FRAUD

Meaning: A false representation of fact made willfully with a view to deceive the other
party.

Sec.17:

Fraud includes any of the following acts committed by a party to a contract, or with his
connivance , or by his agent, with intent to deceive another party to enter in to
contract:

• An untrue suggestion as to fact by a party who believes it to be untrue:

Illustration:

X sells to B local goods by claiming as imported goods charging high price. It amounts to
fraud.

2) The active concealment of a fact by one having knowledge or belief of the fact.

Mere concealment is no fraud, but where steps are taken by a seller concealing some
material facts so that the buyer even after the reasonable examination can not trace the
defects. It will amount to fraud.

Illustration:

A furniture dealer, conceals the cracks in furniture sold by him by using some pacing
material and polishing it in such a way that the buyer even after reasonable
examination cannot trace the defect. It amounts to fraud through active concealment.

c) A promise made without any intention of performing it.

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

e.g. under Companies Act and Insolvency Acts , certain kinds of transfers have been
declared to be fraudulent.

 Essential elements of fraud:

 By a Party to contract:

Illustration:

The directors of a company issued a prospectus containing false statements. A shareholder

who had subscribed for the shares on the faith of the prospectus wanted to avoid the
contract. It was held that he could so because the false statement made by directors
amounted to fraud.

( Reese River Mining Co. v. smith)

2. False Representation:

Illustration:

X fraudulently informs Y that X’s estate is free from encumbrance. On the faith of X’s
Statement, Y buys the estate. Actually the estate is subject to mortgage. Here Y may
avoid the contract because X with the intention to deceive Y induced Y to enter in to a
contract.

Illustration 2:

On 1st Jan, X correctly informs Y that the monthly sales of his business are Rs. 1,000,000. In
 May, the contract of sale of business was signed. During this period the monthly sales
decreased to Rs.500,000. It was held that Y was entitled to avoid the contract because
X’s failure to disclose the fall in monthly sales amounted to fraud.

3. Representation as to fact:

A mere opinion as does not amount to fraud. It should be a representation.

4.The fraud must have actually deceived the other party who has acted on the basis
of such representation.

Illustration: (Horsefull v. Thomas)

X had defective cannon. In order to conceal the defect, he put a metal plug on it. Y bought
his cannon without examining. When Y used it, it burst. Y refused to pay the balance.
It was held that Y was liable to pay as he was not actually deceived by fraud because he
would have bought it even if no deceptive plug was inserted.

5. Suffered Loss:

The Party acting on the representation must have suffered some loss.

Effects of Fraud:

• Cancellation

• The aggrieved party may insist on Performance as if the representation was

true.

• Damages
 Misrepresentation
A false statement of fact made innocently non-disclosure or a material fact without any
intention to deceive the other party.

Sec.18:

Misrepresentation means and includes:

• the positive assertion, in a manner not warranted by the information of the

person making it, of that which is not true, though he believes it to be true;

b) Any breach of duty which, without an intent to deceive, gains an advantage to the
person committing it by misleading another to his prejudice.

Illustration:

Any change in value /quality of the subject matter---duty of the party to inform----did not
inform though innocently, amounted to misrepresentation.
c) Causing, however innocently, a party to an agreement, to make a mistake as to the
substance of the thing which is the subject matter of the agreement.

Illustration:

Contract of sale of machinery ----seller mistakenly makes a statement as to “no defect”-----

buyer believes and purchases the machinery----misrepresentation

ESSENTIAL ELEMENTS OF MISREPRESENTATION:

1. By a party to a contract:

The representation must be made by a party to a contract or by anyone with his connivance
or by his agent. Thus, the representation by a stranger to the contract does not
affect the validity of the contract.

2. False Representation:

the representation must be false but with the knowledge of its falsehood i.e. the person
making it must honestly believe it to be true.

3. Representation as to Fact:

The representation must relate to a fact. A mere “opinion” or a statement of expression or

intention does not amount to misrepresentation.

Illustration:

X sold his hotel to Y and stated that a part of the hotel is occupied by a tenant who is most
desirable. In fact the rent from the tenant could only be recovered under pressure and
was currently in arrear. It was held that Y was entitled to avoid the contract because X’s
statement a mounted to misrepresentation.

