misrepresentation, etc., on the part of the other party, the contract is void-able and can be avoided by the injured, party. Illustration. A, has a horse with a hole in the hoof. A, so fills it up that the defect cannot be discovered on a reasonable examination. B. purchases the horse under the impression that the horse is sound. Here A, is guilty of fraud and as such on discovery of the defect B can avoid the contract because his unilateral mistake has been caused by A s fraud Agreement void ab-initio. In the following two cases, where the con-sent is given by a party under a mistake which is so fundamental as goes to the root of the agreement and has the effect of nullifying consent, no contract will arise even though there is a unilateral mistake only: 1. Mistake as to the identity _contracted with. where such identity is important. The rule of law is that a contract apparently made between A and C is a complete nullity, if the inference from the faces is that to the knowledge of C, it was the intention of A to contract only with B, for, there can be no real formation of an agreement by proposal and acceptance unless a proposal is accepted by the person to whom it is made. Thus, whenever the identity of the person with whom one intends to contract is important element of the contract, a mistake with regard to the person contracted with destroys his consent and consequently annuls the contract. Identity of person contracted with is important either when there is a credit deal or when one party has a set-off agilest the other party. It is important to note that in case of mistake as to identity of person contracted with, even if the mistake is committed because of fraud or misrepresentation of another party, the contract is not merely voidable but is absolutely void. Illustrations. (a) In Boulton vs Jones Boulton had. taken over the business of one Brocklehurst, with whom the defendant, Jones, had been accustomed to deal, and against whom he had a set-of. Jones sent an order for goods to. Brocklehurst; which Boulton supplied without informing hi131 that the business has . changed hands. Jones consumed the goods of the belief that thy had been supplied by Brocklehurst. When Boulton demanded. the payment the of the goods supplied, Jones refused to pay, alleging that he had intended to contract with Brocklehurst personally, since he had a set-off which he wished to enforce against him. Boulton, therefore, sue3d Jones for the

price. It was held that Jones was not liable to pay for the goods. Pollock C.B. observed, it is a rule of law that if a person intends to contract with A, B cannot give himself any right under it. (b) In Said vs Butt Butt, the managing director of a theatrical company, gave instructions that no ticket was to be sold to Said, who was a very bad critic of all the plays of _11e company. Said, knowing this, asked a friend to buy a ticket for him. With this ticket Said went to the theatre but was refused admission. Said filed a suit for damages for breach of contract. Held that there was no contract because the theatrical company never intended to contract with Said. (Notice that in the given circumstances the identity of the plaintiff was a material element in the formation of the contract.) (c) In Cundy vs Lindsay A fraudulent person named Blenkarn, taking advan-tage of the similarity of his name with that of a big company named Blenkiron & Co., in the same town, placed an order with Lindsey & Co., for supply of certain goods on credit and signed the order in such a way as to look like that of Blenkiron & Co. Lindsay & Co., mistook his order for that of Blenkiron & Co., and dispatched the goods. Blenkarn took delivery of the goods and sold them to Cundy & Co., a bona fide purchaser for value, and did not pay Lindsay & _o., for them. On coming to know the true facts, Lindsay & Co., filed a suit on Cundy & Co., for recovery of goods. The Court of Appeal held that owing to mistake as to identity of contracting party caused by Blenkarn, the rogue, there was no consensus of mind which could lead to any agreement whatever between Blenkarn and Lindsay & Co., and hence the agreement was void ab-initio and Blenkarn got no title to the goods which he could pass to Cundy & Co. As Cundy & Co., obtained no title to the goods, it must return them or pay their price to Lindsay & Co. Notice that in the above case if the contract between Blenkarn and Lindsay & Co., would have been merely voidable for fraud, Cundy & Co., would have been entitled to retain the goods as it had taken them in good faith for value, because in case of a voidable contract before it is repudiated, one can pass a good title to a bonafide purchaser for value. Hence the specialty of a mistake as to the identity of person contracted with becomes clear. that in such a case, even if the mistake is committed because of misrepresentation or fraud of another party, the contract is absolutely void. to the prejudice of third parties who later deal in good faith with the fraudulent person. Further, mistakes to the identity of a party is to be distinguished from mistake as to the attributes of the other party. Mistake as to attributes, for example, as to the solvency or social status of that person, cannot negative the consent. It can only Vitiate consent.. It, therefore, makes the contract merely voidable for fraud. Thus where X enters into a contract with Y, falsely representing himself to be a richman, the contract is only voidable at the option of Y. Again where the identity of the party contracted with is. immaterial, mistake as to identity will not avoid a contract. Thus ifX enters a shop, introduces himself as Y and purchases some goods for cash, the contract is

valid. 2. Mistake as to the nature and character of a written document. The second circumstances which even an unilateral mistake may make a con-tract absolutely void is LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 46 11.555

where the consent is given by a party under a mistake as to the nature and character of a written document. The rule of law is that where the mind of the signer did not accompany the signature; i. e., he did not intend to sign; in contemplation of law, he never did sign the contract to which his name is appended and the agreement is void abinitio. Illustrations (a) An old illiterate woman executed a deed under the impression that she was executing a power of attorney authorising her nephew to manage her estate, while in fact it was a deed of gift in favour of her nephew. The evidence showed that the woman never intended to execute such a deed of gift nor was the deed read or explained to her. The document was held to be void, as her mind did not go with her signature (Bala Devi vs Santi Mazllmda). (b) A blind man signed what he thought was a compromise petition, but was in fact a release, on the fraudulent representation of another, the document was held to be void (Hem Singh vs Bhaar). (c) M, an old man with feeble sight, signed a bill of exchange for 3,000 thinking it was a guarantee. It was held that M was not liable (Foster vs Mackin-non). In this case made a very interesting observation was made: It was as if he had written his name in a lady s album, or on an order for admission to the Temple Church, or in the fly-leaf of a book, and there had already been without his knowledge, a bill of exchange ... on the other side of the paper. It should be borne in mind that in the aforesaid type of mistake, even if one party s consent is induced by misrepresentation of another, the con-tract is not merely voidable but is entirely void and the third party would acquire no rights (Ningawwa vs Byrappa). . Practical Problems Attempt the following problems, giving reasons for your answers: 1. A, sells a horse to B knowing fully well that the horse is vicious. A does not disclose the nature of the horse to B. Is the sale valid? [Hint. Yes, the sale is valid, because A is under no duty to disclose the fault to B. the general rule of law being let the buyer beware. ] 2. A, who is trying to sell an unsound horse, forges a veterinary surgeon s certificate, stating that the horse is, sound and pins it on the stable door. B comes to examine the horse but the certificate goes unnoticed by him. He buys the horse and finds later on the horse to be unsound. He wants to avoid the agreement under the plea that he has been defra6ded. Will he succeed?

[Hint. B will not succeed because he bought the horse after his examination and not on the basis of the Certificate. B has not therefore been deceived by the Certificate actually and a deceit which does not deceive is not fraud-.] 3. X offers to sell Y a painting which X knows is a copy of a well known masterpiece. Y, thinking that the painting is an original one and that X must be unaware of this, immediately accepts X s offer. Does this result in ac6ntract? [Hint. Yes, there is a contract. The rule ofCaveat Emptor applies in case of unilateral mistake as to quality of subject matter of a contract, and despite the mistake the contract remains valid.] 4. X buys from Y a painting which both believe to be the work of an old master and for which X pays a high price. The painting turns out to be only a modern copy. Discuss the validity of the contract? [Hint. The contract is absolutely void as there is a mutual mistake of both the parties as to the substance or quality of the subject-matter going to the very root of the contract. In case of bilateral mistake of essential fact, the agreement is void ab-initio, as per Section 20.] . 5. X threatens to kill Y if he does not sell his house to X for Rs 1,00,000. Y assigns the necessary documents for the sale of house and receives the pay-ment. Later on, Y wants to avoid the contract. Will he succeed? Solution: Sections to which the given problem relates: Sections 15 and 72. Decision: Y can avoid the contract on the ground of coercion but he will have to return Rs 1,00,000 which he has received from X. Reason: Y s consent is not free as it has been obtained by giving a threat to commit an act which is forbidden by the Indian Penal Code. 6. X threatens to kill Y s son if Y does not sell his house to X for Rs 1,00,000. Y signs the necessary documents for the sale of house and receives the pay-ment. Later on, Y wants to avoid the contract. Will he succeed? Solution: Sections to which the given problem relates: - Sections 15 and 72. Decision: Y can avoid the contract on the ground of coercion but he will have to return Rs 1,00,000 which he has received from X. Reason: Y s consent is not free, as it has been obtained by committing an act, which is forbidden by the Indian Penal Code. 7. X threatens to kill Y s son if Y does not sell his house to Z for Rs 1,00,000. Y signs the necessary document for the sale of house and receives the pay-ment. Later on, Y wants to avoid the contract. Will he succeed? Solution: Sections to which the given problem relates: Sections

15 and 72. Decision: Y can avoid the contract on the ground of coercion but he will have to return Rs 1,00,000 which he has received from X. Reason: Y s consent is not free as it has been obtained by committing an act which is forbidden by the Indian Penal Code. 8. X, by a threat to commit suicide induced Y, his wife, and Z, his son, to execute a release deed in favor of his brother in respect of certain property. Are Y and Z bound by such release deed? Solution: Section to which the given problem relates: Section 15. Decision: Y and Z are not bound by such release deed. LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 47

Reason: The consent of Y and Z is not free as it has been obtained by threatening to commit an act which is deemed to be forbidden by the Indian Penal Code. [Leading case: Ammiraju v. Seshamma] 9. X, an illiterate old man of about 90 years, physically infirm and mentally in distress, executed a gift deed of his properties in favour of Y his nearest relative who was looking after his daily needs and managing his cultivation.Is X bound by this gift deed? Solution: Section to which the given problem relates: Section 16(2). Decision: No. X is not bound by this gift deed. Reason: Y s consent is not free as it has been obtained by exercising undue influence because Y was in position to dominate the will of X [Leading case: Sher Singh v. Prithi Singh] 10. X, a poor Hindu widow, was in great need of money to establish her right to maintenance. She took a loan of Rs 1,500 bearing a rate of interest of 100% p.a. Is this transaction an unconscionable? Solution: Section to which the given problem relates: Section 16(3). Decision: This transaction appears to be an unconscionable. Reason: Not only the rate of interest is too high but also the lender has used the circumstances of poor Hindu widow to obtain an unfair advantage. [Leading case: Ranee Annapurni v. Swaminatha] References Kapoor, N.D. (2003), Elements of Mercantile Law, Sultan Chand and Sons, New Delhi. http://www.indialawinfo.com/bareacts/soga.html M.C. Kucchal ( 2002), Business Law , Vikas Publishing House Pvt. Ltd, Delhi. P.C. Tulsian (2002), Pvt. Ltd, Delhi. Business Law , Tata Mc. Graw Hill

Rohini Aggarwal(2003), Student s Guide To Mercantile And Commercial Laws, Tata Mc. Graw Hill Pvt. Ltd, Delhi. Notes: LEGAL ASPECTS OF BUSINESS

 Copy Right: Rai University 48 11.555

LESSON 9: LEGALITY OF OBJECT AND CONSIDERATION Learning Outcomes After todays class you should be able to answer the following questions: The legality of object and consideration The consequence of the unlawful object or consideration The effect of illegal agreement on collateral transaction Introduction In today s lecture we shall study about another essential element of a contract that is legality of object and consideration The object of consideration of an agreement must be lawful, in order to make the agreement a valid contract, for, Section 10 lays down that all agreements are contracts if made for lawful consideration and with a lawful object. Section 23 declares what kinds of considerations and objects are not lawful. If the object or consideration is unlawful for one or the other of the reasons mentioned in Section 23, the agreement is illegal and therefore void (Sec. 23). The use of the word illegal is somewhat a misnomer here. It usually connotes a punishable offence, but the parties to a so called illegal agreement, unless it is expressly punishable by law or amounts to a criminal conspiracy are not liable to punishment. They have committed no offence. They have merely concluded a transaction that will be spurned by the courts. The words object and consideration used in Section 23 are not synonymous. The word object here means purpose or design. Thus, where a person, while in insolvent circumstances, transferred his property to one of his creditors with the object of defrauding his other creditors, it was held that the agreement was void and the transfer was inoperative (Jajlar Meher Ali vs Budge Budge Jute Mills Co. ). The court observed that although the consideration of the contract was lawful but the object was unlawful because the purpose of the parties was to defeat the provisions of the Insolvency Law. What Considerations and Objects are Unlawful? According to Section 23, every agreement of which the object or con-sideration is unlawful is void, and the consideration or the object of an agreement is unlawful in the following cases: 1. If it is forbidden by law. This clause refers to agreements which arc declared illegal by law. If the consideration or object for a promise is such as is

forbidden by law, the agreement is void. An act or an undertaking is forbidden by law: a. When it is punishable by the criminal law of the country, or b. When it is prohibited by special legislation or regulations made by a competent authority under powers derived from the legislature. Illustrations (a) Agreements for sale or purchase above the standard price fixed by the relevant law (e.g Commodity s Act. 1955) with regard to a controlled article are illegal and hence void (Sua Ram vs Kunj LaI). (b) An agreement to pay consideration to a tenant to induce him to vacatepremises governed by the Rent Restriction Act is illegal and cannot be enforced because such an act is forbidden by the said Act (Mohanchana vs Manindta). 2. If it is of such a nature that, if permitted, it would defeat the provision of any law. This clause refers to cases where the objector consideration to an agreement is of such a nature that, though not directly forbidden by law, it would indirectly lend to a violation of law, whether enacted or otherwise (e.g., Hindu and Mohammedan Laws). Such an agree-ment. is also void. Illustrations (a) A loan granted under a promissory note to the guard-ian of a minor to enable him to. celebrate the minor s marriage in contravention of the Child Marriage Restraint Act was held illegal and could not be recovered back (Chandra Shrinivisa Rao vs Korrapati Raja Rama Mohana Rao).It will be seen that the purpose of borrowing in this case is of such a nature that if permitted it would defeat the provisions of Child Marriage Restraint Act of 1929, for the money was lent to enable the guardian to celebrate the marriage contrary to the provisions of the said Act. (b) An agreement by the debtor not to raise the plea of limitation, should a suit have to be filed, is void as tending to limit the provisions of the Limitation Act (Rama Murthy vs Gopayya). (c) An agreement between husband and wife to live separately is invalid as being opposed to Hindu Law (A. E. Thimma/ Naidu vs Rajamma). 3. If it is fraudulent. An agreement whose object or consideration is to defraud others, is unlawful and hence void. Illustrations. (a) A, promises to pay Rs 200 to B, if B would commit fraud on C. B agrees. B s agreeing to defraud is unlawful

consideration for A s promise to pay. Hence the agreement is illegal and void. (b) A, B and Center into an agreement for the division among them of gains acquired, to be acquired, by them by fraud. The agreement is void, as its object is unlawful. [Illustration (e) to Section 23] ( c) A, being agent for a landed proprietor, agrees for money, without the, knowl-edge of his principal, to obtain a lease LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 49

of land belonging to his principal . The agreement between A and B is void as it implies a fraud by concealment by A upon his principal. [Illustration (g) to Section 23]. 4. If it involves or implies in fury to the person or property of an-other. If the object or consideration of an agreement is injury to the person or property of another, it is void, being an lawful agreement. Let us now do some illustrations in this respect Illustrations (a) An agreement to commit an assault or to beat a man has been held unlawful and void (Allen vs Raucously). (b) An agreement to put certain property to fire is unlawful and void under this clause. (c) An agreement involving the publication of a libel (defamatory article against someone) has been held unlawful and void (Clay vs Yates). (d) An agreement by which a debtor, who borrowed Rs 100, promised to do manual labour without pay for the creditor, so long as the debt was not repaid in full has been held to be void, as it involved injury to the person of the debtor (Ram Sarup vs Bansi Mandar) 5. If. the court regards it as immoral. An agreement whose object orconsideration, is immoral, is illegal and therefore void. The scope of the word immoral here extends to the following: (i) Sexual immorality e.g., illicit cohabitation or concubinage or pros-titution. Illustrations (a) A, agrees to let her daughter to hire to B for concubi-nage. The agreement is void, because it is immoral, though the letting may not be punishable under the Indian Penal Code. - [Illustration (k) to Section 23] (b) A gift deed executed in consideration of illicit intercourse has been held void as its object was immoral (Ghumma vs Ram Chandra ). It may be noted that an agreement to pay for past or future illicit cohabitation is also void, as being immoral. Consideration which is immoral at the time when it passes cannot become innocent by passage of time and therefore the .consideration for past cohabitation is unlawful as being immoral (Hussenali vs Dinbai). Similarly, a promise to pay for the purpose of future cohabitation, which comprised the consideration, was held illegal and void (Lakshminarayana vs Subhadri). (ii) Furtherance of sexual immorality. Illutration (a) A prostitute was sued for the hire money of a carriage in

which she used to go every evening in order to make a display of her beauty and thus to attract customers. The suit was dismissed on the ground that the plaintiff contributed towards the performance of an immoral and illegal act and hence he was liable to suffer ( Pearce vs Brooks). (b) A man who knowingly lets out his house for prostitution cannot recover the rent, it being an act for furtherance of sexual immorality ( Choga Lal vs Piyasi). The landlord may, however, recover if he did not know the purpose. Illustrations (a) Money advanced to a married woman to enable her to procure a divorce and to marry the plaintiff could not be recovered back as the object of the agreement was held immoral (Bai Vij/i vs Nansa Nagar). (iii) An agreement for future separation between a husband and wife is void ab--initio, it being immoral in the eye or law. (iv) Such acts which are against good public morals. Illustrations (a) An agreement for future marriage, after the death of first wife is against good morals and hence would be void (Wilson vs Comleyl) (b) A who is B s mukhtar, promises to exercise his influence, as such with B in favour of C and C promises to pay Rs 1,000 to A. The agreement is void, because it is immoral. [Illustration to Section 23] 6. If the court regards it as opposed to public policy. An agreement is unlawful if the court regards it as opposed to public policy. It is not possible to give a precise or exact definition of the term public policy. It is rather an elastic term and its connotation may vary with the social structure of a state. Public policy is a principle of law which holds the no citizen can lawfully do that which is injurious to the public or is against the interests of the society or the state. Broadly speaking, an agreement which tends to promote corruption or injustice or immorality is said to be opposed to public policy. It is interesting to note that opposed to public policy and immoral, both are very much similar in nature because what is immoral must be opposed to public policy and reverse is also true in most cases. Public policy is an illusive concept. It has been described as an un-trustworthy guide unruly horse etc., and therefore, the doctrine of public policy is generally governed by precedents. In Gherulal vs Mahadeodas the Supreme court served, , though the heads (of public policy) are not closed and though theoretically it may be permissible to evolve a new head under exceptional circumstances of a changing world, it is advisable in the interest of stability of society not to make any attempt to discover new heads in these days. The courts, thus, are generally disinclined to invent new heads of public policy. On the basis of decided cases. on the subject the following

agreements have been held to be against -public polity: (i) Trading with an alien enemy. It is now fully established that trading with an alien enemy ( i.e. a citizen of the other country at war with the state ) is against public polity in so far as It tends to aid the economy of the enemy country. Such agreements are therefore illegal, unless made with the special permission of Government. It is to be noted that LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 50 11.555

an agreement to promote hostile action in a friendly state is also illegal and void as being opposed to public policy. (ii) Agreements interfering with the course of justice, An agreement the object of which is to interfere with the course of justice, e.g., an agreement not to disclose misconduct to the other interested party or an agreement to influence a judge to induce him to decide the case in a party s favour, is obviously opposed to public policy and is void. But an agreement to refer present or future disputes to arbitration is a valid agreement. (iii) Agreements for stifling criminal prosecution:. It is well settled law that if a-person has committed a crime, he must be punished. Hence any agreement which seeks to prevent the prosecution of a guilty party is opposed to public policy and is void In Sudhindra Kumar vs Ganesh Chand, it was observed: No court of law can countenance or give effect to an agreement which attempts to take the administration of law out of the hands of the judges and put it in the hands of private individuals. Where, there fore, A promises B to drop a prosecution which he has instituted against B for robbery, and B promises to restore the value of the thing taken, the agreement is void, as its object is unlawful. Similarly, the compromise of a public offence is illegal . It is obvious that if such a course is allowed to be adopted and agreements made between the parties based solely on the consideration of stifling criminal prosecutions are sustained, the basic pur-pose of Criminal Law would be defeated. However, under the Indian Criminal Procedure Code there are certain compoundable offences (e.g., assault) which can be compromised and agreements for the compromise of such offences are valid (Ramachandra vs Bhauwari Bai). (iv) Maintenance and Champertv: Maintenance may be defined as an agreement whereby a stranger promises to help another person by money or otherwise in litigation in which that -third person has himself no legal interest. Champerty is an agreement whereby a person agrees to assist another in litigation in exchange promise to hand over a portion of the proceeds of the action. Thus, in both cases financial or professional assistance is provided with a view to assisting another person in litigation but in case of champerty the party helping in litigation also shares in the gains of the litigation in addition to interest on money advanced or fees for professional services. Under the English Law such agreements are absolutely void. The Indian Law, however, does not make them absolutely void because of the peculiar position of Indian litigants many of whom are too poor to afford expensive litigation. The uncertainties of litigation are proverbial; and if the financier must need risk losing his money he may well be allowed some chances of exceptional advantage (Ram Sarup vs Court of Wards). The rules applied in India are as follows: -

I. An agreement for supplying funds by way of maintenance for Champerty is valid unless: (a) it is unreasonable so as to be unjust to the other party, or (b) It is made by a malicious motive like that of gambling in litigation or oppressing other party by encouraging unrighteous suits, and not with the -bona fide object of assisting a claim believed to be just (Bhagwat Dayal -Singh vs Debi D I Sahu ). II. An agreement for providing professional services is valid if it is made by way of maintenance and with a bona fide object of assisting a claim believed to be-just and obtaining a reasonable recompense therefore. But if it is made by way of Champerty , i.e., making the remuneration dependent to any extent whatsoever upon the result of the suit, it is void (Ko/hi Jairam vs Vishvanat). Illustrations (a) Where 75 paise in a rupee was agreed as the share of the financier, out of the prop recovered, It was held that the agreement was unreasonable and hence void. However, the plaintiff (financier) was awarded the expenses legitimately incurred by him with interest (Nuthaki Venkataswami vs Katta Nagi Reddy). (c) An agreement by a client to pay his lawyer according to the result of the case was held opposed to public policy and void, it being against the professional code of conduct (Kothi Jairam vs Vishvanath). (v) Traffic in public offices. Agreements for sale or transfer of public offices or for appointments to public offices in consideration of money are -illegal, being opposed to public policy. Such agreements, if enforced, would lead to inefficiency and corruption in public life. Illustrations. (a) A, promises to obtain for B an employment in the public service, and B promises to pay Rs. 1,000 to A. The agreement is void as the consideration for it is unlawful [Illustration (f) to Section 23]. (b) So also a promise to pay money to a public servant to induce him to retire and make way for the appointment of the promisor is void ( Saminatha vs Muthusami). (vi) Agreements creating an interest opposed to duty. An agreement which tends to create a conflict between interest and duty is illegal and. void on. the ground that it is opposed to public policy. Illustrations. (a) A, agrees to pay B, the lieutenant colonel in the army,

Rs10,000 if he will assist her brother to desert the army. The object of the agreement is opposed to public policy and .hence the agreement is void and illegal. (b) An agreement by an agent with a third party whereby he would be enabled to make secret profits is illegal and void as it tends to create a conflict between interest and duty. (vii) Agreements unduly restraining personal liberty: Agreements which unduly restrict personal freedom have been held to be void and illegal as being against public policy. LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 51

Illustration. A, borrowed money from B, a moneylender, and agreed that he .would not, without the written consent of B, leave his job, borrow money, dispose of his property or change his residence. It was held that the agreement was illegal as it unduly restricted the liberty of A ( Harwood vs Miller s Timber and Trading Co ). (viii)Agreements interfering with parental duties. A father, and in his absence the mother, is the legal guardian of his/her minor child. The au-thority of a guardian is to be exercised in the best interest of the child, in accordance with good public morals. If, therefore, the right of guardianship is bartered away by any agreement, which is - inconsistent with the duties arising out of such custody such an agreement shall be void on the ground of public policy. Illustration. For monetary consideration, A agrees to place his daughter at the disposal of B to be married as B likes. The agreement is illegal and void as B it would interfere with A s parental duty to select a husband in the best interests of the girl (Alma Ram vs Banku Mal) (ix) Marriage brokerage agreements. These are agreements for the- payment of money in consideration of procuring for another in marriage a husband or a wife. Such agreement its are illegal and void as being contrary to public policy. Thus, when a profit was promised Rs 200 in consideration of procuring a wife for the defendant, the agreement was held, invalid and the money could} recovered (Pitamber vs. Jagjiwan). . Further, an agreement of dowry i.e., to give money or property to the parents of the bride or the bridegroom in connection of their agreeing to the contract of marriage is also illegal and cannot be enforced. But such an agreement is illegal in respect of payment only; the validity of marriage is not affected. So, once the marriage is solemnized, money if actually paid cannot be recovered back, and if not paid, a suit therefore would not lie, because the agreement to pay is illegal. Of course the money can be recovered when the marriage is not performed (Dharnidhar vs. Kanhji Sahay). Similarly, clothes and ornaments or their value can be recovered if the marriage does not take place (Girdhari Singh vs Neelandhar Singh ). (x) Miscellaneous cases. The following agreements have also been held to be against public policy: (a) Agreements tending to create monopolies are illegal and void (Kameshwar Singh vs Yasin Khan). . (b) Agreements to the fraud revenue authorities are void and illegal. For example, an agreement by which an employee was to get, in addition to salary, an expense allowance grossly in excess of the expenses actually incurred by him, was held illegal because the provision as to expenses was contrary to public policy being merely a device to defraud the income-tax authorities (Napeier vs National Business

Agency Ltd). (c) Agreements whereby money is given to induce persons to give evidences in a civil court are void because every one is expected to perform his legal duty ( Adhiraja Shatty vs Vittil Bhatta). Object or Consideration Unlawful in Part Section 23 (already discussed) deals with cases in which object or/and consideration are unlawful. Now we come to those cases where object/consideration are unlawful in part The Dowry Prohibition Act, 1961 had defined dowry as property given directly or indirectly by one party to another, by parents of one party to either party at or before or after the marriage or in consideration of marriage. The Dowry Prohibition (Amendment) Act, 1984 has changed the definition of dowry slightly. The new Act has defined dowry as property given in connection (not consideration) with marriage. The Amendment Act however clarifies that presents given to the bride or the bridegroom at the time of marriage voluntarily, without a demand being made, will not be treated as dowry. But these presents will have to be carefully listed in accordance with the rules of the Amendment Act. In this case consideration is wholly illegal. But what is the position if the same agree-ment contains, both 1egal and illegal terms, i.e., it is partly legal and partly illegal? Sections 24, 57 and 58 of and 58 of the Contract Act provide for such cases. Accordingly, if the object or consideration is partially unlawful, the following rules will apply: 1. When an agreement contains several distinct promises to do things legal and also other things illegal, and the legal part cannot be separated from the illegal part (i.e., the consideration for different promises is a single sum of money), the whole agreement is illegal and void (Sec.24). Illustrations (a) A promises to superintend, on behalf of B, a legal manufacturer of indigo and an illegal traffic in other articles. B promises to pay to A a salary of Rs. 10,000 a year. The agreement is void and unlawful. Here a part of the object is legal and a part is illegal which are not severable because the consideration for both promises is a single sum (illustration to Section 24). (c) A agrees to serve B as his housekeeper and also to live in adultery with him at a fixed salary. The whole agreement is unlawful and void. A cannot sue even for service rendered as housekeeper because it cannot be ascertained as to what was due on account of adulterous intercourse and what was due for housekeeping (Alice Hill vs. William Clarke). 2. Where there is reciprocal promise to do things legal and also other things illegal and the legal part can be separated from the illegal part (i. e., there is a separate consideration for different promises), the legal part is a contract and the

illegal part is a void agreement (Sec. 57). Illustration. A and B agree that A shall sell B a house for Rs 10,000, but that, if B uses it is as a gambling house he shall pay A Rs50,000 for it. The first set of reciprocal promises, namely, to sell the house and to pay Rs10,000 for it is a contract. The second set is for an unlawful. object, namely, that B may use the house as a gambling house, and is a void and illegal agreement. (Illustration to Section 57). Here it is to be noted that the two promises are distinct and severable with a separate consideration for each such promise. The promises are thus inde-pendent of each other except that they form part of the same contract. LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 52 11.555

3. In the case of an alternative promise, one branch of which is legal and the other. illegal, the illegal branch alone can be enforced (Sec. 58). Illustration. A and B agree that A shall pay B Rs1,000 for which B shall afterwards deliver to. A either rice or smuggled opium. This is a valid contract to deliver rice and a void and unlawful agreement as to opium (Illustration to Section 58). Effect of Illegal Agreements on Collateral Transactions While discussing different kinds of contracts in Chapter Lesson 3 we have already seen that an illegal agreement like the void agreement is unen-forceable as between the immediate parties. But an illegal agreement has this further effect that other transactions whether incidental or collateral to it are also tainted with illegality and, therefore, are not enforceable, provided the parties to the collateral transaction had the knowledge of the illegal or immoral design of the main or primary agreement ( a void agreement does not invalidate collateral transaction). Illustrations (a) A enters into a smuggling of goods agreement with B and borrows Rs 1,000 from C for giving an advance to B. C cannot recover the money lent - if he knew the illegal purpose, because his loan agreement was a collateral transaction to an illegal agreement. Of course if C. did not know the purpose of the loan, he can recover even though A had used the money for an illegal object. ( c) A bets on - a horse race with B and borrows Rs 500 from C for this purpose. C can always recover the money lent, whether he knew the purpose of loan or not, because his loan agreement was collateral of a void (wagering) agreement only. No restitution is allowed. Parties to an illegal agreement cannot get all help from a court of law, for, no polluted hand shall touch the pure fountain of justice. So, nothing can be recovered under an illegal agreement and if something has been paid it cannot be recovered back, whether the illegal object has been carried out or has not been carried out, is immaterial. The rule of law is that no action is allowed on a illegal agreement and in case of equal guilt, the position of the defendant is better than that of the plaintiff. Illustration X promises Y to pay Rs 10,000 if he murders Z. If Y commits the murder, he cannot recover the amount from X. If X has already paid the amount and Y fails in murdering Z, X cannot recover the amount back. Practical Problems Attempt the following problems, giving reasons for your answers: 1.

A promises to pay a certain slim of money to B, wHs.f is 8l1' intended witness in a suit against A, in consideration of B s absenting hit P self-at-the trial. B absents I but fails to get the money. Can he recover? (Hint. B cannot recover the money because an agreement, which tends to create a conflict, between interest and duty is illegal and void being opposed to public 2. In a suit by A against B for the recovery of Rs 5,000, A is in need of money. C agrees to provide funds to A in consideration of sharing one-fourth of the money recovered from B. Decide the validity of the agreement between C and A. [Hint. The agreement between C and A is valid. It is a champertous agreement which is valid provided its terms are fair and reasonable and is made with a bona fide object of. assisting a just claim.] 3. A, while his wife B was alive, promised to marry C in the event of B s death. Subsequently B died but A refused to marry. C sues A for damages for breach of promise. Decide. [Hint. C will not succeed because an agreement for future marriage, after the death of first wife is against good public morals and hence illegal and void (Wilson vs Carnley, 1908, 1 K.B. 729)] 5. A, entered into an agreement with B and engaged B for the purpose of informing puja (prayer) for A s success in a suit which he had before the court and promised to pay Rs 2,000 in the event of success. A succeeded in the suit. B sued A for the amount agreed upon. Will B succeed? [Hint. No, B will not succeed as the object of the agreement is to interfere with the course of justice, making the agreement illegal and void. It has been held that where the object of an agreement is to exercise some extraneous influence, unauthorized by law, on the mind of the court, the agreement is contrary to public policy and hence void [Bhagwan Datt Shastri vs Raja Ram, (1927) All. 406]. However, in Balasundara Mudaliar vs Mahomed Usman, A.I.R. (1929) Mad. 812, a promise of reward by a Muslim litigant to a Hindu devotee in consideration of offering prayers for the success of his suit has been held not against public policy. Thus accordingly the agreement between A and B is valid and B must succeed.] 6. X s estate is sold for arrears of revenue under the provisions of an Act of the Legislature, by which a defaulter is prohibited from purchasing the estate. Y, upon the understanding with X, becomes the purchaser and agrees to convey the estate to X for the price, which Y has paid. Is this agreement valid? Solution: Section to which the given problem relates: Section 23. Decision: The agreement is void. Reason: This agreement results in an indirect purchase by the

defaulter and hence it defeats the object of the law by which a defaulter is prohibited from purchasing the estate. 7. X, Y and Z enter into an agreement for the division among them of gains acquired or to be acquired by them by fraud. Is this agreement valid? Solution: Section to which the given problem relates: Section 23. Decision: This agreement is void. Reason: The object of this agreement is unlawful as it is fraudulent. 8. X borrowed Rs 1,000 from Y. X executed a bond promising to work for Y without pay for 2 years and in LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 53

case of default agreed to pay interest at 10% per month and the principal amount at once. Is this agreement valid? Solution: Section to which the given problem relates: Section 23. Decision: This agreement is void. Reason: The object of this agreement is unlawful as it involves an injury to another person. [Leading case: Ram Saroop v. Bansi Mandar] 9. X let a flat on hire to y, a prostitute, knowing that it would be used for immoral purposes. Is this agreement void? Solution: Section to which the given problem relates: Section 23. Decision: The agreement is void. Reason: The object of this agreement is immoral. -[Leading case: Pearce v. Brooks] 10. X knowing that Y has committed a murder, obtains a promise from Y to pay him (X) Rs 5,00,000 in consideration of not exposing Y. Is this agreement valid? Solution: Section to which the given problem relates: Section 23. Decision: The agreement is void. Reason: This agreement is opposed to public policy as it is for stifling prosecution. 11. X promises to pay Y Rs 1,00,000 if Y secures him an employment in the public service. Is tip s agreement valid? Solution: Section to which the given problem relates: Section 23. Decision: The agreement is void. Reason: The agreement is opposed to public policy as it is for the sale of public office. References Kapoor, N.D. (2003), Elements of Mercantile Law, Sultan Chand and Sons, New Delhi. http://www.indialawinfo.com/bareacts/soga.html M.C. Kucchal ( 2002), Business Law , Vikas Publishing House Pvt. Ltd, Delhi. P.C. Tulsian (2002), Pvt. Ltd, Delhi. Business Law , Tata Mc. Graw Hill

Rohini Aggarwal(2003), Student s Guide To Mercantile And Commercial Laws, Tata Mc. Graw Hill Pvt. Ltd, Delhi. Notes: LEGAL ASPECTS OF BUSINESS Copy Right: Rai University

54 11.555

LESSON 10: VOID AGREEMENTS Learning Outcomes After today s class you should be able to answer the following questions; The agreements expressly declared to be void The uncertain agreements The wagering agreements Introduction In today s lecture we shall study about void agreements and their different classes You all must be aware by now that An agreement not enforceable by law is said to be void [Sec.2(g)]. Thus a void agreement does not give rise to any legal consequences and is void ab-initio. In the eye of law such an agreement is no agreement at all from its very inception. We have already dealt with the following types of void agreements in the preceding chapters, and will not therefore discuss them here again: The preceding chapters, and will not therefore discuss them here again: 1. Agreements by a minor or a person of unsound mind (Sec. 11). 2. Agreements made under a bilateral mistake of fact material to the agreements(Sec. 20). 3. Agreements of which the consideration or object is unlawful (Sec. 23). 4. Agreements of which the consideration or object is unlawful in part and the illegal part cannot be separated from the legal part (Sec. 24). 5. Agreements made without consideration (Sec. 25). Expressly Declared Void Agreements The last essential of a valid contract as declared by Section 10 is that it must not be one which is expressly declared to be void by the Act. Thus, there arises a question, as to what are expressly declared void agreements? The following agreements have been expressly declared , to be void by the Indian Contract Act: 1. Agreements in restraint of marriage (Sec. 26). 2.

agreements in restraint of trade (Sec. 27). 3. Agreements in restraint of legal proceedings (Sec. 28). 4. Agreements the meaning of which is uncertain (Sec. 29) 5. Agreements by way of wager (Sec. 30). 6. Agreements contingent on impossible events (Sec. 36). 7. Agreements to do impossible acts (Sec. 56). At the very outset, it may be borne in mind that the law declares these agreements void ab-initio and not illegal, and therefore transactions collateral to such agreements are not made void. In fact it is for this reason that these agreements have not been discussed in the preceding chapter. Illegal agreements are also unlawful agreements as they are expressly declared void by the Contract Act. It may be recalled that in the case of illegal agreements, transactions collateral to them are also tainted with illegality and hence void. 1. Agreements in Restraint of Marriage Every individual enjoys the freedom to marry and so according to Section 26 of the Contract Act every agreement in restraint of the marriage of any person, other than a minor, is void. The restraint may be general or partial but the agreement is void, and therefore, an agreement agreeing not to marry at all, or a certain person, or a class of persons, or for a fixed period, is void. However, an agreement restraining the marriage of a minor is valid under the Section. It is interesting to note that a promise to marry a particular person does not imply any restraint of marriage, and is, therefore, a valid contract. Illustrations (a) Agrees with B for good consideration that he will not marry C. It is a void agreement. (b) A agrees with B that she will marry him only. It is a valid contract of marriage. 2. Agreements in Restraint of Trade The Constitution of India guarantees the freedom of trade and commerce to every citizen and therefore Section27 declares every agreement by which any one is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void, Thus no person is at liberty to deprive himself of the fruit of his labour, skill or talent, by any contracts that he enters into. It is to be noted that whether restraint is reasonable or not, if it is in the nature of restraint of trade, the agreement is void always, subject to certain exceptions provided for statutorily. Illustration. An agreement whereby one of the parties agrees to close his business in consideration of the promise by the other party to

pay a certain sum of money, is void, being an agreement in restraint of trade, and the amount is not recoverable, if the other party fails to pay the promised sum of money ( Madhub Chander vs Raj Kumar) But agreements merely restraining freedom of action necessary for the carrying on of business are not void, for the law does not intend to take away the right of a trader to regulate his business according to his own discretion and choice. Illustration An agreement to sell all produce to a certain party, with a stipulation that the purchaser was bound to accept the whole quantity, was held valid because it aimed to promote business LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 55

and did not restrain it (Mackenzie vs Striramiah). But where in a similar agreement the purchaser was free to reject the goods (i.e., was not bound to accept the whole quantity tendered) it was held that the agreement was void as being in restraint of trade (Sheikh Kalu vs Ram Saran). Exceptions An agreement in restraint of trade is valid in the following cases (i) Sale of goodwill. The seller of the goodwill of a business can be restrained from carrying on a similar business, within specified local limits, so long as the buyer, or any person deriving title to the goodwill from him, carries on a like business therein, provided the restraint is reasonable in point of time and space (Exception to Sec. 27). Illustrations (a) A after selling the goodwill of his business to B promises not to carry on similar business anywhere in the world. As the restraint is unreasonable the agreement is void. (b) C a seller of imitation jewellery in London sells his business to D and promises that for a period of two years he would not deal: (a) in imitation jewellery in England, (b) in real jewellery in England, and (c) in real or imitation jewellery in certain foreign countries. The first promise alone was held lawful. The other two promises, namely (b) and (c), were held void as the restraint was unreasonable in point of space and the nature of business (Goldsoll vs Goldma). (ii) Partners agreements. An agreement in restraint of trade among the partners or between any partner and the buyer of firm s goodwill is valid if the restraint comes within any of the following cases: (a) An agreement among the partners that a partner shall not carry on any business other than that of the firm while he is a partner . (b) An agreement by a partner with his other partners that. on retiring from the partnership he will not carry on any business similar to that of the firm within a specified period or within specified local limits, provided the restrictions imposed are reasonable [Section 36(2) of the Partnership Act}. (c) An agreement among the partners, upon or in anticipation of the dissolution of the term, that some or all of them will not carry on a business similar to that of the firm within a specified period or within specified local limits, provided the restrictions imposed are reasonable (Section 54 of the Partnership Act). (d) An agreement between any partner and the buyer of the firms that such partner will not carry on any business similar to that of the firm within a specified period or within specified local limits, provided the restrictions

imposed are reasonable [Section 55(3) of the Partnership , Act.] (iii) Trade combinations. As pointed out earlier, an agreement, the Ii primary object of which is to regulate business and not to restrain it, is valid. Thus, an agreement in the nature of a business combination between traders or manufacturers e.g., not to sell their goods below a certain price, to pool profits or output and to divide the same in an agreed proportion, does not amount to a restart of trade and IS perfectly valid (Fraser & Co. v Bombay Ice Company5). Similarly, an agreement amongst the traders of a, particular locality with the object of keeping the trade in their own hands is not void merely because it hurts a rival in trade (Bhola Nath vs Lachmi Narain). But if an agreement attempts to create a monopoly, it would be void (Kameshwar Singh vs Yasin Khan). Agreements tending to create monopolies are now also governed by the provisions of the Monopolies and Restrictive Trade Practices Act, 1969, which forbids certain types of trade agreements. (iv) Negative stipulations in service agreements. An agreement of service by which a person binds himself during the term of the agreement, not to take service with anyone else, is not in restraint of lawful profession and is valid. Thus a chartered accountant employed in a company may be debarred from private practice or from serving elsewhere during the con-tinuance of service (Maganlal vs Ambica Mills Ltd. 8) But an agreement of service which seeks to restrict the freedom of occupation for some period, after the termination of service, is void. Thus, where S, who was an employ-ee of Brahmputra Tea Co. Assam, agreed not to employ himself or to change himself in any similar business within 40 miles from Assam, for a period of five years from the date of the termination of his service, it was held that the agreement is in restraint of lawful profession and hence void (Brahamputra Tea Co. vs Scarth). 3. Agreements in Restraint of Legal Proceedings Section 28, as amended by the Indian Contract (Amendment) Act, 1996, declares the following three kinds of agreements void: (a) An agreement by which a party is restricted absolutely nom taking usual legal proceedings, in respect of any rights arising Item a contract. (b) An agreement which limits the time within which one may enforce his contract rights, without regard to the time allowed by the Limitation Act. (c) An agreement which provides for forfeiture of any rights arising from a contract, if suit is not brought within a specified period, without regard to the time allowed by the Limitation Act. Restriction on Legal proceedings. As stated above Section 28 renders every agreement in restraint of legal proceedings void. This is in furtherance of what we studied under the definition of a contract , namely, agreement plus enforceability at law is a contract. Thus if an agreement inter-alia provides that no party

shall -go to a court of law, in case of breach, there is no contract and the agreement is void ab-initio. In this connection the following points must also be borne in mind: (a) The Section applies only to rights arising from a contract. It does not apply to cases1o of civil or criminal wrongs or torts. LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 56 11.555

(b) This Section does not affect the law relating to arbitration e.g., if the parties agree to refer to arbitration any dispute which may arise between them under the contract, such a contract is valid (Exceptions 1 and 2 to Section 28). (c) The Section does not affect an agreement whereby parties agree not to file an appeal in a higher court. Thus where it was agreed that neither party shall appeal against the trial court s decision, the agreement was held valid, for, Section 28 applies only to absolute restriction on taking the legal proceedings, whereas here the restriction is only partial as the parties can go to a court of law alright and the only restriction is that the losing party cannot file an appeal (Kedar Nath vs Ramlal). (d) Lastly, this Section does not prevent the parties to a contract from selecting one of the two courts which are equally competent to try the suit. Thus in A. Milton & Co. vs qjha Automobile Engineering Company s Casel2, there was an agreement which inter-alia provided Any litigation arising out of this agreement shall be settled in. the High Court of Judicature at Calcutta, and in no other court whatsoever. The defendants filed a suit in Agra whereas the plaintiff brought a suit in Calcutta. It was held that the agreement was binding between the parties and it was not open to the defendants to proceed with their suit in Agra. Curtailing the period of limitation. Any agreement curtailing the period of limitation prescribed by the Limitation Act is also void under .section 28. Thus, if a clause in an agreement between A and B provides that either party can sue for breach within a year of breach only, the clause is void and despite the clause the parties have a right to sue in case of breach Such cases come under Agreements Stifling Prosecutions which have been discussed in the preceding chapter.by either party within the time allowed by the Limitation Act i. e.. within three years from the date of breach. It is relevant to state that agreements extend tile period of limitation prescribed by the Limitation Act are also void, not under this Section but under Section 23, as the object will be to defeat the provisions of the law (Rama Murthy vs Gopayya). Forfeiture of contract rights. Under Clause (c) of Section 28 (stated above) an agreement which provides for forfeiture of any rights arising from a contract, if suit is not brought within a specified time (say 3 months) is also void. This Clause was inserted by the Indian Contract (Amendment) Act, 1996. The distinction between Clause (b) and Clause (c) of Section 28 (stated above) may be noted. Under Clause (b), the agreement limits the time within which one may enforce his contract rights thereby curtailing the. period of limitation prescribed by the Limitation Act, whereas under Clause (c), the agreement limits the time within which one is to have any contract tights to enforce. Thus, Clause (c) refers to an agreement which does not affect the remedy for breach but which extinguishes the right itself after the specified time and such a stipulation has also been declared void. The background behind the passing of the Indian Contract

(Amend-ment) Act, 1996 may be briefly stated as follows. Prior to this Amendment Act, the insurance policy documents issued by general insurance companies invariably provided that if a claim is rejected and a suit is not tiled within three months after such rejection, all benefits under the policy shall be forfeited. Such a provision was held valid and binding on the ground that it is outside the scope of Section 28 (Baroda Spinning Co. Ltd. vs Satya-narayan Marine & Fire Insurance Co. Ltd. 14). The learned judge observed: what the plaintiff was forbidden to do was to limit the time within which he was to enforce his rights; what he has done is to limit the time within which he is to have any rights to enforce; and that appears to me to be a very different thing . However, the Supreme Court in the Food Corporation of India vs New India insurance Co. Ltd. (1994) .Case held that insurance contracts restraining the time period within which one is to have any con-tract rights to enforce were violative of the Limitation Act. The Parliament has therefore amended Section 28 by inserting a new clause. Accordingly henceforth general insurance companies cannot insist that suits for claims be brought within a period of time smal1er than the period provided under the Limitation Act, otherwise all benefits under the policy shall be forfeited. Uncertain Agreements Agreements, the meaning of which is not certain, or capable of being made certain, are void (Sec. 29). Through Section 29 the law aims to ensure that the parties to a contract should be aware of the precise nature and scope of their mutual rights and obligations under the contract: Thus, words used by the parties are vague or indefinite, the law cannot enforce the agreement. Illustrations (to Sec. 29). (a) A agrees to sell to B , a hundred tons of lories nothing whatever to show what kind of oil was intended. The agree void for uncertainty. (b) A, who is a dealer in coconut oil only, agrees to sell to B one hundred tons. The nature of A s trade affords an indication of the meaning of the words, last entered into a contract for the sale of one hundred tons of coconut oil. (c) A agrees to sell to B one thousand mounds of rice at a price to be fixed As the price is capable of being made certain, there is no uncertainty here the agreement void. (d) A agrees to sell to B his white horse for rupees five hundred or rupees one oil. There is nothing to show which of the two prices was, to be given. The agreement is void. Further, an agreement of to enter into an agreement in future is void certainty unless all the terms of the proposed agreement are agreed sly or implicitly. Thus, an agreement to engage a servant some time next year, at a salary to be mutually agreed upon is a void agreement. 5. Wagering Agreements What is a wager? Literally the word wager means a a bet.: something to be lost or won on the result of a doubtful issue

and, therefore, wagering agreements are nothing but ordinary betting agreements. Thus A and B mutually agree that if it rains today A will pay B Rs 100 it does not rain B will pay A Rs 100 or where C and D enter into agreement that on tossing up a LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 57

coin, if it falls head upwards C will pay O and if it falls tail upwards D will pay C Rs 50; there is, a wagering agreement A wager can be described as, follows: The agreement of gaming and wagering is that one party is to win and the other e upon a future every which at the time C the contract is of an a in nature - that is to say, if the event turns out one way A will lose; I it turns out the other way he will win. Possibly the most expressive and all-encompassing definition of a was agreement was given by, Hawkins., in Carlill vs Carboli,c Smoke Ball Co. A wagering contract is one by which two persons professing to hold opposite views touching the issue of a future uncertain event mutually agree independent upon the determination of that event, one shall win from the and the other shall pay or hand over to him, a sum of money or other neither of the contracting parties having any other interest ill that contract than the sum of stake he will so win or lose, there being no other real consideration for the making of such contract by either of the parties. It is essential to a wagering contract that each party may under it either win or lose, whether he will win or lose being dependent on the issue of the event, and, therefore, remaining uncertain until that issue is known. If either of the parties may win but cannot lose, or may lose but cannot win, it is not a wagering contract. Certain aspects of the above definition require to be emphasised. In me first place, wager is a game of chance in which the contingency of either gain or loss is wholly dependent on an uncertain event. An event may be uncertain., not only because it is a future event, but because it is not yet known to the parties. Thus a wager may be made upon the result of the cricket match which is to take place , next month in Calcutta, or upon the result of an election which is over, if the parties do not know the result. Secondly, the parties to a wager must have no interest in the event s hap-pening or non-happening except the winning or losing of the bet laid be-tween them. It is here that wagering agreements differ from insurance contracts which are valid because parties have an interest to protect the life or property, and have, for that very reason, entered into the contract of insurance. Essential features of a wager. The essentials of a wagering agreement may thus be summarised as follows: (a) There must bean promise to pay money or money s worth,_ (b) The promise must be conditional on an event s happening or not happening (c) The event must be an uncertain one. If one of the parties has the event in his own hands, the transaction is not a wager. (d) Each party must stand to win or lose under the terms of agreement. An agreement is not a wager if one party- may

only win and cannot lose, or if he may lose but cannot win, or if he can neither win nor lose. (e) No party should have a proprietary interest in the event. The stake must be the only interest which the parties have in the agreement. An agreement by way of a wager , void. Section 30 lays down that agreements by way of wager are void; and no suit shall be brought or recovering anything alleged to be won on any wager, or entrusted to any person to abide the result of any game or other uncertain event on which any wager if made. Thus, where A and B enter into an agreement which provides that if England s cricket team wins the test match, A will pay B Rs, 100, and if it loses B will pay Rs. 100 to A, nothing can be recovered by the winning party under the agreement, it being a wager. Similarly, where C and D enter into a wagering agreement and each deposits Rs 100 with Z. instructing him to, pay or give the total sum to the winner, no suit can be brought by the winner for recovering the. bet amount from Z, the stake-holder. Further, if I.. had paid the sum to the winner, the loser cannot bring a suit. for recovering his Rs 100, either against the winner or against Z, the stake-holder, even if Z had paid after the loser s definite instructions not to pay. Of course the loser can recover back, his deposit if he makes the demand before the stake-holder had paid it ovation the winner (Ratnakalli vs Vochalapu). But even such a deposit cannot be recovered by a loser. in the States of Maharashtra and Gujarat. where such an agreement is void and illegal. The Section makes an exception in favour of certain prizes for horse racing by providing further that This Section shall not be deemed to render unlawful a subscription, or contribution, or agreement to subscribe or con-tribute, made or entered into for or toward any plate, prize or sum of money, of the value or amount of five hundred rupees or upwards, to be awarded to the winner or winners of any horse race. Thus, a bet on a horse race carrying a prize of Rs 500 or more to the winners has been made valid under the exception. But with a view to protecting the poor persons from gambling, a bet on a horse race carrying a prize of less than Rs 500 remains a wager. It is important to note that in the States of Maharashtra and Gujarat wagering agreements are, by a local statute, not only void but also illegal. As a result in these states the collateral transactions to wagering agreements become tainted with illegality and hence are void. Special cases. We now turn to certain special cases in order to examine as to whether they are wagers: Commercial transactions. Agreements for sale and purchase of any commodity or share market transactions, in which there is a genuine inten-tion to do legitimate business i. e., to give and take delivery of goods or shares, are not wagering agreements. If there is no such genuine intention and parties only want to gamble on the rise or fall of the market by paying or receiving the differences in prices only, the transaction would be a wagering agreement and therefore void. In order to constitute a

wagering contract, neither party should intend to perform the contract itself, but only to pay the differences Lotteries. A lottery is a game of chance. Hence the lottery business is a wagering transaction. Such a transaction is not only void but also illegal because 294-A of the Indian Penal Code declares conducting of lottery a punishable offence. If a lottery is authorized by the Government, the only effect of such permission is that the persons conducting the lottery (i. e., the LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 58 11.555

persons running the lottery and the buyer of lottery ticket) will not. be guilty of a criminal offence, but the lottery remains a wager alright (Dorabji Tata vs Lance). . . Crossword puzzles. Where prizes depend upon a chance, it is a lottery and therefore a wagering transaction. Thus a crossword puzzle, in which prizes depend upon correspondence of the competitor s solution with a previously prepared solution, is a wager. But if prizes depend upon skill and intelligence, it is a valid transaction. Thus prize competitions which are games of skill and in which an effort is made to select the best competitor e.g., picture puzzles, literary competitions and athletic competitions are not wagers. Even in such competitions .the amount of prize should not exceed Rs 1,000, otherwise they shall be wagers as per the provisions of the Prize Competition Act, 1955. Insurance contracts. Insurance contracts are valid contracts even though they provide for payment of money by the insurer ,on the happening of a future uncertain event. Such contracts differ from wagering agreements mainly in three respects: (a) The holder of an insurance policy must have an insurable interest in the event upon which the insurance money becomes payable. thus con-tracts of insurance are entered into to protect an interest. In a wagering agreement there is no interest to protect and the parties bet exclusively because they can thereby make some easy money. (b) Contracts of insurance are based on scientific and actuarial calculation whereas wagering agreements are a gamble without any scientific calculation of risks. (c) Contracts of insurance are regarded as beneficial to the public, whereas wagering agreements do not serve any useful purpose. 6. Agreements Contingent on Impossible Events Contingent agreement to do or not to do anything, if an impossible event happens, are void, whether the impossibility of the event is known or not to the parties to the agreement at the time when it is made. (See.. 36) Illustrations (to Sec. 36). (a) A agrees to pay B Rs 1,000 (as a loan) if two straight lines should enclose a space. The agreement is void. (b) A agrees to pay B Rs. 1,000 (as a loan) if B will marry A s daughter, C. C was dead at the time of the agreement. The agreement is void. 7. Agreements to do Impossible Acts An agreement to do an act impossible in itself is void. (Sec. 56 Para 1 Illustrations

(a) A agrees with B to discover treasure by magic. The agreement is void [Illustration (a) to Section 56]. (b) A agrees with B to run with a speed of -100 Kilometers per hour. The agreement is void. No Restitution The term restitution means return or restoration of the benefit received from the plaintiff under the agreement. As per Section 65 , no restitution ,of the benefit received is allowed in the case of expressly declared void agreements. Practical Problem Attempt the following problems, giving reasons for your answers: 1. A agrees to sell all the goods manufactured by him in the ensuring season to B. In breach of the said agreement A sold some goods manufactured during the said season to C. Thereupon B sued A for breach of contract. Will B succeed? {Hint: Yes, B will succeed because the agreement between him and A is valid as it aims to promote business and does not restrain it.} 2. A agrees to sell his cow to B for Rs 500 if the cow gives 6 kg milk every day, but for Rs 10 only if it fails to do so. The cow fails, whereupon B demands the cow for Rs. 10 as agreed. A refuses. Bbrings a suit against him. Will B succeed? [Hint: No, B will not succeed as the transaction, through ostensibly a sale, is in reality a wager ( Brogden vs Marriott) 3. A lends money to B to enable him to pay off the loss which he has sustained in a wagering transaction with C. Can A recover the money lent by him? [ Hint: A can recover, because an agreement collateral to a wagering agreement remains valid except in Maharashtra and Gujarat States where wagering agreements are illegal.] 4. A and B are partners in a business. They enter into a wagering agreement with a third party. On losing the bet A satisfies his own and also B s liability under the agreement. Can A claim from B the amount paid on his behalf? [Hint. Yes, A can claim the amount from B because a wagering agreement is only void and not illegal and therefore a collateral contract can be enforced.] True or False Questions State whether the following statements are true or false: 1. The performance of a contingent contract depends upon

the happening of some future event. 2. The performance of a contingent contract depends upon the non-happening of some future event. 3. The event in. a contingent contract must be essential to the contract. 4. The event in a contingent contract may be certain, or uncertain. 5. The performance of a contingent contract must not depend upon mere will of the promisor. 6. Contracts contingent upon the happening of an uncertain future event be- comes avoidable at the option of promisee if that event becomes impossible. 7. Contracts contingent upon the non-happening of a certain future event cannot be enforced if the happening of that event becomes impossible. 8. Contracts contingent upon the happening of an uncertain specified event within a fixed time can become void only after the expiry of the fixed time. LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 59

9. Contracts contingent upon the non-happening of an uncertain specified event within a fixed time can be enforced only after the expiry of the fixed time. 10. Agreements contingent upon impossible events are void only if the parties to the agreements at the time when these are made know the impossi-bility of the event. Answers LEGAL ASPECTS OF BUSINESS 1. False 2. False 3. False 4. False5. True 6. . False 7. False 8. False 9. False 10. False References Kapoor, N.D. (2003), Elements of Mercantile Law, Sultan Chand and Sons, New Delhi. http://www.indialawinfo.com/bareacts/soga.html M.C. Kucchal ( 2002), Business Law , Vikas Publishing House Pvt. Ltd, Delhi. P.C. Tulsian (2002), Pvt. Ltd, Delhi. Business Law , Tata Mc. Graw Hill

Rohini Aggarwal(2003), Student s Guide To Mercantile And Commercial Laws, Tata Mc. Graw Hill Pvt. Ltd, Delhi Notes Copy Right: Rai University 60 11.555

LESSON 11: QUASI CONTRACTS AND CONTINGENT CONTRACTS Learning Outcomes After today s class you should be able to answer the following questions: The meaning of quasi contract The different types of quasi contract The meaning of contingent contract The nature and effect of contingent contract The differences between wagering and contingent contracts. The first of all we will start with the Quasi Contracts Quasi Contracts Introduction We have seen that a contract is the result of an agreement enforceable by law. But in some cases there is no offer, no acceptance, no consensus ad idem and in fact no intention on the part of parties to enter into a contract and still the law, from the conduct and relationship of the parties, implies a promise imposing obligation on the one party and conferring a right in favour of the other. In other words under certain special circumstances obligations resembling those created by a contract are imposed by law although the parties have never entered into a contract. Such obligations imposed by law are referred to as Quasi-Contracts or Constructive Con-tracts under the English law, and certain relations resembling those cre-ated by contracts under the Indian law. The term quasi-contract has been used because such a contract resembles with a contract so far as result or effect is concerned but it has little or no affinity with a contract in respect of mode of creation. A quasi-contract rests upon the equitable doctrine of unjust enrich-ment which declares that a person shall not be allowed to enrich himself unjustly at the expense of another. Duty, and not a promise or agreement, is the basis of such contracts. It may be noted that a suit for damages for the breach of the contract can be filed in the case of a quasi-contract in the same way as in the case of a completed contract (Sec. 73). The Contract Act deals with quasi-contractual obligations under Sections 68 to 72, which are discussed below: I. Claim for necessaries supplied to a person incapable of contract-ing or on his account (Sec. 68). If a person,

incapable of entering into a 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 such supplies is entitled to be reimbursed from the property of such incapable person. This provision has already been considered in connection with minor s agreements in the chapter of Capacity of Parties. With a view to recapitu-late it may be stated here that although agreements by minors, idiots, luna-tics, etc., are void ab-initio, but Section 68 makes an exception to this rule by providing that their estates are liable to reimburse the supplier who supplies them or to some one whom they are legally bound to support with necessaries of life. The following points need to be emphasized: (i) The Section does not create any personal liability but only the estates are liable. (ii) The things supplied must come within the category of necessaries . The word necessaries here covers not only bare necessities of existence, e.g.. food and clothes, but all things which are reasonably necessary to the incompetent person, having regard to his status in society, e.g., a watch, a radio, a bicycle may be included therein. (iii) Necessaries should be supplied only to such incompetent person or to some one whom he is legally bound to support such as his wife and children. (iv) Incompetent person s property is liable to pay only reasonable price for the goods or services supplied and not the price which the incompetent person might have agreed to pay(legally speaking an incompetent person cannot agree to anything). Illustrations (to See 68) (a) A supplies B, a lunatic, with necessaries suitable to his condition in life. A is entitled to be reimbursed from B s property. (b) A supplies the wife and children of B, a lunatic, with necessaries suitable to their condition in life. A is entitled to be reimbursed from B s property. 2. Reimbursement of person paying money due by another, in pay-ment of which he is interested (Sec. 69). A person who is interested in the payment of money which another is bound by law to pay, and who therefore pays it, is entitled to be reimbursed by the other. Illustration (to Sec. 69). B holds land in Bengal, on a lease granted by the zamindar. The revenue payable by A to the Government being in arrear, his land is advertised for sale by the Government. Under the revenue law, the. conse-quence of such sale will be the annulment of B s lease. B, to prevent the sale and the consequent annulment of his own lease, pays to the government the sum due from A. A is bound to make good to B the amount so

paid. In order to make Section 69 applicable, the following conditions must be satisfied: (i) The plaintiff should be interested in making the payment in order to protect his own interest and the payment LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 61

should not be voluntary one. Moreover, the payment must have been done in good faith and not to manufacture evidence of title to land or any other thing. Illustrations. (a) A sub-tenant pays the arrears of rent due by the tenant the landlord, in order to save the tenancy from forfeiture. The sub-tenant is entitled to recover from the tenant, the amount paid by him to the landlord, although there is no contract between the two. (b) A, pays the arrears of rent of his neighbour B, just to avoid a struggle between B and his landlord. A cannot recover from B as he acted voluntarily and had no interest of his own in the payment. [But if B should agree to reimburse A, this would be a good contract under Section 25(2).] (ii) The payment must be such as the other party was bound by law to pay. Illustration a s goods were wrongfully attached to. realise the arrears of Government revenue due by B. A pays the dues to save the goods from being sold. He is entitled to recover the amount from B (Abid Hussain vs Ganga Sahai). (iii) The payment must not be such as the plaintiff himself was bound to pay. He should only be interested in making the payment. In other words, a suit under this section is maintainable only for reimbursement and not for contribution. Thus, where there is a joint liability on joint wrong doers and only one of them discharges the liability, no suit for contribution from the other would be maintainable under this Section (Ramkrishna vs Radhakrishana). [A suit for contribution from the other joint promisor would be maintainable under Section 43.] Illustration A and B have been fined jointly Rs500 for selling adulter-ated ghee. A alone pays the amount of fine in good faith, A cannot later claim contribution from B under Section 69. Notice that although B was bound by law to pay and A has paid B s share in good faith, yet A cannot recover as he himself was bound to make the payment, being jointly liable with B and was not simply inter-ested in making the payment. [A can, however, claim contribution form B under action 43.] 3. Obligation of person enjoying benefit of non-gratuitous act (Sec. 70). This is the third type of quasi-contract provided in the Contract Act. Section 70 lays down thus, Where a person lawfully does anything for another person, or delivers anything to him, not intending to do so gratui-tously, 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. For giving rise to a right of action under this Section, the following three conditions must be fulfilled: (i)

The thing must have been done lawfully in good faith. This means that the act done must be in pursuance of the implied wishes (because there should not be any request in the case of a quasi-contract) and in the presence of the other party, giving him the full choice to reject the thing or service. (ii) The thing must have been done by a person not intending to act gratuitous i.e., it must have been done with the intention of being paid for. . (iii) The person for whom the act is done must have enjoyed the benefit of the act. Illustrations (a) A, a tradesman, leaves goods at B s house by mistake. B treats the goods as his own. He is bound to pay A for them. [Illustration to Section 70]. (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. [Illustration to Section 70] (c) Where a coolie takes the luggage at the railway station without being asked by the passenger or a shoe-shiner starts shining shoes of the passenger without being asked to do so, and if the passenger does not object to that, then he is bound to pay reasonably for the same as the work was not intended to be gratuitous. . 4. Responsibility of finder of goods (Sec. 71). Section 71 lays down another circumstance in which also a quasicontractual obligation is to be presumed. It says: A person.. who finds goods belonging to another and takes them into his custody, is subject to the same responsibility as a bailee. Thus law between the owner and finder of the goods also implies an agreement and the latter is deemed to be a bailee. Duties of finder of goods. He must try to find out the real , owner of the goods and must not appropriate the property to his own use. If the real owner is traced, he must restore the goods to him on demand. If he does not take these measures, he will be guilty of criminal misappropriation of the property under Section 403 of Indian Penal Code. Further, till the goods are in possession of the finder, he must take as much care of the goods as a man of ordinary prudence would, under similar circumstances, take of his own goods of the same bulk, quality and value (Sec. 151). The rights of a finder of goods have been discussed in Sections 168-.169 which provide as follows: Rights of finder of goods. Till the true owner is found out, he can retain possession of the goods against everybody in the world. He is entitled to receive from the true owner, all expenses incurred by him for preserving the goods or finding the true owner. He has a lien on the goods for the money so spent i.e., he can refuse to redeem the goods to the true owner until these moneys are paid. He is not entitled to file a suit for the recovery

of such sums. But he can file a suit against the owner to recover any reward, which was offered by the owner for the return of the goods, provided he came to know of the offer of reward before actually finding out the goods. The finder of goods is entitled to sell the goods if the owner cannot be found out or if he refuses to pay the lawful charges of the finder, in the following two situations only: LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 62 11.555

(a) When the thing is in danger of perishing or of losing the greater part of its value, or (b) When the lawful charges of the finder amount to twothirds of the value of the goods found. The true owner is entitled to get the balance of sale proceeds, if there is surplus after meeting the lawful charges. It is to be noted that no one except the real owner can claim possession of goods from the finder. If anybody deprives him of the possession of the goods, he can file a suit for damages for trespass. Illustration. H picked up a diamond on the floor of F s shop and handed it over to F to keep it till the owner appeared. In spite of best efforts the true owner could not be searched. After the lapse of some weeks, H tendered to F the lawful expenses incurred by him for finding the true owner and an indemnity bond and requested him to return the diamond to him (i.e., H). F refused to do so. Held, F must return the diamond to H as he was entitled to retain the goods as against everybody except the true owner (Hollinsvs FowlerS). 5. Liability of person to whom money is paid, or thing delivered by mistake or under coercion (Sec. 72). This is the fifth and the last kind of quasi-contract mentioned in the Act. Section 72 declares thus, A person to whom money has been paid, or anything delivered, by mistake or under coercion, must repay or return it. Accordingly, if one party under a mistake pays to another party money, which is not due by contract or otherwise, that money must be repaid. The term mistake has been used in the Section without any qualifi-cation or limitation whatever and comprises within its scope a mistake of law as well as a mistake of fact (Sales Tax Officer vs Kanhaiyalal Mukund). The term coercion has been used in its ordinary sense and not as defined in Section 157 (Pep/ad Bulakhidas Mills vs Union of India). Here coercion means under pressure . Illustration (a) A and B jointly owe Rs 100 to C. A alone pays the amount to C, and 13, not knowing this fact, pays Rs 100 over again to C. C is bound to repay the amount to B [illustration to Section 72]. (b) A railway company refuses to deliver up certain goods to the consignee, except upon the payment of an illegal charge for carriage. The consignee pays the sum charged in order to obtain the goods. He is entitled to recover so much of the charge as was illegally excessive (illustration to Section 72). (c) A pays some money to B by mistake. It is really due to C. B must refund the money to A. C, however, cannot recover the amount from B in the absence of privities of contract between B and C. (d) A fruit parcel is delivered under a mistake to R who consumes the fruits thinking them as birthday present, R

must return the parcel or pay for the fruits. Although there is no agreem ent between R and the true owner, yet he is bound to pay as the law regards it a quasi-contract. It is to be noted, that this Section does not cover a, base Where money has been paid in payment of a natural obligation. Thus where one has paid up a time-barred debt, he cannot recover it. Similarly the Section does not apply when there is a deliberate disregard of law e.g., where moneys are paid voluntarily knowing fully well that the contract has become void, it cannot be recovered under the Section (Ananth Bandhu vs Union of India). Contingent Contracts First let us define a contingent contract Definition Section 31 of the Contract Act 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 it is a contract, the performance of which is dependent upon, the happening or non-happening of an uncertain event, collateral to such contract. Illustration A contract to indemnify B upto Rs20,000, in consideration of B paying Rs1,000 annual premium, if B s factory is burnt. This is a contingent contract. Any ordinary contract can be changed into a contingent contract, if its performance is made dependent upon the happening or non-happening of an uncertain event, collateral to such contract. For example, the following are contingent contracts: (a) A contracts to sell B 10 bales of cotton for Rs20, 000, if the ship by which they are coming returns safely. (b) A promises to give a loan of Rs1, 000 to B, if he is elected the president of a particular association. (c) A promises to pay Rs50, 000 to B if a certain ship does not return, of course after charging usual premium. (It is a contract of insurance.) (d) C advances a loan of Rs10, 000 to D and M promises to C that if D does not repay the loan, M will do so. (It is a contract of guarantee.) Contracts of insurance and contracts of indemnity and guarantee are popular instances of contingent contracts. As the performance of a contract is made dependent upon a contingency, contingent contracts are also known as conditional contracts. But in certain cases a contract may look like a conditional contract, whereas in fact it may be simply an ordinary absolute contract where the promisor undertakes to perform the contract in all events. For example, where A promises to pay