(Smith Case)

4. Object:

The representation must be made to inducing the party to enter into contract but without
 the intention of deceiving the other party.

5. Actually acted:

Other party must have acted on the faith of the representation.

Illustration 1:

X says to Y who intends to purchase his land, “My land

Produces 2 tons of rice per acre”. X believes his statement to be true although he has no
sufficient ground for the belief. Y purchases X’s land believing X’s statement. Later on,
Y finds that the land produces only 1.5 tons of rice per acre. Here, X’s representation is
misrepresentation.

Illustration 2:

The prospectus of a company contained a statement that the company had been
authorized by ‘Special Act of the Parliament ‘to use steam or mechanical power for
running the trains. In fact, the authority to use the steam was subject to the approval
of “Board of Trade”. But this fact was not mentioned in the prospectus. The Board of
Trade did not approve the use of steam and , consequently, the company wound up.
The shareholders of the company filed a suit against the directors for fraud. But the
court held that they were not liable for fraud because they honestly believed that once
the Parliament had authorized the use of steam, the consent of the Board of trade
practically concluded. (Derry v. Peak)

Effects of Misrepresentation:

• Right to rescind the contract exists:

Exceptions:

 The contract can not be cancelled when the party whose consent was
obtained by misrepresentation had the means of discovering truth by ordinary
 diligence;

 And not when consent was given in ignorance of the misrepresentation.

 The party despite awareness of misrepresentation takes benefit under the

contract.

 Where the parties can not be restored to their original position.

Illustration:

X leads Y erroneously that to believe that 1000 moulds of indigo are made annually at X’s
factory. Y examines the accounts of X’s factory which show that only 800 moulds of
indigo have been made. After this Y buys the factory. Here, the contract is not voidable
on account of X’s misrepresentation because Y after becoming aware of
misrepresentation takes the benefit under the contract.

) Right to insist upon Performance:

b) Right to insist upon Performance:

the party whose consent was caused by misrepresentation may if he thinks fit, insist that
the contract shall be performed , and that he shall be put in the position in which he
would have been if the representation made had been true.

Distinction Between Fraud & Misrepresentation:

FRAUD MISREP.

 Intention to deceive -------- No such intention

  Belief of being untrue --------No such belief

 Damages can be awarded ---- Damages can’t be.

 Can avoid even if ----------- Cant avoid if means Means of discovering

were available

truth were available

 Mistake
Sec.20:

A mistake is said to have occurred where the parties intending to do one thing , by error do
something else. Mistake is an erroneous belief concerning something. The mistake can
be of two types.

 Mistake of fact

 Mistake of Law

 MISTAKE OF FACT:

Mistake can be bilateral or unilateral mistake.

• Bilateral Mistake : (Sec.20)

the term bilateral means: “where both the parties to the agreement are under a mistake
as to matter of fact essential to the agreement. The agreement is void.” Thus the
following three conditions must be satisfied before declaring a contract void under
the section:

i. Both the parties must be under a mistake

ii. Mistake must be of fact not of Law.

Note: Sec.20 provides that “An erroneous opinion” as to 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.

Illustration: X buys a painting believing to be worth of Rs. 50,000 while in fact it is worth
only Rs.5,000. the contract is not void.

iii. Mistake must relate to an essential fact:

Illustration:

A agrees to sell to B a specific cargo of goods supposed to be on its way from England to
Mumbai. It turns out that , before the date of bargain, the ship conveying the cargo
had been cast away and the goods lost. Neither party was aware of the facts.

 Bilateral Mistake as to the Subject Matter:

i. Mistake as to the Existence of subject Matter

ii. Mistake as to the quantity of the subject matter

iii. Mistake as to the quality of the subject matter

iv. Mistake as to the price of the subject matter

v. Mistake as to the identity of the subject matter

vi. Mistake as to the title of the subject matter

Illustration (i):

A agrees to buy from B certain horse. It turns out that the horse was dead at the time of
bargain though neither party was aware of the fact. The agreement is void because
there is bilateral mistake as to the existence of subject matter.
Illustration (ii):

A agrees to buy from B all his horses believing that B has two horses but B has three
horses. The agreement is void because there is bilateral mistake as to the quantity of
subject matter.

Illustration (iii):

A agrees to buy particular horse from B. Both believe to be a race horse but it turns out to
be a cart horse. The agreement is void because there is bilateral mistake as to the
quality of the subject matter.

Illustration (iv):

A agrees to buy a particular horse from B who mentioned in his letter the price as Rs. 1,150
instead of Rs. 5,150. The agreement is void because there is bilateral mistake as to the
price of the subject matter.

Illustration (v):

A agrees to buy from B a certain horse from B who mentioned in his letter. B has a one
race horse and one cart horse. A thinks that he is buying race horse but B thinks that
he is selling cart horse. The agreement is void because there is bilateral mistake as to
the identity of subject matter.

Illustration (vi):

A agrees to buy a particular horse from B. That horse is already owned by A. The
agreement is void because there is a bilateral mistake as to the title of the subject
matter.
  Unilateral Mistake:

Sec.22:

A contract is not voidable merely because it was caused by one of the parties to it being
under a mistake as to matter of fact.

Illustration:

X sold oats to Y, thinking that they were old oats, purchased them. In fact, the oats were
new. It was held that Y was bound by the contract (Smith v. Hughes).

 Exceptions:

the agreement is void where a unilateral mistake relates to the identity of the party
contracted with or as to the nature of the contract.

Cundy v. Lindsay (1878)

The plaintiff (Cundy) received an order for a quantity of handkerchiefs from Blankarn,
who had his address at 37 Wood Street, Cheapside. The order was signed in a way
that indicated it came from Blenkiron & Company, who were a reputable firm
carrying on business at 123 Wood Street, Cheapside. The order was filled by the
plaintiff and addressed to “ Blenkiron & Company, 37 wood street, Cheapside”.
Blankarn received the order . He sold a large quantity of handkerchiefs to the defedant
(Lindsay) and then left without paying the plaintiff. When the plaintiff discovered the
true state of affairs, he sued the defendant for the tort of conversion.

Decision:

The court held that there was no contract with Blenkarn. This was because the plaintiff
had only intended to deal with Blenkiron & Company and this fact must have been
known to Blenkarn. Because there was no contract with Blankarn, he did not obtain a
good title to the goods and therefore could not pass a good title to the defendant. te
 defendant therefore was in possession of goods he did own and was therefore liable.

Lake v. Simmons

A woman by falsely representing her to be wife of a well known Baron ( a millionaire)

obtained two pearl necklaces from a firm of jewelers on the pretext of showing them to
her husband before buying. She pledged them with a broker, who in good faith paid
her Rs.100,000. A suit was filed by the jeweler against the broker . It was held that there
was no contract between the jeweler and the broker as the jeweler never intended to
contract with her and as such, the broker did not get a good title and hence he must
return the goods.

Contract of Sale of Goods

 Definition contained in “Sale of Goods Act, 1930”

Sec.4(1):

“A contract whereby the seller transfers or agrees to transfer the property in

goods to the buyer for a price.”

In other words, a contract to transfer the ownership of goods from the seller to the buyer is
known as contract of sale.
  ESSENTIALS OF A CONTRACT OF SALE:

1.Contract:

the word contract means an agreement enforceable by law. All the essentials of a valid
contract like capacity of parties, free consent, legality of object, etc should also be
present in a contract of sale. It may be express or implied.

2. Two Parties:

there should be two parties to a contract of sale. i.e. a buyer and a seller.

3. Transfer of property.

Property means ownership. A mere transfer of possession of goods can not be termed as
sale. He To constitute a contract of sale the seller, the seller must either transfer or
agree to transfer the property (ownership) in the goods to the buyer.

4. Goods:

The subject matter of the contract of sale of goods must be goods. According to sec. 2(7): “
goods means every kind of movable property other than actionable claims and money;
and includes electricity, water, gas, 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.

5. Price:

The consideration in a contract of sale must be the price. When goods are sold or
exchanged for other goods, the transaction is barter and not a contract of sale of goods.
If goods are sold partly for goods and partly for money, the contract is sale.
6. Sale and Agreement to sell:

the term contract of sale includes both sale and an agreement to sell. When the property in
the goods is transferred from the seller to the buyer at the time of formation of
contract, the contract is called a sale.

When under a contract of sale the transfer of ownership in the goods is to be transferred
from seller to buyer at some future date, the contract is called an agreement to sell.