Rs.500 to B, a property broker, if B manages to get a two rooms accommodation for him at a rental of Rs2,500 per months, it is not a contingent contract, though on the face of it, it appears like a conditional contract. It is an ordinary absolute contract because the uncertain event (namely, managing to get an accommodation) itself forms the consideration of the contract and is not a collateral event. Hence it must be clearly understood that in the case of contingent contracts the uncertain events must be collateral to such contracts. Collateral event. According to Pollock and Mulla, a collateral event, means an event which is neither a performance directly promised as part of the contract, nor the whole of the considerLEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 63

ation for a promise. Thus, where C contracts to pay Rs100 to D for white-washing his house on the terms that no payment shall be made till the completion of the work, it is not collateral to the contract, but is itself a reciprocal promise or is the very thing contracted for, and is thus an integral part of the contract. Similarly, a contract for the sale of goods wherein the seller agrees to give delivery of goods after a week provided the purchaser makes the payment within two days, is an absolute contract and not a contingent contract because the event (making payment by the buyer) is an integral part of the contract ( a condition precedent ) and not collateral to the contract. In simple words, the collateral event is one, which does not form part of consideration of the contract, and is independent of it. For example, A contracts to pay Rs50,000 to B, a contractor, for constructing a building, provided the construction is approved by an architect. It is a contingent contract because the consideration of the promise to pay Rs50,000, is the construction of the building, and the event, namely, approval by an architect, is a collateral event, which is independent of the consideration, and it is on the happening of this collateral event that the contract shall be enforced. Essentials of Contingent Contract From the foregoing discussion the following two essentials of a contingent contract become evident: 1. The performance of such a contract depends upon the happening or non-happening of some future uncertain event. 2. The future uncertain event is collateral i.e., incidental to the contract. Rules Regarding the Performances of Contingent Contracts The rules regarding the performance of contingent contracts, as contained in Sections 32 to 36 of the Contract Act, are given below: 1. Contingent contracts to do or not to do anything if an uncertain future event happens, it cannot be enforced by law unless and until that event has happened. If the event becomes impossible, such contracts become void (Sec. 32). Illustrations (a) A makes a contract with B to buy B s horse if A survives C. The contract cannot be enforced by law unless and until C, dies in A s lifetime. (b) A makes a contract with B to sell a horse to B at a specified price, if C, to whom the horse has been offered, refuses to buy it. The contract cannot be enforced by law unless and

until C refuses to buy the horse. (c) A contracts to pay B a sum of money (as loan when B marries C. C dies without being married to B. The contract becomes void. 2. Contingent contracts to do or not to do anything if an uncertain future event does not happen, it can be enforced when the happening of that event becomes impossible, and not before (Sec. 33). Illustration ( to Sec. 33). A agrees to pay B a sum of money (as insurance claim) if a certain ship does not return (of course after charging premium). The ship is sunk. The contract can be enforced when the ship sinks. 3. If a contract is contingent upon how a person will act at an unspecified time, the event shall be considered to become impossible when such person does anything which renders it impossible that he should so act within any definite time, or otherwise than under further contingencies (Sec. 34). Illustration (To Sec. 34). A agrees to pay B a sum of money (as loan) if B marries C. C marries D. The marriage of B to C must now be considered impossible, although it is possible that D may die and that C may afterwards marry B. [If later B actually marries C (the D s widow), it will not revive the old obligation of A to pay the sum, because that came to an end when C married D]. 4. Contingent contracts to do or not to do anything, if a specified uncertain event happens within a fixed time, becomes void, if, at the expiration of the time fixed, such event has not happened, or if, before the time fixed, such event becomes impossible [Sec. 35 (1)]. Illustration ( to Sec. 35). A promises to pay B a sum of money (as loan) if a certain ship returns within a year. The contract may be enforced if the ship returns within the year, and becomes void if the ship is burnt within the year or if the ship does not return within the year. 5. 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 [Sec. 35 (2)]. Illustration ( to Sec, 35). A promises to pay B a sum of money ( as insurance claim) if a certain ship does not return within a year. The contract may be enforced if the ship does not return within the year, or is burnt within the year. 6. Contingent agreements to do or not to do anything, if an impossible event happens, are void, whether the impossibility of the event is known or not to the parties to the agreement at the time when it is made (Sec. 36). Illustrations (to Sec. 36). (a) A agrees to pay B Rs. 1,000 (as a

loan), if two straight lines should enclose a space. The agreement is void. (a) A agrees to pay B Rs. 1,000 (as a loan), if B will marry A s daughter C. C was dead at the time of the agreement. The agreement is void. Difference between a Contingent Contract and a Wagering Agreement The main points of distinction between the two are as under: 1. A contingent contract is a valid contract but a wagering agreement is absolutely void. 2. In a contingent contract the parties have real interest is the occurrence or non-occurrence of the event e.g., insurable interest in the property insured, but in a wager the parties LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 64 11.555

are not interested in the occurrence of the event except for the winning or losing the best amount. 3. In a contingent contract the future uncertain event is merely collateral whereas in a wagering agreement the uncertain event is the sole determining factor of the agreement. Attempt the following problems, giving reasons for your answers: Practical Problems 1. A, a Hindu minor, fraudulently representing himself as major, takes a loan of Rs 5,000 for the marriage of his sister from B at 8 per cent interest. Can B recover the loan and the interest? [Hint. Although the minor cannot be estopped from setting up his minority. Yet B can recover the loan out of A s property. If any, because marriage expenses of one s sister are included within the scope of necessaries. (Nanadan Pd. Vs Ajundhia pd. 1910, 32 All. 325). Interest, of course , will not be allowed.] 2. A contracts to sell a part of a specific crop of potatoes to be grown on his farms to B for Rs1,000. The delivery is to be made after two months and the payment is to be made one month before delivery. Soon after the crop is destroyed by a pest to the knowledge of both the parties but still makes the payment as agreed. On the expiry of two months, when no potatoes are delivered to B, B sues A for breach of the contract and for refund of the purchase price. Will B succeed ? [Hint. No, B will not succeed. The contract in question stands discharged by subsequent destruction of subject-matter and hence there arises no question of its breach. As regards the refund of purchase price. it also cannot be recovered because Sec. 72 does not apply when there is a deliberate disregard of law (Ananth Bandhu vs Dom. of India, A.J.R. 1955. Cal. 626). 3. A agreed to construct a building for B for Rs. 2 lakhs, on the terms that no payment shall be made till the completion of the work. Is this a contingent contract? [Hint. No, this is not a contingent contract because the uncertain event ( i.e., A s completing the work ) is not collateral to the contract but is the very thing contracted for, and is thus an integral part of the contract.] 4. A agrees to sell land to B at a price to be fixed by C. C refuses to fix the price, the contract enforceable? [Hint. No, the contract is not enforceable because by C s refusal to fix the price the agreement becomes void for uncertainty in terms.] 5. A promises to pay B for his services whatever A himself will think right or reasonable. Later, being dissatisfied with

the payment made, B sues A. Decide. [Hint. B s suit will not be admitted by the Court because if the performance of a promise is contingent upon the mere will and pleasure of the promisor, certain, or capable of being made certain, are void (Sec. 29).] References Kapoor, N.D. (2003), Elements of Mercantile Law, Sultan Chand and Sons, New Delhi. http://www.indialawinfo.com/bareacts/soga.html M.C. Kucchal ( 2002), Business Law , Vikas Publishing House Pvt. Ltd, Delhi. P.C. Tulsian (2002), Pvt. Ltd, Delhi. Business Law , Tata Mc. Graw Hill

Rohini Aggarwal(2003), Student s Guide To Mercantile And Commercial Laws, Tata Mc. Graw Hill Pvt. Ltd, Delhi. Notes: LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 65

LESSON 12: PERFORMANCE AND DISCHARGE OF A CONTRACT Learning Outcomes After todays class you should be able to answer the following questions: The performance of a contract The time and place of performance The performance of reciprocal promises The appropriation of payment The contracts which need not be performed The modes of discharge of a contract Introduction Let us first learn about the performance of a contract Section 37 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. Promises bind the representatives of the promisors in case of death of such promisors before performance, unless a contrary intention appears from the contract. Illustrations (a) A promises to deliver goods to B on a certain day on payment of Rs. 1,000. A dies before that day. A s representatives are bound to deliver the goods to B, and B is bound to pay Rs. 1,000 to A s representatives. (b) A promises to paint a picture for B by a certain day, at a certain price. A dies before the day. The contract cannot be enforced either by A s representative or by B [section 37]. The performance can be actual performance or attempted performance , i.e. offer to perform . Section 38 specifies 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. Every such offer must fulfill the following conditions: (1) It must be unconditional; (2) 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 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; (3) If the offer is an offer to deliver anything to the promisee, the promisee must have a reasonable opportunity of seeing that the thing offered is the thing which the promisor is bound by his promise to deliver. An offer to one of several joint promisees has the same legal consequences as an offer to all of them. Effect of refusal of party to perform promise wholly (Section 39) 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. Now a question arises who are the persons who should perform the contract By Whom Contracts Must be Performed Section 40 specifies that if it appears from the nature of the case that it was the intention of the parties to any contract that any promise contained in it should be performed by the promisor himself, such promise must be performed by the promisor. In other cases, the promisor or his representatives may employ a competent person to perform it. Effect of accepting performance from third person (Section 41)- When a promisee accepts performance of the promise from a third person, he cannot afterwards enforce it against the promisor. Devolution of joint liabilities (Section 42)- When two or more persons have made a joint promise, then, unless a contrary intention appears by the contract all such persons, during their joint lives, and, after the death of any of them, his representative jointly with the survivor or survivors, and, after the death of the last survivor, the representatives of all jointly, must fulfill the promise. Any one of joint promisors may be compelled to perform ( Section 43) 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. Each promisor may compel contribution.- Each of two or more joint promisors may compel every other joint promisor to contribute equally with himself to the performance of the promise, unless a contrary intention appears from the contract. Sharing of loss by default in contribution.- If any one of two or more joint promisors makes default in such contribution, the remaining joint promisors must bear the loss arising from such default in equal shares. Explanation. Nothing in this section shall prevent a surety from recovering from his principal, payments made by the surety on behalf of the principal, or entitle the principal to recover anything from the surety on

account of payments made by the principal. As the liability is joint and several under Sec. 43 of the Contract Act, D1 cannot escape from his liability merely because the claim as against D2 stood abated. Therefore, there is not any illegality in the decree granted by the lower Court as against D1. Effect of release of one joint promisor (Section 44) Where two or more persons have made a joint promise, a release of one of LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 66 11.555

such joint promisors by the promisee does not discharge the other joint promisor or joint promisors, neither does it free the joint promisors so released from responsibility to the other joint promisor or joint promisors. Devolution of joint rights (Section 45)- 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. The time and place of performance is very important in the context of a valid performance of a contract Time and Place For Performance Time for performance of promise, where no application is to be made and no time is specified (Section 46) 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. Explanation The question what is a reasonable time is, in each particular

case, a question of fact. Time and place for performance of promise, where time is specified and no application to be made (Section 47) 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 it at any time during the usual hours of business on such day and at the place at which the promise ought to be performed. Application for performance on a certain day to be at proper time and place. (Section 48) 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. Explanation.- The question what is a proper time and place is, in each particular case, a question of fact. (Section 49) Place for performance of promise, where no application to be made and no place fixed for performance.When a promise is to be performed without application by the promisee, and no place is fixed for the performance of it; it is the duty of the promisor to apply to the promisee to appoint a reasonable place for the performance of the promise, and to perform it at such place. (Section 50) Performance in manner or at time prescribed or sanctioned by promisee.- The performance of any promise may

be made in any manner, or at any time which the promisee prescribes or sanctions. Let us learn about the performance of reciprocal promises Performance of Reciprocal Promises Promisor not bound to perform, unless reciprocal promisee ready and willing to perform. - (Section 51) When a contract consists of reciprocal promises to be simultaneously per formed, no promisor need perform his promise unless the promisee is ready and willing to perform his reciprocal promise. Section 52 states that where the order in which reciprocal promises are to be performed is expressly fixed by the contract, they shall be performed in that order; and where the order is not expressly fixed by the contract, they shall be performed in that order which the nature of the transaction requires. Section 53 states that 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 compensation1 from the other party for any loss which he may sustain in consequence of the non-performance of the contract. Effect of default as to that promise which should be first performed, in contract consisting of reciprocal promises (Section 54) When a contract consists of reciprocal promises, such that one of them cannot be performed, or that its performance cannot be claimed till the other has been performed, and the promisor of the promise last mentioned fails to perform it, such promisor cannot claim the performance of the reciprocal promise, and must make compensation to the other party to the contract for any loss which such other party may sustain by the non-performance of the contract. Effect of failure to perform at fixed time, in contract in which time is essential. - - (Section 55) 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, and fails to do any such thing at or before the specified times, the contract, or so much of it as has not beer performed becomes voidable at the option of the promisee, if the intention of the parties was that time should be of the essence of the contract. Effect of such failure when time is not essential.- If it was not the intention of the parties that time should be of the essence of the contract, the contract does not become voidable by the failure to do such thing at or before the specified time; but the promisee is entitled to compensation from the promisor for any loss occasioned to him by such failure. Effect of acceptance of performance at time other than that agreed upon.- If, in case of a contract voidable on account of the promisor s failure to perform his promise at the time agreed, the promisee accepts performance of such promise at any time other than that agreed, promisee cannot claim

compensation for any loss occasioned by the non-performance of the promise at the time agreed, unless, at the time of such acceptance, he gives notice to the promisor of his intention to do so. Section 56 states that an agreement to do impossible act in itself is void. A contract to do an act which, after the contract is made, becomes impossible, or, by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful. Where one person has promised to do something which he knew, or, with reasonable diligence, might have known, and which the promisee did not know, to be impossible or unlawful, such promisor must make compensation to such promisee for any loss which such LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 67

promisee sustains through the non-performance of the promise. Section 57 - Reciprocal promise to do things legal, and also other things illegal.- Where persons reciprocally promise, firstly to do certain things which are legal, and, secondly, under specified circumstances, to do certain other things which are illegal, the first set of promises is a contract, but the second is a void agreement. Section 58-Alternative promise, one branch being illegal.- In the case of an alternative promise, one branch of which is legal and the other illegal, the legal branch alone can be enforced. Let us now learn about the appropriation of payments Appropriation Of Payments Section 59 specifies that an application of payment where debt to be discharged is indicated.- 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 60 states about an application of payment where debt to be discharged is not indicated.- Where the debtor has omitted to intimate, and there are no other circumstances indicating to which debt the payment is to be applied, the creditor may apply it at his discretion to any lawful debt actually due and payable to him from the debtor, whether its recovery is or is not barred by the law in force for the time being as to the limitation of suits. Section 61 states that where neither party makes any appropriation, the payment shall be applied in discharge of the debts in order of time, whether they are or are not barred by the law in force for the time being as to the limitation of suits. If the debts are of equal standing, the payment shall be applied in discharge of each proportionately. You may be thinking that is it necessary that every contract need to be performed What are the contracts, which need not be performed? Contracts, Which Need Not be Performed Section 62 states the Effect of novation, rescission and alteration of contract.- If the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contract need not be performed. Promisee may dispense with or remit performance of promise (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, 3 or may accept instead of it any satisfaction which he thinks fit. Consequences of rescission of voidable contract (Section 64) When a person at whose option a contract is voidable rescinds it, the other party thereto need not perform any promise therein

contained in which he is promisor. The party rescinding a voidable contract shall, if he has received any benefit thereunder from another party to such contract, restore such benefit, so far as may be, to the person from whom it was received. Obligation of person who has received advantage under void agreement or contract that becomes void (Section 65) When an agreement is discovered to be void, or when a contract becomes void, any person who has received any advantage under such agreement or contract is bound to restore it, or to make compensation for it, to the person from whom he received it. Mode of communicating or revoking rescission of a voidable contract (Section 66) The rescission of a voidable contract may be communicated or revoked in the same manner, and subject to the same rules, as apply to the communication or revocation of a proposal. Effect of neglect of promisee to afford promisor reasonable facilities for performance (Section 66) If any promisee neglects or refuses to afford the promisor reasonable facilities for the performance of his promise, the promisor is excused by such neglect or refusal as to any non-performance caused thereby. This was all-important about the performance of a contract. Let us now learn about the modes of a discharge of a contract. Discharge of a Contract Discharge of a contract means relations between the parties be discharged when the rights under the contract come to an termination of the contractual to a contract. A contract is said to and obligations of the parties end.

Modes of discharge of contract A contract may be discharged in various modes as discussed below: Discharge by Performance A contract can be discharged by performance in any of the following ways: (a) By Actual Performance A contract is said to be discharged by actual per-formance when the parties to the contract perform their promises in accordance with the terms of the contract. (b) By Attempted Performance or Tender A contract is said to be discharged by attempted performance when the promisor has made an offer of performance to the promisee but it has not been accepted by the promisee. Discharge by Mutual Agreement Since a contract is created by mutual agreement, it can also be discharged by mutual agreement. A contract can be discharged by mutual agreement in any of the following ways:

a) Novation [Section 62] Novation means the substitution of a new contract for the original contract. Such a new contract may be either between the same parties or between different parties. The consideration for the new contract is the discharge of the original contract. Example i) A owes money to B under a contract. It is agreed between A, Band C that B shall henceforth accept C as his debtor, instead of A. The old debt of A to B no longer exists and a new debt from C to B has been contracted. ii) A owes B Rs 10,000. A enters into an agreement with B, and gives B a mortgage of his (A s) estate for Rs 5,000 in place of the debt of Rs 10,000. This is a new contract and extinguishes the old. LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 68 11.555

(c) Rescission [Section 62] Rescission means cancellation of the contract by any party or all the parties to a contract. Example X promises Y to sell and deliver 100 Bales of cotton on 1st Oct. at his god own and Y promises to pay for goods on 1st Nov. X does not supply the goods. Y may rescind the contract. (d) Alteration [Section 62] Alteration means a change in the terms of a contract with mutual consent of the parties. Alteration discharges the original contract and creates a new contract. However, parties to the new contract must not change. Example X promises to sell and deliver 100 bales of cotton on 1st Oct. and Y promises to pay for goods on 1st Nov. Afterwards, X and Y mutually decide that the goods shall be delivered in five equal installments at Z s godown. Here, original contract has been discharged and a new contract has come into effect. (e) Remission [Section 63] Remission means acceptance by the promisee of a lesser fulfillment of the promise made. 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. Example i) A promises to paint a picture for B. B afterwards forbids him to do so. A is no longer bound to perform the promise. ii) A owes B Rs 5,000. A pays to B, and B accepts, in satisfaction of the whole debt, Rs 2,000 paid at the time and place at which Rs 5,000 were payable. The whole debt is discharged. iii) A owes B, under a contract a sum of money, the amount of which has not been ascertained. A, without ascertaining the amount, gives to B, and B, in satisfaction thereof, accepts the sum of Rs 2,000. This is a discharge of the whole debt; whatever may be its amount. iv) A owes B Rs 2,000, and is also indebted to other creditors. A makes an arrangement with his creditors, including B, to pay them a composition of 50 paise in a rupee upon

respective demands. Payment to B of Rs 1,000 is a discharge of B s demand. (f) Waiver Waiver means intentional Case I Where both the promisor and promisee know about the initial impossibility II. Where both the promisor and promisee do not know about the initial impossibility III. Where the promisor alone knows about the initial impossibility relinquishment of a right under the con-tract. Thus, it amounts to releasing a person of certain legal obligation under a Example exempts waiving contract. A promises to supply goods to Y. Subsequently, Y X from carrying out the promise. This amounts to the right of performance on the part of Y.

Discharge by Operation of Law A contract may be discharged by operation of law in the following cases: (a) By Death of the Promisor A contract involving the personal skill or ability of the promisor is discharged on the death of the promisor. (b) By Insolvency When a person is declared insolvent, he is discharged from his liability up to the date of his insolvency. (c) By Unauthorised Material Alteration If any party makes any material alteration in the terms of the contract without the approval of the other party, the contract comes to an end. (d) By the Identity of Promisor and Promisee When the promisor becomes the promisee, the other parties are discharged. Example X draws a bill receivable on Y who accepts the same. X endorses the bill in favour of Z who in turn endorses in favour of Y. Here, Y is both promisor and promisee and hence the other parties are discharged. Discharge by Impossibility of Performance The effects of impossibility of the performance of a contract may be discussed under the following two heads: (a) Effects of Initial Impossibility (b) Effects of Supervening Impossibility (a)

Effects of Initial Impossibility [Section 56] Initial impossibility means the impossibility existing at the time of making the contract. The effects of initial impossibility are as under Effect Such agreement is void ab initio. Example X undertakes to put life into the dead wife of Y. This agreement is void. Such agreement is void on the ground of mutual mistake. Example X agrees to sell his horse to Y. Unknown to both the parties; the horse was dead at the time of making the agreement. This agreement is void. Such promisor must compensate for any loss which such promisee sustains through the nonperformance of the promise. Example A contracts to marry B, being already married to C, and being forbidden by the law to which he is subject to practise polygamy. A must make compensation to B for the loss caused to her by the non-performance of his promise. LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 69

(b) Effects of Supervening Impossibility [Section 56] the land. The contract was discharged. [Shyam Sunder v. Supervening impossibility means impossibility which does Durga] not exist at the time of making the contract but which (e) Non-existence or Non-occurrence of a Particular State of arises subsequently after the formation of the contract. The Things Necessary for Performance The contract is effects of supervening impossibility are as under Case Effect 1. Where an act becomes impossible after the contract is made II. Where an act becomes unlawful by reason of some event beyond the control of promisor III. Where the promisor alone knows about the impossibility IV. Where an agreement is discovered to be void or where a contract becomes void Let us discuss some of the cases when a Contract is discharged on the ground of Supervening Impossibility A contract is discharged by supervening impossibility in the following cases: (a) Destruction of Subject Matter: The contract is discharged if the subject matter of the contract is destroyed after the formation of the contract without any fault of either party. Example X agreed to sell his crop of wheat. The entire crop was destroyed by fire though no fault of the party. The contract was discharged. Example A music hall was rented out for a series of concerts on certain days. The hall caught fire before the date of first concert. It was held, the contract has become void on ground of supervening impossibility. (b) Death or personal incapacity: The contract is discharged on the death or incapacity or illness of a person if the performance of a contract depends on his personal skill or ability. Example X agreed to sing on a specified day. X fell seriously ill and could not perform on the day. The contract was discharged. (c) Declaration of War The pending contracts at the time of declaration of war are either suspended or declared as void. Example X contracts to take in cargo for Y at a foreign port. X s government afterwards declares war against the country in which the port is situated. The contract becomes void when the war is declared. (d) Change of Law The contract is discharged if the performance of the contract becomes impossible or unlawful due to change in law after the formation of the

contract. Example X agreed to sell his land to Y. After the formation of the contract, the Government issued a notification and acquired discharged if that particular state of thing which forms the basis of a contract, ceases to exist or occur. Example a) X and Y contract to marry each other. Before the time fixed for the marriage X goes mad. The contract becomes void. b) X hired a room from Y for viewing the coronation process of King Edward VII. The procession was cancelled because of King s illness. It was held that X was not liable to pay the The contract to do such an act becomes void when the act becomes impossible. [Section 56 Para 2] The contract to do such an act becomes void when the act becomes unlawful. [Section 56, Para 2] Such promisor must compensate the promisee for any loss which such promisee might have suffered on account of non-performance of the promise. [Section 56 Para 3] Any person who has received any benefit under such agreement or contract is bound to restore it or to make compensation for it, to the person from whom he received it. [Section 65] Example X contracts to sing for Y at a concert for Rs 1,000, which is paid in advance. X is too ill to sing. X must refund Rs 1,000 to Y. room rent because the procession, which formed the basis of the contract, did not occur. (Krell v. Henry) Cases when the Contract is not Discharged on the Ground of Supervening Impossibility Impossibility of performance is, as a rule, not an excuse from performance. It means that when a person has promised to do something, he must perform his promise unless the performance becomes absolutely impossible. A contract is not discharged by the supervening impossibility in the following cases: (a)

Difficulty of Performance A contract is not discharged simply on the ground that its performance has become more difficult, more expensive or less profitable than that agreed at the time of its formation. Example X agreed to supply coal within a specified time. He failed to supply in time because of government s restriction on the transport of coal from collieries. Here X will not be discharged because the coal was available in the open market from where X could have obtained it. (b) Commercial Impossibility A contract is not discharged simply on the ground of commercial impossibility, i.e. when the contract becomes commercially unviable or unprofitable. Example X, a furniture manufacturer agreed to supply certain furniture to Y at an agreed rate. Afterwards, there was a sharp increase in the rates of the timber and rates of wages. Since, it was no longer profitable to supply at the agreed rate, X did not supply. X will not be discharged on the ground of commercial impossibility. (c) Default of a Third Party A contract is not discharged if it could not be performed because of the default of a third party on whose work the promisor relied. Example X entered into a contract with Y for the sale of goods to be manufactured by Z, a manufacturer of those goods. Z LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 70 11.555

did not manufacture those goods. X will not be discharged and will be liable to Y for damages. (d) Strikes, Lockouts and Civil Disturbances A contract is not discharged on the grounds of strikes, lockouts and civil disturbances unless otherwise agreed by the parties to the contract. Example X agreed to supply to Y certain goods to be imported from Algeria. The goods could not be imported due to riots in that country. It was held that this was no excuse for nonperformance of-the contract. [Jacobs v. Credit Lyonnais] (e) Partial Impossibility A contract is not discharged simply on the ground of impossibility of some of the objects of the contract. Example X agreed to let a boat to H (i) to view the naval review at the coronation. of king and (Ii) to cruise round the fleet. Due to the illness of the king, the naval review was cancelled but the fleet was assembled and the boat could have been used to cruise round the fleet. It was held that the contract was not discharged. [H.B. Steamboat Co. v. Hutton] Discharge by Lapse of Time A contract is discharged if it is not performed or enforced within a specified period, called period of limitation. The Limitation Act, 1963 has prescribed the different periods for different contracts, e.g. period of limitation for exercising right to recover a debt is 3 years, and to recover an immovable property is 12 years. The contractual parties cannot exercise their rights after the expiry of period of limitation. Example On 1st July, 2001 X sold goods to Y for Rs 1,00,000 and Y has made no payment till Aug. 2004. State the legal position as on 1st Aug. 2004 if no credit period was allowed (b) if 2 months credit period was allowed. Solution Case (a) The contract is discharged by lapse of time (i.e. 3 years) from 1st July 2001 because the debt has become time barred and hence X cannot exercise his right to recover this debt. Case (b) The contract is not discharged by lapse of time because the period of limitation is yet to expire on 31st Aug. 2004 (3 years from the expiry of the credit period) Discharge by Breach of Contract A contract is said to be discharged by breach of contract if any party to the contract refuses or fails to perform his part of the contract or by his act makes it impossible to perform his obligation under the contract. A breach of contract may occur in the following two ways: (a) Anticipatory Breach of Contract Anticipatory breach of contract occurs when party declares his intention of not

performing the contract before the performance is due. (b) Actual Breach of Contract Actual breach of contract occurs in the follow-ing two ways: (i) On Due Date of Performance: If any party to a contract refuses or fails to perform his part of the contract at the time fixed for performance, it is called an actual breach of contract on due date of performance. During the Course of Performance: If any party has performed a part of the contract and then refuses or fails to perform the remaining part of the contract, it is called an actual breach of contract during the course of performance. Consequences of Breach of Contract The aggrieved party (i.e. the party not at fault) is discharged from his obligation and gets rights to proceed against the party at fault. The various remedies available to an aggrieved party will be discussed with you in detail in the next class. Solve the following problems for a better understanding: Practical Problems 1. X undertakes to put life into the dead wife of Y and takes his fees Rs 5,000 in advance. X fails to do so. Y claims Rs 5,000. Is Y s claim valid? Solution: Section to which the given problem relates: [Section 56 (Para 1), and Section 65]. Decision: Y s claim is void. Reason: (a) The agreement is void ab-initio [Section 56 (Para 2)]. (a) The person who received any advantage under a void agreement, is bound to restore it [Section 65] 2. X of Delhi agreed to sell 100 bales of cotton @ Rs 1,000 per bale and to deliver within a fortnight at buyer s godown at Lahore. X failed to supply these goods. State the legal position in each of the following alternative cases: Case (a) If, unknown to both the parties, the goods were destroyed by fire at the time of agreement Case (b) If X knew that goods were destroyed by fire at the time of agreement. Case (c) If the goods were destroyed by fire after the formation of agreement. Case (d) If war is declared between India and Pakistan. Case (e) If these goods were to be manufactured by Z who is ready to supply @ Rs 1,100 per bale because of unexpected increase in the cost of material and labour. Case if) If these goods were to be manufactured by Z who

did not manufacture those goods. Case (g) If these goods could not be delivered because of strike of transport operators. Solution: Section to which the given problem relates: Section 56. Decision and Reason Case(a) The contract is void on the ground of mutual mistake. Case (b) The contract is void but X; the promisor, must compensate the buyer for the promisee for any loss which such promisee sustains through the non-perfor-mance of the promise. Case (c) & (d) The contract has become void on the ground of supervening possibility Case (e) The contract is not discharged because of commercial impossibility. Case (j) The contract is not discharged because of default of third party. Case (g) The contract is not discharged because of non-performance due to strikes, lock-out or civil disturbance 4. Mr X a Hindu contracts to marry Y a Muslim. State the legal position in each of the following alternative cases: LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 71

Case (a) If Mr X is already married to Z who lives with X; Case (b) If Mr X goes mad before the date fixed for marriage; Case (c) If Mr X dies before the date fixed for marriage. Solution: Section to which the given problem relates: Section 56 Decision and Reason: Case (a) The contract is void ab-initio because such contract is forbidden by law. X must compensate Y for the loss caused to her by the non-performance of the promise. Case (a) The contract becomes void because of change in the state of things which formed the basis of the contract. Case (c) The contract is discharged on the death of X. 5. 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 at the rate of Rs 100 for each night on completion of the contract. State the legal position in each of the following alternative cases: Case (a) On sixth night if X willfully absents herself from the theatre and wants to sing on the seventh night but Y does not allow her to sing on the seventh night. Case (b) On the sixth night if X willfully absents herself from the theatre and Y allows X to sing on seventh night. Case (c) On sixth night, X is too ill to sing. Case (d) On sixth night, X dies before she sings Solution: Section to which the given problem relates: Sections 39, 56. Decision and Reason: Case (a) Y can rescind the contract and can claim the damages for the breach of contract [Section 39]. Case (b) Y cannot rescind the contract but can claim the compensation for the damages sustained by him through X s failure to sing on the sixth night [Section 39]. (c) & (d) X is discharged on the sixth night because of her incapability to sing and Y cannot claim the compensation for the damages sustained by him through Y s failure to sing on the sixth night. References Kapoor, N.D. (2003), Elements of Mercantile Law, Sultan Chand and Sons, New Delhi. http://www.indialawinfo.com/bareacts/soga.html M.C. Kucchal ( 2002), Business Law , Vikas Publishing

LEGAL ASPECTS OF BUSINESS House Pvt. Ltd, Delhi. P.C. Tulsian (2002), Pvt. Ltd, Delhi. Business Law , Tata Mc. Graw Hill

Rohini Aggarwal(2003), Student s Guide To Mercantile And Commercial Laws, Tata Mc. Graw Hill Pvt. Ltd, Delhi. Notes: Copy Right: Rai University 72 11.555

LESSON 13 : REMEDIES FOR BREACH OF CONTRACT Learning Outcomes At the end of this chapter, you would be able to: Identify the remedies for breach of the Contract Rescission of the contract Suit for damages Suit upon quantum meruit Suit for specific performance of the contract Suit for an injunction Introduction There are the following remedies available to the aggrieved party for the breach of the Contract Let us first start with the Rescission of the Contract Rescission of the Contract When there is a breach of contract by one party, the other party may rescind the contract and need not perform his part of the obligations under the contract and may sit quietly at home if he decides not to take any legal action against the guilty party. But in case the aggrieved party intends to sue the guilty party for damages for breach of contract, he has to file a suit for rescission of the contract. When the court grants rescission, the aggrieved party is freed from all his obligations under the contract; and becomes entitled to compensation for any damage which he has sustained through the non-fulfillment of the contract (Sec. 75). . Illustration A contracts to supply 100 kg of 8,000 to B on 15 April. If A does not supply the appointed day, B need not pay the price. contract as rescinded and may sit quietly at a suit for rescission and claim damages. tea leaves for Rs the tea leaves on B may treat the home. B may also file

Thus, applying to the court for rescission of the contract is necessary for claiming damages for breach or for availing any other remedy. In prac-tice a suit for rescission is accompanied by a suit for damages, etc., in the same plaint. It is worth noting that in certain cases a suit for rescission of the contract may be filed even when no damages are to be claimed, for example, in case of pledge of movable goods, say gold ornaments, if the pledger does not pay as per agreement, the pledgee may file a suit for rescission of the contract (of course within the period of limitation which is 30 years in this case), in order to free himself from his obligation to return the

ornaments on payment and to become entitled to sell the ornaments in order to realise his debt. Suit for Damages Damages are monetary compensation allowed to the injured party for the loss suffered by him as a result of the breach of contract. The fundamental principle underlying damages is not punishment but compensation. By awarding damages the court aims to put the injured party into the position in which he would have been had there been performance and not breach, and not to punish the defaulter party. As a general rule, compensation must be commensurate with the injury or loss sustained, arising naturally from the breach. If actual loss is not proved, no damages will be awarded. Assessment of damages. We will now consider the extent to which a plaintiff is entitled to demand damages for breach of contract. The rules in this regard have been laid down by Section 73. Accordingly, an injured party is entitled to receive from the defaulter party: (a) Such damages which naturally arose in the usual course of things from such breach. No compensation is to be given generally for any remote or indirect loss sustained by reason of the breach (Ordinary Damages). (b) Such damages which the parties knew, when they entered into the contract, as likely to result from the breach (Special Damages). (c) In estimating the loss or damage caused to a party by breach, the means which existed of remedying the inconvenience caused by the breach must also be taken into account (Explanation to Sec.73). (Duty to mitigate damage suffered.) With a view to making the study of the quantum of damages easily comprehensible, the above rules, as enunciated in Section 73 may now be considered in some more details under appropriate heads. Different kinds of damages. Damages may be of four kinds: 1. Ordinary or General or Compensatory damages (i.e., damages arising naturally from the breach). 2. Special damages (i.e., damages in contemplation of the parties at the time of contract). 3. Exemplary, Punitive or Vindictive damages. 4. Nominal damages. We shall now see these kinds one by one. 1. Ordinary Damages When a contract has been broken, the injured party can, as a rule, always recover from the guilty party ordinary or general damages. These are such damages as may fairly and reasonably be considered as arising natu-rally and directly in the usual course of

things from the breach of contract itself. In other words, ordinary damages are restricted to the direct or proximate consequences of the breach of contract and remote or indirect losses, which are not the natural and probable consequence of the breach of contract, are generally not regarded. LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 73

Illustrations (a) The leading case of Hadley vs Baxendale, which is said to be the foundation of modern law of damages in England and India (as Sec, 73 is almost based on the rules laid down in this case); is an authority on the point. In that case: H s mill was stopped by a breakage of the crankshaft. H delivered the shaft to B, a common carrier, to take it to the manufacturers at Greenwich as a pattern for a new one. The only information given to B was that the article to be carried was the broken shaft of the mill. It was not made known to B that delay would result in loss of profits. By some neglect on the part of B the delivery of the shaft was delayed beyond a reasonable time. In consequence the mill remained idle for a longer period than should have been necessary. H brought an action against B claiming damages for loss of profits, which would have been made during the period of delay. Held that B was not liable for loss of profits caused by the delay because it was a remote consequence, and only nominal damages were awarded. The Court pointed out that B, the defendant, was never told that the delay in the delivery of the shaft would entail loss of profits of the mill; the plaintiffs might have had another shaft, or there might have been some other defect in the machinery to cause the stoppage, or for any other reason there might have been loss actually. Accord-ingly it was not a direct consequence of the breach and hence not recoverable. (b) A contracts to pay a sum of money to B on a specified day. A does not pay the money on that day. B, in consequence of not receiving the money on that day, is unable to pay his debts, and is totally ruined. A is not liable to make good to B anything except the principal sum he contracted to pay, together with interest upto the date of payment [Illustration (n) to Section 73]. (If a suit has been filed then A will have also to pay cost of the suit to B.) (c) A contracts to sell and deliver 500 bales of cotton to B on a fixed day. A knows nothing of B s mode of conducting his business. A breaks his promise, and B, having no cotton, is obliged to close his mill. A is not responsible to B for the loss caused to B by the closing of the mill [Illustration (p) to Section 73]. (B, however, can claim damages for the breach of contract. He cannot claim the loss of profits callused by the closing of the mill because it cannot be considered to have been in contemplation of both the parties when they made the contract and thus is a remote consequence of the breach.) In the case of a contract for sale and purchase the general rule as regards measure of damages is that the damages would be assessed on the difference between the contract price and the market price at the date of breach and any subsequent increase or decrease in the market price would not be taken note of. If there is no market price for the subject matter of the contract, the rule is to take the market price of the nearest substitute. If there is no nearest substitute, the market price is to be ascertained by adding to the price at the place of purchase, the conveyance charges to the place of delivery plus the usual profit of the importer (Hajee Ismail & Sons vs Wilson & Co). If the

delivery is to be made in instalments, then the due date of each instalment is taken as the date of breach and the measure of damages is the sum of the difference of the market value at the several dates of delivery. Illustrations (a) A agrees to sell to B 5 bags of rice at Rs 500 per bag, delivery to be given after two months. On the date of delivery the price of rice goes up and the rate is Rs550 per bag. A refuses to deliver the bags to B, B can claim from A Rs 250, as ordinary damages arising directly from the breach, being the difference between the contract price (i.e.; Rs 500 per bag) and the market price (i,e Rs 550 per bag) on the date of delivery of 5 bags. Notice that if Rs 250 are paid to B by way of damages, then he will be in the same position as if the contract has been performed. (b) A contracts to buy from B, at a stated price, 50 maunds of rice, no time being fixed for delivery: A afterwards informs B that he will not accept the rice if tendered to him. B is entitled to receive from A, by way of compensation, the amount, if any, by which the contract price exceeds that which B can obtain for the rice at the time when A informs B that he will not accept it [Illustration (c) to Section 73]. (c) A contracts to buy B s ship for Rs 60,000, but breaks his promise. As a consequence of breach B sold the ship in the open market and he could only get Rs 52,000 for the ship. B can recover by way of compensation Rs 8,000, the excess of the contract price over the actual sale price [Adapted from Illustration (d) to Section 73]. Under a contract of sale of goods, if there is a breach of warranty, the seller is liable to pay all damages which the purchaser has to pay to the person to whom the goods are sold by him, whether the seller is aware of such a sale or not. In order that the purchaser should be able to claim such damages and costs it is an overriding requirement that the sub-contracts should have been made on the same terms and conditions as the first contract. Illustration A sells certain merchandise to B, warrant-ing it to be of a particular quality, and B, in reliance upon this warranty, sells it to C with a similar warranty. The goods prove to be not according to the warranty, and B becomes liable to pay C a sum of money by way of compensation. B is entitled to be reimbursed this sum by A. 2. Special Damages Special damages are those which arise on account of the special or unusual circumstances affecting the plaintiff. In other words, they are such remote losses which are not the natural and probable consequences of the breach of contract. Unlike ordinary damages, special damages cannot be claimed as a matter of right. These can be claimed if the special circumstances which would result in a loss in case of breach of contract are brought to the notice of the other party. It is important that such damages must be in contemplation of the parties at the time when the contract is entered into. Subsequent

knowledge of the special circumstances will not create any special liability on the guilty party. LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 74 11.555

Illustrations (a) A having contracted with B to supply B 1,000 tons of iron at Rs 100 a ton, to be delivered at a stated time, contracts with C for the purchase of 1,000 tons of iron at Rs 80 a ton, telling C that he does so for the purpose of performing his contract with B, C fails to perform his contract with A, and A could not procure other iron, and B, in consequence rescinds the contract. C must pay to A Rs 20,000 being the profit which A would have made by the perform-ance of his contract with B. [Illustration to Section 73]. (If C was not told of B s contract then only the difference in contract price and market price, if any, could be claimed.) (b) A contracts with B to make and deliver to B, by a fixed day, for a specified price a certain piece of machinery. A does not deliver the piece of machinery at the time specified, and, in consequence of this, B is obliged to procure another at a higher price than that which he was to be paid to A, and is prevented from performing a contract which B had made with a third person at the time of his contract with A, (but which had not been then communicated to A), and is compelled to make compensation for breach of that contract. A must pay to B, by way of compensation, the difference between the contract price of the piece of machinery and the sum paid by B for another, but not the sum paid by B to the third person by way of compensation [Illustration to Section 73]. (c) A,a builder, contracts to erect and finish a house by the first of January, in order that B may give possession of it at that time to C, to whom B has contracted to let it. A is informed of the contract between Band C. A builds the house so badly that, before the first of January, it falls down, and has to be rebuilt by B, who, in consequence loses the rent which he was to have received from C, and is obliged to make compensation for breach of that contract. A must pay to B, by way of compensation, (i) for the cost of rebuilding the house, (ii) for the rent lost, and (iii) for the compensation made to C. [Illustration (l) to Section 73] 3. Exemplary or Vindictive Damages These are such damages which are awarded with a view to punishing the guilty party for the breach and not by way of compensation for the loss suffered by the aggrieved party. As observed earlier, the cardinal principle of the taw of damages for a breach of contract is to. compensate the injured party for the loss suffered and to punish the guilty party. Hence, obviously exemplary damages have no place in the law of contract and are not recoverable for a breach of contract. There are, however, two exceptions to this rule. (a) Breach of a contract to marry. In this case the amount of the damages will depend upon the extent of injury to the party s feelings. One may be ruined, other may not mind so much. (b) Dishonour of a cheque by a banker when there are

sufficient funds to the credit of the customer. In this case the rule of ascertaining damages is, the smaller the cheque, the greater the damage. Of course, the actual amount of damages will differ according to the status of the party. 4. Nominal Damages Nominal damages are these which are awarded only for the name sake. These are neither awarded by way of compensation to the aggrieved party nor by way of punishment to the guilty party. These are awarded to establish the right to decree for breach at contract when the injured party has not actually suffered any real damage and consist of a very small sum of money, say, a rupee or two. For example, where in a contract of sale of goods, if the contract price and the market price is almost the same at the date of breach at the contract, then the aggrieved party is entitled only to nominal damages. Duty to Mitigate Damage Suffered It is the duty of the injured party to mitigate damage suffered as a result of the breach of contract by the other party. He must use all reasonable means of mitigating the damage, just as a prudent man would, under similar circumstances in his own case. He cannot recover any part of the damage, traceable to his own neglect to mitigate. The onus of proof, however, is on the defendant to show that the plaintiff has failed in his duty of mitigation and the plaintiff is free from the burden of proving that he tried his best to mitigate the loss (Pauzu, Ltd. vs Saunders). The rule in regard to mitigation must be applied with discretion and a man who has already put himself in the wrong by breaking his contract has no right to impose new and extraordinary duties on the aggrieved partys. Courts should take care to see that they have put the plaintiff in the same position as if the contract had been performed, and have been overgenerous to the contract-breaker by too severe an application of the rule that the plaintiff must take reasonable steps to mitigate damages. Illustrations (a) Where a servant is dismissed, even though wrongfully, it is his duty to mitigate the damages by seeking other employment. He can recover only nominal damages if he refuses a reasonable offer of fresh employment. But if it cannot be proved that he has failed in his duty of mitigation, he will be entitled to the full salary for the whole of the unexpired period of service, if the contract of employment was for a fixed period. If the contract of employment was not for a fixed term, then the principle of awarding damages for a reasonable period of notice comes into play (S S Shetty vs Bharat Nidhi Ltd. ). (b) A took a shop on rent from B and paid one month s rent in advance. B could not give possession of the shop to A. A chose to do no business for 8 months though there were other shops available in the vicinity. A sued B for breach of contract and claimed damages for the loss

suffered. Held, he was entitled only to a refund of his advance, and nothing more, as he had failed in his duty to minimize the loss by not taking another shop in the neighborhood (Neki vs. Pribhu). LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 75

Liquidated Damages and Penalty Let us first know what we mean by the two terms. Liquidated dam-ages means a sum fixed up in advance, which is a fair and genuine pre--estimate of the probable loss that is likely to result from the breach. Pen-alty means a sum fixed up in advance, which is extravagant and uncon-scionable in amount in comparison with the greatest loss that could conceiv-ably be proved to have followed Item the breach. Thus the essence of a penalty is a payment of money stipulated as per the terms of the offending party. Sometimes the parties fix up at the time of the contract the sum payable as damages in case of breach. In such a case, a distinction is made in English Law as to whether the provision amounts to liquidated damages or a penalty . Courts in England usually allow liquidated damages as stipulated in the contract, without any regard to the actual loss sustained. Penalty clauses, however, are treated as invalid and the courts in that case calculate damages according to the ordinary principles and allow only rea-sonable compensation. Under the Indian Law Section 74 does away with the distinction be-tween liquidated damages and penalty . This Section lays down that the Courts are not bound to treat the sum mentioned in the contract, either by way of liquidated damages or penalty, as the sum payable as damages for the breach. Instead the courts are required to allow reasonable compensation so as to cover the actual loss sustained, not exceeding the amount so named in the contract. Thus, according to the section, the named sum, regardless whether it is a penalty or not, determines only the maximum limit of liability in case of the breach of contract. The section does not confer a special benefit upon any party; it merely declares the law that notwithstanding any term in the contract pre-determining damages or pro-viding for forfeiture of any property by way of penalty, the Court will award to the party aggrieved only reasonable compensation not exceeding the amount named or penalty stipulated. Exception. There is, however, one exception provided for by Section 74 to the above rule. When any person enters into any bailbond, recognizance or other instrument of the same nature, or under the provisions of any law or under the orders of the Government, gives any bond for the performance of any public duty or act in which the public are interested, he shall be liable to pay the whole sum mentioned therein upon breach of the condition of any such instrument. Illustrations (a) A contracts with B to pay Rs 1,000 if he fails to pay B Rs 500 on a given day, A fails to pay B Rs 500 on that day. B is entitled to recover from A such compensation, not exceeding Rs 1,000 as the court considers reason-able. [illustration (a) to Section 74] (b) A undertakes to repay B a loan of Rs 1,000 by five equal monthly installments with a stipulation that, in default of payment of any installment, the whole shall become due.

This stipulation is not by way of penalty and the contract may be enforced according to its terms. [Illustration (j) to Section 74] (c) A borrows Rs 100 from B, and gives him a bond for Rs 200 payable by five yearly installments of Rs 40, with a stipulation that, in default of payment of any installment, the whole shall become due. This is a stipulation by way of penalty. [illustration (g) to Section 74] Stipulation regarding payment of interest. The Explanation added to Section 74 states, a stipulation for increased interest from the date of default may be a stipulation by way of penalty. It implies that such a stipulation maybe considered a penalty clause and disallowed by the courts, if the enhanced rate is exorbitant. Illustration [(d) to Sec. 74]. A gives B a bond for the repayment of Rs 1,000 with interest at 12 percent per annum at the end of six months, with a stipulation that in case of default interest shall be payable at the rate of 75 per cent p.a. from the date of default. This is a stipulation by way of penalty and B is only, entitled to recover from A such compensation as the court considers reasonable. The following rules must also be noted in connection with payment of interest (a) Unless the parties have made a stipulation for the payment of interest or there is a usage to that effect, interest cannot be recovered legally as damages, generally speaking {Mahabir Prasad vs Durga Datt). (b) Where a contract provides that the amount should be paid without interest by a particular date and on default it will be payable with interest, such a stipulation may be allowed if the interest is reasonable. If the interest is exorbitant, the courts will give relief. (c) Payment of compound interest on default is allowed, only if it is not at an enhanced rate (Bhushan Rao vs Subayyal). Earnest money. Money deposited as security for the due performance of a contract is known as earnest money. Forfeiture of earnest money is allowed if the amount is reasonable. But where it is in the nature of penalty, the court has jurisdiction to award such sum only as it considers reasonable but not exceeding the amount so agreed (Fateh Chand vs Balkishen Dass). The proportion the amount bears to the total sale price, the nature of the contract and other circumstances have to be taken into account in ascertain-ing the reasonableness of the amount. Cost of Suit The aggrieved party is entitled, in addition to the damages, to get the costs of getting the decree for damages tram the defaulter party. The cost of suit for damages is in the discretion of the court. Summary of the Rules Regarding the Measure of Damages The principles governing the measure of damages discussed

above may be summarised as under: 1. The damages are awarded by way of compensation for the loss suffered by the aggrieved party and not for the purpose of punishing the guilty party for the breach. 2. The injured party is to be placed in the same position, so far as money can do, as if the contract had been performed. LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 76 11.555

3. The aggrieved party can recover by way of compensation only the actual loss suffered by him, arising naturally in the usual course of things. 4. Special or remote damages, i.e., damages which are not the natural and probable consequence of the breach are usually not allowed until they are in the knowledge of both the patties at the time of entering into the contract. 5. The fact that damages are difficult to assess does not prevent the injured party from recovering them. 6. When no real loss arises from the breach of contract, only nominal damages are awarded. 7. If the parties fix up in advance the sum payable as damages in case of breach of ,contract, the court will allow only, reasonable compensation so as to cover the actual loss sustained, not exceeding the amount so named in the contract. 8. Exemplary damages cannot be awarded for breach of contract except in case of breach of contract of marriage or wrongful refusal by the bank to honour the customer s cheque. 9. It is the duty of the injured party to minimise the damage suffered. 10. The injured party is entitled to get the costs of getting the decree for damages from the defaulter party. Suit Upon Quantum Meruit (Sections 65 and 70) The third remedy for a breach of contract available to an injured party against the guilty party is to file a suit upon quantum meruit. The phrase quantum meruit literally means as much as is earned or in proportion to the work done. A right to use upon quantum meruit usually arises where after part performance of the contract by one party, there is a breach of contract, or the contract is discovered void or becomes void. This remedy may be availed of either without claiming damages (i. e., claiming reason-able compensation only for the work done) or in addition to claiming damages for breach (i.e., claiming reasonable compensation for part per-formance and damages for the remaining unperformed part). The aggrieved party may file a suit upon quantum meruit and may claim payment in proportion to work done or goods supplied in the follow-ing cases: I. Where work has been done in pursuance of a contract, which has been discharged by the default of the defendant. Illustrations (a) P agreed to write a volume on ancient arm our to be published ,in a magazine owned by C. For this he was to

receive $ 100 on comple-tion. When he had completed part, but not the whole, of his volume, C abandoned the magazine. P was held entitled to get damages for breach of contract and payment quantum meruit for the part already completed (Planche vs Colburn). (b) A, engages B, a contractor, to build a three storied house. After a part is constructed A prevents B from working any more. B, the contractor, is entitled to get reasonable compensation for work done under the doctrine of quantum meruit in addition. to the damages for breach of contract. Notice that in both the above cases the contract was wrongfully terminated by the defendant, and both damages as well as payment quantum meruit have been allowed. It is important that in the case of a wrongful breach of contract the injured party can always claim payment quantum meruit, whether the contract is divisible or indivisible. 2. Where work has been done in pursuance of a contract which is discovered void or becomes void, provided the contract is divisible. Illustrations. (a) C was appointed as managing director of a company by the board of directors under a written contract which provided for his remunera-tion. The contract was found void because the directors who constituted the Board were not qualified to make the appointment. C nevertheless, purporting to act under the agreement, rendered services to the company and sued for the sums specified in the agreement, or, alternatively, for a reasonable, remuneration on a quantum meruit. Held, C could recover on a quantum meruit. (Craven-Ellis vs Canons Ltd. ). (b) A contracts with B to repair his house at a piece rate. After a part of the repairs were carried out, the house is destroyed by lightning. Although the contract becomes void and stands discharged because of destruction of the house, A can claim payment for the work done on quantum meruit . Note that if under the contract a lump sum is to be paid for the repair job as a whole, then A cannot claim quantum meruit because no money is due till the whole job is done. 3. When a person enjoys benefit of non-gratuitous act although there exists no express agreement between the parties. One of such cases is provided in Section 70.14 Section 70 lays down that when services are rendered or goods are supplied by a person, (i) without any intention of doing so gratuitously, and (ii) the benefit of the same is enjoyed by the other party, the latter must compensate the former or restore the thing so deliv-ered. Illustrations (a) A, a trader, leaves certain goods at B s house by mistake. B treats the goods as his own. He is bound to pay A for them. [Illustration (a) to Section 70]

(b) Where A ploughed the field of B with a tractor to the satisfaction of B in B s presence, it was held that A was entitled to payment as the work was not intended to be gratuitous and the other party has enjoyed the benefit of the same. (Ram Krishna vs Rangoobed). 4. A party who is guilty of breach of contract may also sue on a quantum meruit provided both the following conditions are fulfilled: (a) The contract must be divisible, and (b) The other party must have enjoyed the benefit of the part which has been performed, although he had an option of declining it. LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 77

Illustrations (a) Where a common carrier fails to take a complete consignment to the agreed destination, he may recover prorata freight. (He will, of course, be liable for breach of the contract.) (b) S had agreed to erect upon H s land two houses and stables for $ 565. S did part of the work and then abandoned the contract. H himself completed the buildings using some materials left on his land by S. In an action by S for the value of work done and of the materials used by H, it was held that S could recover the value of the materials (for H had the option to accept or to reject these) but he could not recover the value of the work done (for H had no option with regard to the partly erected building, but to accept that). The court observed, The mere fact that a defendant is in possession of what he cannot help keeping, or even has done work upon it, affords no ground for such an inference. He is not bound to keep unfinished a building which in an incomplete state would be a nuisance on his land. (Sumpter vs Hedges). Suit for Specific Performance Specific performance means the actual carrying out of the contract as agreed. Under certain circumstances an aggrieved party may file a suit for specific performance, i. e., for a decree by the court directing the defendant to actually perform the promise that he has made. Such a suit may be filed either instead of or in addition to a suit for damages. A decree for specific performance is not granted for contracts of every description. It is only where it is just and equitable so to do, i.e., where the regal remedy is inadequate or defective, that the courts issue a decree for specific performance. It is usually granted in contracts connected with land buildings articles and unique goods having some special value to the party suing because of family association. Notice that in all these contracts monetary compensation is not an adequate relief because the injured party will not be able to get an exact substitute in the market. Specific performance is not granted, as a rule, in the following cases: (i) Where monetary compensation is an adequate relief. Thus the courts refuse specific performance of it contract to lend or to borrow money or where the contract is for the sale of goods easily procurable elsewhere. (ii) Where the court cannot supervise the actual execution of the con-tract, e.g., a building construction contract. Moreover, in most cases dam-ages afford an adequate remedy. (iii) Where the contract is for personal services, e.g., a contract to marry or to paint a picture. In such contracts injunction (i.e., an order which forbids the defendant to perform a like personal service for other persons) is granted in place of

specific performance. Suit for an Injunction Injunction is an order of a court restraining a person from doing particular act. It is a mode of securing the specific performance of the negative terms of the contract. To put it differently, where a party is in breach of negative term of the contract (i. e., where he is doing something which he promised not to do), the court may, by issuing an injunction, restrain him from doing, what he promised not to do. Thus -injunction is a preventive relief. It is particularly appropriate in cases of anticipatory breach of contract where damages would not be an adequate relief. Illustration (a) A, agreed to sing at B s theatre for three months from 1st April and to sing for no one else during that period. Subsequently she contracted to-sing at C s theatre and refused to sing at B s theatre. On a suit by B, the court refused to order specific performance of her positive engagement to sing at the plaintiff s theatre, but granted an injunction restraining A from singing elsewhere and awarded damages to B to compensate him for the loss caused by A s refusal. (Lumley vs Wagnerl) (b) G agreed to take the whole of his supply of electricity from a certain company. The agreement was held to import a negative promise that he would take none from elsewhere. He was, therefore, restrained by an injunction from buying electricity from any other company. (Metropolitan Electric Supply Company vs Ginder). Practical Problems Attempt the following problems, giving reasons for your answers: 1. A contracts to pay a sum of money to B on a specified day. A does not pay the amount on that day. B in consequence of not receiving the money on that day, is unable to pay his debts and, is totally ruined. B claims heavy damages. Advise A. [Hint. A is liable to pay interest only from the specified day upto the date of payment. In other words B can; claim only ordinary damages. B cannot claim heavy damages unless A had notice of the special circumstances resulting in the special loss at the time of entering into the contract] 2. A agreed to erect a plant for B by 31st March, 1976. A further agreed to pay Rs 500 per month as damages in case of delay beyond the agreed date. A was late by four months. B sued A for Rs 4,500, the actual loss caused to him as a result of the delay. What damages will you award, and why? [Hint B is entitled to recover Rs 2,000 only, because when a sum is named in - the contract as the amount to be paid in case of breach, the court will allow only reasonable compensation so as

to cover the actual loss sustained, within the limits stated in the contract.] 3. A employs B as manager of his factory for a term of three years at a monthly salary of Rs 3,000. Without any lapse on the part of B, A dismisses him after two years of service. B could not get an alternate job elsewhere and files a suit for damages for breach of contract against A. Will he succeed? If yes, assess the amount of damages recoverable by him. LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 78 11.555

[Hint. Yes, B will succeed. If it cannot be proved that B has failed in his duty to mitigate the loss subsequent upon the breach, B. will be entitled to full salary for the whole of the un expired period of service i.e., one year. Hence the amount of damages recoverable by B amounts to Rs 36,000.] 4. A mate was engaged for a lump sum to be paid after the completion of voyage. The mate dies when only of the voyage was completed. His legal representatives claim damages on quantum meruit. Decide. [Hint. The legal representatives of the mate cannot recover anything as the doctrine of quantum meruit is inapplicable under the circumstances (Cutter vs. Powell, 6 T.R. 320). The rule of law on the point is that party in default cannot sue upon quantum meruit, if the contract is indivisible and a lump sum is to be paid for the job as a whole, because no money is due till the job is done.] References Kapoor, N.D. (2003), Elements of Mercantile Law, Sultan Chand and Sons, New Delhi. http://www.indialawinfo.com/bareacts/soga.html M.C. Kucchal ( 2002), Business Law , Vikas Publishing House Pvt. Ltd, Delhi. P.C. Tulsian (2002), Pvt. Ltd, Delhi. Business Law , Tata Mc. Graw Hill

Rohini Aggarwal(2003), Student s Guide To Mercantile And Commercial Laws, Tata Mc. Graw Hill Pvt. Ltd, Delhi. Notes: LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 79

LESSON 14: THE SALE OF GOODS ACT, 1930 INTODUCTION TO SALE OF GOODS AND ITS FORMATION Learning Outcomes After reading the lesson, you should be able to know: Contract of Sale of Goods Formation of Sale of Goods Difference between Sale and Agreement to Sale Introduction Contract of Sale of Goods We have already studied rules relating to Indian Contract Act, 1872. These rules are applicable to contract of Sales of Goods Act as for as they are not in consistent with the express provisions of sales of goods Acts. This Act came into force on first July 1930. The provisions of this Act extends to the whole of India except the state of J&K. certain minor amendments where made in this Act in 1963. Some of the provisions of Indian Contract Act apply to this Act for example the rules relating to Capacity of parties, free consent, agreements in Restaurant of trade , wagering agreements and measure of damages. However the definition of consideration stands modified to the extent that in a contract of sale of goods consideration must be my way of Price , only money consideration. Just like Indian Contract Act, there should be offer and acceptance in the case of sales of goods. The parties to the contract enjoy unfettered discretion to agree to any terms they like, for example delivery of goods and payment of Price etc. The sales of goods Act does not seek to fetter this discretion; it simply lays down certain positive rules of General application for those cases where the parties have failed to contemplate expressly for contingencies which may interrupt the smooth performance of a contract of sale, such as destruction of goods sold, before it is delivered or in solvency of the buyer. However the law gives full freedom to the parties to modify any provisions. Definition of Sale of goods Section 4 (1) the sales of goods Act defines a contract of sale of goods as A contract where by the seller transfers or agrees to transfer the property in goods to the buyer for a price . Essential Characteristics of Sale of Goods 1. Two parties: There should be two parties namely the buyer

and seller. Incase the students of a Hostel take meals in a mess run by them , there is no contract of sale because the student are undivided joined owners, who are running the mess on cooperative basis. An undivided join owners must be distinguished from a part-owner who is a join owner with divisible share. Example supposes X and Y jointly owns a typewriter and X sells the type writer to Y the ownership of type writer goes to Y. Although the general rule is that a person cannot buy his own goods, there is one exemption i.e. where a person s goods are sold in execution of a decree, he himself may buy them. 2. Transfer of Property: Property here means ownership . Transfer of property in the goods is another essential of a contract of sales of goods. A mere transfer of possession of the goods cannot be termed as sale. To constitute a contract of sale the seller must either transfer or agree to transfer the property in the goods to the buyer. Further, the term property, as used in the Sale of Goods Act, means general property in goods as distinguished from special property 3. Goods: The subject-matter of the contract of sale must be goods According to Section 2(7) 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. Goodwill, trade marks, copyrights, patents right, water, gas, electricity,, decree of a court of law, are all regarded as goods. In the case of land the grass which forms part of land have to be separated from the land. Thus where trees sold so that they could be cut out and separated from the land and then taken away by the buyer, it was held that there was a contract for sale of movable property or goods (Kursell vs Timber Operators & Contractors Ltd.). But contracts for sale of things forming part of the land itself are not contracts for sale of goods. For example, a contract for the sale of coal mine or building-stone quarry is not a contract of sale of goods. Actionable Claims means claims which can be enforced by a legal action or a suit, example a book debt. A book debt is not goods because it can only be assigned as per Transfer of Property Act but cannot be sold. Same is case in the case of bill of exchange, promissory note etc. The negotiable instrument like promissory note can be transferred under Negotiable Instruments Act by mere delivery or endorsement and delivery, such instruments cannot be sold. Money means current money. It is not regarded as goods because it is the medium of exchange through which goods can be bought. Old and rare coins, however, many be treated as goods and sold as such. It may be mentioned that sale of immovable property is governed by the Transfer of Property Act, 1882. 4. Price: The consideration for a contract of sale must be

money consideration called the price . If goods are sold or exchanged for other goods, the transaction is barter, governed by the Transfer of Property Act and not a sale of goods under this Act. But if goods are sold partly for goods and partly for money, the contract is one of sale (Aldridge vs Johnson). LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 80 11.555

5. Includes both a sale and an agreement to sell. The term contract of sale is a generic term and includes both a sale and an agreement to sell [as is clear from the definition of the term as per Section 4(1) given carlier ]. 6. Sale: Where under a contract of sale the property in the goods is immediately transferred at the time of making the contract from the seller to the buyer, the contract is called a sale [Sec. 4(3)]. It refers to an absolute sale , e.g. an outright sale on a counter in a shop. There is immediate conveyance of the ownership and mostly of the subject matter of the sale as well (delivery may also be given in future), It is an executed contract. An agreement to sell. Where under a contract of sale the transfer of property in the goods is to take place at a future time or subject to some condition thereafter to be fulfilled, the contract is called an agreement to sell [Sec. 4(3)]. It is an executory contract and refers to a conditional sale. Illustration (a) On 1 January, A agrees with B that he will sell B his scooter on 15 January for a sum of Rs. 3,000. It is an agreement to sell, since A agrees to transfer the ownership of the scooter to B at a future time. (b) A agrees to purchase B s car for Rs 5,000 provided B stands surety for him with C. It is an agreement to sell for B. It becomes a sale when the condition is fulfilled by B. (c) B agrees to buy A s car for Rs. 30,000 and pay for it, if his solicitor approves. It is an agreement to sell for A and an agreement to buy for B. (d) A buys some furniture for Rs. 2,000 and agrees to pay for that in two monthly installments, the ownership to pass to him on the payment of second installment. There is an agreement to sell for the furniture dealer. An agreement to sell becomes a sale when the time elapses or the conditions are fulfilled subject to which the property in the goods is to be transferred [Sec. 4(4)]. 7. No formalities to be observed: A contract of sales of goods can be made by mere offer and acceptance. Neither payment nor delivery is necessary at time of making the contract of sale. It can be made either orally or in writing or partly orally or partly in writing or may be even implied from the contact of the parties. Let us try to understand the difference between sale and agreement to sale. Sale and Agreement to Sale Distinguished

1. Transfer of property (ownership) In a sale the property in goods passes to the buyer immediately at the time of making the contract. In other words, a sale implies immediate conveyance of property so that the seller ceases

to be the owner of the goods and the buyer becomes the owner thereof. It creates a just in rem, i.e., gives right to the buyer to enjoy goods as against the whole world. In an agreement to sell there is no transfer of property to the buyer at the time of the contract. The conveyance of property takes place later so that the seller continues to be the owner until the agreement to sell becomes a sale either by the expiry of certain time or the fulfillment of some condition. Thus where A agrees to buy 50 kg wheat from B and the wheat is yet to be weighed, the transaction is an agreement to sell because as per Section 22, in such a case the property does not pass to the buyer till the goods are weighed and the buyer has notice thereof. The transaction becomes a sale and the property in the goods passes to the buyer after the wheat is weighed and the buyer has notice thereof. An agreement to sell creates a jus in person, that is, it gives a right to either buyer or seller against the other for any default in fulfilling his part of the agreement. It is worth nothing that this is the basic point of distinction between a sale and an agreement to sell. All other points of distinction follow from this basic difference, i.e. whether the property in the goods has passed or is yet to pass from seller to buyer. 2. Risk of loss. The general rule is that unless otherwise agreed, the risk of loss prima facie passes with property (Sec. 26). Thus in case of sale, if the goods are destroyed the loss falls on the buyer even though the goods may never have come into his possession because the property in the goods has already passed to the buyer. On the other hand, in case of an agreement to sell where the ownership in the goods is yet to pass from the seller to the buyer, such loss has to be borne by the seller even though the goods are in the possession of the buyer. 3. Consequences of breach. In case of sale, if the buyer wrongfully neglects or refuses to pay the price of the goods, the seller can sue for the price, even though the goods are still in his possession. In case of an agreement to sell, if the buyer fails to accept and pay for the goods, the seller can only sue for damages and not for the price, even though the goods are in the possession of buyer. 4. Right of resale In a sale, the property is with the buyer and as such the seller ( in possession of goods after sale ) cannot resell the goods. If he does so, the subsequent buyer having knowledge of the previous sale does not acquire a title to the goods. The original buyer can sue and recover the goods from the third person as owner, and can also sue the seller for the breach of contract as well as for the tort of conversion. The right to recover the goods from the third person is, however, lost if the subsequent buyer had bought them bonafide without notice of the previous sale (Sec. 30). In an agreement to sell, the property in the goods remains with the seller and as such he can dispose of the goods as he likes and the original buyer can sue him for the breach of contract only. In this case, the subsequent buyer gets a good title to the

goods, irrespective of his knowledge of previous sale. Further, goods forming the subject matter of an agreement to sell can also be attached in execution of a decree of a court of law against the seller. 5. Insolvency of buyer before he pays for the goods In a sale, if the buyer is adjudged insolvent before he pays for the goods, the seller, in the absence of a right of lien over the goods, must deliver the goods to the Official Receiver or Assignee. The seller is entitled only to a ratable dividend LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 81

for the price of the goods. But in an agreement to sell, in these circumstances, the seller may refuse to deliver the goods to the Official Receiver or Assignee unless paid for, as ownership has not passed to the buyers. 6. Insolvency of seller if the buyer has already paid the price In a sale, if the seller is adjudged insolvent, the buyer is entitled to recover the goods from the Official Receiver or Assignee, as the property in the goods rests with the buyer. On the other hand, in an agreement to sell, if the buyer has already paid the price and the seller is adjudged insolvent, the buyer can only claim a ratable dividend (as a creditor) and not the goods because property in them still rests with the seller. Let us now understand the difference between Sale And Hire Purchase Hire Purchase Although hire purchase resembles sale of goods it is different in many ways. Under hire purchase agreement the goods are delivered to the hire purchaser for his use at the time of the agreement but the owner of the goods agrees to transfer the property in the goods to the hire purchaser only when the hirer pays a certain fixed number of installments of price. Thus, the essence of hire-purchase agreement is that there is no agreement to buy, but there is only a bailment of the goods coupled with an option to purchase them, which may or may not be exercised. Distinction between a sale and a hire-purchase agreement [Hint: B shall have to pay for the car already delivered a reasonable price. A cannot ask for its return. As regards the second car, B cannot insist on its delivery to him since the contract has become void (Sec. 10)]. d) A dealer in radios gives a Murphy radio to a customer on the terms that Rs. 100 should be paid by him immediately and Rs 200 more in two monthly equal instalments. It was further agreed that if the radio is found defective the customer may return it within a week but not later. The customer makes default in paying the last installment. Can the radio dealer take back the radio on his default? [ Hint. No. the radio dealer connot take back the radio on default by the customer because it is a contract of sale and not of hire purchase] e) A sold 100 quintals of groundnut oil to B. Before it could be delivered to B, the Government of India requisitioned the whole quantity lying with A in public interest. B wants to sue A for breach of contract. Advise B.

Notes Sale Hire-purchase agreement 1. Ownership is transferred from the seller to 1 Ownership is transferred from the seller to the the buyer as soon as the contract is entered hire-purchaser only when a certain agreed into. number of instalments is paid. 2. The position of the buyer is that of the 2. The position of the hire-purchaser is that of owner. the bailee. 3. The buyer cannot terminate the contract and 3. The hire-purchaser has an option to terminate as such is bound to pay the price of the the contract at any stage, and cannot be forced goods. to pay the further instalments. 4 If the buyer makes the payment in 4. The instalments paid by the hire-purchaser are instalments, the amount payable by the buyer regarded as hire charges and not as payment to the seller is reduced, for the payment made towards the price of the goods till option to by the buyer is towards the price of the purchase the goods is exercised. goods. Answer the following Questions

a) A agrees to sell a horse to B who tells A that a) He needs the horse for riding to Ban galore immediately. The horse is ill at the time of agreement. What are the rights of A and B? b) B agrees to buy A s Furniture at a price to be fixed by D, a furniture dealer. D refuses to oblige A and B and fixes no price. On A s refusal to sell, can B legally compel him to sell the furniture for any price? c) A agrees to sell to B his two second hand cars on the terms that the price was to be fixed by C. B takes delivery of one car immediately. G, however, refuses to fix the price, A asks for the return of the car already delivered whereas B insists on the delivery of the second car to him, for a reasonable price of both the cars. Decide. LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 82 11.555

LESSON 15: THE SALE OF GOODS ACT, 1930 SUBJECT MATTER OF CONTRACT OF SALE AND PRICE Learning Outcomes After reading the lesson, you should be able to know: Subject matter of Contract of Sale Kinds of Goods Perishing of Goods Fixation of Price Importance of time Document of title to the goods. Introduction Subject Matter of Contract of Sale The subject matter in sales of goods is goods . I have already explained what we mean by Goods. Let us know about its classification. Goods may be classified into 1. Existing goods; 2. Future goods; and 3. Contingent goods 1. Existing goods: At the time of sales if the goods are physically in existence and are in possession of the seller the goods are called Existing Goods Existing goods can be classified into specific or unascertained. (a) Specific goods. Goods identified and agreed upon at the time of the making of the contract of sale are called specific goods [Sec. 2(14)]. It may be noted that in actual practice the term ascertained goods is used in the same sense as specific goods, For example, where A agrees to sell to B a particular radio bearing a distinctive number, there is a contract of sale of specific or ascertained goods. (b) Unascertained goods. The goods, which are not separately identified or ascertained at the time of the making of the contract, are known as unascertained goods. They are indicated or defined only by description. For example, if A agrees to sell to B one bag of sugar out of the lot of one hundred bags lying in his godown, it is a sale of

unascertained goods because it is not known which bag is to be delivered. As soon as a particular bag is separated from the lot for delivery, it becomes ascertained or specific goods. The distinction between specific or ascertained and unascertained goods is important in connection with the rules regarding transfer of property from the seller to the buyer. 2. Future goods: Future goods are goods to be manufactured or produced or yet to be acquired by seller. There cannot be present sale in respect future goods because the property cannot pass. Example (a) A agrees to sell to B all the milk that his cow may yield during the coming year. This is a contract for the sale of future goods. (b) X agrees to sell to Y all the mangoes, which will be produced in his garden next year. It is contract of sale of future goods, amounting to an agreement to sell. 3. Contingent Goods: Though a type of future goods, these are the goods the acquisition of which by the seller depends upon a contingency, which may or may not happen [Sec. 6 (2)]. Example A agrees to sell specific goods in a particular ship to B to be delivered on the arrival of the ship. If the ship arrives but with no such goods on board, the seller is not liable, for the contract is to deliver the goods should they arrive. Do you know what would happen if the goods are perished? Effect of Pershing of Goods The first we must know what we mean by perishing of goods. Pershing means not only physically destruction of goods but it also covers: (a) Damage to goods so that the goods have ceased to exist in the commercial sense, i.e., their merchantable character as such has been lost (although they are not physically destroyed), e.g., where cement is spoiled by water and becomes almost stone or where sugar becomes sharbat and thus are unsaleable as cement or sugar; (b) Loss of goods by theft (Barrow Ltd. Vs Phillips Ltd. ); (c) Where the goods have been lawfully requisitioned by the government (Re Shipton, Anderson & Co. ). You must note that it is only the perishing of specific and ascertained goods that affect the sales. In the case of unascertained goods, their perishing does not affect the contract. Where A agrees to sell to B ten bales of Egyptian cotton out of 100 bales lying in his godown and the bales in the godown are completely destroyed by fire, the contract does not become void. A must supply ten bales of cotton after purchasing them from the market or pay damages for the breach.