Illustrations:

• A buys a book from S and pays the whole price on a counter. It is sale.

• A agrees to buy B’s car for Rs.2 lac. He promises to make payment and take
delivery after one month. It is an agreement to sell.

7. Other formalities:

there is no specific procedure to make a contract. Apart from the above, all other essentials
of a valid contract like capacity of the parties, free consent , legality of object etc.
should also be there in a contract of sale. It may be oral or in writing.

Conditions and Warranties

 A contract of sale of goods contains various terms or stipulations regarding

the quality, the price, the mode of payment, the delivery of goods, the time of
performance and the place where the goods are to be sent etc. Some of these
stipulations may be major terms and others may be minor terms. The major terms are
called conditions and minor terms are warranties.

Definition of Condition: Sec.12(2)

“Condition is a stipulation essential to the main purpose of the contract, the breach of
which gives rise to a right to treat the contract as repudiated.”

Illustration:

A contracts to deliver 100 Pak Fans to B. But A delivers Climax fans. It is breach of
 condition. B can reject or accept them and claim damages.

Definition: Sec.12(3)

“A warranty is collateral to main purpose of the contract, the breach of which gives rise to
claim for damages but not right to reject the goods and treat the contract as
repudiated.”

In other words, a warranty is not essential for the main purpose of the contract, the breach
of which gives the injured party a right to recover damages only but not to reject the
contract.

Difference Between Condition and Warranty

Condition

 Essential to main purposeForms the basis of Contract

 Breach gives right to repudiate

 A breach of condition may be treated as Breach of Warranty.

 Option of not to reject (viodable)

Warranty

 Not so

 Not so
 Not So

 Not So….no option of rejecting the contract

 Rights of unpaid Seller

 Sec.45:

“the seller of goods is deemed to be an unpaid seller:

• When the whole of the price has not been paid or tendered.

• When a bill of exchange or other negotiable instrument has been received as

 a conditional payment and it has been dishonoured. The term seller includes any
person who is in the position of a seller. e.g an agent of the seller”

 Features of Unpaid Seller:

• He must sell his goods on cash basis. If he sells the goods on credit, he is not
an unpaid seller during the period of credit.

• He must be unpaid wholly or partly. If a part of the price remains unpaid, he

is an unpaid seller.

• If the price is offered by the buyer and the seller refuses to accept it, the seller
can not be called unpaid seller.

Illustration:

A sells good to B on five-month credit. A is not an unpaid seller. But if B becomes insolvent
after 2 months , A becomes an unpaid seller.

 Rights of unpaid seller:

Two kinds of rights:

• Right against goods

• Right against buyer personally

Rights Against Goods:

there are three rights:

a) Right of lien:

Right of lien means the right to retain the possession of the goods until the full price is
 received. An unpaid seller can exercise the right of lien in the following cases.

• Where the goods have been sold for cash and not on credit,

ii) Where the goods have been sold on credit but the term of credit has expired.

iii) Where the buyer becomes insolvent even if the term of credit has not expired.

Rules regarding lien:

i) It can be exercised when goods are in possession of seller.

ii) It can be exercised for price and not for other expenses.

iii) If seller delivers some goods, it can be exercised on the remainder.

Termination of lien:

The unpaid seller loses the right of lien in the following cases:

1. Delivery of goods:

when the unpaid seller delivers the goods or other bailee for transmission to the buyer.

2. Possession of buyer:

When the buyer or his agent lawfully obtains possession of the goods

3. Waiver:

When the seller waives his right of lien on goods

4. New Sale:

Where the buyer further sells the goods and the seller agrees. The right of lien once lost,
can not be restored even if the buyer delivers the goods to the seller for any particular
purpose.

Illustration:
E sold and delivered a refrigerator to J and since it was not functioning properly, J delivered
back to E for repairs. It was held that E could not exercise his lien over the refrigerator.

B) Right of s:toppage of Goods in Transit:

The right of stoppage of goods in transit means the right of stopping the goods while they
are in transit to take possession until the price is paid. The unpaid seller can stop the
goods in transit in the following cases.

 The seller must have parted with the possession of goods i.e. the goods must
not be in the possession of seller.

 The goods must be in the course of transit.

 The buyer must have become insolvent.

Termination of this right:

The seller cannot stop the goods in transit in the following cases.

 When the buyer or his agent takes delivery of the goods after the goods have
reached destination.

 When the buyer or his agent takes delivery of the goods before the goods
have reached destination.

 When the buyer requests the carrier to carry the goods to a new destination
after the goods have reached at original destination.
iv) When the carrier wrongfully refuses to deliver the goods to the buyer or his agent.

Illustration:

A sells 200 bags of cement to B. A delivers the cement to carrier to carry to B. Later
on, A gets a news that B has become insolvent. A can stop delivery of cement.

c) Right of Resale:

The unpaid seller can resell the goods in the following cases:

 Where the goods are of perishable nature

 When there is a provision regarding the right of sale in the contract.

 Where the seller gives a notice to the buyer of his intention to resell and
buyer does not pay within a reasonable time, he can :

a) recover loss on resale of the goods, if any

b)retain any surplus on resale of goods, if any.

However if the seller resells without notice to the buyer:

 He can not recover any loss on resale of the goods, if any.

 He can not retain any surplus on resale of the goods, if any.

Illustration:

X sells some vegetables to Y on credit. Y does not pay. X can resell to any other person.

2. Right Against Buyer Personally:

The unpaid seller has the following rights against buyer.

a) Suit for price:

Where the ownership in goods has passed to the buyer and the buyer refuses to pay the
price according to the terms of the contract. The seller can sue the buyer for price
irrespective of delivery of goods.

b) Suit for damages for non-acceptance

Where the buyer refuses to accept and pay for the goods, the seller may sue him for
damages for non-acceptance. The seller can recover damages only. He can not
recover full price.

c) Suit for Special damages and interest:

The seller can sue the buyer for special damages where the parties are aware of such
damages at the time of contract. The unpaid seller can recover interest at a reasonable
rate on the total unpaid price of goods from the time it was due until it is paid.

Illustration:

X sells some goods to Y. Y does not pay the price. X can sue for damages and interest if the
parties are aware of such circumstances.

Rights and Duties of Buyer

 RIGHTS OF BUYER:

• Right to take delivery:

The first right of buyer is to take delivery of goods according to the terms of the
contract.

 Right to reject:
 If the seller sends to the buyer a larger or smaller quantity of goods against the contract,
the buyer may reject or accept the whole or accept some and reject the rest. He can
refuse to accept the goods in installments.

3.Rights to notice of insurance:

Where goods are sent by the seller to the buyer by sea route, the buyer has a right to be
informed by the seller so that he may get the goods insured.

4. Right to examine:

The buyer has a right to examine the goods which he has not previously examined before
he accepts them.

5. Right to sue for damages:

Where the seller refuses to deliver the goods to the buyer, the buyer may sue the seller for
damages for non-delivery.

6. Right to sue for price:

If the buyer has paid the price and the goods are not delivered, he can recover the amount.

7. Right to sue for performance:

The buyer may sue the seller for specific performance of the contract. If the goods are
specific, the court may order for the performance of the contract.

8. Right to sue for breach of warranty:

Where there is breach of warranty by the seller the buyer can not reject the goods. He can
sue for damages.

9. Right to Cancel the Contract:

When the seller cancel the contract before the date of delivery, the buyer may cancel the
contract or wait for the date of delivery.

10. Right to sue for interest:

Where there is breach of contract on the part of the seller, the buyer has a right to claim
interest on the amount.

 DUTIES OF BUYER:

1. Duty to accept the goods:

It is the duty of the buyer to accept the goods and pay for them according to the terms of
the contract.

2. Duty to apply for delivery:

It is the duty of the buyer to apply for delivery of the goods.

3. Duty to demand delivery:

It is the duty of the buyer to demand for the delivery at a reasonable hour.

4. Duty to take risk of deterioration:

Where the seller agrees to deliver the goods at his own risk at a place other than where they
are when sold, the buyer shall take a risk of deterioration in the goods.

5. Duty to inform the seller:

It is the duty of the buyer to inform the if he refuses to accept the goods.

6. Duty to take delivery:

It is the duty of the buyer to take delivery of the goods within a reasonable time.