Effect of Pershing of Goods May Fall Under 1. Where specific goods from the subject matter of contract of sale (both actual sale and agreement to sell, and they, without the knowledge of seller perish, at or before the time of contract , the contract is void. This provision is made either on the ground of mutual mistake as to matter of fact essential to agreement, or on the ground of impossibility of performance, both of which render the contract void ab-initio. LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 83

2. Pershing of goods before sell, but after agreement to sell: Where there is agreement to sell specific goods, and subsequently the goods, without any fault on the part of the seller or buyer, perish before the risk passes to buyer, the agreement is thereby avoided, i.e., Sales becomes void and both parties are excused from performance. This is based on Supervening Impossibility. If only part of the goods agreed to be sold perish, the contract is void is if it is indivisible. In case contract is divisible, perishing of goods rule apply to the extent of perishing goods. The contract is valid as regards the part available in good condition. It is to be noted that if fault of either party causes the destruction of the goods , then the party in default is liable for non-delivery or to pay for goods as the case may be. Again if the risk has passed to the buyer, he must pay for the goods, though undelivered. 3. Effect of Perishing of Future goods: Present sale of future goods is an agreement to sale. In case of future goods, if sufficiently identified, are to be treated as specific goods, the destruction of which makes the contract void. E.g. A agreed to sell B, 100 tons of potatoes to be grown in A s land. A did everything needed but decease attacked and could produce only 20 tones. The contract was held as void. Price is very important in the contract of Sale of Goods. Let me now take up the meaning and fixation of price. Price For a sale of goods, money consideration is known as price . Without money (Price) there are no sales. Unless otherwise agreed, the price should be pay or promised to be paid, in legal tender money. Price may be paid by cheque, hundi, Bank deposit etc. the requisite to make a valid sales of goods contract is to pay a price in money and not the mode of payment. Modes of Fixing the Price: Sec 9 says that price may be paid in one or the other following modes: 1. It may be Expressly Fixed by the Contract Itself It is the usual mode of fixing price. The parties are free to fix any price they like and court will not bother as to adequacy of price. But the sum should be definite. Where an alternative price is fixed, the agreement is void ab-nitio as it involves an element of wager. E.g. A offers to B a cow. B agrees to buy for Rs. 5000/- if cow gives 10 ltr milk and only Rs. 100/- if it fails to do so. 2. It may be fixed in accordance with an agreed manner provided by the contract: It may by agreed that the buyer would pay the market price prevailing on a particular date or that the price is to be fixed by a third party ( e.g. valuer ) appointed with consent of

parties. If no price is fixed, then the contract is void for uncertainty because in that case law usually allows market price prevailing on the date of supply of goods as the price bargained for. 3. It may be determined by the course of dealings between the parties. If the buyer has been previously paying to a particular seller the price prevailing on the date or placing the order, the course of dealing suggest that in subsequent transactions also the price as on the date of order will be paid. 4. If the price is not capable of being determined in accordance with any of the above modes, the buyer is bound to pay to the seller A reasonable price . What is reasonable price depends of circumstances. Generally, the market price of the goods prevailing on the date of supply is taken as reasonable price. Agreement to Sell at Valuation (Sec. 10 ) says where there is an agreement to sell goods and the price is to be fixed by the valuation of a third party and such that parties fails to fix the price (either because he cannot value of because he does not want to value ) the contract becomes void, except to as part of goods delivered and accepted, if any, under the contract, as regards which the buyer is bound to pay a reasonable price. If, however any one of the parties , namely, the sellers or the buyer, prevents the third party from making the valuation, the innocent party may maintain a suit for damages against the party at fault. Although in this case also the contract becomes void, yet the party at fault is bound to compensate the other party for the actual loss suffered by him because of the Act of prevention. Sec:32 says that, unless otherwise agreed, payment of price and delivery of goods are concurrent condition. Escalation Clause Secton-64A, unless otherwise agreed, where, after making of the contract and fixing the price but before the delivery of the goods, a new or increased custom or excise duty of sale or purchase tax is imposed and the seller has to pay it, the seller is entitled to add the same to the price. Conversely, if the rate of duty or tax is lowered, the buyer would be entitled to a reduction in price. Earnest or Deposit Money Money deposited by buyer with seller is known as earnest or deposit money for fulfillment of contract. It is treated as part payment and only balance to be paid by the buyer. In case of default by buyer, the seller can forfeit this. In case of default by seller, the buyer can get a back in addition to damages.

The time is very important in life. The lost time is never back. It is important to realize the importance in the contract of sale of goods. Importance of Time To Goods Do you know that as regards the time fixed for the delivery of goods, time is usually held to be of the essence of the contract. ? Thus if time is fixed for the delivery of goods and the seller makes a delay, the contract is voidable at the option of the buyer. In case of late delivery, therefore, the buyer may refuse to accept the delivery and may put an end to the contract. You must understand the importance of time to goods. Stipulations as to time in a contract of sale fall under the following two heads: 1. Stipulation relating to time of delivery of goods. LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 84 11.555

2. Stipulation relating to time of payment of the price. As regards the time fixed for the payment of the price, the general rule is that time is not deemed to be of the essence of the contract, unless a different intention appears from the terms of the contract (Sec.11). Thus even if the price is not paid as agreed, the seller cannot avoid the contract on that account. He has to deliver the goods if the buyer tenders the price within reasonable time before resale of the goods. The seller may, however, claim compensation for the loss occasioned to him by the buyer s failure to pay on the appointed day. Documents to Title To Goods Section-2(4) Lays down rules regarding above. Any document used in ordinary cause of business, as proof of the possession or control of goods, or authorizing or purporting to authorize, either by endorsement or by delivery, the possessor of document to transfer or receive goods thereby represented is a document of title of goods. It is a proof of ownership of goods and authorizes its holder to receive goods or further transfer such right to another person by proper endorsement of delivery. Documents of title to goods are unconditional under taking on the part of issuing authority to deliver goods. Although these documents can be transferred by mere delivery or by endorsement, yet it is regarded as quasi negotiable instrument , because the title of transferee ( even if bonafide will not be superior to that of the transferor in the case of transfer of such documents. Examples of the Documents of Title to Goods Bill of lading Dock-warrant Warehouse keeper s certificate, Where finger s certificate Railway receipt Delivery order etc. Attempt the Following Problems 1. A agrees to sell to B 10 bags of wheat Kalyan (superior) out of 100 bags lying in his godown for Rs. 6,500. The wheat is completely destroyed by fire. Can B compel A to supply the wheat as per agreement? [Hint. Yes, B can compel A, because the goods forming the subject-matter of the contract in question are unascertained goods, the perishing of which does not affect the contract. A must supply the wheat from elsewhere or pay damages for the breach] 2. A hirer, who obtains possession of a refrigerator from its owner under a hire-purchase agreement, sells the refrigerator to a buyer who buys in good faith and without notices of he right of the owner. Does this buyer get a

good title to the refrigerator? State reasons for your answer. [ Hint: No, as the hire-purchaser has no title to the refrigerator]. 3. P. agrees to sell to Q his two motor cars on the terms that the price was to be fixed by R. Q takes the delivery of one car immediately. R refuses to oblige P and Q and fixes no price. P asks for the return of the car already delivered whereas Q insists on the delivery of the second car to him for a reasonable price of both the cars. Decide the case. [Hint. The case is governed by Section 10 which provides that if the third party refuses to fix the price, the contract becomes void except as to part of goods delivered and accepted as regards which the buyer must pay a reasonable price. Thus as regards the car already delivered, P cannot ask for its return and must accept a reasonable price for that. As regards the second car, Q cannot insist on its delivery to him since the contract has become void.] 4. A agrees to sell a horse to B who tells A that he B needs the horse for riding to Mumbai immediately. The horse is ill at the time of agreement. What are the rights of A and B? [ Hint: The agreement is void (Sec. 8)]. 5. B agrees to buy A s furniture at a price to be fixed by C, a furniture dealer, C refuses to oblige A and B and fixes no price. On A s refusal to sell, can B legally compel him to sell the furniture for any price? [Hint: No (Sec. 10)]. References Kapoor, N.D. (2003), Elements of Mercantile Law, Sultan Chand and Sons, New Delhi. http://www.indialawinfo.com/bareacts/soga.html M.C. Kucchal ( 2002), Business Law , Vikas Publishing House Pvt. Ltd, Delhi. P.C. Tulsian (2002), Pvt. Ltd, Delhi. Notes: Business Law , Tata Mc. Graw Hill

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LESSON 16: THE SALE OF GOODS ACT, 1930 CONDITIONS AND WARRANTIES Learning Outcomes After reading the lesson, you should be able to know: The meaning of conditions and warranties The difference between conditions and warranties The important conditions and warranties The doctrine of caveat emptor Introduction In a contract of sale of goods various terms or stipulations regarding quality of the goods, price mode of payment, delivery of goods etc. are very important. These stipulations are known as conditions and warranties. Let us know about it. Conditions and Warranties Stipulations regarding quality of the goods, price mode of payment, delivery of goods etc. are very important are known as conditions and warranties There is a difference between conditions and warranties. While some of them may not be very important but some stipulations may be major terms which go to the very root of contract and any breach may frustrate the contract, while others may be minor terms which are not very vital that their breach may seem to be breach of contract as such. In law of sales major terms are called Conditions and minor terms are called warranties From the terms of contract, it is necessary to distinguish mere statements commendation or praise or expressions made by the seller in reference to goods. The commendatory statements are neither conditions nor warranties. They do not form part of contract and give no right of action. For Example: Where a horse dealer, while praising his horse, states that the horse is very lucky and one whosoever shall purchase it must very soon become a millionaire, his statement, being mere commendatory in nature, does not form a part of the contract and its breach ( i.e., if the buyer of the horse does not actually become a millionaire later) does not give rise to any legal consequences. Condition Sec. 12 (2) defines as A condition is a stipulation essential to the main purpose of the contract, the breach of which gives the aggrieved party a right to repudiate the contract itself. In addition he can claim damages from the guilty party Warranty Sec. 12(3) defines A warranty is a stipulation collateral to the main purpose of the contract, the breach of which gives the aggrieved party a right to sue for damages only, and not to avoid the contract itself .

Conditions are the very basis of contract of sale, so any breach of condition will make contract void, but in the case of warranties, aggrieved parties can claim only damages. There is no hard and fast rule as to which stipulation in a contract is a condition or warranty. Sec 12(4) lays down whether a stipulation in a contract of sale is a condition or a warranty stipulation may be a condition though called a warranty in the contract. The court is not to be guided by the terminology of the parties but has to look to the intention of the parities by referring to the terms of the contract, its construction and the surrounding circumstances to judge whether a stipulation was a condition or a warranty. The best test is to see whether a stipulation is fatal to the aggrieved party, then such stipulation is a condition. Example (a) A man buys a particular horse which is warranted quiet to ride and drive. If the horse turns out to be vicious, the buyer s only remedy is to claim damages. But if instead of buying a particular horse, a man asks a dealer to supply him with a quiet horse and the dealer supplies him with a vicious one, the stipulation is a condition, and the buyer can return the horse and can also claim damages for breach of contract ( Hartley vs Hyman). (b) P goes to R, a horse dealer, and sys, I want a horse which can run at a speed of 30 kilometers per hour. The horse dealer points out a particular horse and says, This will suit you. P buys the horse. Later on P finds that the horse can run only at a speed of 20 kilometers per hour. There is a breach of condition, P can repudiate the contract, return the horse to R and get back the price. But if P says to R, I want a good horse. R shows him a horse and says, This is a good horse and it can run at a speed of 30 kilometers per hour, and P buys the horse and finds later on that it can run at a speed of 20 kilometers per hour only, there is a breach of warranty because the stipulation made by the seller did not form the very basis of the contract and was only subsidiary one. The seller gave the assurance about the running speed of the horse of his own without being asked by the buyer hence it is only of secondary important. The above illustrations are a clear proof of the fact that an exactly similar term may be a condition in one contract and a warranty in another depending upon the construction of the contract as a whole. Distinction between condition and warranty You may summarize the difference as follows: 1. As to value. A condition is a stipulation which is essential to the main purpose of the contract, whereas a warranty is a stipulation which is collateral to the main purpose of the contract. [Sec. 12(2)(3). 2. As to breach. The breach of a condition gives the aggrieved

party the right to repudiate the contract and also to claim damages, whereas the breach of warranty gives the aggrieved party a right to claim damages only. LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 86 11.555 depends in each case on the construction of contract. A

3. As to treatment. A breach of condition may be treated as a breach of warranty. But a breach of warranty can not be treated as a breach of condition. When breach of Condition is to be treated as Breach of Warranty: Sec-13 deals, where breach of condition is to be treated as breach of warranty. In this situation the buyer can claim only damages and cannot rescind contract. The Cases are as Follows 1. Voluntary waiver by buyer. In a breach of condition by seller the buyer may instead elect to waive the condition i.e to treat the breach of condition as a breach of warranty and accept goods and sue the seller for damages. Example: A agrees to supply B 10 bags of first quality sugar @ Rs. 625 per bag but supplies only second quality sugar, the price of which is Rs. 600 per bag. There is a breach of condition and the buyer can reject the goods. But if the buyer so elects, he may treat it as a breach of warranty, accept the second quality sugar and claim damages @ Rs. 25 per bag. Acceptance of goods by buyer When the buyer has accepted the goods and subsequently he comes to know of the breach of the conditions, he cannot reject them, but can only maintain an action for damages. This case does not depend on the will of the buyer but the law compulsorily treats a breach of condition as a breach of warranty. In case the buyer has accepted only part of the goods and the contract indivisible, he will have to treat the breach of condition as a breach of warranty and accept the remaining part also. But in case of divisible contracts, he can repudiate as regards remaining goods, if he has accepted only part thereof. Express and Implied Conditions and Warranties Conditions & warranties may be either express or implied. When they are inserted in the contract they are expressed and they are implied when the law presumes their existence in the contract , although they are not been put in express words. Implied condition and warranties may, however, be negatived by express agreement, or by course of dealing between the parties or by the useage of trade. This provision is merely an application of the general maxim of law what is expressly done puts an end to what is tacit or implied and custom and agreement over-rule implied conditions and warranties . Implied Conditions Unless otherwise agreed, the law incooperates following conditions in to a contract for sale of goods. 1. Condition as to title: Sec.-14(a) In every contract of sale the

first implied condition on the part of the seller is that, in case of sales he has a right to sell the goods and that, in the case of agreement to sale, he will have a right to sell to goods at the time when the property is to pass. Usually the seller has right to sel the goods if either he is the owner or he is owner s agent. This implies that if seller s title is defective the buyer is entitled to reject the goods and to recover his price. Example R. purchased a motorcar from D used the same for several months. D had no title to the car and, therefore, R was compelled to return the car to the true owner. R sued D to recover back the price which he had already paid. He was held entitled to recover the whole of the price paid by him despite the fact that he had used the car for some months ( Rowland vs Divall). It may be noted that the implied condition as to title makes it obligatory upon the seller that he must not only be the owner but also must be able to uphold the validity of the contract. Thus if the goods sold bear labels infringing the trade mark of another, the seller is guilty of breach of this condition although he had full ownership of the goods. 2. Condition in a sale by Description Where there is a contract of sale of goods by description, there is an implied condition that the goods shall correspond with description . The goods must correspond with description whether it is a sale of specific goods or of unascertained goods. The description may be in term of the qualities or characteristics of the goods. E.g. long staple cotton, kalyan wheat, Basmati Rice, Sugar S.30 or may mention trademark, brand name, type of packing etc. Example (b) M agreed to supply to L 3,000 tins of canned fruit, to be packed in cases each containing 30 tins. M tendered a substantial portion in cases containing 24 tins, It was held that the mode of packing constituted a part of the description and, therefore, L was entitled to reject the whole consignment ( Re Moore & co. and Landaure & C.) 3. Condition in a sale by sample: The implied conditions under the contract for sale by sample are The bulk of goods should correspond with sample quality Buyer shall have reasonable opportunity to compare the sample That the goods shall be free from any defect, rendering them unmerchantable, which would not be apparent on reasonable examination of the sample In other words, there should not be any latent defect in the goods. If the defect is patent one, that is, easily discoverable by the exercise of ordinary care, and the buyer takes delivery after

inspection, there is no breach of implied condition and the buyer has no remedy. 4. Condition in a sale by sample as well as by description: The implied condition is that the bulk of goods shall correspond, both with the sample and with description. If it corresponds with only sample and not with description, or vice versa, the buyer is entitled to reject the goods. It must correspond with both. Example (b) N agreed to sell G some oil described as foreign refined rape oil, warranted only equal to sample. The oil supplied, though corresponded with the sample, was adulterated with hemp oil. Held that since the oil supplied was not in LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 87

accordance with the description the buyer was entitled to reject the same ( Nichol vs godts). 5. Condition as to fitness or quality: Usually in a contract of sale of goods there is no implied condition or warranty as to quality or fitness for any particular propose of goods supplied ; the rule being Caveat Emptor that is, let the buyer beware. But an implied condition is deemed to exist on the part of the seller that the goods supplied shall be reasonably fit for the purpose for which the buyer wants them, if the following conditions are satisfied: (i) The buyer, expressly or impliedly, should make known to the seller the particular purpose for which the goods are required; and (ii) The buyer should rely on the seller s skill or judgment and (iii) The goods sold must be of a description which the seller deals in the ordinary course of his business, whether he be the manufacturer or not. Example A buyer ordered for the Hessian cloth, which is generally used for packing purposes, without specifying the purpose for which he wanted the same. The cloth was supplied accordingly. On receiving the cloth the buyer found that it was not suitable for packing food products as it had an unusual smell. Held, that the buyer had no right to reject the cloth as it was suitable for packing purposes alright. The buyer ought to have disclosed his particular purpose to the seller in order to make him liable for the breach of implied condition as to fitness (Rs. Andrew Yule & Co.) The purpose need not be told expressly if the goods are fit for one particular purpose only or if the nature of the goods itself tells the purpose by implication. In such case the purpose is deemed to be made known to the seller impliedly. 6. Condition as to merchantability: This condition is applicable only when the sale is by description. The goods should correspond with description. Sec-15 Lays down another implied condition that the goods should be merchantable quality and it should satisfy following conditions: (a) The seller should be a dealer in goods of that description, whether he be a manufacturer or not (b) The buyer must not have any opportunity of examining the goods or there must be some latent defect in the goods, which should be apparent on reasonable examination. The term merchantable quality means that the goods are such quality and in such condition that a reasonable man, acting reasonably, would accept them under the circumstances of the case in performance of his offer to buy those goods, whether he buys them for his own use or to sell. 7.

Condition as to wholesomeness. This condition is implied only in a contract of sale of eatables and provisions. In such cases the goods supplied must not only answer to description and be merchantable but must also be wholesome, i.e., free from any defect which render them unfit for human consumption. Example (b) The plaintiff bought a bun at a baker s and confectioner s ship. The bun contained a stone which broke one of the plaintiff s teeth. Held, the seller was liable in damages because he violated the condition of wholesomeness (Chaproniere vs Mason). (c) W bought a bottle of beer from H, a dealer in wines. The beer was contaminated with arsenic. W, on taking the beer, feel ill. H was held liable to W for the consequent illness (Wren vs Halt ). Implied Warranties Unless otherwise agreed, the law in-corporate following Implied Warranties 1. Warranty of quite possession: Sec 14 (b), the first implied warranty on the part of the seller is that the buyer shall have and enjoy quite possession of goods. If the buyer is in anyway disturbed by a person having a superior right than that of the seller, the buyer can claim damages from the seller. Since disturbances of quite possession is likely to arise only where the seller s title of goods is defective, this warranty is regarded as an extension of the implied condition of the title provided in section-14(a) Example: A buys a typewriter and spent some money for repairs. It turns to be a stolen article. A is entitled to get back what he paid plus repair charges. 2. Warranty of freedom from encumbrances: Sec.-14 (c) Says that the goods shall be free from any charge or encumbrance in favour of any third party not declared or known to the buyer before or at the time when the contract is made if goods are afterwards found to be subject to a charge and the buyer has to discharge the same , there is a breach of warranty and the buyer is entitled to damages. If the buyer knows about the encumbrance on the goods at the time of entering into the contract, he becomes bound by the same and he is not entitled to claim compensation from the seller for discharging same. Example A pledges a watch with B. Later gets the watch for limited purpose and A sales it to C. B tells C about the pledge. C has to make payment for the pledge amount to B. Here is breach of warranty and C can get compensation from A. 3. Warranty of disclosing the dangerous nature of goods to the ignorant buyer: The third implied warranty on the part of seller is that in case the goods sold are of dangerous

nature he will warn the ignorant buyer of the probable danger. If there is a breach of warranty the buyer is entitled to claim damages for injury. The seller is bound to give some warning of the danger in the goods to the buyer. Example C. Purchases a tin of disinfectant powder from A. A knows that the lid of the tin is defective and if it is opened without special care it may be dangerous, but tells nothing to C. C opens the tin in the normal ways whereupon the disinfectant powder flies into her eyes and causes injury, A is liable in damages to C as he should have warned C of the probable danger. LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 88 11.555

Doctrine of Caveat Emptor: The maxim of caveat emptier means Let the buyer beware according to this it is the duty of the buyer to be careful while purchasing goods of his requirement, and in the absence of any inquiry from the buyer, the seller is not bound to disclose every defect in goods of which he may be aware. The buyer must examine the goods thoroughly and must see that the goods he buys are suitable for the purpose for which he wants them. If the goods turn out to be defective the buyer cannot sue the seller because there is no implied undertaking by the seller that he shall supply goods to suit the buyer s purpose. If the buyer depends on his own skill and makes bad choice he must suffer in the absence of any misrepresentation or fraud or guarantee by the seller. Example: A buys a horse from B for riding but did not mention this. The horse was found fit only for carriage. A cannot claim damage. However caveat emptor is subject to following exceptions: Exceptions. The doctrine of caveat emptor is subject to the following exceptions: 1. Where the seller makes a mis-representation and the buyer relies on it, the doctrine of caveat emptor does not apply. Such a contract being voidable at the option of the innocent party, the buyer has a right to rescind the contract. 2. Where the seller makes a false representation amounting to froud and the buyer relies on it, or where the seller actively conceals a defect in the goods so that the same could not be discovered on a reasonable examination, the doctrine of caveat emptor does not apply. Such a contract is also voidable at the option of the buyer and the buyer is entitled to avoid the contract and also claim damages for fraud. 3. Where the goods are purchased by description and they do not correspond with the (Sec.15). See implied condition in a sale by description discussed earlier). 4. Where the goods are purchased by description from a seller who deals in such class of goods and they are not of merchantable quality , the doctrine of caveat emptor does not apply. But the doctrine applies, if the buyer has examined the goods, as regards defects which such examination ought to have revealed [Sec. 16(2)]. (See implied condition as to merchantability discussed earlier). 5. Where the goods are bought by sample, the doctrine of caveat emptor does not apply if the bulk does not correspond with the sample, or if the buyer is not provided an opportunity to compare the build with the sample, or if there is any hidden or latent defect in the goods (Sec. 17). (See implied condition in a sale by sample discussed earlier). 6. Where the goods are bought by sample as well as by description and the bulk of the goods does not

correspond both with the sample and with the description, the buyer is entitled to reject the goods (Sec. 15). (See implied condition in a sale by sample as well as by description discussed earlier). 7. Where the buyer makes known to the seller the purpose for which he requires the goods and relies upon the seller s skill and judgement but the goods supplied are unfit for the specified purpose, the principle of caveat emptor does not protect the seller and he is liable in damages [Sec. 16(1)]. (See condition as to fitness or quality discussed earlier). 8. Where the trade usage attaches an implied condition or warranty as to quality or fitness and the seller deviates from that, the doctrine of caveat emptor does not apply and the seller is liable in damages [Sec. 16(3)]. Attempt the following problems for better understanding: Practical Problems 1. Worsted coating of quality equal to sample was sold to tailors who could not stitch it into coats owing to some latent defect in its texture. The tailors had examined the cloth before affecting the purchase. Are they entitled to damages? [Hint. In a contract of sale by sample there is an implied condition that the goods shall be free from any latent or hidden defect (Sec. 17). As this implied condition is broken in the instant case, the tailors are entitled to recover damages. 2. A purchases a car from B and uses it for some item. It turns out that the car sold by B to A was a stolen one and had to be returned to the rightful owner. A brings action against B for the return of the price. Will he succeed? [Hint: Yes (sec. 14(a), Rowland v. Divall]. 3. Soda-water was supplied by S to B in bottles. B was injured by the bursting of one of the bottles. Can B claim damages from S? [Hint. B can claim damages from S for the injury as the bottle is not of merchantable quality and there is a sale of goods by description. (Refer to Condition as to Merchantability)]. 4. A, a farmer, simply exhibits oats in his farm. B buys the oats in the belief that they are old oats. In fact they are new oats. B wants. B wants to return the oats and refuses to pay the price, Decide. [Hint: B cannot return the oats as the doctrine of caveat emptor will apply]. 5. M was shopping in a self-service super market. He picked up a bottle of orange squash from a shelf. While he was examining it, the bottle exploded in his hand and injured him. Can M claim damages for the injury?

[Hint: M cannot claim damages because a warranty or condition as to merchantability does not arise unless there is a sale. As there was no sale (since M may decide not to buy and put back the bottle in the shelf), there was no implied condition.] 6. A purchased a hot-water bottle from a retail chemist. The bottle could stand hot water but not boiling water. When it was filled by A with boiling water, it burst and injured his wife. A sues for damages. Decide. [Hint: There is a breach of implied condition as to fitness and hence A can recover damages (Priest v. Last)]. 7. A agrees to supply to B a certain quantity of timber of half-inch thickness. The timber actually supplied varies in thickness from one-third inch to five-eighth inch. The timber is merchantable and commercially fit for the LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 89

purpose for which it was ordered. B rejects the timber. Is his action justified? [Hint. Yes, B is entitled to reject the goods. The facts of the given case are similar to Arcos Ltd. Vs E.A. Ronaasen & Son, 1933, A.C. 470, in which case Lord Atkin observed: If the contract specifies conditions of weight, measurement and the like, those conditions must be complied with. A ton does not mean about a ton, or a yard about a yard. Still less, when you descend to minute measurements, does half an inch means about half inch. If the seller wants a margin he must, and in my experience does, stipulate for it. ] 8. A purchases some chocolates from a shop. One of the chocolates contains a poisonous matter and as a result A s wife who has eaten it falls seriously ill. What remedy is available to A against the shopkeeper? [Hint The chocolates are not of merchantable quality and hence A can repudiate the contract and recover damages (Sec. 17: Drummond v. Van Ingen)]. 9. A lady, who knew that her skin was abnormally sensitive, bought a tweed coat and developed skin trouble by using it. She did not disclose to the seller that her skin was abnormally sensitive. Is the seller liable for breach of implied condition as to fitness or quality? [Hint. The implied condition as to fitness or quality is with regard to the suitability of the goods to a normal buyer. If the buyer is suffering from an abnormality and does not inform the seller about the same, this implied condition does not apply. Hence in the given case there is no breach of implied condition as to fitness and as such the seller is not liable. (Griffths vs peter Conway Ltd., 1939, 10. Worsted cotton cloth of quality equal to sample was sold to tailors who could not stitch it into coats owing to some defect in its texture. The buyers had examined the cloth before effecting the purchase. Are they entitled to damages? [Hint. Yes, as there is a latent defect in cloth (Sec. 17; Drummond v. Van Ingen)]. 11. M. asked for a bottle of Stone s Ginger Wine at F s shop which was licensed for the sale of wines. While M was drawing the cork, the bottle broke because of defect in the glass and M was injured. Can M claim damages for the injury? [Hint: Yes, as the bottle is not of merchantable quality and there is a sale of goods by description [Sec. 15 and 16(2); Morelli v. Fitch and Gibbons)]. 12. A sold to B a tin of disinfectant power. He knew that it would be dangerous to open the tin without special care but he did not warn B. B without knowledge of the danger, opened the tin whereupon the power flew into his

eyes and injured him. B filed a suit for damages for the injury. Will he succeed? [Hint: Yes (Sec. 16(2)]. 13. A contract to sell B a piece of silk. B thinks that it is Indian silk. A knows that B thinks so, but knows that it is not Indian silk. A does not correct B s impression. B afterwards discovers that it is not Indian silk. Can he repudiate the contract? [Hint: Yes, as the rule of caveat emptor will apply in this case]. 14. H, a housewife, ordered from C, a coal merchant, a ton of coalite and it was duly delivered to her. When part of the consignment was put on fire in an open grate in H s house, an explosion occurred which caused damage. H claims damages. Is she entitled to sue? [Hint: Yes, as the goods are not of merchantable quality (Sec. 16(2)]. 15. In a contract for the purchase of 3,00 tins of canned fruits to be packed in cases each containing 30 tins, a substantial part was tendered in cases containing 24 tins instead of 30. Can the buyer reject the cases? [Hint: Yes, as the goods do not correspond with the description of the goods ordered [ Sec. 15; Moore & Co. v. Landaur & Co.)]. References Kapoor, N.D. (2003), Elements of Mercantile Law, Sultan Chand and Sons, New Delhi. http://www.indialawinfo.com/bareacts/soga.html M.C. Kucchal ( 2002), Business Law , Vikas Publishing House Pvt. Ltd, Delhi. P.C. Tulsian (2002), Pvt. Ltd, Delhi. Notes: Business Law , Tata Mc. Graw Hill

LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 90 11.555

LESSON 17: THE SALE OF GOODS ACT, 1930 TRANSFER OF PROPERTY Learning Outcomes After reading the lesson, you should be able to know: The meaning of transfer of property The rules relating to transfer of property The transfer of property by non owners Introduction You must know what we mean by transfer of property. Transfer of property in a contract of sale is primarily the transfer of property in goods by the seller to the buyer. The exact time at which property in goods passes from seller to the buyer is of great importance. The transfer of property in goods means transfer of ownership of goods. Property in goods is different from possession of goods. Possession simply refers to the custody of goods. Although the property in goods may pass from the seller to the buyer, but the goods may be in possession of the seller as unpaid seller or as a bailee for buyer. In some cases the property in goods to still be with the seller although the goods may be in possession of the buyer or his agent or a carrier for transmission to the buyer. The Following Require special Notice 1. Risk prima-facia passes with property. As a general rule the risk of the loss of goods is prima-facie in the person in whom property is. Section 26 provides to the same effect, thus, 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 buyer, the goods are at the buyer s risk whether delivery has been made or not. Thus, if after the contract the goods are destroyed or damaged the question who is to bear the loss is to be decided not on the basis of possession of the goods but on the basis of ownership of goods. Whosoever is the owner of the goods at the time of loss must bear the loss. Example A buys goods from B and property has passed to him, but the goods remained in B s warehouse. Before delivery of goods to A, there is a fire in B s warehouse and all the goods are destroyed. A must bear the loss and pay the price of goods to B, if he has not paid it so far. The opening words of Section 26, namely, unless otherwise agreed are of great significance. These words imply that risk passes with property is not an absolute or inflexible rule, but a prima facie one. Risk is no test of property passing. There is nothing to prevent the parties from contracting that risk shall

pass even before passing of property or vice versa. 1. Action against third parties: If after the contract of sale, the goods having damaged by a third party, it is only the person in whom the property vests who can take action against the wrong doer. 2. Suit for price: Generally speaking the seller can sue for the price if the property in goods has passed to the buyer. 3. Insolvency of the seller or the buyer: In case of insolvency of the buyer or seller, whether official receiver or assignee can take over goods shall depend upon whether the property in goods was with the party who has become insolvent. Example: If the seller becomes insolvent before giving delivery of the goods but the property in goods has already passed on to the buyer who has paid the price, the official receiver have no claim on goods. Do you know that there is a difference in transfer of property in specific /ascertained goods and unascertained goods. Let us try to understand the difference. Rule regarding Transfer of Property in specific or ascertained goods: In the case of specific or ascertained goods the property is transferred to the buyer at such time as parties intend to be transferred. For ascertaining the intention of parties regard shall be had on terms of the contract, the conduct of parties and circumstances of the case. The parties may intend to pass the property as wanted at the time making the contract, or when goods are delivered or when the goods are paid. Only when the intention of parties cannot be judged from the contract or conduct or circumstances of the case, the rules in Section-20, 21,22,23, will apply. 1. When goods are in a deliverable state(Sec 20). Where there is an unconditional (i.e., not subject to any condition precedent to be fulfilled by the parties) contract for the sale of specific goods in a deliverable state, the property in the goods passes to the buyer as soon as 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 are postponed. Example (a) A buys a bicycle for Rs. 300 on a month s credit and asks the shopkeeper to send it to his house. The shopkeeper agrees to do so. The bicycle immediately becomes the property of A. (b) P buys a table for Rs 100 on a week s credit and arranges to take delivery of the table the next day. A fire broke out in the furniture mart the same evening and the table is destroyed. The property in the table has passed to P and the is bound to pay the price. The goods are said to be in a deliverable sate when they are in

such a state that the buyer would, under the contract, be bound to take delivery of them [sec.2(3)]. For example, in illustration (b) above, if the seller has to polish the table to make it acceptable to the buyer, it is not in a deliverable state until it is LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 91

so polished, and the buyer does not acquire property at the time of the contract. 2. When goods have to be put into a deliverable state: (Section. 21) in the case of sale of specific goods, when the seller is bound to do something to do goods for making them in a deliverable state, the property does not pass until such thing is done and the buyer has notice thereof. Something may be like polishing, packing, finishing, etc. It is important that that something to be done must be completed and the fact that it has been done must be brought the notice of buyer. The fact that the goods having put in a deliverable state must come to the knowledge of the buyer in some way or the other. Example: A agrees to sell to B the whole of turpentine oil lying in a cistern. It is further agreed that the oil is to be put into casks by A and then B is to take them away. Some of the casks are filled in the presence of B, but before they are removed or the remainder filled, the whole is destroyed accidentally bye fire. B must bear the loss of oil which had been put into the casks because in all these casks the property has passed to him as nothing further remained to be done to them by the seller. But the property in the casks not filled up remained in the seller, at whose risk they continued (Rugg vs Minett). 3. When the goods have to be measured etc, to ascertain price: In a contract of specific sale of goods in deliverable state, but the seller is bound to weigh, measure, test or do something with reference to the goods for the propose of ascertaining price, the property does not pass until such act is done and the buyer has notice thereof. It may be noted that if the seller has done all what he was required to do under the contract and nothing remains to be done by him, the property passes to the buyer even if the buyer has to do something for his own satisfaction. Example A sold to B 289 bales of goat skins, each bale containing five dozens, and the price was for certain sum per dozen skins. It was the duty of A to count the goat skins in each bale. Before A could do the same, the bales were destroyed by fire. Held, that the property in the goods had not passed to the buyer (i.e.B) as something still remained to be done by the seller (i.e. , A) for ascertaining the price, and as such the loss caused by fire had to be borne by the seller ( i.e., A) (Zagury vs Furnell). 4. When goods are delivered on approval: (Section 24) When goods are delivered to the buyer on approval or on sale or return, or on other similar terms, the property therein passes to the buyer: (i) When he signifies his approval or acceptance to the seller or does any other act adopting the transaction, e.g., uses the goods, pledges the goods or resells them; (ii)

If he does seller but rejection, if no time Example

not signify his approval or acceptance to the retains the goods, without giving notice of beyond the time fixed for the return of goods, or has been fixed, beyond a reasonable time.

(a) A delivered a horse to B on the terms of sale or return, within 8 days. The horse died on the third day without any fault on the part of B. Held, A was to bear the loss as the horse was still his property when it perished (Elphick vs Barnes). (b) A delivered a horse to B on trial for 8 days. B continued to retain the horse even after the expiry of 8 days without giving notice of rejection A. B had automatically become the owner of the horse on the expiry of 8 days. Transfer of Property in Unascertained and future goods In section 18 and 23 the rules relating to transfer of property in unascertained and future goods are laid down. These sections provide that where goods contracted to be sold are not ascertained or where they are future goods, the property in goods does not pass to the buyer unless and until the goods are ascertained or unconditionally appropriated to the contract so as to bring them in a deliverable state, either by the seller with the assent of the buyer or by the buyer with the assent of the seller. Such assent may be expressed or implied, and may be given either before or after the appropriation is made. The above rule is fundamental rule and it applies irrespective of what the parties intended until goods are ascertained or appropriated there is merely as certained agreement to sell . example: Sale of ten tons of wheat from a granary, has not the effect of transferring property to buyer (It is an agreement to sell only) until ten tons are appropriated to the contract by the seller and the buyer knows it. The process of ascertainment or appropriation consists in earmarking or setting apart goods as subject-matter of the contract. It involves separating, weighing, measuring, counting or similar acts done in relation to goods with an intention to identify and determine the specific goods to be delivered under the contract. The distinction between ascertainment and appropriation is that whereas ascertainment can be a unilateral act of the seller, that is, he alone may set apart the goods, appropriation involves the element of mutual consent of the seller and the buyer. Essentials of valid appropriation: As regard a valid or proper appropriation of goods, the following point should be noted: (i) The appropriation must be of goods answering the contract description, both as to quality and quantity. (ii) The appropriation must be intentional, i.e., it must be made with intention to appropriate goods to specific contract, and it must not be due to mere accident or mistake.

(iii) The appropriation must be made either by the seller with the assent of the buyer or by the buyer with the assent of the seller. Assent of the other future party is thus necessary; whether before of after the appropriation is made for a valid appropriation. (iv) The appropriation must be unconditional, i.e. the seller should not reserve to himself the right of disposal of the goods until and unless certain conditions are fulfilled. LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 92 11.555

Delivery to Carrier: When a seller delivers the goods to a carrier or other bailee for the purpose of transmission to the buyer and does not reserve the right of disposal, the property passes on to the buyer at once. As soon as goods are loaded and railway receipt obtained and the same is sent to buyer direct the ownership is passed on delivery of goods to railway company. If the railway receipt is sent to banker with instructions to deliver the same on payment, the right of disposal is said to be reserved and the property will not pass to buyer at the time of delivery of goods to railway co. The delivery to the carrier may be: (i) Absolutely for the buyer. Where the bill of lading or railway receipt is made out in the name of the buyer and is sent to him, the presumption is that no right of disposal has been reserved by the seller in respect of those goods. The ownership in such a case passes from the seller to the buyer. (ii) Absolutely for the seller. Where the bill of lading or railway receipt is taken in the seller s or his agent s name and is sent to the agent of the seller to be delivered to the buyer on the fulfillment of certain conditions, the seller is deemed to have reserved the right of disposal of the goods. In such a case the ownership does not pass to the buyer until the necessary conditions are fulfilled and the documents of title are delivered to the buyer. Reservation of right of disposal: (Sec. 25) Reservation of the right of disposal means reserving a right to dispose of the goods until certain conditions (like payment of the price) are fulfilled. When the seller reserves such a right the property in the goods does not pass until those conditions are fulfilled. The seller may reserve such a right expressly while making a contract or while making appropriation of unascertained goods. He may also reserve this right by implication, for example, when the seller while transporting goods takes the railway receipt or the bill of lading in his own name or where the seller has taken the R/R or B/L in the name of the buyer but has delivered the same to his bank with the instructions that the document is to be delivered to the buyer only when he makes payment of the price or accepts the bill of exchange, the right of disposal is said to be reserved impliedly. Rule on transfer of title on sale: The rule is the seller can not transfer to the buyer of goods a better title when he himself has . Sector 27 says where goods are sold by a person who is not the owner thereof and who does not sell them under the authority or with the consent of the owner, the buyer acquires no better title to goods than the seller had . The maxim is nemo det quod non habet, which means that no one can give what he has not got. The general rule aims at protecting the interest of the true owner and is deemed necessary in the larger interest of society. If a thief disposes of a stolen property, the buyer acquire no title though he may have purchased the goods bonabfide for value, and real owner of the goods is entitled to recover

possession of goods without paying anything to the buyer. So the buyer cannot get a good title to the goods unless he purchase the goods from a person who is the owner thereof or who sells them under the authority or with the consent of the owner. Transfer of Title by Non-Owners The above rule as to the title is however subject to following exceptions where the buyer gets a better title to the goods than what the seller himself possesses. 1. An unauthorized sale by a mercantile agent:( Sec. 27 ) A mercantile agent means an agent having in the customary course of business as such agent authority either to sell goods, or to consign goods for the purposes of sale, or to buy goods, or to raise money on the security of goods [Sec. 2(9)]. Thus as a rule a mercantile agent having an authority to sell goods conveys a good title to the buyer. But by virtue of this provision ( proviso to Sec. 27) a mercantile agent can convey a good title to the buyer even though he sells goods without having any authority from the principal to do so, provided the following conditions are satisfied: (a) He should be in possession of the goods or documents of title to the goods in his capacity as mercantile agent and with the consent of the owner, (b) He should sell the goods while acting in the ordinary course of business, (c) The buyer should act in good faith without having any notice, at the time of the contract, that the agent has no authority to sell. Example: F entrusted his car to a mercantile agent for sale at a stated price and not below that. The agent sold it to S, a bonafide purchaser, below the reserve price and misappropriated the proceeds. S resold the car to K, the defendant. Held, S obtained a good title to the car from the mercantile agent and he conveyed a good title to K and therefore F was not entitled to recover the car from K (Kolkes vs King). 2. Transfer of title by estoppel (Sec. 27 ) Estoppal means that a person who by his conduct or words leads another to believe that certain state of affairs existed, would be estopped ( precluded ) from denying later that such as state of affairs did not exist. Sometimes the doctrine of estop or preclude the owner from denying the seller s right to sell the goods and thus an innocent buyer may have a good title dispite the want of authority of the seller. When the true owner of goods by his conduct or word or by any act or omission leads the buyer to believe that the seller is the owner of the goods or has the authority to sell them, he cannot afar wards deny the seller s authority to sell. The buyer in such case gets a better title when that of the seller. The estopal may arise in any of the following ways:

1. The owner standing by, when the sale is effected, or 2. Still more, by his assisting the sale, or 3. By permitting goods to go into the possession of another with all the insignia of possession thereof and apparent title, or LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 93

4. If he has otherwise acted or made representations so as to induce the buyer to alter his position to his prejudice. Example: M, the owner of a wagon allowed one of his employees K, to have his name painted on it. M did so for the purpose of inducing the public to believe that the wagon belonged to K. C purchased the wagon from K in good faith. C acquires a good title as M is estopped from denying K s authority to sell (O, Connor vs Clark). 3. Sale by joint owner: (Sec.28) If one of several joint owners of goods has the sole possession of them by permission of the co-owners of goods has the sole possession of them by permission of the co-owners, the property in the goods is transferred to any person who buys them from such joint owner in good faith without notice of the fact that the seller has no authority to sell. It may be noted that in the absence of this provision (i.e., Sec. 28) the buyer would have obtained only the title of the co-owners and would have become merely a co-owner with the other coowners. Hence the provision constitutes an exception to the rule no one can give what the has not got. Example: A, B and C are three brothers. They own a cow in common. B and C entrust the work of looking after the cow to A and leave the cow in A s possession. A sells the cow to D. D purchases bonafide for value. D gets a good title. 4. Sale by person in possession under voidable contract: (Sec. 29) When a person has obtained possession of goods under voidable contract and sells those goods before the contract has been rescinded acquires a good title to them provided he acts in good faith and without notice of the seller s defect in title. Example: A, by misrepresentation induces B to sell and deliver to him a cow. A sells the cow to C before B has rescinded the contract. C purchases the cow in good faith and without notice of the seller s defective title. C acquires a good title. It is to be noted that this Section (Sec. 29) does not apply unless there is a contract. Thus it does not apply to a contract originally void or where goods have been obtained by theft. 5. Sale by Seller in possession after sale [Sec. 30 (1)] Where a seller, after having sold the goods, continues to be in possession of the goods or of the documents of title to them and again sells or pledges them either himself or through a mercantile agent, he will convey a good title to the buyer or the pledge provided the buyer or the pledge acts in good faith and without notice of the previous sale. For the application of this exception it is essential that the possession of the seller must be as seller and not as hirer or bailee. 6. Sale by buyer in possession after agreement to buy [Sec. 30(2)]. Where a buyer has agreed to buy the goods and has

obtained possession of the same or the documents of title to them with the consent of the seller, resells or pledges the goods either himself or through a mercantile agent, he will convey a good title to the buyer or the pledge provided the person receiving the goods acts in good faith and without notice of any lien or other right of the original seller in respect of those goods. It is to be noted that a person who has got merely an option to buy, as in a hire-purchase agreement, cannot convey a good title to a sub-buyer, however bonafide, for an option to buy is not an agreement to buy (Belsize Motor Supply Co. vs Cox). In order to make this exception applicable it is essential that the person must have obtained possession of the goods under an agreement to sell (i.e., under and agreement to buy from the buyer s point of view). Example (a) A buys some furniture and agrees to pay for that in two monthly installments, the ownership to pass to him on payment of the second installment. Having obtained possession of the furniture, A, sells the furniture to B before paying the second installment. B buys the furniture bonafide. Subsequently A does not pay the second installment. The furniture dealer cannot take back furniture from B, who obtains a good title to the same. The dealer can, of course, sue A for the breach of the contract and claim damages. (b) A agreed to buy a car and pay for it, if his solicitor approved. A obtained possession of the car and sold the same to B. But the solicitor subsequently disapproved of the transaction. It was held that B, the bonafide buyer, got a good title, because A agreed to buy ( Marten vs Whale). 7. Resale by an unpaid seller: [Sec. 54(3)]. Where an unpaid seller, who has exercised his right of lien or stoppage in transit, resells the goods (of which ownership has passed to the buyer), the subsequent buyer acquires a good title thereto as against the original buyer, even though the resale may not be justified in the circumstances, i.e., no notice of the resale has been given to the original buyer. 8. Exceptions under other Acts. Other Acts also contain some provisions under which a non-owner may pass to the buyer a better title than he himself has. For example, (a) Sale by finder of lost goods under certain circumstances (Sec. 169, The Indian Contract Act). (b) Sale by Pawnee or pledgee under certain circumstance (Sec. 176, The Indian Contract Act.). (c) Sale by Official Receiver or Assignee in case of insolvency of an individual and Liquidators of companies. These persons are not owners of the properties they deal in, but convey a better (good) title to the buyers than they themselves possess. (d) Under the Negotiable Instruments Act, a holder in due

course gets a better title than what his endorser had. In other words, a person who takes a negotiable instrument in good faith and for value becomes the true owner even if he takes it from a thief of finder. Solve the following problems for a better understanding: Practical Problems Attempt the following problems, giving reasons: LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 94 11.555

1. Has the property in the goods passed in the following cases? (a) B offers for a specific horse Rs. 20,000 the horse to be delivered on 5th January, and the price to be paid on the 1st February following. (b) B orders A, a boat-builder, to make him a boat. While the boat is being built, B pays to A money from time to time on account of price. (c) A, having a quantity of sugar which is more than twenty quintals, contracts to sell to B ten quintals out of it. Afterwards A puts ten quintals of sugar in sacks and gives notice to B that the sugar is ready and requires him to take it away. B says he will take it as soon as he can. [Hint: (a) The property in the horse would pass to B as soon as the seller accepts the offer. The fact that the time of delivery and of payment of price is postponed does not prevent the property from passing at once. (b) No. The property in the boat would pass to B when the boat is ready and A gives a notice to B to this effect (Sec. 21). (c) Yes. The property in sugar passes to B when A gives notice to B (Sec. 21)]. 2. A, a jeweler, was entrusted with a diamond by P with the instructions that A should obtain offers for it, and if any such offer was approved by P, A should sell it to the offer or. Acting contrary to P s instructions A sold the diamond to S who bought it in good faith. Thereafter, A absconded with the price money. Can P recover the diamond from S? [Hint: No. P cannot recover the diamond from S who bought it in good faith from A who is a mercantile agent (Sec. 27)] 3. A delivers a gold necklace to B on sale or return basis. It is agreed between A and B that property is not to pass to B till he has paid price of the necklace. Without paying the price, B sells the necklace to C. Does C get a good title to the necklace? [Hint: No. C does not get a good title to the necklace, as B himself has no title to the necklace till he pays its price (Weiner v. Smith)]. 4. In a mixed contract for storage of paddy and the sale of the same thereafter, the paddy was delivered by A to B for storage. B had the option to name a particular day on which he was to buy the paddy at the current prevailing rate. Shall B be liable if the goods are destroyed before he exercises this option? [Hint: No. (Sec. 19; Chidambaram Chettiar v. Steel Bros.)]. 5. Jewellery was sent by A to B on sale or return . B pledged the jewellery with C. Discuss the rights and liabilities of the parties. [Hint: A can recover the price of jewellery from B. He cannot recover the jewellery from C [Sec. 24; Kirkham v.

Attenborough)]. 6. In a contract of sale of goods, 200 specified bales of goatskins containing 60 pieces in each bale were sold. It was necessary for the seller to count them before delivery. Before counting was completed, the bales were destroyed by fire. Who should bear the loss, the buyer or the seller? [Hint: The seller (Sec. 22)]. 7. A sells to B a horse which is to be delivered to B the next week. B is to pay the price on delivery. A asks his servant to keep the horse separate from other horses. The horse, however, dies before it is delivered and paid for. Who shall bear the loss? [Hint. It is a contract of sale of specific goods in a deliverable state and therefore the property in the horse passes to B at once at the time of contract. Hence B should bear the loss]. 8. On 6th May, A entered into a contract for the sale of 100 bags of wheat to B and received Rs 2,500 in part payment of the price. The goods were not with the seller at that time but had been dispatched from Hapur on 4th May. A had received the R/R which he endorsed in favour of B on 6th May. The goods never reached the destination as they were burnt of 7th May while in transit. Who shall bear the loss? [Hint. B has to bear the loss as the property in the goods had passed to him at once at the time of endorsement of the R/R in his name, i.e., on 6th May while the loss occurred on 7th May]. 9. X sells a car by auction to Y, who is the highest bidder. Y offers to pay for the car by a cheque and he is allowed to do so provided he signs a document stating that the property in the car would not pass to him until the amount of the cheque has been credited to the seller s account. The cheque is subsequently dishonored. X asks Y to return back the car as he has not become the owner of the car because the cheque given by him has been dishonored. Is X s contention justified? [Hint: No, X s contention is not justified. The property in the car had passed on the fall of hammer, a subsequent agreement that the property would not pass until the cheque is realized is of no effect and therefore X having lost his title to the car cannot recover back the same from Y. X s only remedy is to sue Y for the price. Delivery and payment are concurrent conditions. X was, therefore, entitled to refuse delivery of car until paid and could have exercised his right of lien as an unpaid seller. But once he has given the delivery of car, his right of lien is lost, since lien is lost once possession is lost.] 10. A sells to B the whole content of a certain heap of wheat, which according to A contains 10 quintals. B gets the wheat weighed for his own satisfaction. When the wheat is being weighed, there is a fire and the whole of the wheat is destroyed. Can A recover the price of wheat from B?

[Hint. Yes, A can recover the price from B. It is a contract of sale of specific goods in a deliverable state (as nothing remained to be done by the seller to ascertain the price), and, therefore, the property passes to the buyer as soon as the contract is made. When the buer gets something done for his own satisfaction, the passing of property is not affected by that and Sec. 20 applies to such a case alright]. 11. A gives some diamonds to B on sale or return basis. On the same day B gives those diamonds to C on sale or return and from him they are lost. Who shall bear the loss? LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 95

[Hint: B must bear the loss because by transferring the diamonds further he has adopted the transaction and the property in them has, therefore, passed to him. References Kapoor, N.D. (2003), Elements of Mercantile Law, Sultan Chand and Sons, New Delhi. http://www.indialawinfo.com/bareacts/soga.html M.C. Kucchal ( 2002), Business Law , Vikas Publishing House Pvt. Ltd, Delhi. P.C. Tulsian (2002), Business Law , Tata Mc. Graw Hill Pvt. Ltd, Delhi. Notes: LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 96 11.555

LESSON 18: THE SALE OF GOODS ACT, 1930 PERFORMANCE OF CONTRACT OF SALE Learning Outcomes After reading the lesson, you should be able to know: The meaning of performance of contract of sale The rules as to delivery of goods Introduction Now you know much about the contract of Sale. Try to answer what you could mean by Performance of Contract of Sale The performance of contract of sale implies delivery of goods, by the seller, and acceptance of the delivery of goods and payment for them by the buyer, in accordance with in contract. The parties are free to provide any terms they like in their contract about the time, place and manner of delivery of goods, acceptance there of and payment of the price. But if the parties are silent and do not provide any thing regarding these matters in the contract then the rules contained in the sale of Goods Act are applicable. If the contract contains any special terms as to delivery and acceptance, these must be complied with. If there are no terms in the contract to this effect, delivery of the goods and payment of the price are concurrent conditions, that is , both these must take place at the same time as in, for instance, a cash sale over a shop over counter (sec.32). Delivery of goods (section. 2(2) Delivery means voluntary transfer of possession of goods from one person to another [sec. 2(2)]. Delivery of goods sold may be made by doing anything which the parties agree shall be treated as delivery or which has the effect of putting the goods in the possession of the buyer or his agent (sec.33) Delivery of goods may be actual, symbolic, or constructive. 1. Actual delivery. Where the goods are handed over by the seller to the buyer or his duly authorized agent, the delivery is said to be actual. Delivery of goods may also be made by doing anything which has the effect of putting the goods in the possession of the buyer [sec 33]. 2. Symbolic delivery. Where the goods are ponderous or bulky and incapable of actual delivery, e.g., haystack in a meadow, the delivery may be symbolic. Handing over of the key of a warehouse to the buyer is symbolic delivery of the goods to the buyer and is as effective as actual delivery, even though there is no change in the possession of the goods.

3. Constructive delivery or delivery by attornment .Where a third person (e.g., a bailee) who is in possession of the goods of the seller at the time of the sale acknowledges to the buyer that he holds the goods on his behalf, there takes place a delivery by attornment or constructive delivery [sec.36(3)]. This may happen in the following cases: (a) where the seller in possession of the goods agrees to hold them on behalf of the buyer. (b) Where the buyer is in possession of the goods and the seller agrees to the buyer s holding the goods as owner. (c) Where a third person in possession of the goods acknowledges to the buyer that he holds them on his behalf. Example. A sells to B 10 bags of wheat lying in C s Go down. A gives an order to C, asking him to transfer the goods to B. C assents to such order and transfer the goods in his books to B. this is a delivery by attornment. Rules as to Delivery of Goods 1. Delivery may be either actual or symbolic or constructive. (sec. 33) Delivery of goods sold may be made by doing anything which the parties agree shall be treated as delivery or which has the effect of putting the goods in the possession of the buyer or of any person authorized to hold them on his half. Thus, the delivery of the goods may be either actual or symbolic or constructive. 2. Delivery and payment are concurrent conditions (sec. 32.) unless otherwise agreed, delivery of the goods and payment of the price are con-current conditions, that is , the seller should be ready and willing to deliver the goods to the buyer in exchange for the price and the buyer should be ready and willing to pay the price in exchange for possession of the goods simultaneously, just like in a cash sale over a shop counter. Illustration A contracts to sell to B 10 bags of sugar for Rs. 9,000. A need not deliver the goods unless B is ready and willing to pay for the goods on delivery, and B need not pay for the goods unless A is ready and willing to deliver them on payment. 3. Buyer to apply for delivery. Apart from any express contract, the seller of goods is not bound to deliver them until the buyer applies for delivery (sec.35). where the goods are subsequently acquired by the seller. He should intimate this to the buyer and the buyer should then apply for delivery. Unless otherwise agreed , the buyer has no cause of action against the seller if he does not apply for delivey. 4. Effect of part delivery, when property in goods is to pass on delivery (sec.34). A delivery of part of the 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. In other words, when delivery of

part of the goods has been made with the intention of delivering the rest also, the property in the whole of the goods is deemed to pass to the buyer as soon as some portion is delivered. LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 97

Illustration. A ship arrives with a cargo consigned to X, the buyer of the cargo, upon the condition that the property is to pass to him on delivery. The captain begins to discharge it. And delivers over part of the goods to X in progress of the delivery of the whole. Here, he delivers of the portion of the goods to X is equivalent to the delivery of the whole of the cargo and he property in the whole of the goods passes to X, the buyer (Dixon vs Yates ). But when a part of the goods is delivered with the intention of severing it from the whole, it is not regarded as delivery of the whole of the goods and the property is deemed to pass to the buyer in that portion of the goods only which has been delivered. If in a contract for the sale of a stack of hay the buyer is permitted to remove only a part of it, this does not amount to delivery of the whole as it shows an intention to separate the part delivered from the rest of hay (Bunnery vs Poyntz). Place of Delivery SEC.36(1) The delivey of goods should be effected as per the terms contained in the contract. The rules are 1. where there is a contract as to the place of At the agreed place. delivery 2. where there is no contract as to the place of At the place at which the goods are at the time of sale. delivery. (a) In case of saleAt the place at which the goods are at the time of (b) In case of an agreement to sellagreement to sell. (i) in respect of existing goodsAt the place at which the goods are manufactured or (ii) In respect of future goods produced. 1. Time of delivery [sec. 36(2) & (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. Further, demand of delivery by the buyer or the tender of delivery by the seller should be made at a reasonable hour. What is a reasonable hour is a question of fact. 2. Delivery of goods where they are in possession of a third party (sec. 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 acknowledge to the buyer that he holds the goods on his behalf. Such a delivery is known as constructive delivery or delivery by attornment and requires the consent of all the three parties, the seller, the buyer and the person having possession of the goods, where the seller hands over the delivery order to the buyer, there is no delivery unless the seller s agent holding the goods has assented thereto. But where the goods have been sold by the transfer of the document of title to goods, e.g., railway receipt or bill of lading, the buyer is deemed to be in possession of the goods represented by such document, and the assent of the third party is not required. 3. Cost of delivery. Unless otherwise agreed, all expenses of

and incidental to making of delivery are borne by the seller, but all expenses of and incidental to obtaining of delivery are borne by the buyer (sec.36(5)). 4. Delivery of wrong quantity or different quality. [Sec 37] the delivery of the quanti ty of goods contracted for should be strictly according to terms of the contract. A defective delivery entities the buyer to reject the goods. The three different contingencies which may arise in case of a defective delivery, i.e., delivery of a wrong quantity, are: (1) Delivery of goods less than contracted for . where the seller delivers to the buyer a quantity of goods less than he contractecd to sell, the buyer may reject the goods. If he accepts them, he shall pay for them at the contract rate [sec. 37(1)]. Example. A sells to B 2,000 OF 200 yards reels of sewing cotton. After taking delivery B finds that the length of the cotton per reel is less than 200 yards. The average being shortage of about 6 per cent. B may reject the goods. If he waives the right of rejection, he is liable to pay the price of the goods at the contract rate [Back etc. v. synzmanoski, (1924)A.C. 43]. If the goods have been rejected for short delivery. The seller can make, within the time limit, another delivery in accordance with the terms of the contract. (2) 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 (i) accept the whole ; or (ii) reject the whole ;or (iii) accept the quantity he ordered and reject the rest. If the buyer accepts the whole of the goods so delivered, he must pay for them at the contract rate [sec. 37(2) Example . A places an order with B to supply 25 bottles of orange syrup. B sends 30.A is entitled to reject the whole, or he may accept 25 and reject the rest. If he accepts all the 30, he must pay for them at the contract rate. (3) 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, the buyer may accept the goods which are in accordance with the contract and reject the rest, or may reject the whole [sec 37(3)]. Example. A contracts with B to buy 100 tons of cane sugar. A delivers to B 75 tone of cane sugar and 25 tons of beet sugar. A may either (i) accept 75 tons of cane sugar which is in accordance with the contract, and reject 25 tons of beet sugar which is of a

different description, or (ii) reject the whole sugar. The provision of sec.37 are subject to any usage of trade, special agreement, or course of dealing between the parties [sec.37(4)]. If quantity deliver is deficit or excess which is negligilgible , the court does not take it into account. The maxim is the law does not take trival deviations into account. 10. Delivery by installment [sec 38] unless otherwise agreed, the buyer of goods is not bound to accept delivery thereof by installments. If the parties so agree then only the delivery of the goods may be made by installments. LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 98 11.555

When the parties agree that to be separately paid for, and either buyer or seller commits a breach of contract in respect of one or more installments, there arises a question as to whether such a breach amounts to a breach of the whole of the contract or a breach of only a part of it? The answer to this question depends upon the terms of the contract and the circumstances of the case, unless otherwise agreed the following two factors must be borne in mind in deciding the whole matter. (a) The quantitative proportion which the breach bears to the contract as a whole, and (b) The degree of probability of the repetition of the breach (Maple Flock co.Ltd..vs Universal Furniture products Ltd.) Generally, failure to deliver or pay for one installment does not amount to a breach of the whole contract, unless from the special circumstances of the case (e.g., the factory is closed because of a labour strike or the buyer become insolvent) it can be inferred that similar breaches will be repeated. Illustration A sold to B 1,500 tons of meat of a specified quality to be shipped 125 tons monthly in equal weekly installments. After about half the meat was delivered and paid for, B discovered that it was not of the contract quality and could have been rejected, and therefore he refused to take further deliveries. Held, that B was entitled to do so (Robert A. Munroe & Co,Ltd. Vs Meyer). (if B might have discovered the defect just after first installment, he would not have been allowed to repudiate the whole contract but only the damages for the loss in that particular installment delivery would have been allowed. 11. Delivery to carrier or wharfinger [section 39] where the seller is authorized or required to send the goods to the buyer, delivery of the goods to carrier (whether named by the buyer, or not) for the purpose of transmission to the buyer, or delivery of the goods to wharfinger custody, is prima facie deemed to be a delivery of the goods to the buyer (section 39(1)]. The seller is further required to perform the following two duties also. (a) To make a reasonable contract with the carrier or wharfinger: unless other wise authorized by the buyer, the seller shall make a reasonable contract with the carrier or wharfinger on behalf of the buyer. If the seller omits to do so, 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 any hold the seller irresponsible for damages (section 39(2)] (b) To give notice to the buyer to enable him to insure the goods: 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 must inform the buyer to enable him to insure them during their sea transit, and if the seller fails to do so, the goods shall be deemed to be at his risk during such transit [section 39(3)].

12. Liability of buyer for neglecting or refusing to take delivery of goods. (Sec.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 becomes liable to the seller for any loss occasioned by his neglect or refusal to take delivery, and also for a reasonable charge for the care and custody of the goods. Acceptance of Delivery by Buyer The mere fact that the buyer has taken the delivery of the goods does not amount to acceptance of them. According to section 42, the buyer is deemed to have accepted the goods in either of the following circumstances, namely: 1. when he intimates to the seller that he has accepted the goods. (Sec.41,) to examine and test the goods in order to be sure as to whether they are in conformity with the contract regarding quality etc. in the case of a horse sale conditioned to run at 25 kilometers per hour it is necessary to use the horse for ascertaining, whether the horse is in conformity with the contract. But if he is not satisfied, he must act promptly to inform the seller about rejection. 2. when he does any act in relation to the goods which is inconsistent with the ownership of the seller, e.g., consumers, uses, pledges or resells the goods or puts his mark on them. Example (a) Where the buyer having seen that samples drawn from bulk were inferior to the samples originally shown to him, offered the goods for sale by auction at reduced price and the auction having failed to produce a purchaser, the buyer purported to reject the goods, it was held that the buyer could not do so as he had in law accepted the goods (parker vs plamer) (b) Where the buyer took delivery of wheat and sold a part of it, and afterwards found that the wheat was not of contract quality and therefore sought to reject it, it was held that he had lost the right of rejection as he had accepted the wheat by a dealing inconsistent with the rights of the seller, in so far as he had sold out a portion of it ( Hardy & co. vs fowler). 3. when, after the lapse of a reasonable time, he retains the goods with out intimating the seller that he has rejected them. What is reasonable time is a question of fact. If time for rejection is stipulated, rejection must be within that period. It may be mentioned that on rejection of goods because of defective delivery, mere informing the seller is enough and the buyer is not bound to return the rejected goods to the seller (sec.43). Attempt the following problems for a better understanding: Practical Problems

1. X, a dealer in cattle feed, sold to Y, another such dealer, 15,000 tons of meat and bone-meal of specified quality to be shipped, 1,250 tons monthly in equal instalments. After about half the meat was delivered and paid for, it was found that it was not of the contract quality, and Y refused to take further delivery. Advise X. LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 99

[Hint: Y is entitled to refuse to take further delivery as he is not bound to take the risk of having put upon him further deliveries of goods which do not conform to the contract (Sec. 38; Robert A. Munro & Co. v. Myer,(1930) 2 K.B. 312)] 1. A contracts with B to buy 50 easy-chairs of a certain quality. B delivers 25 chairs of the type agreed upon and 25 chairs of some other type. What are the rights of A? [Hint: A may accept the chairs which are in accordance with the contract and reject the rest or may reject the whole (Sec. 37 (3)]. 2. P sold barley to B by sample, delivery to be made at T railway station. B resold the barley to D. The barley was delivered at T station and B, after inspecting a sample of it, sent it on to D. D rejected it as not being according to sample, whereupon B claimed to be entitled to reject it. What are B s rights? [Hint: B is not entitled to reject the barley (Secs.17 and 42; Perkins v. Bell)]. 3. There was a contract for the sale of 4,000 tons of meal, 2 per cent more or less. The seller delivered meal greatly in excess of the permitted variation. What are the rights of the buyer? [Hint: The buyer can reject the whole quantity (Sec. 37 (3); Payne & Routh V. Lillico & Sons]. 4. A of Agra ordered certain specified goods from B of Mumbai. B sends the goods, not ordered, along with them. What should A do? [Hint: A may either reject the whole or accept the whole or accept the goods ordered by him and reject the rest (Sec. 37(3)]. 5. A contract with B to purchase 30 tons of apple juice. B crushes the apples, puts the juice in casks and keeps it ready for delivery. A delays to take the delivery and the juice goes putrid and has to be thrown away. Is A liable to pay the price? {Hint: Yes]. 6. A sells to B 100 bags of wheat which are locked up in a godown. A hands over to B the key of the godown. Does it constitute delivery of the goods to B? [Hint. Yes, this is a delivery to B, being a symbolic delivery.] 7. X of Cochin agreed to sell 400 tons of rice to Y of Calcutta to be shipped in November or December 1995. X puts the rice on ship on 20 October 1995. Is the buyer bound to accept the consignment? [Hint: The buyer is not bound to accept the consignment because the seller has not complied with the stipulation as to time of delivery and time of delivery of goods being of the

essence of all mercantile contracts, an essential term of the contract has been broken.] 8. P of Delhi writes to R of Bombay to send him a book by parcel post. R accordingly sends the book by parcel post. The parcel is lost on the way. Can R recover its price from P? [Hint. Yes, R can recover the price of the book from P because as per Section 39 of the sale of Goods Act, delivery to the carrier (i.e., the post office) is delivery to the buyer and the buyer becomes the owner thereafter who should bear the loss.] 9. P sold barley to B by sample, delivery to be made at T railway station. B sold the barley to X. The barley was delivered at T railway station and B, after inspecting a sample of it, sent it on to X. X rejected it as not being according to sample, whereupon B seeks to reject the goods. Will B succeed? [Hint. B cannot reject the barley, as by reselling those goods to X and ordering to send them to X, he had in law accepted the goods.] References Kapoor, N.D. (2003), Elements of Mercantile Law, Sultan Chand and Sons, New Delhi. http://www.indialawinfo.com/bareacts/soga.html M.C. Kucchal ( 2002), Business Law , Vikas Publishing House Pvt. Ltd, Delhi. P.C. Tulsian (2002), Pvt. Ltd, Delhi. Notes: Business Law , Tata Mc. Graw Hill

LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 100 11.555

LESSON 19 THE SALE OF GOODS ACT, 1930 REMEDIES IN CASE OF BREACH BY BUYER AND SELLER Learning Outcomes After reading the lesson, you should Against the goods Against the buyer persona llybe able to know: The rights of an unpaid seller The rights of an unpaid seller Where the property Where the property against the goods In the goods has in the goods has not Passed (Sec.46(1) passed (Sec. 46(2)

The rights of an unpaid seller against the buyer personally Lien Stoppage The rights of buyer (Secs. Secs. 50 Introduction 47 to 49 to 52 Today will be discussing about the remedies in case of breach by seller and buyer. Let us first start with the study of rights of an unpaid seller. Rights of an Unpaid Seller According to (section 45) the term seller includes any person who is in the position of a seller, as, for instance, an agent of the seller to whom the bill of lading had been endorsed, or a consignor or agent who has himself paid, or is directly responsible for, the price. The seller of goods is deemed to be an unpaid seller (a) when the whole of the price has not been paid or tendered; or (b) where a bill of exchange or other negotiable instrument has been received as a conditional payment, i.e., subject to the realization thereof, and the same has been dishonoured. According to above the following are the characteristics of and unpaid seller . 1. He must sell goods on cash terms and not on credit, and he must be unpaid.

2. He must be unpaid either wholly or partly. Even if only a portion of the price, however small, remains unpaid, he is deemed to be an unpaid seller. Where the price is paid through a bill of exchange or other negotiable instrument, the same must be dishonoured. 3. He must not refuse to accept payment when tendered. If the buyer has tendered the price but the seller wrongfully refuses to take the same, he ceases to be an unpaid seller. Re-sale Withholding Stoppage in (Sec. 54) delivery Transit Suit for Suit forRepudiation Suit for Price damages of contract interest (Sec.55) (Sec. 56) (Sec. 60) (Sec.61) Rights of an Unpaid Seller An unpaid seller has two-fold rights, viz.,; I. Rights of unpaid seller against the goods, and II. Rights of unpaid seller against the buyer personally. We shall now examine these rights in detail. 1. Rights of Unpaid Seller against the Goods. An unpaid seller has the following rights against the goods notwithstanding the fact that the property in the goods has passed to the buyer: 1. Right of lien; 2. Right of stoppage of goods in transit; 3. Right of resale [Sec. 46 (1)]. 1. Right of lien (Sec. 47) Lien is the right to retain possession of goods and refuse to deliver them to the buyer until the price due in respect of them is paid or tendered. An unpaid seller in possession of goods sold is entitled to exercise his lien on the goods in the following cases: (a) Where the goods have been sold without any stipulation as to credit; (b) Where the goods have been sold on credit, but the term of credit has expired: (c) Where the buyer becomes insolvent, even though the period of credit may not have yet expired. In the case of buyer s insolvency the lien exists even though goods had been sold on credit and the period of credit has not yet expired. When he goods are sold on credit the presumption is that the buyer shall keep his credit good. If, therefore, before payment the buyer becomes insolvent, the seller is entitled to exercise this right and hold the goods as security for the price.

LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 101

The effect of buyer s insolvency is that all stipulations as to credit are put to an end and the seller has a right to say, I will not deliver the goods until I see that I shall get my price paid (Griffiths vs Perry2) The unpaid seller s lien is a possessory lien, i.e., the lien can be exercised as long as the seller remains in possession of the goods. He may exercise his right of lien notwithstanding that he is in possession of the goods as agent or bailee for the buyer [Sec. 47(2)]. Transfer of property in the goods or transfer of documents of title to the goods does not affect the exercise of this right, provided the goods remain in the actual possession of the seller. In fact when property has passed to the buyer then only retaining of goods is called technically lien. Where the property in goods has not passed to the buyer and the title is still with the seller then it is, strictly speaking, anomalous to say that the seller has a lien against his own goods. The seller s lien when property has not passed to the buyer is termed as a right of withholding delivery. Accordingly, Section 46(2) provides: The term insolvent here does not mean a person who has been adjudged insolvent under the Insolvency Law. In Sale of Goods Act a person is said to be insolvent who has ceased to pay his debts in the ordinary course of business, or cannot pay his debts as they become due, whether he has committed an act of insolvency or not [Sec. 2(8)]. But if the buyer has transferred the documents of title to a bonafide purchaser, the seller s lien is defeated (Sec. 53). Where the property in goods has not passed to the buyer, the unpaid seller has, in addition to his other remedies, a right of withholding delivery similar to and coextensive with his rights of lien and stoppage in transit where the property has passed to the buyer. This right of lien can be exercised only for the non-payment of the price and not for any other charges, i.e., maintenance or custody charges, which the seller may have to incur for storing the goods in exercise of his lien for the price. This right of lien extends to the whole of the goods in his possession even though part payment for those goods has already been made. In other words the buyer is not entitled to claim delivery of a portion of the goods on payment of a proportionate price. Further, where an unpaid seller has made part delivery of the goods, he may exercise his right of lien on the remainder, unless such part delivery has been made under such circumstances as to show an agreement to waive the lien (Sec. 48). Also, the lien can be exercised even though the seller has obtained a decree for the price of the goods [Sec. 49(2)]. When lien is lost? As already observed, lien depends on physical possession of goods. Once the possession is lost, the lien is also lost. Section 49 accordingly provides that the unpaid seller of goods loses his lien thereon in the following cases: (a) When he delivers the goods to a carrier or other beilee for the purpose of transmission to the buyer without

reserving the right of disposal of the goods; or (b) When the buyer or his agent lawfully obtains possession of the goods; or (c) When the seller expressly or impliedly waives his right of lien. An implied waiver takes place when the seller grants fresh term of credit or allows the buyer to accept a bill of exchange payable at a future date or assents to a sub-sale which the buyer may have made. It may be noted that right of lien, if once lost, will not revive if the buyer redelivers the goods to the seller for any particular purpose. Thus, where a refrigerator after being sold was delivered to the buyer and since it was not functioning properly, the buyer delivered back the same to the seller for repairs, it was held that the seller could not exercise his lien over the refrigerator ( Eduljee vs John Bros.). 2. Right of Stoppage of Goods in Transit: Meaning of Right of Stoppage of Goods in Transit: The right of stoppage in transit means the right of stopping the goods while they are in transit, to regain possession and to retian them till the full price is paid. Lord Cairns LJ in case of Schotsmans v. Lances and Yorks Rly. Had made the following observation in this regard: The essential feature of stoppage in transit is that the goods should be in the possession of a middleman or some other person intervening between the vendor who has parted with and the purchaser who has not received them. Conditions under which Right of Stoppage in Transit can be Exercised [Section 50]: The unpaid seller can exercise the right of stoppage in transit only if the following conditions are fulfilled: (i) The seller must have parted with the possession of goods, i.e., the goods must not be in the possession of seller. (ii) The goods must be in the course of transit. (iii) The buyer must have become insolvent. Note: The buyer is said to be insolvent when he has ceased to pay his debts in ordinary course of business, or cannot pay his debts as they become due, whether he has committed an act of insolvency or not. Note: The seller s right of stoppage in transit is based on the principle that one man s goods shall nto be applied to the payment of other man s debt. [Lord Reading in Booth Steamship Co Ltd. V. Cargo Fleet Iran Co.] Duration of Transit [Section 51(1)]: 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.

Note: The carrier must hold the goods in the capacity of an independent person and not in the capacity of an agent for the seller or buyer. If the carrier holds the goods as an agent for the seller, there is no question of exercising the right of stoppage in transit because the seller can exercise his right of lien. If the carrier holds the goods as an agent for the buyer, the seller cannot exercise the right of stoppage in transit because the delivery to the carrier amounts to delivery to buyer. Circumstances under which Right of Sopttage is Lost [Sections 51 and 53 (1)]: The right of stoppage in transit is lost when transit comes to an end. Transit comes to an end in the following cases: LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 102 11.555

(i) If the buyer or his agent in that behalf obtains delivery of the goods before their arrival at the appointed destination [Section 51(2)]. (ii) 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, even if a further destination for the goods may have been indicated by the buyer [Section 51(3)]. (iii) When goods are delivered to a ship chartered by the buyer, it is a question depending on the circumstances of the particular case, whether goods are in the possession of the master as a carrier or as agent of the buyer [Section 51(5)]. (iv) Where the carrier or other bailee wrongfully refuses to deliver the goods to the buyer or his agent in that behalf [Section 51(6)]. (v) 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 and such part delivery has not been given in such circumstances as to show an agreement to give up possession of the whole of the goods [Section 51(7)]. (vi) Where the sub-sale or other disposition by the buyer has been done with seller s consent [Section 53(1)]. (vii) Where a document of title to goods ( e.g., bill of lading or railway receipt ) has been issued or lawfully transferred to any person as buyer and that person transfers the document by way of sale to a person who takes the document in good faith and for consideration. [Provision to Section 53(1)]. How to Exercise Right of Stoppage in Transit [Section 52(1)]: The unpaid seller may exercise his right of stoppage in transit in anyone of the following two ways: (i) by taking actual possession of the goods, or (ii) By giving notice of his claim to the carrier or other bailee who possesses the goods. 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 in time to prevent a delivery to the buyer. Duty of Carrier [Section 51(2)]: When notice of stoppage in

transit is given by the seller to the carrier or other bailee in possession of the goods, he shall redeliver the goods to or according to the directions of the seller. The expenses of such redelivery shall be borne by the seller. Distinction Between Right of Lien and Right of Stoppage in Transit Basis of distinction 1. Possession of goods 2. Solvency 3. End. Vs. Commencement on delivery to carrier 4. Purpose Mode of exercising the right Right of lien The goods must be in actual possession of the seller. The right can be exercised even when the buyer is solvent but refuses to pay the price. This right comes to an end when the seller delivers the goods to a carrier. The purpose of right is to retain possession of the goods. This right can be exercised by the seller himself. Right of stoppage in transit The goods must be in the possession of a carrier or other bailee who is acting as an independent person. This right can be exercised only when the buyer has become insolvent. This right commences only when the seller delivers the goods to a carrier. The purpose of this right is to regain the possession of the goods. This right can be exercised by the seller through the carrier or the other bailee. Right of Stoppage in as an Extension of the Right of Lien: The right of stoppage in transit is an extension of the right of lien in the sense that the right of stoppage in transit begins when the right of lien ends and the purpose of the right of stoppage in transit is to regain possession of the goods. Effect of Sub-sale or Pledge by Buyer upon the Two Rights of

the Unpaid Seller Discussed Above (Sec. 53) The unpaid seller s right of lien or stoppage in transit is not affected by any sale or other disposition (e.g., pledge) of the goods which the buyer might have made. For example, P sells certain goods to R and delivers them to a carrier for transmission to R. Before the goods reach their destination P comes to

know that R has become insolvent. In the meanwhile R sells those goods to Q. The sale of goods between R and Q will not affect the right of P to stop them in transit. But there are two exceptional cases when these two rights of the unpaid seller are affected by a sale or other disposition (e.g., pledge) of the goods by the buyer. These exceptions are: (i) When the seller has assented to the sale or other disposition (e.g., pledge) which the buyer may have made. (ii) When a document of title to goods (e.g., a bill of lading or railway receipt) has been issued or transferred to a buyer, and the buyer transfers the document to a person who takes the document in good faith and for consideration, then, (a) if such last mentioned transfer was by way of sale, the unpaid seller s right of lien or stoppage in transit is defeated, and (b) if such last mentioned transfer was by way of pledge, the unpaid seller s right of lien or stoppage in transit can only be exercised subject to the rights of the pledgee. But in this case the unpaid seller may require the pledgee to satisfy his claim against the buyer first out of any other goods or securities of the buyer in the hands of the pledgee. Rights of Unpaid Seller in case of Transfer of Document by way of Pledge [Proviso to Sections 53(1) and 53(2)] (i) Where the transfer was by way of pledge or other disposition for value, the unpaid seller s right of lien or LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 103

stoppage in transit can only be exercised subject to rights of the transferee (ii) Where the transfer is by way of pledge, the unpaid seller may require the pledgee 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 pledgee and available against the buyer. 3. Right of Resale The right of resale is a very valuable right given to an unpaid seller. In the absence of this right, the unpaid seller s other rights against the goods, namely, lien and stoppage in transit, would not have been of much use because these rights only entitle the unpaid seller to retain the goods until paid by the buyer. If the buyer continues to remain in default, then should the seller be expected to retain the goods indefinitely, specially when the goods are perishable? Obviously, this cannot be the intention of the law. Section 54, therefore, gives to the unpaid seller a limited right to resell the goods in the following cases: (a) Where the goods are of a perishable nature; or (b) Where such a right is expressly reserved in the contract in case the buyer should make a default; or (c) Where the seller has given a notice to the buyer of his intention to resell and the buyer does not pay or tender the price within a reasonable time. If on a resale there is a loss to the seller, he can recover it from the defaulting buyer. But if there is a surplus on the resale, the seller can keep it with him because the buyer cannot be allowed to take advantage of his own wrong. If, however, no notice of resale [as required in case(c) above] is given to the buyer, the right of seller to claim loss and retain surplus, if any, is reversed. In other words, if the unpaid seller fails to give notice of resale to the buyer, there neither the goods are of perishable nature nor such a right was expressly reserved, he cannot recover the loss from the buyer and it under an obligation to hand over the surplus, if any, to the buyer, arising from the resale. Thus, it will be seen that giving of notice to the buyer, when so required, is very necessary to make him liable for the breach of contract. It is so because such a notice gives an opportunity to the buyer either to pay the price and have the goods, or, if he cannot pay, to supervise the sale to see that the same is properly made. It is important that absence of notice, when so required, affects the rights of the unpaid seller himself only as discussed above and it does not affect the title of the subsequent buyer who will acquire a good title to the goods. Section 54(3) specially declares Where an unpaid seller who has exercised his right of lien or stoppage in transit resells the goods, the buyer acquires a good title thereto as against the original buyer, notwithstanding that no notice of the resale has been given to the original buyer. II. Rights of Unpaid Seller against the Buyer Personally The unpaid seller, in addition to his rights against the goods as discussed above, has the following three rights of action against the buyer personally:

1. Suit for price (Sec. 55). Where property in goods has passed to the buyer; or where the sale price is payable on a day certain , although the property in goods has not passed; and the buyer wrongfully neglects or refuses to pay the price according to the terms of the contract, the seller is entitled to sue the buyer for price, irrespective of the delivery of goods. Where the goods have not been delivered, the seller would file a suit for price normally when the goods have been manufactured to some special order and thus are unsaleable otherwise. 2. Suit for damages for non-acceptance (Sec. 56). Where the buyer wrongfully neglects or refuses to accept and pay for the goods, the seller may sue him for damages for nonacceptance. The seller s remedy in this case is a suit for damages rather than an action for the full price of the goods. The damages are calculated in accordance with the rules contained in Section 73 of the Indian Contract Act, that is, the measure of damages is the estimated loss arising directly and naturally from the buyer s breach of contract. Where the goods have a ready market the principle applicable is that the seller may recover from the buyer damages equal to the difference between the contract price and the market price on the data of the breach of the contract. Thus, if the difference between the contract price and market price is nil, the seller can get only nominal damages ( Charter vs Sullivan). But where the goods do not have any ready market, the measure of damages will depend upon the facts of each case. For example, in Thompson Ltd. Vs Robinson the damages were assessed on the basis of profits lost. In that case, T Ltd., who were car dealers, contracted to supply a motorcar to R.R refused to accept delivery. It was found as a fact that the supply of cars exceeded the demand at the time of breach and hence in a sense there was no market price on the date of breach. Held, T Ltd., were entitled to damages for the loss of their bargain viz., the profit they would have made, as they had sold one car less than they otherwise would have sold. To take another illustration, if the goods have been manufactured to some special order and they are unsaleable and have been manufactured to some special order and they are unsaleable and have no value at all for other buyers, then the seller may even be allowed the full price of the goods as damages. 1. Suit for special damages and interest (Sec.61) This Section entitles the seller to sue the buyer for special damages also for such loss which the parties knew, when they made the contract, to be likely to result from the breach of it. In fact the Section is only declaratory of the principle regarding special damages laid down in Section 73 of the Indian Contract Act. The Section also recognizes unpaid seller s right to get interest at a reasonable rate on the total unpaid price of the goods sold, from the time it was due until it is actually paid. (Telu Ram Jain vs Aggarwal & Sons). We have discussed a lot about the rights of an unpaid seller. But does the buyer too enjoys some rights. Yes, of course! Let

me throw a light on it. Rights of Buyer The rights available to the buyer have been shown below in Let us discuss these rights one by one. LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 104 11.555

(a) Suit for Damages for Non-delivery [Section 57] Where the seller wrongfully neglects or refuses to deliver the goods to the buyer, the buyer may sue the seller for damages for non-delivery. (b) Suit for Specific Performance [Section 58] In any suit for breach of contract to deliver specific or ascertained goods, the court may direct that the contract shall be performed specifically. (c) Suit for Breach of Warranty [Section 59] Where there is a breach of warranty by the seller, or where the buyer elects or is compelled to treat any breach of a condition on the part of the seller as a breach of warranty, the buyer is not by reason only of such breach of warranty entitled to reject the goods, but he may (i) Set up against the seller the breach of warranty in diminution or extinction of the price; or (ii) Sue the seller for damages for breach of warranty. Note: The fact that a buyer has set up a breach of warranty in diminution or extinction of the price does not prevent him from suing for the same breach of warranty if he suffered further damage. [Section 59(2)] Example: X sold a second hand Radio to Y who spent Rs 100 on the repair of this Radio. This Radio was seized by the police as it was a stolen one. Y filed a suit against X for recovery of damages for breach of warranty of quite possession including the cost of repairs. It was held that Y was entitled to recover the same. [Mason v. Burmingham] (d) Right to Treat the Contract as Rescinded or Operative in Case of Repudiation of Contract by Seller before due Date [Section 60] Where seller repudiates the contract before the date of delivery, the buyer may either treat the contract as subsisting and wait till the date of delivery, or he may treat the contract as rescinded and sue for damages for the breach. (e) Suit for Interest [Section 61(2)] In case of breach of the contract on the part of the seller, the buyer may sue the seller for interest from the date on which the payment was made. Practical Problem 1. A sells goods to B. B pays to A through a cheque. Before B could obtain the delivery of goods, his cheque has been dishonored by the bank. A, therefore, refuses to give delivery of the goods until paid. Is A s action justified? [Hint: Yes, A s action is justified, because the right of lien is linked with possession and not with title or passing of property.] 2. A sells goods to B and transfers him the document of title to the goods. B pays A through a cheque. In fulfillment of a contract of sale B transfers that document of title to

C. Before C could obtain the delivery of goods, B,s cheque has been dishonoured by the bank. Hence A gives instructions to stop delivery of the goods to C until paid. Is A s action justified? [Hint. No. A s action is not justified. An unpaid seller s right of lien is defeated against transferee who takes a document of title in good faith and for consideration (Sec. 53)]. 3. A sells and consigns to B goods of the value of Rs. 10,000 on credit. B assigns the railway receipt to C to secure a specific advance of Rs. 50,00 on the railway receipt. Before the goods reach the destination B becomes insolvent. A gives notice to stop the goods in transit but C claims them. Can A stop the goods in transit? [Hint. Yes, A can stop the goods in transit but subject to the pledge of C.C can recover the amount of pledge from the goods or from A. Hence A can stop the goods in transit only when he pays Rs. 5,000 to C (Sec.53)]. 4. P sells to R a quantity of wheat lying in P s warehouse. It is agreed that three months credit shall be given to R.R allows the wheat to remain in P s warehouse. Before the expiry of the three months R becomes insolvent and the Official Assignee demands delivery of the wheat from P without offering to pay the price. Is P entitled to retain the goods until paid? [Hint. Yes, P is entitled to retain the goods as security for the price until he is paid. In the case of buyer s insolvency the lien exists even though goods had been sold on credit and the period of credit has not yet expired, provided the goods are still in possession of the seller (Sec. 47).] 5. A sells certain goods to B, the property in the goods is to pass to B on delivery which is to take place on Ist August 1987, and the payment to be made by property in the goods has not passed to him. Can A sue B for the price before the delivery of the goods takes place? [Hint. Yes, A can sue B for the price. Where the sale price is payable on a day certain, the seller can sue the buyer on his default, irrespective of passing of property and delivery of goods (Sec. 55)]. 6. A attended an auction sale and made a bid of Rs. 600 for a typewriter but withdrew the offer before the fall of the hammer. One of the conditions of the sale, which A had read was that biddings once made, shall not be withdrawn. A was sued for Rs. 600, his being the highest bid. Decide. [Hint. A is liable to pay Rs 600 because as per the conditions of the auction no bid can be withdrawn. The auctioneer has the right to make the auction subject to any conditions he likes (The Coffee Board vs Famous Coffee and Tea Works, ] 7. At an auction sale, A makes the highest bid for a flower vase. Purporting to accept the bid the auctioneer strikes the hammer, but strikes the vase and breaks it. Who is to bear

the loss? Would your decision differ if the auctioneer had struck the table, on which the vase was kept, with the hammer and the vase fell down and broke into pieces? [Hint. The loss in both the cases is to be borne by the owner of the flower vase, because at the time of the completion of the contract, namely, striking the hammer, the goods forming the subject matter of the contract have perished, and as such impossibility of performance at the time of contract renders the agreements void ab-initio. LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 105

References Kapoor, N.D. (2003), Elements of Mercantile Law, Sultan Chand and Sons, New Delhi. http://www.indialawinfo.com/bareacts/soga.html M.C. Kucchal ( 2002), Business Law , Vikas Publishing House Pvt. Ltd, Delhi. P.C. Tulsian (2002), Pvt. Ltd, Delhi Notes: Business Law , Tata Mc. Graw Hill

LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 106 11.555

LESSON 21: THE NEGOTIABLE INSTRUMENT ACT 1881 MEANING AND TYPES OF NEGOTIABLE INTRUMENTS Learning Outcomes After reading the lesson, you should be able to know: The meaning of Negotiable Instruments The important types of Negotiable Instruments Introduction We are aware that money is most common medium of exchange itself has the exchange value and is freely transferable. It was felt although the use of ready cash is desirable due to acceptability but may cause risk and inconvenience in dealing. Its substitute leads to development of Negotiable Instruments. The Negotiable Instrument Act 1881 came into force on 1st March 1881. It extends to the whole of India except the State of Jammu & Kashmir. The term Negotiable Instrument consists of two parts viz; Negotiable and Instrument. The word negotiable means transferable by delivery and the word instrument mean written documents by which a right is created in favour of some person. It means an instrument possessing the quality of Negotiability is entitled to be called negotiable instrument According to Will A negotiable instrument is one the property in which is acquired by anyone who takes it bonafide and for value not withstanding any defect of title in the person from whom he took it Thus a negotiable instrument must possess two features. 1. The right of ownership contained in the instrument can be transferred from one person to another by mere delivery, if it is payable to bearer or by endorsement and delivery if payable to order and 2. The transferee taking the instrument in good faith and for consideration gets a good title to the same even though the title of the transfer is defective. (a) Meaning of Negotiable Instrument Payable to order. A promissory note, bill of exchange or cheque is payable to order if, either of the following two conditions is fulfilled: (a) It must be expressed to be so payable (b) It must be expressed to be payable to a particular person and it must not contains words which prohibit transfer or indicate and intention that it shall not be transferable. (b) Meaning of Negotiable instrument Payable to Bearer.

A Promissory note, bill of exchange or cheque is payable to bearer if either of the following condition is fulfilled (a) It must be expressed to be so payable (b) The only and last endorsement must be endorsement in blank Essential Characteristics Feature of a Negotiable Instrument The essential characteristics of a negotiable instrument have been shown as under: 1. Payable to order or bearer 2. Freely transferable 3. Presumption as to holder 4. Title of holder in due course 5. Presumption as to consideration Let us discuss these one by one 1. Payable to order or bearer: - It must be payable either to order or bearer 2. Freely Transferable:- A instrument payable to order is negotiable by endorsement and delivery and an instrument payable to bearer is negotiable by mere delivery 3. Presumption as to Holder:- Every holder of negotiable instrument is presumed to be holder in due course (Section 118) 4. Title of holder in due course:- A holder in due course ( i.e. the person who become the possessor of negotiable instrument before maturity, for valuable consideration and in good faith ) get the instrument free from all defects in the title of transferor 5. Presumption as to considerations:-Every negotiable instrument is presumed to have been made, drawn, accepted, endorsed , negotiated or transferred for consideration. Since the Negotiable Instrument Act deals with only three Negotiable Instruments; Promissory Note, Bill of exchange and cheque. The same are being discussed in some detail. Let us come to the definition aspect of important negotiable instruments Definitions (a) Promissory Note: A promissory note is an instrument (not being a bank note or a currency note ) in writing 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 to the bearer of the instrument ( Section 4).

In other words, the requirements of promissory note are as follows: (i) It must be in writing: This means that cannot be oral. There is no prescribed this; even the word promise need not necessary is that whatever language is show that the maker is unconditionally sum. LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 108 11.555 the engagement form of language for be used. What is used, it must clearly bound to pay the

(ii) The promise to pay must be unconditional: If a condition is attached to the promise to pay then the instrument will not be construed as a promissory note. Suppose, A signs an instrument made out as follows, I promise to pay to B Rs. 500 on D s death, provided D leaves me enough to pay the sum . The instrument will not be a promissory note. Similarly, if A signs thus, I promise to pay to B Rs. 500 deducting any money which B may owe me; such an instrument also will not be a promissory note. Let us now take a converse case. An instrument runs thus: I acknowledge myself to be indebted to B of Rs. 500 to be paid on demand, for value received . Thus instrument would be a promissory note. It may be noted that a promise to pay will not be conditional under Section 4, where it depends upon an event which is certain to happen but the time of its occurrence may be uncertain. For example, where a promissory note is in this form: I promise to pay to A Rs. 2,000, 15 days after the death of B , it is not conditional as it is certain that B will die though the exact time of his death is uncertain (Section 4). (iii) The amount promised must be a certain and a definite sum of money: Certainty is one of the essential characteristics of a promissory note. Certainty must be as to the amount and also as to the person by whose order and to whom payment is to be made. Uncertainty in such matters has a tendency to restrict credit and to hamper commerce. Hence the necessity of certainty. For example, where an instrument contains: I promise to pay Rs. 350 and all other sums which shall be due , it is not a valid promissory note as the sum is not certain within the meaning of Section 4. You should also note that payment with interest of at a specified rate of exchange is certain within the meaning of Section 4. You should also remember that in the event of figures and words indicating the sum payable being contradictory; the sum in words must be taken into account. (iv) The instrument must be signed by the maker: It is incomplete till it is so signed. Since the signature is intended to authenticate the instrument it can be on any part of the instrument. (v) The person to whom the promise is made must be a definite person:-The payee must be a certain person. Where the name of the payee is not mentioned as a party, the instrument becomes invalid. Remember that a promissory note cannot be made payable to the maker himself. Thus, a note, which runs I promise to pay myself , is not a promissory note and hence invalid. However, it would become valid when it is endorsed by the maker. This is because it then becomes payable to bearer, if endorsed in blank, or it becomes payable to the endorsee or his order, if endorsed specially. In connection with the promissory note, you should also remember that: (a) consideration need not be mentioned; (b) place and date of making it need not the mentioned: (c) an undated instrument will be treated as having been made on the

date of its delivery; and (d) an antedated or post dated instrument is not invalid. N.B. The words or to the bearer of the instrument still appear in Section 4 to the Act. since these have not yet been deleted there from by the Parliament: Nevertheless, in view of the provision contained in Sub-section (2) of Section 31 of the Reserve Bank of India or the Central Government can make or issue a promissory note payable to the bearer of the instrument. Let us discuss some of the illustrations. Illustrations A signs instruments in the following terms: The instruments respectively marked (a) and (b) are promissory notes. The instruments respectively marked (c), (d), (e), (f), (g) and (h) are not promissory notes. (b) Bill of Exchange: Before going into the definition, you must know how a bill of exchange ordinarily comes into existence. It comes into being, when a trader decides to sell goods on credit. Suppose, A sells goods worth Rs. 800 to B, and allows him three months time to pay the price. A will them draw a bill on B in the following terms Three months after date pay to my order the sum of Rs. 800 for value received . After signing the bill, A will present it to B for acceptance. If B writes across the bill accepted , it will indicate that B undertakes the liability to pay a sum of Rs. 800 within the time stipulated therein. Here A is the drawer, B is the drawee and after acceptance B will be the acceptor. A bill of exchange is an instrument in writing containing an unconditional order signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of certain person to the bearer of the instrument (Section 4). You should now try to understand the application of the points emerging from the said definition: (i) The bill of exchange must be in writing. This point, we take it for granted, needs no further annotation. (ii) There must be money to the payee. It is of the essence of the bill that its drawer orders the drawee to pay money to the payee. It must be imperative mere predatory words do not suffice. Although terms of politeness may be admissible, excessive politeness may nonetheless prompt one to disregard it as an order. LEGAL ASPECTS OF BUSINESS (a) I promise to Pay B or order Rs.500 . (b) I acknowledge myself to be indebted to B in Rs.1,000, to be paid on demand, for value received. (c) Mr B I.O.U Rs.1,000. (d) I promise to pay B Rs. 500 and all other sums which shall be due to him. (e) I promise to pay B Rs. 500 first deducting there out any money which he may owe me. (f) I promise to pay B Rs. 500 seven days after my

marriage with C. (g ) I promise to pay B Rs. 500 on D s death, provided D leaves me enough to pay that sum. (h) I promise to pay B Rs. 500 and to deliver to him my black horse on lst January next. Copy Right: Rai University 11.555 109

Promissory Note Bill of exchange (i) It contains a promise to pay. (ii) The liability of the maker of a note is primary and absolute (Section 32) (iii) It is presented for payment without any previous acceptance by the maker. (iv) The maker of promissory note stands in immediate relationship with the payee (Explanation to Section 44) and is primarily liable to the payee or the holder. (v) It cannot be made payable to the maker himself, that is the maker and the payee cannot be the same person. (vi) In the case of a promissory note there are only two parties, viz, the maker (debtor) and the payee (creditor). (vii) A promissory note cannot be drawn in sets. (viii) A promissory note can never be conditional. (iii) This order must be unconditional, as the bill is payable at all events. Thus it is absolutely necessary for the drawer s order to the drawee to be unconditional. The order must not make the payment of the bill dependent on a contingent event. A conditional bill of exchange is invalid. Where a bill contains an order to pay the amount specified therein out of a particular fund it will be conditional and therefore invalid. The reason for this invalidity is that it is uncertain whether the funds will be in existence or prove sufficient on the bill becoming payable. However, an unqualified order to pay together with an indication of a particular fund out of which the drawee is to reimburse himself, is not conditional. Hence such as indication does not vitiate the instrument. (iv) The drawee must sign the instrument. The instrument without the proper signature will be inchoate and hence ineffective. It is permissible to add the signature at any time after the issue of the bill. But if it is not so added, the instrument remains ineffectual. (v) The drawer, the drawee (acceptor) and the payee the necessary parties to a bill are to be specified in the instrument with reasonable certainty. You should remember that all these three parties may not necessarily be three different persons. Once can play the role of two. But there must be two distinct persons in any case.

1.It contains an order to pay. 2.The liability of the drawer of a bill is secondary and conditional. He would be liable if the drawee, after accepting the bill fails to pay the money due upon it provided notice of dishonour is given to the drawer within the prescribed time (Section 30) 3.If a bill is payable some time after sight, it is required to be accepted either by the drawee himself or by some one else on his behalf, before it can be presented for payment. 4.The maker or drawer of an accepted bill stands in immediate relationship with the acceptor and the payee (Explanation to Section 44). 5.In the case of bill, the drawer and payee or the drawee and the payee may be the same person. 6.In the parties, of these the same case of a bill of exchange there are three viz, drawer, drawee and payee, and any two three capacities can be filled by one and person.

7.The bills can be drawn in sets. 8.A bill of change too cannot be drawn conditionally, but it can be accepted conditionally with the consent of the holder. (vi) The sum must be certain [what we have discussed on this point in relation to promissory note vide requirement (iii) on page 2 will equally hold goods here]. (vii) The medium of payment must be money and money only. The distinctive order to pay anything in kind will vitiate the bill. (c) Distinction between a promissory note and a bill of exchange: The distinctive features of these two types of negotiable instruments are tabulated below: You should carefully note that neither a promissory note nor a bill of exchange can be made payable to bearer on demand. (d) Definition of Cheque: A cheque is a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand and it includes the electronic image of a truncated cheque and a cheque in the electronic form. For the purposes of this section, the expressions (a) a cheque in the electronic form means a cheque which contains the exact mirror image of a paper cheque, and is generated, written and signed 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 a clearing cycle, either by the clearing LEGAL ASPECTS OF BUSINESS

 Copy Right: Rai University 110 11.555

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. For the purposes of this section, the expression clearing house recognized as such by the Reserve Bank of India. (Section 6, Negotiable Instruments Act) That is to say, it is a bill drawn on a banker which is payable on demand. A cheque being specie of bill of exchange, it must, under the Section 5, be signed by the drawer and must contain an unconditional order on a specified banker to pay a certain sum of money to or the order of the specified person or to the bearer of the instrument. A cheque, however, is a peculiar type of negotiable instrument in the sense that it does not require acceptance; also it is not meant to be payable to bearer on demand. A cheque is an exception to the general rule that a bill of exchange cannot be drawn payable to bearer on demand Section 31, (The Reserve Bank of India Act). A cheque may be drawn up in three forms, viz., (i) bearer cheque (i.e., one which is either expressed to be so payable or on which the last or only endorsement is an endorsement in blank); (ii) order cheque i.e., one which is expressed to be so payable words against its transfer or indicating an intention that it shall not be transferable (Section 18); and (iii) crossed cheque is a cheque which can be only collected through a banker. Difference between Cheque and Bill of Exchange (1) In the case of a cheque the drawee i.e., the person on whom the bill is drawn must always be banker whereas in the case of a bill of exchange the drawee may be any person. 2) No days of grace are allowed in the case of a cheque, and a cheque is as a rule, payable on demand, whereas three days grace is allowed in the case of a bill. 3) In the case of a dishonour of a cheque, notice of dishonour is not necessary whereas notice of dishonour is usually required in the case of a bill. 4) A cheque can be drawn to bearer and made payable on demand, whereas a bill cannot be bearer if it is made payable on demand. 5) In the case of a cheque, it is not necessary to present it for acceptance. It needs only is advisable to present them for acceptance even when it is not essential to do so. 6) Cheque do not require to be stamped in India, whereas bill must be stamped according to the law. In England and

several other countries, cheques also are required to be stamped. 7) A cheque may be crossed, whereas a bill cannot be crossed. Generally, it must be remembered that cheques are negotiable instruments and the most of the rules in relation to bills of exchange also apply to cheques. (f) Bank Draft: A bank draft is, by definition, an order drawn by an office of a bank upon another office of the same bank. In other words, it is, in a sense, an order drawn by one person upon himself, whereas in the case of bills, they are drawn by one person upon another person (Section 85A). Section 131A of the Act makes all rules as regards crossed cheques, laid down in Sections 123 to 131, applicable to drafts definition by Section 85A, Thus a banker who collects a draft on behalf of a customer will not be protected by Section 131. A draft is drawn either against cash deposited at the time of its purchase or against debit to the buyer s current account with the banker. The buyer of the draft generally furnishes particulars of the person to whom the amount thereof should be paid. The banker charges for his services a small commission. The draft like a cheque, can be made payable to drawer on demand without any legal objection thereto, since the Reserve Bank of India. Act, under Section 31, specially allows such a draft be issued. Moreover, where a draft purports to have been endorsed by or on behalf of the payee the paying bank is discharged from liability by its payment in due course even though the endorsement of the payee has been forged. This affords great protection to the paying banker in so far as it is always possible for the paying banker to identify the signature of the payee. (g) Marked cheque: A cheque need not be presented for acceptance. Therefore the drawee of the cheque i.e., the banker, is under liability, to the person in whose favour the cheque is drawn. The banker, however, will be liable to his customer ( drawer), if he wrongly refuses to honour the cheque. In such a case, action can be taken by the customer against the banker for the loss of his reputation. In certain cases, however , a cheque is marked or certified by the banker on whom it is drawn as good for payment . Such a certification of marking is strictly not equivalent to an acceptance but is very similar to it and protects the person to whom the cheque is issued against the cheque being refused for payment subsequently by Banking in India, as a rule, do not mark or certify cheque in this manner. Bankers in India, are not liable even if a bank has marked a cheque as good for payment (Bank of Baroda vs. Punjab National Bank Ltd. ). (h) Crossed cheque (a) The usage of crossing cheques: Cheques are usually crossed as a measure of safety. Crossing is made by drawing two parallel transverse lines across the face of

the cheque with or without the addition of certain words. The usage of crossing distinguishes cheques from other bills of exchange. The object of general crossing is to direct the drawee banker to pay the amount of the cheque only to a banker, to prevent the payment of the cheque being made to wrong person (Section 123); (b) Special crossing: Where a cheque bears across its face an entry of the name of a banker either with or without the words not negotiable , the cheque is considered to have been crossed specially to that banker. In the case of special crossing the addition of two parallel transverse lines is not essential though generally the name of the bank to which the cheque is crossed LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 111

specially is written between two parallel transverse lines (Section 124). (c) Crossing after issue: (f) If cheque has not been crossed, the holder thereof may cross it either generally, or specially. (ii) If it is crossed generally, the holder may cross it, specially. (iii) If it is crossed, either generally or specially the holder may add the words not negotiable . (iv) If a cheque is crossed specially, the banker to whom it is crossed, may again cross it specially to another banker, his agent, for collection. This is the only case where the Act allows a second special crossing by a banker and for the purpose of collection [Akro Kervi Mines vs. Economic Bank (1904) 2 K.B. 465 (Section 125)]. It may be noted that the crossing of a cheque is an instance of an alteration which is authorized by the Act. (d) Payment of cheque, crossed generally or specially (Section 126 & 127): If a cheque is crossed generally, the banker on whom it is drawn shall not pay it otherwise than to a banker. Again, 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. Where a cheque is crossed specially to more than one banker except when it is crossed to an agent for the purpose of collection, the banker on whom it is drawn shall refuse payment thereof. This is because, in such a case, the instruction by the drawer would not be clear (Section 127). (e) Payment in due course of crossed cheque: Where the banker on whom a crossed cheque is drawn, pays it in due course, it is to be presumed that he has made payment to the true owner of cheque, though in fact, the amount of the cheque may not reach the true owner. In other words, banker making payment in due course is protected, whether the money is or is not, in fact, received by the true owner of the cheque (Section 128). (f) Payment out of due course: Any banker paying a crossed cheque otherwise than in accordance with the provisions of Section 126 shall be liable to the true owner of the cheque for any loss he may have sustained. Thus, if the money does not reach the true owner, he can claim payment over again from the banker (Section 129). (g) Cheque marked not negotiable : A person taking a cheque crossed generally or specially bearing in either case the words not negotiable shall not have or shall not be able to give a better title to the cheque than the title the person from whom he took had. In consequence if the title of the transferor is defective, the title of the transferee would be vitiated by the defect. But, in the case of a bill negotiated in the ordinary way, the title of the holder in due course would not be affected by the defect in the title of the transferor (Section 130).

For example, X, by means of fraud, obtained from Y a cheque crossed not negotiable and got it cashed at a bank other than the drawee bank. Y sued the bank for conversion. Is the bank liable for conversion? The effect of Section 130 of the Act. broadly, is that if the holder has a good title, he can still transfer it with a good title; but if the transferor has a defective title, the transferee is affected by such defects, and he cannot claim the right of a holder in due course by providing that he purchased the instrument in good faith and for value. As X in the case in question had obtained the cheque by fraud, he had no title to it and could not give to the bank any title to the cheque or the money and the bank would be liable for the amount of the cheque for conversion. A similar decision was taken in Great Western Railway Co. vs. London and Country Banking Co. (1901) A.C. 414 the facts whereof are exactly the same as the example cited above. The addition of the words not negotiable in a crossed cheque has a special significance. The use of the words does not render the cheque non-negotiable but only affects one of the main features of negotiability. The general rule about the negotiability is that the holder in due course of a bill or promissory note or cheque takes the instrument free from any defect which might be existing in the title of the transferor. If the holder takes the instrument in good faith , before maturity and for valuable consideration, his claim is not defeated or affected by the defective title of the transferor. In case of any dispute, it is the transferor with the defective title who is liable. But the addition on the words not negotiable to the crossing of a cheque, makes the position different. When such a crossing is placed on a cheque, the holder in due course does not get any better title than what the transferor had: If the transferor had defective title, the title of the holder in due course also becomes defective. Therefore, he will have to refund the amount of the bill to the true owner. In other words, the principle of the nemo dat quod non habet (that is, nobody can pass on a title better than what he himself has ) will be applicable to a cheque with a not negotiable crossing. Thus, cheques with not negotiable crossing are negotiable so long as their title is good. Once the title of the transferor or endorser become defective the title of the transferee is also affected by such defect and the transferee cannot claim the right of a holder in due course. As per the latest instructions issued by the Reserve Bank of India (9-9-1992) it would be safer for the drawer to cross a cheque not negotiable with the words account payee added to it. The courts of law have held that an account payee crossing is a direction to the collecting banker as to how the proceeds are to be applied after receipt. The banker can disregard the direction only at his own risk and responsibility. In other words, an account payee, cheque can be collected only for the account of the payee named in the cheque and not for anyone else. A banker collecting an account payee cheque for a person other than the payee named in the cheque may be held liable for conversion.

In other words, if the bank collects an account payee cheque for a person other than the payee it does so at its own risk. It is imperative on the part of collecting bank, therefore to take utmost care to enquire into the title of its customer and satisfy LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 112 11.555

itself that there is no defect in the title of the customer presenting such cheque for collection. (h) Cheque marked Account Payee : It is a form of restrictive crossing, represented by the words Account Payee entered on the face of the cheque. Such a crossing acts as a warning to the collecting bankers that the proceeds are to be credited only to the account of the payee. If the collecting banker allows the proceeds of the cheque so crossed to be credited to pay any other account, he may be held guilty of a negligence in the event of an action for wrongful conversion of funds being brought against him. These words are not an addition to the crossing but are mere direction to the receiving or collecting bankers. These do not affect the paying banker who is under no duty to ascertain that the cheque in fact has been collected for the account of the person named as the payee. In the case of a cheque bearing Account Payee crossing which is not specially crossed to another banker, the paying banker needs only to see that the cheques bears no other endorsement but that of the payee, and that it is otherwise in order. But where the cheque is also crossed specially, the paying banker must make payment only to the bank named in the crossing. If has been held that crossing cheque with the words Account Payee and mentioning a bank is not a restrictive endorsement so as to invalidate further negotiations of the cheque by the endorsee. (i) Protection in respect of uncrossed cheque: When a cheque payable to order purports to be endorsed by or on behalf of the payee and the banker on whom it is drawn pays the cheque in due course, he is authorized to debit the account of his customer with the amount so paid, even though the endorsement of the payee subsequently terns out to be a forgery, or though the endorsement may have been made by payee, agent without his authority . In other words, the banker is exonerated for the failure to direct either the genuineness of the validity of the endorsement on the cheque purporting to be that of the payee of his authorized agent. For example, a cheque is drawn payable to B on order and it is stolen, Thereafter, the thief or someone else forges B s endorsement and presents the cheque to the bank for encashment. On paying the cheque, the banker would be able to debit the drawer s account with the amount of the cheque. Likewise, if the cheque in the above case, was not stolen but instead presented for payment by B s agent on endorsing the same Per Pro for B and the cheque is cashed the banker could debit the account of the drawer. He would not be held guilty of the ground that he has cashed the cheque endorsed by the agent of B who has misappropriated the amount thereof. Such a protection is also available in respect of drafts drawn by one branch of a bank of another payable to order (Section 85A). (j)

Protection in respect of crossed cheques: When a banker pays a cheque (drawn by his customer), if crossed generally then to any banker, and if crossed specially then to banker, to whom it is crossed or his agent for collection (also being a banker), he can debit the drawer s account so paid, even though the amount of the cheque does not reach true owner. The protection in either of the two cases aforementioned can be availed of, if the payment has been made in due course i.e., according to the apparent tenor of the instrument, in good faith and without negligence, to any person in possession thereof in the circumstances which do not excite any suspicion that he is not entitled to receive payment of the cheque. Let us know in detail about the other important classification of instruments. Classification of Instruments (a) Bearer and Order instruments: An instrument may be made payable: (1) to bearer; (2) to a specified person or to his order. An instrument is payable to bearer which is expressed to be so payable on which is expressed thus Pay to R or bearer . It is also payable to bearer when the only or last endorsement on it is an endorsement in blank. An instrument is payable to order (i) when it is payable to the order of a specified person or (2) when it is payable to a specified person or his order or, (3) when it is payable to a specified person without the addition of the words or his order and does not contain words prohibiting transfer or indicating an intention that it should not be transferable. When an instrument, either originally or by endorsement, is made payable to the order of a specified person and not to him or his order, it is payable to him or his order, at his option. When an instrument is not payable to bearer, the payee must be indicated with reasonable certainty. Significance of bearer instruments The expression bearer instrument signifies an instrument, be it a promissory note, bill of exchange or a cheque, which is expressed to be so payable or on which the last endorsement is in blank (Explanation 2 to Section 13 of the Negotiable Instrument Act ). Under Section 46, where an instrument is made payable to bearer it is transferable merely by delivery, i.e., without any further endorsement thereon. This character of the instrument, however, can be altered subsequently. For Section 49 provides that a holder of negotiable instrument endorsed in blank (i.e., bearer ) may, without signing his own name, by writing above

the endorser s signatures, direct that the payment of the instrument be made to another person. An endorsee thus, can convert an endorsement in blank into an endorsement in full. In such a case, the holder of the instrument would not be able to negotiable the instrument by mere delivery. He will be required to endorse the instrument before delivering it. In the case of a cheques, however the law is a little different from the one stated above. According to the provisions of Section 85(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, despite any endorsement whether in blank or full appearing thereon notwithstanding that any such instrument purported to restrict or exclude further negotiation. In other words, the original character of the cheque LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 113

is not altered so far as the paying bank is concerned, provided the payment is made in due course. Hence the proposition that once a bearer instrument always a bearer instrument. (b) Inland and Foreign Instrument (Sections 11 & 12): A promissory note, bill of exchange or cheque drawn or made in India and made payable in or drawn upon any person resident in India shall be deemed to be an inland instrument. Any such instrument, not so drawn, made or payable shall be deemed to be a foreign instrument. Thus, the foreign bills are: (a) bills drawn outside India and made payable in or drawn upon any person resident in any country outside India; (b) bills drawn outside India and made payable in India, or drawn upon any person resident in India; (c) bills drawn in India upon persons resident outside India and made payable outside India. In the absence of a contract to the country, the liability of the maker or drawer of a foreign promissory note or bill of exchange is regulated in all essential matters by the law of the place where he made the instrument, and the respective liability of the acceptor and endorser by the law of the place where the instrument is made payable (Section 134). For example, a bill of exchange is drawn by A in California where the rate of interest is 25% and accepted by B payable in Washington where the rate of interest is 6%. The bill is endorsed in the State and is dishonoured. An action on the bill is brought against B in the States. He is liable too pay interest at the rate of 6% only. But if A is charged as drawer, he is liable to pay interest at 25. The distinction between inland and foreign bills is of importance in connection with Sections 104 and 134 of the Act. Inland bills need not be protested for dishonour; protest in this case is optional. But foreign bills must be protested when law of the place of making or drawing them requires such protest. The question by what law are the contracts on negotiable instruments governed is also important. Foreign bills must be protested for dishonour if the law of the place where these are drawn prescribes for such a protest. In the case of inland bills, protest is optional (Section 104). c) Ambiguous and inchoate bills An ambiguous bill means an instrument which can be constructed either as a promissory note or as bill of exchange (Section 17). E.g., a bill drawn by a person on himself in favour of a third person or where the drawee is a fictitious person. The law on the point is that the holder of such a bill is at liberty to treat the instrument as bill or a promissory note. The nature of the instrument will be as determined by the holder. An incomplete instrument called an inchoate instrument. Section 20 of the Negotiable Instruments Act provides that when one person signs and delivers to another a paper stamped in accordance with the law relating to negotiable instruments then in force in India and either wholly blank or having written thereon an incomplete negotiable instrument, he thereby give

prima facie authority to as the case may be, upon amount specified therein by the stamp. The person

the holder thereof to maker or complete, it a negotiable instrument for an and not exceeding the amount covered so signing shall be liable upon such

instrument in the capacity in which he signed the same, to any holder in due course for such amount. Provided that no person other than a holder in due course shall recover from the person delivering the instrument anything in excess of the amount intended to be paid by them there under. The principle of this rule (namely that a person who gives another possession to his signature on a blank stamped paper, Prima facie authorizes the latter as his agent to fil it up and give to the world the instrument as accepted by him ) is one of estoppel. By such signature he binds himself as drawer, maker, acceptor or endorser. His signature on the blank paper purports to be an authority to the holder to fill up the blank, and complete the paper as a negotiable instrument. Till this filling in and completion, the instrument is not a valid negotiable instrument, and no action is maintainable on it. Further, as a condition of liability, the signer as a maker, drawer, endorser or acceptor must deliver the instrument to another. In the absence of delivery, the signer is not liable. Furthermore, the paper so signed and delivered must be stamped in accordance with the law prevalent at the time of signing and on delivering otherwise the signer is not estopped from showing that the instrument was filled without his authority. Sight And Time Bills Etc.: (Sections 21 To 25) (i) Instruuments payable on demand: Bills and notes are payable either on demand or at a fixed future time. Cheques are always payable on demand. A promissory note or bill of exchange in which no time for payment is mentioned is payable on demand. A bill or promissory note is also payable on demand when it is expressed to be payable on demand, or at sight or presentment . It should be noted that the expression on demand does not imply that any actual demand is to be made; it is only a technical expression meaning immediately payable . Such a bill or note may be presented for payment at any time at the option of holder, but it must be presented within a reasonable time after its issue in order to tender the drawer liable, and within a reasonable time after its endorsement to render the endorser liable. (ii) Time Bills: The expression after sight means, a promissory note after presentment for sight, and in a bill of exchange, after acceptance, noting for non-acceptance or protest for non acceptance. It is useful to make a bill or not payable at so many months or days after sight. The term after sight is differently used in a note and a bill. In the former case, it denotes that payment is not to be demanded till it has been exhibited to the maker, for a note is incapable of being accepted; while in the latter case, it denotes that sight must appears in legal way , i.e., after acceptance, if the bill has been accepted or a after noting for non-acceptance or protest for non-acceptance soon).

(iii) Maturity. Where bill or note is payable at fixed period after sight, the question of maturity becomes important. The maturity of a note or bill is the date on which it falls due. A note or bill, not payable on demand, at sight or on presentment; is at maturity on the third day after the day on which it is expressed to be payable. Three days are LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 114 11.555

allowed as days of grace. No days of grace are allowed in the case of a note or bill payable on demand, at sight on presentment. (iv) Calculation of maturity: Where a bill is payable at a fixed period after sight, the time is to be calculated from the date of acceptances if the bill is accepted and from the date of noting or protest if the bill is noted or protested for nonacceptance (For the explanation of noting and protesting, read Section 99 and 100 of the Negotiable Instruments Act). In the case of note, the expression after sight means after exhibition thereof to maker for the purpose of founding a claim for payment. In the case of a bill payable after a stipulated number of months after sight which has been accepted for honour, the date of its maturity is calculated from the date of acceptance for honour. (For the explanation of the phrase acceptance for honour , read Section 108 of the Negotiable Instruments Act. ). In calculating the date at which a note or bill made payable a certain number of days after date or after sight or after a certain event is at maturity on the days or the date, or the day of presentment for acceptance or sight or the day of protest for non-acceptance, or the day on which the event happens shall be excluded (Section 24). When a note or bill is made payable, a stated number of months after date, the period stated terminates on the day of the month, which corresponds, with the day on which the instrument is dated. When it is made payable after a stated number of months after sight the period terminates on the day on the month which corresponds with the day on which it is presented for acceptance or sight or noted for non-acceptance or protested for non-acceptance. When it is payable a stated number of months after a certain event, the period terminations on the day of the months which corresponds with the day on which the event happens (Section 23). If the months in which the period would terminate have no corresponding day, the period terminates on the last day of such month (Section 23). Three days of grace are allowed to these instruments after the day on which they are expressed to be payable (Section 22). When the last day of grace falls on a day, which is public holiday, the instrument is due and payable on the preceding business day (Section 15). Illustrations (a) A negotiable instrument dated 29th January, 1878, is made payable at one month after date. The instrument is at maturity on the third day after the 28th February, 1878. (b) A negotiable instrument, dated 30th August, 1878, is made payable three months after date. The instrument is at maturity on the 3rd December, 1878. (a)

A promissory note or bill of exchange, dated 31st August, 1878, is made payable three months after date. The instrument is at maturity on the 3rd December, 1878. Solve the following problems for a better understanding 1. A bill of exchange is drawn stating Pay to the X or his order a sum of ten thousand rupees . In the margin the amount stated is Rs. 1,000. Is it a valid bill? If so, how much amount it will represent? [Hints : Yes, it will represent Rs. 10,000. Section 18 of the Act says that if the amount in words and figures is different in a negotiable instrument, the amount stated in words shall be taken as final. ] 2. Classify the following instruments as payable to bear or to order. (a) to X (b) to bearer (c) to X or order (d) to X bearer (e) to the order of X [Hints: (a) order, (b) bearer, (c) order, (d) bearer, (e) order] 3. A firm carries on business in Bombay and Calcutta. The Bombay house draws a bill on Calcutta house. Can the holder treat this bill as a promissory note? [Hint: Yes, it is an ambiguous instrument and holder may treat it as a bill or note at his option. The facts of this case are similar to those of Miller v. Thompson [1841] 3 M & G, 576] 4. A bill was payable three months after the date it was accepted. The acceptance bore no date, and the drawee attained the majority the day before the bill matured. Will the drawee be liable on the bill? [Hint: No. In this case it is presumed that the drawee accepted the bill on a date when he was minor. A minor being incompetent to contract will not incur any liability under the bill. The facts of this case are similar to those of Roberts v. Bethel [1852] 12 CB 778. 5. Are the following instruments promissory notes? (a) Mr. X, I owe you Rs. 10,000 the note is signed by Y. (b) XYZ signs a note reading I have received Rs. 1,000, which I borrowed, form you. And I have to be accountable to you for the same with interest. (c) XYZ signs a note reading I am liable to A in a sum of Rs. 10,000 which is to be paid by installments for rent. 6. Mr. X promises by way of promissory note to pay Mr. Y, his partner, a sum of Rs. 10,000 in the event of latter s retirement from the partnership firm. Decide giving reasons for your answer whether the promissory note in the above case in a laid promissory note. [Hint. The promise of X is conditional, nad hence it cannot be

constituted as a valid promissory note. Further retirement of Y from the partnership firm is not a certain event] 1. A company issued a cheque to its bankers. was appended to the cheque and it ordered to make the payment provided the receipt hereof is duly signed, stamped and dated. cheque valid? LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 115 A receipt the banker form at foot Is the

[Hint: No, because its payment is conditional upon signing of the receipt. Facts of this case are similar to those of Bevin v. London & south western Bank Ltd.[1990] 1 KB 270] 7. An instrument on which the word hundi was written was in the following form sixty days after date we promise to pay a or order the sum of Rs. 1,000 only for the value received across the document was written accepted and it was signed by the maker x y. is this instrument a promissory note or a bill of exchange? [Hint: it is promissory note. An instrument does not become a bill of exchange for the reason of appearance of word hundi on its face.] 8. X draws a bill of exchange on Y and negotiates it to Z. Y is a fictitious person. Can Z treat it as a promissory note made by X? [Hint: Yes. Where in a bill, the drawee is a fictitious person, it is an ambiguous instrument and the holder has an option to treat it as a bill or note]. References Kapoor, N.D. (2003), Elements of Mercantile Law, Sultan Chand and Sons, New Delhi. http://www.indialawinfo.com/bareacts/soga.html M.C. Kucchal (2002), Business Law , Vikas Publishing House Pvt. Ltd, Delhi. P.C. Tulsian (2002), Pvt. Ltd, Delhi. Business Law , Tata Mc. Graw Hill

Aggarwal, Rohini (2003), Student s Guide to Mercantile and Commercial Laws, Taxmann s, New Delhi Notes: LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 116 11.555

LESSON 22: THE NEGOTIABLE INSTRUMENT ACT 1881 PARTIES TO A NEGOTIABLE INTRUMENTS Learning Outcomes After reading the lesson, you should be able to know: The Parties to a negotiable instrument The liability of various parties to negotiable instrument Introduction The important parties to Negotiable Instruments can be listed as follows: Parties to a promissory note: Maker, payee, indorser, indorsee Parties to a bill of exchange: Drawer, Drawee or Acceptor, drawee in case of need, acceptor for honour, , indorser, indorsee. Parties to a cheque: Drawer, drawee ( always a banker), payee, indorser, indorsee Let us learn about them Drawer, Drawee, Acceptor, Maker, Payee, etc.,: (i) The party who draws a bill of exchange or a cheque or any other instrument is called drawer. (ii) The party on whom such bill of exchange of cheque is drawn is called the drawee. In other words the person who is thereby directed to pay is called the drawee. (iii) The drawee of a bill of exchange who has signified his assent to the order of the drawer is called the acceptor. The acceptor becomes liable to the holder after he has signified his assent but not before. Now a question would naturally arise as to who can be acceptors? Under Section 33 of the Act, no person except the drawee of a bill of exchange, or all or some of several drawees or a person named there in as drawee in case of need, can bind himself by an acceptance. Under Section 34, where they are several drawees of a bill of exchange who are not partners, each of them can accept it for himself; but none of them can accept it for another without his authority. If follows from the aforesaid provisions that the following person can be acceptors: (a) Drawee, i.e., the person directed to pay. (b)

All or some of the several drawees when the bill is addressed to more drawees than one. (c) A drawee in case of need. (d) An acceptor for honour. (e) Agent of any of the persons mentioned above. (f) When no drawee has been named in a bill but a person accepts it, then he may be stopped from denying his liability as an acceptor. Acceptance is ordinarily made by the drawee by the signing of his names across the face of the bill and by delivery. Acceptance, therefore, means the signification of assent to the order of the drawer by delivery or notification thereof. Under Section 27 of the Act, every person capable of legally entering into a contract, may make, draw, accept endorse, deliver and negotiate a promissory note, bill of exchange or cheque, himself or through a duly authorized agent. The agent may sign in two ways, viz., (a) he may sign the principal s name, for it is immaterial what hand actually signs the name of the principal, when in fact there exists an authority for the agent to put it these; (b) he may sign by procreation stating on the face of the instrument that he signs as agent. It is thus essenial that the agent, while putting his signature to the instrument, must have either express or implied authority to enter, for his principal who must be sui juris, into the particular contract. The authority of an agent to make, draw, accept or endorse notes and bills depends on the general law of agency and is a question of fact. From a perusal of Section 27 and 28 it is, however, evident that a general authority to transact business and to discharge debits does not confer upon an agent the power to endorse bills of exchange so as to bind his principal; nor can an agent escape personal liability unless he indicates that he signs as an agent and does not intend to incur personal liability. What do you think constitutes a valid acceptance: The essentials of a valid acceptance are as follows: (a) Acceptance must be written: The drawee may use any appropriate word to convey his assent. It may be sufficient acceptance even if just a bare signature is put without additional words. But it should be remembered that an oral acceptance is not valid in law. . (b) Acceptance must be signed: A mere signature would be sufficient for the purpose. Alternatively, the words accepted may be written across the face of the will with a signature underneath; if it is not so signed, it would not be an acceptance. (c) Acceptance must be on the bill: That the acceptance should be on the face of the bill is not necessary; an acceptance written on the back of a bill has been held to be sufficient in law. What is essential is that it must be written on the bill; else it creates no liability as acceptor on the part of the person who signs it. Now what will happen if acceptance is signed upon a copy of the bill and the copy is not one of the part of it or if acceptance is made on a paper attached

to the bill; in either of the cases, acceptance would not be sufficient. (d) Acceptance must be completed by delivery: It would not complete and the drawee would not be bound until the drawee has either actually delivered the accepted bill to the holder or tendered notice of such acceptance to the holder of the bill or some person on his behalf. LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 117

Where a bill is drawn in sets, the acceptance should be put on one part only. Where the drawee signs his acceptance on two or more parts, he may become liable on each of them separately. Acceptance may be either general or qualified. By a general acceptance, the acceptor assents without qualification to the order of the drawer . The acceptance of bill is said to be qualified, when the drawee does not accept it according to the apparent tenor of the bill but attaches some conditions or qualification which have the effect of either reducing his (acceptor s) liability or acceptance of the liability subject to certain conditions. The holder of a bill is entitled to require an absolute and unconditional acceptance as well as to treat it as dishonoured, if it is not so accepted. However he may agree to qualified acceptance, but he does so at his own peril, since thereby he discharges all parties prior to himself, unless he has obtained their consent. According to the Explanation to Section 86 of the Act, an acceptance to be treated as qualified. (1) Where it is conditional, declaring the payment to be dependent on the happening of an event therein stated, accepted payable when in funds accepted payable on giving up bills of lading for cover per S.S. Amazon accepted payable when a cargo consigned to me is sold (2) When it undertakes the payment of part only of the sum ordered to be paid, e.g., a bill drawn for Rs. 5,000 but accepted for Rs. 4,000 only . (3) When, no place of payment being specified on the order, it undertakes to pay only at a specified place and not elsewhere or to pay at a place different from that specified in the bill and not elsewhere. (4) Where it undertakes the payment at a time other than that at which under the order it would be legally due e.g., a bill drawn payable three months after date is accepted as accepted, payable six months after date. The aforementioned list of examples is only illustrative of the different respects in which the bill may be qualified, for it is possible to qualify the acceptance of a bill in other ways as well. (5) Drawee in case of need: When in the bill or any endorsement thereon the name of any person is entered, in addition to the drawee, to be restored to in case of need, such a person is called a drawee in case of need. In case of need means in the event of the bill being dishnoured by the drawee by non-acceptance or non-payment. The holder of the bill is at liberty to choose whether be will resort to the drawee in case of need or not. (6) Payee: The party to whom or to whose order the amount of a bill of exchange, cheque or promissory note is payable is the payee. (7)

Delivery means transfer of possession from one person to another. (8) Issue of negotiable instrument means its first delivery, complete in form, to a person who takes it as a holder. A holder may become the possessor or payee of an instrument even without consideration whereas a holder in due course is one who acquires possession for consideration. You must be able to distinguish between a holder and a holder in due course: (i) A holder may become the possessor or payee of an instrument even without consideration whereas a holder in due course is one who acquires possession for consideration. (ii) A holder in due course as against a holder must become the possessor payee of the instrument before the amount thereon become payable. (iii) A holder in due course as against a holder, must have become the payee of the instrument in good faith i.e., without having sufficient cause to believe that any defect existed in the transferor s little Privileges of a Holder in Due Course : (i) A person signing and delivering to another a stamped but otherwise inchoate instrument is debarred from asserting, as against a holder in due course, that the instrument has not been filled in accordance with the authority given by him, the stamp being sufficient to cover the amount (Section 20). (ii) In case a bill of exchange is drawn payable to the drawer s order in a fictitious name and is endorsed by the same hand as the drawer s signature, it is not permissible for acceptor to allege as against the holder in due course that such name is fictitious (Section 42). (iii) In case a bill or note is negotiated to a holder in due course, the other parties to the bill or note cannot avoid liability on the ground that the delivery of the instrument was conditional or for a special purpose only (Section 42 and 47 ). (iv) The person liable in a negotiable instrument cannot set up against the holder in due course the defence that the instrument had been lost or obtained from the former by means of an offence or fraud or for an unlawful consideration (Section 58). (v) No maker of a promissory note, and no drawer of a bill or cheque and no acceptor of a bill for the honour of the drawer shall, in a suit thereon by a holder in due course be permitted to deny the validity of the instrument as originally made or drawn (Section 120). (vi) No maker of a promissory note and no acceptor of a bill payable to order shall, in a suit thereon by a holder in due course, be permitted to deny the payee s capacity, at the rate of the note or bill, to endorse the same (Section 121). In

short, a holder in due course gets a good title to the bill. You must understand the liability of various parties to negotiable instrument Liabilities of Parties (a) Liability of legal representatives (Section 29): A legal representative of a deceased person, who signs his own name on an instrument, is personally liable for the entire amount; but he may expressly limit his liability to the extent of the assets received by him as legal representative. The term legal representative includes heirs, executors and administrators. LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 118 11.555

(b) Liability of drawer (Section 30): The drawer of a bill of exchange or cheque is bound, in the case of dishonour by the drawer or acceptor thereof to compensate the however. Provided due notice of dishonour has been given to, or received by him provided in Section 93 to 98 of the Act. The drawer s liability is conditional, i.e., it arises only in the event of a dishonour by the drawee or acceptor. Once there has been dishonour and the notice of dishonour has been served on the drawer, he is bound to compensate the holder whatever be the state of the account between himself and the drawee or acceptor (Seth Ka Haridas vs. Bhan 3. Bom 182). The holder will have to be compensated, for the principal sum together with interest calculated according to the rules mentioned in Section 79 & 80 and form the expenses properly incurred by him in presenting noting and protesting the instrument. On dishonour of a bill of exchange by non-acceptance followed by a notice of dishonour to the drawer, the drawer becomes liable immediately for the full amount of the bill. The drawer cannot ask the holder to wait till the date of maturity to see whether it will be dishonoured by non-payment [Whitehead vs. Walker [1842] 9 M and W 506, If however, the holder chooses to wait till its maturity before he sues the drawer he ones not acquire a fresh cause of action by reason of its non-payment of the due date. The only pre-condition of the liability of the drawer is that notice of dishonour should have been received by him, unless the case is one covered by Section 98 of the Act and notice of dishonour is dispensed with. The drawer of a bill or cheque is a prior party to the instrument and as such as liable for every holder in due course, under Section 36 of the Act, till the instrument is discharged. Until acceptance, he is liable in the instrument as a principal debtor and thereafter as a surety (Section 37). (c) Liability of drawee of cheque (Section 31) The drawee of the cheque is always a banker. It is the duty of the banker to pay the cheque, provided he has in his hands sufficient found of the drawer and the founds are properly applicable to such payment. Trust money is not properly applicable to the payment of a cheque drawn in breach of trust. If the banker refuses payment without sufficient case being shown, he must compensate the drawer for any loss caused by such improper refusal. The bank is required to compensate, not the holder, but the drawer. The amount of compensation, that the drawee would have to pay to the drawer is to be measured by the loss or damage say loss of credit, suffered by the drawer). The principle is: The lesser the value of the cheque dishonoured, the greater the damage to the credit of the drawer . If there is any agreement between the drawer and the banker that the former shall not draw more than one cheque every week, the banker is not bound to pay the second cheque. The banker must pay the cheque, only when he is duly required to do so. If any trustee opens an account the banker is entitled to refuse to pay cheques drawn for purposes other than those of the trust.

In addition to such a general right, a banker will be justified or bound to dishonour a cheque in the following cases, viz.; (i) If a cheque is undated (ii) If it is stale, that is if it has not been presented within reasonable period , which may vary three months to a year after its issue dependent on the circumstances of the case (iii) If the instrument is inchoate or not free from reasonable doubt If the cheque is post-dated and represented for payment before its ostensible date (iv) If the customer s funds in the banker s hands are not properly applicable to the payment of cheque drawn by the former. Thus, should the funds in the banker s hand s be subject to a lien or should the banker be entitled to a set-off in respect of them, the funds cannot be said to be properly applicable to the payment of the customer s cheque, and the banker would be justified in refusing payment. (v) If the customer has credit with one branch of a bank and he draws a cheque upon another branch of the same bank in which either he has account or his account is overdrawn (vi) If the bankers receive notice of customer s insolvency or lunacy . (vii) If the customer countermands the payment of cheque the banker s duty and authority to pay on a cheque ceases [Mowji Shamji vs. The National bank of India 22 Bom. 499]. (viii)If a garnishee or other legal order from the Court attaching or otherwise dealing with the money in the hand of the banker, is served on the banker [Rogers vs. Whitely ( 1889), 22 Q.B.D. 236, affirmed 1892 A.C. 118]. (ix) If the authority of the banker to honour a cheque of his customer is undermined by the notice of the latter s death. However, any payment made prior to the receipt of the notice of death is valid [Tata vs. Hbert 9 Ves, 111; in re Beaumant. 1 Ch. 889]. (e) Liability of endorser (Section 35): The endorser of an instrument by endorshing and delivering the instrument, before maturity, undertakes in effect the responsibility that on the due presentment it shall be accepted, (if a bill), and paid and that if it is dishonoured by the drawee, acceptor or maker, he will indemnify the holder or subsequent endorser who is compelled to pay, provided due notice of dishonour is received by him. But he may insert, in the endorsement, stipulations excluding, or making his liability conditional ; In this respect, his position is better than that a drawer or an acceptor, neither of whom can exclude his liability. An acceptor, however can make his acceptance conditional. (f) Liability of parties to holder in due course (Section 36 ) : Every prior party ( ie. , maker or drawer, acceptor and all intervening endorsers to an instrument is liable to a holder in due course until the instrument is satisfied. Thus the

maker and endorsers of a note are jointly and severally liable for the payment and may be sued jointly. (g) Liability of maker, drawer and acceptor as principals (Section 37 & 38): The maker of a promissory note is liable as the principal debtor. If the payee endorses it to A, the LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 119

maker will be liable to A as the principal debtor and the payee will be liable as a surety. Similarly, the drawer of a cheque, the drawer of a bill until acceptance and the acceptor are respectively liable as sureties. As between the parties so liable as sure ties, each prior party is also liable as a principal debtor in respect of each subsequent party. For instance, A draws a bill payable to his own order on B who accepts it. Afterwards A endorses the bill to C, C to D to E. As between E ( holder and B, B is the principal debtor and A, C and D are his sureties. As between E and C, C is the principal debtor and D his surety. (h) Nature of suretyship (Section 39): The holder of an accepted bill may waive his claim against the acceptor, but at the same time , he may expressly reserve his right to change the other parties. Under Section 134 of the Contract Act, the release of the principal debtor has the effect of discharging the surety, but in the case of a bill it is not so. But if the holder does not reserve his right expressly against the other parties , they too will be discharged if he released the acceptor. (i) Discharge of endorser s liability (Section 40): Any party liable on the instrument may be discharged by the intentional cancellation of his signature by the holder. Suppose that A is the holder of bill of exchange of which B is the payee and it contains the following endorsement in blank: First Endorsement, B Second Endorsement, C Third Endorsement, D Fourth Endorsement, E A, the holder, may intentionally strike out the endorsement by D and C; in that case the liability of D and C upon the bill will come to an end. But if the endorsements of D and C are struck out without the consent of E, A will not be entitled to recover anything firm E the reason being that as between D and E, D is the principal debtor and E is surety. If D is released by the holder under section 39 of the act, E, Being surety, will be discharged. The rule may be stated thus: when the holder without the consent of the endorser impairers the endorser s remedy against a prior party, the endorser is discharged from liability to the holder. (i) Liability of acceptor of a bill drawn in a fictitious name: the acceptor is not relieved from liability by proving that the drawer is fictitious. Suppose X uses a fictitious name in drawing a bill upon Z and that the bill is made payable to the order of the drawer X then endorses the bill in the same fictitious name to Y, who presents the Bill to Z, for acceptance. If Z accepts the bill, in spite of the fact that the name of the drawer is fictitious; he cannot escape liability to pay by showing that the name of the drawer is fictitious; rather he will not be allowed to lead evidence that the name is fictitious. (ii) Liability on an instrument made drawn etc. without

consideration: an instrument made, drawn, accepted, endorse, or transferred without consideration creates no obligation of payment between the parties to the instrument. For example, if the maker delivers a promissory note to the payee as a gift, the payee cannot endorse it against the maker. Similarly, if the consideration fails, there is no obligation on the parties to pay. For example, X makes note in favor of Y in anticipation of Y s supplying a bale of cotton. Y fails to deliver the cotton cannot claim payment from X. Again, a bill that is drawn or accepted without consideration does not impose any liability either on the drawer or on the acceptor to pay the holder. Similarly, if an instrument is endorsed without consideration, nothing can be claimed from the endorser. But if any party to an instrument made, accepted, endorsed or transferred without any consideration, or for a consideration which fails, has transferred the instrument to a holder for a consideration such holder and every subsequent holder deriving title from him, may recover the amount due on such instrument from the transfer for consideration or from any party prior thereto. For example, X and Z are respectively the drawer, the payee and the acceptor of a bill of exchange drawn without consideration; y transfers the bill to P for consideration. P can claim payment from Y and also from Z and X. (a) Is also entitled to receive amount when the person through whom he claims was a holder or the lost instrument in due course. Under section 45A, the loser of the instrument has the right to apply to the drawer for a duplicate of the lost bill. If the drawer does not grant the application the loser many compel him to provide him with a duplicate. Liabilities on an accommodation note or bill (Provision to Section 59): In the case of accommodation bills or notes, a defect in the title of the transferor does not affect the title of the holder acquiring after maturity. An accommodation may be explained as follows: X draws a bill payable to himself on Y, who accepts the bill without consideration just to accommodate X, that is, to enable X to raise money by negotiating the bill in the market. Though Y accepts the bill, X is primarily liable on the bill, and he cannot demand the amount from Y, for in an accommodation bill, the acceptor is only surety for the party accommodated. However, if the accommodation bill, in the above illustration, is transferred by X to Z for good consideration after maturity and Z becomes the holder in good faith, Z will be able to realize the amount of the bill from Y, the acceptor though Z s transferor X could not, at the date of transfer, recover anything from Y. Do you know what are the rights and obligations of a person who had obtained an instrument by unlawful means of for unlawful consideration? Let us discuss it.

a) Rights and obligations of a person who had obtained an instrument by unlawful means: If an instrument is obtained from any maker, acceptor or holder by means, of an offence or fraud, the possessor is not, ordinarily, entitled to received the amount under it from such maker, acceptor, X does not acquire any title to the instrument, and the proceeds of the bill, if collected, could be recovered from X by acceptor. If X transfers it to Y who is a gratuitous LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 120 11.555

transferee, Y too would not acquire any title to the bill. Similarly if X obtains a bill from the acceptor by fraud, he cannot receive the amount of it, but if he endorses it to Y who receives the bill for value without notice of the fraud, he could collect the amount of the bill from X but from no other party. (b) Right and obligations of a person who has obtained an instrument for unlawful consideration: When an instrument has been obtained from any maker, acceptor or holder for an unlawful consideration no possessor is, ordinarily entitled to receive the amount due thereon from such maker, acceptor or holder or form any party prior to such holder. The consideration may be unlawful either because it is immoral and contrary to public policy or because it is specially interdicted or prohibited by the stature if the possessor endorses it to say, P, even P would not be entitled to claim payment, unless he is holder in due course. P would be regarded as a holder in the course, if it is endorsed to him for valuable consideration without any notice having been received by him as to the consideration being unlawful. Effect of forgery: When a signature on a negotiable instrument has forged, it becomes a nullity: the property in the instrument remains vested in the person who is the holder at the time when the forged signature was put on it. The holder of a forged instrument can neither enforce payment thereon nor give a valid discharge therefore. In the event of the holder being able to obtain payment in spite of forgery, he cannot retain the money. The true owner many sue in tort the person who had received. This principle is universal in character, by reasons whereof even a holder in due course is not exempt from. It forgery is not capable of being ratified. But what would be the effect of a forged endorsement? The answer to this question is wholly dependent upon whether the instrument had been endorsed in full or in blank. In the former case, the person claiming under the forged endorsement even if he is purchaser for value and in good faith, cannot acquire the rights of a purchaser for value and in good faith cannot acquire the rights of a holder in due course. He acquires no title to the bill or not (Mercantile Bank vs. D Silva, 30 Bom L.R. 1225). Instrument acquired after dishonour (Section 59) It has already been pointed out that the holder in due course is not affected by the defect in the title of his transferor; but it is not so in the case of a holder whole acquires the instrument after dishonour, or after maturity. The holder of instrument, who has acquired it after dishonour, has as against the other parties, only the rights thereon of his transferor. For example, receive the amount of it from the other parties because the endorsee too could not do so. Instrument acquired after maturity (Section 59): The holder of

an overdue instrument too is affected by the defect in title of his transferor. For example, Q. accepts a bill drawn by P and deposits with P certain goods as collateral security for the payment of bill. The bill, not having been paid at maturity, P sells the goods and retains the proceeds, but in breach of faith endorses the bill to R.R. having only the right of P, cannot realize the amount of the bill from Q. But if R were bona fide endorsee before maturity, he could relies the amount from Q. References Kapoor, N.D. (2003), Elements of Mercantile Law, Sultan Chand and Sons, New Delhi. http://www.indialawinfo.com/bareacts/soga.html M.C. Kucchal (2002), Business Law , Vikas Publishing House Pvt. Ltd, Delhi. P.C. Tulsian (2002), Pvt. Ltd, Delhi. Business Law , Tata Mc. Graw Hill

Aggarwal, Rohini (2003), Student s Guide to Mercantile and Commercial Laws, Taxmann s, New Delhi Notes: LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 121

LESSON 23: THE NEGOTIABLE INSTRUMENT ACT 1881 NEGOTIATION, ENDORSEMENT, ASSIGN ABILITY Learning Outcomes After reading the lesson, you should be able to know: The meaning of negotiation, endorsement and assign ability The rules of negotiation, endorsement and assign ability The provisions relating to dishonored cheque The meaning of noting and protesting The presentment of negotiable instrument The international law related to negotiable instruments Introduction Today, we will discuss about the meaning of negotiation, endorsement and assign ability and the important rules related to it. Negotiation When a negotiable instrument is transferred to many person with a view to constituting that person the holder thereof, the instrument is deemed to have been negotiated (Section 14). A negotiable instrument may be transferred in either of the two ways viz., (1) by negotiation under the Negotiable Instruments Act (Section 14, 48, 47, 46); and (ii) by assignment of the instrument as an ordinary chosen in action under the Transfer of Property Act (Chapter VII, Section 130). Transfer by negotiation, however, is the only mode of transfer recognized by the Act. Duration of negotiation (Section 60): An instrument may be negotiated until payment thereof by the maker, drawee or acceptor at or after maturity, but not after such payment. But the maker, drawee or acceptor cannot negotiate the instrument after maturity, even if it remains unpaid. An instrument may be satisfied even without payment, and such satisfaction is equivalent to payment. Under the Act, negotiable instruments may be negotiated either by delivery when these are payable to bearer or by endorsement and delivery when these are payable to order. (i) Importance of delivery (Section 46): Delivery is an incident of the utmost importance in the case of an instrument. It is essential to the issue of an instrument for issue means the delivery of the instrument, complete in form, to

a person who takes is as a holder. It is equally essential to the negotiation of an instrument, for a bearer instrument, must be transferred by delivery and in the case of any other instrument, endorsement is incomplete without delivery. In fact, a negotiable instrument is nothing but a contract, which is incomplete and revocable until the delivery of the instrument is made. For the payee cannot claim payment; Section 46 of the Act provides as follows: The making, acceptance or endorsement of promissory note, bill of exchange or cheque is completed by delivery, actual or constructive (ii) How to deliver: As between parties standing in immediate relations, delivery to be effectual, must be made by the party making, accepting or endorsing the instrument, or by a person authorized by him in this behalf. Thus a promissory note must be handed over to the payee by the maker himself or by some one authorized by the maker. Similarly, a bill of exchange must be delivered to the transferee by the maker, acceptor or endorser, as a case may be. (iii) Conditional and unconditional delivery; An instrument may be delivered conditionally or only for a special purpose, and not for the purpose of transferring absolutely the property in the instrument. A bill delivered conditionally is called an escrow . Although a conditional delivery is valid, the condition attaches exclusively to the delivery and not to the making or drawing of an instrument. A bill must be drawn and a note made unconditionally When an instrument is delivered conditional or for special purpose, the property in the instrument does not pass on to the transferee until the condition is fulfilled and the transferee holds such instrument in law as trustee or agent of the transferor. If, however, he transfers an instrument delivered conditionally to X for value to Y without notice of the condition, Y can claim payment even if the condition is not complied with. The reason is obvious Y is bonafide transferee for value without notice of the condition and, as such, he should not suffer for suppression of fact by X. (iv) Negotiation by delivery (Section 47): An instrument payable to bearer is negotiable by delivery thereof. But when such instrument is delivered on condition that it is not to take effect except in certain event, it is not negotiable (except in the hands of a holder for value without notice of the condition ) unless such event happens. The distinction between delivery and negotiation should be noticed. An instrument is said to be negotiated, when it is transferred from one person to another in such a manner as to constitute the transferee the holder thereof. (v) Negotiation by endorsement: In order to negotiate, that is to transfer title to an instrument payable to order, it is at first to be endorsed and then delivered by the holder thereof. (vi) Different types of endorsements (a) Blank ( or general): No endorsee is specified in an endorsement in blank it

contains only the bare signature of the endorser. A bill so endorsed becomes payable to bearer. LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 122 11.555

Specimen Kishan Lal (b) Special ( or in full) : In such an endorsement, in addition to the signature of the endorser the person to whom or to whose order the instrument is payable is specified. Specimen Pay to Hari Ram. Kishan Lal (c) Restrictive: Such an endorsement has the effect of restricting further negotiation and transfer. Specimen (1) Pay to A only ] M.Lal P.Kumar (d) Conditional : Such an endorsement combines an order to pay with condition. Specimen: Pay to A on safe receipt of goods. V. Chopra (e) Sanse Recourse: By adding these words after the endorsement, the endorser declines to accept and liability on the instrument of any subsequent party. (f) Sans Frais: These words when added at the end of the endorsement, indicate that no expenses should be incurred on account of the bill. (g) Facultative: When it is desired to waive certain right, the appropriate words are added to indicate the fact, e.g., notice of dishonour dispensed with . Every endorser of a negotiable instrument is liable, under Section 35, to every subsequent party to it provided due notice of dishonour is given to or received by him e.g., if a bill is drawn by A upon B and is payable to C or order, and C endorses the bill to D, who in turn endorses it to E, then, in case B, dishonours the bill, the holder, i.e., E has the right of action against all the parties i.e., D.C. and A. Similarly, D has right against C and A. To this rule that every prior party of a bill is liable to every subsequent party, there are a few exceptions which are enumerated below: (1) Any endorser can exclude personal liability by endorsing sans recourse i.e. without recourse. (2) If the holder of a negotiable instrument, without the consent of the endorser destroys the instrument or in any way prejudices the holder (Section 40 ). (3) The rule is not applicable also in the case of circuitry of action e.g., a bill is drawn by A upon B payable to C or order, who endorses it to D who endorses it to E, who

endorses it to F, who endorses it to G and who again. Endorses it back to D. In that case, it will be observed that a circle is complete between the first and second holdings of D; and the parties in between ( i.e., E,F and G) are absolved from liability to D because D is, as against them, both a subsequent party and a prior party. If, however, D s first endorsement was sans recourse , the intermediate parties, i.e., E,F and G would not be absolved from liability to him. (vii) Conversion of endorsement in blank into endorsement in full (Section 49): The holder of a negotiable instrument endorsed in blank may, without signing his own name by writing above the endorsers, signature a direction to pay to any other person as endorsee, covert the endorsement in blank into an endorsement in full; and the holder does not thereby insure the responsibility of an endorser . (viii)Effect of endorsement (Section 50): (a) The endorsement of an instrument, followed by delivery, transfers to the endorsee the property in the instrument with right of further negotiation. That is, the endorsee may endorse it to some other person. (b) The endorsement may also contain express terms making it restrictive. The effect of restrictive endorsement is (1) to prohibit or exclude the right of further negotiation, or (2) to constitute the endorsee an agent to endorse the instrument; or (3) to entitle the endorsee to receive the contents of the instrument for the endorser or for some other specified person. (c) A restrictive endorsement gives the endorsee: (1) the right to receive payment of the instrument; (2) the same rights of action against any other party to the instrument as the endorser had; (3) power, only in accordance with the express terms of his authority, to transfer the instruments and his right thereon to another. (ix) Who may negotiate (Section 51): The following persons may negotiate an instrument: . (1) sole maker, (2) drawer, (3) payee, (4) endorsee. A maker or drawer only when the instrument is drawn to his own order. When the endorsee is the holder under a restrictive endorsement, he must exercise his power of negotiability is excluded by the respective endorsement, the endorsee, as holder, cannot negotiate. The explanation to Section 51 provides that though a maker or a drawer may endorse or negotiate an instrument, he cannot do, so unless the instrument fall into his possession in a lawful manner or unless he is the holder thereof. Further, insofar as t he payee or an endorsee is concerned, he must before he can negotiate the instrument, be a holder thereof. Consequently, a person who steals or endorses or finds a lost instrument, cannot endorse or negotiate, as he is not a holder within the meanings of the Act. (x) Exclusion of liability of endorser (Section 52): The endorser of an instrument may, by express words in the

endorsement, exclude his own liability on the instrument. Suppose that the endorser signs his name, adding the words without recourse , the incurs no liability. The holder cannot claim compensation from him in case of dishonoured by the drawee, acceptor or maker. But for the words without recourse , he would have been liable. The endorser, instead of excluding his liability altogether, may restrict his liability by endorsement. Thus, he may either (1) make his liability depend upon the happening of a specified uncertain event, (2) make the right of the endorsee to receive the amount mentioned in the instrument depend upon a specified uncertain event. LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 123

But when such endorser afterwards becomes the holder, all intermediate endorsers are liable to him. For example A the payee and holder of an instrument endorses it to B with the words without recourse and B endorses it to C who in his turn endorses it to A, B and C are liable to A as intermediate endorsers. (xi) Holder deriving title from holder in due course (Section 53): A holder of an instrument deriving title from a holder in due course has rights thereon of the holder in due course. Therefore, a holder deriving title from a holder in due course can claim the amount of a bill drawn and accepted without consideration. It has been held that title which has been cleansed of defects by passing through the hands of a holder in due course remains immune from those defects inspite of the fact that a subsequent holder may have noticed that the defects once existed provided he was not a party to them. For example, X obtains Y s acceptance to a bill by fraud. X endorses it to Z who takes it as a holder in due course. Z endorses the bill to F who knows of the fraud. Since F derives the title from Z who is a holder in due course and F is not party to fraud, F gets a good title to the bill. (xii) Effect of endorsement in full after a blank one (Section 54 and 55): An instrument endorsed in blank is payable to the bearer, although originally it was payable to order. If an instrument after having been endorsed in blank is endorsed in full, the endorsee in full does not incur the liability of an endorser, so the amount of it cannot be claimed from him. In other words if an endorsement in blank is followed by an endorsement in full, the instrument still remains payable to bearer and negotiable by delivery as against all parties prior to the endorse in full, though the endorser in full is only liable to a holder who made title directly through his endorsement and the persons deriving title through such holder.For example, X is the payee holder of a bill of exchange X endorsee it in blasnk and delivers it to Y who endorses it in full to Z or order Z, without endorsement, transfers the bill to F. In view of Section 55, F as the bearer of the instrument can receive payment or sue the drawer, acceptor or X but not Y or Z who is a subsequent but not a prior party. But there is an exception to this rule. The person to whom it has been endorsed in full, or any one who derives title through him, can claim the amount from the endorser in full. (xiii)Effect of endorsement for part of sum due (Section 56): An endorsement purposing to transfer only a part of the amount of instrument is invalid, and the endorsee, therefore cannot negotiate it. But when the amount due has been paid in part, a note to that effect may be endorsed on instrument and the instrument may then be negotiated from the balance. There is an important difference between negotiation and assignment. Let us first try to understand the difference between it.

Negotiability VS. Assignability (i) The essential distinction between transfer by negotiation and transfer by assignment is that in the latter case, the assignee does not acquire the right of a holder in due course but has only the right, title and interest of his assignor; on the other hand in the former case he acquires all the rights of a holder in due course i.e., rights from equities (Mohammad Khunerali vs. Ranga Rao, 24 M. 654). (ii) In the case of negotiable instrument, notice of transfer is not necessary while in the case of an assignment of chose in action, notice of assignment must be served by the assignee on his debtor. (iii) Again, in the case of transfer of negotiable instrument, consideration is presumed but in the case of transfer by assignment, consideration must be proved as in the case in any other contract. (iv) Negotiation requires either delivery only in the case of bearer instrument or endorsement and delivery only in the case of order instrument . But of in the case an assignment, Section 130 of the Transfer of Property Act requires a document be reduced into writing and signed by the transferor. (v) Endorsements do not require payment of stamp duty whereas negotiation requires payment of stamp duty. Negotiation Back An instrument is said to have been negotiated back to him and he is said to have taken up or taken back the negotiable instrument when a person who has been a party to the negotiable instrument takes it again. For example, suppose that that the endorsements on a negotiable instrument are as under. Pabxya Here A is person who is a prior party to the instrument. He negotiated it to B, B to X, X to Y and Y again to this very A. On account of this last endorsement, A should have right to claim money from X, Y and B. The rule is that every prior party is liable to every subsequent party. Thus, conversely, every subsequent party may sue every prior party. As a result of the prior party (i.e. a) having taken back the instrument subsequent, he (i.e., a) becomes a subsequent party. Therefore A, by reason of the last endorsement mentioned above, come to have the rights to claim money Y, X or B.A is permitted by law to use Y, X or B then Y, X or B in his turn can sue A because of A s prior endorsement. This will lead to a circuitry of action. To prevent this, Section 52 of the Negotiable Instruments Act enacts an exception to the general rule to provide that the holder in due course of a negotiable instrument may sue all prior parties thereto. Thus A, in the above case cannot sue Y, X or B. But A can sue P since the latter is prior to A s original endorsement. If however A, in original endorsement, had signed sans recourse there could be no circuitry of action and A could sue Y, X or B. (b) Capacity to incur liability under instrument Section 26: Every person competent to contract has capacity to

incur liability by making drawing accepting, endorsing , delivering and negotiating an instrument. LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 124 11.555

A party having such capacity may himself put his signature or authorize some other person to do so. A minor cannot make himself liable as drawer, acceptor or endorser, but where the instrument is drawn or endorsed by him, the holder can receive payment from any other party thereto. Authority to sign (Section 27 & 28): Every person, capable of incurring liability, may bind himself or be bound by a duly authorized agent acting in the name. A general authority to transact business given to an agent does not empower him to accept or endorse bill of exchange so as to bind the principal. An agent may have authority to draw bills of exchange, but endorse them. An authority to draw does not, necessarily, imply an authority to endorse. An agent who signs his name on an instrument without indicating that he signs as agent, is personally liable, but this rule does not apply where any one induces him to sign upon the belief that principal only would be held liable. The mere signature of an agent in his own name, with the word agent added, does not exempt him from personal liability. You also need to understand the following in regard to the dishonoured cheque. Dishonoured cheque to be treated as an offence: From 1st April 1989, a person issuing a Cheque will be committing an offence if the cheque is dishonoured for insufficiency of funds. The offence will be punishable with imprisonment for a term up to two years [as prescribed by the Negotiable Instruments. (Amendment and Miscellaneous and Provisions Act, 2002] or with a fine twice the amount of the cheque or both. The cheque in question should be issued in discharge of a liability and therefore a cheque given as gift will not fall in this category. The cheque should be presented within six months or its specific validity period whichever is earlier. The payee or holder in due course should give notice demanding payment within 15 days of the receipt of the notice and only if he fails to do so, prosecution can take place. The complaint can be made only by the payee/holder in due course, within one month. A banker who in good faith but without negligence receives payment for a customer of a cheque crossed generally or specially to himself, does not, in the event of the title of the customer to the cheque providing to be defective, incur any liability to the true owner of the cheque for having received payment therefore (Section 131). It is special protection given to the collecting banker which is available to him only if he acts in good faith but without negligence. Given below are a few illustrations of circumstances in which a banker has been deemed to have complied with these conditions: Discharge from Liability on Notes, Bills and Cheque Distinction between discharge of a party and discharge of instrument: An instrument is said to be discharged only when the party who is ultimately liable thereon is discharged from liability. Therefore, discharge of a party to an instrument does

not discharge the instrument itself. Consequently, the holder in due course may proceed against the other parties liable for the instrument. For example, the endorser of a bill may be discharged from his liability, but even then acceptor may be proceeded against. On the other hand, when a bill has been discharged by payment, all rights there under are extinguished, even a holder in due course cannot claim any amount under the bill. (b) Different modes of discharge from liability: Parties to negotiable instrument are discharged from liabilities when the right of action on the instrument is extinguished. The right of action on a negotiable instrument is extinguished by the following method: (i) By payment in due course: The maker, acceptor or endorser respectively of a negotiable ins trument is discharged from liability thereon to all parties thereto if the instrument is payable to bearer, or has been endorsed in blank and such maker, acceptor or endorser makes payment in due course of the amount due thereon i.e., when the payment has been made to the holder of the instrument at or after maturity in good faith and without notice of any defect in the title to the instrument (Section 82). (ii) By cancellations of acceptor s endorser s name: The maker, acceptor and endorser respectively of a negotiable instrument is discharged from liability thereon to a holder there of who has cancelled such acceptor s or endorser s name with the intent to discharge him and to all parties claiming under such holder. In other words, if the holder ( Payee) of a bill cancels the signature of acceptor ( drawee ) with an intention to discharge him both maker (drawer) and the acceptor of such negotiable instrument are discharged from the liability to the holder and to all parties claiming under such a holder [Clause (a) Section 82.} (iii) By release: The maker, acceptor or endorser respectively of a negotiable instrument is discharged from liability thereon to a holder thereof who has renounced his right in respect of the instrument. The waiver of the right may be express or implied [Clause (b) of Section 82.] (iv) By default of the holder: If the holder of a bill of exchange allows the drawee more than forty-eight hours, exclusive of public holiday, to decide whether he will accept the bill, all prior parties not consenting to such an allowance are discharged from liability to such holder. It is because if the drawee fails to signify his acceptance within forty-eight hours, the holder must treat the instrument as dishonoured and he must at once give notice to the drawer and to all prior, parties, and must not allow time unless they give their consent that more time should be allowed (Section 83). (v) Dissenting parties discharged by qualified or a limited acceptance: If the holder of a bill who is entitled to an absolute and unqualified acceptance elects to take a qualified acceptance, he does so at his own peril and discharges all parties prior to himself unless he obtains their consent to such an acceptance. Thus, the previous parties are

discharged in the following cases namely (i) when acceptance is qualified, (ii) when acceptance is for a part of the sum, (iii) when acceptance substitutes a different place or time of payment, (iv) when acceptance is not signed by the drawees not being partners. LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 125

They are discharged, if such acceptance is acquiesced in by the holder without obtaining their previous consent. They are discharged as against the holder and those claiming under him. But, if they subsequently approve of such acceptance by the holder , they will not be discharged. An acceptance is qualified in the following cases, namely: (a) where it is conditional, declaring the payment to be dependent on the happening of an event stated therein, (b) when it undertakes the payment of part only of the sum ordered to be paid,(c) where no place of payment being specified on the order, it undertakes the payment at a specified place, and not otherwise or elsewhere or where a place of payment being specified in the order it undertakes the payment at some other place and otherwise or elsewhere, (d) where it undertakes the payment at a time other than that at which under the order it would be legally due (vi) By material alteration of the instrument without assent of all parties liable: Any material alteration of a negotiable instrument renders the same void as against any one who is party there to at the time of making such alteration and does not consent there to, unless it was made in order to carry out the common intention of the original parties and any such alteration, if made by an endorsee, discharges his endorser from all liability to him in respect of the consideration there of (section87). The alteration must be so material that it alters the character of the instrument to a great extent, alteration of the date, alteration of the amount payable, or alteration of the time and the alteration on the place of payment of the instrument are regarded as material alterations of the instrument, in hongkong and Shangai Bank vs. Lee shi (1928)A.C 181, it has been held that an accidental alteration will not, however render the instrument void. It is necessary to show that the alteration has been improperly and intentionally. (vii) By payment, alteration not being apparent: if, however a person pays an altered note, bill or cheque, provided the alteration is not apparent and payment is made in due course by person or a banker who is liable to pay the amount he is protected (section 89. For example, if A draws a cheque for Rs. 8 in favour of B who fraudulently converts eight into eighty, and the alteration is not apparent, the banker, paying Rs. 80 to B will not be liable to make good to the drawer the amount paid in excess. (viii) By acceptor becoming holder of a bill at or after maturity in his own right: If a bill of exchange which has been negotiated is at or after maturity held by the acceptor in his own right all rights to action thereon are extinguished (section90) (ix) By default in presenting the cheque within a reasonable time: In the case of a cheque if it is not presented for payment within a reasonable time of its issue and the drawer or person on whose account, it is drawn had the right at the time when presentment ought to have been made as between himself and the banker, to have the cheque paid and suffers actual damage through the delay he is discharged to the extent of such damage, that is to say,

to the extent to which such drawer or person is creditor of the banker to a larger amount that he would have been if such cheque had been paid(section84) for example, if X draws 10 cheques of Rs. 100 each, but when the cheque ought to be presented, has only Rs. 600 at the bank and subsequently the bank fails before the cheques are presented, X will be released from liability to the extent of Rs. 600 but will remain liable for the balance. If he had the full amount of Rs. 1,000 at the bank, he will be discharged in full. Note In the above case liability of the drawer will be transferred to the banker. For determining what is reasonable time for presentation, the following matters would be considered: (i) nature of instrument: (ii) usage of the trade and bankers and (iii) facts of the case. (x) By operation of Law: it should be noted that a negotiable instrument is also discharged by operation of law, which may occur in any of the following circumstances. (a) By lapse of time i.e. when the claim under the instrument become barred by the limitation act on the expiry of the period prescribed for the recovery of the amount due on the instrument; (b) By merger, i.e. when the debt, under the instrument is merged in the judgment debt obtained against the acceptor maker or endorse; under the law of insolvency, i.e. when the acceptor, maker, or endorser, who has been adjudicated an insolvent, is discharged by an order of the court made in the insolvency proceedings. (xi) By payment by the drawee of a cheque payable to order or to bearer: where a cheque payable to order purports to be endorsed by or on behalf of the payee, the drawee who always is a banker is discharged by payment in due course. A cheque is said to have been paid in due course, when it has been paid in good faith, after taking proper care to ascertain the genuineness of the endorsement. Payment in due course discharge the bank from liability even if the payment is made to a wrong person. Even if the endorsement of the payee is forged the banker is discharged from the payment in good faith and with negligence. But if the drawer s signature is forged, the banker can, under no circumstance, claim discharge on payment, for the banker is presumed to know the signature of his customer (i.e. the drawer) The bank is discharged by payment in due course to the bearer not with standing any endorsement thereon, whether in full or in part and whether or not such endorsement purports to restrict or exclude further negotiation. The endorsee under an endorsement in full cannot recover the amount from the banker who has paid it to the bearer (section 85) The rule of the discharge applicable to a cheque payable to order also applies, to a draft drawn by one of the bank upon another payable to order or demand (section 85 A) 4.10 Notice of Dishonour (a) Dishonour by non - acceptance (section 91): A bill may be dishonored either by non acceptance or by non payment. A dishonour by non - acceptance may take place in any one

of the following circumstances: (i) when the drawee either does not accept the bill within forty eight hours of LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 126 11.555

presentment or refuse to accept it; (ii) when one of several drawees, not being partners, makes default in acceptance; (iii) when the drawee gives a qualified acceptance; (iv) when presented for acceptance is excused and the bill remains unaccepted; and (v) when the drawee is incompetent to contract. Note that presentment is not necessary where the drawee after diligent, search cannot be discovered, or where the drawee is incompetent to contract or here the drawee is a fictitious person. When a bill has been dishonoured by non- acceptance, it gives the holder an immediate right to have recourse against the drawer or the endorser. Since a dishonour by non -acceptance constitutes a material ground entitling the holder to take action against the drawer, he need not wait till the maturity of the bill for it to be dishonored on presentment for payment (Ram Ravij Jambekar vs. prulhaddas 20 Bom. 133). (b) Dishonour by non-payment (section 92) : An instrument is dishonored by non-payment when the party primarily liable e.g., the acceptor of a bill, the maker of a not or the drawee of a cheque, make default in payment. An instrument is also dishonored for non-payment when presentment for payment excused and the instrument, when overdue, remains unpaid, under section 76 of the Act. (c) Distinction between dishounour by non-acceptance and by non-payment. If a bill is dishonored by nonacceptance, there is no right of action against the drawee as he is not a party to the bill. The holder of the bill can proceed only against the drawer or endorser, if any, on Dishonour by non-payment the drawee can be sued. (d) Notice of Dishonour (sections 93 and 94) : (i) by whom notice to be given: when an instrument is dishonored either by non-acceptance or by nonpayment, the holder thereof or some party thereto who remains liable thereon must give notice of dishounour. (ii) To whom notice is to be given : Notice must be given to such parties whom the holder proposes to charge with liability severally or jointly, e.g., the drawer and the endorsers. Notices may be given either to the party himself or to his agent, or to his legal representative on his death, or to the official assignee on his insolvency. It is not necessary to give notice to the maker of a note or the drawee or acceptor of a bill or cheque. (iii) Effect of non-service of notice : if a notice is not sent to any prior party who is entitled to such notice within a reasonable time, he is discharged form liability. It is a condition precedent to the continuation of the liability of the drawer under section 30 and of the endorsee under section 35 of the Act that they should be notified of the dishonour. (v) Mode of service of notice. The notice, if written, may be

given by post at the place of business or at the residence of party for whom it is intended, and even if it is miscarried the notice is not rendered invalid by such miscarriage. When the holder of the instrument and the party to whom notice of dishonour must be posted by the next post if the parties carry on business or live in the same place, it is sufficient if the notice is so dispatched that it reaches its destination on the day next after the day of dishonour. (e) Transmission of notice of dishonour by party receiving it (section 95) : any party receiving notice of dishounour should communicate the same within a reasonable time to any prior party whom he intends to hold liable in respect of the instrument, but if the prior party receives otherwise ,no such communication is necessary. To illustrate the necessity of transmission of notices, let us consider the following case. A drawn a bill in favour of B on X. B endorses it to C; C endorses it to D; D endorses it to E; E endorses it to F. Suppose X refuses to accept the bill and F, the holder, gives notice of dishonour only to E and A, but E does not transmit the notice to D, C and B, in that case F shall have the right of action against E or A, E also has right of action against D, C and B,E must transmit the notice to them as well. (f) When notice of dishonour is unnecessary (section 98): in a suit against the drawer or endorser on an instrument being dishonored, notice of dishonour is a material part of the cause of action. However, in the following cases the notice of dishonour is not necessary. (i) when the necessity of the notice has been dispended with by an express waiver by the party entitled to it. For example, when the drawer of a bill informs the holder that the bill will be dishonored on presentment, the notice of dishonour is said to have been dispensed with [ Bertt vs. Levett (18]1) 13 East 213]. (ii) when the drawer has countermanded payment, he, having put an impediment in the way of the holder obtaining payment is not entitled to the notice of dishonour. (iii) When the party charged would not suffer damage for want of a notice. In such a case neither presentment nor notice of dishonour is necessary is necessary, provided it is shown that at the time of drawing the instrument there were no funds belonging to the drawer in the hands of the drawee [ subrao vs. sitaram 2 Bom L. R. 891] (iv) When the party entitled to notice after due search, cannot be found. (v) where there has been accidental omission to give notice, provided the omission has been caused by an unavoidable circumstances, e.g., death or dangerous malady of the holder or his agent, or other inevitable accident, or

overwhelming catastrophe not attributable to the default, misconduct or negligence of the party tendering notice. (vi) when one of the drawers is acceptor. Form this, it is also possible to deduce a further rule that notice of dishonour LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 127

is not necessary for charging the drawer where the drawer and drawee of a bill are partners does not give rise to the presumption that they are partners in respect of the drawing of the bill, or that the bill was drawn by one of them on behalf of both. [jambu Ramaswamy vs. Sundraraja chetti 29 mad 239]. Such a case does not fall under purview of the rule mentioned above, so as to dispense with notice, (vii) in the case of promissory note which is not negotiable, (viii) when the party entitled to notice, knowing the facts, promises unconditionally to pay the amount due on the instrument. 4.11 Noting and Protesting (a) Noting- noting is a convenient mode of authenticating the fact that a bill or note has been dishonored. When a note or a bill has been dishonored by non- acceptance or nonpayment, the holder causes such dishounour to be noted by a Notary public. Noting is a minute recorded by a notary public on the dishonored instrument. When an instrument, say a bill of exchange, is to be noted for dishonour, it is taken to Notary public who presents it once again for acceptance or payment, as the case may be; and if the drawee or acceptor still refuses to accept or pay the bill, it is noted, i.e., a minute is prepared containing the date of dishonour, reason for such dishonour, etc.; which is attached to the instrument; and the facts are noted on the instrument. (b) Protest - When an instrument is dishonored, the holder may cause the fact not on by to be noted, but also to be certified by a Notary Public that the bill has been dishonolired. Such a certificate is referred to as a protest. If the creed it or an acceptor of a bill is shaken by insolvency or otherwise before the date of maturity of the bill, the holder may cause such a fact also to be noted and certified, Such a certificate is called a protest for better security. The contents of a protest are given in Section, 101 of the Act. Neither noting nor protesting is compulsory in the case of inland bi is. But under Section 104 every foreign bill of exchange must be protested for dishonour when such a pretest is required by the law of the country where the bill was drawn. The advantage of both noting and protesting is that this constitutes prim facie good evidence in the Court of the fact that instrument has been dishonoured; It is necessary to note that under Section 119, the Court is bound to recognise a protest. But it may of may not recognise noting. To make good this lacuna, Section 104 A has been introduced. It c1ai-ifies the position that any bill or document which has been noted can be protested any time thereafter for taking legal action against the parties. Thus, where a document has been noted within the time required by law, legal proceeding cannot be vitiated on account of protest not having been made.

(c) Notary Public: A Notary public is appointed by the Central State Government . His functions are to attest deeds, contracts and other instruments that are to be used abroad and to give a certificate of due execution of such documents. He enjoys the confidence of the business world, and any certificate given by him is presumed to be true by a court of law. The profession of notaries is regulated by the Notaries Act, 1952. (d) Notice of Protest: When a promissory note or a bill of exchange is required by law to be protested, notice of such protest in lieu of notice of dishonour must be given in the same manner as notice of dishonour (Section 102). 4.12 Acceptance and Payment for Honour and reference in Case of Need Acceptance for honour If a bill has been dishonoured by non-acceptance and has been duly noted or protested for such dishonour, any person, before it is overdue, who is not a partly already liable under the bill may, with the consent of the holder of the bill, by writing on the bill, accept the bill for the honour of any of the parties liable on it. The object of such an acceptance for honour is to protect the credit of the party liable on the bill, and to prevent legal proceeding being taken against him. Conditions for valid acceptance for honour: These are: (i) that the bill has been noted or protested for non-acceptance or better security: (ii) that such an acceptance has been made with the consent of the holder, (iii) that the acceptor for honour is not already liable on the bill, (iv) that the acceptance is for the honour of any party already liable on the bill; and (v) that the acceptance is by writing on the bill. Rights and Liabilities of such acceptor: Section 111 of the Act states that an acceptor for honour binds h himself all parties subsequent to the party for whose honour he accepts to pay the amount of the bill if the drawee does not. But an acceptor for honour is not liable to the holder of the bill unless it is presented or (in case the address given by such acceptor on the bill is a place other then the place where the bill is made payable) forwarded for presentment not later than the day next after the day of its maturity. Moreover, an acceptor for honour cannot be charged unless the bill has been presented at its maturity to the drawee for payment and has been dishonoured by him and noted or protested for such dishonour (Section 112), Section 111 further provides that the party for whose honour the acceptor accepts to pay and all prior parties become liable in their respective capacities to compensate the acceptor for honour for all loss or damage sustained by him, in consequence of sad acceptance: Payment for honour: It is a payment which is made by any person for the honour of any party liable on the bill after it has been protested for non-payment. The condition essential for

such payment are, (i) that the bill must have been noted or, protested for non-payment (ii) that the person paying or his agent declares before Notary Public the pal}:y for whose honour he pays; (iii) that such declaration has been recorded by such Notary Public; (iv) that the payment must be made for the honour of an y party liable to pay the bill and ( v) that the payment may be made by any person whether he is already liable on the bill or not. The effects of such a payment are : All parties subseq1,Jent to the party for whose honour it is paid are is charged. ( 2) The LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 128 11.555

payer for honour acquires for the rights of a holder whom he pays and becomes entitled to all the remedies of the holder on the instrument, (3) The payer can recover all sums paid by him together with the interest and expenses properly incurred in making such payment (Section 114). According to Section 115 where a drawee in case of need is motioned in a bill or nay endorsement thereon, it is obligatory for the holder to present the instrument to him i.e. , the drawee in case of need, and it will not be considered to have been dishonoured, unless it has been dishonoured by such drawee. The failure to present the bill to the drawee in case of need absolves the drawer from liability (Bahadur Chand v. Gulab Rai AIR Lah 557). Again according to the Bombay High Court if a bill of exchange has been duly accepted by dishonoured when presented to drawee in the first instance for payment, it cannot be validly presented for payment to the drawee in case of need if it was not first presented to him for acceptance [Dore vs. Kanchiwalla & co. 40 Bom LR 473]. 4.13 Presentment Of Instruments (a) Presentment of bills for acceptance (Section 61) - A bill of exchange is not necessarily required to be presented for acceptance, before its being presented for payment. For example, a bill payable on demand, payable certain number of days after date, payable on a certain day, etc., need not be presented for acceptance. Although it is a matter of common practice to obtain acceptance of the bill by the drawee at the earliest opportunity after it is drawn, such an acceptance is not absolutely essential to the bill being a negotiable instrument. For example, a person to whom a bill has been negotiated before acceptance may sue thereon as a holder in due course. [National Park Bank of New York vs. Berggren & (1914) 110 L.T. 907]. It should, however, be noted that in two cases presented for acceptance would be necessary, namely: (i) Where a bill is payable after sight presentment for acceptance is with a view to fixing the maturity of the instrument: (ii) Where a bill expressly stipulates that it shall be presented for acceptance. But when a bill is not payable after sight, presentment is unnecessary to render any prior party liable. It is, however, prudent for the holder of such bill to present it for acceptance, for if it is accepted, he obtains the security of the acceptor s signature and if it is not accepted he is relieved of the necessary presentment for payment. How, when and by whom bill is to be presented: A bill payable after sight is to be presented to the drawee by a person entitled to demand acceptance, and it is generally the holder of the bill who is entitled to demand acceptance. The bill must be presented by the holder within a reasonable time after it is drawn, and in business hours on a business day either at the

residence or at the place of business of the drawee. But if the bill itself indicates a place of presentment, it must be presented at the place. If the drawee cannot, after reasonable search, be found, the bill is to be regarded as dishonoured for non acceptance. When authorized by agreement of usage, a present ment through the post office by a registered letter is sufficient. Drawee s time for deliberation: Under Section 63, the drawee is entitled to a respite of forty eight hours ( exclusive of public holidays ) top consider whether he should accept a bill presented to him for acceptance. When presentment is excused: Presentment for acceptance is excused if the drawee is a fictitious person (Section 91) or if he cannot, after reasonable search, be found (Section 61). Against even if presentment is made irregularly, such an irregularity is excused if the bill has been dishonoured by non-acceptance on some other ground. (b) Presentment of promissory note for sight (Section 64): When and why a note is to be presented for sight? Like a bill of exchange payable after sight, a promissory note payable at a certain period after sight must be presented to the maker for sight. The presentment is to be made by a person entitled to demand payment who is usually the holder. Against, the note must be presented within a reasonable time after it is made and in business hours on a business day. In default of such presentment, the maker is not liable to pay anything to the holder. The necessity for presentment, in the case of such a note, viz., a note payable at a certain period after sight, is obvious; without such presentment the maturity of the note cannot be fixed. (c) Presentment of instrument for payment: Presentment of a bill of exchange means it exhibition to drawee or acceptor by holder with a request for payment in Accordance With Its Apparent Tenor (section 64). Presentment may be made through post by means of a registered letter if such a mode of presentment is authorized by agreement or usage. If registered letter if such a mode of presentment is authorized by agreement or usage. If the bill is paid, the holder would have to hand it over to the payer. In default of the bill is paid, the holder would have to hand it over to the payer. In default of presentment, the drawer and the endorser would be discharged form their liability to the holder. (i) By whom and to whom presentment is to be made: Presentment is to be made either by the holder or by somebody on behalf of the holder. Promissory notes are to be presented to the maker; bills of exchange are to be presented to the acceptor; and cheque are to be presented to the drawee. (ii) Time of presentment for payment: (a) Presentment should be made during the usual business hours (Section 65( (b) If the bill is made payable a specified period after date or sight, it must be presented for payment at its maturity

(Section 66) (C). If the bill is payable on demand, it must be presented for payment within a reasonable time after its receipt by the holder (Section 74). (iii) Place of presentment for payment: (a) If the bill is drawn or accepted payable at a specified place and not elsewhere, it must be presented for payment at such a place in order to charge any party to the bill (Section 68) (b). If, however the bill is accepted payable at a special place (the word and not LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 129

elsewhere being omitted) then to charge the drawer ( but not he acceptor), presentment should be made at the place specified (Section 69) (C) If no place of payment is specified then the bill should be presented for payment at the place of business ( if any ) or the residence of the drawee or acceptor or (if he has no fixed place of business or residence) to him in person wherever he can be found (Section 70 and 71). (iv) Presentment of promissory note payable by installment (Section 67) A promissory note payable by instalments must be presented for payment on the third day after the date fixed for payment of each instalment. (v) Presentment of cheque to drawer (Section 72): It is the duty of the holder of cheque to present it at the bank upon which it is drawn. If payment is refused by the bank, the holder may sue the drawer. If the holder sues the drawer without first presenting the cheque at the bank, the suit will be dismissed. If the holder does not present the cheque at the bank in time, the position of the bank may become unsound and it may not be possible for the banker to honour the cheque; in this case, the drawer is not liable if the bank refuses payment on presentment. The rule is that the cheque must be presented before the relation between the drawer and his banker has been altered to the prejudice of the drawer. (vi) Distinction between drawer of bills and drawer of cheque: If a bill is not presented in time, the drawer is absolutely discharged; but the drawer of a cheque, in case of delay in presentment, is discharged only if he has suffered some loss or injury and that too, to the extent of such loss only. Therefore, if the bank remains solvent, the drawer will remain bound after presentment and refusal, although solvent, the drawer will remain bound after presentment and refusal, although months ( short of the period of limitation ) have elapsed since the drawing. (vii) Presentment of cheque to charge any other person (Section 73) : It may be recalled that in order to charge the drawer, the cheque must be presented before the relation between the drawer and his banker has been altered to the prejudice of the drawer, but in order to charge any person other than the drawer the cheque must be presented within a reasonable time. For example, A drawes a cheque in favour of B, who endorses it to C. C must present it at the bank within a reasonable time, otherwise B will be discharged from liability. (viii)Presentment of instrument to agents, etc. (Section 75): Presentment for acceptance or payment may be made not only to the drawer maker or acceptor acceptance or payment may be made not only to the drawer maker or acceptor but also to his duly authorized agent or where he is dead to his legal representative, or where he has been declared an insolvent, to his assignee. When presentment is unnecessary (Section 76): (a) No presentment

for payment is necessary in any of the following cases; (1) if the maker, of acceptor intentionally prevents the presentment of the instrument; (2) if the instrument being payable at his place of business, he ( i.e., maker, drawer or acceptor ) closes such place on a business, day during the usual business hours; (3) if the instrument being payable at some other specified place, neither he nor any person authorized to pay it attends at such place during the usual business hours: (4) if the instrument not being payable at any specified place, he (i.e., maker, etc. ) cannot after due search be found. (b) Not presentment for payment is necessary as against any party sought to be charged with payment, if he has engaged to pay notwithstanding non-presentment. (c) No presentment for payment is necessary as against any party if, after maturity and with the knowledge that instrument has not been presented: (d) He makes a part-payment on account of the amount due on the instrument; or (2) he promises to pay the amount due thereon in whole or in part; or (3) he otherwise waives his right to take advantage of any default in presentment for payment. When we say that no presentment for payment is necessary, we mean thereby the instrument is taken as dishonoured at the due date for presentment even though it has not been presented. The result is that the holder any sue the party liable without presentment and the plea that the instrument was not presented for payment is no defence to the claim of the holder. 4.14 Payment and Interest (a) To whom payment should be made (Section 78): Payment of the amount due on promissory note, bill of exchange or cheque must, in order to discharge that maker or acceptor, be made to the holder. If payment is made to any person other than the holder, the holder can claim payment over again from the maker or acceptor. (b) Payment of interest when rate is specified (Section 49): Where interest at a specified rate is expressly made payable on a promissory note or a bill of exchange, interest shall be calculated at the rate specified, on the amount of the principal money due thereon; (i) from the date of the instrument until tender or realization of such amount (ii) from the date of the instrument until such a date after the institution of a suit to recover the principal amount as the Court directs. (c) Payment of interest when no rate is specified (Section 80): When no rate interest is specified in the instrument , interest on the amount due shall be calculated at the rate of 18% per annum from the date at which the instrument ought to have been paid until tender or realization of the amount, or until such date as the Court directs. 4.15 International Law Regarding Negotiable Instrument In the absence of a contract the contrary (i.e., unless the parties otherwise agree ), the liability of the maker or drawer a foreign promissory note, bill of exchange or cheque is governed in all

essential matters by the law of the place where he made instrument. The respective liability of the acceptor and endorser, in such cases, will be governed by the law of the place where the LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 130 11.555

instrument is made payable (Section 1 34). For example, if a bill of change was drawn by A in California where the rate of interest was 25% it was accepted by B, payable in Washington, where the rate of interest was 6% and the bill was endorsed in Indian and was dishonoured. On an action on the bill being brought against B in India. B would be liable to pay interest @6% only; but if A was charged as drawer, A would be liable to pay interest @25%. When the foreign instrument made is payable in a place different from that at which it is made or endorsed, the law of the place where the instrument is made payable would determine what constitutes dishonour and what notice of dishonour is sufficient (Section 135). If the instrument is made, drawn, accepted or endorsed abroad, but it is in accordance with the law of India, any subsequent acceptance or endorsement thereon India will not be regarded as invalid, because the agreement as evidenced by such an instrument is invalid according to the law of such foreign country (Section 136). Special Rules of Evidence (a) Presumption as to negotiable instrument (Section 118): For deciding cases in respect of rights of parties on the basis of a bill of exchange, the Court is entitled to make certain presumptions. These are briefly stated as follow: (a) That the negotiable instrument was made or drawn for consideration and every party who made itself bound in respect thereof did so for consideration; (b) That the negotiable instrument was drawn on the date shown on the face of it; (c) That the bill of exchange was accepted before its maturity, i.e., before it became overdue; (d) That the negotiable instrument was transferred before its maturity; (e) That the endorsements appearing upon a negotiable instrument were made in the order in which they appear. (f) That an instrument which has been lost was properly stamped; (g) That the holder of a negotiable instrument is the holder in due course, except when the instrument has been obtained from its lawful owner or its lawful custodian. Likewise, if it has been obtained from a maker or and acceptor by means of an offence or fraud, it is for the holder to prove that he is the holder in due course. (b) Certain rules of estoppel applicable to instruments: When one person causes another person to believe a thing to be true and to act upon such belief he is not allowed in a suit between him and such person, to deny the truth of that thing. That is, he is not allowed to give evidence in support of his denial. This rule is called the rule of estoppel, by which evidence is excluded. There are certain rules of estoppel applicable to negotiable instruments. These are

contained in Section 120 of the Act. The objective of these provisions are: (i) that the original parties to the instrument may not deny the validity of the instrument; (ii) that the maker of a promissory note or an acceptor of a bill may not deny the right of the payee to receive the payment therefore; and (iii) that an endorser of a negotiable instrument may not disown the signature or capacity to contract of any prior party to the instrument. Hundis : Bills of exchange drawn up in the vernacular are generally known as Hundis. The negotiable instruments Act ordinarily is not applicable to Hundis but, the parties to the Hundis may agree to be the Negotiable instrument Act. Notes LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 131

LESSON 24: THE NEGOTIABLE INSTRUMENT ACT 1881 TUTORIAL These questions are intended to enable the student to test his knowledge before proceeding to answer the test paper. The answer to these questions are not required to be written out or submitted for evaluation. (The Answers are given at the end). 1. X signs a negotiable instrument in the following terms. (a) I promise to pay X or order Rs. 400 . (b) I acknowledge myself to be indebted to X in the sums of Rs. 400 to be paid on demand for value received . (c) Mr. X, I.O.U. Rs. 800 . (d) I promise to pay X Rs. 400 and all other sums which shall be due to him . (e) I promise to pay X Rs. 400 first deducting thereout any money which he may owe me . (f) I promise to pay X Rs. 400 seven days after my marriage with Z (g) I promise to pay, X Rs. 400 on P s death provided P leaves me enough to pay that sum. (h) I promise to pay Rs. 400 and deliver to him may black horse on Ist July next. Which of the aforesaid instruments are not promissory notes? 2. State whether the following bills are inland bills. (a) Bills drawn outside India and made payable in or drawn upon any person resident in any country outside India. (b) A bill drawn in Calcutta on a merchant in Bombay but endorsed in Paris. (c) Bills drawn outside India made payable in India, or drawn upon any person resident therein. (d) Bills drawn in India and made payable outside India, or drawn upon a person resident outside India, but not made payable In India. (e) A bill is drawn in Madras upon a merchant in Brussels and accepted payable in Bombay. 3. When a note is drawn in this from ; I promise to pay Rs. 500 to B only , Can it be called a negotiable instrument? 4. A bill is made payable to Saroj Sehgal . Saroj Sehgal endorses it in blank and negotiates it. Is the bill payable to bearer? 5. A bill is drawn by an agent acting with the scope of his authority upon his principal. Can the holder thereof treat it at his option as a note or bill.? 6. A draws a bill on B and negotiates it away. B is fictitious drawee. Can the holder of the bill teat it as note made by A? 7.

A bill is drawn Pay to X or order the sum of one thousand rupees. In the margin the amount stated is Rs. 100. What is the amount of the bill for? 8. When is a negotiable instrument, dated 30th August ( in a year ) and made payable three months after date, deemed to be at maturity? 9. A bill of exchange is addressed to Swapan Ganguli, Anil Benerjee writes an acceptance on it. Can Anil Banerjee bind himself by such acceptance? 10. Where there are several drawees of a bill, who are not partners, can any one of such drawees accept it for another without that other s authority? 11. A who is the holder of a bill transfers it to B without consideration. B transfers it to C without consideration. C transfers it to D for value. D transfers it without consideration to E. (a) Can E recover the amount of the bill from A? (b) Has E any right against D? Say Yes or No. 12. A owes to B Rs. 500. B draws a bill on A for Rs. 1,000. A to accommodate B and at his request, accept it. B sues A on the bill. Can he recover Rs. 1,000? 13. A agrees to supply a quantity of paper to B. B accept a bill for Rs, 1,000 drawn by A, being the price of the paper. The paper. The paper is delivered to B but it turns out to be of a quality different from the stipulated one, and worth Rs. 500 only. B retains the paper. A sues B on the bill. Is B bound to pay Rs. 1,000 to A? 14. X accepts a bill for Rs. 1,500. This is the agreed price of two bales of cotton to be supplied by Y to X, Y delivers only one bale to X, Y sues X on the bill. Can Y recover Rs. 1,500 from X? 15. X owes to Y Rs. 2,000 and makes a promissory note for the amount payable to Y. X dies and the note is subsequently found amongst his papers. Can Y sue on the note even if it was later on delivered to him? 16. A, the holder of a negotiable instrument payable to bearer, which is in the hands of A s banker who is at the time the banker to transfer the instrument to B s credit in the banker s account with B. The banker does so and according now possesses the instrument as B s agent. Can the instrument be deemed to have been negotiated?. 17. A is the holder of a bill payable to A or order . A by simple delivery transfers the bill without endorsing it to B. Can B deemed to be a holder in due course? 18. A is holder of a bill endorsed by B in bank. A writes over B s signature the words Pay to C or order . (a) is the writing of A operates as an endorsement in full from B to C ? (b) Is A liable an endorser? 19 B signs the following endorsement on different negotiable

instruments payable to bearer. Do these endorsements LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 132 11.555

exclude the right of further negotiation by C? Say yes or no: (a) Pay the contents to C only . (b) Pay C for my use (c) Pay C or order for the account of B . (d) The within must be credited to C . (e) Pay C (f) Pay C value in account with the State Bank . (g) Pay the contents to C, being part of the consideration in a certain deed of assignment executed by the endorser and other 19. A bill is drawn payable to A or order. A endorses it to B but the endorsement doe4s not contain the words or order or any equivalent words. Can B negotiate the instrument? Notes: LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 133

LESSON 25: INDIAN PARTNERSHIP ACT, 1932 PARTNERSHIP ,FORMATION ,TEST AND REGISTRATION OF PARTNERSHIP Learning Objectives At the end of this chapter, you will able to know: The Meaning and nature of partnership The true test of partnership The types of partnership The formation of partnership The registration of partnership Introduction Have you ever heard of partnership? Try to answer what do you mean by partnership in general. Yes, partnership is an association between two or more persons. Let us now discuss about the legal aspects of partnership. The Rules and regulations relating to partnership are governed by the Indian Partnership Act 1932. This act contains 74 sections and it came into force on Ist December 1932 except Section 69 (relating to the effect of non registration of the firms ) which came into force on Ist October 1933. It extends to whole of India except to the state of Jammu and Kashmir Definition Section 4 Indian Partnership Act 1932 defines the following terms: Partnership in

Partnership is the relation between persons who have agreed to share the profit of business carried on by all or any of them acting for all. Breaking the above definition, following essential elements of partnership are revealed: 1. There must be an agreement. 2. Between two or more persons 3. Who agree to carry on business 4. With the object of sharing profit 5.

The business must be carried by all or any of them acting for all or Mutual Agency. All the above elements must coexist in order to constitute partnership. A brief explanation of these elements is as follows: 1. An agreement :-The relationship of partnership arises from an agreement between the persons concerned not from status. Agreement as made between the persons must be valid and enforceable by law. This agreement may be oral or written. To avoid future complications and dispute amongst the persons constituting partnership, agreement in writing must be preferred. Example A & B enters into a contract to carry on business of manufacturing of tin plates; a partnership is exacted between A&B. 2. Two or more persons:-There must be at least two persons to form a partnership. It is obvious that a single person cannot constitute partnership. Only persons competent to contract can enter into partnerships. As to the maximum number of partners, there is no limitation in the partnership Act 1932 but is no limitation in the partnership Act 1932 but the Joint Stock companies Act 1956 provides that in a firm carrying banking business, the number of partners should not be more than 10 whereas in other type of business, the limit is 20 partners. It is also mentioned that in case, the number of partners in the above business are more than the prescribed limit, the partnership will be treated as illegal. 3. Carrying on of business There can be partnership if there is some business is carried under it. Sec 2(b) of the Act reads as under business includes every trade, occupation or profession. If the purpose is to carry on charitable work, it will not be partnership. Carrying on of the business means continuity of business activities is required to consider it as partnership business. A and B agrees to open a shop of fancy items and agree to carrying on of the business for sharing of profit. It is a partnership. Sec. 8, however, provides that there can be a particular partnership between partners whereby they engage in a particular adventure or undertaking, which, if successful, would result in profit. Thus there can be a partnership for production of a film, construction of a building etc. although there is single adventure but the same requires a series of transaction a and continuing relationship. 4. Sharing of profit:-The essential element of partnership is to carry on business with the object of sharing profit amongst the partners. The partners may however, agree to share profits in any ratio they like. Ex. A, B, and C entered into a contract to carry on business of manufacturing of toys. ABC decided the ratio as 40:30:30. Besides sharing of profit, in case, there is loss in the partnership,

it is not essential that the partners should agree to share the losses. Sec 13(b) however, provides that the partners are entitled to share equally in profits earned and shall contribute equally to the loss sustained by the firm, unless otherwise, agreed. It means that the partners may make a contract contrary to this provision. There may be an agreement vide when only one artner may bear the whole loss. 5. Mutual Agency Business must be carried by all or any of them acting for all It means all the partners should be able to represent each other and should be represented by each other with respect to the business of partnership. Thus the fundament of a partnership is that partners carrying on the business of the firm are agents as well as principals of each other. A partner can bind the firm by has act provided: LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 134 11.555

He act within the scope of his authority His acts are done in the name of he firm They are done for the purpose of the business of the firm Example. ABC inters into an agreement to form partnership for carrying on business of rice. D, an outsider makes a deal with B. B has acted as agent of the firm. D can file a suit against ABC in case of default. The rules laid in Cox v/s Hickman (1860) are an authority in this behalf. The facts of the case are as follows:S and S was iron merchant in partnership. They became financially embarrassed and made a compromise with their creditors. The creditors were empowered to carry on business as trustee, to proportionately divide the income amongst the creditors and return the business after discharge of debt. Cox was of the trustee who never acted. The other trustee purchased coal from Hickman and failed to pay the price. Hickman sued all the trustees including Cox. The court observed that the creditors working as trustee, although dividing the profit of the business in a ratable proportion were not partners because they were not empowered to represent each other. It was holding that Cox was not liable to pay Hickman for Coke. ] Do you know how you would identify the partnership? What is the true test to identify the partnership? Let me now know first your views on it. Yes, It is the mutual agency, which makes a true partnership. Let us now elaborate further over it. Test of Partnership The all elements as discussed above must co-exist in order to constitute partnership Sec 6 of Indian Partnership Act provides that in determining whether a group of persons is or is not a firm or whether a person is or in 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 Thus all incidents of relations of the partnership are to be examined as shown in written agreement, verbal agreement or conduct. We can explain be position by the following examples. Example (i) A&B jointly buy a mine and lease it out. They make a partnership agreement that they will divide the lease rent in a ratio of 50:50 between themselves. In this case A&B are having understanding that they are partners but in the eyes of low it is not partnership. How many types of partnership are there?

Type of Partnership Sec 4 of the Act provides that persons who have entered into a partnership with one another are called individually partners and collectively a firm and the name under which their business is carried is called the firm name The formation of the partnership of type of partnership means, there is an agreement between parties to form the firm that too as per provision of Partnership Act. The Partnership can be classified as under: 1. Partnership at will:- Sec 7 Where no provision is made by a contract between the partners for duration of their partnership or for the determination of their partnership, the partnership is, partnership at will . It means the partnership is made without specifying any period and is at the sweet will of the partners. Any partner may dissolve such a partnerships by giving a notice to that effect to all the other partners. 2. Particular Partnership:-When a partnership is to formed for a particular period or for a particular venture, in a such a case the partnership is automatically dissolved at expiry of fixed term or on the completion of the venture e.g. A&B have formed a partnership for manufacture of a particular film, the partnership is automatically dissolved on completion of the venture provided they don t enter into a contract to continue this partnership for future. We have discussed the distinction of partnership vide which the important elements for the formation ware discussed in detail. However to make it more clear, we give below the important points for execution of partnership. 1. It is executed by a agreement between the partners 2. It has no separate entity apart from its members. It is simply a collection of members 3. Maximum number of person allowed 10 in banking firm and 20 in non banking firm 4. Carrying on business is necessary for existence of partnership 5. The liability of partnership is unlimited an the partners are jointly/personally liable. 6. Every partner is agent of the other partner as well as the firm 7. Every partner has a right to take part in the management of the affairs of the firm Now, we will discuss how the partnership comes into formation. What legal formalities are there in the formation of partnership?

Formation of Partnership A partnership is formed by an agreement between the partners. The rights and obligations of the partners towards each other and towards the firm can be determined by an oral or written agreement. To avoid future dispute it is always advisable to have partnership expressed in writing. Partnership Deed A partnership agreement put to writing and is termed as partnership deed. Before starting of the business the partners are drafting the deed in proper manner so that the business may run smoothly by and if there is any dispute the same may be settled according to the terms of partnership deed. What should be the exact contents, it depends on the circumstances but generally the partnership deed must contain the following clauses 1. Name and address of the firm and nature of business to be carried on. 2. Name and address of the partners 3. Date of commencement and duration of partnership 4. The capital and any other contribution made by partners LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 135

5. The ratio to share profit and losses amongst the partners. 6. Rules as to interest on loans and capital, their salary, commission, etc. 7. Method and arrangement of keeping accounts 8. Division of task and obligation of partners 9. Rules to be followed in case of admission, expulsion / retirement or death of a partner. 10. Whether a partner is allowed to carry competing business. 11. The circumstances under which the partnership will stand dissolved. 12. In case of dispute which course of action shall be followed e.g. Court, arbitrations etc. Registration of Partnership Registration of firm means the recording of the firm name along with the prescribed particulars, in the Register of the firms, kept. in the office of the Registrar of Firms. The registration provides a reliable evidence and conclusive proof of the existence of a partnership firm. Section 56- Power to exempt from application of this Chapter The 3[State Government of any State], may, by notification in the Official Gazette, direct that the provisions of this Chapter shall not apply to 4[that State] or to any part thereof specified in the notification. Section 57- Appointment of Registrars (1) The State Government may appoint Registrars of Firms for the purposes of this Act, and may define the areas within which they shall exercise their powers and perform their duties. (2) Every Registrar shall be deemed to be a public servant within the meaning of section 21 of the Indian Penal Code (45 of 1860). Section-58- Application for registration (1) The registration of a firm may be effected at any time by sending by post or delivering to the Registrar of the area in which any place of business of the firm is situated or proposed to be situated, a statement in the prescribed form and accompanied by the prescribed fee, stating( a) The firm name, (b) The place or principal place of business of the firm, (c) The names of any other places where the firm carries on business, (d) The date when each partner joined the firm,

(e) The names in full and permanent addresses of the partners, and (f) The duration of the firm. The statement shall be signed by all the partners, or by their agents specially authorized in this behalf. (2) Each person signing the statement shall also verify it in the manner prescribed. (3) A firm name shall not contain any of the following words, namely Crown , Emperor , Empress , Empire , Imperial , King , Queen , Royal , or words expressing or implying the sanction, approval or patronage of,, 5[Government], except 6[when the State Government] signified 7[its] consent to t he use of such words as part of the firm name by order in writing Section 59- Registration When the Registrar is satisfied that the provisions of section 58 have been duly complied with, he shall record an entry of the statement in a register called the Register of Firms, and shall file the statement.. Section 60- Recording of alterations in firm name and principal place of business (1) When an alteration is made in the firm name or in the location of the principal place of business of a registered firm, a statement may be sent to the Registrar accompanied by the prescribed fee, specifying the alteration and signed and verified in the manner required under section 58. (2) When the Registrar is satisfied that the provisions of subsection (1) have been duly complied with, he shall amend the entry relating to the firm in the Register of Firms is accordance with the statement, and shall file it along with the statement relating to the firm filed under section 59. Section 61- Noting of closing and opening of branches When a registered firm discontinued business at any place or begins to carry on business at any place, such place not being its principal place of business, any partner or agent of the firm may send intimation thereof to the Registrar, who shall make a note of such intimation in the entry relating to the firm in the Register of Firms, and shall file the intimation along with the statement relating to the firm filed under section 59. Section 62- Noting of changes in names and addresses of partners When any partner in a registered firm alters his name or permanent address, any partner or agent of the firm may send an intimation of the alteration to the Registrar, who shall deal with it in the manner provided in section 61.

Section 63- Recording of changes in and dissolution of a firm (1) When a change occurs in the constitution of a registered firm any incoming, continuing or outgoing partner, and when a registered firm is dissolved any person who was a partner immediately before the dissolution, or the agent of any such partner or person specially authorized in this behalf, may give notice to the Registrar of such change or dissolution, specifying the date thereof; and the Registrar shall make a record of the notice in the entry relating to the firm in the Register of Firms, and shall file the notice along with the statement relating to the firm filed under section 59. (2) Recording of withdrawal of a minor-When a minor who has been admitted to the benefits of partnership in a firm attains majority and elects to become or not to become a partner, and the firm is then a registered firm, he, or his agent specially authorised in this behalf, may give notice to the Registrar that he has or has not become a partner, and LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 136 11.555

the Registrar shall deal with the notice in the manner provided in sub-section (1). Section 64- Rectification of mistakes (1) The Registrar shall have power at all times to rectify any mistake in order to bring the entry in the Register of Firms relating to any firm into conformity with the documents relating to that firm filed under this Chapter. (2) On application made by all the parties who have signed any document relating to a firm filed under this Chapter, the Registrar may rectify any mistake in such document or in the record or note thereof made in the Register of Firms. Section 65- Amendment of Register by order of Court A court deciding any matter relating direct that the Registrar shall make in the Register of Firms relating to upon its decision; and the Registrar entry accordingly. to a registered firm may any amendment in the entry such firm which is consequential shall amend the

Section 66-Inspection of Register and filed Documents (1) The Register of Firms shall be open to inspection by any person on payment of such fee as may be prescribed. (2) All statements, notices and intimations filed under this Chapter shall be open to inspection, subject to such conditions and on payment of such fee as may be prescribed. Section 67- Grant of Copies The Registrar shall on application furnish to any person, an payment of such fee as may be prescribed, a copy, certified under his hand, of any entry or portion thereof in the Register of Firms. Section 68- Rules of Evidence (1) Any statement, intimation or notice recorded or noted in the Register of Firms shall, as against any person by whom or on whose behalf such statement, intimation or notice was signed, be conclusive proof of any fact therein stated. (2) A certified copy of an entry relating to a firm in the Register of Firms may be produced in proof of the fact of the registration of such firm, and of the contents of any statement, intimation or notice recorded or noted therein. What is the effect of non-registration? Is it mandatory? No, it is not mandatory. But there would be some serious effects if the firm is not registered as covered under Section 69.

Section 69- Effect of non-registration (1) No suit to enforce a right arising from a contract or conferred by this Act shall be instituted in any court by or on behalf of any person suing as a partner in a firm against the firm or any person alleged to be or to have been a partner in the firm unless the firm is registered and the person suing is or has been shown in the register of firms as a partner in the firm. (2) No suit to enforce a right a rising from a contract shall be instituted in any court by or on behalf of a firm against any third party unless the firm is registered and the persons suing are or have been shown in the register of firms as partners in the firm. (3) The provisions of sub-sections (1) and (2) shall apply also to a claim of set-off or other proceeding to enforce a right arising from a contract, but shall not affect( a) The enforcement of any right to sue for the dissolution of a firm or for accounts of a dissolved firm, or any right or power to realise the property of a dissolved firm, or (b) The powers of an official assignee, receiver or court under the Presidency-towns Insolvency Act, 1909 (3 of 1909) or the Provincial Insolvency Act, 1920 (5 of 1920) to realise the property of an insolvent partner. (4) This section shall not apply( a) To firms or to partners in firms which have no place of business in 10[the territories to which this Act extends], or whose places of business in 11[the said territories], are situated in areas to which, by notification under 12[section 56], this Chapter does not apply, or (b) To any suit or claim of set-off not exceeding one hundred rupees in value which, in the Presidency-towns, is not of a kind specified in section 19 of the Presidency Small Cause Courts Act, 1882 (5 of 1882), or, outside the Presidency-towns, is not of a kind specified in Schedule II to the Provincial Small Cause Courts Act, 1887 (9 of 1887), or to any proceeding in execution or other proceeding incidental to or arising from any such suit or claim. Section 70- Penalty for furnishing false particulars Section 70 lays down that if any person who signs any statement, amending statement, notice or intimation under this Chapter containing any particular which he knows to be false or does not believe to be true, or containing particulars which he knows to be incomplete or does not believe to be complete, shall be punishable with imprisonment which may extend to three months, or with

fine, or with both. Section 71- Power to make rules Section 71 states that The State Government may by notification in the Official Gazette make rules describing the fees which shall accompany documents sent to the Registrar of Firms, or which shall be payable for the LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 137

inspection of documents in the custody of the Registrar of Firms or for copies from the Register of Firms: It is also provided that such fees shall not exceed the maximum fees specified in Schedule I. The State Government may make rules (a) Prescribing the form of statement submitted under section 58, and of the verification thereof; (b) Requiring statements, intimations and notices under sections 60, 61, 62 and 63 to be in prescribed form, and prescribing the form thereof; (c) Prescribing the form of the Register of Firms, and the mode in which entries relating to firms are to be made therein, and the mode in which such entries are to be amended or notes made therein; (d) Regulating the procedure of the Registrar when disputes arise; (e) Regulating the filing of documents received by the Registrar; (f) Prescribing conditions for the inspection of original documents; (g) Regulating the grant of copies; (h) Regulating the elimination of registers and documents; (i) Providing for the maintenance and form of an index to the Register of Firms; and (j) Generally, to carry out the purposes of this Chapter. (3) All rules made under this section shall be subject to the condition of previous publication. Every rule made by the State Government under this section shall be laid, as soon as it is made, before the State Legislature. Attempt the following problems for a better understanding: 1. X, a publisher, agrees to publish at his own expense, a book written by Y and to pay Y half the net profits. Is there a partnership between X and Y? [Hint. No partnership, mere profit-sharing is not conclusive test of partnership.] 2. Two trading firms, each having twelve partners join hands and make a partnership form having twenty-four partners. Is it a valid entity? [Hint. No, it s an illegal association as per section 11 of the companies Act, as the number of members exceeds 20] 3. A and B separately tender for a contract to cut and remove bamboos form a certain jungle. They mutually agree that each one of them shall be entitled to a certain share of

bamboos, no matter whosoever is granted the contract. Is it a partnership agreement? [Hint. No] 4. A agreed with B, a goldsmith, to buy and deliver gold to B, where B will make ornaments out of it and sell them, and they shall share the resulting profit and losses. Is it a partnership agreement? [Hint. Yes.] 5. A advanced some money to B and C, two merchants. The merchants agreed to carryon the business subject to the control of A in several respects. A was to receive a commission of 20% on all the profits. Is it a partnership agreement between A, Band C? [Hint: A is not a partner. The object of the agreement is to give maximum security to A for the returns on his money - Mallow March & Co. v. The Court of Wards [1872] LR 2 CP 419.] 6. A, a contractor, undertook a contract of loading and unloading railway wagons. He appointed H-to manage the work. It was agreed that B would receive 75%of the profits as his remuneration and would bear all the losses, if any. Is it a partnership agreement? [B. Com. (H), 1999] [Hint- No, B is an agent of A, not his partner - Munshi Abdul Latif v. Gopeshwar Chattoraj AIR 1933 Calcutta 204.] ) 6. A, B and C are partners of an unregistered firm. D owes this firm Rs. 1,000 on a con-tract. The firm filed a suit against D. The suit is dismissed for non-registration of the firm. The firm is registered later on. Can the firm now successfully bring the suit against D? [B. Com. (H), 1986] [Hint - Yes, after registration, the firm can file a fresh suit. The provision is - before a suit is filed in the court, registration must have been effected .] 7. A and B purchased a taxi to ply it in partnership. They plied the taxi for a year. When A, without the consent of B, disposed of the taxi, B brought an action to recover his share in sale proceeds. A resisted B s claim on the ground that the firn1 was not registered. Will B succeed in his claim? [B. Com. (H), 1982] [Hint - B will succeed in his claim because partner of an unregistered firm can sue for his share on dissolution of the firm.] 8. An unregistered firm filed a suit against a debtor to recover Rs. 500. The court dismissed firm s application on the ground of non-registration. Can the firm get its

registration now and file a fresh suit against the debtor to recover the amount? [B. Com. (H.), 2000] [Hint: Yes, the partners can get the firm registered and then file a fresh suit against the debtor.] 9. A, B and C were partners in a firm. A died. Z, who did know about the death of A, made a deal with the firm. The firm committed a default in meeting out the deal. Z sued upon A s estate, B and C for compensation of his damages. Is A s estate liable for the damages? [Hint - No, A s estate is not liable for the dealings of the firm after A death.] 10. A, a holding out partner in the firm of X & Y is adjudicated as insolvent. The firm caused heavy losses to Z by breaching a contract. Z sued X, Y and A for the damages. Is A liable to share such damages? [Hint - No, A partner by holding out who is an insolvent, cannot be held liable for the claims on the firm.] LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 138 11.555

References Kapoor, N.D. (2003), Elements of Mercantile Law, Sultan Chand and Sons, New Delhi. http://www.indialawinfo.com/bareacts/soga.html M.C. Kucchal ( 2002), Business Law , Vikas Publishing House Pvt. Ltd, Delhi. P.C. Tulsian (2002), Pvt. Ltd, Delhi. Business Law , Tata Mc. Graw Hill

Aggarwal, Rohini (2003), Student s Guide to Mercantile and Commercial Laws, Taxmann s, New Delhi Notes LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 139

LESSON 26: INDIAN PARTNERSHIP ACT, 1932 TYPES OF PARTNERS AND THEIR RIGHTS AND OBLIGATIONS Learning Objectives At the end of this chapter, you will able to know: The types of partners The rights of partners The obligations of partners The minor s status in the partnership Introduction We are now well versed what we mean by partnership. Its nature and formation and registration formalities. Today we will discuss about the kinds of partners and their rights and obligations as provided under the Act. Kinds of Partners in a partnership terms The partners of partnership firm may be classified in following categories: 1. Actual/Active partner 2. Dormant or sleeping partner 3. Nominal partner 4. Partner in profit only 5. Sub Partner 6. Partner by estoppels or partner by holding out. 1. Actual/Active Partner Partners actively engaged in the conduct on business are known as active partners . They are full fledged partners in the real sense. If such partner wants to retire from the firm he must give public notice of his retirement from the firm in order to get himself absolved from the responsibly of the firm. 2. Dormant of Sleeping Partner: Some times, there are persons who merely become partners in a firm by contributing capital or even without capital and donot take active pact in the conduct of the partnership business. Such partners are liable to third parties as actual partner Such partners can retire from the firm without giving notice but they have assess to the books of the accounts of the firm and can have a copy of the same.