7. Duty to pay price:

Where the ownership of goods passes to the buyer, it is the duty of the buyer to pay the
price according to the contract.
8. Duty to pay damages:

Where the buyer refuses to accept and pay for the goods, he will have to compensate the
seller for damages for non-acceptance.
 Partnership Act, 1932.

 TOPICS TO BE COVERED:

• Meaning and Essential Elements of Partnership

• Nature of Partnership Firm

• Difference between Partnership and Company

• Duration of Partnership

• Types of Partners

• Mutual Rights and Duties

• Implied Authority of a Partner

• Reconstitution of a Firm
 1- MEANING AND ESSENTIAL ELEMENTS OF PARTNERSHIP:
Meaning:

Sec.4:
“Partnership is the relation between two more persons who have agreed to share the profits
of a business carried on by all or any of them acting for all.”

 Essential Elements:

1. Two or more persons:

 at least two persons competent to contract e.g. minors, persons of unsound

mind , person disqualified by law (alien enemies, insolvents) are not competent to
make partnership.

 No limit of maximum number in partnership.

 Agreement:

express or implied---Sec.5: relationship arises from contract and not from status----

3. Business:

e.g. trade , occupation or profession not a rental property---Charitable, religious or

social purpose not a business ---

4. Sharing of Profit:

As well as sharing of losses as well--- sharing of profits not a conclusive proof of

partnership e.g. Manager having share in profits---only employee not partner.

5. Mutual Agency:

Partners X,Y,Z may act as principles and agnets alternatively.

2- Nature of Partnership Firm

“A partnership firm is not a person in the eyes of law. It has no separate legal entity.”

3- Difference between Partnership and Company

 Separate Legal entitiy:

In company Vs Not So in partnership

 Limited Vs Unlimited liability.

(limited by shares)

 Perpetual vs non Perpetual

(death, illness, retirement may affect partnership)

 No. of Members:

Minimum 2 vs 7 members, no limit on maximum numbers.

 Transfer of shares :

with consent Vs without consent of partners.

 Agency relationship:

Partners are responsible for the actions of other partner, not in the company.

 Profits:

as per partnership deed Vs not so in company. Only when dividends are declared.
  Management:

The entire management lies with all member Vs members can not participate in
management---but can participate unless appointed as Directors---however members
can vote at meetings for appointment of directors.

 Property:

Property of the firm is the joint property of all its partners. Not so in the company---
separate legal existence.

4- Duration of Partnership

1-Partnership at will

when no provision in the partnership agreement regarding duration --- partnership can be
dissolved by any partner any time by giving notice in writing to all other partners.

2- Particular Partnership

specific venture---specific duration---ends on completion or duration is over---however

can be dissolved earlier by the mutual consent of the partners---

5- TYPES OF PARTNERS

A- Actual Or Ostensible Partner:

active participation---liable to third parties along with other partners---public notice of

retirement is must---his insanity or permanent incapacity is a good ground for
dissolution.

B- Sleeping Partner:

no active part---liable to third parties along with others- no public notice of his
retirement required---insanity or permanent incapacity no ground for the
dissolution of the firm.
C- Nominal Partner:

lends his name only--- no real interest in the firm---no participation---no capital
contribution--- no share in the profit---liable to third parties---public notice of his
retirement is must---insanity or permanent incapacity no ground for dissolution of the
firm.

D- Partner in Profits Only:

Shares the profits not losses---liable to third parties---public notice of his retirement is
must--- insanity or permanent incapacity no ground for dissolution of the firm.

E- Sub-Partner:

a third person with whom a partner agrees to share his profit derived from the firm---no
rights against the firm nor liable for the acts of the firm---public notice is out of
question---insanity or permanent incapacity is no ground for dissolution.

Partner by Estoppel or Holding Out

A person is held liable as a partner by estoppel or holding out if the following conditions
are fulfilled:

A- “Active or Passive representation”:

Active representation as if he is a partner by words (written or spoken) or conduct. Or

“Passive representation”: he let himself to be represented by others to be a
partner.

B- Other person acted on the belief:

of such representation must have given credit to the firm.

  Illustration 1:

A a sole proprietor B is a manager---A’s introduction of B to supplier S as partner---B

remained silent---supplied goods on credit --- A defaulted---B is liable as a parner by
holding out---he knowingly let himself to be represented as partner (Martyn v. Grag).