Example:-A&B start a partnership firm wherein A is active partners and B is dormant partner. This is valid partnership 3. Nominal Partner:- These are the partners who have no real interest in the firm . They donot invest or participate in the business of the firm but give their name as partner of the firm. Example:-A is a renowned businessman. His son B starts the business in which A has given consent to become partner of the firm which is to be run by his son with the sole purpose to help his son. A is only a nominal partner. 4. Partner in profits only:-Some times the partnership firm is formed to carryon business wherein a partner becomes partner of the firm only for profits. In case the firm suffers loss, he shall not be liable for the loss. These type of partners have no say in the management of the firm. However, the liability of such partner towards third party is similar to active partner . 5. Sub Partner:-When a partner agrees to share his profit in a partnerships firm with an outsider such a outsider in called sub partner. The outsider cannot interfere business of the firm nor he is liable to third party as an active partner. 6. Partner by estoppel or holding all :-Section 28 Anyone who by words spoken or written or by conduct represent himself or knowingly permit himself to be represented himself to be a partner in a firm, is liable as a partner in that firm to anyone who has on the faith of any such representation gives credits 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 Thus if the behavior of such person cause misunderstanding to third parties that he is partner of a particular firm. Later on such a person is estopped from denying the fact that he is a partner in that particular firm, shall be called partner by estoppels. Example:-ABC are partners in a partnership firm named XYZ. A tells in the market that D is partners of the firm. D does not c cant contradict his statement: XYZ gets a loan from Y and later on become insolvent. In the instant case D is partner in the firm and is estopped from the fact that he is partner of XYZ. Holding out means a partner retires from the firm and does not give notice of retirement. If transactions are taking place treating the retired partner as active partner of the firm, he shall be estopped from denying the fact. Let us now talk about the rights and liabilities of partners Rights and liabilities/ obligations of partners We would be discussing the rights and liabilities/ obligations of the partners in term of Indian Partnership Act 1932 as

amended up to date. Section 9-12 deals with the mutual relation pf partners. Section 9-General duties of partners Partners are bound to carry on the business of the firm to the greatest common advantage, to be just and faithful to each other, and to render true accounts and full information of all things affecting the firm to any partner or his legal representative. Section 10- Duty to indemnify for loss caused by fraud Every partner shall indemnify the firm for any loss caused to it by his fraud in the conduct of the business of the firm. LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 140 11.555

Section 11- Determination of rights and duties of partners by contract between the partners (1) Subject to the provisions of this Act, the mutual rights, and duties of the partners of a firm may be determined by contract between the partners, and such contract may be expressed or may be implied by a course of dealing. Such contract may be varied by consent of all the partners, and such consent may be expressed or may be implied by a course of dealing. (2) Agreements in restraints of trade-Notwithstanding anything contained in section 27 of the Indian Contract Act, 1872 (9 of 1872), such contracts may provide that a partner shall not carry on any business other than that of the firm while he is a partner. Section 12- The conduct of the business Subject to contract between the partners, (a) Every partner has a right to take part in the conduct of the business; (b) Every partner is bound to attend diligently to his duties in the conduct of the business; (c) Any difference arising as to ordinary matters connected with the business may be decided by a majority of the partners, and every partner shall have the right to express his opinion, before the matter is decided, but no change may be made in the nature of the business without the consent of all the partners; and (d) Every partner has a right to have access to and to inspect and copy any of the books of the firm. Section 13- Mutual rights and liabilities Subject to contract between the partners (a) Partner is not entitled to receive remuneration for taking part in the conduct of the business; (b) The partners are entitled to share equally in the profits earned, and shall contribute equally to the losses sustained by the firm; (c) Where a partner is entitled to interest on the capital subscribed by him such interest shall be payable only out of profits; (d) Partner making, for the purposes of the business, any payment or advance beyond the amount of capital he has agreed to subscribe, is entitled to interest thereon at the rate of six per cent per annum; (e) The firm shall indemnify a partner in respect of payments made and liabilities incurred by him( i) In the ordinary and proper conduct of the business, and (ii) In doing such act, in an emergency, for the purpose of protecting the firm from loss, as would be done

by a person of ordinary prudence, in his own case, under similar circumstances; and (f) A partner shall indemnify the firm for any loss caused to it by his wilful neglect in the conduct of the business of the firm. Section 14- The property of the firm The property of the firm includes all property and rights and interests in property originally brought into the stock of the firm, or acquired, by purchase or otherwise, by or for the firm, or for the purposes and in the course of business of the firm, and includes also the goodwill of the business subject to contract between the partners,. 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 15- Application of the property of the firm Section 15 states that the property of the firm shall be held and used by the partners exclusively for the purposes of the business subject to contract between the partners Section 16.-Personal profits earned by partners As is subject to contract between the partners (a) If a partner derives any profit for himself from any 0 transaction of the firm, or from the use of the property or business connection of the firm or the firm name, he shall account for that profit and pay it to the firm; (b) If a partner carries on any business of the same nature as and competing with that of the firm, he shall account for and pay to the firm all profits made by him in that business. Section 17- Rights and duties of partners Subject to contract between the partners (a) After a change in the firm-where a change occurs in the constitution of a firm, the mutual rights and duties of the partners in the reconstituted firm remain the same as they were immediately before the change, as far as may be; (b) After the expiry of the term of the firm, and - where a firm constituted for a fixed term continues to carry on business after the expiry of that term, the mutual rights and duties of the partners remain the same as they were before the expiry, so far as they may be consistent with the incidents of partnership at will; and (c) Where additional undertakings are carried out-where a firm constituted to carry out one or more adventures or undertakings, the mental 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. Section 25- Liability of a partner for acts of the firm Every partner is liable, jointly with all the other partners and also severally, for all acts of the firm done while he is a partner. Section 26- Liability of the firm for wrongful acts of a partner Where, by the wrongful act or omission of a partner acting in the ordinary course of the business of a firm, or with the LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 141

authority of his partners, loss or injury is caused to any third party, or any penalty is incurred, the firm is liable therefor to the same extent as the partner. Section 27- Liability of firm for misapplication by partners Where (a) A partner acting within his apparent authority receives money or property from a third party and misapplies it, or (b) A firm in the course of its business receives money or property from a third party, and the money or property is misapplied by any of the partners while it is in the custody of the firm, the firm is liable to make good the loss. Section 28- Holding out (1) Anyone who by words spoken or written or 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. (2) Where after a partner s death the business is continued in the old firm name, the continued use of that name or of the deceased partner s name as a part thereof shall not of itself make his legal representative or his estate liable for any act of the firm done after his death. Section 29- Rights of transferee or a partner s interest (1) A transfer by a partner of his interest in the firm, either absolute or by mortgage, or by the creation by him of a charge on such interest, does not entitle the transferee, during the continuance of the firm, to interfere in the conduct of the business, or to require accounts, or to inspect the books of the firm, but entitles the transferee only to receive the share of profits of the transferring partner, and the transferee shall accept the account of profits agreed to by the partners. (2) If the firm is dissolved or if the transferring partner ceases to be a partner, the transferee is entitled as against the remaining partners to receive the share of the assets of the firm to which the transferring partner is entitled, and, for the purpose of ascertaining that share, to an account as from the date of the dissolution. This was all about the rights and obligations of partners. Do you think that minor can be a partner in the partnership firm? Minor s status in partnership firm Partnership is based on mutual contract and only those who are

competent to contract can become partners of a firm. As per Indian Contract Act, any agreement with a minor is void ab intio but he can derive benefit under it. Under section 30 of the Partnership Act, a minor can be admitted to the partnership for his benefit. Section 30 lays down certain condition which are discussed as under: Section 30- Minors Admitted to the Benefits of Partnership (1) A person who is a minor according to the law to which he is subject may not be a partner in a firm, but, with the consent of all the partners for the time being, he may be admitted to the benefits of partnership. (2) Such minor has a right to such share of the property and of the profits of the firm as may be agreed upon, and he may have access to and inspect and copy any of the accounts of the firm. (3) Such minor s share is liable for the acts of the firm, but the minor is not personally liable for any such act. (4) Such minor may not sue the partners for an account or payment of his share of the property or profits of the firm, save when severing his connection with the firm, and in such case the amount of his share shall be determined by a valuation made as far as possible in accordance with the rules contained in section 48: It is provided that all the partners acting together or any partner entitled to dissolve the firm upon notice to other partners may elect in such suit to dissolve the firm, and thereupon the court shall proceed with the suit as one for dissolution and for settling accounts between the partners, and the amount of the share of the minor shall be determined along with the shares of the partners. (5) At any time within six months of his attaining majority, or of his obtaining knowledge that he had been admitted to the benefits of partnership, whichever date is later, such person may give public notice that he has elected to become or that he has elected not to become a partner in the firm, and such notice shall determine his position as regards the firm: It is provided that, if he fails to give such notice, he shall become a partner in the firm on the expiry of the said six months. (6) Where any person has been admitted as a minor to the benefits of partnership in a firm, the burden of proving the fact that such person had no knowledge of such admission until a particular date after the expiry of six months of his attaining majority shall lie on the persons asserting that fact. (7) Where such person becomes a partner( a) His rights and liabilities as a minor continue up to the date on which he becomes a partner, but he also becomes personally liable to third parties for all acts of the firm done since he was admitted to the benefits of partnership, and

(b) His share in the property and profits of the firm shall be the share to which he was entitled as a minor. (8) Where such person elects not to become a partner,LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 142 11.555

(a) His rights and liabilities shall continue to be those of a minor under this section up to the date on which he gives public notice, (b) His share shall not be liable for any acts of the firm done after the date of the notice, and (c) He shall be entitled to sue the partners for his share of the property and profits in accordance with subsection (4). It is provided that nothing in sub-sections (7) and (8) shall affect the provisions of section 28. Attempt the Following Problems for a Better Understanding 1. A , B and C are partners in a firm. A manages to get a contract from Indian Railways after paying a bribe of Rs. 10 lac. The contract is worth Rs. 1 crore. He charges this amount to the firm, but B and C object to it. Advise. [Hint: A cannot charge Rs. 10 lac to the firm, because a partner has a right to be reimbursed for the payments made by him in the ordinary and proper conduct of the business This is not the manner in which business should ordinarily be conducted. See Section 13 (e).] 2. A gives continuing guarantee to B for due fulfillment of business obligations by firm X& Y in its dealings with B. A partner in the firm retires and another partner admitted. What effect the change has on A s guarantee? [Hint: Guarantee is revoked.] 3. A and B are partners in a firm. C , the minor son of B is admitted to the benefits of the partnership. Soon after the admission of C , B dies. And the business of the firm is carried on. During this period, A speculates and loses heavily. The creditors of the firm demand the losses from A and C. Is C liable to creditors? [Hint. when B died, partnership came to an end. C being a minor cannot be sole part-x with A. Thus C is not liable for any losses incurred after B s death.] 4. X, Y and Z are partners in a firm. X, without the authority of Y and Z buys certain shares in his name out of partnership money. Will shares constitute partnership property? [Hint. Yes, though shares stand in the name of X, they have been acquired using firm s money.] 5. A, Band C are partners. C is a sleeping partner who is not known to the creditors. C retires without giving public notice of his retirement. Is C liable for subsequent debts incurred by A and B? [B. Com (Pass), 1995, B. Com (H), 1976, 1981, 1994] [Hint - No, C is not liable. He being a sleeping partner is not supposed to be known to the outsiders dealing with the firm.]

6. X, Y and Z are partners in a firm. Z retires and A is admitted as a new partner. No public notice of this change is given but the firm continues its business in the old name. Mr. P, a customer deals with the firm after this change and the firm become indebted to P. P sues X, Y and A for his dues. What will be the implication? Will he succeed? [Hint - Yes, he will succeed. He can sue at his option either the old partners, i.e., X, Y, and Z on the ground of estoppel, or the new partners, i.e., X, Y. and A.] References Kapoor, N.D. (2003), Elements of Mercantile Law, Sultan Chand and Sons, New Delhi. http://www.indialawinfo.com/bareacts/soga.html M.C. Kucchal ( 2002), Business Law , Vikas Publishing House Pvt. Ltd, Delhi. P.C. Tulsian (2002), Pvt. Ltd, Delhi. Business Law , Tata Mc. Graw Hill Student s Guide to Mercantile

Aggarwal, Rohini (2003), and Commercial Laws, Taxmann s, New Delhi Notes LEGAL ASPECTS OF BUSINESS

Copy Right: Rai University 11.555 143

LESSON 27: INDIAN PARTNERSHIP ACT, 1932 DISSOLUTION OF PARTNERSHIP Learning Objectives At the end of this chapter, you will able to know: The modes of dissolution of partnership The consequences of dissolution of partnership The settlement of accounts on dissolution of partnership Introduction Today, we will be discussing dissolution of partnership business. But before going ahead you need to understand that there is a difference between the dissolution of partnership and dissolution of firm. Section 39 of the Act provides that there is a difference between the dissolution of partnership and the dissolution of the firm. Partnership is a relation between the partners and the partnership firm is an entity which exists because of partnership relations. Thus, whenever a partner leaves the firm, partnership is dissolved but the firm continues until the partnership firm is dissolved. After starting the business, partners may feel like closing the business, may be because the business is not lucrative or it is not going the way they predicted or for any other reason. When a partner close down the firm, dissolution of the partnership firm takes place. Thus , when partners close down the business, dissolution of the partnership firm takes place. The dissolution of partnership between all the partners of the firms occurs is called dissolution of the firm. Let us now concentrate on the modes of dissolution of the firm. Modes of Dissolution of the Firm Section 40- Dissolution by Agreement A firm may be dissolved with the consent of all the partners or in accordance with a contract between the partners. Section 41- Compulsory dissolution A firm is dissolved (a) By the adjudication of all the partners or of all the partners but one as insolvent, or (b) By the happening of any event which makes it unlawful for the business of the firm to be carried on

or for the partners to carry it on in partnership: It is further 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. Section 42- Dissolution on the Happening of Certain Contingencies Subject to contract between the partners a firm is dissolved (a) If constituted for a fixed term, by the expiry of that term; (b) If constituted to carry out one or more adventures or undertakings, by the completion thereof; (c) By the death of a partner; and (d) By the adjudication of a partner as an insolvent. Section 43- Dissolution by notice of partnership at will (1) Where the partnership is at will, any partner giving notice in writing to all the other partners of his intention to dissolve the firm may dissolve the firm. (2) The firm is dissolved as from the date mentioned in the notice as the date of dissolution or, if no date is so mentioned, as from the date of the communication of the notice. Section 44- Dissolution by the court At the suit of a partner, the court may dissolve a firm on any of the following grounds, namely (a) That a partner has become of unsound mind, in which case the suit may be brought as well by the next friend of the partner who has become of unsound mind as by any other partner; (b) That a partner, other than the partner suing, has become in any way permanently incapable of performing his duties as partner; (c) That a partner, other than the partner suing, is guilty of conduct which is likely to affect prejudicially the carrying on of the business, regard being had to the nature of the business; (d) That a partner, other than the partner suing, willfully or persistently commits breach of agreements relating to the management of the affairs of the firm or the conduct of its business, or otherwise so conducts himself in matters relating to the business that it is not reasonably practicable for the other partners to carry on the business in partnership with him; (e) That a partner, other than the partner suing, has in any way transferred the whole of his interest in the firm to a third party, or has allowed his share to be charged under the provisions of rule 49 of Order XXI of the First Schedule to the Code of Civil Procedure, 1908 (5 of 1908) or has allowed it to be sold in the recovery of

arrears of land revenue or of any dues recoverable as arrears of land revenue due by the partner; (f) That the business of the firm cannot be carried on save at a loss; or (g) On any other ground which renders it just and equitable that the firm should be dissolved. LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 144 11.555

What are the consequences of dissolution ? Consequences of Dissolution Since dissolution initiates the process of winding up the affairs of the firm some rights are inferred and some obligation are imposed upon the partners to do the needful in this regard . Such consequences are covered under the Indian Partnership Act 1932 vide Vide Sec 45 to Sec 55 Section 45- Liability for acts of Partners done after Dissolution (10 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: It is further provided that the estate of a partner who dies, or who is adjudicated an insolvent, or of a partner who, not having been known to the person dealing with the firm to be a partner, retires from the firm, is not liable under this section for acts done after the date on which he ceases to be a partner. Notices under sub-section (1) may be given by any partner. Section 46- Rights of Partners to have Business Wound up after Dissolution On the dissolution of a firm every partner or his representative is entitled, as against all the other partners or their representatives, to have the property of the firm applied in payment of the debts and liabilities of the firm, and to have the surplus distributed among the partners or their representatives according to their rights. Section 47- Continuing authority of Partners for Purposes of Winding up After the dissolution of a firm the authority of each partner to bind the firm, and the other mutual rights and obligations of the partners continue notwithstanding the dissolution, so far as may be necessary to wind up the affair of the firm and to complete transactions begun but unfinished at the time of the dissolution, but not otherwise: It is provided that the firm is in no case bound by the acts of a partner who has been adjudicated insolvent; but this proviso does not affect the liability of any person who has after the adjudication represented himself or knowingly permitted himself to be represented as a partner of the insolvent. Settlement of accounts is very important in the partnership business. Section 48 deals with it. Section 48- Mode of Settlement of accounts between Partners In settling the accounts of a firm after dissolution, the following

rules shall, subject to agreement by the partners, be observed (a) Losses, including deficiencies of capital, shall be paid first out of profits, next out of capital, and, lastly, if necessary, by the partners individually in the proportions in which they were entitled to share profits; (b) The assets of the firm, including any sums contributed by the partners to make up deficiencies of capital, shall be applied in the following manner and order( i) In paying the debts of the firm to third parties; (ii) In paying to each partner ratably what is due to him from the firm for advances as distinguished from capital; (iii) In paying to each partner ratably what is due to him on account of capital; and (iv) The residue, if any, shall be divided among the partners in the proportions in which they were entitled to share profits. Section 49- Payment of firm debts and of separate debts Where there are joint debts due from the firm, and also separate debts due from any partner, the property of the firm shall be applied in the first instance in payment of the debts of the firm, and, if there is any surplus, then the share of each partner shall be applied in payment of his separate debts or paid to him. The separate property of any partner shall be applied first in the payment of his separate debts, and the surplus (if any) in the payment of the debts of the firm. Section 50- Personal profits Earned after Dissolution Subject to contract between the partners, the provisions of clause (a) of section 16 shall apply to transactions by any surviving partner or by the representatives of 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: It is 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 51- Return of Premium on Premature Dissolution Where a partner has paid a premium on entering into partnership of a fixed term, and the firm is dissolved before the expiration of that term otherwise than by the death of a partner, he shall be entitled to repayment of the premium or of such part thereof as may be reasonable, regard being had to the terms upon which he became a partner and to the length of time during which he was a partner, unless

(a) The dissolution is mainly due to his own misconduct, or (b) The dissolution is in pursuance of an agreement containing no provision for the return of the premium or any part of it. Section 52- Rights where Partnership Contract is Rescinded for Fraud or Misrepresentation 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 LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 145

firm have been paid, for any sum paid by him for the purchase of a share in the firm and for any capital contributed to 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. Section 53- Right to Restrain from use of Firm name or firm Property After a firm is dissolved, every partner or his representative may, in the absence of a contract between the partners to the contrary, restrain any other partner or his representative from carrying on a similar business in the firm name or from using any of the property of the firm for his own benefit, until the affairs of the firm have been completely wound up: It is 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 54- Agreements in Restraint of Trade Partners may, upon or in anticipation of the dissolution of the firm, make an agreement that some or all of them will not carry on a business similar to that of the firm within a specified period or within specified local limits; and notwithstanding anything contained in section 27 of the Indian Contract Act, 1872 (9 of 1872), such agreement shall be valid if the restrictions imposed are reasonable. Section 55- Sale of Goodwill after Dissolution In settling the accounts of a firm after dissolution, the goodwill shall, subject to contract between the partners, be included in the assets, and it may be sold either separately or along with other property of the firm. Rights of buyer and seller of goodwill-Where the goodwill of a firm is sold after dissolution, a partner may carry on a business competing with that of the buyer and he may advertise such business, but, subject to agreement between him and the buyer, he may not (a) Use the firm name, (b Represent himself as carrying on the business of the firm, or (c) Solicit the custom of persons who were dealing with the firm before its dissolution.

Agreement in restraint of trade -Any partner may, upon the sale of the goodwill of a firm, make an agreement with the buyer that such partner will not carry on any business similar to that of the firm within a specified period or within specified local limits and, notwithstanding anything contained in section 27 of the Indian Contract Act, 1872 (9 of 1872), such agreement shall be valid if the restrictions imposed are reasonable. Attempt the following Problems for a Better Understanding: 1. A and B partners under an agreement, which provided that the partnership could be terminated by mutual arrangement only. A alone wants to terminate the partnership. Can he do so? [Hint. No, however, under Section 44, the court may, at the suit of A, dissolve the firm on certain grounds.] 2. X and Y started business in partnership. After a couple of years they found that the firm is incurring continues losses. Can it be a ground for dissolution of a firm? [Hint- Yes, the dissolution can be applied for on the ground that business cannot be carried on except losses. See section 44(f)] 3. X, Y and Z are partners in a firm. X and Y always behave arrogantly with each other and do not also co-operate in business matters. Z applies to court for dissolution of the firm. Will he succeed? [Hint- Yes, on Just and Equitable grounds .] 4. X and Y form a partnership firm. After 5 years, Delhi police for trading in narcotics detains Y. He is later convicted for the same. Will the court dissolve the firm on the application of X before the expiry of the term? Advice. [Hint Yes. It is possible on the ground Conduct prejudicial to partnership business . See Section 44] 5. X and Y were carrying on a printing business as partners. They decided to dissolve the firm, and it was provided in the dissolution deed that even after the sale of goodwill of the firm to one of them, nothing should prevent the other partner from carrying on the similar business in the neighborhood. X purchased the goodwill of the firm, and Y opened another printing house nearby and started soliciting the customers of the old firm. X objects. Advice. [Hint- Y is legally justified in opening a printing house in the neighborhood, but after the sale of goodwill, Y has no right to solicit the customers of the firm. X can take an injunction order from the court to stop Y from soliciting the firm s customers.] 6. A, B and C were partners in a firm sharing profits in the ratio of 4:3:2. After 15 years they agree to dissolve the firm.

After paying outside liabilities and the capital of partners, there is a surplus of Rs. 40,000. What will be the share of A, B and C? [Hint. They will share the surplus in the ratio of 4:3:2.] References Kapoor, N.D. (2003), Elements of Mercantile Law, Sultan Chand and Sons, New Delhi. http://www.indialawinfo.com/bareacts/soga.html M.C. Kucchal ( 2002), Business Law , Vikas Publishing House Pvt. Ltd, Delhi. P.C. Tulsian (2002), Pvt. Ltd, Delhi. Business Law , Tata Mc. Graw Hill

Aggarwal, Rohini (2003), Student s Guide to Mercantile and Commercial Laws, Taxmann s, New Delhi LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 146 11.555

LESSON 29: THE COMPANIES ACT, 1956 DEFINITION AND NATURE OF A COMPANY Learning Objectives At the end of this chapter, you will be able to Identify the meaning and nature of a company Identify the important characteristics of a company Introduction Today, we will begin with the Companies Act that was passed in 1956. In the lecture of today we will discuss the meaning and nature of a company. Do you know what do we mean by company? In simple words, a company can be defined as a group of persons associated together for the purpose of carrying on a business, with a view to earn profits. The word Company is an amalgamation of the Latin word Com meaning with or together and Pains meaning bread . Thus, a company is nothing but a group of persons who have come together or who have contributed money for some common person and who have incorporated themselves into a distinct legal entity in the form of a company for that purpose. Section 3(1)(i) of the Act provides that, a company means a company formed and registered under this Act or an existing company. Section 3(1)(ii) lays down that, An 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 1886), 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 Companies Ordinance, 1942 (54 of 1942); and 40[ (f) An law corresponding to any of the Acts or the Ordinance aforesaid and in force( 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 41[ in so far as banking, insurance and financial corporations are concerned, and before the commencement of the Central Laws (Extension to Jammu & Kashmir)

There is very good definition by Lord Justice Lindey, A company is an association of many persons who contribute money or money s worth to a common stock and employ it in some trade or business and who share the profit and loss arising there from. The common stock so contributed is denoted in money and is the capital of the company. The persons who contribute it or to whom it belongs are members. The proportion of capital to which each member is entitled is his share. The shares are always transferable although the right to transfer is more or less restricted. The Supreme Court of India has held in the case of State Trading Corporation of India v/s CTO that a company cannot have the status of a citizen under the Constitution of India. Let us learn about its important characteristics. Characteristics of a Company A company as an entity has several distinct features, which together make it a unique organization. The following are the defining characteristics of a company: Separate Legal Entity On incorporation under law, a company becomes a separate legal entity as compared to its members. The company is different and distinct from its members in law. It has its own name and its own seal, its assets and liabilities are separate and distinct from those of its members. It is capable of owning property, incurring debt, borrowing money, having a bank account, employing people, entering into contracts and suing and being sued separately. The importance of the separate entity of the company was however firmly established in the following case. Salomon v. Salomon & co. Ltd.(1897) A.C. 22. S sold his boots business to a newly formed company for 30,000. His wife, one daughter and four sons took up one share of 1 each. S took 23,000 shares of 1 each and 10,000 debentures in the company. The debentures gave S a charge over the assets of the company as the consideration for the transfer of the business. Subsequently when the company was wound up, its assets were found to the worth 6,000 and its liabilities amounted to 17,000 of which 10,000 were due to S (secured by debentures) and 7,000 due to unsecured creditors, the unsecured creditors claimed that S and the company were one and the same person and that the company was a mere agent for S and was hence they should be paid in priority to S. Held, the company was, in the eyes of the law, a separate person independent from S and was not his agent. S, though virtually the holder of all the shares in the company, was also a secured creditor and was entitled to repayment in priority to the unsecured creditors. Limited Liability The liability of the members of the company is limited to

contribution to the assets of the company up to the face value of shares held by him. A member is liable to pay only the uncalled money due on shares held by him when called upon to LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 148 11.555

pay and nothing more, even if liabilities of the company far exceeds its assets. On the other hand, partners of a partnership firm have unlimited liability i.e. if the assets of the firm are not adequate to pay the liabilities of the firm, the creditors can force the partners to make good the deficit from their personal assets. This cannot be done in case of a company once the members have paid all their dues towards the shares held by them in the company. For example, if the face value of the share in a company is Rs. 10 and a member has already paid Rs. 5 per share, he can be called upon to pay not more than Rs. 5 per share during the lifetime of the company. Perpetual Succession A company does not die or cease to exist unless it is specifically wound up or the task for which it was formed has been completed. Membership of a company may keep on changing from time to time but that does not affect life of the company. Death or insolvency of member does not affect the existence of the company. There is a very good saying. Even where during war all the members of a private company, while in general meeting was killed by a bomb, the company survived; not even a hydrogen bomb could have destroyed it. [ Meat Supplies( Guildford) Ltd; Re( 1966) 3 All E.R.320] Separate Property A company is a distinct legal entity. The company s property is its own. A member cannot claim to be owner of the company s property during the existence of the company. Transferability of Shares Shares in a company are freely transferable, subject to certain conditions, such that no shareholder is permanently or necessarily wedded to a company. When a member transfers his shares to another person, the transferee steps into the shoes of the transferor and acquires all the rights of the transferor in respect of those shares. Common Seal A company is a artificial person and does not have a physical presence. Therefore, it acts through its Board of Directors for carrying out its activities and entering into various agreements. Such contracts must be under the seal of the company. The common seal is the official signature of the company. The name of the company must be engraved on the common seal. Any document not bearing the seal of the company may not be accepted as authentic and may not have any legal force. Capacity to sue and Being Sued A company can sue or be sued in its own name as distinct from its members.

Separate Management A company is administered and managed by its managerial personnel i.e. the Board of Directors. The shareholders are simply the holders of the shares in the company and need not be necessarily the managers of the company. One Share-One Vote: The principle of voting in a company is one share-one vote. I.e. if a person has 10 shares, he has 10 votes in the company. This is in direct contrast to the voting principle of a co-operative society where the One Member - One Vote principle applies i.e. irrespective of the number of shares held; one member has only one vote. You have learnt about partnership. Now you also know about company. Let us try to differentiate between company and partnership. Distinction between Company and Partnership 1. A Partnership firm is sum total of persons who have come together to share the profits of the business carried on by them or any of them. It does not have a separate legal entity. A Company is association of persons who have come together for a specific purpose. The company has a separate legal entity as soon as it is incorporated under law. 2. Liability of the partners is unlimited. However, the liability of shareholders of a limited company is limited to the extent of unpaid share or to the tune of the unpaid amount guaranteed by the shareholder. 3. Property of the firm belongs to the partners and they are collectively entitled to it. In case of a company, the property belongs to the company and not to its members. 4. A partner cannot transfer his shares in the partnership firm without the consent of all other partners. In case of a company, shares may be transferred without the permission of the other members, in absence of provision to contrary in articles of association of the company. 5. In case of partnership, the number of members must not exceed 20 in case of banking business and 10 in other businesses. A Public company may have as many members as it desires subject to a minimum of 7 members. A Private company cannot have more than 50 members. 6. There must be at least 2 members in order to form a partnership firm. The minimum number of members necessary for a public limited company is seven and two for a private limited company.

7. In case of a partnership, 100 % consensus is required for any decision. In case of a company, decision of the majority prevails. 8. On the death of any partner, the partnership is dissolved unless there is provision to the contrary. On the death of the shareholder the company existence does not get terminated. I must tell you about the meaning of illegal association. Illegal Association Under the Companies Act, 1956, not more than 10 persons can come together for carrying on any banking business and not more than 20 persons can come together for carrying on any other of business, unless the association is registered under the Companies Act or any other Indian law. Any association, which does not comply with the above norms, is an illegal association. Therefore, a partnership of more 10 or 20 members, as the case may be, is an illegal association unless the registered under the Companies Act or any other Indian law. However, you cannot apply this provision in the following cases LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 149

1. A Joint Hindu Family business comprising of family members only. But where two or more Joint Hindu families come together for business through partnership, the total number of members cannot exceed 10 or 20 as the case may be, but in computing the number of persons, minor members of such family will be excluded. 2. Any association of charitable, religious, scientific trust or organisation which is not formed with a profit motive 3. Foreign companies. When the number of members exceeds the prescribed maximum, members must register it under Companies Act or any other Indian law. Consequences of non-Registration Law does not recognize an illegal association. An illegal association cannot enter into any contract, cannot sue any members or any outsider, and cannot be sued by any members or outsiders for any of its debts. The members of the illegal association are personally for the obligations of the illegal association. A member may be liable to a fine of Rs. 1000. Any member of an illegal association cannot sue another member in respect of any matter connected with the association. Minimum Number of Members A public company must have at least 7 members whereas a private company may have only 2 members. If the number of members falls below the statutory minimum and the company carries on its business beyond a period of six months after the number has so fallen, the reduction of number of members below the legal minimum is a ground for the winding up of the company. Practical Problems 1. A husband and wife who were the only two members of a private company died in an accident. Does the company also come to an end? 2. There are five members in a company. They are all holding fully paid shares in a company. What is their liability? 3. What would be the effect if 22 members were carrying on a business without registration? 4. How would you differentiate between a company and partnership? References Kapoor, N.D. (2003), Elements of Mercantile Law, Sultan Chand and Sons, New Delhi. LEGAL ASPECTS OF BUSINESS

http://www.vakilno1.com http://www.saarclawnet.com/saarclawnet/ osca20.html Notes: Copy Right: Rai University 150 11.555

LESSON 30: THE COMPANIES ACT, 1956 TYPES OF COMPANIES Learning Objectives At the end of this chapter, you will be able to Identify the different types of company Introduction Today we will learn about the important types of company. There are various basis to classify companies. On the basis of the number of the members, companies can be divided in two: A Private Company A Public Company Public Company means a company which not a private company. Private Company means a company which by its articles of association: a. Restricts the right of members to transfer its shares b. Limits the number of its members to fifty. In determining this number of 50, employee-members and ex-employee members are not to be considered. c. Prohibits an invitation to the public to subscribe to shares in or the debentures of the company. If a private company contravenes any of the aforesaid provisions, it ceases to be private company and loses exemptions and privileges, which a private company is

any three all the entitled.

Following are some of the privileges and exemptions of a private limited company: 1. Minimum number is members is 2 (7 in case of public companies) 2. Prohibition of allotment of the shares or debentures in certain cases unless statement in lieu of prospectus has been delivered to the Registrar of Companies does not apply. 3. Restriction contained in Section 81 related to the rights

issues of share capital does not apply. A special resolution to issue shares to non-members is not required in case of a private company. 4. Restriction contained in Section 149 on commencement of business by a company does not apply. A private company does not need a separate certificate of commencement of business. 5. Provisions of Section 165 relating to statutory meeting and submission of statutory report do not apply. 6. One (if 7 or less members are present) or two members (if more than 7 members are present) present in person at a meeting of the company can demand a poll. 7. In case of a private company which not a subsidiary of a public limited company or in the case of a private company of which the entire paid up share capital is held by the one or more body corporate incorporated outside India, no person other than the member of the company concerned shall be entitled to inspect or obtain the copies of profit and loss account of that company. 8. Minimum number of directors is only two. (3 in case of a public company) The Company Law Board on being satisfied that the infringement of the aforesaid 3 conditions was accidental or due to inadvertence or that on other grounds, it just an equitable to grant relief, may grant relief to the company from the consequences of such infringement. The infringement of the aforesaid 3 conditions does not automatically convert a private company into a public company. It continues to remain a private company; it merely ceases to be entitled to the privileges and exemptions available to a private company. Companies Deemed to be Public limited Company A private company will be treated as a deemed public limited company in any of the following circumstances : 1. Where at least 25% of the paid up share capital of a private company is held by one or more bodies corporate, the private company shall automatically become the public company on and from the date on which the aforesaid percentage is so held. 2. Where the annual average turnover of the private company during the period of three consecutive financial years is not less than Rs 25 crores, the private company shall be, irrespective of its paid up share capital, become a deemed public company. 3. Where not less than 25% of the paid up capital of a public company limited is held by the private company, then the private company shall become a public company on and from the date on which the aforesaid percentage is so held.

4. Where a private company accepts deposits after the invitation is made by advertisement or renews deposits from the public (other than from its members or directors or their relatives), such companies shall become public company on and from date such acceptance or renewal is first made. On the basis of the liability of the members, a company can be classified in Limited Companies Unlimited Companies Limited Companies Companies may be limited or unlimited companies. Company may be limited by shares or limited by guarantee. a. Company limited by shares In this case, the liability of members is limited to the amount of uncalled share LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 151

capital. No member of company limited by the shares can be called upon to pay more than the face value of shares or so much of it as is remaining unpaid. Members have no liability in case of fully paid up shares. b. Company limited by the guarantee A company limited by guarantee is a registered company having the liability of its members limited by its memorandum of association to such amount as the members may respectively thereby undertake to pay if necessary on liquidation of the company. The liability of the members to pay the guaranteed amount arises only when the company has gone into liquidation and not when it is a going concern. A guarantee company may be a company with share capital or without share capital. Unlimited Company: The liability of members of an unlimited company is unlimited. Therefore their liability is similar to that of the liability of the partners of a partnership firm. It may or may not have a share capital. Under the Companies Act, 1956, the name of a public limited company must end with the word Limited and the name of a private limited company must end with the word Private Limited . However, under Section 25, the Central Government may allow companies to remove the word Limited / Private Limited from the name if the following conditions are satisfied : 1. The company is formed for promoting commerce, science, art, religion, charity or other socially useful objects 2. The company does not intend to pay dividend to its members but apply its profits and other income in promotion of its objects. On the basis of the control, we can classify company as Holding and Subsidiary companies Holding and Subsidiary companies (Sec 4) A company shall be deemed to be subsidiary of another company if: 1. That other company controls the composition of its board of directors; or 2. That other company holds more than half in face value of its equity share capital 3. Where the first mentioned company is subsidiary company of any company, which that other s subsidiary. eg Company B is subsidiary of the Company A and Company C is subsidiary of Company B, therefore Company C is subsidiary of Company A. The control of the composition of the Board of Directors of

the company means that the holding company has the power at its discretion to appoint or remove all or majority of directors of the subsidiary company without consent or concurrence of any other person. On the basis of the ownership, a company can be classified as Government Companies Non Government Companies Foreign Companies Government Companies It means any company in which not less than 51% of the paid up share capital is held by the Central Government or any State Government or partly by the Central Government and partly by the one or more State Governments and includes a company which is a subsidiary of a government company. Government Companies are also governed by the provisions of the Companies Act. However, the Central Government may direct that certain provisions of the Companies Act shall not apply or shall apply only with such exceptions, modifications and adaptions as may be specified to such government companies. Non Government Companies It is controlled and operated by a private capital Foreign Companies By this, we mean a company incorporated in a country outside India under the law of that other country and has established the place of business in India. There is another important type of company which is called as One Man Company One man company is a company in which one man holds practically the whole of the share capital of the company, and in order to meet the statutory requirement of minimum number of members, some dummy members who are mostly his friends or relations, hold just 1or 2 shares each. It is like any other company is a legal entity distinct from its members. The dummy members are usually nominees of the principal shareholder who is the virtual owner of the business and who carries it on with limited liability. Now attempt the following problems. Practical Problems Attempt the following problems, giving reasons : 1. A, a trader, carried on business under the name of A& Co. Ltd. Without being registered as a company with limited liability. Discuss the consequences of the act of A. 2.

An association of 12 members starts a banking business without being registered. 4 members retire and thereafter a suit is instituted by one of the continuing members for the partitions of assets of the business. Is the suit valid? [Hint. No] 3. 35 percent of the paid up capita of a private company is held by a public company. Does the private company become a public company? Give reasons for your answer. [Hint. Yes(Badri Prasad v.Nagarmal)] 4. X & Co. and Y & co. are 2 firms roistered under the Indian partnership act, 1932, each consisting of 12 partners. The firms desire to carry on business jointly as partners under the name XY & co. Does XY & co. require registration and, if so, under what provisions of the companies act? [Hint. Yes] LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 152 11.555

5. A joint Hindu family consisting of a father and 5 major sons and another family consisting of a father. 5 major sons and 1minor son carried on banking business. As owners thereof. Does the organization require registration under the companies act, 1956? [Hint. Yes ] References Kapoor, N.D. (2003), Elements of Mercantile Law, Sultan Chand and Sons, New Delhi. http://www.vakilno1.com http://www.saarclawnet.com/saarclawnet/osca20.html Notes: LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 153

LESSON 31: THE COMPANIES ACT, 1956 PROMOTION AND FORMATION OF A COMPANY Learning Objectives At the end of this chapter, you will be able to Identify the process of forming a company Identify the process of registration of a company Introduction We have learnt about the meaning, nature and types of company. Today we will learn about how the company is formed. Before a company is formed, certain preliminary steps are to be taken, e.g; whether it should be a private company or a public company; what should be its capital;etc. The process of forming a company can be divided into four distinct stages: a) Promotion b) Registration or incorporation c) Capital Subscription d) Commencement of Business. As regards a private company, it needs to go through the first two stages only. As soon it receives the certificate of incorporation, it can commence business. This is so because it cannot invite the public to subscribe to its shares and must arrange to raise the capital privately. But Public Company has to go through all of the four stages. We shall now discuss each of these four stages. Promotion This is the first stage in the formation of a company. It refers to the entire process by which a company is brought into existence. It starts with the conceptualization of the birth a company and determination of the purpose for which it is to be formed. Do you know what we mean by promoters? Promoters The persons who conceive the company and invest the initial

funds are known as the promoters of the company. The promoters enter into preliminary contracts with vendors and make arrangements for the preparation, advertisement and the circulation of prospectus and placement of capital. However, a person who merely acts in his professional capacity on behalf of the promoter (e.g. lawyer, CA, etc) for drawing up the agreement or other documents or prepares the figures on behalf of the promoter and whom the promoter pays is not a promoter. Pre-Incorporation or Preliminary Contracts The promoters of a company usually enter into contract to acquire some property or right for the company, which is yet to be incorporated. Such contracts are called Pre-Incorporation or Preliminary Contracts. Position of promoters as regards Pre-Incorporation or Preliminary Contracts Company not bound by pre-incorporation contract English & colonial produce co. ltd Re (1906) 2 ch. 435. A solicitor prepared the memorandum and Articles of association of a company and paid the necessary registration fees and other incidental expenses to obtain of the company. He did this on the instruction of certain persons who later became directors of the company. Held, the company was not liable of his work. Company can not enforce pre-incorporation contract Natal land & colonization co. Ltd. V. Pauline colliery & Development syndicate ltd., (1904) A.C. 120. The N company agreed with an agent of the P syndicate Ltd before its formation to grant a mining lease to the syndicate. The syndicate was registered and discovered a seam of coal. The company refused to grant the lease. Held, there was no binding contract between the company and the syndicate. Promoters are personally liable Kelner v. Baxter, (1866) L.R. 2 C.P. 174.A hotel company was about to be formed and persons responsible for the new company signed an agreement on 27th January, 1866, for the purchase of stock on behalf of the proposed company, payment to be made on 28th January, 1866. The company was incorporated on 20th February 1866. the goods were consumed in the business and the company went into liquidation before the debt was paid. The persons signing the agreement were sued on the contract. Held. The persons signing were promoters and personally liable on their signatures. The promoters have certain basic duties towards the company formed : 1. He must not make any secret profit out of the promotion of the company. Secret profit is made by entering into a transaction on his own behalf and then sell to concerned property to the company at a profit without making disclosure of the profit to the company or its members. The promoter can make profits in his dealings with the company provided he discloses these profits to the

company and its members. What is not permitted is making secret profits i.e. making profits without disclosing them to the company and its members. 2. He must make full disclosure to the company of all relevant facts including to any profit made by him in transaction with the company. In case of default on the part of the promoter in fulfilling the above duties, the company may: 1. Rescind or cancel the contract made and if he has made profit on any related transaction, that profit also may be recovered LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 154 11.555

2. Retain the property paying no more for it then what the promoter has paid for it depriving him of the secret profit. 3. If these are not appropriate (e.g. cases where the property has altered in such a manner that it is not possible to cancel the contract or where the promoter has already received his secret profit), the company can sue him to for breach of trust. Damages up to the difference between the market value of the property and the contract price can be recovered from him. A promoter may be rewarded by the company for efforts undertaken by him in forming the company in several ways. The more common ones are : 1. The company may to pay some remuneration for the services rendered. 2. The promoter may make profits on transactions entered by him with the company after making full disclosure to the company and its members. 3. The promoter may sell his property for fully paid shares in the company after making full disclosures. 4. The promoter may be given an option to buy further shares in the company. 5. The promoter may be given commission on shares sold. 6. The articles of the Company may provide for fixed sum to be paid by the company to him. However, such provision has no legal effect and the promoter cannot sue to enforce it but if the company makes such payment, it cannot recover it back. If the promoter fails to disclose the profit made by him in course of promotion or knowingly makes a false statement in the prospectus whereby the person relying on that statement makes a loss, he will be liable to make good the loss suffered by that other person. The promoter is liable for untrue statements made in the prospectus. A person who subscribes for any shares or debenture in the company on the faith of the untrue statement contained in the prospectus can sue the promoter for the loss or damages sustained by him as the result of such untrue statement. Let us learn about the incorporation of the company. Incorporation by Registration The promoters must make a decision regarding the type of company i.e. a public company or a private company or an unlimited company, etc and accordingly prepare the documents for incorporation of the company. In this connection the Memorandum and Articles of Association (MA & AA) are crucial documents to be prepared.

Mode of forming incorporated company (Sec. 12) Any 7 or more persons (2 or more in case of a private company) associated for any lawful purpose may form an incorporated company, with or without limited liability. They shall subscribe their names to a Memorandum of Association and also comply other formalities in respect of registration. A company so formed may be : a) A company limited by shares, or b) A company limited by guarantee, or c) Unlimited company Registration of the Company Once the documents have been prepared, vetted, stamped and signed, they must be filed with the Registrar of Companies for incorporating the Company. The following documents must be filed in this connection: 1. The Memorandum of Association duly signed by subscribers and the Articles of Association, if any signed by subscribers to the Memorandum of Association 3. An agreement, if any, which the company proposes to enter into with any individual for appointment as its managing director or whole-time director or manager. 5. A statutory declaration in Form 1 by an advocate, attorney or pleader entitled to appear before the High Court or a company secretary or Chartered Accountant in whole - time practice in India who is engaged in the formation of the company or by a person who is named as a director or manager or secretary of the company that the requirements of the Companies Act have been complied with in respect of the registration of the company and matters precedent and incidental thereto. 4. In addition to the above, in case of a public company, the following documents must also be filed: 1. 2. Written consent of directors in Form 29 to agree to act as directors and their written consent to act as directors and take up qualification shares. 3. 4. The complete address of the registered office of the company in Form 18. 5. 6. Details of the directors, managing director and manager of the company in Form 32.

Certificate of Incorporation Once all the above documents have been filed and they are found to be in order, the Registrar of Companies will issue Certificate of Incorporation of the Company. This document is the birth certificate of the company and is proof of the existence of the company. Once, this certificate is issued, the company cannot cease its existence unless it is dissolved by order of the Court. Conclusiveness of Certificate of Incorporation The certificate of incorporation given by registrar in respect of a company is conclusive evidence that all the requirements of the Companies Act have been complied in respect of registration. This is known as Rule In Peel s Case. Note the following Case Jubilee cotton mills Ltd. V. Lewis, (1924) A.C. 958, On 6th January, the necessary documents were delivered to the registrar for registration. Two days after, the registrar issued the certificate of incorporation but dated it 6th January instead of 8th, i.e.. the day on which the certificate was issued. On 6th January some shares were allotted to L, i.e.. before the certificate of incorporation was issued. The question arose whether the allotment was LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 155

void. Held, the certificate of incorporation is conclusive evidence of all that it contains, in law the company was formed on 6th January and, therefore, the allotment of shares was valid. Commencement of Business A private company or a company having no share capital can commence its business immediately after it has been incorporated. However, other companies can commence their activities only after they have obtained Certificate of Commencement of Business. For this purpose, the following additional formalities have to be complied with: 1. If a company has share capital and has issued a prospectus, then: 2. If a company has share capital but has not issued a prospectus, then: a. b. It must file a statement in lieu of prospectus with the Registrar of Companies c. d. Every director has paid to the company on each of the shares, which he has taken the same amount as the other members have paid on such shares e. f. A statutory declaration in Form 20 signed by one director or the employee - company secretary or a Company secretary in whole time practice that the above provisions have been complied with must be filed. Once the above provisions have been complied with, the Registrar of Companies grants Certificate of Commencement of Business after which the company can commence its activities. Now attempt the following problems Practical Problems Attempt the following problems, giving reasons: 1. The promoters of a company, before its incorporation, enter into an agreement with P to buy A Plot of land on behalf of the company, after incorporation the company refuses to buy the said plot of land. Has P any remedy either against the promoters or against the company? [Hint. P has no remedy against the company. The promoters are personally liable on the contract], 2. 6 of the 7 signatures to the memorandum of association of a company were forged. The memorandum was duly presented, registered and a certificated of incorporation was issued. Can the existence of the of the company be subsequently attacked on the ground that the registration

was void. Decide. [Hint. No (see.35 Rule in peel s case)] 3. The memorandum of association of a company was presented to the registrar of companies for registration and the registrar issued the certificate of incorporation. The company after complying with all the prescribed legal formalities started a business. The company contends that the nature of business cannot be one into as the certificate of incorporation is conclusive. Discuss. [Hint. The company s contention is untenable and the nature of the business can be gone into.] 4. The memorandum of association of a company was signed by 2 adult members and by a guardian of the other 5 minor members. The guardian signing separately for each minor member. The registrar registered the company and issued under his hand a certificate of incorporation, the plaintiff contended that (a) Conditions of registration were not duly complied with, and (b) There were no 7 subscribes to the memorandum. Will the court uphold his contention? [Hint. No (peel s case)] 5. The express newspapers (Pvt.) Ltd., leading publishers of newspapers and weeklies, sold its undertaking to a new company. Andhra Prabha (Pvt). Ltd; consequent upon the Government adopting certain recommendations of the wage board for improvement in the terms of service and salaries of the working journalists. Shall the registration of the company be declared void on the plea that new company was formed for the purpose of evading the new obligations imposed by the wage board? Hint. No (T.V. Krishna v. Andhra Prabha [Pvt.] Ltd; (1902) 2 Ch 809)] References Kapoor, N.D. (2003), Elements of Mercantile Law, Sultan Chand and Sons, New Delhi. http://www.vakilno1.com http://www.saarclawnet.com/saarclawnet/osca20.html a. b. Shares up to the amount of minimum subscription must be allotted. c. d. Every director has paid to the company on each of the shares, which he has taken the same amount as the public has paid on such shares. e. f. No money is or may become payable to the applicants of shares or debentures for failure to apply for or to

obtain permission to deal in those shares or debentures in any recognized stock exchange. g. h. A statutory declaration in Form 19 signed by one director or the employee - company secretary or a Company secretary in whole time practice that the above provisions have been complied with must be filed. LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 156 11.555

LESSON 32: THE COMPANIES ACT, 1956 MEMORANDUM AND ARTICLES OF ASSOCIATION Learning Objectives At the end of this chapter, you will be able to know about: The memorandum of association The articles of association The doctrine of ultra virus Introduction Memorandum and Articles of Association are the two important documents of the company. Let us learn about them. Memorandum of Association of a Company It is the constitution or charter of the company and contains the powers of the company. No company can be registered under the Companies Act, 1956 without the memorandum of association. Under Section 2(28) of the Companies Act, 1956 the memorandum means the memorandum of association of the company as originally framed or as altered from time to time in pursuance with any of the previous companies law or the Companies Act, 1956. The memorandum of association should be in any of the one form specified in the tables B,C,D and E of Schedule 1 to the Companies Act, 1956. Form in Table B is applicable in case of companies limited by the shares, form in Table C is applicable to the companies limited by guarantee and not having share capital, form in Table D is applicable to company limited by guarantee and having a share capital whereas form in table E is applicable to unlimited companies. Contents of Memorandum: The memorandum of association of every company must contain the following clauses Name Clause The name of the company is mentioned in the name clause. A public limited company must end with the word Limited and a private limited company must end with the words Private Limited . The company cannot have a name which in the opinion of the Central Government is undesirable. A name which is identical with or the nearly resembles the name of another company in existence will not be allowed. A company cannot use a name which is prohibited under the Names and Emblems (Prevntion of Misuse Act, 1950 or use a name

suggestive of connection to government or State patronage. Domicile clause The state in which the registered office of company is to be situated is mentioned in this clause. If it is not possible to state the exact location of the registered office, the company must state it provide the exact address either on the day on which commences to carry on its business or within 30 days from the date of incorporation of the company, whichever is earlier. Notice in form no 18 must be given to the Registrar of Comapnies within 30 days of the date of incorporation of the company. Similarly, any change in the registered office must also be intimated in form no 18 to the Registrar of Companies within 30 days. The registered office of the company is the official address of the company where the statutory books and records must be normally be kept. Every company must affix or paint its name and address of its registered office on the outside of the every office or place at which its activities are carried on in. The name must be written in one of the local languages and in English. Objects Clause This clause is the most important clause of the company. It specifies the activities which a company can carry on and which activities it cannot carry on. The company cannot carry on any activity, which is not authorised by its MA. This clause must specify: i. Main objects of the company to be pursued by the company on its incorporation ii. Objects incidental or ancillary to the attainment of the main objects iii. Other objects of the company not included in (i) and (ii) above. In case of the companies other than trading corporations whose objects are not confined to one state, the states to whose territories the objects of the company extend must be specified. Doctrine of the ultra-vires Any transaction which is outside the scope of the powers specified in the objects clause of the MA and are not reasonable incidentally or necessary to the attainment of objects is ultra-vires the company and therefore void. No rights and liabilities on the part of the company arise out of such transactions and it is a nullity even if every member agrees to it. Consequences of an Ultra vires transaction : 1. The company cannot sue any person for enforcement of any of its rights. 2.

No person can sue the company for enforcement of its rights. 3. The directors of the company may be held personally liable to outsiders for an ultra vires. Note the following case Ashbury Rly. Carriage & Iron Co. Ltd. V. Riche. (1875) l. R. 7 H.L 653. A company was incorporated with the following objects. (a) To make, sell, or lend on hire, railway carriages and wagons. (b) To carry on the business of mechanical engineers and general contractors. LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 157

(c) To purchase, lease, work, and sell mines, minerals, land and buildings. The company entered into a contract with Riche for the financing of the construction of a railway line in Belgium. The question raised was whether that contract was covered within the meaning of general contractors. The house of lords held that the contract was ultra virus the company and void so that not even the subsequent assent of the whole body of shareholders could ratify it. However, the doctrine of ultra-vires does not apply in the following cases : 1. If an act is ultra-vires of powers the directors but intravires of company, the company is liable. 2. If an act is ultra-vires the articles of the company but it is intra-vires of the memorandum, the articles can be altered to rectify the error. 3. If an act is within the powers of the company but is irregualarly done, consent of the shareholders will validate it. 4. Where there is ultra-vires borrowing by the company or it obtains deliver of the property under an ultra-vires contract, then the third party has no claim against the company on the basis of the loan but he has right to follow his money or property if it exist as it is and obtain an injunction from the Court restraining the company from parting with it provided that he intervenes before is money spent on or the identity of the property is lost. 5. The lender of the money to a company under the ultra-vires contract has a right to make director personally liable. Liability clause A declaration that the liability of the members is limited in case of the company limited by the shares or guarantee must be given. The MA of a company limited by guarantee must also state that each member undertakes to contribute to the assets of the company such amount not exceeding specified amounts as may be required in the event of the liquidation of the company. A declaration that the liability of the members is unlimited in case of the unlimted companies must be given. The effect of this clause is that in a company limited by shares, no member can be called upon to pay more than the uncalled amount on his shares. If his shares are already fully paid up, he has no liabilty towards the company. The following are exceptions to the rule of limited liability of members : 1. If a member agrees in writing to be bound by the

alteration of MA / AA requiring him to take more shares or increasing his liability, he shall be liable upto the amount agreed to by him. 2. If every member agrees in writing to re-register the company as an unlimited company and the company is reregistered as such, such members will have unlimited liability. 3. If to the knowledge of a member, the number of shareholders has fallen below the legal minimum, (seven in the case of a public limited company and two in case of a private limited company ) and the company has carried on business for more than 6 months, while the number is so reduced, the members for the time being constituting the company would be personally liable for the debts of the company contracted during that time. Capital clause The amount of share capital with which the company is to be registered divided into shares must be specified giving details of the number of shares and types of shares. A company cannot issue share capital greater than the maximum amount of share capital mentioned in this clause without altering the memorandum. A company limited by shares can alter the capital clause of its Memorandum in any of the following ways provided that such alteration is authorized by the articles of association of the company: 1. Increase in share capital by such amount as it thinks expedient by issuing new shares. 2. Consolidate and divide all or any of its share capital into shares of larger amount than its existing shares. eg, if the company has 100 shares of Rs.10 each ( aggregating to Rs. 1000/-) it may consolidate those shares into 10 shares of Rs100 each. 3. Convert all or any of its fully paid shares into stock and re-convert stock into fully paid shares of any denomination. 4. Subdivide shares or any of shares into smaller amounts fixed by the Memorandum so that in subdivision the proportion between the amount paid and the amount if any unpaid on each reduced shares shall be same as it was in case of from which the reduced share is derived. 5. Cancel shares which have been not been taken or agreed to be taken by any person and diminish the amount of share capital by the amount of the shares so cancelled.

The alteration of the capital of the company in any of the manner specified above can be done by passing a resolution at the general meeting of the company and does not require any confirmation by the court. Reduction of the share capital can be effected only in the manners specified in Section 100-104 of the Act or by way of buy back under Section 77A and 77B of the Act. Notice of alteration to share capital is required to be filed with the registrar of the company in Form no 5 within 30 days of the alteration of the capital clause of the MA. The Registrar shall record the notice and make necessary alteration in Memorandum and Articles of Association of the company. Any default in giving notice to the registrar renders company and its officers in default liable to punishment with fine which may extend to the Rs50 for each day of default. Association clause A declaration by the persons for subscribing to the Memorandum that they desire to form into a company and agree to take the shares place against their respective name must be given by the promoters. LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 158 11.555

Articles of Association The Articles of Association (AA) contain the rules and regulations of the internal management of the company. The AA is nothing but a contract between the company and its members and also between the members themselves that they shall abide by the rules and regulations of internal management of the company specified in the AA. It specifies the rights and duties of the members and directors. The provisions of the AA must not be in conflict with the provisions of the MA. In case such a conflict arises, the MA will prevail. Normally, every company has its own AA. However, if a company does not have its own AA, the model AA specified in Schedule I - Table A will apply. A company may adopt any of the model forms of AA, with or without modifications. The articles of association should be in any of the one form specified in the tables B,C,D and E of Schedule 1 to the Companies Act, 1956. Form in Table B is applicable in case of companies limited by the shares , form in Table C is applicable to the companies limited by guarantee and not having share capital, form in Table D is applicable to company limited by guarantee and having a share capital whereas form in table E is applicable to unlimited companies. However, a private company must have its own AA. The important items covered by the AA include : 1. Powers, duties, rights and liabilities of Directors 2. Powers, duties, rights and liabilities of members 3. Rules for Meetings of the Company 4. Dividends 5. Borrowing powers of the company 6. Calls on shares 7. Transfer & transmission of shares 8. Forfeiture of shares 9. Voting powers of members, etc Alteration of articles of association : A company can alter any of the provisions of its AA, subject to provisions of the Companies Act and subject to the conditions contained in the Memorandum of association of the company. A company, by special resolution at a general meeting of members, alter its articles provided that such alteration does not have the effect of converting a public limited company into a private company unless it has been approved by the Central Government. The articles must be printed, divided into paragraphs and numbered consequently and must be signed by each subscriber to the Memorandum of Association who shall add his address,

description and occupation in presence of at least one witness who must attest the signature and likewise add his address, description and occupation. The articles of association of the company when registered bind the company and the members thereof to the same extent as if it was signed by the company and by each member. Practical Problems Attempt the following problems, giving reasons 1. 1. X Ltd. A cotton textile company enters into a contract with A Ltd. an adjacent cotton textile mil, to supply electricity form their power generation plant. After supplies have been made fro 3 months it is discovered that this activity is beyond the scope of the objective clause of the memorandum of association of X Ltd. Shareholders of X Ltd. Ratify the contract in their general body meeting can A Ltd, which refuses to make payment on the ground that the contract is wholly null and void be legally compelled to make payment? Hint. No, as the transaction in ultra virus X Ltd] 2. A company altered the objects clause of its memorandum of association according to the procedure laid down by law by passing a special resolution. A copy of the resolution was filed with the registrar 4 months after the passing of the resolution. Can the registrar register the alteration? [Hint. No. Sec. 18] 3. A company carrying on business in jute is empowered by the objects clause of its memorandum of association to do any other business connected with jute. By a resolution passed unanimously the company resolved to alter the objects clause to include the power to carry on additional business in rubber. Is this alteration valid? [Hint. No]. 4. A company put up telephone wires in a certain area. There was no power in the memorandum to put up wires there. The defendants cut them down. Can the company sue for the damage done to the wire? [Hint. Yes (National Telephone Co v. St. Peter Port Constables)] 5. The memorandum of association of a company formed to improve and encourage the breeding of poultry contained a provision that no remuneration should be paid to the members of the governing body of the company. But the company owing to its increase in the business passed a special resolution providing for equitable remuneration to such members for

services rendered. Is this alteration of the memorandum valid? [Hint. Yes (Scientific Poultry Breeders Assn. Ltd., Re)] References Kapoor, N.D. (2003), Elements of Mercantile Law, Sultan Chand and Sons, New Delhi. http://www.vakilno1.com http://www.saarclawnet.com/saarclawnet/osca20.html LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 159

LESSON 33: THE COMPANIES ACT, 1956 THE MANAGEMENT OF A COMPANY DIRECTORS AND MANAGING DIRECTORS Learning Objectives At the end of this chapter, you will be able to know about: The meaning of directors and managing director The position of directors and managing director The appointment and removal of directors and managing director Introduction A company in the eyes of the law is an artificial person. It has no physical existence. As such it cannot act by itself and acts instead through human agency. The persons through whom it acts and by whom the business of the company is conducted are known as directors. The directors of a company are collectively known as the board of directors or the board First of all, you must know what do we mean by director? Section 2(13) defines a director as any person occupying the position of a director, by whatever name he is called. It is the directors who exercise the powers of a company on the behalf of the company. Only individuals can be appointed as the directors of the company. No body corporate, association or firm shall be appointed as director of a company. The directors are the brain of a company. They occupy a pivotal position in the structure of the company. They are in fact the mainsprings of the company. Speaking about the importance of directors. Nevile J; observed in Bath v. Standard Land Co [1910] 2CH. 408 that the Board of directors are the brain and the only brain of the company which is the body, and the company can and does act only through them. It is only when the brain functions that the corporation is said to function. Number of Directors Every public company (other than a deemed public company) must have at least three directors. Every other company must have at least two directors. Subject to this minimum number of directors, the articles of a company may fix the minimum and maximum number of directors for its board of directors. Right of company to increase or reduce the number of directors A company, at a general meeting may, by ordinary resolution, increase or reduce the number of its directors within the limits fixed in that behalf by its articles. Increase in number of directors to require Government

sanction (Sec. 259) In the case of a public company, or a private company which is a subsidiary of a public company, any increase in the number of its directors, beyond the maximum number of directors permitted by the Articles of the Company as first registered, shall not have any effect unless approved by the Central Government and shall become void if, and in so far as, it is disapproved by that Government. However, where such permissible maximum is 12 or less, no approval of the Central Government is required provided the increase does not increase the number of directors beyond 12. Let us now learn about the appointment of directors. Appointment of Directors 1. First Directors The articles of a company usually name the first directors by their respective names or prescribe the method of appointing them. In case the promoters of a company do not appoint the first directors, subscribers of the memorandum who are individuals, shall be deemed to be the directors of the company, until the directors are duly appointed. If the first directors are not appointed in the above manner, the subscribers of the memorandum who are individuals become directors of the company. They shall hold office until directors are duly appointed in the first annual general meeting. 2. Appointment of Directors by the Company (Secs 255 to 257, 263 and 264). Shareholders in general meeting must appoint directors. In the case of a public company or a private company, which is a subsidiary of a public company, at least 2/3rds of the total number of directors shall be liable to retire by rotation. Such directors are called rotational directors and shall be appointed by the shareholders in general meeting. Ascertainment of Directors retiring by Rotation and Filling of Vacancies (Sec. 256) At the annual general meeting of a public company or a private company which is a subsidiary of a public company, 1 /3rd (or the number nearest to 1/3rd) of the rotational directors shall retire form office. The directors to retire by rotation at every annual general meeting shall be those who have been longest in the office since their last appointment. At the annual general meeting at which a director retires by rotation, the company may fill up the vacancy (thus created) by appointing the retiring director or some other person. If the place of the retiring director is not filled up, the meeting may resolve not to fill the vacancy. If there is no such resolution, the meeting shall stand adjourned

till the same day in the next week. If at the adjourned meeting also, the place of retiring director is not filled up, nor is there a resolution not to fill the vacancy, the retiring director shall be deemed to have been reappointed at the adjourned meeting. 3. Appointment of Directors by Directors (Secs. 260, 262 and 313). The directors of a company may appoint directorsLEGAL ASPECTS OF BUSINESS Copy Right: Rai University 160 11.555

As Additional Directors (Sec. 260) Any additional directors appointed by the directors shall hold office only up to the date of the next annual general meeting of the company. The number of directors and additional directors must not exceed the maximum strength fixed for the Board by the Articles [Patrakola Tea Co; Re, A.I.R.(1967) Cal. 406] If the annual general meeting of a company is not held or cannot be held, the additional director shall vacate his office on the day on which the annual general meeting should have been held. If an additional director has been appointed as managing director also, the moment he ceases to be an additional director, he will cease to be the managing director. In a casual vacancy (Sec. 262) In the case of a public company, or a private company which is a subsidiary of a public company, if the office of any director appointed by the company in general meeting is vacated before his term of office expires in the normal course, the resulting casual vacancy may be filled by the board of directors subject to any regulations in the Articles of the Company. By casual vacancy is meant any vacancy, which occurs by reason of death, resignation, disqualification, or failure of an elected director to accept the office for any reason other than retirement, by rotation. A vacancy caused by the retirement of a director by rotation is not a casual vacancy. Such a vacancy has to be filled by the annual general meeting. As alternate director (Sec.313) An alternate director can be appointed by the board if it is so authorized by (i) the articles of the company, or (ii) a resolution passed by the company in the general meeting. He shall act for a director called the original director during his absence for a period of at least 3 months form the state in which board meetings are ordinarily held. 4. Appointment of directors by third parties. The Articles under certain circumstances give power to the debenture holders or other creditors, e.g., a banking company or financial corporation, who have advanced loans to the company to appoint their nominees to the board. The number of directors so appointed shall not exceed 1/3 of the total number of directors, and they are not liable to retire by rotation. 5. Appointment by Proportional Representation [Sec. 265] The Articles of a company may provide for the appointment of not less than 2/3rds of the total number of directors of a public company or of a private company which is a subsidiary of a public company according to the principle of proportional representation. The proportional representation may be by a single transferable vote or by a system of cumulative voting or otherwise. The appointment shall be made once in 3 years and

interim casual vacancies shall be filled in the manner as provided in the articles. 6.Appointment of directors by the central government (Sec. 408) Sec 408 empowers the central government to appoint such number of directors on the Board as the Tribunal may, by order in writing, specify as necessary to effectively safeguard the interests of the company or its shareholders or the public interest. The appointment will be for a period not exceeding 3 years on any one occasion. The purpose of the appointment is to prevent the affairs of the company from being conducted either in the manner. Which is oppressive to any members of the company or Which is prejudicial to the interests of the company or to public interest. The Tribunal may pass the above order on a reference made to it by the central government or on the application. (i) of not less than 100 members of the company or (ii) of members of the company holding not less than 1/ 10th of the total voting power there in . Any director appointed by the central government shall not be required to hold any qualification shares nor shall his period of office be liable to termination by retirement of directors by rotation .Any such director may be removed by the central government from his office and another person may be appointed in his place. Consent of candidate for directorship to be filled with Registrar A person shall not act as director of a company unless he has, by himself or by his agent authorized in writing, signed and filed with the Registrar, consent in writing to act as such director within 30 days of his appointment. This provision shall not apply to a private company unless it is a subsidiary of a public company. As already discussed, directors hold very important position in the Company. Let us now discuss their position Position of Directors It is very difficult to pinpoint the exact legal position of the directors of a company. They have been described by various names, sometimes as agents, sometimes as trustees, and sometimes as managing partners of the company. But such expressions are not used as exhaustive of the powers and responsibilities of such persons but only as indicating useful points of view from which they may, for the moment and for the particular purpose, be considered.

We may now consider the position of the director s form all these points of view. Directors as Agents. A company as an artificial person acts through directors who are elected representatives of the shareholders. They are, in the eyes of the law, agents of the company for which they act, and the general principle of the law of principal and agent regulate in most respects the relationship between the company and its directors. LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 161

Directors as Employees. Although the directors of a company are its agents they are not employees or servants of the company for being entitled to privileges and benefits, which are granted under the Companies Act to the employees. But there is nothing to prevent a director form being a servant of the company under a special contract of service, which he may enter into with the company. The Companies Act itself indicates many situations where a director may be in the employment of a company. Directors as officers For certain matters under the Companies Act, the directors are treated as officers of the company [Sec 2 (30)]. As such they are liable to certain penalties if the provisions of the Companies Act are not strictly complied with. Directors as trustees Directors are treated as trustees Of the company s money and property; and Of the powers entrusted to them. Directors are trustees of the company s money and property in the sense that they must account for all the company s money and property over which they exercise control. They have also to refund to the company any of its money or property, which they have improperly paid away or transferred. Directors are, however, not trustees in the real sense of the word because they are not vested with the ownership of the company s property. It is only as regards some of their obligations to the company and certain powers that they are regarded as trustees of the company. Directors are trustees of the power entrusted to them in the sense that they must exercise their powers honestly and in the interest of the company and the shareholders and not in their own interest. Alexander v. Automatic Telephone Co; (1900) 2 CH. 56 The directors of a company paid up nothing on their own shares. They however made all the other shareholders pay 3s. 6d. on each share. They did not tell the other shareholders of the difference. Held, this was a breach of trust, and the directors were bound to pay to the company 3s. 6d. on each of their shares. Piercy v. S. Mills & Co. Ltd (1920) Ch 77 The directors of a company had the power to issue the unissued shares of the company. The company was in no need of further capital but the directors made a fresh issue to themselves and their supporters with a view to maintaining control of the company Held, the allotment was invalid and void. Trustees for the company Directors are trustees for the company and not for third persons who have made

contracts with the company (City Equitable Fire Ins. Co. Ltd., Re (1925) Ch. 407] or for the individual shareholders. The leading case on the point is : Percival v. Wright, (1902 )2 Ch. 421 The directors of a company bought shares from a shareholder, while they were negotiating for the sale of the company to another at a very high price and they did not disclose this fact to the shareholder. The shareholder sued to have the sale set aside. Held, the sale was binding, as the directors were under no obligation to disclose the negotiations to the shareholder. Quasi- trustees. Directors are really only quasi trustees because They are not vested with ownership of the company s property. Their functions are not the same as those of trustees. Their duties of care are not as onerous as those of trustees. To sum up we can say: Directors have sometimes been called as trustees or commercial trustees, and sometimes they have been called managing partners; it does not matter much what you call them so long as you understand what their real position is, which is that they are really commercial men managing a trading concern for the benefit of themselves and of all the shareholders in it. They stand in a fiduciary position towards the company in respect of their powers and capital under their control. The remaining directors in the case of any such company, and the directors generally in the case of a private company which is not a subsidiary of a public company, must also be appointed by the company in general meeting, unless otherwise provided in any regulations in the articles of the company. There are some important restrictions on the appointment of director. Let us learn about them. Restrictions on Appointment or Advertisement of Director (Sec. 266) A person shall not be capable of being appointed director of a company by the articles, unless before the registration of the articles, the publication of the prospectus, or the filing of the statement in lieu of prospectus, as the case may be , he has, by himself or by his agent authorized 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 or 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 and 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. Qualification shares are the minimum number of shares a person must own, as provided in the articles of the company, in order to qualify to become a director of the company. A director must acquire qualification shares within 2 months of his appointment. The articles cannot require a director to acquire LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 162 11.555

qualification shares within a shorter period. The face value of the qualification shares cannot exceed five thousand rupees, or if the face value of one share is more than five thousand rupees, then the qualification share will be one qualification share. Every director, not being a technical director of a director appointed, by the Central or a State Government, shall within two months after his appointment file with the company a declaration specifying the qualification shares held by him. 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, he shall be punishable with the fine which may extend to fifty rupees for every day between such expiry and the last day on which he acted as a director. The above provisions do not apply toa. 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. Disqualifications of directors (Sec. 274) A person shall not be capable of being appointed director of a company, if, The Central Government may, by notification in the Official Gazette, remove : i. The disqualification incurred by any person in virtue of clause (d) either generally or in relation to any company or companies specified in the notification; or ii. The disqualification incurred by any person in virtue of clause (e) 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 above. No Person to be a Director of More than Twenty Companies Do you know that no person could, hold office at the same time as director in more than twenty companies? Where a person already holding the office of director in twenty companies is appointed, as a director of any other 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. Where a person already holding the office of director in nineteen companies or less is appointed, 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. 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. In calculating the number of companies of which a person may be a director, the following companies shall be 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 profit or which prohibits the payment of dividend d. A company in which such person is only an alternate director, that is to say, a director who is only qualified to act as such during the absence or incapacity of some other director. 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. Vacation of office by directors The office of a director shall become vacant if: a. He fails to obtain within the time specified ( 2 months) 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 an insolvent d. He is adjudged an insolvent LEGAL ASPECTS OF BUSINESS 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 f. An order disqualifying him for appointment as director has been passed by a court and is in force unless the leave of the court has been obtained for his appointment in pursuance of that section. Copy Right: Rai University 11.555 163

The disqualification referred to in clauses (d). (e) and (j) shall not take effect, a. For thirty days from the date of the adjudication sentence or order 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 of 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 of. If a person functions as a director, knowing that his office has vacated on account of the above provisions, shall be liable to a fine upto Rs. 500/- per day of default. 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 above. If the director fails to function in a proper way, he could be removed. Now we will discuss how it is made possible? Removal of Directors A company may, by ordinary resolution, remove a director (not being a director appointed by the Central Government in pursuance of section 408) before the expiry of his period of office. This provision shall not apply where the company has availed itself of the option given to it of proportional representation on the Board of Directors to appoint not less than two-thirds of the total number of directors according to the principle of proportional representation. Special notice shall be required of any resolution to remove a director, or to appoint somebody instead of a director so removed at the meeting at which he is removed. On receipt of notice of a resolution to remove a director under this section, the company shall forthwith send a copy thereof to the director concerned, and the director (whether or not he is a member of the company) shall be entitled to be heard on the resolution at the meeting. Where notice the director company (not notification is given of a resolution to remove a director and concerned makes representations in writing to the exceeding a reasonable length) and requests their to members of the company, the company shall,

unless the representations are received by it too late for it to do so : a. In any notice of the resolution given to members of the company state the fact of the representations having been made; and b. Send a copy of the representations to every member of the company to whom notice of the meeting is sent 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 director may (without prejudice to his right to be heard orally) require that the representations shall be read out at the meeting. However, 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 is satisfied that the rights conferred by this provision are being abused to secure needless publicity for defamatory matter and the Company Law Board may order the company s costs on the application to be paid in whole or in part by the director. A vacancy created by the removal of a director if he had been appointed by the company in general meeting or by the board in on a casual vacancy, be filled by the appointment of another director in his stead by the meeting at which he is removed, provided special notice of the intended appointment has been given. A director so appointed shall hold office until the date up to which his predecessor would have held office if he had not been removed as aforesaid. If the vacancy is not filled, it may be filled as a causal vacancy in accordance with the provisions. The above provisions of removal of a director shall not affect : e. He is convicted by a Court of any offence involving moral turpitude and is 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, with in 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 such disqualification. 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 in contravention of section 295 ( without due authorization of the Central Government ) i. He acts in contravention of section 299 ( failure to disclose interest in any transaction with the company ) j. He becomes disqualified by an order of Court under section 203 k. He is removed by the members by- resolution at a general meeting l. Having been appointed a director by virtue of his holding any office or other employment in the company, he ceases to hold such office or other employment in the company. LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 164 11.555

a. Any compensation or damages payable to him in respect of the termination of his appointment as director or of any appointment terminating with that as director b. Any other power to remove a director which may exist apart from this provision. We will also discuss in brief about the managing director as he holds very important position in the company. Managing Director Managing Director means a person who, by virtue of an agreement with the company or of a resolution passed by the company in a general meeting or by its Board of directors or by virtue of its memorandum or articles of association, is entrusted with substantial powers of management which could not otherwise be exercisable by him and includes a director occupying the position of a managing director, by whatever name called. The power merely to do administrative acts of a routine nature, when so authorised by the Board such as the power to affix the common seal of the company on any document or to draw and endorse any cheque on the account of the company in any bank or to draw and endorse any negotiable instrument or to sign any share certificate or to direct registration of share transfers will not be deemed to be included within substantial powers of management. The managing director must exercise his powers subject to the superintendence, control and direction of the Board. Certain Persons not to be Appointed Managing Directors No company can, appoint or employ, or continue the appointment or employment of, any person as its managing or whole time director who a. Is an undischarged insolvent, or has at any time been adjudged an insolvent b. Suspends, or has at any time suspended, payment to his creditors or makes, or has at any time made, a composition with them c. Is, or has at any time been, convicted by a Court in India of an offence involving moral turpitude. Every public company or a private company which is a subsidiary of a public company, having a paid up share capital of Rs. 5 crores or more must have a managing director or wholetime director or manager. Appointment of managing director or wholetime director or manager of a public company or a private company which is a subsidiary of a public company requires the approval of the Central Government unless the appointment is in accordance with the conditions specified in Schedule XIII of the Companies

Act, 1956 and a returm in Form 25 C is filed within 30 days of appointment. Application for approval must be made to the Central Government if Form 25 A within 90 days of appointment. The Central Government shall grant its approval if it is satisfied that a. The managing director or wholetime director or manager is in its opinion, a fit and proper person b. Such appointment is not against public interest c. The terms and conditions of the appointment are fair and reasonable. The Central Government may grant approval for a period less that the period for which approval is sought. In case the approval of the Central Government is refused, the appointed person shall vacate his office on the date of communication of the decision of the Central Government to the company and if he omits to do so, he shall be liable to a fine of Rs. 500/- for each day of default. The Central Government, on information received by moto, is of the opinion that such appointment made approval of the Central Government contravenes the given in Schedule XIII, it may refer the matter to Company Law Board for decision. it or suo without conditions the

On receipt of the order of the Company Law Board against the company,: Number of Companies of which one Person may be Appointed Managing director No public company or private company which is a subsidiary of a public company can, appoint or employ any person as managing director, of he is either the managing director or the manager of any other company, except as provided below. A public company or a private company which is the subsidiary of a public company may appoint or employ a person as its managing director, if he is the managing director or manager of one, and of not more than one, other company provided that such appointment or employment is made or approved by a unanimous resolution passed at a meeting of the Board and of which meeting, and of the resolution to be moved thereat, specific notice has been given to all the directors then in India. In addition to the above provision, the Central Government may, by order, permit any person to be appointed as a managing direct of more than two companies if the Central Government is satisfied that it is necessary that the companies should, for their proper working, function as a single unit and have a common managing director. Managing Director not to be Appointed for more than five Years at a Time

No company can, appoint or employ any individual as its managing director for a term exceeding five years at a time. However, a person may be re-appointed, re-employed, or his term of office extended by further periods not exceeding five years on each occasion. Such re-appointment, re-employment or extension cannot be sanctioned earlier than two years from the date on which it is to come into force. LEGAL ASPECTS OF BUSINESS a. The company shall be liable to fine of upto Rs. 5000/b. Every officer of the company in default shall be liable to a fine of Rs. 10000/c. The appointment shall be deemed to have come to an end and the appointed person shall in addition to being liable to pay a fine of Rs. 10000/-, refund to the company the entire amount of remuneration received by him from such appointment. Copy Right: Rai University 11.555 165

This provision does not apply to a private company unless it is a subsidiary of a public company. Practical Problems Attempt the following problems, giving reasons 1. A contract between N.W. Ltd. And B. one of its directors is referred to a general meeting for its approval. At the meeting, B voted for the resolution and all others against it. But as B held majority of shares and was entitled to majority of votes. The resolution was passed. Is the contract binding on the company? [Hint. No (sec. 300)]. 2. A public limited company has 15 directors, 4 of whom are not subject to retire by rotation, is it a validly constituted Board? [Hint. Yes (sec. 255)]. 3. A private company having 2 directors has just become a public company by virtue of sec. 43 A is it obligatory for the company to appoint a third director? [Hint. No (Sec. 252)]. 4. The Board of directors of X Ltd. Met only 3 times in the previous year. A fourth meeting was adjourned twice for lack of quorum. Does this constitute a violation of sec. 285 of the companies Act,1956? [Hint. No (Sec. 288)]. References Kapoor, N.D. (2003), Elements of Mercantile Law, Sultan Chand and Sons, New Delhi. http://www.vakilno1.com http://www.saarclawnet.com/saarclawnet/osca20.html Notes: LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 166 11.555

LESSON 34: THE COMPANIES ACT, 1956 MEETINGS AND PROCEEDINGS Learning Objectives After reading the lesson, you will be able to know about the: The kinds of meeting of a company The requisites of a valid meeting of a company The kinds of resolutions The other important terms related to meeting, viz; adjournment, postponement, dissolution and minutes of meeting Introduction A company is an association of several persons. Decisions are made according to the view of the majority. Various matters have to be discussed and decided upon. These discussions take place at the various meetings, which take place between members and between the directors. Needless to say, the importance of meetings cannot be under-emphasized in case of companies. The Companies Act 1956 contains several provisions regarding meetings. These provisions have to be understood and followed. For a meeting, there must be at least 2 persons attending the meeting. One member cannot constitute a company meeting even if he holds proxies for other members. Kinds of Company Meetings Broadly, meetings in a company are of the following types : I Meetings of Members These are meetings where the members / shareholders of the company meet and discuss various matters. Member s meetings are of the following types : Statutory Meeting (Sec 165) A public company limited by shares or a guarantee company having share capital is required to hold a statutory meeting. Such a statutory meeting is held only once in the lifetime of the company. Such a meeting must be held within a period of not less than one month or within a period not more than six months from the date on which it is entitled to commence business i.e. it obtains certificate of commencement of business. In a statutory meeting, the following matters only can be discussed:

a. Floatation of shares / debentures by the company b. Modification to contracts mentioned in the prospectus The purpose of the meeting is to enable members to know allimportant matters pertaining to the formation of the company and its initial life history. The matters discussed include which shares have been taken up, what money has been received, what contracts have been entered into, what sums have been spent on preliminary expenses, etc. The members of the company present at the meeting may discuss any other matter relating to the formation of the Company or arising out of the statutory report also, even if no prior notice has been given for such other discussions but no resolution can be passed of which notice have not been given in accordance with the provisions of the Act. A notice of at least 21 days before the meeting must be given to members unless consent is accorded to a shorter notice by members, holding not less than 95% of voting rights in the company. A statutory meeting may be adjourned from time to time by the members present at the meeting. The Board of Directors must prepare and send to every member a report called the Statutory Report at least 21 days before the day on which the meeting is to be held. But if all the members entitled to attend and vote at the meeting agree, the report could be forwarded later also. The report should be certified as correct by at least two directors, one of whom must be the managing director, where there is one, and must also be certified as correct by the auditors of the company with respect to the shares allotted by the company, the cash received in respect of such shares and the receipts and payments of the company. A certified copy of the report must be sent to the Registrar for registration immediately after copies have been sent to the members of the company. A list of members showing their names, addresses and occupations together with the number shares held by each member must be kept in readiness and produced at the commencement of the meeting and kept open for inspection during the meeting. If default is made in complying with the above provisions, every director or other officer of the company who is in default shall be punishable with fine upto Rs. 500. The Registrar or a contributory may file a petition for the winding up of the company if default is made in delivering the statutory report to the Registrar or in holding the statutory meeting on or after 14 days after the last date on which the statutory meeting ought to have been held. Contents of Statutory Report Must provide the following Particulars (a)

The total number of shares allotted, distinguishing those fully or partly paid-up, otherwise than in cash, the extent to which partly paid shares are paid-up, and in both cases the consideration for which they were allotted.(b) The total amount of cash received by the company in respect of all shares allotted, distinguishing as aforesaid.(c) An abstract of the receipts and payments upto a date within 7 days of the date of the report and the balance of cash and bank accounts in hand, and an account of preliminary expenses.(d) Any commission or discount paid or to be paid on the issue or sale of shares or debentures must be separately shown in the aforesaid abstract.(e) The names, addresses and occupations of directors, auditors, manager LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 167

and secretary, if any, of the company and the changes which have taken place in the names, addresses and occupations of the above since the date of incorporation.(f) Particulars of any contracts to be submitted to the meeting for approval and modifications done or proposed.(g) If the company has entered into any underwriting contracts, the extent, if any, to which they have not been carried out and the reasons for the failure.(h) The arrears, if any, due on calls from every director and from the manager.(i) The particulars of any commission or brokerage paid or to be paid, in connection with the issue or sale of shares or debentures to any director or to the manager. The auditors have to certify that all information regarding calls and allotment of shares are correct. B. Annual General Meeting (Secs. 166 and 167) It must be held by every type of company, public or private, limited by shares or by guarantee, with or without share capital or unlimited company, once a year. Every company must in each year hold an annual general meeting. Not more than 15 months must elapse between two annual general meetings. However, a company may hold its first annual general meeting within 18 months from the date of its incorporation. In such a case, it need not hold any annual general meeting in the year of its incorporation as well as in the following year only. Note the following case: Sree Meenakshi Mills Co. Ltd. V. Assistant Registrar of Companies. A.I.R. (1938) Mad 640. The annual general meeting of a company called in December 1934 was adjourned and held in march 1935, the next meeting was held in January, 1936, no other meeting being held in 1935. the company contended that it did hold a meeting in the year 1935. but it was held by the court that the meeting of march 1935 was the adjourned meeting of 1934. In the case there is any difficulty in holding any annual general meeting (except the first annual meeting), the Registrar may, for any special reasons shown, grant an extension of time for holding the meeting by a period not exceeding 3 months provided the application for the purpose is made before the due date of the annual general meeting. However, generally delay in the completion of the audit of the annual accounts of the company is not treated as special reason for granting extension of time for holding its annual general meeting. Generally, in such circumstances, an AGM is convened and held at the proper time . all matters other than the accounts are discussed. All other resolutions are passed and the meeting is adjourned to a later date for discussing the final accounts of the company. However, the adjourned meeting must be held before the last day of holding the AGM. A notice of at least 21 days before the meeting must be given to members unless members, holding not less than 95% of voting rights in the company, accord consent to a shorter notice. The notice must state that the meeting is an annual general meeting. The time, date and place of the meeting must be

mentioned in the notice. The notice of the meeting must be accompanied by a copy of the annual accounts of the company, director s report on the position of the company for the year and auditor s report on the accounts. Companies having share capital should also state in the notice that a member is entitled to attend and vote at the meeting and is also entitled to appoint proxies in his absence. A proxy need not be a member of that company. A proxy form should be enclosed with the notice. The proxy forms are required to be submitted to the company at least 48 hours before the meeting. The AGM must be held on a working day during business hours at the registered office of the company or at some other place within the city, town or village in which the registered office of the company is situated. The Central Government may, however, exempt any class of companies from the above provisions. If any day is declared by the Central government to be a public holiday after the issue of the notice convening such meeting, such a day will be treated as a working day. A company may, by appropriate provisions in its articles, fix the time for its annual general meeting and may also by a resolution passed in one annual general meeting fix the time for its subsequent annual general meetings. Companies licensed under Section 25 are exempt from the above provisions provided that the time, date and place of each annual general meeting are decided upon beforehand by the Board of Directors having regard to the directions, if any, given in this regard by the company in general meeting. In case of default in holding an annual general meeting, the following are the consequences: 1. Any member of the company may apply to the Company Law Board. The Company Law Board may call, or direct the calling of the meeting, and give such ancillary or consequential directions as it may consider expedient in relation to the calling, holding and conducting of the meeting. The Company Law Board may direct that one member present in person or by proxy shall be deemed to constitute the meeting. A meeting held in pursuance of this order will be deemed to be an annual general meeting of the company. An application by a member of the company for this purpose must be made to the concerned Regional Bench of the Company Law Board by way of petition in Form No. 1 in Annexure II to the CLB Regulations with a fee of rupees fifty accompanied by (i) affidavit verifying the petition, (ii) bank draft for payment of application fee. 2. Fine which may extend to Rs. 5,000 on the company and every officer of the company who is in default may be levied and for continuing default, a further fine of Rs. 250 per day during which the default continues may be levied. Business to be Transacted at Annual General Meeting

At every AGM, the following decided. Since such matters known as ordinary business. be discussed at the AGM are

matters must be discussed and are discussed at every AGM, they are All other matters and business to specila business.

The following matters constitute ordinary business at an AGM a. Consideration of annual accounts, director s report and the auditor s report LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 168 11.555

b. Declaration of dividend c. Appointment of directors in the place of those retiring d. Appointment of and the fixing of the remuneration of the statutory auditors. In case any other business ( special business ) has to be discussed and decided upon, an explanatory statement of the special business must also accompany the notice calling the meeting. The notice must should also give the nature and extent of the interest of the directors or manager in the special business, as also the extent of the shareholding interest in the company of every such person. In case approval of any document has to be done by the members at the meeting, the notice must also state that the document would be available for inspection at the Registered Office of the company during the specified dates and timings. C. Extraordinary General Meeting( Sec. 169) Every general meeting (i.e. meeting of members of the company) other than the statutory meeting and the annual general meeting or any adjournment thereof, is an extraordinary general meeting. Such meeting is usually called by the Board of Directors for some urgent business which cannot wait to be decided till the next AGM. Every business transacted at such a meeting is special business. An explanatory statement of the special business must also accompany the notice calling the meeting. The notice must should also give the nature and extent of the interest of the directors or manager in the special business, as also the extent of the shareholding interest in the company of every such person. In case approval of any document has to be done by the members at the meeting, the notice mus also state that the document would be available for inspection at the Registered Office of the company during the specified dates and timings. The Articles of Association of a Company may contain provisions for convening an extraordinary general meeting. It may provide that the board may, whenever it thinks fit, call an extraordinary general meeting or it may provide that if at any time there are not within India, directors capable of acting who are sufficient in number to form a quorum, any director or any two members of the company may call an extraordinary general meeting . Extraordinary General Meeting on Requisition : The members of a company have the right to require the calling of an extraordinary general meeting by the directors. The board of directors of a company must call an extraordinary general meeting if required to do so by the following number of members : a. Members of the company holding at the date of making the demand for an EGM not less than onetenth of such of the voting rights in regard to the

matter to be discussed at the meeting ; or b. if the company has no share capital, the members representing not less than one-tenth of the total voting rights at that date in regard to the said matter. The requisition must state the objects of the meetings and must be signed by the requisitioning members. The requisition must be deposited at the company s registered office. When the requisition is deposited at the registered office of the company, the directors should within 21 days, move to call a meeting and the meeting should be actually be held within 45 days from the date of the lodgement of the requisition. If the directors fail to call and hold the meeting as aforesaid, the requisitionists or any of them meeting the requirements at (a) or (b) above, as the case may be, may themselves proceed to call meeting within 3 months from the date of the requisition, and claim the necessary expenses from the company. The company can make good this sum from the directors in default. At such an EGM, any business which is not covered by the agenda mentioned in the notice of the meeting cannot be voted upon. Power of Company Law Board to Order Calling of Extraordinary General Meeting : If for any reason, it is impracticable to call a meeting of a company, other than an annual general meeting, or to hold or conduct the meeting of the company, the Company Law Board may, either i) on its own motion, or ii) on the application of any director of the company, or of any member of the company, who would be entitled to vote at the meeting, order a meeting to be called and conducted as the Company Law Board thinks fit, and may also give such other ancillary and consequential directions as it thinks fit expedient. A meeting so called and conducted shall be deemed to be a meeting of the company duly called and conducted. Procedure for Application under Section 186 : An application by a director or a member of a company for this purpose is required to be made to the Regional Bench of the Company Law Board before whom the petition is to be made in Form No 1 specified in Annexure II to the CLB Regulations with a fee of Rs200. The petition must e accompanied with the following documents a. Evidence in proof of status of the applicant. b. Affidavit verifying the petition. c. Bank draft evidencing payment of application fee. d. Memorandum of appearance with copy of the Board s resolution or executed vakalat nama, as the case may be. D. Class Meeting Class meetings are meetings which are held by holders of a particular class of shares, e.g., preference shareholders. Such meetings are normally called when it is proposed to vary the

rights of that particular class of shares. At such meetings, these members dicuss the pros and cons of the proposal and vote accordingly. (See provisions on variations of shareholder s rights). Class meetings are held to pass resolution which will bind only the members of the class concerned, and only members of that class can attend and vote. Unless the articles of the company or a contract binding on the persons concerned otherwise provides, all provisions pertaining to calling of a general meeting and its conduct apply to class meetings in like manner as they apply with respect to general meetings of the company. LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 169

II. Meetings of the Board of Directors -Meeting of the Board of Directors -Meeting of a Committee of the Board III. Other Meetings A. Meeting of debenture holders A company issuing debentures may provide for the holding of meetings of the debentureholders. At such meetings, generally nmmatters pertaining to the variation in terms of security or to alteration of their rights are discussed. All matters connected with the holding, conduct and proceedings of the meetings of the debentureholders are normally specified in the Debenture Trust Deed. The decisions at the meeting made by the prescribed majority are valid and lawful and binding upon the minority. B. Meeting of Creditors Sometimes, a company, either as a running concern or in the event of winding up, has to make certain arrangements with its creditors. Meetings of creditors may be called for this purpose. Eg U/s 393, a company may enter into arrangements with creditors with the sanction of the Court for reconstruction or any arrangement with its creditors. The court, on application, may order the holding of a creditors s meeting. If the scheme of arrangement is agreed to by majority in number of holding debts to value of the three-fourth of the total value of the debts, the court may sanction the scheme. A certified copy of the court s order is then filed with the Registrar and it is binding on all the creditors and the company only after it is filed with Registrar. Similarly, in case of winding up of a company, a meeting of creditors and of contributories is held to ascertain the total amount due by the company and also to appoint a liquidator to wind up the affairs of the company. Requisites of a Valid Meetings It is necessary for you to understand that the following conditions must be satisfied for a meeting to be called a valid meeting: 1. It must be properly convened. The persons calling the meeting must be authorized to do so. 2. Proper and adequate notice must have been given to all those entitled to attend. 3. The meeting must be legally constituted. There must be a chairperson. The rules of quorum must be maintained and the provisions of the Companies Act, 1956 and the articles must be complied with. 4. The business at the meeting must be validly transacted. The meeting must be conducted in accordance with the regulations governing the meetings. Notice of General Meeting

You must know that a meeting cannot be held unless a proper notice has been given to all persons entitled to attend the meeting at the proper time, containing the necessary information. A notice convening a general meeting must be given at least 21 clear days prior to the date of meeting. However, an annual general meeting may be called and held with a shorter notice, if it is consented to by all the members entitled to vote at the meeting. In respect of any other meeting, it may be called and held with a shorter notice, if at least members holding 95 percent of the total voting power of the Company consent to a shorter notice. Notice of every meeting of company must be sent to all members entitled to attend and vote at the meeting. Notice of the AGM must be given to the statutory auditor of the company. Accidental omission to give notice to, or the non-receipt of notice by, any member or any other person on whom it should be given will not invalidate the proceedings of the meeting. The notice may be given to any member either personally or by sending it by post to him at his registered address, or if there is none in India, to any address within India supplied by him for the purpose. Where notice is sent by post, properly addressing, pre-paying and posting the notice affect service. A notice may be given to joint holders by giving it to the joint holder first named in the register of members. A notice of meeting may also be given by advertising the same in a newspaper circulating in the neighborhood of the registered office of the company and it shall be deemed to be served on every member who has to registered address in India for the giving of notices to him. A notice calling a meeting must state the place, day and hour of the meeting and must contain the agenda of the meeting. If the meeting is a statutory or annual general meeting, notice must describe it as such. Where any items of special business are to be transacted at the meeting, an explanatory statement setting out all materials facts concerning each item of the special business including the concern or interest, if any, therein of every director and manager, is any, must be annexed to the notice. If it is intended to propose any resolution as a special resolution, such intention should be specified. A notice convening an AGM must be accompanied by the annual accounts of the company, the director s report and the auditor s report. The copies of these documents could, however, be sent less than 21 days before of the date of the meeting if agreed to by all members entitled to vote at the meeting. You must have heard about proxy. Let us learn what we mean by it in respect of a company. Proxy In case of a company having a share capital and in the case of any other company, if the articles so authorize, any member of a company entitled to attend and vote at a meeting of the company shall be entitled to appoint another person (whether a

member or not) as his proxy to attend and vote instead of himself. Every notice calling a meeting of the company must contain a statement that a member entitled to attend and vote is entitled to appoint one proxy in the case of a private company and one or more proxies in the case of a public company and that the proxy need not be member of the company. A member may appoint another person to attend and vote at a meeting on his behalf. Such other person is known as Proxy . A member may appoint one or more proxies to vote in respect of the different shares held by him, or he may appoint one or LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 170 11.555

more proxies in the alternative, so that if the first named proxy fails to vote, the second one may do so, and so on. The member appointing a proxy must deposit with the company a proxy form at the time of the meeting or prior to it giving details of the proxy appointed. However, any provision in the articles which requires a period longer than forty eight hours before the meeting for depositing with the company any proxy form appointing a proxy, shall have the effect as if a period of 48 hours had been specified in such provision. A company cannot issue an invitation at its expense asking any member to appoint a particular person as proxy. If the company does so, every officer in default shall be liable to fine up to Rs1,000. But if a proxy form is sent at the request of a member, the officer shall not be liable. Every member entitled to vote at a meeting of the company, during the period beginning 24 hours before the date fixed for the meeting and ending with the conclusion of the meeting may inspect proxy forms at any time during business hours by giving 3 days notice to the company of his intention to do so. The proxy- form must be in writing and be signed by the member or his authorised attorney duly authorised in writing or if the appointer is a company, the proxy form must be under its seal or be signed by an officer or an attorney duly authorised by it. The proxy can be revoked by the member at any time, and is automatically revoked by the death or insolvency of the member. The member may revoke the proxy by voting himself before the proxy has voted, but once the proxy has exercised the vote, the member cannot retract his vote. Where two proxy forms by the same shareholder are lodged in respect of the same votes, the last proxy form will be treated as the correct proxy form. A proxy is not entitled to vote except on a poll. Therefore, a proxy cannot vote on show of hands. Another requirement is in respect of a Quorum Quorum Quorum refers to the minimum number of members who must be present at a meeting in order to constitute a valid meeting. A meeting without the minimum quorum is invalid and decisions taken at such a meeting are not binding. The articles of a company may provide for a quorum without which a meeting will be construed to be invalid. Unless the articles of a company provide for larger quorum, 5 members personally present (not by proxy) in the case of a public company and 2 members personally present (not by proxy) in the case of a private company shall be the quorum for a general meeting of a company. It has been held by Courts that unless the articles otherwise provide, a quorum need to be present only when the meeting commenced, and it was immaterial that there was no quorum at the time when the vote was taken. Further, unless the articles

otherwise provide, if within half an hour from the time appointed for holding a meeting of the company, a quorum is not present in the person, the meeting: a. If called upon the requisition of members, shall stand dissolved; b. In any other case, it shall stand adjourned to the same day in the next week, at the same time and place, or to such other day and time as the Board of Directors may determine. If at the adjourned meeting also, the quorum is not present within half an hour from the time appointed for holding the meeting, the members present shall a quorum. In case the Company Law Board calls or directs the calling of a meeting of the company, when default is made in holding an annual general meeting, the government may give directions regarding the quorum including a direction that even one member of the company present in person, or by proxy shall be deemed to constitute a meeting. Similarly the Company Law Board may, direct a meeting of the company (other than an annual general meeting) to be called and held where for any reason it is impracticable to call a meeting and direct that even one member present in person or by proxy shall be deemed to constitute a meeting. No meeting can be valid unless it has a chairperson to preside in the meeting. Chairman The chairman is the head of the meeting. Generally, the chairman of the Board of Directors is the Chairman of the meeting. Unless the articles otherwise provide, the members present in person at the meeting elect one of themselves to be the chairman thereof on a show of the hands. If there is no Chairman or he is not present within 15 minutes after the appointed time of the meeting or is unwilling to act as chairman of the meeting, the directors present may elect one among themselves to be the chairman of the meeting. If, however no director is willing to act as chairman or if no director is present within 15 minutes after the appointed time of the meeting, the members present should choose one among themselves to be chairman of the meeting. If, after the election of a chairman on a show of hands, poll is demanded and taken and a different person is elected as chairman, then that person will be the chairman for the rest of the meeting. Duties of the Chairman Without a chairman, a meeting is incomplete. The chairman is the regulator of the meeting. His duties include the following : 1. He must ensure that the meeting is properly convened and constituted i.e. that proper notice has been given,

that the required quorum is present, etc. 2. He must ensure that the provisions of the act and the articles in regard to the meeting and its procedures are observed. 3. He must ensure that business is taken in the order set out in agenda and no business, which is not mentioned in the agenda, is taken up unless agreed to by the members. 4. He must impartially regulate the proceedings of the meeting and maintain discipline at the meeting. 5. He may exercise his powers of adjournment of the meeting, should he in good faith feel that such a step is necessary. The chairman has the power to adjourn the LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 171

meeting in case of indiscipline at the meeting. A chairman however does not have the power to stop or adjourn the meeting at his own will and pleasure. If he adjourns the meeting prematurely, the members present may decide to continue the meeting and elect another chairman and proceed with the business for which it was convened. 6. He must exercise his power to order a poll correctly and must order it to be taken when demanded properly. 7. He must exercise his casting vote bonafide in the interest of the company. Motion Motion means a proposal to be discussed at a meeting by the members. A resolution may be passed accepting the motion, with or without modifications or a motion may be entirely rejected. A motion, on being passed, as a resolution becomes a decision. A motion must be in writing and signed by the mover and put to the vote of the meeting by the chairman. Only those motions, which are mentioned in the agenda to the meeting, can be discussed at the meeting. However, motions incidental or ancillary to the matter under discussion may be moved and passed. Generally, a motion is proposed by one member and seconded by another member. The motions proposed in a general meeting of a company are decided on the votes of the members of the company. The Voting may be: Voting by a show of hands Voting by poll Voting by a show of hands (Secs . 177 and 178). At any general meeting, motions put to vote are in the first instance decided by a show of hands, unless a poll is demanded (sec. 177) in taking a vote by show of hands. The duty of the chairman is to count the hands raised and to declare the result accordingly, without regard to the number of votes that a member raising the hand possesses. Proxies cannot be used on a show of hands [Earnest v. Loma Gold Mines. (1906) 2 Ch. 572.] Voting and Demand for Poll (Sec. 179) Generally, initially matters are decided at a general meeting by a show of hands. If the majority of the hands raise their hands in favor of a particular resolution, then unless a poll is demanded, it is taken as passed. Voting by a show of hands operates on the principle of One Member-One Vote . However, since the fundamental voting principle in a company is One Share-One Vote , if a poll is demanded, voting takes place by a poll. Before or on declaration of the result of the voting on any resolution on a show of hands, the chairman

may order suo motu (of his own motion) that a poll be taken. However, when a demand for poll is made, he must order the poll be taken. The chairman may order a poll when a resolution proposed by the Board is lost on the show of hands or if he is of the opinion that the decision taken on the show of hands is likely to be reversed by poll. When a poll is taken, The decision arrived by poll is final and the decision on the show of hands has no effect. A poll is allowed only if the prescribed number of members demand a poll. A poll must be ordered by the chairman if it is demanded: Now we are going to discuss about resolutions. Resolutions Resolutions mean decisions taken at a meeting. A motion, with or without amendments is put to vote at a meeting. Once the motion is passed, it becomes a resolution. A valid resolution can be passed at a properly convened meeting with the required quorum. There are broadly three types of resolutions: 1. Ordinary Resolution [Sec. 189(1)] An ordinary resolution is one which can be passed by a simple majority. I.e. if the votes (including the casting vote, if any, of the chairman), at a general meeting cast by members entitled to vote in its favour are more than votes cast against it. Voting may be by way of a show of hands or by a poll provided 21 days notice has been given for the meeting. 2. Special Resolution [Sec. 189(2)] A special resolution is one in regard to which is passed by a 75 % majority only i.e. the number of votes cast in favour of the resolution is at least three times the number of votes cast against it, either by a show of hands or on a poll in person or by proxy. The intention to propose a resolution as a special resolution must be specifically mentioned in the notice of the general meeting. Special resolutions are needed to decide on important matters of the company. Examples where special resolutions are required are : a. To alter the domicile clause of the memorandum from one State to another or to alter the objects clause of the memorandum. b. To alter / change the name of the company with the approval of the central government c. To alter the articles of association d. To change the name of the company by omitting Limited or Private Limited . The Central Government may allow a company with charitable a. In the case of a public company having a share capital, by any member or members present in person or by

proxy and holding shares in the companyi. Which confer a power to vote on the resolution not being less than one-tenth of the total voting power in respect of the resolution, or ii. on which an aggregate sum of not less than fifty thousand rupees has been paid up. b. In the case of a private company having a share capital, by one member having the right to vote on the resolution and present in person or by proxy if not more than seven such members are personally present, and by two such members present in person or by proxy, if more than seven such members are personally present. c. In the case of any other, by any member or members present in person or by proxy and having not less than one-tenth of the total voting power in respect of the resolution. LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 172 11.555

objects to do so by special resolution under section 25 of the Companies Act, 1956. 3. Resolution Requiring Special Notice [Sec. 190] There are certain matters specified in the Companies Act, 1956 which may be discussed at a general meeting only if a special notice is given regarding the proposal to discuss these matters at a meeting. A special notice enables the members to be prepared on the matter to be discussed and gives them time to indicate their views on the resolution. In case special notice of resolution is required by the Companies Act, 1956 or by the articles of a company, the intention to propose such a resolution must be notified to the company at least 14 days before the meeting. The company must within 7 days before the meeting give the notice of the proposed resolution to its members. Notice of the resolution is required to be given in the same way in which notice of a meeting is given, or if that is not practicable, the company may give notice by advertisement in a newspaper having an appropriate circulation or in any other manner allowed by the articles, not less 7 days before the meeting. The following matters requiring Special Notice before they are discussed before tha meeting : a. To appoint at an annual general meeting appointing an auditor a person other than a retiring auditor. b. To resolve at an annual general meeting that a retiring auditor shall not be reappointed. c. To remove a director before the expiry of his period of office. d. To appoint another director in place of removed director. e. Where the articles of a company provide for the giving of a special notice for a resolution, in respect of any specified matter or matters. Please note that a resolution requiring special notice may be passed either as an ordinary resolution (Simple majority) or as a special resolution (75 % majority). Circulation of Member s Resolution Generally, the Board of Directors prepare the agenda of the meeting to be sent to all members of the meeting. A member, by himself has very little say in deciding the agenda. However, there are provisions in the Companies Act which enable members to introduce motions at a meeting and give prior notice of their intention to do so to all other members of the company. If members having one twentieth of the total voting rights of all members having the right to vote on a resolution or if 100 members having the right to vote and holding paidup capital of Rs1,00,000 or more, require the company to do so, the company must :

1. Give to the members entitled to receive notice of the next annual general meeting, notice of any resolution which may be properly moved and is intended to be moved at that meeting; and 2. Circulate to members entitled to have notice of any general meeting sent to them, any statement of not more than 1,000 words with respect to the matter referred to in any proposed resolution, or any business to be dealt with at that meeting. The expenses for this purpose must be borne by the requisitionists and must be tendered to the company. The requisition, signed by all the requisitionists, must be deposited at the registered office of the company at least 6 weeks before the meeting in the case of resolution and not less than 2 weeks before the meeting in case of any other requisition together with a reasonable sum to meet the expenses. However, where a copy of the requisition requiring notice of resolution has been deposited at the registered office of the company and an annual general meeting is called for a date six weeks or less after the requisition is deposited, the copy though not deposited within the prescribed time is deemed to have been properly deposited. The company is required to serve the notice of resolution and/ or the statement to the members as far as possible in the manner and so far as practicable at the same time as the notice of the meeting ; otherwise as soon as practicable thereafter. However, a company need not circulate a statement if the Court, on the application either of the company or any other aggrieved person, is satisfied that the rights so conferred are being abused to secure needless publicity or for defamatory purposes. Secondly a banking company need not circulate such statement, if in the opinion of its Board of directors, the circulation will injure the interest of the company. It is required to register the resolutions and agreements. Registration of Resolutions and Agreements A copy of each of the following resolutions along with the explanatory statement in case of a special business and agreements must, within 30 days after the passing or making thereof, be printed or typewritten and duly certified under the signature of an officer of the company and filed with the Registrar of Companies who shall record the same : 1. All special resolutions 2. All resolutions which have been unanimously agreed to by all the members but which, if not so agreed, would not have been effective unless passed as special resolutions 3.

All resolutions of the board of directors of a company or agreement executed by a company, relating to the appointment, re-appointment or renewal of the appointment, or variation of the terms of appointment, of a managing director 4. All resolutions or agreements which have been agreed to by all members of any class of members but which, if not so agreed, would not have been effective unless passed by a particular majority or in a particular manner and all resolutions or agreements which effectively bind all members of any class of shareholders though not agreed to by all of those members 5. All resolutions passed by a company conferring power upon its directors to sell or dispose of the whole or any part of the company s undertaking; or to borrow money beyond the limit of the paid-up share capital and free reserves of the company; or to contribute to LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 173

charities beyond Rs50000 or 5 per cent of the average net profits 6. All resolutions approving the appointment of sole selling agents of the company 7. All copies of the terms and conditions of appointment of a sole selling agent or sole buying or purchasing agent 8. Resolutions for voluntary winding up of a company We will know discuss some important terms related to meetings of company in brief. Adjournment Adjournment means suspending the proceedings of a meeting for the time being so that the meeting may be continued at a later date and time fixed in that meeting itself at the time of such adjournment or to decided later on. Only the business not finished at the original meeting can be transacted at the adjourned meeting. The majority of members at a meeting may move an adjournment motion at a meeting. If the chairman adjourns the meeting, ignoring the views of the majority, the remaining members can continue the meeting. The chairman cannot adjourn the meeting at his own discretion without there being a good cause for such an adjournment. Where the chairman, acting bona fide within his powers, adjourns the meeting as per the view of the majority, the minority members cannot to continue with such meeting and, if they do the proceedings there will be null and void. An adjourned meeting is merely the continuation of the original meeting and therefore, a fresh notice is not necessary, if the time, date and place for holding the adjourned meeting are decided and declared at the time of adjourning it. If a meeting is adjourned without stipulation as to when it will be continued, fresh notice of the adjourned meeting must be given. Postponement Postponement of a meeting means deferring the holding of the meeting itself at a later date. Postponement is done by the Board of Directors or by the person convening the meeting. In case of adjournment, it is the decision of the majority of the members present at the meeting itself. Dissolution Dissolution of a meeting means termination of a meeting. The meeting no longer exists once it has been dissolved. If within half an hour after the time appointed for holding a general meeting; the quorum is not present, the meeting shall stand dissolved if it was called on requisition by members. Minutes of Proceedings of Meetings

Every company must keep minutes of the proceedings of general meetings and of the meetings of board of directors and its committees. The minutes are a record of the discussions made at the meeting and the final decisions taken thereat. Every company must keep minutes containing details of all proceedings at the meetings. The pages of the minute books must be consecutively numbered and the minutes must be recorded therein within 30 days of the meeting. They have to be written directly on the numbered pages. Pasting or attaching of papers is not allowed. Each page of every such minutes books must be initialed or signed and last page of the record of proceedings of each meeting in such books must be dated and signed by : a. In the case of the meeting of the Board of directors or committee thereof, by the chairman of that meeting or that of the succeeding meeting, and b. In the case of a general meeting, by the chairman of the same meeting within the aforesaid 30 days or in the event of the death or inability of that chairman within the period, by a director duly authorised by the Board of directors for the purpose. The Company Law Board, however, may not object if minutes are maintained in loose-leaf form provided all other procedural requirements are complied with and all possible safeguards against manipulation or interpolation of the minutes are ensured. The loose leaves must be bound at reasonable intervals. Entering the minutes in a bound minute book by a chemical process, which does not amount to attachment to any book by pasting or otherwise is permissible provided on the mechanical impression of the minutes, the original signatures of the Chairman are given on each page. All appointments of officers made at any of the meetings must be included in the minutes of the meeting. In the case of a meeting of the Board of directors or its Committee, the minutes must also state the names of directors present at the meeting and the names of directors, if any, dissenting from, or not concurring with a resolution passed at the meeting. The chairman may exclude from the minutes any matters which are defamatory, irrelevant or immaterial or which are detrimental to the interests of the company. The discretion of the Chairman with regard to the inclusion or exclusion of any matter is absolute and unfettered. Where minutes of the proceedings of any meeting have been kept properly, they are, unless the contrary is proved, presumed to be correct, and are valid evidence that the meeting was duly called and held, and all proceedings thereat have actually taken place, and in particular, all appointments of directors or liquidators made at the meeting shall be deemed to be valid. The minute books of the proceedings of general meetings must be kept the registered office of the company. Any member

has a right to inspect, free of cost during business hours at the registered office of the company, the minutes books containing the proceedings of the general meetings of the company. Further, any member shall be entitled to be furnished, within 7 days after he has made a request to the company, with a copy of any minutes on payment of Rupee One for every hundred words or fraction thereof. If any inspection is refused or copy not furnished within the time specified, every officer in default shall be punishable with fine up to Rs. 500 for each offence. The Company Law Board may also by order compel an immediate inspection or furnishing of a copy forthwith. But the minutes books of the board meetings are not open for inspection of members. Practical Problems Attempt the following problems, giving reasons LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 174 11.555

1. At a meeting of a company, only 15 shareholders were present. 9 voted for a special resolution and 2 against and 4 did not vote at all. No poll was demanded and the chairman declared the resolution to be carried. Is this a valid resolution? [Hint. Yes (Sec. 189)] 2. S, a shareholder. After appointing P as his proxy at a meeting of the company. He himself attended the meeting and voted on a particular resolution. P, thereafter, claimed to exercise his vote. Examine his claim. [Hint. His claim is invalid (Cousins v. International Brick Co. Ltd.)]. References Kapoor, N.D. (2003), Elements of Mercantile Law, Sultan Chand and Sons, New Delhi. http://www.vakilno1.com http://www.saarclawnet.com/saarclawnet/osca20.html Notes: LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 175

LESSON 35: THE COMPANIES ACT, 1956 THE WINDING UP OF A COMPANY MODES OF WINDING UP OF A COMPANY Learning Objectives After reading the lesson, you will be able to know about the: The meaning of winding up of a company The modes of winding up of a company The petition for winding up of a company The commencement of winding up of a company The powers of a tribunal/ liquidator in the winding up of a company Introduction A company comes into existence by a legal process and when for any reason, it is desired to end its existence; it must go through the legal process of winding up of its affairs. Winding up or liquidation is the process by which the management of a company s affairs is taken out of its director s hands, its assets are realized by a liquidator, and its debts are paid out of the proceeds of realization. If any balance remains in the hands of the liquidator, it is divided among the members of the company in accordance with their rights under the articles. However, you must understand that winding up and dissolution of the company are not one and the same thing. A company is said to be dissolved when it ceases to exist as a corporate body. Winding up precedes dissolution. It is the process by which the dissolution of the company is brought about. Let us learn about the modes of winding up. Modes of Winding Up (1) The winding up of a company may be either( a) By the Court; or (b) Voluntary; or (c) Subject to the supervision of the Court. (2) The provisions of this Act with respect to winding up apply, unless the contrary appears, to the winding up of a company in any of those modes. Winding up By The Court Section 433 lays down that the Court in the following case may wind up a company: 1.

If the company has passed a special resolution of it s being wound up by the Court. It may be mentioned here that without such act cannot be done by the directors themselves. It can be done only if a resolution to this effect has passed at a general meeting of the company. The members can however ratify the act of directors already done. 2. If the company makes default in delivering the statutory report to the Registrar or in holding the Statutory Meeting. A petition under this ground can be made either by the Registrar with the previous approval of the Central Government or by a contributory or after 14 days after the last day on which the statutory meeting should have been held. 3. It does not commence business within one year from its incorporation or it suspends business for a whole year. 4. The number of its members falls before the minimum required i.e. 2 in case of a private company and 7 in case of a public company. 5. It is unable to pay its debts. 6. If the Court of opinion that it is just and equitable that the company should be wound up. Let us now understand when the Company would be deemed to be unable to pay its debts and what do we mean by just and equitable cause?. A Company shall be Deemed to be unable to Pay its Debts (Section 434) (a) If a creditor, by assignment or otherwise, to whom the company is indebted in a sum exceeding five hundred rupees then due, has served on the company, by causing it to be delivered at its registered office, by registered post or otherwise, a demand under his hand requiring the company to pay the sum so due and the company has for three weeks thereafter neglected to pay the sum, or to secure or compound for it to the reasonable satisfaction of the creditor; (b) If execution or other process issued on a decree or order of any Court in favour of a creditor of the company is returned unsatisfied in whole or in part; or (c) If it is proved to the satisfaction of the Court that the company is unable to pay its debts, and, in determining whether a company is unable to pay its debts, the Court shall take into account the contingent and prospective liabilities of the company. (2) The demand referred to in clause (a) of sub-section (1) shall be deemed to have been duly given under the hand of the creditor if it is signed by any agent or legal adviser duly authorized on his behalf, or in the case of a firm, if it is signed by any such agent or legal adviser or by any member

of the firm. What is just and Equitable Clause ? It depends upon the facts of each case. The tribunal may order winding up under the just and equitable clause in the following cases. (1) When the substratum of a company is gone. The substratum of a company can be said to have disappeared only when the object for which it was incorporated has substantially failed, or when it is impossible to carry on the business of the company LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 176 11.555

except at a loss, or the existing and possible assets are insufficient to meet the existing liabilities. The substratum of a company disappears : (i) When the very basis for the survival of the company is gone Pirie v. Stewart, (1904) 6 F 847 A shipping company lost it s only ship, the remaining asset being a paltry sum of $ 363. A majority in number and value of shareholders petitioned for its compulsory winding up but a minority shareholder opposed this and desired to carry on the business as chatterer. Held it was just and equitable that the company should be wound up. (ii) When the main object of the company has substantially failed or become impracticable. Where a company s main object fails, its substratum is gone and it may be wound up even though it is carrying on its business in pursuit of a subsidiary objects. German Date Coffee Co., Re. (1882) 20 Ch. D. 169. In this case, the objects clause of the German Date Coffee Co. stated that it was for making a partial substitute for coffee from dates and for the acquisition of inventions incidental there to and also other inventions for similar purposes. The German patent was never granted but the company did acquire and work a Swedish patent and carried on business at Hamburg where a substitute coffee was made from dates, but not under the protection of a patent. Held, on a petition by 2 shareholders, that the main object could not be achieved and. Therefore, it was just and equitable that the company should be wound up. (iii) When the company is carrying on its business at a loss and there is no reasonable hope that the object of trading at a profit can be attained. However, where the majority shareholders are against it, the tribunal will not order a company to be wound up merely because it is making a loss. (iv) When the existing and probable assets of the company are insufficient to meet its existing liabilities. Where a company is totally unable to pay off creditors and there is ever- increasing burden of interest and deteriorating state of management and control of business owing to sharp differences between shareholders. The tribunal will order winding up. (2) When the management is carried on in such a way that the minority is disregarded or oppressed Oppression of minority shareholders will be a just and equitable ground where those who control the company abuse their power to such an extent as to seriously prejudice the interest of minority shareholders. (3) Where there s a deadlock in the management of the company. When shareholding is more or less equal and there is a case of complete deadlock in the company on account of lack of probity in the management of the

company and there is no hope or possibility of smooth and efficient continuance of the company as a commercial concern, there may arise a case fro winding up ion the just and equitable ground. Yenidje Tobacco co. Ltd. Re (1916) 2 Ch. 426. A and B were the only shareholders and directors of a company with equal right of management and voting power. After a time they become bitterly hostile to each other and disagreed about the appointment of important servant s of the company. All communications between them were made through the secretary as they were not on speaking terms with each other. The company made large profits in spite of the disagreement. Held there was a complete deadlock in the management and the company was ordered to be wound up. (4) Where public interest is likely to be prejudiced. Having regard to the provisions of Secs. 397 and 398 (dealing with prevention of oppression and mismanagement) where the concept of prejudice to public interest is introduced, it would appear that the court winding up a company will have to take into consideration not only the interest of shareholders and creditors but also public interest in the shape of need of the community, interest of the employees, etc. (5) When the company was formed to carry out fraudulent or illegal business or when the business of the company become illegal. (6) When the company is a mere bubble and does not carry on any business or does not have any property [London & County Coal Co; Re (1867) L.R. 3 Eq. 355]. (7) If the company has acted against the interests of the sovereignty and integrity of India, the security of the state, friendly relations with foreign states. Public order, decency or morality. (8) If the tribunal is of the opinion that the company should be wound up under the circumstances specified in Sec. 424 The last two clauses in Sec. 333(1) have been added by the Companies [Amendment] Act. Petition for Winding up Section 439 lays down that an application to the Court for the winding up of a company shall be by petition presented, subject to the provisions of this section, 1. The Company 2. Any creditor of the Company 3. Any contributory / shareholder. Contributory means every person liable to contribute to the assets of a company in the event of its being wound up and includes holders of

its fully paid shares. While every member of a company becomes a contributory, not every contributory is a member. Besides members, any person who ceased to be a member 1 year prior to the commencement of winding up is also a contributory. 4. The Registrar may petition for winding up in the following circumstances: ( i) If default is made in delivering statutory report or holding the statutory report. (ii) If the company does not commence its business within one year from its incorporation or suspends its business for a whole year. LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 177

(iii) If it appears to him either from the financial position of the company as disclosed in the balance sheet of the company or from the report of a special auditor or an inspector that the company is unable to pay its debts. (iv) Where the Registrar is authorized by the Central Government to petition for winding up the company. (v) Where the number of members of the company fall below the statutory minimum. (vi) Where it is just and equitable that the company be wound up. 5. Any person authorized by the Central Government. Under section 243, if any report of an inspector appointed to investigate the affairs of the company discloses: ( i) That the business of the company is being conducted to defraud its creditors or members or for a fraudulent or unlawful purpose (ii) That the persons concerned in the formation or management have been guilty of fraud, misfeasance, and it appears to the Central Government from such report so to do, then the Central Government may authorize any person including the Registrar to petition for winding up the company on the ground that it is just and equitable to do so. 6. The Official Liquidator attached to a Court where a company is already being voluntarily wound up and such voluntary winding up cannot be continued with due regard to the interests of the creditors or contributors or both. Please note that A secured creditor, the holder of any debentures (including debenture stock), whether or not any trustee or trustees have been appointed in respect of such and other like debentures, and the trustee for the holders of debentures, shall be deemed to be creditors within the meaning of clause (b) of sub-section (1). A contributory shall be entitled to present a petition for winding up a company, notwithstanding that he may be the holder of fully paid-up shares, or that the company may have no assets at all, or may have no surplus assets left for distribution among the shareholders after the satisfaction of its liabilities. However, a contributory shall not be entitled to present a petition for winding up a company unless (a) Either the number of members is reduced, in the case of a public company, below seven, and, in the case of a private company, below two; or (b) The shares in respect of which he is a contributory, or some of them, either were originally allotted to him or have been held by him, and registered in his name, for a least six months during the eighteen months immediately before the commencement of the winding up, or have

devolved on him through the death of a former holder. Except, in the case where he is authorized in pursuance of clause (f) of sub-section (1), the Registrar shall be entitled to present a petition for winding up a company only on the grounds specified in 12[clause (b), (c), (d), (e) and (f)] of section 433: It is also provided that the Registrar shall not present a petition on the ground specified in clause (e) aforesaid, unless it appears to him either from the financial condition of the company as disclosed in its balance sheet or from the report of 13[a special auditor appointed under section 233A or an inspector] appointed under section 235 or 237, that the company is unable to pay its debts. A registrar shall obtain the previous sanction of the Central Government for the presentation of the petition on any of the grounds aforesaid. The Central Government shall not accord its sanction in pursuance of the foregoing proviso, unless the company has first been afforded an opportunity of making its representations, if any. Please note that a petition for winding up a company on the ground specified in clause (b) of section 433 shall not be presented (a) Except by the Registrar or by a contributory; or (b) Before the expiration of fourteen days after the last day on which the statutory meeting referred to in clause (b) aforesaid ought to have been held. Before a petition for winding up a company presented by a contingent or prospective creditor is admitted, the leave of the Court shall be obtained for the admission of the petition and such leave shall not be granted (a) Unless, in the opinion of the Court, there is a prima facie case for winding up the company; and (b) Until such security for costs has been given as the Court thinks reasonable. Commencement of Winding up Section 441 lays down that where, before the presentation of a petition for the winding up of a company by the Court, a resolution has been passed by the company for voluntary winding up, the winding up of the company shall be deemed to have commenced at the time of the passing of the resolution, and unless the Court, on proof of fraud or mistake, thinks fit to direct otherwise, all proceedings taken in the voluntary winding up shall be deemed to have been validity taken. In any other case, the winding up of a company by the Court shall be deemed to commence at the time of the presentation of the petition for the winding up.

Statement of affairs to be made to Official Liquidator. It is very important document to be prepared by the company. Section 454 requires that where the Court has made a winding up order or appointed the Official Liquidator as provisional liquidator, unless the Court in its discretion otherwise orders, there shall be made out and submitted to the Official Liquidator a statement as to the affairs of the company in the prescribed form, verified by an affidavit, and containing the following particulars, namely LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 178 11.555

(a) The assets of the company, stating separately the cash balance in hand and at the bank, if any, and the negotiable securities, if any, held by the company; (b) Its debts and liabilities; (c) The names, residences and occupations of its creditors, stating separately the amount of secured and unsecured debts; and in the case of secured debts, particulars of the securities given, whether by the company or an officer thereof, their value and the dates on which they were given; (d) The debts due to the company and the names, residences and occupations of the persons from whom they are due and the amount likely to be realised on account thereof; (e) Such further or other information as may be prescribed, or as the Official Liquidator may require. The statement shall be submitted and verified by one or more of the persons who are at the relevant date the directors and by the person who is at that date the manager, secretary or other chief officer of the company, or by such of the persons hereinafter in this sub-section mentioned, as the Official Liquidator, subject to the direction of the Court, may require to submit and verify the statement, that is to say, persons (a) Who are or have been officers of the company; (b) Who have taken part in the formation of the company at any time within one year before the relevant date; (c) Who are in the employment of the company, or have been in the employment of the company within the said year, and are, in the opinion of the Official Liquidator, capable of giving the information required; (d) Who are or have been within the said year officers of, or in the employment of, a company which is, or within the said year was, an officer of the company to which the statement relates. The statement shall be submitted within twenty-one days from the relevant date, or within such extended time not exceeding three months from that date as the Official Liquidator or the Court may, for special reasons, appoint. Any person making, or concurring in making, the statement and affidavit required by this section shall be allowed, and shall be paid by the Official Liquidator or provisional liquidator, as the case may be, out of the assets of the company, such costs and expenses incurred in and about the preparation and making of the statement and affidavit as the Official Liquidator may consider reasonable, subject to an appeal to the Court. If any person, without reasonable excuse, makes default in complying with any of the requirements of this section, he shall be punishable with imprisonment for a term which may extend to two years, or with fine which may extend to one hundred rupees for every day during which the default continues, or with both.

Any person stating himself in writing to be a creditor or contributory of the company shall be entitled, by himself or by his agent, at all reasonable times, on payment of the prescribed fee, to inspect the statement submitted in pursuance of this section, and to a copy thereof or extract there from. Any person untruthfully so stating himself to be a creditor or contributory shall be guilty of an offence under section 18223 of the Indian Penal Code (45 of 1860); and shall, on the application of the Official Liquidator, be punishable accordingly. In this section, the expression the relevant date means, in a case where a provisional liquidator is appointed, the date of his appointment, and in a case where no such appointment is made, the date of the winding up order. We shall now discuss about the important powers of the Tribunal. Powers of Tribunal Power of Court to stay or restrain proceedings against company. It is provided under Section 442 that at any after the presentation of a winding up petition and before a winding up order has been made, the company, or any creditor or contributory, may (a) Where any suit or proceeding against the company is pending in the Supreme Court or in any High Court, apply to the Court in which the suit or proceeding is pending for a stay of proceedings therein; and (b) Where any suit or proceeding is pending against the company in any other Court, apply to the Court having jurisdiction to wind up the company, to restrain further proceedings in the suit or proceeding; and the Court to which application is so made may stay or restrain the proceedings accordingly, on such terms as it thinks fit. Powers of Court on Hearing Petition (Section 443) On hearing a winding up petition, the court may (a) Dismiss it, with or without cost; or (b) Adjourn the hearing conditionally or unconditionally; or (c) Make any interim order that it thinks fit; or (d) Make an order for winding up the company with or without costs, or any other order that it thins fit: It is provided that the Court shall not refuse to make a winding up order on the ground only that the assets of the company have been mortgaged to an amount equal to or in excess of those assets, or that the company has no assets.

Where the petition is presented on the ground that it is just and equitable that the company should be wound up, the Court may refuse to make an order of winding up, if it is of opinion that some other remedy is available to the petitioners and that they are acting unreasonably in seeking to have the company would up instead of pursuing that other remedy. Where the petition is presented on the ground of default in delivering the statutory report to the Registrar, or in holding the statutory meeting, the Court may (a) Instead of making a winding up order, direct that the statutory report shall be delivered or that a meeting shall be held; and (b) Order the cost to be paid by any persons who, in the opinion of the Court, are responsible for the default. LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 179

Copy of Winding up order to be filed with Registrar ( Section 445) On the making of a winding up order, it shall be the duty of the petitioner in the winding up proceedings and of the company to file with the Registrar a certified copy of the order, within thirty days from the date of the making of the order. In computing the period of thirty days from the date of the making of a winding up order, the time requisite for obtaining a certified copy of the order shall be excluded. Suits Stayed on winding up Order (Section 446) When a winding up order has been made or the Official Liquidator has been appointed as provisional liquidator, no suit or other legal proceeding shall be commenced, or if pending at the date of the winding up order, shall be proceeded with, against the company, except by leave of the Court and subject to such terms as the Court may impose. Effect of Winding up Order (Section 447) An order for winding up a company shall operate in favour of all the creditors and of all the contributories of the company as if it had been made on the joint petition of a creditor and of a contributory. Appointment of Official Liquidator (Section 448) For the purposes of this Act, so far as it relates to the winding up of companies by the Court, (a) There shall be attached to each High Court, an Official Liquidator appointed by the Central Government, who shall be a whole-time officer, unless the Central Government considers that there will not be sufficient work for a whole-time officer in which case a part-time officer may be appointed; and (b) the Official Receiver attached to a District Court for insolvency purposes, or if there is no such Official Receiver, then, such person as the Central Government may, by notification in the Official Gazette appoint for the purpose, shall be the Official Liquidator attached to the District Court. The Central Government may appoint one or more Deputy or Assistant Official Liquidators to assist the Official Liquidator in the discharge of his functions. Official Liquidator to be liquidator Section 449 provides that on a winding up order being made in respect of a company, the Official Liquidator shall, by virtue of his office, become the liquidator of the company. Appointment and powers of Provisional Liquidator (Section 450)

At any time after the presentation of a winding up petition and before the making of a winding up order, the Court may appoint the Official Liquidator to be liquidator provisionally. Before appointing a provisional liquidator, the Court shall give notice to the company and give a reasonable opportunity to it to make its representations, if any, unless, for special reasons to be recorded in writing, the Court thinks fit to dispense with such notice. Where a provisional liquidator is appointed by the Court, the Court may limit and restrict his powers by the order appointing him or by a subsequent order; but otherwise he shall have the same powers as a liquidator. The Official Liquidator shall cease to hold office as provisional liquidator, and shall become the liquidator, or the company, on a winding up order being made. General provisions as to liquidators are laid down under Section 421 The liquidator shall conduct the proceedings in winding up the company and perform such duties in reference thereto as the Court may impose. Where the Official Liquidator becomes or acts as liquidator, there shall be paid to the Central Government out of the assets of the company such fees as may be prescribed. The acts of a liquidator shall be valid, notwithstanding any defect that may afterwards be discovered in his appointment or qualification: It is provided that nothing in this sub-section shall be deemed to give validity to acts done by a liquidator after his appointment has been shown to be invalid. Powers of liquidator Section 457 provides that the liquidator in a winding up by the Court shall have power, with the sanction of the Court, (powers exercisable without the sanction of the tribunal) (a) to institute or defend any suit, prosecution, or other legal proceeding, civil or criminal, in the name and on behalf of the company; (b) To carry on the business of the company so far as may be necessary for the beneficial winding up of the company; (c) To sell the immovable and movable property and actionable claims of the company by public auction or private contract, with power to transfer the whole thereof to any person or body corporate, or to sell the same in parcels; (d) To raise the money on the security of the assets of the company any money requisite; (e) To do all such other things as may be necessary for winding up the affairs of the company and distributing its assets. The liquidator in a winding up by the Court shall have power under Section 457 (powers exercisable without the sanction of

the tribunal) (i) To do all acts and to execute, in the name and on behalf of the company, all deeds, receipts, and other documents, and for that purpose to use, when necessary, the company s seal; ii) To inspect records and returns of the company on the files of the Registrar without payment of any fee;] (ii) To prove, rank and claim in the insolvency of any contributory, for any balance against his estate, and to receive dividends in the insolvency, in respect of that balance, as a separate debt due from the insolvent, and ratably with the other separate creditors; (iii) To draw, accept, make and endorse any bill of exchange, hundi or promissory note in the name and on behalf of the company, with the same effect with respect to the liability of the company as if the bill, hundi, or note had LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 180 11.555

been drawn, accepted, made or endorsed by or on behalf of the company in the course of its business; (iv) To take out, in his official name, letters of administration to any deceased contributory, and to do in his official name any other act necessary for obtaining payment of any money due from a contributory or his estate which cannot be conveniently done in the name of the company, and in all such cases, the money due shall, for the purpose of enabling the liquidator to take out the letters of administration or recover the money, be deemed to be due to the liquidator himself: (v) To appoint an agent to do any business which the liquidator is unable to do himself. Winding up of a company leads to dissolution of the company. When the Court is of opinion that the liquidator cannot proceed with the winding up for want of funds or assets or for any other reason whatsoever, and that it is just and reasonable in the circumstances of the case that an order for the dissolution of the company be made, the Court may make an order that the company be dissolved from the date of the order, and the company is accordingly dissolved. A copy of this order has to be forwarded by the liquidator to the Registrar within 30 days and the Registrar is required to record it in his books. Do the Court may also declare the Dissolution of a Company void in Certain cases? Yes, the Court may at any time within two years of the date of the dissolution, make an order, on the application of the liquidator or of any other person interested and upon such terms as it thinks fit, declaring the dissolution to have been void. The person who obtains the order avoiding the dissolution must file a certified copy thereof with the Registrar within 30 days or such further time as the Court may allow. In case of default, he will be punishable with fine to the extent of Rs. 500 for every day during which the default continues. We will now discuss about other modes of winding up. Voluntary Winding Up (Section 484 to 520) In case of voluntary winding up, the entire process is done without Court Supervision. When the winding up is complete, the relevant documents are filed before the Court for obtaining the order of dissolution. The members may do a voluntary winding up as the creditors may do it. The circumstances in which a company may be wound up voluntarily are: 1. When the period fixed for the duration of the company in its articles has expired 2. When an event on the happening of which the company is

to be dissolved as per its articles happens 3. The company resolves by a special resolution at a general meeting to be voluntarily wound up. A voluntary winding up commences from the date of the passing of the resolution for voluntary winding up. This is so even when after passing a resolution for voluntary winding up, the Court presents a petition for winding up. The effect of the voluntary winding up is that the company ceases to carry on its business except so for as may be required for the beneficial winding up thereof. Types of Voluntary Winding Up A voluntary winding up may be: Member s Voluntary Winding Up Creditor s Voluntary Winding Up Let me tell you about it in detail Member s Voluntary Winding Up In case of a company which is solvent and able to pay its liabilities in full and which desires to be wound up voluntarily, the majority of its directors at a Meeting of the Board must make a declaration of solvency verified by an affidavit staling that in their opinion the company will be able to pay its debts in full within such period not exceeding 3 years from the commencement of the winding up as may be specified in the declaration. Such a declaration must be made within 5 weeks immediately preceding the date of the passing of the resolution for winding up the company and be delivered to the Registrar for registration before that date. The declaration must embody a statement of the company s assets and liabilities as at the practicable date before the making of the declaration. Any director making a false declaration shall be criminally liable to imprisonment as well as with fine extending up to Rs. 50,000. The company must appoint liquidators for the purpose of winding up and fix their remuneration at a general meeting. On the appointment of the liquidators, the Board of directors, managing director and manager of the company cease to have any management power. The liquidator may transfer or sell the assets of the company and pay off its liabilities. If the winding up proceedings continue for more than one year, the liquidator must call a general meeting at the end of each year the liquidation continues. At the last meeting, the accounts of the liquidator must be approved by the members. Such accounts must be filed by him with the registrar of Companies and the Official Liquidator attached to the Court having jurisdiction over the company. The Registrar on receiving such accounts must register them. The Official Liquidator on receipt of the accounts and other relevant details must make a report to the Court if he is of the opinion that the affairs of the company have not been conducted in a manner prejudicial to the interest of its members or to public interest. The company shall be deemed to be dissolved from the date of submission of such report. If the Official Liquidator makes a

report that the affairs of the company have been conducted in a manner prejudicial to the interest of its members or to public interest, the Court may direct the Official Liquidator to make further investigation of the affairs of the Company. On receipt of the investigation report, the Court may make an order of dissolution or may make such order as it deems fit and proper ion the given circumstances. Creditors Voluntary Winding Up

Where the company is not solvent or where the declaration of solvency of the company is not made and delivered to the LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 181

Registrar in a voluntary winding up, it amounts to creditor s voluntary winding up. In this case all the provisions of a member s voluntary winding up apply except that instead of the members, it is the creditors who appoint the liquidator, approve the accounts and regulate the winding up proceedings. The creditors may appoint a Committee of Inspection consisting of not more than 5 creditors in order to regulate and supervise the winding up proceedings. You will find that Court has some specific powers in case of Voluntary Winding Up. Powers of the Court in case of Voluntary Winding Up 1. It may appoint the Official Liquidator or any other person as liquidator where the appointed liquidator is not acting. 2. It may remove the liquidator and appoint the Official Liquidator or any other person as liquidator on justifiable cause being shown. 3. It may determine the remuneration of the liquidator when the Official Liquidator is appointed as a liquidator 4. It may amend, vary, confirm or set aside the arrangement entered into between a company and its creditors on an appeal made by any creditor or contributory within 3 weeks of the completion of the arrangement 5. On an application of the Liquidator or contributory or creditor, it may determine any question arising in the winding up of a company and it may exercise, as respects the enforcing of calls, the staying of suits or other legal proceedings or any other matter, all or any of the powers which the Court might exercise if the company were being wound up by the Court. 6. It may set aside any attachment, distress or execution started against the assets of the company after the commencement of the winding up on such terms as it thinks fit on an application made by the liquidator, creditor or contributory if the Court thinks fit. 7. It may order a public examination of any person connected with the promotion or formation of the company or any officer connected with the company. Winding up subject to the supervision of court When a company has by special or ordinary resolution resolved wind up voluntarily, the Court may make an order that the voluntary winding up shall continue, but subject to such supervision the Court and with such liberty for creditors, contributories or others to apply to the Court and generally on such terms and conditions, as the Court thinks just.

The application for a creditor, contributory or the voluntary liquidator may make such intervention of the Court, when there are irregularities or frauds in the voluntary winding up. The effect of such an order is: 1. The liquidator may exercise his powers for liquidation subject to terms and conditions imposed by the Court. 2. The Court obtains jurisdiction over suits and legal proceedings as in case of compulsory winding up by the Court. 3. The supervision order also confers the power on the Court to make calls or to enforce calls made by the liquidators and to exercise all other powers which it would have in case of compulsory winding up by the court. 4. The supervision order when passed, acts as a stay of actions and other proceedings against the company 5. When an order has been made for winding up subject to supervision of Court and an order is afterwards made for winding up by the Court up, the Court has power to appoint any person as either provisional or permanent liquidators, in addition to, and subject to the control of the Official Liquidator. The Company cannot be dissolved except by order of dissolution by the Court References Kapoor, N.D. (2003), Elements of Mercantile Law, Sultan Chand and Sons, New Delhi. http://www.vakilno1.com http://www.saarclawnet.com/saarclawnet/osca20.html Notes: LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 182 11.555

LESSON 36: THE COMPANIES ACT, 1956 THE WINDING UP OF A COMPANY CONSEQUENCES OF A WINDING UP OF A COMPANY Learning Objectives After reading the lesson, you will be able to know about the: The consequences of winding up of a company The proof and ranking up of claims The preferential payments in regard to winding up of a company The meaning of defunct company Introduction By now, you are all aware of Winding Up. Today, we will discuss its consequences and how the claims are settled. Consequences of Winding Up 1. Consequences as to Shareholders/ Members In a company limited by shares, a shareholder is liable to pay the full amount up to the face value of the shares held by him. His liability continues even after the company goes into liquidation, but he is then described as a contributory. A contributory may be present or past. The liability of present and past contributories has already been discussed in this chapter. In a company limited by guarantee, the members are liable to contribute up to the amount guaranteed by them. 2. Consequences as to Creditors (1) Where the company is solvent (Sec. 528) Where a company is being wound up, all debts payable on a contingency and all claims against the company, present or future, certain or contingent, ascertained or sounding only in damages, shall be admissible to proof against the company. A just estimate of the value of such debts or claims shall be made. Where a solvent company is wound up. Where a solvent company is wound up, all claims of creditors, when proved, are fully met. (2) Where the company is insolvent (Sec.529) Where a company is insolvent and is wound up, the same rules shall prevail as in the case of insolvency with regard to: (a) Debts provable; (b) The valuation of annuities and future and contingent liabilities, and (c) The respective rights of secured and unsecured creditors The security of every secured creditor shall, however, be deemed to be subject to a pari passu charge in favors of the workmen to the extent of the workmen s portion; therein. Where a secured

creditor instead of relinquishing his security and proving his debt, opts to realize his security (a) The liquidator shall be entitled to represent the workmen and enforce the workmen s charge. (b) Any amount realized by the liquidator by way of enforcement of the workmen s charge shall be applied rate ably for the discharge of workmen s dues; and (c) The debt due to the secured creditor or the amount of the workmen s portion in his security, shall rank pari passu with the workmen s dues for the purposes of sec. 529-A (which deals with overriding preferential payments.) All persons who in any such case would be entitled to prove foe and receive dividends out for the assets of the company may come in under the winding up, and make such claims against the company as they are entitled to make. Secured and Unsecured creditors The creditors may be secured or unsecured. A secured. A secured creditor has 3 alternatives before him. (i) He may rely on his security and ignore the liquidation. (ii) He may value his security and prove for the deficit. (iii) He may surrender his security and prove for the whole debt. If a secured creditor instead of relinquishing his security and proving his debt proceeds to realize his security, he shall be liable to pay his portion of the expenses incurred by the liquidator (including a provisional liquidator, if any) for preservation of the security before its realization by the secured creditor. (a) All revenues, taxes, cases and rates due to the central government or a state government or to a local authority at the relevant date. The amount should have become due and payable within the 12 months preceding the relevant date. Relevant date means (i) In the case of a compulsory winding up of a company, the date on which a provisional liquidator is appointed, or if he is not appointed, the date of the winding up order. In case the company had commenced to be wound up winding up order, in case the company had commenced to be wound up voluntarily before that date, relevant dare means date of commencement of voluntary winding up. (ii) In the case of a voluntarily winding up of a company, the date of the passing of the resolution for the winding up of the company. (b) All wages or salary of any employee, in respect of services rendered to the company and due for a period not exceeding 4 months within the 12 months before winding up, the amount shall not, in case of any one claimant, exceed such sum as may be notified by the central

government in the official Gazette. LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 183

(c) All accrued holiday remuneration becoming payable to any employee on account of winding up. (d) All amounts due in respect of contributors payable during the 12 months before the winding up order under the employees state insurance act. 1948. This,however does not apply when the company is being wound up voluntarily for the purpose of reconstruction or amalgamation with another company. (e) All amounts due in respect of any compensation or liability under the workmen s compensation act. 1923, in respect of death or disablement of any employee of the company. (f) All sums due to any employee form a provident fund, a pension fund, a gratuity fund or any other fund for the welfare of the employees maintained by the company. (g) The expenses of any investigation held in pursuance of sec. 235 or 237 in as far as they are payable by the company. Advances made by a third person to pay wages or salary to any employee, or in the case of his death to any other person in his right on account of holiday remuneration, shall, in a winding up, have the same priority as the persons to whom these payments are made out of money advanced have priority. Primrose (Builders) Ltd; Re. (1950) Ch. 561 A bank allowed overdrafts to a company for the purpose of paying the wages of the company on the understanding that an amount equal to the loan would shortly be paid in order to reduce the overdraft. Held, the bank was entitled to preferential payment in respect of the overdrafts 3. Consequences as to servants and officers. A winding up order shall be deemed to be a notice of discharge to the officers and employees of the company, except when the business of the company is continued. Such a discharge shall relieve them of all obligations under their contract of service. A voluntary winding up shall also operate as a notice of discharge to the company s servants. 4. Consequences as to Proceedings Against the Company When a winding up order has been made or the official liquidator, has been appointed as provisional liqudator, no suit or other legal proceeding against the company shall be commenced except by leave of the tribunal. Similarly if a suit is pending against the company at the date of the winding up order, it shall not be proceeded with against the company, except by leave of the tribunal. In a voluntary winding up also, the tribunal may restrain proceedings against the company if it thinks fit. 5. Consequences as to Costs If assets are insufficient to satisfy liabilities, the tribunal may order for payment of the costs, charges and expenses of the winding up out of the assets of the company. The payment shall be made in such order of priority inter se as the tribunal

thinks just. Similarly all costs, charges and expenses property incurred in a voluntary winding up, including the remuneration of the liquidator, shall be paid out of the assets of the company in priority to all other claims. The payment shall, however, be subject of the rights of secured creditors. Now, we will learn about the proof and ranking of claims. Proof and Ranking of Claims Debts of all Descriptions to be Admitted to Proof Section 528 requires that in every winding up (subject, in the case of insolvent companies, to the application in accordance with the provisions of this Act of the law of insolvency), all debts payable on a contingency, and all claims against the company, present or future, certain or contingent, ascertained or sounding only in damages, shall be admissible to proof against the company, a just estimate being made, so far as possible, of the value of such debts or claims as may be subject to any contingency, or may sound only in damages, or for some other reason may not bear a certain value. Application of insolvency rules in winding up of insolvent companies. Section 529 lays down that in the winding up of an insolvent company, the same rules shall prevail and be observed with regard to (a) Debts provable; (b) The valuation of annuities and future and contingent liabilities; and (c) The respective rights of secured and unsecured creditors; as are in force for the time being under the law of insolvency with respect to the estates of persons adjudged insolvent: The security of every secured creditor shall be deemed to be subject to a pari passu charge in favour of the workmen to the extent of the workmen s portion therein, and, where a secured creditor, instead of relinquishing his security and proving his debt, opts to realise his security, (a) The liquidator shall be entitled to represent the workmen and enforce such charge; (b) Any amount realised by the liquidator by way of enforcement of such charge shall be applied rateably for the discharge of workmen s dues; and (c) So much of the debt due to such secured creditor as could not be realised by him by virtue of the foregoing provisions of this proviso or the amount of the workmen s portion in his security, whichever is less, shall rank pari passu with the workmen s dues for the purposes of section 529A. (2)

All persons who in any such case would be entitled to prove for and receive dividends out of the assets of the company, may come in under the winding up, and make such claims against the company as they respectively are entitled to make by virtue of this section: If a secured creditor instead of relinquishing his security and proving for his debt proceeds to realize his security, he shall be liable to pay 53[his portion of] the expenses incurred by the liquidator (including a provisional liquidator, if any) for the preservation of the security before its realization by the secured creditor.] LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 184 11.555

For the purposes of this provision, the portion of expenses incurred by the liquidator for the preservation of a security which the secured creditor shall be liable to pay shall be the whole of the expenses less an amount which bears to such expenses the same proportion as the workmen s portion in relation to the security bears to the value of the security. For the purposes of this section, section 529A and section 530, (a) Workmen 55, in relation to a company, means the employees of the company, being workmen within the meaning of the Industrial Disputes Act, 1947 (14 of 1947); (b) Workmen s dues , in relation to a company, means the aggregate of the following sums due from the company to its workmen, namely:( i) All wages or salary including wages payable for time or piece work and salary earned wholly or in part by way of commission of any workman, in respect of services rendered to the company and any compensation payable to any workman under any of the provisions of the Industrial disputes Act, 1947 (14 of 1947); (ii) All accrued holiday remuneration becoming payable to any workman, or in the case of his death to any other person in his right, on the termination of his employment before, or by the effect, of, the winding up order or resolution; (iii) Unless the company is being would up voluntarily merely for the purposes of reconstruction or of amalgamation with another company, or unless the company has, at the commencement of the winding up, under such a contract with insurers as is mentioned in section 14 of the Workman s Compensation Act, 1923 (8 of 1923), rights capable of being transferred to an vested in the workman, all amounts due in respect of any compensation or liability for compensation under the said Act in respect of the death or disablement of any workman of the company; (iv) All sums due to any workman from a provident fund, a pension fund, a gratuity fund or any other fund for the welfare of the workmen, maintained by the company; (c) Workmen s Portion , in relation to the security of any secured creditor of a company, means the amount which bears to the value of the security the same proportion as the amount of the workmen s dues bears to the aggregate of( i) The amount of workmen s dues; and (ii) The amounts of the debts due to the secured creditors. Preferential Payments (Section 530) In a winding up, there shall be paid in priority to all other debts (a)

All revenues, taxes, cesses and rates due from the company to the Central or a State Government or to a local authority at the relevant date as defined in clause (c) of sub-section (8), and having become due and payable within the twelve months next before that date; (b) All wages or salary (including wages payable for time or piece work and salary earned wholly or in part by way of commission) of any employee, in respect of services rendered to the company and due for a period not exceeding four months within the twelve months next before the relevant date subject to the limit specified in sub-section (2); (c) All accrued holiday remuneration becoming payable to any employee, or in the case of his death to any other person in his right, on the termination of his employment before, or by the effect of, the winding up order or resolution; (d) Unless the company is being would up voluntarily merely for the purposes of reconstruction or of amalgamation with another company all amounts due in respect of contributions payable during the twelve months next before the relevant date, by the company as the employer of any persons, under the Employees State Insurance Act, 1948 (34 of 1948), or any other law for the time being in force; (e) Unless the company is being wound up voluntarily merely for the purposes of reconstruction or of amalgamation with another company, or unless the company has, at the commencement of the winding up, under such a contract with insurers as is mentioned in section 1459 of the Workmen s Compensation Act, 1923 (8 of 1923), rights capable of being transferred to and vested in the workman, all amounts due in respect of any compensation or liability for compensation under the said Act in respect of the death or disablement of any employee of the company; (f) All sums to any employee from a provident fund, pension fund, a gratuity fund or any other fund for the welfare of the employees, maintained by the company; and (g) The expenses of any investigation held in pursuance of section 235 or 237, in so far as they are payable by the company. (2) The sum to which priority is to be given under clause (b) of sub-section (1), shall not, in the case of any one claimant, exceed such sum as may be notified61 by the Central Government in the Official Gazette. (3) Where any compensation under the Workmen s Compensation Act, 1923 (8 of 1923) is a weekly payment, the amount due in respect thereof shall, for the purposes of clause (e) of sub-section (1), be taken to be the amount of the lump sum for which the weekly payment could, if redeemable, be redeemed if the employer made an application for that purpose under the said Act. (4)

Where any payment has been made to any employee of a company,( i) On account of wages or salary; or (ii) To him, or in the case of his death, to any other person in his right, on account of accrued holiday remuneration, out of money advanced by some person for that purpose, the person by whom the money was advanced shall, in a winding up, have a right of priority in respect of the money so advanced and paid, up to the amount by which the sum in respect of which the employee or other person in his right, would have been entitled to priority in the LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 185

winding up has been diminished by reason of the payment having been made. (5) The foregoing debts shall( a) Rank equally among themselves and be paid in full, unless the assets are insufficient to meet them, in which case they shall abate in equal proportions; and (b) So far as the assets of the company available for payment of general creditors are insufficient to meet them, have priority over the claims of holders of debentures under any floating charged created by the company, and be paid accordingly out of any property comprised in or subject to that charge. (6) Subject to the retention of such sums as may be necessary for the costs and expenses of the winding up, the foregoing debts shall be discharged forthwith so far as the assets are sufficient to meet them, and in the case of the debts to which priority is given by clause (d) of sub-section (1), formal proof thereof small not be required except in so far as may be otherwise prescribed. (7) In the event of a landlord or other person distraining or having distrained on any goods or effects of the company within three months next before the date of a winding up order, the debts to which priority is given by this section shall be a first charge on the goods or effects so distrained on, or the proceeds of the sale thereof (8) For the purposes of this section( a) Any remuneration in respect of a period of holiday or of absence from work through sickness or other goods cause shall be deemed to be wages in respect of services rendered to the company during that period; (b) The expression accrued holiday remuneration includes, in relation to any person, all sums which, by virtue either or his contract of employment or of any enactment (including any order made or direction given under any enactment), are payable on account of the remuneration which would, in the ordinary course, have become payable to him in respect of a period of holiday, had his employment with the company continued until he became entitled to be allowed the holiday; You must understand that The expression workman; and employee does not include a

The expression the relevant date means( i) In the case of a company ordered to be wound up compulsorily, the date of the appointment (or first appointment) of a provisional liquidator, or if no such appointment was made, the date of the winding up order, unless in either case the company had

commenced to be wound up voluntarily before that date; and (ii) In any case where sub-clause (i) does not apply, the date of the passing of the resolution for the voluntary winding up of the company. This section shall not apply in the case of a winding the dated referred to in sub-section (5) of section 230 of the Indian Companies Act, 1913 (7 of 1913) occurred before the commencement of this Act, and in such a case, the provisions relating to preferential payments which would have applied if this Act had not been passed, shall be deemed to remain in full force. There is another important term which you could find in regard to winding up of company. Defunct company A company is a said to be defunct when it is not carrying on business or when it is not in operation. Sec. 560 deals with defunct companies. If a company has ceased to carry on business, the registrar may strike it off the register as a defunct company in accordance with Sec. 560. Practical Problems Attempt the following problems, giving reasons 1. S, a builder, wrote to a hotel company offering to take 300 shares in the company, if a contract for the renovation of the hotel was given to him. His offer was accepted. 300 shares were allotted to him and the directors passed a resolution that S should have the contract. S paid his deposit on shares and attended 2 meetings of the shareholders. No such contract was made and the company went into liquidation. Is S liable as contributory. [Hint. No ( Aldborough Hotel Co., Re. Simpson s Case)] 2. A creditor of a company applied for winding up of the company for its inability to pay his claim after proper demand had been made by him and on the lapse of the 3 weeks from the dare of such demand. It was proved to the satisfaction of the tribunal during inquiry, that the company was commercially solvent, will the tribunal order for the winding up of the company? [Hint. The tribunal may order for the winding up of the company Secs. 433 (e) and 434]. 3. An application was made by a father as guardian of his minor daughter for shares and the company registered the shares in the name of the daughter describing her as minor. The company went into liquidation and the father of the minor was placed on the list of contributories. The father resists this. Decide.

[Hint. The father cannot be placed on the list of contributories ( Palaniappa Mudaliar v. Official Liquidator, Pasupathi Bank Ltd)]. 4. Ever since its incorporation in 1969 and for 30 years thereafter, a company never met either in a shareholders or in a directors meeting, did not file for more than 10 years any summaries or list of shareholders, treated the company s properties as though they were properties as though they were properties belonging to the individual members, and sales, transfers and various dealing with these properties took place for all over those 30 years as will the registrar be justified in striking off the name of the company from the register? [Hint. Yes. ( Rai Sahib V.N. Mandal s Estates Ltd. Re.)]. 5. A company, in ignorance of the fact that it had been struck off the register, borrowed money on the security of a LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 186 11.555

charge on it property. On an application by the company, the tribunal restored it to the register. Is the charge valid? [Hint. Yes (Boxco Ltd., Re.)] References: Kapoor, N.D. (2003), Elements of Mercantile Law, Sultan Chand and Sons, New Delhi. http://www.vakilno1.com http://www.saarclawnet.com/saarclawnet/osca20.html Notes: LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 187

LESSON 37: TUTORIAL THE COMPANIES ACT, 1956 You are the company secretary of XYZ Ltd., a listed company, which is making a takeover bid to acquire control of ABC Ltd., another listed Company. XYZ Ltd. presently has no stake in ABC Ltd. Advise your Board of directors in respect of the following queries: (i) Govinda, your director, desires to be appointed on the Board of ABC Ltd. during the offer period. (ii) Your company after acquiring control of ABC Ltd. desires to dispose of some assets of ABC Ltd., not in the ordinary course of business and its intention to dispose of such assets is not stated in the offer document. Notes: LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 188 11.555

LESSON 38: CONSUMER PROTECTION ACT Learning Objectives At the end of this chapter, you will be able to know about: The object of the Consumer Protection Act Salient features of the Act The procedure and authorities for filing a complaint under the Act Introduction The earlier principle of Caveat Emptor or let the buyer beware which was prevalent has given way to the principle of Consumer is King . The origins of this principle lie in the fact that in today s mass production economy where there is little contact between the producer and consumer, often sellers make exaggerated claims and advertisements, which they do not intend to fulfill. This leaves the consumer in a difficult position with very few avenues for redressal. The onset on intense competition also made producers aware of the benefits of customer satisfaction and hence by and large, the principle of consumer is king is now accepted. The need to recognize and enforce the rights of consumers is being understood and several laws have been made for this purpose. In India, we have the Indian Contract Act, the Sale of Goods Act, the Dangerous Drugs Act, the Agricultural Produce (Grading and Marketing) Act, the Indian Standards Institution (Certification Marks) Act, the Prevention of Food Adulteration Act, the Standards of Weights and Measures Act, the Trade and Merchandise Marks Act, etc which to some extent protect consumer interests. However, these laws required the consumer to initiate action by way of a civil suit, which involved lengthy legal process proving, to be too expensive and time consuming for lay consumers. Therefore, the need for a more simpler and quicker access to redressal to consumer grievances was felt and accordingly, it lead to the legislation of the Consumer Protection Act, 1986. Object of the Consumer Protection Act, 1986 The main objective of the act is to provide for the better protection of consumers. Unlike existing laws, which are punitive or preventive in nature, the provisions of this Act are compensatory in nature. The act is intended to provide simple, speedy and inexpensive redressal to the consumers grievances, and reliefs of a specific nature and award of compensation wherever appropriate to the consumer. The act has been amended in 1993 both to extend its coverage and scope and to enhance the powers of the redressal machinery. The basic rights of consumers as per the Consumer Protection Act (CPA) are 1.

The right to be protected against marketing of goods and services which are hazardous to life and property 2. The right to be informed about the quality, quantity, potency, purity, standard and price of goods, or services so as to protect the consumer against unfair trade practices 3. The right to be assured, wherever possible, access to variety of goods and services at competitive prices 4. The right to be heard and be assured that consumers interests will receive due consideration at appropriate forums 5. The right to seek redressal against unfair trade practices or restrictive trade practices or unscrupulsous exploitation of consumers 6. The right to consumer education Extend and Coverage of the Act: The salient features of the Act are summed up as under: -The Act applies to all goods and services unless specifically exempted by the Central Government. -It covers all the sectors whether private, public or cooperative. -The provisions of the Act are compensatory in nature. It enshrines the following rights of consumers:Right to be protected against the marketing of goods and services which are hazardous to life and property. -Right to be informed about the quality, quantity, potency, purity, standard and price of goods or services so as to protect the consumer against unfair trade practices; -Right to be assured , wherever possible , access to a variety of goods and services at competitive prices; -Right to be heard and to be assured that consumers interests will receive due consideration at appropriate forums; -Right to seek redressal against unfair trade practices unscrupulous exploitation of consumers; and -Right to consumer education -The Act envisages establishment of Consumer Protection Councils at the Central and State levels, whose main objects will be to promote and protect the rights of the consumers The CPA extends to the whole of India except the State of Jammu and Kashmir and applies to all goods and services unless otherwise notified by the Central Government. Definitions of Important Terms Before studying the provisions of the CPA, it is necessary to understand the terms used in the Act. Let us understand some

of the more important definations. Complainant Means 1. A consumer; or 2. Any voluntary consumer association registered under the Companies Act,1956 or under any other law for the time being in force; or LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 189

3. The Central Government or any State Government, who or which makes a complaint; or 4. One or more consumers where there are numerous consumers having the same interest Complaint means any allegation in writing made by a complainant that : 1. An unfair trade practice or a restricted trade practice has been adopted by any trader 2. The goods bought by him or agreed to be bought by him suffer from one 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. The trader has charged for the goods mentioned in the complaint a price excess of the price fixed by or under any law for the time being in force or displayed on the goods or any package containing such goods. 5. Goods which will be hazardous to life and safety when used, are being offered for sale to the public in contravention of the provisions of any law for the time being in force, requiring traders to display information in regard to the contents, manner and effect of use of such goods ;with a view to obtaining any relief provided by law under the CPA. Goods means goods as defined in the Sale of Goods Act, 1930. Under that act, goods means every kind of movable property other than actionable claims and money and includes stocks and shares, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale. Service is defined to mean service of any description which is made available to potential users and includes the provision of facilities in connection with banking, financing, insurance, transport, processing, supply of electrical or other energy, board or lodging or both, housing construction, entertainment, amusement or the purverying of news or other information but does not include the rendereing of any service free of charge or under a contract of personal service. Consumer dispute means dispute where the person against whom a complaint has been made, denies or disputes the allegation contained in the complaint. Restrictive Trade Practice means any trade practice which requires a consumer to buy, hire, or avail of any good or as the case may be, services as a condition precedent for buying, hiring or availing of any other goods or services. Unfair Trade Practice means unfair trade practice as defined under the Monopolies and Restrictive Trade Practices Act. The

MRPT act has defined certain practices to be unfair trade practices. The detailed definition is given in the Consumer Protection Act, 1986 as amended by the Consumer Protection (Amendment) Act. 1993. It 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: (a) False or misleading representation, (b) Bargain price (c) Offering of gifts, prize, contest etc. (d) Non compliance of product safety standard. (e) Hoarding or destruction of goods. The Act may be consulted before filing a complaint for unfair trade practice. Defect means any fault, imperfection or shortcoming in the quality, quantity, potency, purity or standard which is required to be maintained by or under any law for the time being in force or under any contract, express or implied, or as is claimed by the trade in any manner whatsoever in relation to any goods. Deficiency means any fault, imperfection or 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. Who is a Consumer? All of us are consumers of goods and services. For the purpose of the Consumer Protection Act,the word Consumer has been defined separately for goods and services . For the purpose of goods , a consumer means a person belonging to the following categories: (i) One who buys or agrees to buy any goods for a consideration which has been paid or promised or partly paid and partly promised or under any system of deferred payment; (ii) It includes any user of such goods other than the person who actualy buys goods and such use is made with the approval of the purchaser. Note :- A person is not a consumer if he purchases goods for commercial or resale purposes However, the word commercial does not include use by consumer of goods bought and used by him exclusively for the purpose of earning his livelihood, by means of self employment. -For the purpose of services , a consumer belonging to the following categories: means a person

(i) One who hires or avails of any service or services for a consideration which has been paid or promised or partly paid and partly promised or under any system of deferred payment; i.It includes any beneficiary of such service other than the one who actually hires or avails of the service for consideration and such services are availed with the approval of such person. Who Can file a Complaint The following can file a complaint under the Act: -A consumer -Any voluntary consumer organization registered under the Societies Registration Act,1860 or under the Companies Act,1956 or under any other law for the time being in force. -The Central Government LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 190 11.555

-The State Government or Union Territory Administrations. -One or more consumers on behalf of numerous consumers who are having the same interest (Class action complaints) Structure -To provide simple, speedy and inexpensive redressal of consumer grievances, the Act envisages a three- tier quasijudicial machinery at the National, State and District levels. National Consumer Disputes Redressal Commission known as National Commission . Consumer Disputes Redressal Commissions known as State Commission. Consumer Disputes Redressal Forums- known as District Forum. -The provisions of this Act are in addition to and not in derogation of the provisions of any other law for the time being in force What Constitutes a Complaint? Under the Act, a complaint means any allegation in writing made by a complainant in regard to one or more of the following: -Any unfair trade practice as defined in the Act or restrictive trade practices like tie-up sales adopted by any trader. -One or more defects in goods. The goods hazardous to life and safety, when used,are being offered for sale to public in contravention of provisions of any law for the time being in force. -Deficiencies in services. -A trader charging excess of price. (i) Fixed by or under any law for the time being in force; or (ii) Displayed on goods; or (iii) Displayed on any packet containing such good; Where to file a complaint Consumer Protection Councils The interests of consumers are enforced through various authorities set up under the CPA. The CPA provides for the setting up of the Central Consumer Protection Council, the State Consumer Protection Council and the District Forum Central Consumer Protection Council The Central Government has set up the Central Consumer Protection Council which consists of the following members :

(a) The Minister in charge of Consumer Affairs in the Central Government who is its Chairman, and (b) Other official and non-official members representing varied interests The Central council consists of 150 members and its term is 3 years. The Council meets as and when necessary but at least one meeting is held in a year. State Consumer Protection Council The State Council consists of : (a) The Minister in charge of Consumer Affairs in the State Government who is its Chairman, and (b) Other official and non-official members representing varied interests The State Council meets as and when necessary but not less than two meetings must be held every year. Redressal Machinery under the Act The CPA provides for a 3 tier approach in resolving consumer disputes. The District Forum has jurisdiction to entertain complaints where the value of goods / services complained against and the compensation claimed is less than Rs. 5 lakhs, the State Commission for claims exceeding Rs. 5 lakhs but not exceeding Rs. 20 lakhs and the National Commission for claims exceeding Rs. 20 lakhs. District Forum Under the CPA, the State Government has to set up a district Forum in each district of the State. The overnment may establish more than one District Forum in a district if it deems fit. Each District Forum consists of : (a) A person who is, or who has been, or is qualified to be, a District Judge who shall be its President (b) Two other members who shall be persons of ability, integrity and standing and have adequate knowledge or experience of or have shown capacity in dealing with problems relating to economics, law, commerce, accountancy, industry, public affairs or administration, one of whom shall be a woman. Appointments to the State Commission shall be made by the State Goverrnment on the recommendation of a Selection Committee consisting of the President of the State Committee, the Secretary - Law Department of the State and the secretary in charge of Consumer Affairs Every member of the District Forum holds office for 5 years or upto the age of 65 years, whichever is earlier and is not eligilbe for re-appointment. A member may resign by giving notice in writing to the State Government whereupon the vacancy will be filled up by the State Government.

The District Forum can entertain complaints where the value of goods or services and the compensation, if any, claimed is less than rupees five lakhs. However, in addition to jurisdiction over consumer goods services valued upto Rs. 5 lakhs, the District Forum also may pass orders against traders indulging in unfair trade practices, sale of defective goods or render deficient services provided the turnover of goods or value of services does not exceed rupees five lakhs. A complaint shall be instituted in the District Forum within the local limits of whose jurisdiction (a) The opposite party or the defendant actually and voluntarily resides or carries on business or has a branch office or personally works for gain at the time of institution of the complaint; or LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 191

(b) Any one of the opposite parties (where there are more than one) actually and voluntarily resides or carries on business or has a branch office or personally works for gain, at the time of institution of the complaint provided that the other opposite party/parties acquiescence in such institution or the permission of the Forum is obtained in respect of such opposite parties; or (c) The cause of action arises, wholly or in part. State Commission The Act provides for the establishment of the State Consumer Disputes Redressal Commission by the State Government in the State by notification. Each State Commission shall consist of: (a) A person who is or has been a judge of a High Court appointed by State Government (in consultation with the Chief Justice of the High Court ) who shall be its President; (b) Two other members who shall be persons of ability, integrity, and standing and have adequate knowledge or experience of, or have shown capacity in dealing with, problems relating to economics, law, commerce, accountancy, industry, public affairs or administration, one of whom must be a woman. Every appointment made under this hall be made by the State Government on the recommendation of a Selection Committee consisting of the President of the State Commission, Secretary Law Department of the State and Secretary in charge of Consumer Affairs in the State. Every member of the District Forum holds office for 5 years or upto the age of 65 years, whichever is earlier and is not eligilbe for re-appointment. A member may resign by giving notice in writing to the State Government whereupon the vacancy will be filled up by the State Government. The State Commission can entertain complaints where the value of goods or services and the compensation, if any claimed exceed Rs. 5 lakhs but does not exceed Rs. 20 lakhs; The State Commission also has the jurisdiction to entertain appeal against the orders of any District Forum within the State The State Commission also has the power to call for the records and appropriate orders in any consumer dispute which is pending before or has been decided by any District Forum within the State if it appears that such District Forum has exercised any power not vested in it by law or has failed to exercise a power rightfully vested in it by law or has acted illegally or with material irregularity. National Commission The Central Government provides for the establishment of the National Consumer Disputes Redressal Commission The

National Commission shall consist of : (a) A person who is or has been a judge of the Supreme Court, to be appoint by the Central Government (in consultation with the Chief Justice of India ) who be its President; (b) Four other members who shall be persons of ability, integrity and standing and have adequate knolwiedge or experience of, or have shown capacity in dealing with, problems relating to economics, law, commerce, accountancy, industry, public affairs or administration, one of whom shall be a woman Appointments shall be by the Central Government on the recommendation of a Selection Committee consisting of a Judge of the Supreme Court to be nominated by the Chief Justice of India, the Secretary in the Department of Legal Affairs and the Secretary in charge of Consumer Affairs in the Government of India. Every member of the National Commission shall hold office for a term of five years or upto seventy years of age, whichever is earlier and shall not be eligible for reappointment. The National Commission shall have jurisdiction : (a) To entertain complaints where the value of the goods or services and the compensation, if any, claimed exceeds rupees twenty lakhs: (b) To entertain appeals against the orders of any State Commission; and (c) To call for the records and pass appropriate orders in any consumer dispute which is pending before, or has been decided by any State Commission where it appears to the National Commission that such 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. Complaints may be filed with the District Forum by : 1. The consumer to whom such goods are sold or delivered or agreed to be sold or delivered or such service provided or agreed to be provided 2. Any recognised consumer association, whether the consumer to whom 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 3. 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 the benefit of, all consumers so interested

4. The Central or the State Government. On receipt of a complaint, a copy of the complaint is to be referred to the opposite party, directing him to give his version of the case within 30 days. This period may be extended by another 15 days. If the opposite party admits the allegations contained in the complaint, the complaint will be decided on the basis of materials on the record. Where the opposite party denies or disputes the allegations or omits or fails to take any action to represent his case within the time provided, the dispute will be settled in the following manner : I. In case of dispute relating to any goods : Where the complaint alleges a defect in the goods which cannot be determined without proper analysis or test of the goods, a sample of the goods shall be obtained from the complainant, sealed and authenticated in the manner prescribed for referring to the appropriate laboratory for the purpose of any analysis or test whichever may be necessary, LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 192 11.555

so as to find out whether such goods suffer from any other defect. The appropriate laboratory would be required to report its finding to the referring authority, i.e. the District Forum or the State Commission within a period of fortyfive days from the receipt of the reference or within such extended period as may be granted by these agencies. How to File a Complaint Procedures for filing complaints and seeking redressal are simple. There is no fee District Forum, Commission. ( A There should be plain paper. for filing a complaint before the the State Commission or the National stamp paper is also not required) 3 to 5 copies of the complaint on

The complainant or his authorized agent can present the complaint in person. The complaint can be sent by post to the appropriate Forum / Commission. A complaint should contain the following information (a) The name, description and the address of the complainant. (b) The name , description and address of the opposite party or parties, as the case may be, as far as they can be ascertained; (c) The facts relating to complaint and when and where it arose; (d) Documents, if any, in support of the allegations contained in the complaint. (e) The relief which the complainant is seeking. The complaint should be signed by the complainant or his authorized agent. The complaint is to be filed within two years from the date on which cause of action has arisen. Relief Available to the Consumers Depending on the nature of relief sought by the consumer and facts, the Redressal Forums may give orders for one or more of the following reliefs: (a) Removal of defects from the goods, (b) Replacement of the goods; (c) Refund of the price paid; (d) Award of compensation for the loss or injury suffered; (e)

Removal of defects or deficiencies in the services; (f) discontinuance of unfair trade practices or restrictive trade practices or direction not to repeat them; (g) Withdrawal of the hazardous goods from being offered to sale; or (h) Award for adequate costs to parties. Procedure for Filing the Appeal Procedure for filing the appeal : -Appeal against the decision of a District Forum can be filed before the State Commission within a period of thirty days. Appeal against the decision of a State Commission can be filed before the National Commission within thirty days. Appeal against the orders of the National Commission can be filed before the Supreme Court within a period of thirty days. There is no fee for filing appeal before the State Commission or the National Commission. Procedure for filing the appeal is the same as that of complaint, except the application should be accompanied by the orders of the District/State Commission as the case may be and grounds for filing the appeal should be specified. Speedy Disposal The thrust of the Act is to provide simple, speedy and inexpensive redressal to consumers grievances. To ensure speedy disposal of consumers grievances, the following provisions have been incorporated in the Act and the rules farmed thereunder:

It is obligatory on the complainant or appellant or their authorized agents and the opposite parties to appear before the Forum/Commission on the date of hearing or any other date to which hearing could be adjourned. The National Commission, State Commission and District Forums are required to decide complaints, as far as possible, within a period of three months from the date of notice received by the opposite party where complaint does not require analysis or testing of the commodities and within five months if it requires analysis or testing of commodities. The National Commission and State Commissions are required to decide the appeal as far as possible, within 90 days from the first date of hearing. Read the following questions for a better understanding of the Act:

Q1. I have instituted a complaint before the Consumer Court against a Medical Practitioner. My complaint has been challenge on the ground that a Medical Practitioner cannot be sued under the Consumer Act. What does law provide? A. Yes, a medical practitioner can be sued under the Consumer Protection Act 1986 for his or her professional negligence resulting in damage to patient. Section 2 (d) in defining a consumer in Clause (ii) uses the expression hires and avails of . The word hire means employ of wages or fees . Secondly the words any service in s. 2 (d) (ii) in Consumer Protection Act. A eloquent to bring the delinquent medical practitioners within the ambit of Consumer Protection Act. Thirdly, s. 2 (o), Consumer Protection Act which defines service exempts only two types of services, one service free of charge and another contract of personal service postulates a relationship of master and servant. A medical man whose service is requisitioned for a patient answers the clause contract of service but never a contract of personal service . So, a negligent medical professional can be proceeded under the Consumer Protection Act 1986. LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 193

Q2. I had purchased seeds from a party. The seeds did not germinate. The other party took the plea that I was not a consumer. Whether purchase of seeds for the purpose of agriculture is purchase for commercial purpose? A. Purchase made for agriculture is not for commercial purpose. Therefore, the complainant is a consumer and entitled to seek redressal of his grievance in a Consumer Court against the party which supplied defective seed to him. Q3. I had got a confirmed ticket on Sahara Airways. The flight was later cancelled on account of technical snag. Is it a deficiency in service? A. Cancellation of flight on account of technical snag is not deficiency in service as it is due to unavoidable circumstances. However, you ought to be allowed refund of the fare but no compensation can be granted on account of any loss suffered by you (if any) because of the said cancellation. Q4. I was allotted a Maruti Car. There was a delay in delivery of the car. Subsequently, the dealer called upon me to make further payment as the price of the car had gone up. Am I liable to bear the price increase on account of delay caused by the dealer? A. You are not liable to pay any price increase in the above mentioned circumstances since the increase in price is totally on account of the delay on the part of the dealer for which a consumer cannot be made to suffer. Q5. Does rejection of application for grant of loan by a Bank constitute deficiency in service for which I can approach the Consumer Court? A. The Bank has a wide discretion in the matter of granting loans and advances and continuing disbursement of loans sanctioned .The Consumer Courts cannot sit in judgement over the discretion exercised by the Bank and as such you will not succeed in any such action, if taken by you. Q6. The transformer, which was supplying electricity to me, got burned and was replaced by the department after about two months. However, However I was billed with consumption charges. Am I liable to pay any such charges when there was no consumption of electricity by me? A. When the electricity was not supplied and the electricity bills produced by you showed that there was no consumption of electricity by you and admittedly the reason for that was burning of the transformer, you are not liable to pay any minimum charges. Q7. I had applied for electricity connection. However, power supply was not provided to me. Can I seek redressal of my grievance in Consumer Court? A. Your grievances is that you application for electricity connection was not granted. Electricity may be a service but the hiring of the service is not complete till the Electricity Board sanctions service. Hence, you can t approach a Consumer Court for redressal of your said grievance. Your remedy is to file a civil suit in the Court of law against the Electricity Board. Q8. Can Consumer Forums adjudicate disputes involving scale

of pay? A. No, Consumer Forums do adjudicate dispute-involving scale of pay. Q9. I had applied for subscription in Rajlakshmi scheme of UTI. The essence of the scheme was that the sum of money deposited with the UTI would grow 21 times in 28 years. However subsequently, the UTI extended the maturity date by two years. Can I approach a Consumer Court? A. Unilateral alteration of terms of payment by the UTI in their above scheme is Deficiency in Service for which you can seek relief in a consumer court. Q10. My car met with an accident. The insurance claim was rejected on the ground that my driver was not holding valid driving license. Should I approach a Consumer Court for seeking the Insurance claim? A. The Consumer Court will not be able to grant you any relief since the driver employed by you did not have a driving license. You were bound under law to check the ability of the person employed by you and the failure in holding a license for driving well debar you from claiming the Insurance Claims. Q11. I had purchased a fridge, which suffered from several defects, and those defects could not be removed or repaired by the Company. Can I seek redressal of my grievance? A. You can certainly seek redressal before the Consumer Forum. In a similar case as yours, the Forum appointed a Local Commissioner who corroborated the version of the complainant. It was held by the Forum that the fridge was found to be defective within the period of warranty. The opposite party was directed to replace the unit with a new one. Q12. I filed a complaint before the State Commission regarding payment of policy amount in death claim, which was allowed to me by the State Commission. I wish to file another complaint claiming the Double Accident Benefit. Can I do so? A. It is well-settled principal of law that one can not educate the same cause of action before a court of law or before another adjudicating Forum after it had already been adjudicating upon earlier. This is the basis for the relevant provisions under the Code of Civil Procedure, 1908 (CPC) which embody a sound principal of law to obviate multiplicity of litigation. Even though Consumer Forums are not governed by the CPC yet the sound principles of law and procedure embody in that CPC are followed by the Forums. Consequently, second complaint filed on the same cause of action would not be maintainable. Q13. I had applied for allotment for a plot and paid Rs.100 as registration fees. At the time of draw my name was not included. I lodged a complaint before the Consumer Forum, wherein the Housing Board argued that I was not a Consumer since no allotment had taken place. What is the correct position in law? A. Where the complainant had paid for the cost of application form as well as the registration fee, he is the potential user and the nature of transaction is covered by the expression service

of any description . As such the complaint is maintainable. The Housing Board is deemed to have undertaken to include your name in the draw of lots for allotment of a plot. However, LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 194 11.555

your application has not been considered because your name was not included in the draw. The only inference that can be drawn is that the person who prepared the list was negligent in discharge of his duty. You can proceed on this ground. Q14. My grievance is that I had registered with the M.I.G. scheme of the Haryana Housing Board and the board had escalated the price of the flats three times within a period of two years. Does my case lie within the jurisdiction of Consumer Forums? A. It has been laid down that under Consumer Protection Act the pricing policy of flats cannot be adjudicated upon by Consumer Forums. The question of pricing of the flat by Housing Board is not a Consumer dispute. If any amount has been illegally charged from you by Housing Board , you can recover the same through a civil court. Q15. A Complainant filed a case against our company who s grievance related to transactions dating back to years 199495 while the complaint was filed in the year 1999. Is the complaint within time? A. Session 24 A of the Consumer Protection Act, 1986 provides a limitation period of two years within which the complaint is required to be filed . In the light of the above, the complaint is time barred and hence not maintainable. Q16. My grievance is that I am not getting regular supply of water. What can I do against the concerned Government Authority before a Consumer Forum? A. The Government supplying water is performing a statutory functions which can not termed to be rendering of service. Hence the Consumer Forums have no jurisdictions to entertain such a complaint. Q17. My grievance is that a Hospital where I was treated declined to give me the medical records pertaining to my treatment and operation for Ulcer. Can it be termed a deficiency is service on the part of the hospital? A. There is no negligence on the part of the hospital by reason of such failure to supply the said papers unless there was a legal duty cast on the hospital to furnish such documents to the patients, which has to be seen from their Rules and Regulations. Q18. A registered letter sent to me was not delivered. What is the liability of an employee of the Post Office in this matter? A. Section 6 of the Indian Post Office Act 1878 provides that the Government shall not incur any liability by reasons of the loss, mis-delivery or delay or damage to any postal article in course of transmission by post except in so far as such liability is made in express terms to be undertaken by the Government and no Officer the Post Office shall incur any liability by reason of such loss, mis-delivery , delay or damage unless he had caused the same fraudulently or by his willful act or default. In view of the said Section 6, your complaint is not maintainable unless there is allegation an of fraud or willful act of negligence of any postal employee. Q19. A Superfast Train in which I was travelling was delayed for

long hours without any reason. Can this be a ground for filing a complaint against the Railways? A. Additional charges are taken by the Railways from the passengers travelling by a Superfast Train. If the trains are delayed for long hours and the delay has not been properly explained it amounts to deficiency in service and therefore the Railway is bound to refund the excess charges. Q20. I am a shareholder of HLL. Despite having made all the payments, the share certificates were delivered very late. I have claimed the loss in terms of the escalation in the market price of the share. Is my claim valid? A. Share market is a speculative market and there is bound to be fluctuation in value of shares of the company depending on market condition. Merely because the value of the share went up you are not entitled to get compensation at the increased rate, as damages are remote damages. Q21. I had paid the telephone bill but inspite of that the telephone department disconnect my telephone without any notice. Can the department disconnect the telephone without notice to the subscriber? A. Disconnection cannot be effected without notice to the subscriber. The Department is bound by law to give such a notice. You can seek compensation for the same alongwith restoration of the connection. Q22. I had bought a scooter in last May, after some months it is creating problem to me. When I complained to Service center they serviced it and say the problem was removed. But last week it is creating the same problem again. When I complained them they return me the Scooter next day and they say again that the problem was removed. But today it is creating the same problem to me. Can I go to file a case in consumer forum. A. You can definitely file a case before the Consumer Forum but the ideal remedy at this stage would be to complain to the company i.e. Bajaj Scooters Ltd. against the service center and wait for their response. In case nothing is done even after this, then it will be prudent to file a case in the Consumer Forum. Q23. We have been buying Parag milk packet 500 ml from a retailer. The packet though gives only 400ml. What action can we take against the company. A. There is clear case of cheating and you can file a criminal complaint under Section 421 of the Indian Penal Court. Besides filing a Criminal complaint, you can also approach a Consumer Court for this purpose. You must collect adequate evidence before doing the same, i.e.; retain a sealed packet of Parag Milk which indicates the quantity of 500ml but actually weighs 400ml. Q24. I had deposited a booking amount with Pal-Peugeot, letter the same was cancelled but no refund has come so far, for the last two years. The matter was referred to Delhi Consumer forum who referred to than (Maharashtra) consumer forum. Documents were sent to them but of no avail, again it was sent by us to Delhi as the deposit was made to Premnath Motors Delhi but Delhi Consumer forum has again written to follow than.

LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 195

A. You should file an appeal before the State Commission against the order of the Consumer Forum. Since the cause of action arose at Delhi, i.e.; the Distributor was located at Delhi and money also seems to have been paid at Delhi the Delhi Consumer Forum had the jurisdiction in case the distributors (who work at Delhi) have been made parties to the said petition. You should file an appeal against both the manufacturers as well as the distributors, i.e.; Prem Nath Motors against the order. Q25. I purchased on 1.1.2000 from a shop in Panjim, Goa a bottle of Scotch Whiskey. I find that it is not original in that it tastes too sweat. It appears to be spurious. I have written letters to the MD, Goa Tourism but there is no reply. What remedy is available to me to the relief. A. You can certainly file a complaint before the Consumer Forum against supply of Spurious Whisky supplied to you as well as also lodge a Criminal Complaint in this regard. However, the difficulty (which is a major one) is that since the bottle of Whisky has been open, it will be virtually impossible to prove that the contents of the Whisky are the same as they were when the bottle was sealed. Since, the legal system is totally based on evidence / proof, it would not be a worthwhile exercise to institute any legal proceedings in the facts and circumstances of the present case. Q26. I understand that under the Consumer Protection Act, a complain has to be made within 2 years from the date on which the cause of action arose. What happens in a case where the 2 year period has elapsed because the I spent the time writing(and replying to) to the manufacturer in the hope that he would replace the good? What argument can I give to the Forum in response to the plea of 2 years which I know will be taken by the manufacturer? A. It is correct that the Consumer Protection Act, provides for a limitation period of two years for filing a complaint and the said period starts from the date when the cause of action arose. The same is provided under Section 24-A of the Consumer Protection Act, 1986. However, the Consumer Forum has the power to entertain a complaint even after the said period in case it is convinced that the complaint could not be filed within the said period on account of certain sufficient cause. Thus you would have to give a good explanation in order to have the delay condoned from the Consumer Forum. In case the only ground pleaded by you is that you were corresponding with the Manufacturer and hoping to get the goods replaced, the same would not be construed as sufficient reasons for condoning the delay. Q27. Can I claim for replacement. If they do not replace the vehicle can I move to consumer forum. Who should I make a party i.e. the dealer, or the LML company or both of them. The dealer is in Karol Bagh the company office in Greater Kailash and factory s regd. office in Kanpur in which Jurisdiction/Zone should I file the complaint. Or any other detail which you feel Justified to provide me. A. You should again inform the Company about all the facts and steps taken by them for removing the defect in writing and further pursue the matter with the Company and try to get the

defect rectified. In case your efforts fail with Consumer Forum at Delhi by making both and the Dealer as parties to the complaint. allowed by Forum if the defect is such that rectify the same. Give the Delhi address of the complaint at Delhi.

you can file the complaint the Company Replacement is it is not possible to the company and file

Q28. I injured my knee in a game of football on 31st December 1997. It was diagnosed as ACL TEAR. For that I was operated upon in the knee on 2nd March 1998. After the operation my knee developed stiffness, which is unusual in such cases even after undergoing physiotherapy for two months I was unable to bend or straighten my knee. So after two months of operation my knee was manipulated under anesthesia to relieve stiffness. A plaster was put on the knee for one month. I was told to start walking . I used to walk with a limp. For about 8 months I continued to walk with a limp but then my condition deteriorated & in March-99 I had to start using crutches to move around. To find out the cause of this pain I underwent investigative arthoscopy in June-99 which revealed the following 1. ACL Laxity 2. meniscus tear 3. patellofemoral osteoarthritis . I was advised by the doctor to do physiotherapy, and take painkillers for the pain, I am still doing physiotherapy, but neither the pain has reduced nor am I able to walk without crutches, this whole experience has affected my life badly. Can I sue the doctors for negligence / inefficiency. My both operations were carried out in military hospitals, and they were done free of cost since I am serving in army. So I can not go to Consumer protection court. Please advise?. A. You can file a writ petition in the High Court of judicature against the hospital, making doctors responsible for your condition a party. You can also seek damages alongwith the appropriate action against the doctors and the management in the writ petition . References http://www.vakilno1.com/consumerprotect_qns.htm http://fcamin.nic.in/cpa.htm http://www.indiainfoline.com/lega/cptc/ch01.html Notes: LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 196 11.555

LESSON 39: FEMA AND TRADE AND COPYRIGHTS ACT Learning Objectives After reading the lesson, you will be able to know about the: The brief outline of Fema The brief outline of Trade and Copyrights Act Introduction Today, we will discuss the two Acts as outlined above in brief just to give you an idea as to the purpose of these Acts and the brief introduction of these Acts. Let us first talk about FEMA FEMA (Foreign Exchange Management Act) The Foreign Exchange Management Act (FEMA) is a law to replace the draconian Foreign Exchange Regulation Act, 1973. Any offense under FERA was a criminal offense liable to imprisonment, whereas FEMA seeks to make offenses relating to foreign exchange civil offenses. Unlike other laws where everything is permitted unless specifically prohibited, under FERA nothing was permitted unless specifically permitted. Hence the tenor and tone of the Act was very drastic. It provided for imprisonment of even a very minor offense. Under FERA, a person was presumed guilty unless he proved himself innocent whereas under other laws, a person is presumed innocent unless he is proven guilty. With liberalization, a need was felt to remove the drastic measures of FERA and replace them by a set of liberal foreign exchange management regulations. Therefore FEMA was enacted to replace FERA. FEMA extends to the whole of India. It applies to all branches, offices and agencies outside India owned or controlled by a person resident in India and also to any contravention there under committed outside India by any person to whom this Act applies. FEMA contains definitions of certain terms, which have been used throughout the Act. The meaning of these terms may differ under other laws or under common language. But for the purposes of FEMA, the terms will signify the meaning as defined there under. Let us take up some of the more important ones. Authorized person means an authorized dealer, money changer, off-shore banking unit or any other person for the time being authorized to deal in foreign exchange or foreign securities;

Capital Account Transaction means a transaction which alters the assets or liabilities, including contingent liabilities, outside India of persons resident in India or assets or liabilities in India of persons resident outside India, and includes transactions by way of giving guarantees or surety for any debt, obligation or other liability of (1) a person resident outside India or (2) of a person resident in India and owed to a person resident outside India. Currency includes all currency notes, postal notes, postal orders, money orders, cheques, drafts, travelers cheques, letters of credit, bills of exchange and promissory notes, credit cards or such other similar instruments, as may be notified by the Reserve Bank; Currency Notes means and includes cash in the form of coins

and bank notes; Current Account Transaction means a transaction other than a capital account transaction and includes : i. Payments due in connection with foreign trade, other current business, services, and short-term banking and credit facilities in the ordinary course of business, ii. Payments due as interest on loans and as net income from investments, iii. remittances for living expenses of parents, spouse and children residing abroad, iv. expenses in connection with foreign travel, education and medical care of parents, spouse and children; Export , with its grammatical variations and cognate expressions, means : i. The taking out of India to a place outside India any goods, ii. Provision of services from India to any person outside India; Foreign currency means any currency other than Indian currency; Foreign Exchange means foreign currency and includes :

i. Deposits, credits and balances payable in any foreign currency, ii. Drafts, travelers cheques, letters of credit or bills of exchange, expressed or drawn in Indian currency but payable in any foreign currency, iii.

Drafts, travelers cheques, letters of credit or bills of exchange drawn by banks, institutions or persons outside India, but payable in Indian currency; Foreign Security means any security, in the form of shares, stocks, bonds, debentures or any other instrument denominated or expressed in foreign currency and includes securities expressed in foreign currency, but where redemption or any form of return such as interest or dividends is payable in Indian currency; Import , with its grammatical variations and cognate expres sions, means bringing into India any goods or services; Indian currency means currency which is expressed or drawn in Indian .rupees but does not include special bank notes and LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 197

special one rupee notes issued under section 28A of the Reserve Bank of India Act, 1934 by the Ministry of Finance. Person includes an individual, a Hindu undivided family, a company, a firm, an association of persons or a body of individuals, whether incorporated or not, every artificial juridical person and any agency, office or branch owned or controlled by such person; Person Resident in India Means

Repatriate to India means bringing into India the realized foreign exchange and i. The selling of such foreign exchange to an authorized person in India in exchange for rupees, or ii. The holding of realized amount in an account with an authorized person in India to the extent notified by the Reserve Bank, and includes use of the realized amount for discharge of a debt or liability denominated in foreign exchange and the expression repatriation shall be construed accordingly: Security means shares, stocks, bonds and debentures, Government securities, savings certificates, deposit receipts in respect of deposits of securities and units of the Unit Trust of India or of any mutual fund and includes certificates of title to securities, but does not include bills of exchange or promissory notes other than Government promissory notes or any other instruments which may be notified by the Reserve Bank as security for the purposes of this Act; Service means service of any description which is made available to potential users and includes the provision of facilities in connection with banking, financing, insurance, medical assistance, legal assistance, chit fund, real estate, transport, processing, supply of electrical or other energy, boarding or lodging or both, entertainment, amusement or the purveying of news or other information, but does not include the rendering of any service free of charge or under a contract of personal service; Transfer includes sale, purchase, exchange, mortgage, pledge, gift, loan or any other form of transfer of right, title, possession or lien. What this Act actually regulates? Regulation and Management of Foreign Exchange Except with the general or special permission of the Reserve Bank, no person can : Financial transaction means making any payment to, or for the credit of any person, or receiving any payment for, by order or on behalf of any person, or drawing, issuing or negotiating any

bill of exchange or promissory note, or transferring any security or acknowledging any debt. No person resident in India can acquire, hold, own, possess or transfer any foreign exchange, foreign security or any immovable property situated outside India except with the general or special permission of the Reserve Bank. Any person may sell or draw foreign exchange to or from an authorized person if such sale or drawal is a current account transaction. However, the Central Government may, in public interest and in consultation with the Reserve Bank, impose such reasonable restrictions for current account transactions as may be prescribed. Any person may sell or draw foreign exchange to or from an authorized person for a capital account transaction. The Reserve Bank may, in consultation with the Central Government, specify a. Any class or classes of capital account transactions which are permissible; b. The limit up to which foreign exchange shall be admis sible for such transactions: i. a person residing in India for more than one hundred and eighty-two days during the course of the preceding Financial year but does not include :( a) a person who has gone out of India or who stays outside India, i. For or on taking up employment outside India, or ii. For carrying on outside India a business or vocation outside India, or iii. For any other purpose, in such circumstances as would indicate his intention to stay outside India for an uncertain period; a. A person who has come to or stays in India, otherwise than i. For or on taking up employment in India, or ii. For carrying on in India a business or vocation in India, or iii. For any other purpose, in such circumstances as would indicate his intention to stay in India for an uncertain period; i. Any person or body corporate registered or incorporated in India, ii. An office, branch or agency in India owned or controlled by a person resident outside India, iii. An office, branch or agency outside India owned or controlled by a person resident in India. a. Deal in or transfer any foreign exchange or foreign security to any person not being an authorized person; b. Make any payment to or for the credit of any person resident outside India in any manner; c. Receive otherwise through an authorized person, any payment by order or on behalf of any person resident outside India in any manner; d. Where any person in, or resident in India receives any payment by order or on behalf of any person resident

outside India through any other person (including an authorized person) without a corresponding inward remittance from any place outside India, then, such person shall be deemed to have received such payment otherwise than through an authorized e. Enter into any financial transaction in India as consideration for or in association with acquisition or creation or transfer of a right to acquire, any asset outside India by any person LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 198 11.555

However, the Reserve Bank cannot impose any restriction on the drawal of foreign exchange for payments due on account of amortization of loans or for depreciation of direct investments in the ordinary course of business. The Reserve Bank can, by regulations, prohibit, restrict or regulate the following : A person resident in India may hold, own, transfer or invest in foreign currency, foreign security or any immovable property situated outside India if such currency, security or property was acquired, held or owned by such person when he was resident outside India or inherited from a person who was resident outside India. A person resident outside India may hold, own, transfer or invest in Indian currency, security or any immovable property situated in India if such currency, security or property was acquired, held or owned by such person when he was resident in India or inherited from a person who was resident in India. The Reserve Bank may, by regulation, prohibit, restrict, or regulate establishment in India of a branch, office or other place of business by a person resident outside India, for carrying on any activity relating to such branch, office or other place of business. Every exporter of goods must : a. Furnish to the Reserve Bank or to such other authority a declaration in such form and in such manner as may be specified, containing true and correct material particulars, including the amount representing the full export value or, if the full export value of the goods is not ascertainable at the time of export, the value which the exporter, having regard to the prevailing market conditions, expects to receive on the sale of the goods in a market outside India; b. Furnish to the Reserve Bank such other information as may be required by the Reserve Bank for the purpose of ensuring the realization of the export proceeds by such exporter. The Reserve Bank may, for the purpose of ensuring that the full export value of the goods or such reduced value of the goods as the Reserve Bank determines, having regard to the prevailing market-conditions, is received without any delay, direct any exporter to comply with such requirements as it deems fit. Every exporter of services shall furnish to the to such other authorities a declaration in such manner as may be specified, containing the true material particulars in relation to payment for Reserve Bank or form and in such and correct such services.

Where any amount of foreign exchange is due or has accrued to any person resident in India, such person shall take all reasonable steps to realize and repatriate to India such foreign exchange within such period and in such manner as may be specified by the Reserve Bank. What if the Contravention of The Act takes place? What are the penalties for it ? If any person contravenes any provision of this Act, or contravenes any rule, regulation, notification, direction or order issued in exercise of the powers under this Act, or contravenes any condition subject to which an authorization is issued by the Reserve Bank, he shall, upon adjudication, be liable to a penalty up to thrice the sum involved in such contravention where such amount is quantifiable, or up to two lakh rupees where the amount is not quantifiable, and where such contravention is a continuing one, further penalty which may extend to five thousand rupees for every day after the first day during which the contravention continues.Any Adjudicating Authority adjudging any contravention may, if he thinks fit in addition to any penalty which he may impose for such contravention direct that any currency, security or any other money or property in respect of which the contravention has taken place shall be confiscated to the Central Government and further direct that the foreign exchange holdings, if any, of the persons committing the contraventions or any part thereof, shall be brought back into India or shall be retained outside India in accordance with the directions made in this behalf. Property in respect of which contravention has taken place, shall include deposits in a bank, where the said property is converted into such deposits, Indian currency, where the said property is converted into that currency; and any other property which has resulted out of the conversion of that property. If any person fails to make full payment of the penalty imposed on him within a period of ninety days from the date on which the notice for payment of such penalty is served on him, he shall be liable to civil imprisonment. No order for the arrest and detention in civil prison of a defaulter shall be made unless the Adjudicating Authority has LEGAL ASPECTS OF BUSINESS a. Transfer or issue of any foreign security by a person resident in India; b. Transfer or issue of any security by a person resident outside India; c. Transfer or issue of any security or foreign security by any branch, office or agency in India of a person resident outside India; d. Any borrowing or lending in foreign exchange in whatever form or by whatever name called; e. Any borrowing or tending in rupees in whatever form or by whatever name called between a person resident in India and a person resident outside India; f. Deposits between persons resident in India and

persons resident outside India; g. Export, import or holding of currency or currency notes; h. Transfer of immovable property outside India, other than a lease not exceeding five years, by a person resident in India; i. Acquisition or transfer of immovable property in India, other than a lease not exceeding five years, by a person resident outside India; j. Giving of a guarantee or surety in respect of any debt, obligation or other liability incurred (i) by a person resident in India and owed to a person resident outside India or (ii) by a person resident outside India. Copy Right: Rai University 11.555 199

issued and served a notice upon the defaulter calling upon him to appear before him on the date specified in the notice and to show cause why he should not be committed to the civil prison, and unless the Adjudicating Authority, for reasons in writing, is satisfied : a. That the defaulter, with the object or effect of obstructing the recovery of penalty, has after the issue of notice by the Adjudicating Authority, dishonestly transferred, concealed or removed any part of his property ; or b. That the defaulter has, or has had since the issuing of notice by the Adjudicating Authority, the means to pay the arrears or some substantial part thereof and refuses or neglects or has reused or neglected to pay the same. A warrant for the arrest of the defaulter may be issued by the Adjudicating Authority if the Adjudicating Authority is satisfied, by affidavit or otherwise, that with the object or effect of delaying the execution of the certificate the defaulter is likely to abscond or leave the local limits of the jurisdiction of the Adjudicating Authority. Where appearance is not made pursuant to a notice issued and served, the Adjudicating Authority may issue a warrant for the arrest of the defaulter. A warrant of arrest issued by the Adjudicating Authority may also be executed by any other Adjudicating Authority within whose jurisdiction the defaulter may for the time being be found. Every person arrested in pursuance of a warrant of arrest shall be brought before the Adjudicating Authority issuing the warrant as soon as practicable and in any event within twentyfour hours of his arrest (exclusive of the time required for the journey). However, if the defaulter pays the amount entered in the warrant of arrest as due and the costs of the arrest to the officer arresting him, such officer shall at once release him. When a defaulter appears before the Adjudicating Authority pursuant to a notice to show cause or is brought before the Adjudicating Authority, the Adjudicating Authority shall give the defaulter an opportunity showing cause why he should not be committed to the civil prison. Pending the conclusion of the inquiry, the Adjudicating Authority may, in his discretion, order the defaulter to be detained in the custody of such officer as the Adjudicating Authority may think fit or release him on his furnishing the security to the satisfaction of the Adjudicating Authority for his appearance as and when required. Upon the conclusion of the inquiry, the Adjudicating Authority may make an order for the detention of the defaulter in the civil prison and shall in that event cause him to be arrested if he is not already under arrest. However in order to give a defaulter an

opportunity of satisfying the arrears, the Adjudicating Authority may, before making the order of detention, leave the defaulter in the custody of the officer arresting him or of any other officer for a specified period not exceeding fifteen days, or release him on his furnishing security to the satisfaction of the Adjudicating Authority for his appearance at the expiration of the specified period if the arrears are not satisfied. When the Adjudicating Authority does not make an order of detention, he shall, if the defaulter is under arrest, direct his release. Every person detained in the civil prison in execution of the certificate may be so detained ; a. Where the certificate is for a demand of an amount exceeding rupees one crore, up to three years, and b. In any other case, up to six months However he shall be released from such detention on the amount mentioned in the warrant for his detention being paid to the officer-in-charge of the civil prison. A defaulter released from detention shall not, merely by reason of is/release, be discharged from his liability for the arrears, but he shall not be liable to be arrested under the certificate in execution of which he was detained in the civil prison. A detention order may be executed at any place in India in the manner provided for the execution of warrant of arrest under the Code of Criminal Procedure, 1973. Any such contravention may, on an application made by the person committing such contravention, be compounded (i.e. fine paid in lieu of imprisonment) within one hundred and eighty days from the date of receipt of application by the Director of Enforcement or such other officers of the Directorate of Enforcement and officers of the Reserve Bank as may be authorized in this behalf by the Central Government in such manner as may be prescribed. Where a contravention has been compounded, no proceeding or further proceeding, as the case may be, shall be initiated or continued, as the case may be, against the person committing such contravention, in respect of the contravention so compounded. What are the adjudication authorities and where the appeal can be filed? Adjudication and Appeal For the purpose of adjudication, the Central Government may, by an order published in the Official Gazette, appoint as many officers of the Central Government as it may think fit, as the Adjudicating Authorities for holding an inquiry in the manner prescribed after giving the person alleged to have committed contravention, against whom a complaint has been made a reasonable opportunity of being heard for the purpose of

imposing any penalty.However where the Adjudicating Authority is of opinion that the said person is likely to abscond or is likely to evade in any manner, the payment of penalty, if levied, it may direct the said person to furnish a bond or guarantee for such amount and subject to such conditions as it may deem fit. No Adjudicating Authority shall hold an enquiry except upon a complaint in writing made by any officer authorized by a general or special order by the Central Government. The said person may appear either in person or take the assistance of a legal practitioner or a chartered accountant of his choice for presenting his case before the Adjudicating Authority. Every Adjudicating Authority shall have the same powers of a civil court and : LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 200 11.555

a. All proceedings before it shall be deemed to be judicial proceedings within the meaning of sections 193 and 228 of the Indian Penal Code; b. Shall be deemed to be a civil court for the purposes of sections 345 and 346 of the Code of Criminal Procedure, 1973. c. Every Adjudicating Authority shall deal with the complaint as expeditiously as possible and endeavor shall be made to dispose off the complaint finally within one year from the date of receipt of the complaint. However, where the complaint cannot be disposed off within the said period, the Adjudicating Authority shall record periodically the reasons in writing for not disposing off the complaint within the said period. The Central Government shall, by notification, appoint one or more Special Directors (Appeals) to hear appeals against the orders of the Adjudicating Authorities under this section and shall also specify in the said notification the matter and places in relation to which the Special Director (Appeals) may exercise jurisdiction. Any person aggrieved by an order made by the Adjudicating Authority, being an Assistant Director of Enforcement or a Deputy Director of Enforcement, may prefer an appeal to the Special Director (Appeals). Every appeal must be filed within forty-five days from the date on which the copy of the order made by the Adjudicating Authority is received by the aggrieved person and it shall be in such form verified in such manner and be accompanied by such fee as may be prescribed. However, the Special Director (Appeals) may entertain an appeal after the expiry of the said period of forty-five days if he is satisfied that there was sufficient cause for not filing it within that period. On receipt of an appeal, the Special Director (Appeals) may after giving the parties to the appeal an opportunity of being heard, pass such order thereon as he thinks fit confirming, modifying or setting aside the order appealed against. The Special Director (Appeals) shall send a copy of every order made by him to the parties to appeal and to the concerned Adjudicating Authority. Every Special Director (Appeals) shall have the same powers of a civil court and : d. All proceedings before it shall be deemed to be judicial proceedings within the meaning of sections 193 and 228 of the Indian Penal Code; e. Shall be deemed to be a civil court for the purposes of sections 345 and 346 of the Code of Criminal Procedure, 1973.

The Central Government shall, by notification, establish an Appellate Tribunal to be known as the Appellate Tribunal for Foreign Exchange to hear appeals against the orders of the Adjudicating Authorities and the Special Director (Appeals) under this Act. The Central Government or any person aggrieved by an order made by the Adjudicating Authority or Special Director (Appeals), may prefer an appeal to the Appellate Tribunal. However, any person appealing against the order of the Adjudicating Authority or the Special Director (Appeals) levying any penalty, shall while filing the appeal, deposit the amount of such penalty with such authority as may be notified by the Central Government. Where in any particular case, the Appellate Tribunal is of the opinion that the deposit of such penalty would cause undue hardship to such person, the Appellate Tribunal may dispense with such deposit subject to such conditions as it may deem fit to impose so as to safeguard the realization of penalty. An appeal to the Appellate Tribunal must be filed within a period of forty-five days from the date on which a copy of the order made by the Adjudicating Authority or the Special Director (Appeals) is received by the aggrieved person or by the Central Government and it shall be in such form, verified in such manner and be accompanied by such fee as may be prescribed. The Appellate Tribunal may entertain an appeal after the expiry of the said period of forty-five days if it is satisfied that there was sufficient cause for not filing it within that period. On receipt of an appeal, the Appellate Tribunal may, after giving the parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit, confirming, modifying or setting aside the order appealed against. The Appellate Tribunal shall send a copy of every order made by it to the parties to the appeal and to the concerned Adjudicating Authority or the Special Director (Appeals), as the case may be. The appeal filed before the Appellate Tribunal shall be so dealt with by it as expeditiously as possible and endeavour shall be made by it to dispose the appeal finally within one hundred and eighty days from the date of receipt of the appeal. Where any appeal could not be disposed oft within the said period of one hundred and eighty days, the Appellate Tribunal shall record its reasons in writing for not disposing off the appeal within the said period. The Appellate Tribunal may, for the purpose of examining the legality, propriety or correctness of any order made by the Adjudicating Authority in relation to any proceeding, on its own motion or otherwise, call for the records of such proceedings and make such order in the case as it thinks fit. Let us talk about some other miscellaneous provisions in brief. Miscellaneous

Where any document a. Is produced or furnished by any person or has been seized from the custody or control of any person, in either case, under this Act or under any other law; or b. Has been received from any place outside India (duly authenticated by such authority or person and in such manner as may be prescribed) in the course of investigation of any contravention under this Act alleged to have been committed by any person, and such document is tendered in any proceeding under this Act in evidence against him, or against him and any other LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 201

person who is proceeded against jointly with him, the court or the Adjudicating Authority, as the case may be shall : a. Presume, unless the contrary is proved, that the signature and every other part of such document which purports to be in the handwriting of any particular person or which the court may reasonably assume to have been signed by, or to be in the handwriting of, any particular person, is in that person s handwriting, and in the case of a document executed or attested, that it was executed or attested by the person by whom it purports to have been so executed or attested. b. Admit the document in evidence notwithstanding that it is not duly stamped if such document is otherwise admissible in evidence. c. Unless the contrary is proved, the truth of the contents of such document. For the purposes of this Act, the Central Government may, from time to time, give to the Reserve Bank such general or special directions as it thinks fit, and the Reserve Bank shall, in the discharge of its functions under this Act, comply with any such directions. Where a person committing a contravention of any of the provisions of this Act or of any rule, direction or order made there under is a company, every person who, at the time the contravention 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 contravention and shall be liable to be proceeded against and punished accordingly. However any such person will not be liable to punishment if he proves that the contravention took place without his knowledge or that he exercised due diligence to prevent such contravention. Where a contravention of any of the provisions of this Act or of any rule, direction or order made thereunder has been committed by a company and it is proved that the contravention has taken place with the consent or connivance of, or is attributable to any neglect on the part of, any director, manager, secretary or other officer of the company, such director, manager, secretary or other officer shall also be deemed to be guilty of the contravention and shall be liable to be proceeded against and punished accordingly. The same provisions also apply to a firm or other association of individuals. Notwithstanding anything contained in any other law for the time being in force, no court shall take cognizance of an offence under FERA and no adjudicating officer shall take notice of any contravention under section 51 of the repealed FERA after the expiry of a period of two years from the date of the commencement

of this Act. If any difficulty arises in giving effect to the provisions of this Act, the Central Government by order do anything not inconsistent with the provisions of this Act for the purpose of removing the difficulty.The Central Government may by notification make rules to carry out the provisions of this Act.The Reserve Bank may by notification make regulations to carry out the provisions of this Act and the rules made thereunder. This was all about the FEMA. Let us now talk of the Trade, Patents and Copyrights Act as prevalent In India. Trade, Patents and Copy Rights Act These Acts are covered under the Intellectual Property Rights. Do you know what is Intellectual Property Rights (IPR)? IPR is a general term covering patents, copyright, trademark, industrial designs, geographical indications, protection of layout design of integrated circuits and protection of undisclosed information (trade secrets). Legislations covering IPRs in India are the Following Patents: The Patents Act,1970 and was amended in 1999 and 2002. The amended Act after the amendments made in 2002 came in to force on May 20, 2003. Design: A new Design Act 2000 has been enacted superseding the earlier Designs Act 1911. Trade Mark: A new Trademarks Act, 1999 has been enacted superseding the earlier Trade and Merchandise Marks Act, 1958. The Act came in force from September 15, 2003 Copyright: The Copyright Act, 1957 as amended in 1983, 1984 and 1992, 1994,1999 and the Copyright Rules, 1958. Layout Design of Integrated Circuits: The Semiconductor Integrated Circuit Layout Design Act 2000. (Enforcement pending) Protection of Undisclosed Information: No exclusive legislation exists but the matter would be generally covered under the Contract Act, 1872. Geographical Indications: The Geographical Indication of Goods (Registration and Protection) Act 1999. Administration of IPRs in the Country Patents, designs, trademarks and geographical indications are administered by the Controller General of Patents, Designs and Trade Marks which is under the control of the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry. Copyright is under the charge of the Ministry of Human Resource Development. The Act on Lay out Design of Integrated Circuits. Will be implemented by the Ministry of Communication and Information Technology.

Let us now concentrate on the outline of Trade and Copyrights Act. Copyrights India s copyright law, laid down in the Indian Copyright Act, 1957 as amended by Copyright (Amendment) Act, 1999, fully reflects the Berne Convention on Copyrights, to which India is a party. Additionally, India is party to the Geneva Convention for the Protection of rights of Producers of Phonograms and to the Universal Copyright Convention. India is also an active member of the World Intellectual Property Organization (WIPO), Geneva and UNESCO. The copyright law has been amended periodically to keep pace with changing requirements. The recent amendment to the copyright law, which came into force in May 1995, has ushered LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 202 11.555

in comprehensive changes and brought the copyright law in line with the developments in satellite broadcasting, computer software and digital technology. The amended law has made provisions for the first time, to protect performer s rights as envisaged in the Rome Convention Several measures have been adopted to strengthen and streamline the enforcement of copyrights. These include the setting up of a Copyright Enforcement Advisory Council, training programs for enforcement officers and setting up special policy cells to deal with cases relating to infringement of copyrights. Trade Marks Trademarks have been defined as any sign, or any combination of signs capable of distinguishing the goods or services of one undertaking from those of other undertakings. Such distinguishing marks constitute protect able subject matter under the provisions of the TRIPS Agreement. The Agreement provides that initial registration and each renewal of registration shall be for a term of not less than 7 years and the registration shall be renewable indefinitely. Compulsory licensing of trademarks is not permitted. Keeping in view the changes in trade and commercial practices, globalization of trade, need for simplification and harmonization of trade marks registration systems etc., a comprehensive review of the Trade and Merchandise Marks Act, 1958 was made and a Bill to repeal and replace the 1958 Act has since been passed by Parliament and notified in the Gazette on 30.12.1999. This Act not only makes Trade Marks Law, TRIPS compatibility but also harmonizes it with international systems and practices. Work is underway to bring the law into force. Geographical Indications The Agreement contains a general obligation that parties shall provide the legal means for interested parties to prevent the use of any means in the designation or presentation of a good that indicates or suggests that the good in question originates in a geographical area other than the true place of origin in a manner which misleads the public as to the geographical origin of the goo. There is no obligation under the Agreement to protect geographical indications which are not protected in their country or origin or which have fall en into disuse in that country. A new law for the protection of geographical indications, viz. the Geographical Indications of Goods (Registration and the Protection) Act, 1999 has also been passed by the Parliament and notified on 30.12.1999 and the rules made thee under notified on 8-3-2002. Patents The basic obligation in the area of patents is that, invention in all branches of technology whether products or processes shall be patent able if they meet the three tests of being new involving an inventive step and being capable of industrial application. In addition to the general security exemption which

applied to the entire TRIPS Agreement, specific exclusions are permissible from the scope of patent ability of inventions, the prevention of whose commercial exploitation is necessary to protect public order or morality, human, animal, plant life or health or to avoid serious prejudice to the environment. Further, members may also exclude from patent ability of diagnostic, therapeutic and surgical methods of the treatment of human and animals and plants and animal other than micro-organisms and essentially biological processes for the production of plants and animals. The TRIPS Agreement provides for a minimum term of protection of 20 years counted from the date of filing. India had already implemented its obligations under Articles 70.8 and 70.9 of TRIP Agreement. A comprehensive review of the Patents Act, 1970 was also made and a bill to amend the Patents Act, 1970 was introduced in Parliament on 20 December, 1999 and notified on 25-6-2002 to make the patent law TRIPS compatible. References Kapoor, N.D. (2003), Elements of Mercantile Law, Sultan Chand and Sons, New Delhi. http://www.vakilno1.com http://www.saarclawnet.com/saarclawnet/osca20.html http://dipp.nic.in/ipr.htm Notes: LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 11.555 203

LESSON 40: Group Discussion on the Intellectual Property Rights. Notes: LEGAL ASPECTS OF BUSINESS Copy Right: Rai University 204 11.555