 Illustration 2:

Nawab Patudi renowned sportsman---honourary presidentship of a publishing business

of sports magazine---S , supplier, gave credit to the firm on the bona fide belief that
Patudi is a partner---Patudi was liable as a partner by holding out.

 Exceptions to the principle of holding out:

• If after the death of a partner, the firm uses the name of the deceased as
partner, the estate of the deceased or his legal representatives can not be held
liable for the acts of the firm done after the death of the partner.

• The estate of the insolvent partner can not be held liable for the acts of the
firm done after the date of order of adjudication. A public notice of a partner’s
insolvency is not required.

6- Mutual Rights and Duties

 The mutual rights and duties are governed by :

• The Partnership Agreement

• The Partnership Act

Summary:

Provisions of Sec.9, 10:

Mandatory duties of partners---can not be changed by agreement.

Provisions of Sec.11, 12, 16 to 25:

General rights and duties---can be changed by mutual agreement

 Mandatory Duties of Partners (Sec.9 and 10)

• to carry on the business for greatest common

advantage

• To be just and faithful to each other

• To render true accounts and full information

• To indemnify the firm for the loss caused to it by his fraud.

 General Duties: (sec. 12-b, 13-a, 13-b, 13-f, 15, 16-a)

(can be changed by agreement ):

• To attend diligently , carefully.

• Not to claim remuneration for taking part

• To contribute equally to the losses

• To indemnify the firm due to his willful neglect

 • To hold and use firm’s property for business purpose

f- To account for and pay the personal profits from transactions of the firm e.g. personal
goods supplied to the firm at a high price.

g- To account for and pay the personal profits from a competing business. Partners may
restrain a partner from carrying on any business other than the business of the firm
so long as he is a partner.

Rights of Partners:

(can be changed by agreement)

a) Right to take part

b) Right to express opinion

--- change in the nature of business requires consensus of all.

 Right to have access to books

 Right to Share profits equally

 Right to receive interest on capital

---out of profits only and not in case of losses.

 Right to claim interest on advances

--- regardless of the profit or loss @6%

g) Right to be indemnified:

---to recover payments made by him and liabilities incurred by him e.g. in ordinary course
of business or in case of emergency and acted in a reasonable manner.

h) Right to prevent introduction of a new partner:

--- consent of all is required

i) Right to retire

--- Partnership at will: notice to other partner is required

otherwise: consent of all other partners is required

J) Right not to be expelled:

--- unless partnership agreement provides so. If agreement so provides, then approval of
majority, good faith without animosity, and opportunity of making representation is
required.

k) Right to carry on competing Business:

--- outgoing partner can carry on and advertise such business but CANNOT : use firm’s
name, represent the firm, solicit firm’s customers.

l) Right to dissolve the partnership:

--- in case of Particular Partnership : with the consent of all. In case of partnership at
will, only notice to all is required.

m) Right to share Subsequent profits:

outgoing partner can claim share in the profit or interset @ 6% until accounts are finally
settled.
 7- Implied Authority Of A Partner(Sec-19)

Means the capacity of a partner to bind the firm by his act.

---Authority by mutual agreement: express authority

--- implied authority: three conditions

1- act must relate to normal business of the firm

2- done in usual way of carrying on the business of the firm

3- act must be done in the firm’s name or with the intention to bind the firm.

Illustration:

A, B, C, D, and E are partners of a banking firm. State the legal position of firm for the
following acts of partners:

• A borrows money in the name of the firm

• B orders for a certain quantity of home appliances on the firm’s letter head.

• C receives money from a borrower of a firm and utilized the amount for the
personal use without informing other partners about the receipt of the money.

• D borrows money on his own credit by giving his own promissory note and
utilizes this amount for firm’s use.

Decision and Reason:

 • The firm is liable for the acts of A and C . Their acts fall within the scope of
implied authority because all the conditions of Sec. 19 have been fulfilled.

• The firm is not liable for the acts of B and D. Their acts do not fall within the
scope of implied authority because all the conditions of Sec.19 have not been
fulfilled.

Acts Within The Implied Authority:

• to purchase goods of the kind that are used in the business of the firm.

• To sell the goods of the firm.

• To settle accounts with the persons dealing with the firm.

• To receive payment of the debts due to the firm and issue receipts.

• To engage servants for the business of the firm.

• To engage a lawyer to defend an action against the firm.

• To borrow money for the purpose of the firm.

• To pledge the goods of the firm for borrowing for the firm.

• To draw, accept, endorse negotiable instruments in the name of the firm.

Restrictions on Implied Authority:

• Statutory Restrictions

• Restrictions by Mutual Agreements

Statutory Restrictions: (Sec.19-2)

• To submit a dispute to arbitration

• To open bank account on behalf of firm in own name.

• To compromise on the claim of the firm.

• To withdraw firm’s suit.

• To admit any liability in a suit against the firm

• To acquire immovable property on behalf of the firm.

• To transfer immovable property belonging to the firm.

• To enter in to partnership on behalf of the firm.

A partner can do above if expressly provided in the partnership agreement or if

custom or usage of the trade allows.
Liability of the Firm for the Statutorily restricted Acts of Partner:

--- no liability to third parties whether of not the person dealing with the firm knew about
such restriction.

2-Restriction imposed by Mutual Agreement:

(Sec.20)

The Partners may extend or restrict implied authority of any partner. But a third arty is not
bound by any such restriction unless it has the knowledge of such restriction.
Therefore, the firm will be liable if third party does not know the extended or
restricted implied authority.

Illustration:

X,Y,Z are partners--- restriction on borrowing without consent more than Rs.20,000.---X
borrows Rs.25,000 from W---used for paying firm’s debts--- the firm is liable to pay W
Rs.25,000 if it is unaware of the restriction---but is liable if it knew the restriction.
 Company Law
 Corporate Personality
 No strict or legal meaning
“A company formed are registered under the company’s
Ordinance”
 Common Law:
 Legal person separate from and capable of surviving
beyond the lives of its members
 having rights and duties of its own
 and with perpetual succession
 Constituents of Company
 Separate Legal Entity
 Perpetual succession
 Limited Liability
 Transferability of shares
 Separation of ownership from Control
 Comprehensive Definition
 “ Company is the association of the natural persons to evolve an
artificial , independent person with an administrative structure
run not by the members but by managers with an aim to invest
capital on large scale for an economic and profitable activity with
social and public responsibility”
 Difference between Company and Partnership
 Large scale
 Separate property
 Separate liability
 Personal property of shareholders not open to creditors.
 Separation of ownership from control
 Separate litigation
third party can sue the company not shareholders.
 Small scale
 Not so
 Not so
 Is open to creditors

 Not so

 Not so

 Nature and Advantages

• Independent Corporate existence:
existence separate from its members
subscribers & their successors become body corporate
 company starts functioning as an incorporated company with
perpetual succession and common seal.
No member is the owner

Case: Salomon Vs Salomon & Co

2-Limited Liability
 Company is the owner of the assets and liability not members.

 What “Limited Liability” means?

 Comparison with the partner

 Advantages of limited liability company

 For public and investers

 Because of aggregation of small sums in to large capitals

3- Perpetual Succession:
 Company never dies

 If members change, new come as successors but company

remains the same.

 Same privileges, immunities, estates and possessions

4- Separate Property
 Shareholders not private or joint owners

 Property owned by the company

  Controlled , managed and disposed of by the company.
 Example of a case:

5- Transferable Shares
 Purpose : easy transferability of shares

 Open market for sale and purchase without withdrawing

investment from the company

 Provides liquidity to the investors and stability to the company

in contrast, partnership does not have Consent of partners is

needed.such advantages mentioned above.

6- Capacity to sue and be sued

7- Professional Management
 independence to managers

 No human employer

 Control of share-holders is only formative

 Coordination between competent managers and directors----

rapid growth
 Managerial skills + capital = commercial success

8- Finances
 Privilege of the company to raise capital by public subscription

either by shares or debentures.

 Financial institution don’t hesitate to finance

 Disadvantages
 Limited liability sometimes leads to complications
 Setting aside the fundamental principal of incorporation.
 Lifting the corporate veil:
 Impression of “artificial person” but it is a “tool” by real person
for the benefit of the real person.
 “Real persons” are the actual beneficiaries.
Fiction of Law Vs Reality
 Salomon Vs Salomon Co. case --- the basis
 cases of resistance by the court to lift the veil: