Module I: Legal Environment of Business

Environment of Business, Its importance, Legal environment of business.

Introduction

The main motive of every business is to earn profit by providing the different kinds of products & services to
the consumers, according to their needs. No business can be run efficiently in the absence of rules and
regulations. If there are no policy, law, rules and regulations for the business firms, we cannot expect people's
welfare from the business. So, legal rules are required to control the working of business and frame the policies
for the growth of business. All legal rules and regulations for business, directed by the government, is called
legal environment.

Legal system of a country is framed by the Government. In every country, government is responsible to frame
rules, regulations, policies, and regulate the business activities. All the rules, policies and regulations together
form the legal environment of business.

Regulatory Framework of Legal Environment in India

Formation of business is a very crucial process. Violation of law can lead to the shut down of the business. It is
essential for every business to follow all the rules and regulations, connected to the law, whether it is a
partnership firm, company, cooperative society or any other form of business. For example, if two persons, 'A'
and 'B', want to start a partnership firm, both have to follow the “Partnership Act, 1932”; the “Companies Act,
2013”, in case of a company. These laws provide a base to start a business and give guidelines to carry out the
future activities. The Companies Act, 2013, defines: how to form a company, who can form the company, what
is required in the memorandum and articles of association, how to conduct meetings, what are the
responsibilities of the directors, and how to wind up a company’s business operations. Hence, the regulatory
framework, in the form of acts and policies, is essentially required for Business.

Legal environment opens a number of opportunities for a business and, at the same time, puts restrictions on it.
Every business is obliged to follow the rules, created by the different acts, to run the business smoothly, without
the intervention of government. In the scenario of globalization, the number and scope of the acts have
increased. When so many producers have been selling the same products in the market, the quality check and
price control become essential. With the increasing interaction of Indian economy with the other economies of
the world, government’s responsibility, to see that the business activities are being carried out in the interest of
public, has also increased. Responsibility of the development of business activities also lies on the shoulders of
the government. So, there is a need that every business should understand and follow the laws, rules and
regulations, i.e. legal environment of India, so that different opportunities can be capitalized by the business
organizations.

Need to Study Legal Environment

Every business is supposed to be aware of the legal environment of the country. Each and every form of
business enterprise, whether it is a firm, company or cooperative society, is governed by some act. With the
passing time, it has been realized and observed that a business is also responsible towards the society and
environment. Therefore, many laws have been formulated to make business more sensitive towards
environment and people, living in the society. It is essential for a business as well as consumers, not only to
understand and analyze the legal environment but also to understand the significance of the rules and acts in the
economy. Laws provide protection to the well being and health of the community, employees, and others.
Therefore, it is essential to understand the need of legal environment. The following factors explain the need of
legal environment:
(a) Protection to Community: Legal laws like, Arms and Ammunition Act, Essential Commodities Act, etc.,
have been introduced by the government to protect the interest of consumers and community as a whole.

(b) Protection to Employees: Laws like, Industrial Dispute Act, Company and Compensation Act, Employees
Wage Act, Factories Act, have been introduced to protect the employees from any kind of unfair discrimination
or harassment at work place and provide legal assistance to them.

(c) Protection to Health: Health and Social Care Act, 2012, was introduced to make local authorities like,
MCD, more responsible towards people’s health.

(d) Protection to Consumers: Consumer Protection Act has provided a platform to consumers to file complaints
against the exploitation by producers and manufacturers. It protects the rights of consumers. Consumer
Protection Act ensures that consumers are getting wide variety of quality products and provides redressal forum
to consumers.

(e) Protection to Business: Companies Act 2013, Sale of Goods Act, Indian Contract Act, and Negotiable
Instruments Act provide protection to the Business.

All the above mentioned factors show that it is necessary to understand the implications of legal environment
because it affects the whole economy.

For Consumer: A consumer should be aware of his rights, given by the constitution, so that nobody can take
undue advantage of him. Right to hear, to be informed, to safety, to choose, are some of the rights that have
been given to the consumers by the constitution. The Consumer Protection Act (COPRA), 2002, has been
introduced for the protection of consumers. The Competition Act, 2000, was introduced to eliminate the scope
of monopoly and promote healthy competition. The Essential Commodities Act, 1955, was introduced to
promote equitable distribution of essential commodities at a fair price. Consumers should be aware of the rules,
laws and policies, framed by the government, to protect their interests.

For Business: The need of legal rules is felt in business at every step. For example, suppose that you are an
exporter and receive an order to export your product. Can you expect to complete the entire transaction without
having a legal contract? Without having anything in written form, will it be possible for you to claim the
payment from the other party. In case of any miss-happening, who will be held responsible? So, here arises the
need of a valid legal contract. There is a greater need of legal environment for business to understand the
implications of all rules and regulations. Therefore, legal environment, in the form of Partnership Act,
Companies Act, Import-Export Policy (also known as Foreign Trade Policy), FEMA Act, Industrial
Development and Regulation Act, and many other acts, have been formulated.
Module II: Indian Contract Act, 1872
Nature and kinds of Contracts, Concepts related to offer, Acceptance and Consideration, Principles
Governing Capacity of Parties and Free Consent, Legality of Objects, Performance and Discharge of
Contract, Breach of Contract and its Remedies, Basic Elements of Law Relating to Agency, Guarantee and
Pledge.

A person enters into contracts so many times in a day that ‘contract’ has become an indispensable part of life.
When a person purchases milk or newspaper in the morning or go to movie in the evening, he is entering into a
contract. Indian Contract Act really codifies the way everyone enters into a contract, execute a contract, and
implement provisions of a contract and effects of breach of a contract. Section 1 of Contract Act provides that
any usage or custom or trade or any incident of contract is not affected as long as it is not inconsistent with
provisions of the Act. In other words, provision of Contract Act will prevail over any usage or custom or trade.

The law of contract is that branch of law which determines the circumstances in which promises made by the
parties to a contract shall be legally binding on them. Its rules define the remedies that are available in a court of
law against a person who fails to perform his contract, and the conditions under which the remedies are
available. It affects all of us in one way of the other. It is, however, of particular importance to people engaged
in trade, commerce and industry as most of their business transactions are based on contracts. The law of
contract introduces definiteness in business transactions. In simple words, it may be said that the purpose of the
law of contract is to ensure the realisation of reasonable expectation of the parties who enter into a contract.

THE INDIAN CONTRACT ACT, 1872

The law relating to contracts is contained in the Indian Contract Act, 1872. The Act deals with
(1) The general principles of the law of contract (Secs. 1 to 75), and
(2) Some special contracts only (Secs. 124 t 238).

The first six chapters of the Act deal with the different stages in the formation of a contract, its essential
elements, its performance or breach and the remedies for breach of contract. The remaining deal with some of
the special contracts, viz., indemnity and guarantee [Chapter VIII (Sees. 124 to 147)], bailment and pledge
(Chapter IX (Sees. 148 to 1811) and agency (Chapter X (Sees. 182 to 238).

Nature of the law of contract: The law of contract differs from other branches of law in an important respect.
It does not lay down a number of rights and duties which the law will enforce; it consists of a number of
limiting principles, subject to which the parties may create rights and duties for themselves which the law will
uphold. The parties to a contract, in a sense, make the law for themselves. So long as they do not infringe some
legal prohibition, they can make what rules they like in respect of the subject-matter of their agreement, and the
law will give effect to their decisions. Law of contract is not the whole law of agreements or the whole law of
obligations. There are several agreements which do not give rise to legal obligations. They are, therefore, not
contracts. Similarly, there are certain obligations which do not necessarily spring from an agreement, e.g., (i)
torts or civil wrongs, (ii) quasi-contracts, (iii) judgments of Courts. These obligations are not contractual in
nature. But even then they are enforceable.

Salmond has rightly said that the law of contract is not the whole law of agreements nor is it the whole law of
obligations. It is the law of those agreements which create obligations, and those obligations which have their
sources in agreements. It excludes from its scope all obligations which are not contractual in nature and
agreements which are social in nature. Law of contract creates jus in personam (a right against/in respect of a
specific person) as distinguished from jus in rem (right against/in a respect of a thing).
Ex: (a) A owes a certain sum of money to B. B has a right to recover this amount from A. This right can be
exercised only by B and by no one-else against A. This right of B is a Jus in personam.
(b) X is the owner of a plot of land. He has a right to have quiet possession and enjoyment of that land against
every member of the public. Similarly every member of the public is under an obligation not to disturb Xs
possession or enjoyment. This right of X is jus in rem.

DEFINITION OF CONTRACT: A contract is an agreement made "between two or more parties” which the
law will enforce.

Sec. 2 (h) defines a contract as an agreement enforceable by law.

This definition is based on Pollock's definition which is as follows: "Every agreement and promise enforceable
at law is a contract."
Sir William Anson – "a legally binding agreement between two or more persons by which rights are acquired
by one or more to acts or forbearances (abstaining from doing something) on the part of the other."
Salmond - "an agreement creating and defining obligations between the parties."

Agreement and its enforceability: If we analyse the definitions of contract we find that a contract essentially
consists of two elements, viz.,
(1) Agreement, and (2) Its enforceability by law.

An agreement is defined as "every promise and every set of promises, forming consideration for each other."
[Sec. 2 (e)].

A promise is defined thus: "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." [Sec.2 (b)].
This, in other words, means that an agreement is an accepted proposal. In order to form an agreement, there
must be a proposal or offer by one party and its acceptance by the other. To sum up:
Agreement = Offer + Acceptance.

Consensus ad idem: The essence of an agreement is the meeting of the minds of the parties in full and final
agreement; there must, in fact, be consensus ad idem. This means that the parties to the agreement must have
agreed about the subject-matter of the agreement in the same sense and at the same time. Unless there is
consensus ad idem, there can be no contract.
Ex, A, who owns two horses named Rajhans and Hans raj, is selling horse Rajhans to B. B thinks he is
purchasing horse Hans raj. There is no consensus ad idem and consequently no contract.

CLASSIFICATION OF CONTRACTS
(1) Validity,
(2) Formation, or
(3) Performance.
1. Classification according to validity: A contract is based on an agreement. An agreement becomes a contract
when all the essential elements of a contract are present. In such a case, the contract is a valid contract. If one
or more of these elements are missing, the contract is voidable, void, illegal or unenforceable.
Voidable contract: 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 [Sec. 2 (f)]. This happens when the
essential element of free consent in a contract is missing. When the consent of a party to a contract is not free,
i.e., it is caused by coercion, undue influence, misrepresentation or fraud, the contract is voidable at his option
(Sees. 19 and 19-A). The party whose consent is not free may either rescind (avoid or repudiate) the contract if
he so desires, or elect to be bound by it. A voidable contract continues to be valid till it is avoided by the party
entitled to do so.

Void agreement: An agreement not enforceable by law is said to be void [Sec. 2 (g)]. A void agreement does
not create any legal rights or obligations. It is a nullity and is destitute of legal effects altogether. It is void ab
initio, i.e., from the very beginning as, for example, an agreement with a minor or an agreement without
consideration.

Void contract: A contract which ceases to be enforceable by law becomes void when it ceases to be
enforceable [Sec. 2 (f)]. A contract, when originally entered into, may be valid and binding on the parties, e.g., a
contract to import goods from a foreign country. It may subsequently become void, e.g., when a war breaks out
between the importing country and the exporting country.

Illegal agreement: An illegal agreement is one which trangresses some rule of basic public policy or which is
criminal in nature or which is immoral. Such an agreement is a nullity and has much wider importance than a
void contract. All illegal agreements are void but all void agreements or contracts are not necessarily illegal. An
illegal agreement is not only void as between the immediate parties but has this further effect that even the
collateral transactions to it become tainted with illegality. A collateral transaction is one which is subsidiary,
incidental to the principal or original contract.
Ex: B borrows Rs. 5,000 from A and enters into a contract with an alien to import prohibited goods. A knows of
the purpose of the loan. The transaction between B and A is collateral to the main agreement. It is illegal since
the main agreement is illegal.

Unenforceable contract: An unenforceable contract is one which cannot be enforced in a Court of law because
of some technical defect such as absence of writing or where the remedy has been banned by lapse of time. The
contract may be carried out by the parties concerned; but in the event of breach or repudiation of such a
contract, the aggrieved party will not be entitled to the legal remedies.

2. Classification according to formation: These are the modes of formation of a contract.

Express contract: If the terms of a contract are expressly agreed upon (whether by words spoken or written) at
the time of formation of the contract, the contract is said to be an express contract. Where the offer or
acceptance of any promise is made in words, the promise is said to be express (Sec. 9). An express promise
results in an express contract.

Implied contract: An implied contract is one which is inferred from the acts or conduct of the parties or course
of dealings between them. It is not the result of any express promise or promises by the parties but of their
particular acts. It may also result from a continuing course of conduct of the parties. Where the proposal or
acceptance of any promise is made otherwise than in words, the promise is said to be implied (Sec. 9). An
implied promise results in an implied contract.
Ex: A fire broke out in Fs farm. He called upon the Upton Fire Brigade to put out the fire which the latter did.
Fs farm did not come under the free service zone although he believed to be so. Held, he was liable to pay for
the service rendered as the service was rendered on an implied promise to pay [Upton Rural District Council v.
Powell].

3. Classification according to performance

(1) Executed contract: 'Executed' means that which is done. An executed contract is one in which both the
parties have performed their respective obligations. Ex: A agrees to paint a picture for B for Rs. 100. When A
paints the picture and B pays the price, i.e., when both the parties perform their obligations, the contract is said
to be executed.
(2) Executory contract: 'Executory' means that which remains to be carried into effect. An executory contract
is one in which both the parties have yet to perform their obligations. Thus in the above example, the contract is
executor. If A has not yet painted the picture and B has not paid the price.
A contract may sometimes be partly executed and partly executory. Thus if B has paid the price to A and A has
not yet painted the picture, the contract is executed as to B and executory as to A.
ESSENTIAL ELEMENTS OF A VALID CONTRACT: According to Sec. 10, all agreements are contracts if
they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful
object and are not expressly declared to be void. In order to become a contract, an agreement must have the
following essential elements:

1. Offer and acceptance. There must be two parties to an agreement, i.e., one party making the offer and other
party accepting it. The terms of the offer must be definite and the acceptance of the offer must be absolute and
unconditional. The acceptance must also be according to the mode prescribed and must be communicated to the
offerer.

2. Intention to create legal relationship. When the two parties enter into an agreement, their intention must be
to create legal relationship between them. If there is no such intention on the part of the parties, there is no
contract between them. Agreements of a social or domestic nature do not contemplate legal relationship; as such
they are not contracts.
Ex: A husband promised to pay his wife a household allowance of £ 30 every month. Later the parties separated
and the husband failed to pay the amount. The wife sued for the allowance. Held, agreements doesn’t have an
intention to enter into a legal relationship. [Balfour v. Balfour].

3. Lawful consideration. An agreement to be enforceable by law must be supported by consideration.

'Consideration' means an advantage or benefit moving from one party to the other. It is the essence of a bargain.
In simple words, it means 'something in return'. The agreement is legally enforceable only when both the parties
give something and get something in return.

4. Capacity of parties — competency. Every person is competent to contract if he

a) is of the age of majority,
b) is of sound mind, and
c) is not disqualified from contracting by any law to which he is subject (Secs. 11&12).
Flaw in capacity to contract may arise from minority, lunacy, idiocy, drunkenness, etc., and status. If a party
suffers from any flaw in capacity, the agreement is not enforceable except in some special cases.

5. Free and genuine consent: It is essential to the creation of every contract that there must be free and genuine
consent of the parties to the agreement. The consent of the parties is said to be free when they are of the same
mind on all the material terms of the contract. The parties are said to be of the same mind when they agree
about the subject-matter of the contract in the same sense and at the same time (Sec. 13). There is absence of
free consent if the agreement is induced by coercion, undue influence, fraud, misrepresentation, etc. (Sec. 14).

6. Lawful object. The object of the agreement must be lawful. it means that the object must not be
a) illegal,
b) immoral, or
c) opposed to public policy (Sec. 23).
If an agreement suffers from any legal flaw, it would not be enforceable by law.

7. Agreement not declared void. The agreement must not have been expressly declared void by law in force in
the country (Sees. 24 to 30 and 56).

8. Legal formalities. A contract may be made by words spoken or written. As regards the legal effects, there is
no difference between a contract in writing and a contract made by word of mouth. It is, however, in the interest
of the parties that the contract should be in writing. There are some other formalities also which have to be
complied with in order to make an agreement legally enforceable. In some cases the document in which the
contract is incorporated is to be stamped. In some other cases, contract besides being a written one, has to be
registered. Thus where there is a statutory requirement that a contract should be made in writing; or in the
presence of witnesses/registered, the required statutory formalities must be complied with (Sec. 10, para 2).
OFFER AND ACCEPTANCE

OFFER: At the inception of every agreement, there must be a definite offer by one person to another and its
unqualified acceptance by the person to whom the offer is made. An offer is a proposal by one party to another
to enter into a legally binding agreement with him. A person is said to have made a proposal, when he "signifies
to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that
other to such act or abstinence." [Sec. 2 (a)].

When the offeree accepts the offer, he is called the acceptor or promisee [Sec. 2 (c)].
Ex: A says to B, "Will you purchase my car for Rs. 5,000?" A, in this case, is making an offer to B as he
signifies to B his willingness to sell his car to B for Rs. 5,000 with a view to obtaining Bs assent to purchase the
car.

The person making the offer is known as the offerer, proposer, or promisor.
The person to whom it is made is called the offeree or proposee.

How an offer is made

Express offer: An offer may be made by express words, spoken or written. This is known as an express offer.
For example, when A says to B, “Will you purchase my house at Meerut for Rs. 50,000?" or when A advertises
in a newspaper offering Rs. 50 to anyone who returns his lost dog, there is an express offer.

Implied offer: An offer may also be implied from the conduct of the parties or the circumstances of the case.
This is known as an implied offer.
Thus when a transport company runs a bus on a particular route, there is an implied offer by the transport co. to
carry passengers for a certain fare. The acceptance of the offer is complete as a passenger boards the bus. When
a weighing machine is installed on a railway platform or a public place, there is an implied offer by the owner
of the machine. Any one by putting the required coin in the slot of the weighing machine can accept this offer.

Specific offer: When an offer is made to a definite person, it is called a specific offer. It can be accepted only
by the person to whom it is made.

General offer: When an offer is made to the world at large, it is called a general offer.
Ex: A company advertised in several newspaper is that a reward of £ 100 would be given to any person who
contracted influenza after using the smoke balls of the company according to its printed directions. One Mrs.
Carlill used the smoke balls according to the directions of the company but contracted influent, i.e., she could
recover the amount as by using the smoke balls as she had accepted the offer [Carlill v. Carbolic Smoke Ball
Co.,].
Where an offer is made to the world at large, any person or persons with notice of the offer may accept the
offer. When the offer is accepted by a particular person, there is a contract between the offerer and that
particular person.

LEGAL RULES AS TO OFFER

1. Offer must be such as in law is capable of being accepted and giving rise to legal relationship. A social
invitation, even if it is accepted, does not create legal relations because it is not so intended. An offer, therefore,
must be such as would result in a valid contract when it is accepted.

2. Terms of offer must be definite, unambiguous and certain and not loose and vague. If the terms of an
offer are vague or indefinite, its acceptance cannot create any contractual relationship.
Ex: A offered to take a house on lease for three years at £ 285 per annum if the house was "put into thorough
repair and drawing rooms handsomely decorated according to the present style." Held, the offer was too vague
to result in a contractual relation [Taylor v. Portington].
A says to B, "I will sell you a car." A owns three cars. The offer is not definite.

3. An offer may be distinguished from:

(i) A declaration of intention and an announcement: A declaration by a person that he intends to do something
gives no right of action to another. Such a declaration only means that an offer will be made or invited in future
and not that an offer is made now. An advertisement for a concert or an auction sale does not amount to an offer
to hold such concert or auction sale.
Ex: An auctioneer advertised in a newspaper that a sale of office furniture would be held. A broker came from a
distant place to attend that auction, but all the furniture was withdrawn. The broker thereupon sued the
auctioneer for his loss of time and expenses. Held, a declaration of intention to do a thing did not create a
binding contract with those who acted upon it, so that the broker could not recover [Harris v. Nickerson].

(ii) An invitation to make an offer or do business: Display of goods by a shopkeeper in his window, with
prices marked on them, is not an offer but merely an invitation to the public to make an offer to buy the goods at
the marked prices. Also Quotations, catalogues, advertisements in a newspaper for sale of an article, or circulars
sent to potential customers do not constitute an offer. They are instead an invitation to the public to make an
offer.
A person in case the prices of the goods are marked, cannot force the seller to sell the goods at those prices. He
can, at the most, ask the seller to sell the goods to him, in which case he would be making an offer to the seller
and it is up to the seller to accept the offer or not.
Ex: Goods are sold in a shop under the ‘self-service’ system. Customers select goods in the, shop and take them
to the cashier for payment of the price. The contract, in this case is made, not when a customer selects the
goods, but when the cashier accepts the offer to buy and receives the price.
Newspaper advertisements are not offers. A recognised exception to this is a general offer of reward to the
public. Thus when A advertises in a newspaper that he would pay Rs. 100 to anyone who finds and returns her
lost dog, the offer is addressed to the first person who by performing the required act with knowledge of the
offer of reward, creates an agreement.

4. Offer must be communicated: An offer, to be complete, must be communicated to the person to whom it is
made. Unless an offer is communicated to the offeree by the offerer or by his duly authorised agent, there can
be no acceptance of it. An acceptance of an offer, in ignorance of the offer, is no acceptance and does not confer
any right on the acceptor.
Ex: S sent his servant, L, to trace his missing nephew. He then announced that anybody who traced his nephew
would be entitled to a certain reward. L traced the boy in ignorance of this announcement. Subsequently when
he came to know of the reward, he claimed it. Held, he was not entitled to the reward [Lalman v. Gauri Dutt,
(1913)]

5. Offer must be made with a view to obtaining the assent. The offer to do or not to do something must be
made with a view to obtaining the assent of the other party addressed and not merely with a view to disclosing
the intention of making an offer.

6. Offer should not contain a term the non-compliance of which may be assumed to amount to
acceptance. Thus a man cannot say that if acceptance is not communicated by a certain time, the offer would be
considered as accepted. Ex: A writes to B, "I will sell you my horse for Rs. 5,000 and if you do not reply, I shall
assume you have accepted the offer," there is no contract if B does not reply. B is under no obligation to speak.
However, if B is in possession of A’s horse at the time the offer is made and he continues to use the horse
thereafter, B’s silence and his continued use of horse amount to acceptance on his part of the terms of A’s offer.

7. A statement of price is not an offer. A mere statement of price is not construed as an offer to sell [Harvey v.
Facey].
Ex: Three telegrams were exchanged between Harvey and Facey.
1. 'Will you sell us your Bumper Hall Pen ? Telegraph lowest cash price—answer paid." (Harvey to
Facey).
2. "Lowest price for Bumber Hall Pen £ 900." (Facey to Harvey).
3. "We agree to buy Bumper Hall Pen for the sum of £ 900 asked by you." (Harvey to Facey).
Held, there was no concluded" contract between Harvey and Facey. The first telegram asked two questions: (i)
the willingness of Facey to sell, and (ii) the lowest price. Facey replied only to the second question and gave
his lowest price, i.e., he supplied mere information and no offer had been made by him to sell. There could be a
contract only if he had accepted Harvey's last telegram.

8. Tenders: A tender (in response to an invitation to offer) is an offer and may be either—
(1) A definite offer to supply specified goods or services: When tenders are invited for the supply of specified
goods or services, each tender submitted is an offer. The party inviting tenders may accept any tender he
chooses and thus bring about a binding contract.
(2) A standing offer: Where goods or services are required over a certain period, a trader may invite tenders as a
standing offer which is a continuing offer. The acceptance of a standing offer has the effect that as and when the
goods or services are required, an order is placed with the person who submitted the tender and each time a
distinct contract is made.

9. Cross Offers: When two parties make identical offers to each other, in ignorance of each other's offer, the
offers are cross offers. In such a case, the Court will not construe one offer as the offer and the other as the
acceptance and as such there can be no concluded contract [Tinn v. Hoffmann].

ACCEPTANCE

A contract emerges from the acceptance of an offer. Acceptance is the act of assenting by the offeree to an
offer. In other words, it is the manifestation by the offeree of his willingness to be bound by the terms of the
offer. It is "to an offer what a lighted match is to a train of gunpowder”. It produces something which cannot be
recalled, or undone. This means when the offeree signifies his assent to the offerer, the offer is said to be
accepted.

An offer when accepted becomes a promise [Sec. 2 (b)].

Acceptance may be express or implied. It is express when it is communicated by words, spoken or written or by
doing some required act. It is implied when it is to be gathered from the surrounding circumstances or the
conduct of the parties.
Acceptance of an offer requires more than a tacit (implied) formation of intention to accept. To give evidence of
that intention, there must be some overt (apparent) act, or words spoken or written must be used.

Who can accept?

Acceptance of particular offer: When an offer is made to a particular person, it can be accepted by him alone.
If it is accepted by any other person, there is no valid acceptance. The rule of law is clear that if C propose to
make a contract with A, B cannot substitute himself for A without C’s consent.
Ex: Boulton bought a hose-pipe business from Brocklehurst. Jones, to whom Brocklehurst owed a debt, placed
an order with Brocklehurst for the supply of certain goods. Boulton supplied the goods even though the order
was not addressed to him. Jones refused to pay Boulton for the goods because he by entering into contract with
Brocklehurst, intended to set off his debt against Brocklehurst. Held, the offer was made to Brocklehurst and it
was not in the power of Boulton to step in and accept and therefore there was no contract [Boulton v. Jones].

Acceptance of general offer: When an offer is made to world at large, any persons to whom the offer is made
can accept it [Carlill v. Carbolic Smoke Ball Co.,].
LEGAL RULES AS TO ACCEPTANCE
The acceptance of an offer is the very essence of a contract. To be legally effective, it must satisfy the following
conditions:
1. It must be absolute and unqualified, i.e., it must conform with the offer: An acceptance, in order to be
binding, must be absolute and unqualified [Sec. 7(1)] in respect of all terms of the offer, whether material or
immaterial, major or minor. If the parties are not ad idem on all matters concerning the offer and acceptance,
there is no contract.
Ex: A made an offer to B to purchase a house with possession from 25th July. The offer was followed by an
acceptance suggesting possession from 1st August. Held, there was no concluded contract.

2. It must be communicated to the offeror: To conclude a contract between the parties, the acceptance must
be communicated in some perceptible form. A mental determination on the part of the offeree to accept an offer,
when there is no external manifestation of the intention to do so, is not sufficient. In order to result in a contract,
the acceptance must be a "matter of fact".
F offered to buy his nephew's horse for £ 30 saying: "If I hear no more about it I shall consider the horse
is mine at £ 30." The nephew did not write to F at all, but he told his auctioneer who was selling his horses not
to sell that particular horse because it had been sold to his uncle. The auctioneer inadvertently sold the horse.
Held, F had no right of action against the auctioneer as the horse had not been sold to F, his offer of £ 30 not
having been accepted. [Felthouse v. Bindley].

3. It must be according to the mode prescribed or usual and reasonable mode. If the acceptance is not
according to the mode prescribed, or some usual and reasonable mode (where no mode is prescribed) the offeror
may intimate to the offeree within a reasonable time that the acceptance is not according to 'the mode prescribed
and may insist that the offer must be accepted in the prescribed mode only. If he does not inform the offeree, he
is deemed to have accepted the acceptance [Sec. 7 (2)].
Ex: A makes an offer to B and says: "If you accept the offer, reply by wire." B sends the reply by post. It will
be a valid acceptance unless A informs B that the acceptance is not according to the mode prescribed.

4. It must be given to within a reasonable time. If any time limit is specified, the acceptance must be given
within that time. If no time, limit is specified, it must be given within a reasonable time.
Ex: On Jun 8 M offered to take shares in R company. He received a letter of acceptance on Nov 23. He refused
to take the shares. Held, M was entitled to refuse as his offer had lapsed as the reasonable period during which it
could be accepted had elapsed [Ramsgate Victoria Hotel Co. v. Montejore].

5. It cannot precede an offer. If the acceptance precedes an offer, it is not a valid acceptance and does not
result in a contract. Ex: In a company, shares were allotted to a person who had not applied for them. Later
when he applied for shares, he was unaware of the previous allotment. The allotment of shares previous to the
application is invalid.

6. It must show an intention on the part of the acceptor to fulfil terms of the promise. If no such intention
is present, the acceptance is not valid.

7. It must be given by the party or parties to whom the offer is made.

8. It must be given before the offer lapses or before the offer is withdrawn.

9. It cannot be implied from silence. The acceptance of an offer cannot be implied from silence of the offeree
or his failure to answer; unless the offeree has by his previous conduct indicated that his silence means that he
accepts.
Ex: A wrote to B, "I offer you my car for Rs. 10,000. If I don't hear from you in seven days, I shall assume that
you accept." B did not reply at all. There is no contract.
COMMUNICATION OF OFFER ACCEPTANCE AND REVOCATION
An offer, its acceptance and their revocation(withdrawal) to be complete must be communicated. When the
contracting parties are face to face and negotiate in person, a contract comes into existence the moment the
offeree gives his absolute and unqualified acceptance to the proposal made by the offerer. When the parties are
at a distance and the offer and acceptance and their revocation are made through post, i.e., by letter or telegram,
the rules contained in Secs. 3 to 5 apply. These rules are as follows:
Mode of communication (Sec. 3)
The communication of offer, its acceptance and their revocation respectively are deemed to be made by any (a)
act, or (b) omission, of the party offering, accepting or revoking. Such act or omission must, however have the
effect of communicating such offer, acceptance or revocation. In other words, offer, acceptance or revocation
may be communicated by words spoken or written, or by conduct. Thus installation of a weighing machine at a
public place is an offer, putting of coin in the slot of the machine is the acceptance of the offer, and switching
off the machine amounts to revocation of the offer.

When is communication complete (Sec. 4)?

Communication of offer [Sec. 4, para 1]: The communication of an offer is complete when it comes to the
knowledge of the person to whom it is made.
Ex: A proposes, by a letter, to sell a house to B at a certain price. The letter is posted on 10th July. It reaches B
on 12th July.
The communication of the offer is complete when B receives the letter. i.e., on 12th July.

Communication of acceptance (Sec. 4, para 2): The communication of an acceptance is complete as against
the proposer when it is put into a course of transmission to from, so as to be out of the power of the acceptor; as
against the acceptor when it comes to the knowledge of the proposer.
Ex: B accepts As proposal, in the above case, by a letter sent by post on 13th instant. The letter reaches A on
15th instant. The communication of the acceptance is complete, as against A, when the, letter is posted, i.e., on
13th, as against B, when the letter is received by A Le., on 15th.

Communication of revocation (Sec. 4, Para 3): Revocation means "taking back" " recalling" or "withdrawal".
It may be a revocation of offer or acceptance. The communication of a revocation is complete—
1.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 power of the person who makes it;
2. as against the person to whom it is made, when it comes to his knowledge.
Ex: A proposes, by a letter, to sell a house to B at a certain price. The letter is posted on 15th May. It reaches B
on 19th May. A revokes his offer by telegram on 18th May. The telegram reaches B on 20th May. The
revocation is complete as against A when the telegram is despatched, i.e., on 18th. It is complete as against B
when he receives it, i.e., on 20th.

Time for revocation of offer and acceptance (Sec. 5)

Time for revocation of proposal (Sec 5, para 1): A proposal may be revoked at any time before the
communication of its acceptance is complete as against the proposer, but not afterwards.
Time for revocation of acceptance (Sec. 5, para 2). An acceptance may be revoked at any time before the
communication of the acceptance is complete as against the acceptor, but not afterwards.
Ex: A proposes by a letter sent by post to sell his house to B. The letter is posted on the 1st of the month. B
accepts the proposal by a letter sent by post on the 4th. The letter reaches A on the 6th. A may revoke his offer
at any time before B posts his letter of acceptance, i.e., 4th, but not afterwards. B may revoke his acceptance at
any time before the letter of acceptance reaches A, i.e., 6th, but not afterwards.

Revocation or lapse of offer. Sec. 6 deals with various modes of revocation of offer. According to it, an offer
is revoked—
1. By communication of notice of revocation by the offeror at any time before its acceptance is complete
as against him [Sec. 6 (1)].
Ex: At an auction sale, A makes the highest bid for B"s goods. He withdraws the bid before the fall of the
hammer. The offer has been revoked before its acceptance.
2. By lapse of time if it is not accepted within the prescribed time. If however, no time is prescribed, it
lapses by the expiry of a reasonable time [Sec. 6(2)].
Ex: S offered to sell wool to B on Thursday and agreed to give him three days' time to accept. B accepted the
offer on Monday, but by that time S had sold the wool. Held, the offer had lapsed. [Head v. Diggon].
3. By death or insanity of the offeror provided the offeree comes to know of it before acceptance [Sec. 6
(4)]. If he accepts an offer in ignorance of the death or insanity of the offeror, the acceptance is valid.
4. If a counter-offer is made to it: Where an offer is accepted with some modification in the terms of the offer
or with some other condition not forming part of the offer, such qualified acceptance amounts to a counter-
offer.
Ex: W offered to sell a farm to H for £ 1,000. H offered£ 950. W refused the offer. Subsequently, H offered to
purchase the farm for £1,000. Held, there was no contract as H by offering £ 950 had rejected the original offer.
The counter-offer to a proposal amounts to its rejection. [Hyde v. Wrench].
5. If the law is changed. An offer comes to an end if the law is changed so as to make the contract
contemplated by the offer illegal or incapable of performance.

Consideration
Consideration is one of the essential elements to support a contract. Subject to certain exceptions, an agreement
made without consideration is Nudum pactum (a nude contract) and is void. Consideration is a technical term
used in the sense of quid pro quo (i.e., something in return). When a party to an agreement promises to do
something, he must get "something" in return. This "something" is defined as consideration. In the words of
Pollock, "consideration is the price for which the promise of the other is bought, and the promise is given for
value is enforceable." Ex: A agrees to sell his car to B for Rs.10,000. Car is the consideration for B and price is
the consideration for A.

DEFINITION OF CONSIDERATION: Sec. 2 (d) 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." Consideration, if we analyse this definition, may be:

1. An act, i.e., doing of something. In this sense consideration is in an affirmative form. Ex: A promises B
to guarantee payment of price of the goods which B sells on credit to C. Selling of goods by B to C is
consideration for A's promise.

2. An abstinence or forbearance, i.e., abstaining or refraining from doing something. In this sense
consideration is in a negative form. Ex: A promises B not to file a suit against him if he pays him Rs.
500. The abstinence of A is the consideration for B"s payment.

3. A return promise. Ex: A agrees to sell his horse to B for Rs. 10,000. Here Bs promise to pay the sum of
Rs. 10,000 is the consideration for A's promise to sell the horse, and A's promise to sell the horse is the
consideration for B's promise to pay the sum of Rs. 10.000.

LEGAL RULES AS TO CONSIDERATION

1. It must move at the desire of the promisor. An act constituting consideration must have been done at the
desire or request of the promisor. If it is done at the instance of a third party or without the desire of the
promisor, it will not be a good consideration. Ex: B spent some money on the improvement of a market at the
desire of the Collector. In consideration of this D who was using the market promised to pay some money to B.
Held, the agreement was void being without consideration as it had not moved at the desire of D [Durga Prasad
v. Baldeo].

2. It may move from the promisee or any other person. Under the Indian Law, consideration may move from
the promisee or any other person, i.e., even a stranger. This means that as long as there is consideration for a
promise it is immaterial who has furnished it. But the stranger to consideration will be able to sue only if he is a
party to the contract. Example: An old lady, by a deed of gift, made over certain property to her daughter D,
under the direction that she should pay her aunt, P (sister of the old lady), a certain sum of money annually. The
same day D entered into an agreement with P to pay her the agreed amount. Later, D refused to pay the amount
on the plea that no consideration had moved from P to D. Held, P was entitled to maintain suit as consideration
had moved from the old lady, sister of P, to the daughter, D [Chinnaya v. Ramayya].

3. It may be an act, abstinence or forbearance or a return promise. Thus it may be noted that the following
are good considerations for a contract:
a) Forbearance to sue. If a person who could sue another for the enforcement of a right agrees not to pursue his
claim, this constitutes a good consideration for a promise by the other person. This results in a benefit to the
person not sued and a detriment to the person who could sue. Ex: A borrows from B Rs. 100 at 20 % p.a. but
fails to pay the amount. When B is about to file a suit, A agrees to pay a higher rate of interest. B, as a result,
does not file the suit. This forbearance on the part of B to file a suit is a sufficient consideration and B can
enforce the promise by A to pay the higher rate of interest.

b) Compromise of a disputed claim: Compromise is a kind of forbearance. As such the same principle, applies
to the bonafide compromise of a disputed claim even though ultimately it might appear that the claim was
wholly unfounded. But, originally, the claim should be reasonable and the person claiming should honestly
believe that it is a valid claim. He should also act bonafide. If it turns out that the claim was frivolous and the
claimant was not acting bonafide, the other party can claim compensation.

c) Composition with creditors: A debtor who is financially embarrassed may call a meeting of his creditors and
request them to accept a lesser amount in satisfaction of their debt. If the creditors agree to it, the agreement is
binding both upon the debtor and the creditors and this amount to a compromise of the claims of the creditors.

4. It may be past, present or future. The words used in Sec. 2 (D) are: "... has done or abstained from doing
(post), or does or abstains from doing (present), or promises to do or to abstain from doing (future)
something...." This means consideration may be past, present or future.

a) Past consideration. When consideration by a party for a present promise was given in the past, i.e., before the
date of the promise, it is said to be past consideration. Example: A renders some service to B at latter's desire.
After a month B promises to compensate A for the services rendered to him. It is past consideration. A can
recover the promised amount.

b) Present or executed consideration. When consideration is given simultaneously with promise, i.e., at the time
of the promise, it is said to be present consideration. In a cash sale, for example, consideration is present or
executed. Example: A receives Rs. 5,000 in return for which he promises to deliver certain goods to B. The
money A receives is the present consideration for the promise he makes to deliver the goods.

c) Future or executory consideration. When consideration from one party to the other is to pass subsequently to
the making of the contract, it is future or executory consideration. Example: D promises to deliver certain goods
to P after a week; P promises to pay the price after a fortnight. The promise of D is supported by the promise of
P. Consideration in this case is future or executory.

5. It need not be adequate. Consideration, means "something in return". This "something in return" need not
necessarily be equal in value to "something given". The law simply provides that a contract should be supported
by consideration. So long as consideration exists, the Courts are not concerned as to its adequacy, provided it is
of some value. The adequacy of the consideration is for the parties to consider while making the agreement, not
for the Court when it is sought to be enforced. Consideration must be something to which the law attaches value
though it need not be equal in value to the promise made. The Courts do not exist to repair bad bargains. Ex: A
purchased from B an old table for Rs. 500. It would be a difficult, if not impossible, task for the Court to
ascertain whether the price paid was adequate or not or whether the table was worth the price paid.

6. It must be real and not illusory: Although consideration need not be Adequate, it must be real, competent
and of some value in the eyes of the law. There is no real consideration in the following cases:
Ex: A promises to put life into Bs dead wife should B pay him Rs. 500. A promise is physically impossible of
performance.

7. It must be something which the promisor is not already bound to do. A promise to do what one is already
bound to do, under an existing contract, is not a good consideration for a new promise, since it adds nothing to
the pre-existing legal or contractual obligation. Likewise, a promise to perform a public duty by a public servant
is not a consideration.

8. It must not be illegal, immoral or opposed to public policy (Sec. 23). The consideration given for an
agreement must not be unlawful. Where it is unlawful, the Courts do not allow an action on the agreement.

A CONTRACT WITHOUT CONSIDERATION IS VOID—EXCEPTIONS: The general rule is an

agreement made without consideration is void. Secs. 25 and 185 dealt with the exceptions to this rule. In such
cases the agreements are enforceable even though they are made without consideration. These cases are:

1. Love and affection (Sec. 25 (1)] Where an agreement is expressed in writing and registered under the law for
the time being in force for the registration of documents and is made on account of natural love and affection
between parties standing in a near relation to each other, it is enforceable even if there is no consideration. In
simple words, a written and registered agreement based on natural love and affection between near relatives is
enforceable even if it is without consideration. Ex: (a) F, for natural love and affection, promises to give his son.
S, Rs. 1,000. F puts his promise to S in writing and registers it. This is a contract.

2. Compensation for voluntary services [Sec. 25 (2)]. A promise to compensate, wholly or in part, a person who
has voluntarily done something for the promisor, is enforceable, even though without consideration. In simple
words, a promise to pay for a past voluntary service is binding. Ex. A finds B*s purse and gives it to him. B
promises to give A Rs. 50. This is a contract.

3. Agency (Sec. 185). No consideration is necessary to create an agency.

4. Charitable subscription where the promisee on the strength of the promise makes commitments, i.e., changes
his position to his detriment.

STRANGER TO CONTRACT: It is a general rule of law that only parties to a contract may sue and be sued
on that contract. This rule is known as the doctrine of privity of contract. "Privity of contract" means
relationship subsisting between the parties who have entered into contractual obligations. It implies a mutuality
of will and creates a legal bond or tie between the parties to a contract. There are two consequences of the
doctrine of privity of contract:
(1) A person who is not a partly to a contract cannot sue upon it even though the contract is for his benefit
and he provided consideration.
(2) A contract cannot confer rights or impose obligations arising under it on any person other than the
parties to it. Thus, if there is a contract between A and B, C cannot enforce it.
Ex: S bought tyres from the Dunlop Rubber Co. and sold them to D, a sub-dealer, who agreed with S not to sell
these tyres below Dunlop's list price and to pay the Dunlop Co. £ 5 as damages on every tyre D undersold. D
sold two tyres at less than the list price and thereupon the Dunlop Co. sued him for the breach. Held, the Dunlop
Co. could not maintain the suit as it was a stranger to the contract [Dunlop Pneumatic Tyre Co. Ltd. v. Selfridge
& Co. Ltd].

Exceptions. The following are the exceptions to the rule that "a stranger to a contract cannot sue":
1. A trust or charge. A person (called beneficiary) in whose favour a trust or other interest in some specific
immovable property has been created can enforce it even though he is not a party to the contract. Ex: A agrees
to transfer certain properties to be held by trust for the benefit of B. B can enforce the agreement (i.e., the trust)
even though he is not a party to the agreement.
2. Marriage settlement, Partition or other family arrangements. When an arrangement is made in
connection with marriage, partition or other family arrangements and a provision is made for the benefit of a
person, he may sue although he is not a party to the agreement. Ex: A mother agreed to pay to her younger son
in the event of the failure by the elder son to pay to the younger son the amount which fell short of the younger
son's share in the assets left by their father. The agreement was made to purchase peace for the family. Held, it
was a valid family arrangement. [Commissioner of Wealth Tax v. Vijayaba].

3. Acknowledgement or estoppel. Where the promisor by his conduct, acknowledges or otherwise constitutes
himself as an agent of a third party, a binding obligation is thereby incurred by him towards the third party. Ex:
A receives some money from T to be paid over to P. A admits of this receipt to P. P can recover the amount
from A who acted as the agent of P.

4. Assignment of a contract. The assignee of rights and benefits under a contract not involving personal skill
can enforce the contract subject to the equities between the original parties. Thus the holder in due course of a
negotiable instrument can realise the amount on it even though there is no contract between him and the person
liable to pay.

5. Contracts entered into through an agent. The principal can enforce the contracts entered into by his agent
provided the agent acts within the scope of his authority and in the name of the principal.

Capacity to Contract
The parties who enter into a contract must have the capacity to do so. 'Capacity' here means competence of the
parties to enter into a valid contract. According to Sec. 10, an agreement becomes a contract if it is entered into
between the parties who are competent to contract. According to Sec. 11, every person is competent to contract
who
a) is of the age of majority according to the law to which he is subject,
b) is of sound mind, and
c) is not disqualified from contracting by any law to which he is subject.

Thus Sec. 11 declares the following persons to be incompetent to contract:

1. Minors,
2. Persons of unsound mind, and
3. Persons disqualified by any law to which they are subject.

1. MINORS: According to Sec. 3 of the Indian Majority Act, 1875, a minor is a person who has not completed
eighteen years of age. The rules governing minors' agreements are based on two fundamental rules:
 The first rule is that the law protects minors against their own inexperience and against the possible
improper designs of those more experienced.
 The second rule is that, in pursuing the above object, the law should not cause unnecessary hardship to
persons who deal with minors.
Minor's agreements: The position of a minor as regards his agreements may be summed up as under:
(1) An agreement with or by a minor is void and inoperative ab initio. The Privity Council affirmed this
view most emphatically in Mohiri Bibi v. Dharmodas Ghose. In this case, a minor mortgaged his house in favor
of a money-lender to secure a loan of Rs. 20,000 out of which the mortgagee (the money-lender) paid the minor
a sum of Rs. 8,000. Later the minor sued for setting aside the mortgage, stating that he was underage when he
executed the mortgage. Held, the mortgage was void and it was cancelled. Further the moneylender's request for
the repayment of the amount advanced to the minor as part of the consideration for the mortgage was also not
accepted.
(2) He can be a promisee or a beneficiary. Incapacity of a minor to enter into a contract means incapacity to
bind him by a contract. There is nothing which debars him from becoming a beneficiary. The law does not
regard him as incapable of accepting a benefit.
Ex: (a) M. aged 17, agreed to purchase a second-hand scooter for Rs. 5,000 from S. He paid Rs. 200 as advance
and agreed to pay the balance the next day and collect the scooter. When he came with the money the next day,
S told him that he had changed his mind and offered to return the advance. S cannot avoid the contract, though
M may, if he likes.

(3) His agreement cannot be ratified by him on attaining the age of majority. "Consideration which passed
under the earlier contract cannot be implied into the contract which the minor enters on attaining majority."
Thus consideration given during minority is no consideration. If it is necessary a fresh contract may be entered
into by the minor on attaining majority provided it is supported by fresh consideration.
Ex: M, a minor, borrows Rs. 5,000 from L and executes a promissory note in favor of L. After attaining
majority, he executes another promissory note in settlement of the first note. The second promissory note is
void for want of consideration.

(4) If he has received any benefit under a void agreement he cannot be asked to compensate or pay for it.
Sec. 65 which provides for restitution in case of agreements discovered to be void does not apply to a minor.
Ex: M, a minor, obtains a loan by mortgaging his property. He is not liable to refund the loan. Not only this,
even his mortgaged property cannot be made liable to pay the debt.

(5) He can always plead minority. Even if he has, by misrepresenting his age, induced the other party to
contract with him, he cannot be sued either in contract or in tort for fraud because if the injured party were
allowed to sue for fraud, it would be giving him an indirect means enforcing the void agreement
Ex: S, a minor, by fraudulently representing himself to be of full age, induced L to lend him £ 400. He refused
to repay it and L sued him for the money. Held, the contract was void and S was not liable to repay the amount.

(6) He cannot enter into a contract of partnership. But he may be admitted to the benefits of an already
existing partnership with the consent of the other partners.

(7) He cannot be adjusted insolvent. This is because he is incapable of contracting debts.

(8) He is liable for 'necessaries' supplied or necessary services tendered to him or anyone whom he is
legally bound to support. A minor is liable to pay out of his property for 'necessaries' supplied to him or to
anyone whom he is legally bound to support (Sec. 68). The claim arises not out of contract but out of what are
called quasi-contracts. Again, it is only the property of the minor which is liable for meeting the liability arising
out of such contracts. He is not personally liable. The law has provided this exception intentionally because if it
were not so, it would be impossible for minors even to live.

(10) He can be an agent. An agent is merely a connecting link between his principal and a third party. As soon
as the principal and the third party are brought together, the agent drops out. A minor binds the principal by his
acts without incurring any personal liability.
(11) His parents/guardian are/is not liable for the contract entered into by him, even though the contract
is for the supply of necessaries to the minor. But if the minor is acting as an agent for the parents/guardians,
the parents/guardian shall be liable under the contract.

(12) A minor is liable in tort (a civil wrong), but where a tort arises that out of a contract a minor is not liable
in tort as an indirect way of enforcing an invalid contract.

2. PERSONS OF UNSOUND MIND: One of the essential conditions of competency of parties to a contract is
that they should be of sound mind. Sec. 12 lays down a test of soundness of mind. It reads as follows: A person
is said to be of sound mind for the purpose of making a act if, at the time when he makes it, he is capable of
understanding of forming a rational judgment as to its effect upon his interests. A person who is usually of
unsound mind but occasionally of sound, may make a contract when he is of sound mind. A person who is
usually of sound mind, but occasionally of unsound mind, may not make a contract when he is of unsound
mind.
Ex: A patient in a lunatic asylum, who is at intervals of sound mind, may contract during those intervals.

Soundness of mind of a person depends on two facts:

 his capacity to understand the contents of the business concerned, and
 his ability to form a rational judgment as to its effect upon his interests.

If a person incapable of both, he suffers from unsoundness of mind. Whether a party to a contract is of sound
mind or not is a question of fact to be decided by the Court. There is a presumption in favor of sanity. If a son
relies on unsoundness of mind, he must prove it sufficiently to satisfy the Court.

Contracts of persons of unsound mind

1. Lunatics. A lunatic is a person who is mentally deranged due to some ital strain or other personal
experience. He suffers from intermittent intervals of sanity and insanity. He can enter into contracts
during the period when he is of sound mind.

2. Idiots. An idiot is a person who has completely lost his mental powers. He does not exhibit
understanding of even ordinary matters, Idiocy is permanent whereas lunacy denotes periodical insanity
with lucid intervals. An agreement of an idiot, like that of a minor, is void.

3. Drunken or intoxicated persons. A drunken or intoxicated person suffers from temporary incapacity to
contract, i.e., at the time when he is drunk or intoxicated that he is incapable of forming a rational
judgment. The position of a drunken or intoxicated person is similar to at of a lunatic.

Agreements entered into by persons of unsound mind are void. However, persons of unsound mind are liable
for necessities supplied to them or to anyone whom they are legally bound to support, at even in such cases, no
personal liability attaches to them. It is only their estate which is liable.

3. OTHER PERSONS

Alien enemies: An alien (the subject of a foreign state) is a person who is not a subject of the Republic of India.
He may be
(i) an alien friend, (ii) an alien enemy.

Contracts with an alien friend (an alien whose State is at peace with the Republic of India), subject to certain
restrictions, are valid.
Contracts with an alien enemy (an alien whose State is at war with the Republic of India) may be studied
under two heads, namely—
(a) contracts during the war, and (b) contracts made before the war.

During the continuance of the war, an alien enemy can neither contract with an Indian subject nor can he sue in
an Indian Court. He can do so only after he receives a licence from the Central Government. Contracts made
before the war may either be suspended or dissolved. They will be dissolved if they are against the public policy
or if their performance would benefit the enemy.

Foreign sovereigns, their diplomatic staff and accredited representatives of foreign States: They have
some special privileges and generally cannot be sued unless they of their own submit to the jurisdiction of our
law Courts. They can enter into contracts and enforce those contracts in our Courts. But an Indian citizen has to
obtain a prior sanction of the Central Government In order to sue them in our law Courts. An ex-king can,
however, be sued against in our Courts without any such sanction.

Corporations: A corporation is an artificial person created by law, having a legal existence apart from its
members. It may come into existence by a Special Act of the Legislature or by registration under the Companies
Act, 1956.
As regards a corporation formed under the Companies Act, 1956, its contractual capacity is regulated by the
terms of its Memorandum of Association and the provisions of the Companies Act. It cannot enter into contracts
of a strictly personal nature as it is an artificial and not a natural person.

Insolvents: When a debtor is adjudged insolvent, his property vests in the Official, Receiver or Official
Assignee. As such the insolvent is deprived of his power to deal in that property. It is only the Official Receiver
or Official Assignee who can enter into contracts relating to his property, and sue and be sued on his behalf. The
insolvent also suffers from certain disqualifications which are removed when the Court passes an order of
discharge.
Convicts: A convict when undergoing imprisonment is incapable of entering into a contract. He can, however,
enter into, or sue on, a contract if he is lawfully at large under a licence called "ticket of leave". This incapacity
to contract, or to sue on a contract, comes to an end when the period of sentence expires or when he is
pardoned. The convict, however, does not suffer from the rigours of the Law of Limitation.

FREE CONSENT [See 14]

INTRODUCTION
One of the essential elements of a valid contract is that there should be free consent of the concerned parties
to the contract. ‘Two or more persons are said to consent when they agree upon the same thing in the same
sense.’ [See 13]

Consent is said to be free when it is not caused by—

(1) coercion, or
(2) undue influence, or
(3) fraud, or
(4) misrepresentation, or
(5) mistake, subject to provisions of sec 20, 21 and 22.

Consent is said to be so caused when it would not have been given but for the existence of such coercion, undue
influence, fraud, misrepresentation or mistake.
(1) COERCION [See 15]: “Coercion” is the committing or threatening to commit, any act forbidden by the
Indian Penal Code (45 of 1860), or the unlawful detaining, or threatening to detain, any property, to the
prejudice of any person whatever, with the intention of causing any person to enter into an agreement.
Ex: 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 (45 of 1860). A afterwards sues B for breach of contract at
Calcutta. A has employed coercion, although his act is not an offence by the law of England, and although
section 506 of the Indian Penal Code (45 of 1860) was not in force at the time when, or at the place where the
act was done.

(2) UNDUE INFLUENCE [See 16]: A contract is said to be induced by “undue influence” where the relations
subsisting between the parties are such that one of the parties is in a position to dominate the will of the other
and uses that position to obtain an unfair advantage over the other.

In particular and without prejudice to the generality of the forgoing principle, 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, or where he stands in a fiduciary relation to the
other; or
(b) Where he makes a contract with a person whose mental capacity is temporarily or permanently affected by
reason of age, illness, or mental or bodily distress.
(3) Where a person, who is in a position to dominate the will of another, enters into a contract with him, and the
transaction appears, on the face of it or on the evidence adduced, to be unconscionable, the burden of proving
that such contract was not induced by undue influence shall lie upon the person in a position to dominate the
will of the other.

Nothing in this sub-section shall affect the provisions of section 111 of the Indian Evidence Act, 1872 (1 of
1872).

There is presumption of undue influence in the following relationships:

(i) Parent and child
(ii) Guardian and ward
(iii) Doctor and patient
(iv) Solicitor and client
(v) Trustee and beneficiary
(vi) Religious advisor and disciple
(vii) Fiance and fiancée

There is however no presumption of undue influence incase of relationship of— (i) landlord and tenant (ii)
debtor
and creditor (iii) husband and wife. The wife has to be pardanashin for such presumption. In these relationships
undue influence has to be proved.

Examples:
(a) A, having advanced money to his son, B, during his minority, upon B’s coming of age 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.
(b) A, a man 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.

3) MISREPRESENTATION AND FRAUD: A statement of fact which one party makes in the course of
negotiations with a view to inducing the other party to enter into a contract is known as a representation. It must
relate to some fact which is material to the contract. It may be expressed by words spoken or written or implied
from the acts and conduct of the parties. A representation when wrongly made, either innocently or
intentionally, is a misrepresentation.

Misrepresentation may be
(i) an innocent or unintentional misrepresentation, or
(ii) an intentional, deliberate or willful misrepresentation with an intent to deceive or defraud the other party.
The former is called "misrepresentation" and the latter "fraud".

Misrepresentation is a false statement which the person making it honestly believes to be true or which he does
not know to be false. It also includes non-disclosure of a material fact or facts without any intent to deceive the
other party.
Ex: (a) A, while selling his mare to B, tells him that the mare is thoroughly sound. A genuinely believes the
mare to be sound although he has no sufficient ground for the belief. Later on B finds the mare to be unsound.
The representation made by A is a misrepresentation.
(b) A company's prospectus contained a representation that it had statutory powers to run its tramways by steam
provided the consent of a Government authority was obtained. The directors issued a prospectus stating therein
that the company had the right to use steam power. They honestly believed that the permission for the use of
steam power would be granted. The permission was refused. The company was then wound up. Held, the
directors were guilty of misrepresentation and not of fraud.

Sec. 18 defines "misrepresentation". According to this there is misrepresentation—

 When a person positively asserts that a fact is true when his information does not warrant it to be so,
though he believes it to be true.
 When there is any breath of duty by a person which brings an advantage to the person committing it by
misleading another to his prejudice.
 When a party causes, however innocently, the other party to the agreement to make a mistake as to the
substance of the thing which is the subject of the agreement

Requirements of misrepresentation: A misrepresentation is relevant if it satisfies the following requirements:

 It must be a representation of a material fact. Mere expression of opinion does not amount to
misrepresentation even if it turns out to be wrong.
 It must be made before the conclusion of the contract with a view to inducing the other party to enter
into the contract.
 It must be made with the intention that it should be acted upon by the person to whom it is addressed.
 It must actually have been acted upon and must have induced the contract.
 It must be wrong but the person who made it honestly believed it to be true.
 It must be made without any intention to deceive the other party.
 It need not be made directly to the plaintiff. A wrong statement of facts made to a third person with the
intention of communicating it to the plaintiff, also amounts to misrepresentation.

(4) FRAUD [See 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 another party thereto or his agent, or to induce
him to enter into the contract:—
(1) The suggestion, as a fact, of that which is not true by one who does not believe it to be true;
(2) The active concealment of a fact by one having knowledge or belief of the fact;
(3) A promise made without any intention of performing it;
(4) Any other act fitted to deceive;
(5) Any such act or omission as the law specially declares to be fraudulent.

Explanation : Mere silence as to facts likely to affect the willingness of a person to enter into a contract is not
fraud, unless 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 unless his silence is, in itself, equivalent to speech.
Illustrations
(a) A sells, by auction, to B, a horse which A knows to be unsound. A says nothing to B about the horse’s
unsoundness. This is not fraud in A.
(b) B says to A - “If you do not deny it, I shall assume that the horse is sound”. A says nothing. Here, A’s
silence
is equivalent to speech.
(c) 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.

Distinction between fraud and misrepresentation

1. Intention. In misrepresentation, there is a misstatement or concealment of a material fact or facts essential to
the contract without any intention to deceive the other party. In fraud, the intention is to deceive the other party.
Misrepresentation is innocent, fraud is deliberate or willful.
2. Belief. In case of misrepresentation, the person making the suggestion believes it to be true, while in case of
fraud he does not believe it to be true.
3. Rescission and damages. In misrepresentation, the aggrieved party can rescind the contract or sue for
restitution (Sec. 64). There can be no suit for damages. In fraud, the remedy available to the aggrieved party is
not limited to rescission alone. He can also claim damages.
4. Discovery of truth. In case of misrepresentation, the aggrieved party cannot avoid the contract if it had the
means to discover the truth with ordinary diligence. But in case of fraud, where there is active concealment, the
contract is voidable even though the aggrieved party had the means of discovering the truth with ordinary
diligence.

MISTAKE: Mistake may be defined as an erroneous belief about something. It may be mistake of law or a
mistake of fact.

Mistake of law: Mistake of law may be—(1) mistake of law of the country, or (2) mistake of law of a foreign
country.

(1) Mistake of law of the country. Ignorantia juris nan excusat, i.e. ignorance of law is no excuse, is a well
settled rule of law, A party cannot be allowed to get any relief on the ground that it had done a particular act in
ignorance of law. A mistake of law is, therefore, no excuse, and the contract cannot be avoided. Example. A
and B enter into a contract on the erroneous belief that a particular debt is barred by the Indian Law of
Limitation. This contract is not voidable.

(2) Mistake of law of a foreign country. Such a mistake is treated as mistake of fact and the agreement in such
a case is void (Sec. 21).

Mistake of fact: Mistake of fact may be

(1) a bilateral mistake, or (2) a unilateral mistake.

1. Bilateral mistake: Where both the parties to an agreement are under a mistake as to a matter of fact essential
to the agreement, there is a bilateral mistake. In such a case, the agreement is void (Sec. 20). The following two
conditions have to be fulfilled for the application of Sec. 20:

(i) The mistake must be mutual, i.e., both the parties should misunderstand each other and should be at cross-
purposes. Ex: A agreed to purchase B's motor-car which was lying in B's garage. Unknown to either party, the
car and garage were completely destroyed by fire a day earlier. The agreement is void.
(ii) The mistake must relate to a matter of fact essential to the agreement. As to what facts are essential in an
agreement will depend upon the nature of the promise in each case. Ex: A man and a woman entered into a
separation agreement under which the man agreed to pay a weekly allowance to the woman, mistakenly
believing themselves lawfully married. Held, the agreement was void as there was mutual mistake on a point of
fact which was material to the existence of the agreement. [Galloway vs Galloway].

The various cases which fall under bilateral mistake are as follows :

(1) Mistake as to the subject-matter. Where both the parties to an agreement are working under a mistake
relating to the subject-matter, the agreement is void. Mistake as to the subject-matter covers the following
cases :

(i) Mistake as to the existence of the subject-matter. If both the parties believe the subject-matter of the
contract to be in existence, which in fact at the time of the contract is non-existent, the contract is void. Ex: 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.

(ii) Mistake as to the identity of the subject-matter. It usually arises where one party intends to deal in one
thing and the other intends to deal in another. Ex: (a) W agreed to buy from R a cargo of cotton "to arrive ex-
peerless from Bombay". There were two ships of that name sailing, from Bombay, one sailing in October and
the other in December, iv meant the former ship but R meant the latter. Held, there was a mutual or a bilateral
mistake and there was no contract [Raffles v Wichelhaus].

(iii) Mistake as to the quality of the subject-matter. If the subject-matter is something essentially different
from What the parties thought it to be, the agreement is void. Ex: Table napkins were sold at an auction by a
description “with the crest of Charles I and the authentic property of that monarch”. In fact the napkins were
Georgian. Held, the agreement was void as there was a mistake as to the quality of the subject-matter
[Nicholson & Venn v. Smith Marriott].

(iv) 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. Ex: A silver bar was sold under a mistake as to its weight.
There was a difference in value between the weights of the bar as it was and as it was supposed to be. Held, the
agreement was void [Cox v. Prentice,].

(v) Mistake as to the title to the subject-matter. If the seller is selling a thing which he is not entitled to sell and
both the parties are acting under a mistake, the agreement is void. Ex: A person took a lease of a fishery which,
unknown to either party, already belonged to him. Held, the lease was void [Cooper v. Phibbs].

(vi) Mistake as to the price of the subject-matter. If there is a mutual mistake as to the price of the subject-
matter, the agreement is void. Ex: C wrote to W offering to sell certain property for £ 1,250. He had earlier
declined an offer from W to buy the same property for £ 2,000. W who knew that this offer of £ 1,250 was a
mistake for £ 2.250, immediately accepted the offer. Held, W knew perfectly well that the offer was made by
mistake and hence the contract could not be enforced [Websterv. Cecil].

(2) Mistake as to the possibility of performing the contract. Consent is nullified if both the parties believe that
an agreement is capable of being performed when in fact this is not the case (Sec. 56, para 1). The agreement, in
such a case, is void on the ground of impossibility.

2. Unilateral mistake: When in a contract only one of the parties is mistaken regarding the subject-matter or in
expressing or understanding the terms or the legal effect of the agreement, the mistake is .a unilateral mistake.
According to 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 a matter of fact. A unilateral mistake is not allowed as a defence in avoiding a contract
unless the mistake is brought about by the other party's fraud or misrepresentation.

Examples, (a) A offers to sell his house to B for an intended sum of Rs. 44,000. By mistake he makes an offer
in writing of Rs. 40,000. He cannot plead mistake as a defence.
(b) H bought oats from S a sample of which had been shown to H. H erroneously thought that oafs were old.
The oats were, however, new. Held, H could not avoid the contract [Smith v. Hughes,]
(c) A buys an article thinking that it is worth Rs. 1,000 when it is worth only Rs. 50. A cannot subsequently
avoid the contract.
Exceptions: A unilateral mistake is generally not allowed as a defence in avoiding a contract. But in certain
cases, the consent is given by a party under an error or mistake which is so fundamental as goes to the root of
the agreement. In such cases the agreement is void. Thus in the following cases, even though there is a
unilateral mistake, the agreement is void.

(1) Mistake as to the identity of the person contracted with. It is a fundamental rule of law that if one of the
parties represents himself to be some person other than he really is, there is a mistake as to the identity of the
person contracted with. If, for example, A intends to contract with B but finds he has contracted with C, there is
no contract if the identity of B was a material element of the contract and C knows it. Likewise if A makes an
offer to B, C cannot give himself any rights in respect of the contract by accepting the offer. If he does so, the
contract will be void.
Ex:(a) Boulton v. Jones, (1857) 2 H. & N. 564, discussed in the Chapter on "Offer and Acceptance".
(b) A advertised his car for sale. B who falsely called himself Hutchinson agreed to buy the car, and when he
offered to pay by cheque A said the deal was over. Then he gave an address which A checked in the telephone
directory and found that it corresponded with the name B had given. A thereupon agreed to accept the cheque
which was subsequently dishonoured. The car was subsequently sold to L who bought it in good faith. Held,
there was no contract between A and B as A intended to enter into contract only with Hutchinson and as B had
no title to the car, he could pass none to L.

(2) Mistake as to the nature of contract. If a person enters into a contract in the mistaken belief that he is
signing a document of a different class and character altogether, there is a mistake as to the nature of contract
and the contract is void. He can successfully plead non est factum (it is not his deed, i.e., document). The very
basis of the contract, i.e. consent, is missing in this case. Thus, where in signing a document the mind of the
signer does not go with signature, there is a mistake which would vitiate the contract.
Ex: M, an old man of poor sight, indorsed a bill of exchange thinking that it was a guarantee. Held, there was no
contract on the ground that the mind of the signer did not accompany the signature [Foster v. Mackinnon].

Legality of Object
A contract must not only be based upon mutual assent of competent parties but must also have a lawful object.
If the object of an agreement is the performance of an unlawful act, the agreement is unenforceable.

Sec. 23 declares that the 'object' or the 'consideration' of an agreement is not lawful in certain cases. The words
'object' and 'consideration' in Sec. 23 is not used synonymously. They are distinct in meaning. The word
‘object' means purpose or design. In some cases, consideration for an agreement may be lawful but the purpose
for which the agreement is entered into may be unlawful. In such cases the agreement is void. As such both the
object and the consideration of an agreement must be lawful, otherwise the agreement is void.
When consideration or object is unlawful (Sec. 23): The consideration or object of an agreement is unlawful—

1. If it is forbidden by law. If the object or the consideration of an agreement is the doing of an act forbidden by
law, the agreement is void. An act is forbidden by law when it is punishable by the criminal law of the country
or when it is prohibited by special legislation or regulations made by a competent authority under powers
derived from the Legislature. Ex: 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.

2. If it is of such a nature that, if permitted, it would defeat the provisions of any law. If the object or the
consideration of an agreement is such that, though not directly forbidden by law, it would defeat the provisions
of any law, the agreement is void. Ex: A was licensed under an Excise Act to run a liquor shop. The Act forbade
the sale, transfer or sub-lease of the licence or the creation of a partnership to run the shop. A took B into
partnership. Held, the agreement was void (Nandlalv. Thomas, 171 I.C. 948).

3.If it is fraudulent An agreement which is made for a fraudulent purpose Is void. Thus an agreement In fraud
of creditors with a view to defeating their rights Is void. Ex: (a) A, B and C enter into an agreement for the
division among them of gains acquired, or to be acquired, by them by fraud. The agreement is void, as Its object
is unlawful.

4. If it involves or implies injury to the person or property of another. 'Injury' means "wrong”, 'harm', or
'damage'. 'Person' means one's body. Property' Includes both movable and Immovable properly.
Ex: (a) B borrowed Rs 100 from L and executed a bond promising to work for L without pay for a period of two
years. In case of default, B was to pay interest (at a very exorbitant rate) and the principal sum at once. Held, the
contract was void as it involved Injtuy to the person of B [Ram Scroop v. Bansi Mandar,]

5. If the Court regards it as immoral: An agreement, the consideration or object of which is immoral, e.g., an
agreement between a husband and wife for future separation, is unlawful [Sumttra Devl v. Sulekha Kundu].

UNLAWFUL AND ILLEGAL AGREEMENTS: An unlawful agreement is one which, like a void agreement,
is not enforceable by law. It is void ab initio and is destitute of legal effects altogether. It affects only the
immediate parties and has no further consequences. An illegal agreement, on the other hand, is not only void as
between immediate parties but has this further effect that the collateral transactions to it also become tainted
with illegality.

Ex: L lends Rs. 5,000 to B to help him to purchase some prohibited goods from T, an alien enemy. If B enters
into an agreement with T, the agreement will be illegal and the agreement between B and L shall also become
illegal, being collateral to the main transaction which is illegal. L cannot, therefore, recover the amount. He can
recover the amount if he did not know of the purpose of the loan.

Every illegal agreement is unlawful, but every unlawful agreement & not necessarily illegal It is sometimes
difficult to decide as to whether an act is illegal or unlawful as many of the illegal and the unlawful acts he on
the borderline

Whether illegality is severable. A contract may contain several distinct promises or a promise to do several
distinct acts of which some are legal and others illegal, or a part of which is legal and a part of which is illegal.
If the illegal promise or act is severable from the legal one, the Court will enforce the legal promise or act and
reject the one which is illegal. If the illegal promise or act cannot be separated from the legal one, the whole
contract is declared illegal.

AGREEMENTS OPPOSED TO PUBLIC POLICY: An agreement is said to be opposed to public policy

when it is harmful the public welfare. Public policy is that principle of law which holds that no subject can
lawfully do that which has a mischievous tendency to; injurious to the interests of the public, or which is against
the public or public welfare. It is not possible to give a precise or exact definition of the term public policy. It is,
in a way, a vague and elastic term. Some of the agreements which are or which have been held to be, opposed
to public policy and are unlawful are as follows :

1. Agreements of trading with enemy.

2. Agreement to commit a crime.
3. Agreements which interfere with administration of justice.
4. Agreements in restraint of legal proceedings.
5. Trafficking in public offices and tales.
6. Agreements tending to create interest opposed to duty.
7. Agreements in restraint of parental rights
8. Agreements restricting personal liberty.
9. Agreements in restraint of marriage.
10. Agreements to defraud creditors or revenue authorities.
11. Agreements in restraint of trade

Wagering agreements or wager (Sec. 30): A wager is an agreement between two parties by which one
promises to pay money or money's worth on the happening of some uncertain event in consideration of the
other party's promise to pay if the event does not happen. Thus if A and B enter into an agreement that A shall
pay B Rs. 100 if it rains on Monday, and that B shall pay A the same amount if it does not rain, it is a wagering
agreement. The event may be uncertain either because it is to happen in future or if it has already happened, the
parties are uncertain and express opposite views such as whether Hans Raj College were the champions in
wrestling in 1990, or whether the result of an election which is over has gone in favour of party X or party Y.
Essentials of a wagering agreement
(1) Promise to pay money or money's worth. The wagering agreement must contain a promise to pay money or
money's worth.
(2) Uncertain event. The promise must be conditional on an event happening or not happening. A wager
generally contemplates a future event, but it may also relate to a past event* provided the parties are not aware
of its result or the time of its happening.
(3) Each party must stand to win or lose. Upon the determination of the contemplated event, each party should
stand to win or lose agreement is not a wager if either of the parties may win but cannot lose or may lose but
cannot win.
(4) No control over the event: Neither party should have control over the happening of the event one way or the
other. If one of the parties has the event in his own hands, the transaction lacks an essential ingredient of a
wager.
(5) No other interest in the event Lastly, neither partly should have any interest in the happening or non-
happening of the event other than the sum or stake he will win or lose. Thus an agreement is not a wager if the
party to whom money is promised on the occurrence of an event has an interest in its non-occurrence. That is
why a contract of insurance is not a wagering agreement.
The following transactions are, however, not wagers :
1. A crossword competition involving a good measure of skill for its successful solution.
2. Games of skill, e.g., picture puzzles or athletic competitions.
Performance of Contract
Performance of a contract takes place when the parties to the contract fulfil their obligations arising under the
contract within the time and in the manner prescribed. Sec. 37 (para 1) 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.

OFFER TO PERFORM (Sec. 38)

Sometimes it so happens that the promisor offers to perform his obligation under the' contract at the proper time
and place but the promisee does not accept the performance. This is known as "attempted performance" or
"tender". Sec. 38 sums up the position in this regard thus: 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. Thus, a tender of performance is equivalent to actual
performance. It excuses the promisor from further performance and entitles him to sue the promisee for the
breach of contract.

Requisites of a valid tender

1. It must be unconditional. It becomes conditional when it is not in accordance with the terms of the contract.
Ex: D, a debtor offers to pay to C, the creditor, the amount due to him on the condition that C sells to him
certain shares at cost. This is not a valid tender.
2. It must be of the whole quantity contracted for or of the whole obligation. A tender of an instalment when
the contract' stipulates payment in full Is not a valid tender.
Ex: D, a debtor, offers to pay C, his creditor, the amount due In Instalments and tenders the first instalment. The
tender is not of the whole amount due and hence it is not a valid tender. If, however, the deviation from the
terms of the contract is '"microscopic", i.e., very negligible, the Court may take a practical view of the matter by
holding that the contract has been correctly performed.
3. It must for by a person who is in a position, and willing to perform the promise.
4. It must be made at the proper time and place. A tender of goods after the business hours or of goods or
money before the due date is not a valid tender.
Ex: D owes C Rs. 100 payable, on the 1st of August with interest. He offers to pay on the 1st of July the amount
with interest up to the 1st of July. It is not a valid tender as it is not made at the appointed time.
5. It must be made to the proper person, i.e., the promisee or his duty authorised agent. It must also be in
proper form.
6. It may be made to one of the several joint promisees. In such a case it has the same effect as a tender to all of
them.
7. In case of tender of goods, it must give a reasonable opportunity to the promisee for inspection of the
goods. A tender of goods at such time when the other party cannot inspect the goods is not a valid tender. But in
the following case, tender was held to be valid.
Example. The plaintiffs agreed to sell ten tons of linseed oil to the defendant to be delivered "within the last
fourteen days of March". Delivery was tendered at 8.30 p.m. on March 31, a Saturday. The defendant refused to
accept the goods owing to lateness of the hour. Held, though thejiour was unreasonable, th^ defendant could
still take delivery before midnight [Startup v. Macdonald.].
8. In case of tender of money, -the debtor must make a valid tender in the legal tender money. If the creditor
refuses to accept it. the debtor is not discharged from making the payment. Tender, in this case, does not
discharge the debt. But when the creditor flies a suit against the debtor, the debtor can set up the defence of
tender. If he deposits the money In the j Court and proves his pleas, the creditor gets* the amount originally
tendered to him but without any interest, whereas the debtor gets j judgment for his cost of defence.

Effect of refusal of a party to perform promise wholly (Sec. 39) Ex: A a singer, enters into a contract with B, the
manager of a theatre, to sing at his theatre two nights in every week during the next two months and B agrees to
pay her Rs. 100 for each J night's performance. On the sixth night A wilfully absents herself from the theatre. B
is at liberty to put an end to the contract.

CONTRACTS WHICH NEED NOT BE PERFORMED: A contract need not be performed—

1. When its performance becomes impossible (Sec. 56).
2. When the parties to it agree to substitute a new contract for it or to rescind or alter it (See. 62).
3. When the promisee dispenses with or remits, wholly or in part, the performance of the promise made to him
or extends the time for such performance or accepts any satisfaction for it (Sec. 63).
4. When the person at whose option It is voidable, rescinds it (Sec. 64).
5. When the promisee neglects or refuses to afford the promisor reasonable facilities for the performance of his
promise (Sec. 67).
6. When it is illegal.
BY WHOM MUST CONTRACTS BE PERFORMED
1. Promisor himself. If there is something in the contract to show that it was the intention of the parties that the
promise should be performed by the promisor himself, such promise must be performed by the promisor (Sec.
40). This means contracts which Involve the exercise of personal skill, volition, or diligence 'of the promisor
(for instance, a contract to paint a picture or sing), or which are founded on personal confidence between the
parties (for instance a contract to marry) must be performed by the promisor himself.
2. Agent. Where personal consideration is not the foundation of a contract, the promisor or his representative
may employ a competent person to perform it (Sec. 40).
3. Legal representatives. A contract which involves the use of personal skill or is founded on personal
considerations comes to an end on the death of the promisor. As regards any other contract, the legal
representatives of the deceased promisor are bound to perform it unless a contrary intention appears from the
contract (Sec. 37, para 2). But their liability under a contract is limited to the value of the property they inherit
from the deceased.
4. Third persons. When a promisee accepts performance of promise from a third person, he cannot afterwards
enforce it against promisor (Sec. 41). 5. Joint promisors.
DEVOLUTION OF JOINT LIABILITIES AND RIGHTS Devolution of joint liabilities (Sec. 42 to 44)
'Devolution' means passing over from one person to another. When two or more persons have made a joint
promise, they are known as joint promisors. Unless a (contrary intention appears from the contract, all joint
promisors must jointly fulfil the promise. If any them dies, his legal representatives must, jointly with the
surviving promisors, fulfil the promise. If all of them die, the legal representatives, of all of them must fulfil the
promise jointly (Sec. 42). It would be see that Sec. 42 deals with voluntary discharge of obligations. If the
parties do not discharge their obligations of their own volition. Sec. 43 comes into play. Sec. 43 lays down
three rules as regards performance of joint promises:

(1) Any one of the joint promisors may be compelled to perform (Sec.43, para 1). When two or more persons
make a joint promise and there is no express agreement to the contrary, the promisee may compel any one or
more of the joint promisors to perform the whole of the promise. This means the liability of Joint promisors is
Joint and several.

(2) A Joint promisor compelled to perform 'may claim contribution (Sec. 43, para 2). When a joint promisor
has been compelled to perform the whole of the promise, he may compel the other Joint promisors to contribute
equally with himself to the performance of the promise unless a contrary intention appears from the contract.

(3) Sharing of loss arising from default (Sec. 43, para 3). If any one of the joint promisors makes default in the
contribution, the remaining joint promisors must bear the loss arising from such default in eqt shares. The same
principle applies in the case of recovery of a loan by: creditor from the heirs who by operation of law become
joint promisor after the death of the single promisor [Orissa Cement Ltd. v. Union £ India,].
Release of a Joint promisor (Sec. 44). A release by the promisee of any of the joint promisors does not
discharge the other joint promisors from liability- The released Joint promisor also continues to be liable to the
other Joint promisors.
Ex: DI . D2 and DS jointly owe a debt to C. D releases DI from his liability and flies a suit against D2 and D3
for payment of the debt. D2 and D3 are not released from their liability nor is D1 discharged from his liability
to D2 and D3 for contribution.

TIME AND PLACE OF PERFORMANCE

Time and place of performance of a contract are matters to be determined, by an agreement between the parties
themselves. Secs. 46 to 00 lay down the following rules in this regard :

1. Where no application is to be made and no time is specified. Where, by the contract a promisor is to perform
his promise without application and no time for performance is specified, the promise has to be performed
within a reasonable time (Sec. 46). It depends on the special circumstances of the case, the usage of trade, or the
intention of the parties at the time of entering into the contract.

2. Where time is specified and no application is to be made. When a promise is to be performed on a certain
day, the promisor may undertake to perform it without application by the promisee. In such a case, the promisor
may perform the promise at any time during the usual hours of business on such day and at the place at which
the promise ought to be performed (Sec. 47).

3. Application for performance at a certain day and place. When a promise4s to be performed on a certain day,
the promisor may undertake to perform it after the application by the promisee to that effect. In such a case, it is
the duty of the promisee to apply for performance at a proper place and within the usual hours of business. The
question "what is a proper time and place" is, in each particular case, a question of fact (Sec. 48)

4. .Application by the promisor to the promisee to appoint place. 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 (Sec. 49).
Discharge of Contract
Discharge of contract means germination of the contractual relationship between the parties. A contract Is said
to be discharged when it ceases to operate, i.e., when the rights and obligations created by it come to an end. In
some cases, other rights and obligations may arise as a result of discharge of contract, but they are altogether
independent of the/original contract.

A contract may be discharged—

1. By performance.
2. By agreement or consent.
3. By Impossibility.
4. By lapse of time.
5. By operation of law,
6. By breach of contract.
The various modes of discharge of a contract (shown in a chart on the next page) are discussed below.

1. DISCHARGE BY PERFORMANCE
Performance means the doing of that which is required by a contract. Discharge by performance takes place
when the parties to the contract fulfil their obligations arising under the contract within the time and in the
manner prescribed. In such a case, the parties are discharged and the /contract comes to an end. But if only one
party performs the promise, he alone is discharged. Such a party gets a right of action against the other party
who is guilty of breach.
Performance of a contract is the most usual mode of its discharge. It may be (1) actual performance, or (2)
attempted performance.
(1) Actual performance. When both the parties perform Ntheir promises, the contract is discharged.
Performance should be complete, precise and' according to the terms of the agreement. Most of tne contracts are
discharged by performance In this manner.
(2) Attempted performance or tender. Tender is not actual performance but ^is only an offer to perform the
obligation under the contract. Where the promisor offers to perform his obligation, but the promisee refuses to
accept the performance, tender is equivalent to actual performance, except in case of tender of money.
The'effect of a valid tender Is that the contract is deemed to have been performed by the tenderer. The tenderer
is discharged from-the responsibility for non-performance" of the/contract without in any way prejudicing his
rights which accrue to him against the promisee.
2. DISCHARGE BY AGREEMENT OR CONSENT
As it is the agreement of the parties which binds them, so by their further agreement or consent the contract may
be terminated. This means a contractual obligation may be discharged by agreement which may be express or
implied. Ex: A sells a car to B on approval with the condition that it should be returned within seven days if it is
found wanting in efficient functioning. he may return the car within seven days if it is found wanting. Consent
to return the car is given to B at the time of the formation of the contract.
The various cases of discharge of a contract by mutual agreement are dealt with in Secs. 62 and 63 and are
discussed below:
(a) Novation (Sec. 62). Novation takes place when a new contract is substituted for an existing one between the
same parties, or a contract two parties is rescinded in consideration of a new contract being into on the same
terms between one of the parties and a third A common instance is where a creditor at the request of the debtor
agrees to take another person as his debtor in place of the original debtor. The consideration for the new
contract is the discharge of the old contract. It is essential for the principle of novation to apply that there must
be the mutual or tripartite consent of all the parties concerned.
Ex: A owes money to B under A contract. It is agreed between A, B and C that B shall henceforth accept C as
his debtor, instead of A. The old debt of A to B is at an end, and a new debt from C to B has been contracted.
(b) Rescission (Sec. 62). Rescission of a contract takes place when all or some of the terms of the contract are
cancelled. It may occur by mutual consent of the parties, or where one party fails in the performance his
obligation. In such a case, the other party may rescind the contract without prejudice to right to claim
compensation for the breach of contract.
Ex: A promises to supply certain goods to B six months after date. By that time, the goods go out of fashion. A
and B may rescind the contract.
(c) Alteration (Sec. 62). Alteration of a contract may take place when one or more of the terms of the contract
is/are altered by the mutual consent of the parties to the contract. In such a case, the old contract is discharged.
Ex: A enters into a contract with B for the supply of 100 bales of cotton at his godown No. 1 by the first of the
next month and B may alter the terms of the contract by mutual consent.
(d) Remisson (Sec. 63). Remission means acceptance of a part of the promise made, e.g., acceptance of a
lesser sum than contracted for, in discharge of the whole of the debt. If necessary that there must be some
consideration for the remission of part of the debt. Sec. 63 allows the promisee to dispense with or performance
of the promise by the- promisor, or to extend the performance or to accept any other satisfaction instead of
performance of full promise.
Ex: A owes B Rs. 5,000. A pays to B and B accepts^ satisfaction of the whole debt, Rs. 2,000 paid at the time
and which Rs. 5,000 were payable. The whole debt is discharged.
(e) Merger. Merger takes place when an inferior right accruing party under a contract merges into a superior
right accruing to H party under the same or .some other contract
Ex: P holds a property under a lease. He later buys the property. His rights as a lessee merge into his rights as
an owner.

3. DISCHARGE BY IMPOSSIBILITY OF PERFORMANCE

If an agreement contains an undertaking to perform an impossibility, it is void ab initio. This rule is based on
the following maxims
(1) the law does not recognise impossibilities; and
(2) what is impossible create an obligation.

According to Sec. 56, impossibility of performance may either of the following categories :
1. Impossibility existing at the time of agreement. The first paragraph of Sec. 56 lays down that "an agreement
to do an act impossible in itself is void." This is known as pre-contractual or initial impossibility.
2. Impossibility arising subsequent to the formation of contract. Impossibility which arises subsequent to the
formation of a contract, (which could be performed at the time when the contract was entered into) is called
post-contractual or supervening impossibility.
Discharge by supervening impossibility: A contract is discharged by supervising impossibility in the following
cases :

1. Destruction of subject-matter of contract. When the subject-matter of a contract, subsequent to its formation,
is destroyed without any fault of the parties to the contract, the contract is discharged.
Ex: C let a music hall to T for a series of concerts for certain days. The hall was accidentally burnt down before
the date of the first concert. Held, the contract was void [Taylor v. Caldwett,].

2. Non-existence or non-occurrence of a particular state of things. Sometimes, a contract is entered into between
two parties on the basis of & continued existence or occurrence of a particular state of things. If there is any
change in the state of things which formed the basis of the contract, or if the state of things which ought to have
occurred does not occur, the contract is discharged.
Ex: A and B contract to marry each other. Before the time fixed for the marriage, A goes mad. The contract
becomes void.

3. Death or incapacity for personal service. Where the performance of contract depends on the personal skill or
qualification of a party, the contract is discharged on the illness or Incapacity or death of that party, The man's
life Is an Implied condition of the contract.
Ex: An artist undertook to perform at a concert for certain price. Before she could do so, she was taken seriously
ill. Held, she was discharged due to illness [Robinson v. Dauison,].

4. Change of law or stepping in of a person with statutory authority, When, subsequent to the formation of a
contract, change of law takes place, or the Government takes some power under some Ordinance Special Act, as
for example, the Defence of India Act, so that performance of the contract becomes impossible, the contract
discharged.
Ex: D leased some land to B and agreed to erect building on the adjoining land. The adjoining land, after some
time was acquired under statutory powers by a railway company were to built a railway station on it. Held, D
was excused from performance of the contract [Bafly v. De Campigny,].

5. Outbreak of war. A contract entered into with an alien enemy during war is unlawful and therefore
impossible of performance. Contracts entered into before the outbreak of war are suspended during the war and
may be revived after the war is over.
Ex: A contracts to take in cargo for B at a foreign port. A's Government afterwards declares war against the
country in which the port is situated. The contract becomes void when war is declared.

In the following cases, a contract is not discharged on the ground of supervening impossibility :

1. Difficulty of performance. A contract Js not discharged by the mere fact that it has become more difficult of
performance due to some uncontemplated events or delays. '
Ex: A sold a certain quantity of Finland timber to B to be supplied between July and September. Before any
timber was supplied, war broke out in the month of August and transport to disorganised so that-A could not
bring any timber from Finland^ Held, the difficulty in setting the timber from Finland did not discharge A from
performance [Blackburn Bobbin Co. v. Alien & Sons].

2. Commercial impossibility. A contract is not discharged merely because expectation of higher profits is not
realised, or the necessary raw material Is available at a higher price because of the outbreak of war, or there Is a
sudden depreciation of currency.
Ex: A promised to send certain goods from Bombay to Antwerp In September. Before the goods were sent, war
broke out and there was a sharp increase in shipping rates. Held, the contract was not discharged [Korl
Ettltngerv. Chagandas & Co.,].
3. Impossibility due to failure of a third person. Where a contract not be performed because of the default by a
third person on who’s the promisor relied. It is not discharged.
Ex: A, a wholesaler, entered Into a contract with B for the sale of a certain type of cloth to be produced by C, a
manufacturer of that cloth. C did not manufacture that cloth. Held, A was liable to B or damages.

4. Strikes, lock-outs and dull disturbances. Events such as these do not discharge a contract unless the parties
have specifically agreed in this regard at the time of formation of the contract
Ex: The unloading of a ship was delayed beyond the date agreed with the shipowners owing to a strike of dock
workers. Held, the shipowners were entitled to damages, the impossibility of performance being no excuse.

5. Failure of one of the objects. When a contract is entered into for several objects, the failure of one of them
does not discharge the contract. Ex: B agreed to let out a boat to H for viewing a naval review on the occasion
of the coronation of Edward VII, and to sail round the fleet. Owing to the King's illness the naval review was
abandoned but the fleet was assembled. The boat, therefore, could be used to sail round the fleet. Held, the
contract was not discharged [Heme Bay Steamboat Co. v. Huttori (1903) 2 K.B. 683],

4. DISCHARGE BY LAPSE OF TIME

The Limitation Act, 1963 lays down that a contract should be performed within a specified period, called period
of limitation. If it is not performed, and if no action is taken by the promisee within the period of limitation, he
is deprived of his remedy at law. In other words, we may say that the contract is terminated. For example, the
price of goods sold without any stipulation as |o credit should be paid within three years of the delivery of the
goods. Where goods are sold op credit to be paid for after the expiry of a fixed period of credit, the price should
be paid within three years of the expiry of period of credit. If the price is not paid and creditor does not file a
suit against the buyer for the-recovery of price within three years, the debt becomes time-barred and hence
irrecoverable.

5. DISCHARGE BY OPERATION OF LAW

A contract may be discharged independently of the wishes of the parties, i.e., by operation of law. This includes
discharge-
a. By death.
b. By merger.
c. By Insolvency.
d. By unauthorised alteration of the terms of a written agreement.
e. By rights and liabilities becoming vested in the same person.

6. DISCHARGE BY BREACH OF CONTRACT

Breach of contract means a breaking of the obligation which a contract imposes. It occurs when a party to the
contract without lawful excuse does not fulfil his contractual obligation or by his own act makes it impossible
that he should perform his obligation under it. It confers right of action for damages on the injured party.
Breach of contract may be—
1. Actual breach of contract, or
2. Anticipatory or constructive breach of contract.

1. Actual breach of contract

It may take place
(1) At the time when the performance is due. Actual breach of contract occurs, when at the time when the
performance is due, one party fails or refuses to perform his obligation under the contract.
Ex: A agrees to deliver to B 5 bags of wheat on 1st January. He does not deliver the wheat on, that day. There is
a breach of contract.
(2) During the performance of the contract. Actual breach of contract also occurs when during the performance
of the contract, one party fails or refuses to perform his obligation under the contract.

2. Anticipatory breach of contract: It occurs when a party to an executory contract declares his intention of not
performing the contract before the performance is due. He may do so
(l) By expressly renouncing his obligation under the contract.
Ex: A undertakes to supply certain goods to B on 1st January. Before this date, he informs B that he is not going
to supply the goods. This is anticipatory breach of contract by express repudiation.
(2) By doing some act so that the performance of his promise becomes impossible.
Example. A promised to assign to B, within seven years from the date of his promise, all his interest In a lease
for the sum of £,140. Before the end of seven years he assigned his interest to another person. Held, this was
anticipatory breach of contract by implied repudiation. [Lovelock v. Franklyn]. Sec. 39 gives expression to the
doctrine of anticipatory breach.
Where there is a right, there is a remedy. A contract gives rise to correlative rights and obligations. A right
accruing to a party under a contract would be of no value if there were no remedy to enforce that right in a Law
Court in the event of its infringement or breach of contract. A remedy is the means given by law for the
enforcement of a right.

Remedies for breach of contract:

When a contract is broken, the injured parry (i.e., the party who is not in breach) has one or more of the
following remedies :
1. Rescission of the contract.
2. Suit for damages.
3. Suit upon quantum meruit
4. Suit for specific performance of the contract.
5. Suit for injunction.
1. RESCISSION
When a contract is broken by one party, the other party may sue to treat the contract as rescinded and refuse
further performance. In such a case, he is absolved of all his obligations under the contract.
Ex: A promises B to supply 10 bags of cement on a certain day. B agrees to pay the price after the receipt of the
goods. A does not supply the goods. B is discharged from liability to pay the price.
The Court may grant rescission—
(a] where the contract is voidable by the plaintiff: or
(b) Where the contract is unlawful for causes not apparent on its face and the defendant is more to blame than
the plaintiff.
When a, party treats the contract as rescinded, he makes himself liable to restore any benefits he has received
under the contract to the party from whom such benefits were received (Sec. 64). But if a person rightfully
rescinds a contract he is entitled to compensation for any damage which he has sustained through non-fulfilment
of the contract by the other party (Sec. 75).
2. DAMAGES:
Damages are a monetary compensation allowed to the injured party by the Court for the loss or injury suffered
by him by the breach of a contract. The object of awarding damages for the breach of a contract is to put the
injured party in the same position, so far as money can do it, as if he had not been injured, i.e., in the position in
which he would have been had there been performance and not breach. This is called the doctrine of restitution.
The fundamental basis of awarding damages is compensation for the pecuniary loss which naturally flows from
the breach.
The foundation of modern law of damages, both in India and England, is to be found in the judgment in the case
of Hardley v. Baxendale. Xs mill was stopped by the breakdown of a shaft. He delivered the shaft to Y, a
common carrier, to be taken to a manufacturer to copy it and make a new one. X did not make known to Y that
delay would result in loss of profits. By some neglect on the part of Y the delivery of the shaft was delayed in
transit beyond a reasonable time (so that the mill was idle for a longer period than otherwise would have been
the case had there been no breach of the contract of carriage). Held, Y was not liable for loss of profits during
the period of delay as the circumstances communicated to Y did not show that a delay in the delivery of the
shaft would entail loss of profits to the mill.
Where two parties have made a contract which one of them has broken, the damages which the other party
ought to receive in respect of such breach of contract; should be such as may fairly and reasonably be
considered either arising naturally, i.e.. according to the usual course of things, from such breach of contract
itself, or such as may reasonably be supposed to have been in the contemplation of both the parties at the time
they made the contract, as the probable result of the breach of it."
This statement of law is generally known as the Rule in Hadley v. Baxendale.

Sec. 73 of the Contract Act which deals with compensation for loss or damage caused by breach of contract is
based on the Judgment in the above case. The rules as given In See. 73 are as follows:
When a contract has been broken, the injured party is entitled to—
a. Such damages which naturally arose in the usual course of things from such breach. This relates to
ordinary damages arising in the usual course of things;
b. Such damages which the parties knew, when they made the contract, to be likely to result from the
breach, This relates to special damages. But—
c. Such compensation is not to be given for any remote or indirect loss or damage sustained by reason of
the breach ; and
d. Such compensation for damages arising from breach of a quasi-contract shall be same as in any other
contract.

In estimating the loss or damage arising from a breach of contract, the means which existed of remedying the
inconvenience caused by the non-performance of the contract must be taken into account. The rules relating to
damages may now be considered:

1. Damage arising naturally—ordinary damages

When a contract has been broken, the injured party can recover from the other party such damages as naturally
and directly arose in the usual course of things from the breach. This means that the damages must be the
proximate consequence of the breach of contract. These damages are known as ordinary damages.
Examples, (a) A contracts to sell and deliver 50 quintals of Farm Wheat to B at Rs. 475 per quintal, the price to
be paid at the time of delivery. The price of wheat rises to Rs. 500 per quintal and A refuses to sell the wheat. B
can claim damages at the rate of Rs. 25 per quintal.

2. Damages in contemplation of the parties—special damages

Damages other than those arising from the breach of a contract may be recovered if such damages may
reasonably be supposed to have been given the contemplation of both the parties as the probable result of the
breach of the contract. Such damages, known as special damages, cannot be claimed as a matter of right. These
can be claimed only if the special circumstances which would result in a special loss in case of breach of a
contract, are brought to the notice of the other party.
Examples, (a) S sent some specimens of his goods for exhibition at an agricultural show. After the show he
entrusted some of his samples to an agent of a railway company for carriage to another show ground at New
Castle. On the consignment note he wrote "Must be at New Castle Monday certain". Owing to a default on the
part of the railway company, the samples arrived late for the show. Held, S could claim damages for the loss of
profit at the1 show [Simpson v. London & N.W. RaiL Co.,].

3. Vindictive or exemplary damages

Damages for the breach of a contract are given by way of compensation for loss suffered, and not by way of
punishment for wrong inflicted. Hence, 'vindictive' or 'exemplary damages have no place in the law of contract
because they are punitive (involving punishment) by nature. But in case of (a) breach of a promise to marry, and
(b) dishonour of a cheque by a banker wrongful when he possesses-sufficient funds to the credit of the
customer, the Court may award exemplary damages.

4. Nominal damages
Where the injured party has not in fact suffered any loss by reason of the breach of a contract, the damages
recoverable by him are nominal, i.e., very small for example, a rupee. These damages merely acknowledge the
plaintiff has proved his case and won.
Example. A firm consisting of four partners employed B for a period of two years. After six months two
partners retired, the business being carried on by the other two. B declined to be employed under the continuing
partners. Held, he was only entitled to nominal damages as he had suffered no loss [Bracev. Cafcter].

5. Damages for loss of reputation

Damages for loss of reputation in case of breach of a contract are generally not recoverable. An exception to
this rule exists in the case of a banker who wrongfully refuses to honour a customer's cheque. If the customer
happens to be a tradesman, he can recover damages in respect of any loss to his trade reputation by the breach.
And the rule of law is: the smaller the amount of the cheque dishonoured, the larger the amount of damages
awarded. But if the customer is not a tradesman, he can recover only nominal damages.
6. Damages for inconvenience and discomfort
Damages can be recovered for physical inconvenience and discomfort. The general rule in this connection is
that the measure of damages is not affected by the motive or the manner of the breach.
Examples, (a) A was wrongfully dismissed in a harsh and humiliating manner by G from his employment. Held,
(a) A could recover a sum representing his wages for the period of notice and the commission which he would
have earned during that period ; but he could not recover anything for his injured feelings or for the loss
sustained from the fact that his dismissal made it more difficult for him to-obtain employment [Addis v.
Gramophone Co. Ltd.,].

3. QUANTUM MERUIT
The phrase 'quantum meruit’ literally means 'as much as earned'. As right to sue on a quantum meruit arises
where a contract, partly performed by one party, has become discharged by the breach of the] contract by the
other party. The right is founded not on the original contract which is discharged or is void but on an implied
promise by the other party to pay for what has been done.

4. SPECIFIC PERFORMANCE
In certain cases of breach of a contract, damages are not an adequate remedy. The Court may, in such cases,
direct the party in breach to act out his promise according to the terms of the contract This is a direction by the
Court for specific performance of the contract. Some of the cases in which specific performance of a contract
may be the discretion of the Court, be enforced are as follows :
(a) When the act agreed to be done is such that compensation in itself for its non-performance is not an adequate
relief.
(b) When there exists no standard for ascertaining the actual loss caused by the non-performance of the act
agreed to be done.
(c) When It is probable that the compensation in money cannot be justification for the non-performance of the
act agreed to be done.
Specific performance will not be granted where—
a. damages are an adequate remedy;
b. the contract is not certain, or is inequitable to either party;
c. the contract is in its nature revocable ;
d. the contract is made by trustees in breach of their trust;
e. the contract is of a personal nature, e.g., a contract to marry
f. the contract is made by a company in excess of its powers as laid down in its Memorandum of
Association.

5. INJUNCTION
Where a party is in breach of a negative term of a contract (i.e., where he is doing something which he promised
not to do), the Court may, by issuing an order, restrain him from doing what he promised not to-do. Such an
order of the Court is known as an 'injunction'.
Examples, (a) W agreed to sing at L's theatre, and during a certain period to sing nowhere else. Afterwards W
made contract with Z to sing at another theatre and refused to perform the contract with L. Held, W could be
restrained by injunction from singing for Z [Lurfley v. Wagner, (1852) 5 De G.M. ,& G. 604].
The grant of an injunction by the Court is normally discretionary, but there seems no reason why the Court
should refuse the grant of an injunction to restrain the breach of a contract—
(a) whereby a promisor undertakes not to do something, e.g., not to carry on a certain trade [Nordenfett v.
Maxim Nordenfelt Co. Ltd., (1894) AC. 535]; or
(b) which is negative in substance though not in form. ,
Ex: G agreed to take all the electric energy required by his premises from M. Held, this was in substance an
agreement not to take energy from any other person and it could be enforced by injunction [Metropolitan
Electric Supply Co. v. Cinder, (1901) 2 Ch. 792].

INDEMNITY AND GUARANTEE

The contract of indemnity and guarantee are the special types of contracts. They are species of general contract
accordingly all the provisions of law of contract are equally applicable to them also. Indemnity means
protection against loss, especially in the form of a promise to pay, or payment for loss of money, goods etc.
Basically it is a security against any default or compensation for loss etc. The person who promise to indemnify
is known as indemnifier and the person in whose favor such promise is made is known as indemnified. The
special provision relating to contract of Indemnity and Guarantee are embodied in section 124 to 147 of the Act.

“CONTRACT OF INDEMNITY” DEFINED (Section 124): A contract by which one party promises to save the
other from loss caused to him by the conduct of the promisor himself, or by the conduct of any other person, is
called a “contract of indemnity.”

Illustration: A contracts to indemnify B against the consequences of any proceedings which C may take against
B in respect of a certain sum of 200 rupees. This is a contract of indemnity.

RIGHTS OF INDEMNITY-HOLDER WHEN SUED (Section 125): The promisee in a contract of indemnity,
acting within the scope of his authority, is entitled to recover from the promisor—

(1) all damages which he may be compelled to pay in any suit in respect of any matter to which the promise to
indemnify applies ;

(2) all costs which he may be compelled to pay in any such suit if, in bringing or defending it, he did not
contravene the orders of the promisor, and acted as it would have been prudent for him to act in the absence of
any contract of indemnity, or if the promisor authorized him to bring or defend the suit;

(3) all sums which he may have paid under the terms of any compromise of any such suit, if the compromise
was not contrary to the orders of the promisor, and was one which it would have been prudent for the promisee
to make in the absence of any contract of indemnity, or if the promisor authorised him to compromise the suit.
“CONTRACT OF GUARANTEE” (Section 126)

A “contract of guarantee” is a contract to perform the promise, or discharge the liability, of a third person in
case of his default. The person who gives the guarantee is called the “surety”; the person in respect of whose
default the guarantee is given is called the “principal debtor”, and the person to whom the guarantee is given is
called the “creditor”. A guarantee may be either oral or written.

CONSIDERATION FOR GUARANTEE (Section 127)

Anything done, or any promise made, for the benefit of the principal debtor, may be a sufficient
consideration to the surety for giving the guarantee.

Illustrations
(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 in consideration of A’s promise to
deliver the goods. This is a sufficient consideration for C’s promise.
(b) A sells and delivers goods to B. C afterwards requests A to forbear to sue B for the debt for a year, and
promises that if he does so, C will pay for them in default of payment by B. A agrees to forbear as requested.
This is a sufficient consideration for C’s promise.
(c) A sells and delivers goods to B. C afterwards, without consideration, agrees to pay for them in default of B.
The agreement is void.

SURETY’S LIABILITY (Section 128)

The liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise provided
by the contract.
Illustration: A guarantees to B the payment of a bill of exchange by C, the acceptor. The bill is dishonoured by
C. A is liable not only for the amount of the bill but also for any interest and charges which may have become
due on it.

Distinction between Contract of Indemnity & Contract of Gurantee :

Contract of Indemnity Contract of Guarantee
(i) There are two parties to a contract, indemnifier There are three parties to contract, creditor, principal
and indemnified. debtor and surety.
(ii) The liability of the indemnifier is primary and The liability of the surety is secondary and collateral,
independent. the principal debtor being primarily liable.
(iii) The number of contract is one, between The number of contract is three,(a)between principal
indemnifier and indemnified. debtor and creditor (b)between creditor and surety
(c)between surety and principal debtor.
(iv) The liability of the indemnifier is subject to There is an existing debt the performance of which is
happening of a contingency. guaranteed by the surety.
(v) The indemnifier need not act only at the request The surety should give guarantee only at the request
of the indemnified. of the principal debtor.
(vi) The indemnifier cannot proceed against third After discharging the debt the surety can proceed
parties in his own name unless there is an assignment against the principal debtor in his own name.
in his favour.

DISCHARGE OF A SURETY
1. By revocation which may be by way of –
(i) giving notice (Section 130)
(ii) death of surety (Section 131)
(iii) novation i.e. substitution of with a new contract for an old one.
2. By conduct of creditor –
(i) By Variance in terms of contract (Section 133)
(ii) By release or discharge of principal debtor (Section 134)

Contract of agency
The law of agency is governed by Part X of the Contracts Act 1950. An agent is defined as a person employed
to do any act for another or represent another in dealings with third person. The person for whom such act is
done, or who is so represented, is called the “principal”. In other words, agency is the relationship which
subsists between the principal and the agent, who has been authorized to act for him or represent him in
dealings with others. Thus in agency there are in effect two contracts:-
i. the first made between the principal and the agent from which the agent derives his authority to act for and on
behalf of the principal; and
ii. the second, made between the principal and the third party through the work of the agent.

A. Who can become an agent/principal?

Section 136 CA - Any person who is eighteen years old and above and who is of sound mind may be a
principal. As between the principal and third persons, any person may be come an agent, but persons of
unsound mind and who are below 18 years of age are not liable towards their principal for acts done by them as
agents[2]
eg. if A employs B (a minor) to buy some goods from C on his behalf and C supplies the goods, A cannot allege
that he is not liable to pay for the goods just because B is not at the age of majority. A is still liable to pay C for
the goods.
Creation of Agency
A person who has capacity to contract can enter into contract either by himself or though some other person. If
he adopts the first method there is no question of agency. If he adopts the second method, then there is agency.
The person who represents another in his dealing with third parties is called agent and that person who is so
represented by agent is called principal.
The following are different modes of creation of agency.
 Agency by Express agreement.
 Agency by Operation of law.
 Agency by Ratification.
 Agency by Implied authority.

Agency by Express agreement: Number of agency contract come into force under this method. It may be Oral
or documentary or through power of attorney.

Agency by operation of law: At times contract of agency comes into operation by virtue of law.
For example: According to partnership act, every partner is agent of the firm as well as other parties. It is
implied agency. On account of such implied agency only a partner can bind over firm as well as other partners,
to his activities. In the same way according to companies act promoters are regarded as agents to the company.

Agency by Ratification: Ratification means subsequent adoption of an activity. Soon after ratification principal
– agent relations will come into operation. The person who has done the activity will become agent and the
person who has given ratification will become principal.

Ratification can be express or implied. In case where adoption of activity is made by means of expression, it is
called express ratification. For example: Without A`s direction, B has purchased goods for the sake of A. There
after A has given his support (adoption) to B`s activity, it is called Ratification. Now A is Principal and B is
agent.
The ratification where there is no expression is called implied ratification. For example: Mr. Q has P`s money
with him. Without P`s direction Q has lent that money to R. There after R has paid interest directly to P.
Without any debate P has taken that amount from R. It implies that P has given his support to Q`s activity. It is
implied ratification.

Agency by implied authority: This type of agency comes into force by virtue of relationship between parties
or by conduct of parties.
For example: A and B are brothers, A has got settled in foreign country without any request from A, B has
handed over A`s agricultural land on these basis to a farmer and B is collecting and remitting the amount of rent
to A. Here automatically A becomes principal and B becomes his agent.
Agency by implied authority is of three types as shown below;
 Agency by Necessity
 Agency by Estoppel
 Agency by Holding out.

By Necessity: At times it may become necessary to a person to act as agent to the other. For example: A has
handed over 100 quintals of butter for transportation, to a road transport company. Actually it is bailment
contract, assume that in the transit all vehicles has got stopped where it takes one week for further movement.
So the transport company authorities have sold away the butter in those nearby villages. Here agency by
necessity can be seen.
By Estoppel: In presence of A , B says to C that he (B) is A`s agent though it is not so actually. A has not
restricted B from making such statement. Here agency by Estoppel can be seen
By Holding out: B is A`s servant and A has made B accustomed to bring good on credit from C. On one
occasion A has given amount to B to bring goods from C on cash basis. B has misappropriated that amount and
has brought goods on credit as usually, Here is agency by holding out and therefore A is liable to pay amount to
C.

KINDS OF AGENT:- ‘Agent’ is a person employed to do any act for another or to represent another in dealing
with third person. The person for whom such act is done or who is so represented is called the ‘Principal’. The
agent acts on behalf of the principal depending upon on the authority he has been given. The agent is of
following kinds:-
1. Auctioneers: - Auctioneer is an agent whose business is to sell goods or other property by auction i.e. by
open sale. The authority vested in him is to sell the goods only and not to give warranties on behalf of the seller.
2. Del credere Agent: - Such type of agent who works for extra remuneration. He takes the liability to
guarantee the due performance of the contract. He is responsible for the solvency and performance of their
contracts by the other parties and thus indemnifies employer against loss.
3. Commission Agent: Such type of agent who purchases and sells goods in the market on behalf of his
employer on the best possible terms and who paid commission for the labour of this agent.
4. Factor :- A Factor is an agent who is given the possession of goods for the purpose of selling them. He
entitled to sell the goods in his own name. He has the right to retain the goods for a general balance of accouts.
5. Broker :- Broker is a mercantile agent employed for the purpose of sale and sale of goods. The main duty of
a broker is to establish privity between two parties for a transaction and he gets commission for his labour.
6. Co-Agent: Where several persons are expressly authorised with no stipulation that anyone or more of them
shall be authorised to act in the name of whole body. They have a joint authority and they are called co-agents.
7. Sub-Agent: such type of a person who employed and acting under the control of original agent in the
business of agency.
8. Pacca Artia: He also works on commission basis. He gets the goods from his principal and sells them in the
market.

Termination of Agency: Termination of agency may take place in two ways either by the operation of law or
by the act of parties.
Termination of agency by the operation of law. The following are the situations where the agency is
terminated by the operation of law.
1. Expiry of time: At times contract of agency may get formed for a particular period. In such a case after
expiry of that agreed period, termination of agency takes place.
2. Fulfillment of object: At times the contract of agency may be found for a particular objective or to do a
particular venture. In such a case termination of agency takes place after completion of that venture.
3. Death or lunacy of either party: Whenever principal or agent come across death or lunacy, agency
contract gets terminated.
4. Insolvency of Principal: Principal should have capacity to contract. When principal becomes insolvent,
He foregoes capacity to contract and termination of agency takes place. But the act is silent with regard
to insolvency of agent. As minor also can act as agent, it can be conformed that insolvent person may act
as agent.
5. Destruction of subject matter: When subject matter of contract gets destructed, agency contract comes
to an end.
6. Principal – Alien Enemy: When principal is alien and war breaks out between the countries, then
principal becomes alien enemy and agency contract gets terminated.
7. Liquidation of company: On account of legal entity company may act either as principal or agent.
Whatever the status may be, if company enters into liquidation, termination of agency takes place.

Termination of agency by the act of Parties. The following are the situations where the agency is terminated
by the act of parties.
Termination of agency by the Principal: Principal can terminate the contract of agency by giving notice to
agent. By doing so if agent comes across any suffering. Principal has to compensate the agent.
Termination of agency by the Agent: Agent also can terminate the agency contract by giving notice to
principal but by doing so if principal comes across any suffering, agent has to compensate.
Termination of agency by both the parties to the contract: By means of mutual understanding between
principal and agent, the contract of agency may come to an end.

Rights and Duties of Agents

Rights of Agents.
 Right of Retainer: Agent has right to deduct the amount which is due to him by principal, from amount
payable to principal.
 Right of stoppage in transit: In case where agent is personally liable, he has right to stop the goods in
transit. The good may be moving towards customer or principal.
 Right to claim Remuneration: As per the terms of agency contract, agent has rights to claim
remuneration.
 Right of Indemnity: Principle of indemnity gets operated between principal and agent where principal is
implied indemnifier and agent is implied indemnity holder. So agent can make principal answerable for
all types of sufferings.
 Right of lien: Agent can exercise right of lien but contract act has not specified whether it is general lien
or particular lien. Therefore the nature of agent’s lien depends upon mutual understanding.

Duties of Agents
 Agent should follow the instructions given by the principal.
  If agent comes across any complicated situation, he has to communicate that situation to principal and
his advice is to be obtained.
 Agent should behave in his capacity as agent, he should not run the transaction in his own name.
 Agent should not make secret profits by utilizing reputation of the principal.
 Agent should safe guard property of principal particularly upon happening of events like death of
principal, insolvency of principal, etc.
 Agent should maintain proper accounting records to enrol the transactions run by him. Agent has to
remit amounts to principal properly.
 Agent has to remit amounts to principal properly.
 Agent should not carry on delegation.

BAILMENT

The word 'bailment' is derived from the French word 'ballier’ which means 'to deliver' – which means
any kind of 'handing over'. In legal sense, it involves change of possession of goods from one person to another
for some specific purpose.

Sec. 148 defines 'bailment' as the delivery of goods by one person to another for some purpose, upon a
contract, that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to
the directions of the person delivering them.

The person delivering the goods is called the 'bailor'.

The person to whom they are delivered is called the 'bailee'.

Ex: (a) A delivers a piece of cloth to B, a tailor, to be stitched into a suit. There is a contract of bailment
between A and B.

(b) A lends a book to B to be returned after the exams. There is a contract of bailment between A& B.

(c) A sells certain goods to B who leaves them in the possession of A. The relationship between B and A is that
of bailor and bailee.

Sometimes there may be bailment even without a contract. For example, when a person finds goods
belonging to another, a relationship of bailee and bailor is automatically created between the finder and the
owner.

Ex: E"s ornaments having been stolen and recovered by the police disappeared from police custody. Held, the
State was liable, the contract of bailment having been implied [Basavva K.D. Patil v. State of Mysore,].

Essentials of bailment:

1. Contract. A bailment is usually created by agreement between the bailor and the bailee. The agreement may
be express or implied. In certain exceptional cases, bailment is implied by law as between a finder of goods and
the owner.

2. Delivery of possession. A bailment necessarily involves delivery of possession of goods by bailor to bailee.
The basic features of possession are control and an intention to exclude others. As such, mere custody of goods
does not create relationship of bailor and bailee. A servant who receives certain goods from his master to take
to a third party has custody of the goods; possession remains with the master and the he does not become a
bailee.

Ex: A lady employed a goldsmith for melting her old jewellery and making new one out of it. Every evening
she received the unfinished jewellery and put it into a box kept at the goldsmith premises. She kept the key of
that box with herself. One night the jewellery was stolen from the box. Held, there was no bailment as the
goldsmith had re-delivered to the lady (the bailor) the jewellery bailed with him by her. [Kaliperumal v.
Visalakasmi].

Delivery of possession may be actual or constructive.

Actual delivery may be made by physically handing over the goods bailed to the bailee.
Constructive or symbolic delivery may be made by doing something which has the effect of putting the goods in
the possession of the intended bailee or any person authorised to hold them on his behalf. Ex: The delivery of a
railway re amounts to delivery of the goods.

3. For some purpose. The delivery of goods from bailor to bailee must be for some purpose. If goods are
delivered by mistake to a person, there is no bailment.

4. Return of specific goods. It is agreed between the bailor am bailee that as soon the purpose Is achieved, the
goods shall be return disposed of according to the directions of the bailor. If the goods ar to be specifically
returned, there is no bailment. But there is a bail even if the goods bailed are, in the meantime, altered in form,
e.g., a piece of cloth is stitched into a suit.

5. Bailment is concerned only with goods. Goods, as defined In Sec. of the Sale Goods Act, 1930, mean every
kind of movable property other than money and actionable claims. Moreover, in a contract of bailment it is only
possession that passes from the bailor to the bailee not ownership. Thus if the property in goods is transferred
for money consideration, it is a sale and not a bailment.

Other examples of bailment:

(a) A hire-purchase contract not merely a contract of bailment. It has two aspects: a bailment plus an element of
sale.
(b) Seizure of goods by custom authorities, who after seizure are in the position of a bailee
(c) Acceptance of goods by a transport company or railway carriage
(d) Acceptance of articles by Post-Office as Value Payable Parcel.

CLASSIFICATION OF BAILMENTS

Bailments may be classified according to the benefit derived by the parties. Thus a bailment may be—

(1) For the exclusive benefit of the bailor, as the delivery of some valuables to a neighbour for safe custody,
without charge.

(2) For the exclusive benefit of the bailee, as the lending of a bicycle to a friend for his use, without charge.

(3) For the mutual benefit of the bailor and the bailee, as the hiring of a bicycle or giving of a watch for repair.
In these cases, consideration passes between the bailor and the bailee.

Bailments may also be classified into:

(1) Gratuitous bailment. It is a bailment where no consideration passes between the bailor and the bailee, e.g.,
where A lends a book to his friend B.

(2) Non-gratuitous bailment or bailment for reward. It is a bailment where consideration passes between the
bailor and the bailee, e.g., where certain goods are kept in a godown for hire, or where A hires a bicycle from B.

DUTIES AND RIGHTS OF BAILOR AND BAILEE

Duties of bailor

1. To disclose known faults: It is the first and foremost duty of the bailor to disclose the known faults about the
goods bailed to the bailee. If he does not make such disclosure, he is responsible for any damage caused to the
bailee directly from such faults (Sec. 150, para 1).

Ex: A lends a horse, which he knows to be vicious, to B. He does not disclose that the horse is vicious. The
horse runs away and B is thrown arid injured. A is responsible to B for damage sustained. In case the goods are
bailed for hire, the duty of the bailor is still greater. He is responsible even for those faults which are not known
to him (Sec. 150, para 2).

Ex: (a) A hires a motor launch from B for holiday on the river Thames. The launch caught fire and A was
unable to extinguish it as the fire-fighting equipment was out of order. As such he was injured and suffered loss.
Held, B was liable [Read v. Dean].

2. To bear extraordinary expenses of bailment: The bailee is bound to bear ordinary and reasonable expenses
of the bailment but for any extraordinary expenses the bailor is responsible.

Example, A lends his horse to B, a friend for two days. The feeding charges are to be paid by B. But if the horse
meets with an accident, A will have to repay B medical expense, incurred by B.

3. To indemnify bailee for loss in case of premature termination of gratuitous bailment: A gratuitous
bailment can be terminated by the bailor at any time even though the bailment was for a specified time or
purpose. But in such a case, the loss accruing to the bailee from such premature termination should not exceed
the benefit he has derived out of the bailment. If the loss exceeds the benefit, the bailor shall have to indemnify
the bailee (Sec. 159).

Ex: A lends an old discarded bicycle to B gratuitously for three months. B incurs Rs. 120 on its repairs. If A
asks for the return of the bicycle after one month, he will have to compensate B for expenses incurred by B in
excess of the benefit derived by him.

4. To receive back the goods: It is the duty of the bailor to receive back the goods when the bailee returns them
after the expiry of the term of the bailment or when the purpose for which bailment was created has been
accomplished. If the bailor refuses to receive back the goods, the bailee is entitled to receive compensation from
the bailor for the necessary expenses of custody.

5. To indemnify the bailee. Where the title of the bailor to the goods is defective and the bailee suffers as a
consequence, the bailor is responsible to the bailee for any loss which the bailee may sustain by reason that the
bailor was not entitled to make bailment, or to receive back the goods, or to give directions respecting them
(Sec. 164).

Duties of bailee
1. To take reasonable care of the goods bailed. In all cases of bailment the bailee is bound to take as much care
of the goods bailed to him as a man of ordinary prudence would, under similar circumstances, take of his own
goods of the same bulk, quality and value as the goods bailed (Sec. 151). The onus of proof is on the bailee to
show that there has been no negligence, when he fails to return the goods or returns them in a damaged
condition, and that the loss or damage occurred in spite of the fact that he took reasonable care of them. If, in
spite of the bailee's reasonable care, goods are damaged or destroyed in any way, the bailee is not liable for the
loss, destruction or deterioration of the thing bailed (Sec. 152).

Ex: A entered a restaurant for dining. His coat was taken by a waiter who hung it on a hook behind A. When A
rose to leave, the coat was gone. Held, the proprietor of the restaurant was liable for the loss [Ultzen v. Nicols].

2. Not to make any unauthorised use of goods. If the bailee uses the goods balled in a manner which is
inconsistent with the terms of the contract, he shall be liable for any loss even though he is not guilty of
negligence, and even if the damage is the result of an accident (Sec. 154).

Ex: (a) A lends a horse to B for his riding only. B allows C, a member of his family to ride the rose. C rides
with care, but the horse accidentally falls and is injured. B is liable to make compensation to A for the injury
caused to the horse.

3. Not to mix the goods bailed with his own goods. The bailee must not mix the goods of the bailor with his
own goods, but must keep them separate from his own goods. If he mixes the bailor's goods with his own goods
-

(a) With the bailor's consent, both shall have a proportionate interest in the mixture; thus produced (Sec.
155);
(b) Without the bailor's consent, and if the goods can be separated/divided, the bailee is bound to bear
the expenses of separation/division, as well as damage arising from the mixture (Sec. 156);

Ex: A bails 100 bales of cotton marked with a particular mark to B. B without A's consent, mixes the 100 bales
with other bales of his own, bearing a different mark. A is entitled to have his 100 bales returned and B is bound
to bear all the expenses incurred in the separation of the bales, and any other incidental charges.

(c) Without the bailor's consent, so that the mixture is beyond separation, the bailor is entitled to be
compensated by the bailee for the loss of-the goods (Sec. 157).

Ex: A bails a bag of Farm wheat worth Rs. 550 to B. B, without A's consent, mixes the wheat with imported
wheat of his own, worth only Rs. 250 a bag. B must compensate A for the loss of his wheat if the goods of the
bailor get mixed up with the like goods of the bailee, by inadvertence of the bailee or accident or by an act of
God or by the act of an unauthorised third party, the mixture belongs to the bailor and the bailee in proportion to
their shares but the cost of separation will have to be borne by the bailee.

4. Not to set up an adverse title (Sec. 117 of the Indian Evidence Act, 1872). The bailee must hold the goods
on behalf of and for the bailor. He cannot deny the right of the bailor to bail the goods and receive them back. If
he delivers the goods bailed to a person other than the bailor, he may prove that such person had a right to them
as against the bailor.

5. To return any accretion to the goods. In the absence of any contract to the contrary, the bailee is bound to
deliver to the bailor, or according to his directions, any increase or profit which may have accrued from the
goods bailed (Sec. 163).

Ex: A leaves a cow in the custody of B to be taken care of. The cow has a calf. B is bound to deliver the calf as
well as the cow to A.
6. To return the goods. It is the duty of the bailee to return or deliver, according to the bailor's directions, the
goods bailed, without demand, as soon as the time for which they were bailed has expired, or the purpose for
which they were bailed has been accomplished (Sec. 160). If he fails to do so, he is responsible to the bailor for
any loss (Sec. 161) notwithstanding the exercise of reasonable care on his part.

Ex: A delivered some books to B to be bound. He pressed for their return, but B neglected to return them
although more than a reasonable time had elapsed. A fire accidentally broke out on B's premises, and the books
were burnt. Held, B was liable for the loss, although he was not negligent, because of his failure to deliver the
books within a reasonable time [Shaw & Co. v. Symmons & Sons].

Rights of bailor:

1. Enforcement of rights. The bailor can enforce by suit all the liabilities or duties of tjfie bailee, as his rights.

2. Avoidance of contract. The bailor can terminate the bailment if the bailee does, with regard to the goods
bailed, any act which is inconsistent with the terms of the bailment (Sec. 153).

Ex: A lets a horse to B for his own riding only. B uses the horse with a carriage. A can terminate the bailment.

3. Return of goods lent gratuitously. When the goods are lent gratuitously, the bailor can demand their return
whenever he pleases even though he lent them for a specified time or purpose. But if the bailee suffers any loss
exceeding the benefit actually derived by him from the use of such goods because of premature return of goods,
the bailor shall have to indemnify the bailee (Sec. 159).

4. Compensation from a wrong-doer. If a third person wrongfully deprives the bailee of the use or possession
of the goods bailed, or does them any injury, the bailor or the bailee may bring a suit against the third person for
such deprivation or injury (Sec. 180).

Rights of bailee

The duties of the bailor are the rights of the bailee. As such, the bailee can, by suit, enforce the duties of the
bailor. The other rights of the bailee are as follows:

1. Delivery of goods to one of several joint bailors of goods: If several joint owners of goods bail them, the
bailee may deliver them back to, or according to the directions of one joint owner without the consent of all in
the absence of any agreement to the contrary (Sec. 165).

2. Delivery of goods to bailor without title. If the bailor has no title to the goods, and the bailee in good faith,
delivers them back to, or according to the directions of, the bailor, the bailee is not responsible to the owner in
respect of such delivery (Sec. 166).

3. Right to apply to Court to stop delivery. If a person, other than the bailor, claims goods bailed, the bailee may
apply to the Court to stop the delivery of the goods to the bailor, and to decide the title to the goods (Sec. 167).

4. Right of action against trespassers. If a third person wrongfully deprives the bailee of the use or possession
of the goods bailed to him, he has the right to bring an action against that parry. The bailor can also bring a suit
in respect of the goods bailed (Sec. 180).

5. Bailee's lien. Where the lawful charges of the bailee in respect of the goods bailed are not paid, he may retain
the goods. This right of the bailee to retain the goods is known as 'particular lien'.
'Lien' means the right of a person to retain possession of some goods belonging to another until some debt or
claim of the person in possession is satisfied. It appertains to the person who has possession of the goods which
belong to another, entitling him to retain them until the debt due to him has been paid. Possession is essential
for exercising the right of lien, and in order to create a lien the possession must be (a) rightful, (b) not for a
particular purpose, and (c) continuous.

Ex: A company agreed to garage the motor-car of H for three years, for an annual charge. H was entitled to take
the car out of the company's garage as and. when she liked. The annual payment being an arrear the company
detained the car at the garage and claimed a lien. Held, as H was entitled to take the car away as and when she
pleased, the company had no lien [Hatton v. Car Maintenance Co.Ltd.].
A lien may be

1. Particular lien. A particular lien is one which is available to the bailee against only those goods in respect of
which he has rendered some service involving the exercise of labour or skill.

Ex: A gives a piece of cloth to B, a tailor, to make into a coat. B promises A to deliver the coat as soon as it is
finished. B is entitled to retain the coat till he is paid for.

Sec. 170 explains 'particular lien' as follows: "Where the bailee has, in accordance with the purpose of the
bailment, rendered, any service involving the exercise of labour or skill in respect of the goods balled, he has
the absence of a contract to the contrary, a right to retain such goods until he receives due remuneration for the
services he has rendered in respect of them."

2. General lien. A general lien is a right to retain all the goods or any property (which is in possession of the
holder) of another until all the claims of the holder are satisfied. This is a right to retain the property of another
for a general balance of account. For example, if two securities are given to a banker but a loan is taken only
against one of the securities, the banker may retain both the securities until his claim is satisfied.

General lien, according to Sec. 171, is available to bankers, factors, wharfingers (those who have the care of, or
own, a structure built especially along the shore, for loading or unloading vessels), attorneys of High Court and
policy brokers. These persons are entitled, in the absence of a contract to the contrary, to retain possession of
the goods bailed to them as security until their claims are fully satisfied.

Rights of bailor and bailee against wrong-doer

1. Suit against wrong-doer: Sometimes a third person may wrongfully deprive the bailee of the use or
possession of the goods bailed or may cause injury to the goods. In such a case, the bailee may use such
remedies as the owner might have used and either the bailor or the bailee may bring a suit against the third
person for such deprivation or injury (Sec. 180).

2. Apportionment of relief. Whatever is obtained by way of relief or compensation in any such suit in the above
case shall, as between the bailor and the bailee, be dealt with according to their respective interests (Sec. 181).

FINDER OF GOODS

A person who comes by an article is not obliged to pick it up or take charge of it. But if he does pick it
up, he becomes a bailee. Sec. 71 clearly lays down that "a person, who finds goods belonging to another and
takes them into his custody Is subject to the same responsibility as a bailee."

Rights of finder of goods

1. Right of lien. The finder of goods has a right of lien over the goods for his expenses. As such he can retain
the goods against the owner until he receives compensation for trouble and expense incurred in preserving the
goods and finding out the owner.
But he has no right to sue the owner for any such compensation as the trouble and expense were incurred by
him voluntarily (Sec. 168).

2. Right to sue for reward. The finder can sue for any specific reward which the owner has offered for the return
of the goods. He may also retain the goods until he receives the reward (Sec. 168).

3. Right of sale. A finder of goods may sell the goods found—

(a) If the owner cannot with reasonable diligence be found, or
(b) If found, he refuses to pay the lawful charges of the finder, or
(c) If the goods are in the danger of perishing or of losing the greater part of their value, or
(d) If the lawful charges of the finder, in respect of the goods found, amount to two-thirds of their value (Sec.
169).

Obligations of finder of goods

1. He must take reasonable care of the goods and if, in spite of this, the goods are destroyed, he is not
responsible for any loss.
2. He must not use the goods for his own purpose.
3. He must not mix the goods with his own goods.
4. He must try to find out the owner of the goods. If he does not do that, he will be liable as a trespasser (one
who interfere with another's property).

TERMINATION OF BAILMENT

A contract of bailment is terminated in the following cases :

1. On the expiry of the period. When the bailment is for a specific period, it terminates on the expiry of that
period.

2. On the achievement of the object. When the bailment is for a specific purpose, it terminates as soon as the
purpose is achieved.

3. Inconsistent use of goods. When the bailee uses the goods in a manner inconsistent with the terms of the
contract, the bailment terminates (Sec. 154).

4. Destruction of the subject-matter. A bailment is terminated when the subject-matter of the bailment (a) is
destroyed, or (b) by reason of a change in its nature becomes incapable of use for the purpose of the bailment.

5. Gratuitous bailment. It can be terminated any time subject to condition laid down in Sec. 159.

6. Death of the bailor or bailee. A gratuitous bailment is terminated by the death either of the bailor or of the
bailee (Sec. 162).

PLEDGE

The bailment of goods as security for payment of a debt or performance of a promise is called 'pledge'. The
bailor is, in this case, called the 'pledger’ or 'pawnor’ and the bailee is called the 'pledgee' or 'pawnee’ (Sec.
172).
A pledge is a bailment for security. It is a special kind of bailment. If A borrows Rs. 200 from B and keeps his
watch as security for payment of the debt, the bailment of watch is a pledge. Any kind of movable property, i.e.,
goods, documents, or valuables may be pledged. Even a Savings Bank pass Book may be pledged. But delivery
is necessary to complete a pledge. The delivery may be actual or constructive. If, because of the bulk of the
property or for some other reason, actual delivery is impracticable, a symbolic delivery will suffice (example
delivery of the keys to a safe deposit box).

Ex: The producer of a film borrowed a sum of money from a financier-distributor and agreed to deliver the final
prints of the film when ready. Held, the agreement was not a pledge, there being no actual transfer of possession
[Revenue Authority v. Sudarshan Pictures].

Difference between pledge and bailment

1. Pledge is the bailment of goods as a security for the performance of a specific promise, i.e., the payment of a
debt/performance of a promise. Bailment, on the other hand, is for a purpose of any kind.

2. In case of default by the pawnor to repay the debt, the pawnee may after giving notice to the pawnor sell the
goods pledged with him. The bailee may either retain the goods or sue for his charges.

3. In case of pledge, the pawnee has no right to use the goods pledged with him. In case of bailment, the bailee
may do so if the terms of bailment so provide.

RIGHTS AND DUTIES OF PAWNOR AND PAWNEE

The rights and duties of pawnor and pawnee are almost similar to those of bailor and bailee. But the rights of
the pawnee and pawnor need a special mention.

Rights of pawnee

1. Right of retainer. The pawnee may retain the goods pledged until his dues are paid. He may retain them not
only for the payment of the debt or the performance of the promise, but for
(a) The interest due on the debt, and
(b) all necessary expenses incurred by him in respect of the possession or for the preservation of the goods
pledged (Sec. 173). He can however exercise only a particular lien over the goods.

2. Right of retainer for subsequent advances. When the pawnee lends money to the same pawnor after the date
of the pledge. It is presumed that the right of retainer over the pledged goods extends to subsequent advances
also. This presumption can be rebutted only by a contract to the contrary (Sec. 174).

3. Right to extraordinary expenses. The pawnee is entitled to receive from the pawnor extraordinary expenses
Incurred by him for the preservation of the goods pledged (Sec. 175). For such expenses, he has no right to
retain the goods; he can only sue to recover them.

4. Right against true owner, when the pawnor's title is defective. When the pawnor has obtained possession of
the goods pledged by him under a voidable contract (i.e., by fraud, undue influence, coercion, etc.) but the
contract has not been rescinded at the time of the pledge, the pawnee acquires a good title to the goods,
provided he acts in good faith and without notice of the pawnor's defect of title (Sec. 178-A).

5. Pawnee's rights where pawnor makes default (Sec. 176). Where the pawnor fails to redeem his pledge, the
pawnee can exercise the following rights:
(1) He may file a suit against the pawnor upon the debt or promise and may retain the goods pledged as a
collateral security.

(2) He may sell the goods pledged after giving the pawnor a reasonable notice of the sale.

(3) He can recover from the pawnor any deficiency arising on the sale of the goods by him. But he shall have to
hand over the surplus, if any, realised on the sale of the goods to the pawner.

Rights of pawnor

1. Right to get back goods. On the performance of promise or repayment of loan and interest, if any, the pawnor
is entitled to get back the goods pledged.

2. Right to redeem debt. Quite often a time is stipulated for the payment of the debt, or performance of the
promise, for which the pledge is made. In such a case if the pawnor makes default in payment of the debt or
performance of the promise at the stipulated time, he may still redeem the goods pledged at any subsequent time
before the actual sale of them but he must, in that case, pay, in addition, any expenses which have arisen from
his default (Sec. 177).

3. Preservation and maintenance of the goods. The pawnor has a right to see that the pawnee, like bailee,
preserves the goods pledged and properly maintains them.

4. Rights of an ordinary debtor. The pawnor has, in addition to the above rights, the rights of an ordinary
debtor which are conferred on him by various Statutes meant for the protection of debtors.

PLEDGE BY NON-OWNERS

The general rule is that it is the owner who can ordinarily create a valid pledge. But in the following cases even
a non-owner can create a valid pledge:

1. Pledge by mercantile agent: Where a mercantile agent is, with the consent of the owner, in possession of
goods or the documents of title to goods, any pledge made by him, when acting in the ordinary course of
business of a mercantile agent, is as valid as if he were expressly authorised by the owner of the goods to make
the same. But the pledge is valid only if the pawnee acts in good faith and has not at the time of the pledge
notice that the pawnor has not the authority to pledge (Sec. 178).

2. Pledge by seller or buyer in possession after sale. A seller left in possession of goods after sale and a buyer
who obtains possession of goods with the consent of the seller before sale, can create a valid pledge provided
the pawnee acts in good faith and has no notice of the previous sale of goods to the buyer or of the lien of the
seller over the goods (Sec. 30, of the Sale of Goods Act, 1930).

3. Pledge where pawnor has a limited interest. Where a person pledges goods in which he has only a limited
interest, the pledge is valid to the extent of that interest (Sec. 179). A person having a lien over the goods or a
finder of goods may pledge thennto the extent of his interest.

4. Pledge by co-owner in possession. One of the several co-owners of goods in possession thereof with the
assent of the other co-owners may create a valid pledge of the goods.

5. Pledge by person in possession under a voidable contract. Where a person obtains possession of goods
under a voidable contract, the pledge created by him is valid provided
(1) The contract has not been rescinded before the contract of pledge, and
(2) The pawnee acts in good faith and without notice of the pawnor's defect of title (Sec. 178-A).
Module III: Indian Sale of Goods Act, 1930
Sale and Agreement to Sell, Hire Purchase – Pledge – Mortgage –Hypothecation Lease. Goods – Different
types of Goods, Passing of Property in Goods, Conditions and Warranties, Doctrine of Caveat emptor, Rights
of an unpaid Seller.

Sale of Goods Act 1930

Till 1930,transactions relating to sale and purchase of goods were regulated by the Indian Contract Act,1872.In
1930,Sections 76 to 123 of the Indian Contract Act, 1872 were repealed and a separate Act called ‘The Indian
Sale of Goods Act,1930 was passed. It came into force on 1st July,1930.With effect from 22nd
September,1963,the word ‘Indian’ was also removed. Now, the present Act is called ’The sales of goods
act,1930’. This Act extends to the whole of India except the State of Jammu and Kashmir.

Scope of the Act: The sale of Goods Act deals with ‘Sale of Goods Act,1930,’contract of sale of goods is a
contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price.”
‘Contract of sale’ is a generic term which includes both a sale as well as an agreement to sell.

Essential elements of Contract of sale

1. Seller and buyer: There must be a seller as well as a buyer. ’Buyer’ means a person who buys or agrees to
buy goods. ’Seller’ means a person who sells or agrees to sell goods.

2. Goods: There must be some goods. ’Goods’ means every kind of movable property other than actionable
claims and money 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.

3. Transfer of property: Property means the general property in goods, and not merely a special property.
General property in goods means ownership of the goods. Special property in goods means possession of goods.
Thus, there must be either a transfer of ownership of goods or an agreement to transfer the ownership of goods.
The ownership may transfer either immediately on completion of sale or sometime in future in agreement to
sell.

4. Price: There must be a price. Price here means the money consideration for a sale of goods.When the
consideration is only goods, it amounts to a ‘barter’ and not sale. When there is no consideration, it amounts to
gift and not sale.

5. Essential elements of a valid contract: In addition to the aforesaid specific essential elements,all the essential
elements of a valid contract as specified under Section 10 of Indian Contract Act,1872 must also be present
since a contract of sale is a special type of a contract.

Difference Between Sale and Agreement to sell

‘Contract of Sale‘ is a type of contract whereby one party (seller) either transfers the ownership of goods or
agrees to transfer it for money to the other party (buyer). A contract of sale can be a sale or an agreement to sell.
In a contract of sale, when there is an actual sale of goods, it is known as Sale whereas if there is an intention to
sell the goods at a certain time in future or some conditions are satisfied, it is called an Agreement to sell.

Both sale and agreement to sell are types of contract, wherein the former is an executed contract whereas the
latter represents an executory contract.

The following are the major differences between sale and agreement to sell:
 1. When the vendor sells goods to the customer for a price, and the transfer of goods from the vendor to the
customer takes place at the same time, then it is known as Sale. When the seller agrees to sell the goods
to the buyer at a future specified date or after the necessary conditions are fulfilled then it is known as
Agreement to sell.
2. The nature of sale is absolute while an agreement to sell is conditional.
3. A contract of sale is an example of Executed Contract whereas the Agreement to Sell is an example of
Executory Contract.
4. Risk and rewards are transferred with the transfer of goods to the buyer in Sale. On the other hand, risk
and rewards are not transferred as the goods are still in possession of the seller.
5. If the goods are lost or damaged subsequently, then in the case of sale it is the liability of the buyer, but
if we talk about an agreement to sell, it is the liability of the seller.
6. Tax is imposed at the time of sale, not at the time of agreement to sell.
7. In the case of a sale, the right to sell the goods is in the hands of the buyer. Conversely, in agreement to
sell, the seller has the right to sell the goods.

Meaning and types of goods

 Goods means every kind of movable property other than actionable claims and money,and includes the
following:

 Stock and share

 Growing crops, grass and thing attached to or forming part of the land which are agreed to be served
before sale or under the Contract of sale.

Types of Goods

1. Existing Goods: Existing goods mean the goods which are either owned or possessed by the seller at
the time of contract of sale. The existing goods may be specific or ascertained or unascertained as
follows:

a) Specific Goods: These are the goods which are identified and agreed upon at the time when a contract of sale
is made. For example, specified TV, Car, Ring.

b) Ascertained Goods: Goods are said to be ascertained when out of a mass of unascertained goods, the
quantity extracted for is identified and set aside for a given contract. Thus, when part of the goods lying in bulk
are identified and earmarked for sale, such goods are termed as ascertained goods.
c) Unascertained Goods: These are the goods which are not identified and agreed upon at the time when a
contract of sale is made e.g. goods in stock or lying in lots.

2. Future Goods: Future goods mean goods to be manufactured or produced or acquired by the seller after the
making of the contract of sale. There can be an agreement to sell only. There can be no sale in respect of future
goods because one cannot sell what he does not possess.

3. Contingent Goods: These are the goods the acquisition of which by the seller depends upon a contingency
which may or may not happen.

Price Of Goods: Price means the money consideration for a sale of goods.

Modes of determining Price: There are three modes of determining the price as under:
 It may be fixed by the contract or
 It may be left to be fixed in an agreed manner
 It may be determined by the course of dealing between the parties.
Thus,the price need not necessarily be fixed at the time of sale.

Conditions and Warranties

It is usual for both seller and buyer to make representations to each other at the time of entering into a contract
of sale. Some of these representations are mere opinions which do not form a part of contract of sale. Whereas
some of them may become a part of contract of sale. Representations which become a part of contract of sale
are termed as stipulations which may rank as condition and warranty e.g. a mere commendation of his goods by
the seller doesn’t become a stipulation and gives no right of action to the buyer against the seller as such
representations are mere opinion on the part of the seller. But where the seller assumes to assert a fact of which
the buyer is ignorant, it will amount to a stipulation forming an essential part of the contract of sale.

Meaning of Conditions: A condition is a stipulation

 Which is essential to the main purpose of the contract
 The breach of which gives the aggrieved party a right to terminate the contract.

Meaning of Warranty: A warranty is a stipulation

 Which is collateral to the main purpose of the contract

 The breach of which gives the aggrieved party a right to claim damages but not a right to reject goods
and to terminate the contract.

In the following three cases a breach of a condition is treated as a breach of a warranty:

 Where the buyer waives a conditions; once the buyer waives a conditions, he cannot insist on its
fulfillment e.g. accepting defective goods or beyond the stipulated time amount to waiving a conditions.
 Where the buyer elects to treat breach of the condition as a breach of warranty; e.g. where he claims
damages instead of repudiating the contract.
 Where the contract is not severable and the buyer has accepted the goods or part thereof, the breach of
any condition by the seller can only be treated as breach of warranty. It cannot be treated as a ground for
rejecting the goods unless otherwise specified in the contract. Thus, where the buyer after purchasing the
goods finds that some condition is not fulfilled, he cannot reject the goods. He has to retain the goods
entitling him to claim damages.
Express and Implied Conditions and Warranties: In a contract of sale of goods, conditions and warranties
may be express or implied.

Express Conditions and Warranties: These are expressly provided in the contract. For example, a buyer
desires to buy a Sony TV Model No. 2020.Here model no. is an express condition. In an advertisement for
Khaitan fans, warranty for 5 years is an express warranty.

Implied Conditions and Warranties: These are implied by law in every contract of sale of goods unless a
contrary intention appears from the terms of the contract. The various implied conditions and warranties have
been shown below:

Implied Conditions

1. Conditions as to title: There is an implied condition on the part of the seller that, In the case of a sale, he has
a right to sell the goods and In the case of an agreement to sell, he will have a right to sell the goods at the time
when the property is to pass.
2. Condition in case of 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 main idea is that the goods supplied
must be same as were described by the seller. Sale of goods by description include many situations as under:

 Where the buyer has never seen the goods and buys them only on the basis of description given by the
seller.
 Where the buyer has seen the goods but he buys them only on the basis of description given by the
seller.
 Where the method pf packing has been described.

3. Condition in case of sale by sample: A contract of sale is a contract for sale by sample when there is a term
in the contract, express or implied to that effect. Such sale by sample is subject to the following three
conditions:

 The goods must correspond with the sample in quality.

 The buyer must have a reasonable opportunity of comparing the bulk with the sample.
 The goods must be free from any defect which renders them unmerchantable and which would not be
apparent on reasonable examination of the sample. Such defects are called latent defects and are
discovered when the goods are put to use.

4. Condition in case of sale by description and sample: If the sale is by sample as well as by description, the
goods must correspond with the sample as well as the description.

5. Condition as to quality or fitness: There is no implied condition as to the quality or fitness for any
particular purpose of goods supplied under a contract of sale. In other words, the buyer must satisfy himself
about the quality as well as the suitability of the goods.

Exception to this rule: There is an implied condition that the goods shall be reasonably fit for a particular
purpose described if the following three conditions are satisfied:
 The particular for which goods are required must have been disclosed (expressly or impliedly) by the
buyer to the seller.
 The buyer must have relied upon the seller’s skill or judgement.
 The seller’s business must be to sell such goods.
6. Condition as to merchantable quality: Where the goods are bought by description from a seller who deals
in goods of that description, there is an implied condition that the goods shall be of merchantable quality. The
expression ‘merchantable quality’ means that the quality and condition of the goods must be such that a man of
ordinary prudence would accept them as the goods of that description. Goods must be free from any latent or
hidden defects.

7. Condition as to wholesomeness: In case of eatables or provisions or foodstuffs, there is an implied condition

as to wholesomeness. Condition as to wholesomeness means that the goods shall be fit for human consumption.

Implied warranties

a) Warranty as to quiet possession: There is an implied warranty that the buyer shall have and enjoy
quiet possession of the goods. The reach of this warranty gives buyer a right to claim damages from the
seller.
b) Warranty of freedom from encumbrances: There is an implied warranty that the goods are free from
any charge or encumbrance in favour of any third person if the buyer is not aware of such charge or
encumbrance. The breach of this warranty gives buyer a right to claim damages from the seller.
 Warranty as to quality or fitness for a particular purpose annexed by usage of trade
 Warranty to disclose dangerous nature of goods

Transfer of property in goods: Passing of property implies transfer of ownership and not the physical
possession of goods. For example, where a principal sends goods to his agent, he merely transfers the physical
possession and not the ownership of goods. Here, the principal is the owner of the goods but is not having
possession of goods and the agent is having possession of goods but us not the owner.

Significance of Transfer of Property: The time of transfer of ownership of goods decides various rights and
liabilities of the seller and the buyer. Thus, it becomes very important to know the exact time of transfer of
ownership of goods from seller to buyer to address the following:

 It is the owner who has to bear the risk and not the person who merely has the possession.

 It is the owner who can take action and not the person who merely has the possession.

 The seller can sue for the price only if the ownership of goods has been transferred to the buyer.

 In case of insolvency of a buyer, The Official Receiver or Assignee can take the possession of of
goods from seller only if the ownership of goods has been transferred to the buyer.

 In case of insolvency of a seller, The official receiver or assignee can take the possession of goods
from buyer only if the ownership of goods has not been transferred to the buyer.

Rules relating to Passing of Property/Transfer of Ownership from seller to buyer: For the purposes of
ascertaining the time at which the ownership is transferred from seller to the buyer, the goods have been
classified into the following three categories:

a) Specific or ascertained goods: Specific goods mean goods identified and agreed upon at the time when a
contract of sale is made.
b) Unascertained goods
c) Goods sent ‘on approval’ or ‘on sale on return’ basis.
Delivery (Sections 33-39) Delivery is the voluntary transfer of possession from one person to another. Delivery
may be actual, constructive or symbolic. Actual or physical delivery takes place where the goods are handed
over by the seller to the buyer or his agent authorized to take possession of the goods.

Constructive delivery takes place when the person in possession of the goods acknowledges that he holds the
goods on behalf of and at the disposal of the buyer. For example, where the seller, after having sold the goods,
may hold them as bailee for the buyer, there is constructive delivery.
Symbolic delivery is made by indicating or giving a symbol. Here the goods themselves are not delivered, but
the “means of obtaining possession” of goods is delivered, e.g, by delivering the key of the warehouse where
the goods are stored, bill of lading which will entitle the holder to receive the goods on the arrival of the ship.

Unpaid seller and his rights: 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(such as cheque) has been received as conditional
payment, and it has been dishonored.
 The term ‘seller’ includes any person who is in the position of a seller(for instance, an agent of the seller
to whom the bill of lading has been endorsed, or a consignor or agent who has himself paid, or is
directly responsible for the price).

Rights against the goods: where the property in the goods has passed to the buyer

a) Right of Lien: The right of lien means the right to retain the possession of the goods until the full price is
received. Three circumstance under which right of lien can be exercised.
 Where the goods have been sold without any stipulation to credit;
 Where the goods have been sold on credit, but the term of credit has expired;
 Where the buyer becomes insolvent.
 Other provisions regarding right of lien
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 agreement to waive the lien. The
seller may exercise his right of lien even though he has obtained a decree for the price of the goods.

b) Right of Stoppage of Goods in Transit: The right of stoppage of goods means the right of stopping the
goods while they are in transit to regain possession and to retain them till the full price is paid.

Conditions under which right of stoppage in transit can be exercised: The unpaid seller can exercise the right of
stoppage in transit only if the following conditions are fulfilled:

 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.

c) Right of Resale: An unpaid seller can resell the goods under the following three circumstance:

 Where the goods are of a perishable nature.

 Where the seller expressly reserves a right of resale if the buyer commits a default in making payment.
 Where the unpaid seller who has exercised his right of lien or stoppage in transit gives a notice to the
buyer about his intention to resell an dbuyer does not pay or tender within a reasonable time.

Rights against the goods where the property in the goods has not passed to the buyer

1. Right of withholding delivery: Where the property in the goods has not been passed to the buyer, the
unpaid seller, cannot exercise right of lien, but get a right of withholding the delivery of goods, similar
to and co-extensive with lien and stoppage in transit where the property has passed to the buyer.

2. Rights of Unpaid Seller against the Buyer Personally: The unpaid seller, in addition to his rights
against the goods as discussed, has the following three rights of action against the buyer personally:

a. Suit for price. 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.

b. Suit for damages for non-acceptance. Where the buyer wrongfully neglects or refuses to accept and pay for
the goods, the seller may sue him for damages for non-acceptance. The seller’s remedy in this case is a suit for
damages rather than an action for the full price of the goods.

c. Suit for Interest: In case of breach of the contract on the part of seller, the buyer may sue the seller for
interest from the date on which the payment was made.

1. Hire-Purchase Agreement: A hire purchase agreement is one under which a person takes delivery of goods
promising to pay the price by a certain number of installments and, until full payment is made, to pay hire
charges for using the goods. It is in fact bailment for hire with an option to the hirer to buy the goods in his
possession on making the full payment. Until the full payment is made the agreement remains a contract of hire
and the hirer can return the goods to the owner and the owner can get them back, as the ownership of the goods
remains with him. When the hirer pays full price he buys the goods. The essence of hire purchase agreement is
that there is no purchase or agreement to purchase, but only an option is given to the hirer to buy so that when
he has paid the full price it becomes a sale and he becomes the owner.

2. Pledge is used when the lender (pledgee) takes actual possession of assets (i.e. certificates, goods ). Such
securities or goods are movable securities. In this case the pledgee retains the possession of the goods until the
pledgor (i.e. borrower) repays the entire debt amount. In case there is default by the borrower, the pledgee has
a right to sell the goods in his possession and adjust its proceeds towards the amount due (i.e. principal and
interest amount). Some examples of pledge are Gold /Jewellery Loans, Advance against goods,/stock,
Advances against National Saving Certificates etc.

3. Hypothecation is used for creating charge against the security of movable assets, but here the possession of
the security remains with the borrower itself. Thus, in case of default by the borrower, the lender (i.e. to whom
the goods / security has been hypothecated) will have to first take possession of the security and then sell the
same. The best example of this type of arrangement are Car Loans. In this case Car / Vehicle remains with
the borrower but the same is hypothecated to the bank / financer. In case the borrower, defaults, banks take
possession of the vehicle after giving notice and then sell the same and credit the proceeds to the loan account.
Other examples of these hypothecation are loans against stock and debtors. [Sometimes, borrowers cheat the
banker by partly selling goods hypothecated to bank and not keeping the desired amount of stock of goods. In
such cases, if bank feels that borrower is trying to cheat, then it can convert hypothecation to pledge i.e. it takes
over possession of the goods and keeps the same under lock and key of the bank].

4. Mortgage : is used for creating charge against immovable property which includes land, buildings or
anything that is attached to the earth or permanently fastened to anything attached to the earth (However, it does
not include growing crops or grass as they can be easily detached from the earth). The best example when
mortage is created is when someone takes a Housing Loan / Home Loan. In this case house is mortgaged in
favour of the bank / financer but remains in possession of the borrower, which he uses for himself or even may
give on rent.
In a sale, on the other hand, the property passes to the buyer immediately on making the contract even if the
payment of the price is to be made by instalments. The transaction of hire-purchase protects the owner against
the insolvency of the buyer, for if the buyer becomes insolvent or fails to pay the instalments, the seller has the
right to take the goods as owner and treat all the money already received as hire-charges. Again, until the full
price is paid and the agreement remains that of hire, no title will pass even to an innocent and bonafide parties.

Sale and Bailment: Bailment is the delivery of goods from one person to another upon a condition that he shall
return the goods to the bailor when his purpose is accomplished. Bailment may be with or without
consideration. Sale is delivery of goods in return of monetary payment and there is no provision of return of
those goods.

In a sale, the buyer becomes the absolute owner of goods but in bailment, the question of transfer of ownership
does not arise at all.
Module IV: Negotiable Instruments Act, 1881
Meaning of Negotiability and Definition of Negotiable Instruments, Features, Cheques, Bill of Exchange
and Promissory Note, Holder in Due Course, Crossing of Cheques, Endorsement and Dishonour of Cheques

Negotiable Instruments: There are certain documents which are freely used in commercial transactions and
monetary dealings. These documents, if they satisfy certain conditions, are known as "negotiable instruments".
The word "negotiable" means "transferable from one person to another in return for consideration" and
"instrument" means a "written document by which a right is created in favour of some person."

Thus, a negotiable instrument is a document which entitles a person to a sum of money and which is
transferable from one person to another by mere delivery or by indorsement and delivery. The law relating to
negotiable instruments is contained in the Negotiable Instruments Act, 1881, which deals with promissory
notes, bills of exchange and cheques, as also hundis (a bill of exchange in a vernacular language). It is based,
except where conditions in India require a departure, mainly upon the English Law as to negotiable instruments
and judicial decisions.

The Act extends to the whole of India. It does not affect any local usage relating to any instrument in a
vernacular language. The local usages may however be excluded by any words in the body of the instrument
(Sec. l). The Act came into force on first day of March, 1882. The latest amendment to the Act was made in
1988.

The Reserve Bank of India Act, 1934

The Negotiable Instruments Act does not affect the provisions of Sees. 31&32 of the R.B.I Act, 1934. The
object of Sec. 31 is to prevent private persons from infringing the monopoly of the Government in note
issue(paper currency) in India. The provisions of Sec. 31 are as follows:

1. No person (other than the Reserve Bank or the Central Government) can draw, accept, make, or issue any bill
of exchange, hundi, or promissory note payable to bearer on demand.
2. No person (other than the Reserve Bank or the Central Government) can make or issue any promissory note
payable to the bearer of the instrument. This renders the words 'or to bearer' in the definition of a 'promissory
note' in Sec. 4 of the Negotiable Instruments Act inoperative. But a bill or a note, on being indorsed in blank,
can become payable to bearer on demand. A cheque is also payable to bearer on demand. These are exceptions
to the rules as contained in Sec. 31. Sec. 32 of the R.B.I Act provides that if anybody issues a bill or note
payable to bearer on demand, or a note payable to bearer, he shall be punishable with fine.

DEFINITION OF NEGOTIABLE INSTRUMENT: A negotiable instrument is a method of transferring a

debt from one Person to another. The term 'negotiable instrument' as such is not defined in the Negotiable
Instruments Act. Sec. 13, however, says that: 'a negotiable instrument means a promissory note, bill of
exchange or cheque payable either to order or to bearer." The definition, as it is, says that a negotiable
instrument 'means' and not 'means and includes'. Therefore, any other instrument which satisfies the conditions
of negotiability can be added to the list of negotiable instruments. Justice Willis defines a negotiable' instrument
as "one the property in which is acquired by anyone who takes it bona fide and for value notwithstanding any
defect of title in the person from whom he took it." According to Thomas, a negotiable instrument is one which
is, by a legally recognised custom of trade or by law,

(a) Transferable by delivery or by indorsement and delivery.

(b) Without notice to the party liable, in such a way that the holder of it for the time being-may sue upon it in
his own name, and
(c) The property in it passes to a bona fide transferee for value free from equities and free from any defect in the
title of the person from whom he obtained it.

This means that a person taking an instrument

(1) bona fide, and
(2) For value, known as a holder in due course, gets a good title even though the title of the transferor may be
defective.

A rough and ready test of negotiability" in case of bearer instruments is: Can a good title be required through a
thief? If yes, the, instrument is negotiable. Negotiable instruments are a special class of contracts.

Characteristics of a negotiable instrument

1. Freely transferable. The property in a negotiable instrument passes from one person to another by delivery,
if the instrument is payable to bearer, and by indorsement and delivery if it is payable to bearer.

2. Title of holder free from all defects. A person taking an instrument bona fide and for value, known as a
holder in due course, gets the instrument free from all defects in the title of the transferor. He is not in any way
affected by any defect in the title of the transferor or of any prior party. Ex: S sells certain goods to B. B gives a
promissory note to S for the price. He refuses to pay the promissory note, claiming that the goods are not
according to order. If S sues B on the note, B's defence is good. But if he negotiates the note to H, a holder in
due course, B's defence will be of no avail. The holder in due course is also not affected by certain defences
which might be available against previous holders, for example, fraud, provided he himself is not a party to it.

3. Recovery. The holder in due course can sue upon a negotiable instrument in his own name for the recovery
of the amount. Further he need not give notice of transfer to the party liable on the instrument to pay.

4. Presumptions. Certain presumptions apply to all negotiable instruments unless contrary is proved. These
presumptions are dealt with in Secs. 118 and 119 and are as follows:

(a) Consideration: Every negotiable instrument is presumed to have been made, dawn, accepted, indorsed,
negotiated or transferred, for consideration. This would help a holder to get a decree from a court without any
difficulty.
(b) Date. Every negotiable instrument bearing a date is presumed to have been made or drawn on such date.
(c) Time of acceptance. When a bill of exchange has been accepted it presumed that it was accepted within a
reasonable time of its date and before its maturity.
(d) Time of transfer. Every transfer of a negotiable instrument is presumed to have been made before its
maturity.
(e) Order of indorsements. The indorsements appearing upon a negotiable instrument are presumed to have
been made in the order in which they appear thereon.
(f) Stamp. When an instrument has been lost, it is presumed that it was duly stamped.
(g) Holder presumed to be a holder in due course. Every holder of negotiable instrument is presumed to be a
holder in due course.
(h) Proof of protest. In a suit upon an instrument which has been dishonored, the Court, on proof of the protest,
presumes the fact dishonor, until such fact is disproved.

The above presumptions are rebuttable by evidence. If anyone challenges any of these presumptions, he has to
prove his allegation. Again, these presumptions would not arise where an instrument has been obtained by any
offence, fraud or unlawful consideration.

TYPES OF NEGOTIABLE INSTRUMENTS

Negotiable instruments may be:
o Negotiable by Statute, or
o Negotiable by custom or usage.

1. Instruments negotiable by Statute. The Negotiable Instruments Ac mentions only three kinds of negotiable
instruments. These are promissory notes, bill of exchange and cheques. These instruments are negotiable by
Statute.
2. Instruments negotiable by custom or usage. There are certain other instruments which have acquired the
character of negotiability by the usage or custom of trade. In India, Government promissory notes, banker's
drafts and pay orders, hundis, delivery orders and railway receipts for goods, have been held to be negotiable by
usage or custom.

CLASSIFICATION OF NEGOTIABLE INSTRUMENTS

Bearer instruments: A negotiable instrument is payable to bearer—,
(1) When it is expressed to be so payable, or
(2) When the only or last indorsement on the instrument is indorsement in blank. [Explanation (ii) to Sec. 13]
Any person who is in lawful possession of an instrument payable to bearer, as a holder, is entitled to enforce
payment due on it. He when he receives money is required to acknowledge receipt of money the instrument by
signing on it. A promissory note and a bill of exchange cannot be made payable to bearer on demand. A
promissory note cannot be payable to bearer due restrictions imposed by the Reserve Bank of India Act, 1934.

Order instruments. A negotiable instrument is payable to order—

(1) When it is expressed to be payable to order, e.g., 'Pay to order' or 'Pay to the order of A. In both these cases,
the bill is payable to A or his order at his option.
(2) When it is expressed to be payable to a particular person, and does not contain words prohibiting or
restricting its transfer, e.g ., 'Pay A one hundred rupees.' [Expl:(i) to Sec. 13]

Inland and foreign instruments: Inland instruments: A promissory note, bill of exchange or cheque which is

(1) both drawn or made in India and made payable in India, or

(2) drawn upon any person resident in India, is deemed to be an inland instrument.

Foreign instruments. An instrument, which is not an inland instrument, is deemed to be a foreign instrument
(Sec. 12). Foreign bills must be protested for dishonour if such protest is required by the law of the place where
they are drawn. But protest in case of inland bills is optional.

Instruments payable on demand: A cheque is always payable on demand and it cannot be expressed to be
payable otherwise than on demand. A promissory note or bill of exchange is payable on demand—
(a) when no time for payment is specified in it ; or
(b) when it is expressed to be payable 'on demand', or 'at sight' or 'on presentment'. The words 'on demand' are
usually in a promissory note, the words 'at sight' are in a bill of exchange.

Time instruments: A bill or note which is payable

(a) After a fixed period, or
(b) After sight, or
(c) On a specified day, or
(d) On the happening of an event which is certain to happen, is known as a time instrument.

Accommodation bill: A bill may be—

(1) a genuine trade bill, or
(2) an accommodation bill.
When a bill is drawn, accepted, or indorsed for consideration, called a 'genuine trade bill'. When it is drawn,
accepted or indorsed without any consideration, it is called an 'accommodation bill'.
Ex: A is in need of Rs. 1,000. He approaches his friend for borrowing the amount. B is not in a position to lend,
but suggests that A might draw a bill on him which he would accept the credit of A is good, he would get the
bill discounted by banker. On the due date, A would pay Rs. 1,000 to B who meets the bill. This bill is an
accommodation bill.

Documentary bill and clean bill: When documents of title to the goods and other documents invoice, marine
insurance policy, etc., are annexed to a bill, the called a documentary bill. Such documents are delivered to the
only on acceptance or payment of the bill. When no documents to the goods represented by the bill are attached
to it, it is called a clean bill

Escrow: When a negotiable instrument is delivered conditionally or for a special purpose as a collateral security
or for safe custody only, and not for the purpose of transferring absolutely properly therein, it is called ah
escrow. As between immediate parties, when an instrument is delivered conditionally, there is no liability to pay
unless the conditions agreed upon are fulfilled. The liability to pay in case of an escrow does not arise if the
conditions agreed upon are not fulfilled, or the purpose for which the instrument was delivered is not satisfied.
This, however, does not affect the rights of a holder in due course and the defence that the instrument was
delivered conditionally as between immediate parties cannot be set up against a holder in due course (Sec. 46,
para 3).
Example. A, the holder of a bill, indorses it to ‘B or order’ for the express purpose that B may get it discounted.
B negotiates the bill to C who takes it bonafide and for value. C is a holder in due course, and he acquires a
good title to the bill.

PROMISSORY NOTE: A 'promissory note' is an instrument in writing (not being a bank note or a currency
note) containing an unconditional undertaking, signed by the maker, to pay a certain sum of money only to, or
to order of, a certain person, or to the bearer of the instrument (Sec. 4).

The person who makes the promissory note and promises to pay is, called the maker.
The person to whom the payment is to be made is called the payee.

Ex: A signs an instrument in the following terms:

(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. 500."
(d) "I promise to pay B Rs. 500 and all other sums which shall be due to him."
Of these only (a) and (b) are promissory notes.
The specimen of a promissory note is given below:

Rs. 1,000 City, dt/mm/yy

Three months after date I promise to pay Mr. X or order the sum of one thousand rupees, for value received.

To,
Mr. X
Adress,
City - PIN
Essential elements: For an instrument to become a promissory note, it must have the following essential
elements:

1. Writing. The instrument must be in writing. Mere verbal engagement to pay is not enough. Writing includes
print and typewriting and may also be in pencil or ink.

2. Promise to pay. The instrument must contain an express promise to pay. A mere acknowledgment of
indebtedness or implied undertaking by the use of the word 'debt' or 'pronote', is not sufficient and it does not
constitute a promissory note.

The following instruments signed by A are not promissory notes:

(a) "Mr. B, I.O.U. Rs. 100" or "Mr. B, I owe you Rs. 100".
(b) "I am liable to B. in a sum of Rs. 500 to be paid by instalments."

3. Definite and unconditional: The promise to pay must be definite and unconditional. If it is uncertain or
conditional, the instrument invalid. Thus the following instruments signed by A are not promissory notes:

(a) "I promise to pay B a sum of Rs. 500, when convenient or able".
(b) "I promise to pay B Rs. 500 by instalments with a proviso that payment shall be made after my death." "I
promise to pay B Rs. 500 when he delivers the goods." "I promise to pay B Rs. 500 on D's death, provided D
leaves enough to pay that sum." [Robert v. Peake, (1757) 97 E.R 333).

4. Signed by the maker. The instrument must be signed by the maker, otherwise it is incomplete and of no
effect. Even if it is written by the maker himself and his name appears in the body of the instrument, his
signature must be there. Signature means the writing of a person's name in order to authenticate and give effect
to the contract contained in the instrument. It is at the same time, essential that the mind of the signer must
accompany the signature.

5. Certain parties. The instrument must point out with certainty as to who the maker is and who the payee, is.
Where the maker and the payee cannot be identified with certainty from the instrument itself, the instrument,
even if it contains an unconditional promise to pay, is not a promissory note.

The payee may sometimes be misnamed or designated by description only. In such a case, the note is valid if
the payee can be ascertained by evidence. As such a promissory note payable to the manager of a certain bank is
payable to a certain person.

A promissory note cannot be made payable to the maker (promisor) himself. Such a note is a nullity. But if it is
indorsed by the maker to some other person or indorsed in blank, it becomes a valid promissory note.

6. Certain sum of money. The sum payable must be certain and must not be capable of contingent additions or
subtractions. The following instruments signed by A are not promissory notes (as the sum payable is not
certain):

The sum payable is certain—

(1) When it is payable with interest. But if the rate of interest is not stated in the instrument, it is not a
promissory note.
(2) When it is payable at an indicated rate of exchange.
(3) When it is payable by instalments, with a provision that on default being made in payment, the balance
unpaid shall become due (Sec. 5, para 3).
7. Promise to pay money only: The payment to be made under the instrument must be in the legal tender
money of India. If the instrument contains a promise to pay something other than money or something in
addition to money, it cannot be a promissory note.

Thus the following instruments signed by A are not promissory notes:

"I promise to pay B Rs. 200 and deliver one quintal of paddy."
"I promise to pay B in 20 shares and 10 bonds of XV Ltd."
"I promise to deliver to B 100 bag of wheat"

8. Bank note or currency note is not a promissory note. This is because a bank note or a currency note is
money itself.

9. Formalities like number, date, place, consideration, etc. These are usually found in an instrument although
they are not essential in law. The omission of the words 'for value received', the place where the instrument is
made or where it is payable or date (if the date of execution of the instrument can be independently proved do
not invalidate the instrument. The date of a promissory note is also not necessary unless the amount is payable
at a certain time after date. But it must bear the necessary stamp under the Indian Stamp Act, 1899.

10. It may be payable on demand or after a definite period of time. The expression on demand means
payable immediately or forthwith.

11. It cannot be made payable to bearer on demand. The Reserve Bank of India Act, 1934 prohibits issue of
such promissory notes except by the Reserve Bank of India itself or the Central Government.

BILL OF EXCHANGE: A bill of exchange is an instrument in writing containing an unconditional order,

sighed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a
certain person or to the bearer of the instrument (Sec. 5). Parties to a bill: There are three parties to a bill of
exchange, viz.. the drawer, the drawee and the payee.

 The person who gives the order to pay or who makes the bill is called the drawer.
 The person who is directed to pay is called the drawee.
 When the drawee accepts the bill, he is called the acceptor.
 The person to whom the payment is to be made is called the payee.

Where the payee named in a bill is a fictitious or non-existing person, the bill is treated as payable to bearer. In
some cases, the drawer and the payee, or when a principal draws on his agent, the drawer and the drawee may
be one and the same person. The drawer or the payee who is in possession of the bill is called the holder. The
holder must present the bill to the drawee for his acceptance.

When the holder indorses the bill, note or cheque, he is called the indorser. The person to whom the bill, note or
cheque is indorsed is called the indorsee. When in the bill or in any indorsement thereon the name of any person
is given in addition to the drawee to be referred to in case of need, such person is called a drawee in case of
need (Sec. 7, para 2). The name of the drawee in case of need may be given in the bill by the drawer at the time
when it is drawn or by some subsequent indorser. The resort is to be had to the 'drawee in case of need' only
when the bill is dishonoured non-acceptance or non-payment.

Specimen of a bill of exchange

Sham of Delhi buys goods on credit from Krishan of Bombay for 500 to be paid 3 months after date. Krishan
buys goods from Ram of Delhi for Rs. 500 on similar terms. Now Krishan may order Sham to pay the sum of
Rs. 500 to Ram. This order will be a bill of exchange.
 Rs. 500 Mumbai, Jan. 10, 2000

Three months after date pay to Ram or order the sum of five hundred rupees, for value
received.

To,
Sham
235, Subhash Marg,
Delhi-110006.

In case of need with Accepted Sd/-

Canara Bank, Delhi Sham Stamp

Essential elements

1. It must be in writing.
2. It must contain an order to pay.
Ex: "Mr. X, Please let the bearer have Rs. 1000 and oblige." Signed by A. This is not a bill of exchange as it
contains a request and not an order.
3. The order must be unconditional.
4. It requires three parties, i.e., the drawer, the drawee and the payee.
5. The parties must be certain.
6. It must be signed by the drawer.
7. The sum payable must be certain .
8. It must contain an order to pay money.
9. The formalities relating to number, date, place and consideration, though usually found in bills, are not
essential in law. But a bill must be affixed with the necessary stamp.

Distinction between a bill of exchange and a promissory note

1. In a note there are two parties—the maker and the payee. In a bill there are three parties—the drawer, the
drawee, and the payee.
2. A note contains an unconditional promise to pay. A bill contains an unconditional order to pay.
3. The maker of a note is the debtor and he himself undertakes to Pay. The drawer of a bill is the creditor who
directs the drawee (his debtor) to pay.
4. The maker of a note corresponds in general to the acceptor of a bill. But the maker of the note cannot
undertake to pay conditionally whereas the acceptor may accept the bill conditionally because he is not the
originator of the bill.
5. The liability of the maker of a note is primary and absolute, whereas the liability of the drawer of a bill is
secondary and conditional.
6. A note cannot be made payable to the maker himself, whereas in a bill the drawer and the payee may be one
and the same person.
7. A note requires no acceptance as it is signed by the person who is liable to pay. A bill payable after sight or
after a certain period must be accepted by the drawee before it is presented for payment.
8. A note cannot be drawn payable to bearer. A bill can be so drawn. But in no case can a note or bill be drawn
'payable to bearer on demand.
9. The maker of a note stands in immediate relation with the payee. The drawer of a bill stands in immediate
relation with the acceptor and not the payee.
10. Certain provisions like (a) presentment for acceptance (Sec. 61),
(b) acceptance (Sec. 75),
(c) acceptance for honour (Sec. 108), and
(d) bill in sets (Sec. 132) apply to bills but not to notes.
11. In case of dishonour of a bill either by non-acceptance or by nonpayment, due notice of dishonour must be
given to all the persons who are to be made liable to pay. This includes the drawer and the prior indorsers. But
in the case of dishonour of a note no such notice is required to be given to the maker (Sec. 93).
12. Foreign bills must be protested for dishonour when such protest is required by the law of the place where
they are drawn (Sec. 104). No such protest is required in the case of a note.

CHEQUE: A cheque is a bill of exchange drawn upon a specified banker and payable on demand and it
includes the electronic image of a truncated cheque and a cheque in the electronic form. A cheque in the
electronic form means "cheque which contains the exact mirror image of a proper cheque, and is generated,
written and signed in a secure system ensuring the minimum safety standards with the use of digital signature
and asymmetric crypto system.

A truncated cheque means a cheque which is truncated during the, course of a clearing cycle, either by the
clearing house or by the bank whether paying or receiving payment, immediately on generation of an electronic
image for transmission, substituting the further physical' movement of the cheque in writing. "Clearing house"
means the clearing house managed by the Reserve Bank of India or a clearing house recognised as such by the
Reserve Bank of India [Sec. 6 as substituted by the Negotiable Instruments (Amendment and Miscellaneous
Provisions) Act, 2002]. A cheque is a species of a bill of exchange two additional qualifications, viz., but it has
the following-

(1) It is always drawn on a specified banker, and

(2) It is always payable on demand.

All cheques are bills of exchange, but all bills of exchange are not cheques. A cheque must have all the essential
requisites of a bill exchange. It must be signed by the drawer. It must contain unconditional order on a
specified banker to pay a certain sum of money to or to the order of a specified person or the bearer of the
cheque. It does not require acceptance as it is intended for immediate payment.

The usual form of bank cheque is as follows:

No...... Date ………..2000

PUNJAB NATIONAL BANK

Subzi Mandi,
Delhi-110007

Pay………………………………or bearer the sum of Rs.

………………………………….
Rs. ……………………………….. Sd/-

Distinction between a bill of exchange and a cheque:

1. A bill of exchange may be drawn on any person, including a banker, but a cheque is always drawn on a
banker. Thus all bills are not cheques whereas all cheques are necessarily bills.
2. A bill must be accepted before the drawee can be called upon to make payment upon it. A cheque requires no
acceptance.
3. A bill which is not expressed to be payable on demand is entitled to three days of grace. A cheque is not
entitled to any days of grace.
4. A bill may be payable on demand or after the expiry of a certain period after date or sight. A cheque is
always payable on demand.
5. A bill must be duly presented for payment to the acceptor or else the drawer of the bill will be discharged
from liability. The drawer of a cheque is not necessarily discharged from his liability by delay of the holder in
presenting it for payment. He is discharged only to the extent of the damage, if any, suffered by him.
6. A cheque may be crossed but not a bill.
7. A cheque does not require any stamp whereas a bill, except in certain cases, must be stamped.
8. The payment of a cheque may be countermanded by the drawer but the payment of a bill cannot be
countermanded.
9. A cheque is not required to be noted or protested for dishonour. A bill may be noted or protested for
dishonour.

Marking of cheques
A cheque does not require acceptance in ordinary course of business as it is intended for immediate payment.
The custom among bankers to mark cheques as 'good for payment' does not amount to an acceptance. Marking
is the writing on a cheque by the drawee banker that it would be honoured when it is duly presented for
payment. The effect of marking a cheque as good by the drawee banker is that it cannot be countermanded by
the drawer subsequently and the payee is certain of getting the money. In India, no such practice of marking of
cheques has been established either by judicial decisions or by Statutes.

Cheques may be marked as good by the drawee banker at the instance of

 the drawer, or
 the holder, or
 the collecting banker.

(1) Marking at drawer's instance. When a cheque is marked good at the instance of the drawer, the drawee
banker earmarks sufficient funds in the account to meet the cheque when it will be presented for payment. The
drawer cannot afterwards countermand payment of such cheque' The banker is entitled to dishonour other
cheques if their encashment would leave the banker with insufficient funds to meet the cheque marked good.

(2) Marking at holder's instance. When a cheque is marked good at the holder's instance, it is intimation to the
holder that at the time of marking, the banker has sufficient funds of the drawer in his hands. The banker may
refuse to honour the cheque when it is subsequently presented for payment if in due course the drawer has
withdrawn funds or stopped payment of the cheque.

(3) Marking at collecting banker's instance. Where a cheque is received by a collecting banker too late for
inclusion in the clearing, he may, to safeguard the interest of the customer, present such cheque for marking by
the drawee banker. When a cheque is marked at the collecting banker's instance, the marking is treated as
'constructive payment' because the banking custom is that such cheque shall be honoured when it is presented
through the next clearing.

Crossing of cheques: There are two types of cheques, open cheques and crossed cheques. A cheque which is
payable in cash across the counter of a bank is called, an open cheque. When such a cheque is in circulation, a
great risk, attends it, If its holder loses it, its finder may go to the bank and get payment unless its payment has
already been stopped. It was to prevent the losses incurred by open cheques getting into the hands of wrong
persons that the custom of crossing was introduced.

A crossed cheque is one on which two parallel transverse lines with or without the words '& Co.' are drawn. The
payment of such a cheque can be obtained only through a banker. Thus crossing is a direction to the drawee
banker to pay the amount of money on a crossed cheque generally to a banker or a particular banker so that the
party who obtains the payment of the cheque can be easily traced. The crossing compels the holder to present
the cheque through a "quarter of known respectability and credit" and affords security and protection to the:
owner of the cheque, as the cheque is payable only through a banker.
Types of crossing. There are two types of crossing, viz.,

(1) general crossing, and

(2) special crossing.

Another type of crossing known as 'restrictive crossing' has developed out of business usage.

1. General crossing. A cheque is said to be crossed generally where it bears across its face an addition of—
(i) the words 'and company' or any abbreviation thereof, between two parallel transverse lines, either with or
without the words 'not negotiable' ; or
(ii) two parallel transverse lines simply, either with or without the words 'not negotiable'

2. Special crossing. Where a cheque bears across its face an addition of the name of a banker, either with or
without the words 'not negotiable', the cheque is deemed to be crossed specially (Sec. 124). Transverse lines are
not necessary in case of a special crossing. The payment of a specially crossed cheque can be obtained only
through the particular banker whose name appears across the face of the cheque or between the transverse lines,
if any.

3. Restrictive crossing. In addition to the two statutory types of crossing discussed above, there is another type
which has been adopted by commercial and banking usage. In this type of crossing the words 'A/c Payee' are
added to the general or special crossing.

The words 'A/c Payee' on a cheque are a direction to the collecting banker that the amount collected on the
cheque is to be credited to the account of the payee. If he credits the proceeds to a different account, he is prima
facie guilty of negligence and will be liable to the true owner for the amount of the cheque. It should however
be noted that 'A/c Payee' cheques are negotiable.

Not negotiable crossing (Sec. 130). The effect of the words 'not negotiable' on a crossed cheque is that the title
of the transferee of such a cheque cannot be better than that of its transferor. The addition of the words 'not
negotiable' does not restrict the further transferability of the cheque. It only takes away the main feature of
negotiability, which is that a holder with a defective title can give a good title to a subsequent holder in due
course. Anyone who takes a cheque marked 'not negotiable' takes it at his own risk.

The object of crossing a cheque 'not negotiable' is to afford protection to the drawer or holder of the cheque
against miscarriage or dishonesty in the course of transit by making it difficult to get the cheque so crossed
cashed, until it reaches its destination.

Ex: W drew a cheque crossed 'not negotiable' in blank and, handed it to his clerk to fill in the amount and the
name of the payee. The clerk inserted a sum in excess of her authority and delivered the cheque to P in payment
of a debt of her own. Held, the clerk had no title to the cheque and as such had no better title, and therefore was
not liable [Wilson & Meeson v. Pikering]

Who may cross a checque (Sec. 126).

A cheque may be crossed by- ;

(1) The drawer. He may cross the cheque generally or specially.
(2) The holder. Where the cheque is uncrossed, the holder may cross it generally or specially. Where it is
crossed generally, he may cross it specially. Where it is crossed generally or specially, he may add the; words
'Not Negotiable'.
(3) The banker. Where a cheque is crossed specially, the banker to whom it is crossed may again cross it
specially to another banker agent for collection.
Dishonor of cheques: Section 92 of the Negotiable Instruments Act states that –
“A promissory note, bill of exchange or cheque is said to be dishonored by non-payment when the maker of the
note and acceptor of the bill makes default in payment.”

Dishonour of cheque is an offence: Section 138 of the Negotiable Instruments Act states that, A banker shall
return the cheque when the money standing to the credit of the account holder is insufficient to honour the
cheque.
Dishonour of cheque is a criminal offence. The drawer shall be deemed to have committed an offence and
such offence will be punishable with imprisonment and with fine. (Imprisonment shall be extend 1 years or fine
twice the amount of the cheque or both).

Provisions of section 138 of the Act are applicable only if –

(a) The cheque is issued for discharge of a liability only. A cheque given as gift will not fall in this category.
(b) The cheque is presented to the bank for payment within 6 months or its specific validity period, whichever is
earlier.
(c)The payee or holder in due course has given notice demanding payment within 30 days of the receiving
information of dishonour as regarding the insufficiency of funds.
(d) The drawer does not make payment within 30 days of the receipt of the notice. The complaint can be made
only by the payee/holder in due course, within 1 month.

When banker shall refuse the payment: A banker will be justified or bound to dishonour a cheque in the
following cases if-
(1) The cheque is undated.
(2) The cheque is stale i.e. it has not been presented within the validity period of the cheque.
(3)The instrument is inchoate (unclear or unformed or tentative) or not free from reasonable doubt.
(4)The cheque is post-dated and presented for payment before its ostensible date.
(5) Authority of the banker to honour a cheque of his customer is determined by the notice of the drawer’s
death, lunacy and insolvency. However, any payment made prior to the receipt of the notice of death is valid.
(6) Bank receives notice in respect of closure of the account.
(7) The cheque contains material alterations, irregular signature of irregular endorsement.
(8) The customer has countermanded payment.
(9) Any difference between the amount of cheque in words and in figures.
(10) Any irregular endorsements.
(11) The cheque is mutilated.
(12) Signature of the drawer has been forged.

Bouncing Of Cheques and Penalties to the Drawer: Bouncing of cheques is a serious offence under section
138 to 142 of the amended Banking, Public Financial Institutions and Negotiable Instruments Laws Act, 1988.
This amendment was brought about to make the drawer of the cheque consider that a promise to pay a cheque is
serious business. If the amount on it is not paid by the banker due to insufficiency of funds in the drawer’s
account, he would be penalized. This offence is punishable with imprisonment of one year and/or a fine or both
extending to more than one year and up to a maximum two years with a fine of twice the amount of the cheque.
Therefore when a person draws a cheque, he should keep sufficient amounts for clearing the cheque to avoid
being penalized. If a person has committed an offence, he will be liable to be proceeded against and punished
accordingly. However, if the drawer can prove that he did not commit the offence knowingly, and he has tried
in every possible way not to inconvenience the payee, then, he will not be liable. To summarize, the following
holds good if a person is found guilty of dishonouring a cheque:

Imprisonment for dishonouring cheque: Imprisonment of the drawer for a period that may extend up-to two
years.
Fine for default in payment: The drawer can be fined. The fine may extend to be double the amount of the
cheque.

Imprisonment and fine to drawer: The penalty to a drawer can include imprisonment and also fine that
extends to double the amount of the cheque.

Conditions for Applicability of Section 138: The following conditions should be identified to prove that the
drawer committed an offence and should be penalized:

Insufficient funds: When a banker receives a cheque, he should compare the amount drawn on the cheque with
the customers credit balance and the amounts assigned by him for his various other activities. If the amount is
less than the required funds, he has a right to dishonour the cheques of the drawer. When the cheque is
dishonoured, the drawer will be penalized.

Presentation of cheque beyond validity period: A cheque should be presented within 6 months of the issue. If
the date of drawing the cheque or the validity period has expired, the cheque will be dishonoured.

Discharge of legally enforced debt or liability: The drawer should have made the cheque in favour of the
payee as a payment for discharge of a legally enforceable debt or liability wholly or a part of it.

Dishonour notice to the drawer: The payee or the holder of the cheque must send a written notice to the
drawer within 30 days of receiving a notice from the banker of the dishonour of the cheque, and demand the
amount on the cheque from the drawer. A notice must preclude a complaint

Demand of Payee within 30 days of notice: Notice to a drawer is given so that he gets a chance to rectify his
mistake. If the drawer fails to pay within 30 days of the notice given to the drawer that the cheque has been
dishonoured, it will be considered as an offence. However, if the drawer makes the payment within the time
limit, he will be absolved of his liability.

Holder
According to Section 8 of Negotiable Instruments Act, “holder” of a promissory note, bill of exchange or
cheque means any person entitled in his own name to the possession thereof and to receive or recover the
amount due thereon from the parties thereto. Where the note, bill or cheque is lost or destroyed, its holder is the
person so entitled at the time of such loss or destruction.

Holder in due course

According to Section 9 of Negotiable Instruments Act, “Holder in due course” means any person who for
consideration became the possessor of a promissory note, bill of exchange or cheque if payable to bearer, or the
payee or endorsee thereof, if 1[payable to order], before the amount mentioned in it became payable, and
without having sufficient cause to believe that any defect existed in the title of the person from whom he
derived his title.

Privileges of a Holder in Due Course: Privileges granted to a ‘holder in due course’ under the Negotiable
Instruments are given below:

1. The holder in due course of an instrument is entitled to maintain an action thereon in his own name against all
the prior parties to the instrument (Section 36).
2. A holder who derives the title from a holder in due course, has the same rights as that of a holder in due
course (Section 53).
3. No prior party can set up a defence that the negotiable instrument was drawn, made or endorsed by him
without any consideration (Section 43).
4. No prior party can set up a defence that the negotiable instrument was lost or was obtained from him by an
offence or fraud or for an unlawful consideration.
Thus, a holder in due course gets a valid title to the negotiable instrument, even though the title of the transferor
was defective (Section 58).
5. No prior party can allege that the negotiable instrument was delivered conditionally or for a special purpose
only (Section 46).
A holder in due course can claim full amount of the negotiable instrument (but not exceeding the amount
covered by the stamp) even though such amount is in excess of the amount authorised by the person delivering
an inchoate negotiable instrument (Section 20).

Endorsement: The word endorsement mean the act of writing one’s name on the reverse side of negotiable
instruments (cheque, bill of exchange and promissory note) with a view to transfer its property to another. The
person who signs the cheque is called “Endorser” and to whom the cheque is transferred, called Endorsee”.
Endorsement is usually made on the reverse side of the cheque. But if no space is left on the back of eth cheque
for further endorsement, a slip of paper may be attached to the cheque. The slip is called “Allonge”. By
endorsing a cheque, the endorser engages that it shall be paid on presentment and that if it is not paid he will
compensate the holder.
Essentials for Endorsement: The following are the essentials for a valid endorsement;

 The endorsement must be on the reverse side.

 It must be signed by the endorser in exact spelling as appearing on the face of the instruments.
 The endorsement should be written with Ink. Endorsements in pencil are usually not accepted.
 The endorsement must be of the whole amount of the instrument.
 No prefix or safix to the name of the endorser should be included. E.g. A.A Farooq Ali, while endorsing
should write Farooq Ali only.
 If the names of the payees are exceeding from two, it must be keep in mind that the endorsement always
be in the similar class.

Types of Endorsement: There are five kinds of endorsement which are as under;

Conditional Endorsement: If the endorsement formulates the disbursement of bill subject to the
implementation of a circumstance, then it is known as “Conditional Endorsement’. The bank or payee can
discharge the condition and make the payment to the endorser.

Blank Endorsement: If the endorser signs his name on the bill but not identify the name of any other person to
whom the instrument has been transferred, such endorsement is called as “Blank Endorsement”.

Special Endorsement: It is the kind of endorsement in which the name of transferee is shown for payment of
the instrument called “Special Endorsement”. It is payable to order.

Restrictive Endorsement: A restrictive endorsement is one which restricts or prohibits the additional
negotiation of the bill. For instance, pay to Rashid only, signed by John.

Partial Endorsement: If the bill endorsed for part of the amount payable the endorsement is called “Partial
Endorsement”. Partial endorsement is legally ineffective.

Significance: When a transfer endorses an order bill and passes it on the transferee, he himself makes first sure
that the previous endorsement if any are regular. If he is satisfied with genuine of endorsement previous to his
own, he endorses the order bill. If the bill is dishonor the accept of the bill or the drawee will be primary liable
for the payment of the bill. The subsequent holders of the bill can also be engaged for compensation. If a bill is
accepted and endorsed by the bank, the bill is regarded as “First class bill”. In case a bill which bears the
endorsement of bank is dishonored, the bank will also become one of the parties liable to pay the amount.

Module V: Elements of Company Law

Meaning and types of companies, Formation of a company, Memorandum and Articles of Association,
Prospectus and Issue of Shares, Share Capital and Shareholders, Company Meetings and Proceedings,
Powers and Liabilities of Directors ,Meeting ,Managerial Remuneration and Winding up of Company.

A company, in common parlance, means a group of persons associated together for the attainment of a
common end, social or economic. It has "no strictly technical or legal meaning." It represents different kinds of
associations, both business and otherwise. The term registered company means a company incorporated under
the Companies Act, 1956 or some earlier Companies Acts. Companies incorporated under the Companies Act,
1956 are mostly business companies but they may also be formed for promoting art, charity, research, religion,
commerce, or any other useful purpose. The law relating to companies in India is contained in the Companies
Act, 1956, as amended up-to-date. The latest amendment to the Act was made in 2006 by the Companies
(Amendment) Act, 2006.

DEFINITION OF COMPANY

A voluntary association of persons: A company, in broad sense, may mean an association of individuals
formed for some common purpose. But it is a voluntary association of persons. It has capital divisible into parts,
known as shares. At the same time it is an artificial person created by a process of law. It has a perpetual
succession and a common seal. It exists only in contemplation of law, i.e., it is regarded by the law as a person,
just as a human being, Ram or Shyam, is a person.

An artificial person—has no body or soul. A company has no body, no soul and no conscience nor is it subject
to imbecilities of the body. It is not visible, save to the eye of the law. These physical disabilities make a
company an artificial person. But then a company really exists and it is not a fictitious entity.

Lindley's definition. Lindley, L.J. defines a company as "an association of many persons who contribute
money or money's worth to a common stock, and employ it in some common trade or business (i.e., for a
common purpose), and who share the profit or loss (as the case may be) arising therefrom. 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. Shares
are always transferable although the right to transfer them is often more or less restricted." On incorporation a
company becomes a body corporate or corporation with a perpetual succession and a common seal. It also
acquires a personality distinct from its members.

CHARACTERISTICS OF A COMPANY

1. Separate legal entity. A company is in law regarded as an entity separate from its members. In other words, it
has an independent corporate existence. Any of its members can enter into contracts with it in the same manner
as any other individual can and he cannot be held liable for the acts of the company even if he holds virtually
the entire share capital. The company's money and property belong to the company and not to the shareholders
(although the shareholders own the company). Thus, Ram & Co. Limited is an entirely different person from
Ram even if he holds practically all the shares in the company. Its property is not the property of Ram.

The importance of the separate entity of a company was however firmly established in the following case :
Salomon v. Salomon & Co. Ltd., 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 be
worth £ 6,000 and its liabilities amounted to £ 17,000 of which £ 10,000 was 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 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.

2. Limited liability. A company may be a company limited by shares or a company limited by guarantee. In a
company limited by shares, the liability of members is limited to the unpaid value of the shares. For example, if
the face value of a share in a company is Rs. 10 and a member has already paid Rs. 7 per share, he can be called
to pay not more than Rs. 3 per share during the lifetime of the company. In a company limited by guarantee, the
liability of members is limited to such amount as the members may undertake to contribute to the assets of the
company, in the event of its being wound up.

3. Perpetual succession. A company is a juristic person with a perpetual succession. It is not susceptible to "the
thousand natural shocks that flesh is heir to." As such it never dies; nor does its life depend on the life of its
members. It is not in any manner affected by insolvency, mental disorder or retirement of any of its members. It
is created by a process of law and can be put an end to only by a process of law. Members may come and go but
the company can go on for ever (until dissolved). It continues to exist even if all its human members are dead.
Even where during the war all the members of a private company, while in general meeting, were killed by a
bomb, the company survived; not even a hydrogen bomb could have destroyed it. Perpetual succession,
therefore, means that a company's existence persists irrespective of the change in the composition of its
membership.

4. Common seal. Since a company has no physical existence, it must act through its agents and all such
contracts entered into by its agents must he under the seal of the company. The common seal acts as the official
signature of the company.

5. Transferability of shares. The capital of a company is divided into parts, called shares. These shares are,
subject to certain conditions, freely transferable, so that no shareholder is permanently or necessarily wedded to
a company. When the joint stock companies were established the great object was that the shares should be
capable of being easily transferred.

6. Separate property. As a company is a legal person distinct from its members, it is capable of owning,
enjoying and disposing of property in its own name. Although its capital and assets are contributed by its
shareholders, they are not the private and joint owners of its property. The company is the real person in which
all us property is vested and by which it is controlled, managed and disposed of.

7. Capacity to sue. A company can sue and be sued in its corporate name. It may also inflict or suffer wrongs. It
can in fact do or have done to it most of the things which may be done by or to a human being.

LIFTING OR PIERCING THE CORPORATE VEIL: From the juristic point of view, a company is a legal
person distinct from its members. This Principle may be referred to as "the veil of incorporation". The Courts in
general consider themselves bound by this principle. The effect of this principle is that there is a fictional veil
(and not a wall) between the company and its members. That is, the company has a corporate personality which
is distinct from its members. The human ingenuity, however, started using this veil of corporate personality
blatantly as a cloak for fraud or improper conduct. Thus it became necessary for the Courts (now National
Company Law Tribunal or NCLT) to break through or lift the corporate veil or crack the shell of corporate
personality and look at the persons behind the company who are the real beneficiaries of the corporate fiction.

Exceptions: The various cases in which corporate veil have been lifted are as follows:

1. Protection of revenue. The Courts (now NCLT) may ignore the corporate entity of a company where it is
used for tax evasion. Tax planning may be legitimate provided it is within the framework of law. Colorable
devices cannot be part of tax planning.

2. Prevention of fraud or improper conduct. The legal personality of a company may also be disregarded in
the interest of justice where the machinery of incorporation has been used for some fraudulent purpose like
defrauding creditors or defeating or circumventing law.

3. Determination of character of a company whether it is enemy. A company may assume an enemy

character when persons in de facto control of its affairs are residents in an enemy country. In such a case, the
Court (now NCLT) may examine the character of persons in real control of the company, and declare the
company to be an enemy company.

4. Where the company is a sham. The Courts (now NCLT) also lift the veil where a company is a mere cloak
or sham.

5. Company avoiding legal obligations. Where the use of an incorporated company is being made to avoid
legal obligations, the Court may disregard the legal personality of the company and proceed on the assumption
as if no company existed.

6. Company acting as agent or trustee of the shareholders. Where a company is acting as agent for its
shareholders, the shareholders will be liable for the acts of the company. It is a question of fact in each case
whether the company is acting as agent for its shareholders. There may be an express agreement to this effect or
an agreement may be implied from the circumstances of each particular case.

7. Avoidance of welfare legislation. Avoidance of welfare legislation is as common as avoidance of taxation

and the approach of the Courts (now NCLT) in considering problems arising out of such avoidance is generally
the same as avoidance of taxation. It is the duty of the Courts in every case where ingenuity is expended to
avoid welfare legislation to get behind the smoke screen and discover the true state of affairs.

8. Protecting public policy. The Courts (now NCLT) invariably lift the corporate veil to protect the public
policy and prevent transactions contrary to public policy. Thus where there is a conflict with public policy, the
Courts (now NCLT) ignore the form and take into account the substance

Statutory exceptions:

1. Number of members below statutory minimum (Sec. 45). If a company carries on business for more than
6 months after the number of its members has been reduced below 7 in case of a public company or 2 in case of
a private company, every person who knows this fact and is a member during the time that the company so
carries on business after the six months, is severally liable for the whole of the debts of the company contracted
during that time, i.e., after six months.

2. Failure to refund application money [Sec. 69 (5)]. The directors of a company are jointly and severally
liable to repay the application money with interest if the company fails to refund the application money of those
applicants who have not been allotted shares, within 130 days of the date of issue of the prospectus.
3. Misdescription of company's name [Sec. 147 (4)]. Where an officer or agent of a company does any act or
enters into a contract without fully or properly mentioning the company's name and the address of its registered
office, he shall be personally liable. Thus where a bill of exchange, hundi or promissory note is signed by an
officer of a company or any other person on its behalf, without mentioning this fact that he is signing on behalf
of the company, he is personally liable to the holder of the instrument unless the company has already paid the
amount.

4. Fraudulent trading (Sec. 542). Sometimes in the course of the winding up of a company it may appear that
some business of the company has been carried on with intent to defraud creditors of the company, pr any other
person or for my fraudulent purpose. In such a case, the NCLT may declare that any persons who were
knowingly parties to the carrying on of the business in this way are personally liable without any limitation of
liability for all or any of the debts or other liabilities of the company as the NCLT may direct. The NCLT may
do so on the application of the Official liquidator, or the liquidator or any creditor or contributory of the
company.

COMPANY DISTINGUISHED FROM PARTNERSHIP : Partnership is the relation between persons who
have agreed to share the profits of a business carried on by all or any of them acting for all. Persons who have
entered into partnership with one another are called individually partners and collectively a firm (Sec. 4 of the
Indian Partnership Act, 1932).

The principal differences between a company and a partnership are as follows:

1. Regulating Act. A company is regulated by the Companies Act, 1956, while a partnership is
governed by the Indian Partnership Act, 1932.
2. Mode of creation. A company comes into existence after registration under the Companies Act,
1956. Registration is not compulsory in the case of a partnership.
3. Legal status. A company has a legal personality distinct from that of its members. A firm is not a
person in the eyes of the law; it is made up of the several persons who compose it
4. Liability of members. The liability of the members of a company (except an unlimited company) to
contribute towards satisfaction of the company's debts and liabilities is limited, whereas partners are
liable without limit to contribute towards payment of the partnership debts and liabilities. In the case
of the partnership firm, the partners are jointly and severally liable to the creditors of the firm.
5. Management. The affairs of a company are managed by its directors or managing director or
manager, and its members have no right to take part in the management. On the other hand, every
member of a partnership firm may take part in its management unless the partnership agreement
provides otherwise.
6. Transferability of interest. Shares in a company are freely transferable unless its Articles otherwise
provide. When shares are transferred, the transferee becomes a member of the company and
succeeds to all the rights of the transferor. A partner cannot transfer his share without the consent of
the other partners.
7. Authority of members. Each partner is an agent of the partnership firm to make contracts and incur
liabilities so long as he acts in the ordinary course of the firm's business. On the other hand, a
shareholder is not an agent of the company and has no such power to bind the company by his acts.
8. Powers. A partnership firm can do anything which the partners agree to do and there is no limit to its
activities; a company's powers are limited to those allowed by the objects clause in its Memorandum
of Association.
9. Insolvency of firm and winding up of company. The insolvency of a partnership firm means
insolvency of all the partners, whereas the winding up of an insolvent company does not make the
members insolvent.
10. Debts. If a company owes a debt to any of its members he can claim payment out of its assets when
it is wound up rateably with its other creditors, whereas a partner who is owed money by his firm
cannot prove against the firm's assets in competition with its other creditors.
 11. Dissolution. Unless a partnership is entered into for a fixed period, it may be dissolved at any time
by any partner, and the partnership will automatically be dissolved by the death or insolvency of a
partner. A company has a perpetual succession. No personal circumstance affecting a member, such
as death, insolvency or unsoundness of mind, will affect its existence. It comes to an end only when
it is wound up.
12. Maintenance of books. A company is bound by law to maintain books of account and have its
accounts audited annually by qualified auditors. There is no such statutory provision in the case of a
partnership firm.

Kinds of Companies

I. CLASSIFICATION ON THE BASIS OF INCORPORATION

1. Statutory companies. These are the companies which are created by a special Act of the Legislature, e.g.,
the Reserve Bank of India, the State Bank of India, the Life Insurance Corporation, the Industrial Finance
Corporation, the Unit Trust of India. These are mostly concerned with public utilities, e.g., railways, tramways,
gas and electricity companies and enterprises of national importance. The provisions of the Companies Act,
1956 apply to them, if they are not inconsistent with the provisions of the special Acts under which they are
formed.

2. Registered companies. These are the companies which are formed and registered under the Companies Act,
1956, or were registered under any of the earlier Companies Acts. These are by far the most commonly found
companies.

II. CLASSIFICATION ON THE BASIS OF LIABILITY

1. Companies with limited liability

(1) Companies limited by shares. Where the liability of the members of a company is limited to the amount
unpaid on the shares, such a company is known as a company limited by shares. The liability can be enforced
during the existence of the company as also during the winding up of the company. If the shares are fully paid,
the liability of the members holding such shares is nil. There is one exception to this rule as given in Sec. 45.

Companies limited by shares are the most common. It is in the light of this type of company (public company)
that the term 'company' was defined earlier. A company limited by snares may be a public company or a private
company.

(2) Companies limited by guarantee. Where the liability of the members of a company is limited to a fixed
amount which the members undertake to contribute to the assets of the company in the event of its being wound
up, the company is called a company limited by guarantee. It has a legal personality distinct from its members.
The liability of its members is limited. The Articles of such a company must state the number of members with
which the company is to be registered.

III. CLASSIFICATION ON THE BASIS OF NUMBER OF MEMBERS

From the point of view of the general public and on the basis of number of members, a company may be—

1. a private company or 2. a public company.

1. Private company. A private company is normally what the Americans call a 'close corporation'. According
to Sec 3 (1) a 'private company' means a company which has a minimum paid-up capital of Rs. 1,00,000 or
such higher paid-up capital as may be prescribed, and by its Articles

(a) Restricts the right to transfer its shares, if any. This restriction is meant to preserve the private character of
the company;

(b) Limits the number of its members to 50 not including its employee-members (present or past);

(c) Prohibits any invitation to the public to subscribe for any shares in, or debentures of, the company;

(d) Prohibits any invitation or acceptance of deposits from persons other than its members, directors or their
relatives.

2. Public company. A public company leans a company which—

(a) Has a minimum paid-up capital of Rs. 5 lakh or such high paid-up capital, as may be prescribed:

(b) Is a private company which is a subsidiary of a company which is not a private company.

Distinction between a public company and a private company

1. Minimum capital. A private company must have a minimum paid-up capital of Rs. 1,00,000 whereas a
public limited company must have a minimum paid-up capital of Rs. 5,00,000.

2. Minimum number. The minimum number of persons required to form a public company is 7. It is 2 in case
of a private company.

3. Maximum number. There is no restriction on maximum number of members in a public company, whereas
the maximum number cannot exceed 50 in a private company.

4. Number of directors. A public company must have at least 3 directors whereas a private company must have
at least 2 directors (Sec. 252).

5. .Restriction on appointment of directors. In the case of a public company, the directors must file with the
Registrar a consent to act as directors or sign an undertaking for their qualification shares. The directors of a
private company need not do so (Sec. 266).

6. Restriction on invitation to subscribe for shares. A public company invites the general public to subscribe
for the shares in, or the debentures of, the company. A private company by its Articles prohibits any such
invitation to the public.

7. Transferability of shares/debentures. In a public company, the shares and debentures are freely transferable
(Sec. 82). In a private company the right to transfer shares and debentures is restricted by the Articles.

8. Special privileges. A private company enjoys some special privileges. A public company enjoys no such
privileges.

9. Quorum. If the Articles of a company do not provide for a larger quorum, 5 members personally present in
the case of a public company are quorum for a meeting of the company. It is 2 in the case of a private company
(Sec. 174).
10. Managerial remuneration. Total managerial remuneration in a public company cannot exceed 11 per cent
of the net profits (Sec. 198). No such restriction applies to a private company.

When does a private company become a public company?

1. Conversion by default (Sec. 43). Where a default is made by a private company in complying with the
essential requirements of a private company (viz., restriction on transfer of shares, limitation of the number of
members to 50 and prohibition of invitation to the public to buy shares or debentures), the company ceases to
enjoy the privileges and exemptions conferred on a private company. In such a case, the provisions of the
Companies Act apply to it as if it were not a private company. NCLT may relieve the company from the
consequences as aforesaid, if it is of opinion that the non-compliance was accidental or due to inadvertence or
other sufficient cause. It may also grant relief if on some grounds it is just and equitable. It may, however,
impose such terms and conditions as seem to it just and expedient.

2. Conversion by choice or volition (Sec. 44). If a private company so alters its Articles that they do not contain
the provisions which make it a private company, it shall cease to be a private company as on the date of the
alteration. It shall then file with the Registrar, within 30 days, either a prospectus or a statement in lieu of
prospectus. When this is done, the company becomes a public company.

A private company which becomes a public company shall also—

(1) File a copy of the resolution altering the Articles, within 30 days of passing thereof, with the Registrar ;

(2) take steps to raise its membership to at least 7 if it is below that number on the date of conversion, and also
increase the number of its directors to more than 2 if it is below that number;

(3) Alter the regulations contained in the Articles which are inconsistent with those of a public company.

IV. CLASSIFICATION ON THE BASIS OF CONTROL

On the basis of control, companies may be classified into:

1. Holding company [Sec. 4 (4)]. A company is known as the holding company of another company if it has
control over that other company. According to Sec. 4 (4), a company is "deemed to be the holding company of
another if, but only if, that other is its subsidiary."

2. Subsidiary company [Sec. 4 (1)]. A company is known as a subsidiary of another company when control is
exercised by the latter (called holding company) over the former called a subsidiary company. According to
Sec. 4 (1), a company (say, Company S) is deemed to be a subsidiary of another company (say, Company H) in
the following 3 cases:

(1) Company controlling composition of Board of directors. Where a company (Company H) controls the
composition of Board of directors of another company (Company S), the latter (Company S) becomes the
subsidiary of the former (Company H). For this purpose the composition of Company S's Board of directors is
deemed to be controlled by Company H if Company H can appoint or remove all or a majority of directors of
Company S.

Ex: The Board of directors of a company (S) consists of 7 directors. Any other company (H) which has
authority to appoint 4 directors is deemed to be the holding company of the former (S) which is called the
subsidiary company.
(2) Holding of majority of shares. Where a company (H) holds more than half in nominal value of equity share
capital of another company (S), the latter (S) becomes the subsidiary of the former (H). The words 'nominal
value of equity capital in Sec. 4 means the face value of the equity capital which has been subscribed for.

(3) Subsidiary of another subsidiary. Where a company (S) is subsidiary of another company (H,) which is
itself subsidiary of the controlling company (H), the former (S) becomes the subsidiary of the controlling
company (H).

Ex: Company S is a subsidiary of Company H and Company S, is a subsidiary of Company S. Company S, is a

subsidiary of company H, by virtue of the above Clause. If Company S2 is a subsidiary of Company S,,
Company S2 will be a subsidiary of Company S and consequently also of Company H, by virtue of the above
Clause.

V. CLASSIFICATION ON THE BASIS OF OWNERSHIP

On the basis of ownership, a company may be a—

1. Government company, or 2. Non-Government company: The latter is controlled and operated by private
capital.

Government company: A Government company means any company in which not less than 51 per cent of the
paid-up share capital is held by

(a) The Central Government, or (b) any State Government or Governments, or (c) partly by the Central
Government and partly by one or more State Governments. For example, State Trading Corporation of India
Ltd. and Minerals and Metals Trading Corporation of India Ltd. are Government companies. The subsidiary of
a Government company is also a Government company (Sec. 617).

Foreign Company: It means any company incorporated outside India which has an established place of
business in India [Sec. 591 (1)]. Where, for example, representatives of a foreign company frequently come and
stay in a hotel in India for purchasing raw material, machinery, cotton etc., the foreign company has a place of
business in India.

Where a minimum of 50 per cent of the paid-up share capital (whether equity or preference or partly equity and
partly preference) of a foreign company is held by one or more citizens of India or/and by one or more bodies
corporate incorporated in India, whether singly or jointly, such company shall comply with such provisions as
may be prescribed as if it were an Indian company

ONE-MAN COMPANY

This is a company (usually private) 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 relations or friends, hold just 1 or 2 shares each. 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.

Ex: A private company is registered with a share capital of Rs. 5,00,000 divided into 5,000 shares of Rs. 100
each. Of these shares 4,999 are held by A and one share is held by A's wife, B. This is a one-man company.

A one-man company, like any other company, is a legal entity distinct from its members. On the facts of a case,
it may appear that a company is not the real owner of a business but it is merely carrying it on as an agent of the
person who holds the shares in the company just as an individual may carry on a business as agent of another.
But if a business is in fact and in law the property of a seperate legal entity, a limited company, it cannot be held
that the business is the property of the person who owns all the shares in the company and that the company is
an agent for that other person [E.B.M. & Co. Ltd. v. Dominion Bank.]

Formation of Company

Before a company is formed, certain preliminary steps are necessary, e.g., whether it should be a private
company or a public company, what its capital should be, and whether it is worthwhile forming a new company
or taking over the business of an already established concern. All these steps are taken by certain persons
known as "promoters". They do all the necessary preliminary work incidental to the formation of a company.

INCORPORATION OF COMPANY

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 with other
formalities in respect of registration. A company so formed may be:

(1) a company limited by shares, or

(2) a company limited by guarantee, or
(3) an unlimited company.

Documents to be filed with the Registrar: Before a company is registered, it is desirable to ascertain from the
Registrar of Companies (for the State in which the registered office of the company is to be situate) if the
proposed name of the company is approved. Then the following documents duly stamped together with the
necessary fees are to be filed with the Registrar:

1. The Memorandum of Association duly signed by the subscribers.

2. The Articles of Association, if any, signed by the subscribers to the Memorandum of Association. A public
company limited by shares need not have its own Articles of Association. It may instead adopt Table A in
Schedule I to the Act.

3. The agreement, if any, which the company proposes to enter into with any individual for appointment as its
managing or whole-time director or manager.

4. A list of the directors who have agreed to become the first directors of the company (this applies to a public
company limited by shares) and their written consent to act as directors and take up qualification shares.

5. A declaration stating that all the requirements of the Companies Act and other formalities relating to
registration have been complied with. Such declaration shall be signed by any of the following persons : viz.,

an Advocate of the Supreme Court or of a High Court; or an attorney or a pleader entitled to appear before a
High Court ; or a secretary / chartered accountant in whole-time practice in India, who is engaged in the
formation of the company ; or a person named in the Articles as a director, manager or secretary of the
company.
Then within 30 days of the date of incorporation of the company, a notice of the situation of the registered
office of the company shall be given to the Registrar who shall record the same.

CERTIFICATE OF INCORPORATION: When the requisite documents are filed with the Registrar, the
Registrar shall satisfy himself that the statutory requirements regarding registration have been duly complied
with. In exercising this duty, the Registrar is not required to carry out any investigation. If the Registrar is
satisfied as to the compliance of statutory requirements, he retains and registers the Memorandum, the Articles
and other documents filed with him and issues a 'certificate of incorporation', i.e., of the formation of the
company.

By issuing certificate of incorporation the Registrar certifies under his hand that the company is incorporated
and in the case of a limited company, that the company is limited.

Conclusiveness of certificate of incorporation (Sec 35): A certificate of incorporation given by the Registrar
in respect of a company is conclusive evidence that all the requirements of the Companies Act have been
complied with in respect of registration. This is known as Rule in Peel's Case. The reason for this rule was
expressed by Lord Cairns in Peel's Case thus:

"When once the Memorandum is registered and the company holds out to the world as a company undertaking
business, willing to receive shareholders and ready to contract engagements, then, it would be of the most
disastrous consequences if after all that has been done, any person was allowed to go back and enter into an ex-
amination of the circumstances attending the original registration and the regularity of the execution of the
documents”

Ex: 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 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.

The certificate of incorporation has been held to be conclusive on the following points:

1. That requirements of the Act in respect of registration of matters precedent and incidental have been
complied with.

2. That the association is a company authorised to be registered under the Act, and has been duly registered.

3. That the date borne by the certificate of incorporation is the date of birth of the company, i.e., the date on
which the company comes into existence.

Even though the certificate of incorporation is conclusive for the purpose of incorporation, it does not make an
illegal object a legal one. But the position is firmly established that if a company is born, the only method to put
an end to it is by winding it up [T.V. Krishna v. Andhra Prabha (Pvt.) Ltd., A.I.R. (1960) A.P. 123].

Effects of registration (Sec. 34): When a company is registered and a certificate of incorporation is issued by
the Registrar, three important consequences follow:
1. The company becomes a distinct legal entity. Its life commences from the date mentioned in the certificate of
incorporation.

2. The company acquires a perpetual succession. The members may come and go, but it goes on for ever, unless
it is wound up.

3. The company's property is not the property of the shareholders. The shareholders have a right to share in the
profits of the company when realised and divided. Likewise, any liability of the company is not the liability of
the individual shareholders.

A private limited company can commence business immediately after its incorporation. A public company has
to obtain certificate to commence business before it can commence business.

PROMOTER: A promoter is a person who does the necessary preliminary work incidental to the formation of
a company. It is a compendious term used for a person who undertakes, does and goes through all the necessary
and incidental preliminaries, keeping in view the object, to bring into existence an incorporated company.

Chronologically, the first persons who control a company's affairs are its promoters. It is they who conceive the
idea of forming the company, with reference to a given object and then to set it going. It is they who take the
necessary steps to incorporate the company, provide it with share and loan capital and acquire the business or
property which it is to manage. When these things have been done, they hand over the control of the company
to its directors, who are often the promoters themselves, under a different name.

Functions of a promoter. The promoter of a company decides its name and ascertains that it will be accepted
by the Registrar of Companies. He settles the details of the company's Memorandum and Articles, the
nomination of directors, solicitors, bankers, auditors and secretary and the registered office of the company. He
arranges for the printing of the Memorandum and Articles, the registration of the company, the issue of
prospectus, where a public issue is necessary. He is, in fact, responsible for bringing the company into existence
for the object which he has in view.

Quasi-trustee. A promoter is neither an agent nor a trustee of the company under incorporation but certain
fiduciary duties have been imposed on him under the Companies Act, 1956. He is not an agent because there is
no principal born by that time and he is not a trustee because there is no cestui que trust in existence. Hence he
occupies the peculiar position of a quasi-trustee.

Fiduciary position of a promoter. A promoter stands in a fiduciary relation (relation requiring confidence or
trust) to the company which he promotes. The fiduciary position of a promoter may be summed up as follows:

1. Not to make any profit at the expense of the company. The promoter must not make, either directly or
indirectly, any profit at the expense of the company which is being promoted. If any secret profit is made in
violation of this rule, the company may, on discovering it, compel him to account for and surrender such profit.

2. To give benefit of negotiations to the company. The promoter must, when once he has begun to act in the
promotion of a company, give to the company the benefit of any negotiations or contracts into which he enters
in respect of the company.

3. To make a full disclosure of interest or profit. If the promoter fails to make a full disclosure of all the
relevant facts, including any profit and his personal interest in a transaction with the company, the company
may sue him for damages for breach of his fiduciary duty and recover from him any secret profit made even
though rescission is not asked for or is impossible.
4. Not to make unfair use of position. The promoter must not make an unfair or unreasonable use of his
position and must take care to avoid anything which has the appearance of undue influence or fraud. Further, a
promoter cannot relieve himself of his liability by making provisions to that effect in the Articles of the
company.

Duty of promoter as regards prospectus. The promoter must see, in connection with the prospectus, if any is
issued (or the statement in lieu of prospectus), that the prospectus (1) contains the necessary particulars, and (2)
does not contain any untrue or misleading statements or does not omit any material fact.

Remuneration of promoters. A promoter has no right to get compensation from the company for his services in
promoting the company unless there is a contract to that effect. If there is no such contract, he is not entitled to
get any compensation in respect of any payment made by him in connection with the formation of the company.
Practice, a promoter takes remuneration for his services in one of the following ways :

1. He may sell his own property at a profit to the company for cash or fully-paid shares provided he
makes a disclosure to this effect.
2. He may be given an option to buy a certain number of shares in the company at par.
3. He may take a commission on the shares sold.
4. He may be paid a lump sum by the company.

PRE-INCORPORATION OR PRELIMINARY CONTRACTS: The promoters of a company usually enter

into contracts to acquire some property or right for the company which is yet to be incorporated. Such contracts
are called pre-incorporation or preliminary contracts. The promoters generally enter into such contracts as
agents for the company about to be formed. The legal position is that "two consenting parties are necessary to a
contract whereas the company, before incorporation, is a non-entity." The promoters cannot, therefore, act as
agent for a company which has not yet come into existence. As such the company is not liable for the acts of the
promoters done before its incorporation.

Position of promoters as regards pre-incorporation contracts

1. Company not bound by pre-incorporation contract. A company, when it comes into existence, is not bound
by a pre-incorporation contract even where it takes the benefit of the contract entered into on its behalf.

English & Colonial Produce Co. Ltd.,: A solicitor prepared the Memorandum and Articles of Association of a
company and paid the necessary registration fees and other incidental expenses to obtain the registration 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 to pay the solicitor's costs, although it had taken the benefit of his work.

2. Company cannot enforce pre-incorporation contract. A company cannot, after incorporation, enforce the
contract made before its incorporation. The leading case on the point is :

Natal Land & Colonisation Co. Ltd. v. Pauline Colliery & Development Syndicate Ltd.,: The JV 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.

3. Promoters personally liable. The promoters remain personally liable on a contract made on behalf of a
company not yet in existence. Such a contract is deemed to have been entered into personally by the promoters.

Kelnerv. Baxter,: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.

Ratification of a pre-incorporation contract. A company cannot ratify a contract entered into by the promoters
on its behalf before its incorporation. Therefore, it cannot by adoption or ratification obtain the benefit of the
contract purported to have been made on its behalf before it came into existence as ratification by the company
when formed is legally impossible. The doctrine of ratification applies only if an agent contracts for a principal
who is in existence and who is competent to contract at the time of the contract by the agent.

Where a contract is made on behalf of a company known to both the parties to be non-existent, the contract is
deemed to have been entered into personally by the promoters. The company can, if it desires, enter into a new
contract, after its incorporation, with the other party and

(1) if the company makes a fresh contract in terms of the pre-incorporation contract, the liability of
the promoters shall come to an end; and
(2) if the company does not make a fresh contract within a limited time, either of the parties may
rescind the contract.

Specific performance of pre-incorporation contract: Secs. 15 & 16 of the Specific Relief Act, 1963 deal with
this point.

When the promoters of a company have, before its incorporation, entered into a contract for the purpose of the
company and such contract is warranted by the terms of the incorporation, specific performance may be
obtained by, or enforced against, the company provided that the company has accepted the contract and has
communicated such acceptance to the other parry to the contract.

PROVISIONAL CONTRACTS: Provisional contracts refer to contracts entered into by a public company
after its incorporation but before it is issued the certificate to commence business. Any contract made by a
company before the date at which it is entitled to commence business shall be provisional only, and shall not be
binding on the company until that date, and on that date it shall become binding. If the company is unable to
obtain the certificate to commence business, the provisional contract automatically lapses; if it gets the
certificate, the provisional contract becomes binding on the company. In the latter case, there is no need for
ratification of the contract by the company; the contract becomes binding automatically.

Memorandum of Association
A fundamental document. The Memorandum of Association is a document of great importance in relation to
the proposed company. It contains the fundamental conditions upon which alone the company is allowed to be
incorporated. It is the charter of the company and defines its raison d'etre (i.e., reason for existence). It lays
down the area of operation of the company. It also regulates the external affairs of the company in relation to
outsiders. Its purpose is to enable shareholders and those who deal with the company to know what its permitted
range of enterprise is. It not only shows the object of the formation of a company but also the utmost possible
scope of it. It is, as it were, the area beyond which the actions of the company cannot go inside it area the
shareholders may make such regulations for their own governance as they think fit.

Purpose of Memorandum. The purpose of the Memorandum is two- fold:

1. The prospective shareholders shall know the field in, or the purpose for, which their money is going to be
used by the company and what risk they are undertaking in making investment.
2. The outsiders dealing with the company shall know with certainty as to what the objects of the company are
and as to whether the contractual relation into which they are to enter with the company is within the objects of
the company.

Printing and signing of Memorandum (Sec.15). The Memorandum of Association of a company shall be—

(a) Printed,

(b) Divided into paragraphs numbered consecutively, and

(c) Signed by 7 (2 in case of a private company) subscribers.

Each subscriber shall sign (and add his address, description and occupation, if any) in the presence of at least 1
witness who shall attest the signature and shall likewise add his address, description and occupation, if any. The
Memorandum of Association printed on computer laser printers would be accepted by the Registrar for
registration of a company provided it is neatly and legibly printed.

Form of Memorandum (Sec. 14). The Memorandum of Association of a company shall be in such one of the
Forms in Tables B, C, D and E in Schedule I to the Companies Act, 1956, as may be applicable to the case of
the company, or in a Form as near thereto as circumstances admit.

CONTENTS OF MEMORANDUM (Sec. 13)

1. The name clause (Sec. 20). The name of a company establishes its identity and is the symbol of its existence.
A company may, subject to the following rules, select any suitable name —

(1) Undesirable name to be avoided. A company cannot registered by a name which, in the opinion of the
Central Government, is undesirable.

(2) Injunction if identical name adopted. If a company gets registered with a name which resembles the name
of an existing company, the other company with whom the name resembles can apply to the Court for an
injunction to restrain the new company from adopting the identical name.

(3) 'Limited' or 'Private Limited' as the last word or words of the name. The Memorandum shall state the
name of the company with 'Limited' as the last word of the name in case of a public limited company, and with
'Private Limited' as the last words of the name in case of a private limited company.

(4) Prohibition of use of certain names. The Emblems and Names (Prevention of Improper Use) Act, 1950
prohibits, the use of, or registration of a company or firm with, any name or emblem specified in the Schedule
to that Act. The Schedule specifies, amongst others, the following items, i.e., the name, emblem or official seal
of the United Nations Organisation, the World Health Organisation, the United Nations Educational, Scientific
and Cultural Organisation, the Indian National Flag, the name, emblem or official seal of the Central
Government and State Governments, the name, emblem or official seal of the President of India or Governor of
any State.

(5) Use of some key words according to authorised capital. If a company uses any of the following key words
in its name, it must have a minimum authorised capital mentioned against the key words.

Publication of name (Sec. 147). Every company shall—

  paint or affix its name and the address of its registered office, on the outside of every office or place in
which its business is carried on,
 have it engraved in legible characters on its seal, and
 have its name and the address of its registered office mentioned in legible characters in all business
letters, bill-heads, negotiable instruments, invoices, receipts, etc., of the company.

2. The registered office clause (Sec. 146). Every company shall have a registered office from the day on which
it begins to carry on business, or as from the 30th day after the date of its incorporation, whichever is earlier. All
communications and notices are to be addressed to that registered office. Notice of the situation of the registered
office and every change shall be given to the Registrar within 30 days after the date of incorporation of the
company or after the date of change. If default is made in complying with these requirements, the company and
every officer of the company who is in default shall be punishable with fine which may extend to Rs. 500 for
every day during which the default continues. The situation of the registered office of a company determines its
domicile.

3. The objects clause [Sec. 13 (1)]. The objects of a company shall be clearly set forth in the Memorandum, for
a company can do what is within, or incidental to, the objects stated in the Memorandum. The objects clause
both defines and confines scope of the company's powers, and once registered, it can only be altered as provided
by the Act.

The purpose of the objects clause is —

 To enable subscribers to the Memorandum to know the uses to which their money may be put, and
 To enable creditors and persons dealing with company to know what its permitted range of enterprise or
activities is

The objects clause in the Memorandum of every company has to state—

 Main objects of the company to be pursued by the company on its incorporation and objects incidental
or ancillary to the attainment of the main objects, and
 Other objects of the company not included in the above Clause.

4. The capital clause [Sec. 13 (4)]. The Memorandum of a company, having a share capital, shall state the
amount of the share capital with which the company is to be registered and the division thereof into shares of a
fixed amount. The capital with which a company is registered is called 'registered', 'authorised' or 'nominal'
capital. A company cannot issue more shares than are authorised for the time being by the Memorandum. The
shares issued by a company can only be equity shares or preference shares, but they cannot have
disproportionate rights. A private company which is not a subsidiary of a public company may issue shares of
any kind and with disproportionate rights.

5. The liability clause [Sec. 13 (2)]. The Memorandum of a company limited by shares or by guarantee shall
also state that the liability of its members is limited. This means that the members can only be called upon to
pay to the company at any time the uncalled or unpaid amount on the shares held by them, or up to the
maximum of the amount which they have guaranteed. There is, however, one exception to this rule.

6. The association clause [Sec. 13 (4)]. The association clause states: "We, the several persons whose names
and addresses are subscribed, are desirous of being formed into a company in pursuance of this Memorandum
of Association, and we respectively agree to take the number of shares in the capital of the company set
opposite our respective names."
This is followed by the names, addresses and descriptions of the subscribers and the number of shares taken by
each one of them. Each subscriber has to take at least 1 share. The Memorandum shall be signed by at least 7
subscribers in the case of a public company, and by at least 2 subscribers in the case of a private company. The
signature of each subscriber shall be attested by at least 1 witness who cannot be any of the other subscribers.

ALTERATION OF MEMORANDUM

1. Change of name.

By special resolution. A company may change its name by a special resolution and with the approval of the
Central Government signified in writing. But a change of name which merely involves the deletion or addition
of the word 'Private' on the conversion of a public company into a private company or vice versa does not
require the approval of the Central Government.

By ordinary resolution. Sometimes, through inadvertence or otherwise, a company is registered by a name

which, in the opinion of the Central Government, is identical with, or too nearly resembles, the name of an
existing company. In such a case, the company—

 May change its name, by ordinary resolution and with the previous approval of the Central Government,
 Shall change its name if the Central Government so directs within 12 months of its registration.

2. Change of registered office: This may involve:

(a) Change of registered office from one place to another within a state [Sec. 17-A as introduced by the
Companies (Amendment) Act, 2000]. A company can change the place of its registered office from one place to
another within a State, if it is confirmed by the Regional Director.

Procedure of alteration.

(1) Special resolution. A special resolution shall be passed at a general meeting so as to change the place of
registered office from one State to another.

(2) Confirmation by the National Company Law Tribunal (NCLT or just Tribunal). The alteration shall not
take effect until it is confirmed by the Tribunal on petition.

(3) Notice to affected parties. Before confirming the alteration, the Tribunal shall be satisfied that sufficient
notice has been given to every person whose interest will be affected by the change, and that the consent of the
creditors of the company has been obtained or their debts j or claims have been discharged or secured.

(4) Notice to Registrar. The Tribunal shall cause notice of the petition for confirmation of the change to be
served on the Registrar. The Registrar shall also be given a reasonable opportunity to appear before the Tribunal
and state his objections

3. Alteration of objects (Sec. 17): The objects clause is the most important clause in the Memorandum of
Association. The legal personality of a company exists only for the particular purposes of incorporation as
defined in the objects clause. The power of alteration of objects is subject to two limits, namely—

(1) substantive or physical limit, and

(2) procedural limit.

1. Substantive limit. By Sec.17(1), the objects of a company may be altered by special resolution as to enable
the company,- To carry on the business more economically or more efficiently, To attain its main purpose by
new or improved means, To enlarge or change the local area of its operations.

In the following cases alteration of the objects clause was permitted:

 To restrict or abandon any of the objects specified in the Memorandum;

 To sell or dispose of the whole, or part, of the undertaking, or of any of the undertakings, of the
company;
 To amalgamate with any other company or body of persons.

2. Procedure of alteration.

 Special resolution. A special resolution shall be passed at a general meeting so as to alter the objects of
the company.
 Copy of special resolution to be filed. The company shall file with the Registrar the special resolution
within 1 month from the date of the resolution with a printed copy of the Memorandum as altered.
 Certification of registration. The Registrar shall register the special resolution and certify the registration
under his hand within 1 month from the date of the filing of the special resolution.

4. Change in liability clause: A company limited by shares or guarantee cannot change its Memorandum so as
to impose any additional liability on the members or to compel them to buy additional shares of the company
unless all the members agree in writing to such change either before or after the change (Sec. 38).

5. Change in capital clause. A limited company having share capital may, if authorised by its articles, alter its
share capital as

 increase nominal share capital by issuing new shares

 consolidate or divide all or any part of its share capital into shares of larger amount
 convert fully paid up shares into stock or vice versa.
 cancel shares which have not been taken up or shares cancelled.

DOCTRINE OF ULTRA VIRES: A company has the power to do all such things as are—

 Authorised to be done by the Companies Act, 1956;

 Essential to the attainment of its objects specified in the Memorandum;
 Reasonably and fairly incidental to its objects.

Everything else is ultra vires the company. 'Ultra' means 'beyond' and 'vires' means 'powers'. The term ultra
vires a company means that the doing of the act is beyond the legal power and authority of the company. The
purpose of these restrictions is to protect—

(1) Investors in the company so that they may know the objects in which their money is to be employed ;
and
 (2) Creditors by ensuring that the company's funds are not wasted in unauthorised activities.

Ultra vires act is void. If an act is ultra vires the company, it does not create any legal relationship. Such an act
is absolutely void and even the whole body of shareholders cannot ratify it and make it binding on the company.
It is not necessary that an act to be considered ultra vires must be illegal; it may or may not be. The leading case
on the point is:

Ashbury Rly. Carriage & Iron Co. Ltd. v. Riche, 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 ;
(c) To purchase, lease, work, and sell mines, minerals, land and buildings.

The company entered into a contract with Riche for 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 vires the company and void so that not even the subsequent assent of the whole
body of shareholders could ratify it.

Ultra vires the directors. If an act or transaction is ultra vires the directors (i.e., beyond their powers, but
within the powers of the company), the shareholders can ratify it by & resolution in a general meeting or even
by acquiescence provided they have knowledge of the facts relating to the transaction to be ratified. If an act is
within the powers of the company, any irregularities may be cured by the consent of the shareholders.

Ultra vires the Articles. If an act or transaction is ultra vires the Articles, the company can ratify it by altering
the Articles by a special resolution. Again if the act is done irregularly, it can be validated by the consent of the
shareholders provided it is within the powers of the company.

Articles of Association

The Articles of Association or just Articles are the rules, regulations and bye-laws for the internal management
of the affairs of a company. They are framed with the object of carrying out the aims and objects as set out in
the Memorandum of Association. The Articles are next in importance to the Memorandum of Association
which contains the fundamental conditions upon which alone a company is allowed to be incorporated. They
are as such subordinate to, and controlled by, the Memorandum. In framing the Articles of a company care must
be taken to see that regulations framed do not go beyond the powers of the company itself as contemplated by
the Memorandum of Association.

Contents of Articles: Articles usually contain provisions relating to the following matters:

(1) Share capital, rights of shareholders, variation of (5) Transmission of shares.

these rights, payment of commissions, share
certificates. (6) Forfeiture of shares.

(2) Lien on shares. (7) Conversion of shares into stock.

(3) Calls on shares. (8) Share warrants.

(4) Transfer of shares. (9) Alteration of capital.

(10) General meetings and proceedings thereat. (14) Secretary.

(11) Voting rights of members, voting and poll, (15) Dividends and reserves.
proxies.
(16) Accounts, audit and borrowing powers.
(12) Directors, their appointment, remuneration,
qualifications, powers and proceedings of Board of (17) Capitalisation of profits.
directors.
(18) Winding up.
(13) Manager.

Companies which must have their own Articles (Sec. 26). The following companies shall have their own
Articles,

 Unlimited companies,  Private companies limited by shares.

 Companies limited by guarantee,
The Articles shall be signed by the subscribers of the Memorandum and registered along with the
Memorandum. A public company may have its own Articles of Association. If it does not have its own Articles,
it may adopt Table A given in Schedule I to the Act.

Adoption and application of Table A (Sec. 28). There are 3 alternative forms in which a public company may
adopt Articles:

1. It may adopt Table A in full.

2. It may wholly exclude Table A and set out its own Articles in full.
3. It may frame its own Articles and adopt part of Table A.

In other words, unless the Articles of a public company expressly exclude any or all provisions of Table A,
Table A shall automatically apply to it.

Form of Articles in the case of other companies (Sec. 29). The Articles of any company, not being a company
limited by shares, shall be in such one of the Forms in Tables C, D, and E in Schedule I to the Act, as may be
applicable, or in a Form as near thereto as circumstances admit further, such a company may include any
additional matters in its Articles in so far as they are not inconsistent with the provisions contained in the Form
in any of the Tables C, D, and E adopted by the company.

Form and signature of Articles (Sec. 30). The Articles shall be

a) Printed,
b) Divided into paragraphs, and
c) Signed by each subscriber of the Memorandum (who shall add his description and occupation, if any) in
the presence of at least 1 who will attest the signature and likewise add his address, options and
occupation, if any.

The Articles of Association printed on computer laser printer should be accepted by the Registrar for
registration of a company provided they are neatly and legibly printed.

ALTERATION OF ARTICLES: Companies have been given very wide powers to alter their Article The
right to alter the Articles is so important that a company cannot any manner, either by express provision in the
Articles or by an independent contract, deprive itself of the power to alter its Articles. Any clauses in the
Articles that restrict or prohibit alteration of Articles are invalid. If, for example, the Articles of a company
contain any restriction that the company shall not alter its Articles, it will be contrary to the Companies Act and,
therefore, inoperative.

Procedure of alteration (Sec. 31). A company may, by passing special resolution, alter its Articles any time.
Again any Articles may be adopted which could have been lawfully included originally. A copy of every special
resolution altering the Articles shall be filed with the Registrar within 30 days of its passing and attached to
every copy of the Articles issued thereafter. Any alteration so made in the Articles shall as valid as if originally
contained in the Articles.

Limitations to alteration

1. Must not be inconsistent with the Act. The alteration of the articles must not be inconsistent with, or go
beyond, the provisions of Companies Act. For example, the Articles cannot be altered so as to give power to a
company to purchase its own shares.

2. Must not conflict with the Memorandum. The alteration of Articles must not exceed the power given by the
Memorandum, or conflict with the provisions of the Memorandum. If it does, it will be ultra vires and wholly
void and inoperative.

3. Must not sanction anything illegal. The alteration must not purport to sanction anything which is illegal. But
if it is legal and it is not clearly prohibited by the Memorandum, it may be held to be valid even where it alters
the whole structure of the company.

4. Must be for the benefit of the company. The alteration must be made bona fide for the benefit of the
company as a whole. That the power of alteration must be "exercised subject to those general principles of law
and equity which are applicable to all powers conferred on majorities and enabling them to bind minorities."

Brown v. British Abrasive Wheel Co. Ltd.,: A company was in financial difficulties. The majority of the share
holders were willing to provide more capital if the remaining 2 percent shareholders would sell them their
shares. The majority then passed a special resolution altering the Articles so as to enable 9/10ths of the
shareholders to buy out any other shareholders. The alteration of the Articles could be restrained as it was
designed to allow the majority to do compulsorily what they could not by agreement and it was not for the
benefit of the company as a whole.

5. Must not increase liability of members (Sec. 38). The alteration must not in any way increase the liability of
the existing member contribute to the share capital of, or otherwise pay money to the company unless they
agree in writing before or after the alteration is made. But where the company is a club or association, the
Articles may he altered to provide for subscription or charges at a higher rate.

6. Alteration by special resolution only. The alteration can be made only by a special resolution. Even clerical
errors in the Articles should be set right by a special resolution.

7. Approval of Central Government when a public company is converted into a private company. The
alteration in the Articles which has the effect of converting a public company into a private company can be
made only if it is approved by the Central Government. Where this alteration has been approved by the Central
Government, a printed copy of the Articles as altered shall be filed by the company with the Registrar within 1
month of the date of receipt of order of the approval.

8. Breach of contract. A company is not prevented from altering its Articles even if such an alteration would
result in breach of some contract. The affected party may, however, file a suit for damages for the breach of
contract.
9. Must not result in expulsion of a member. An assumption by the Board of directors of a company of any
power to expel a member by amending its Articles is illegal and void. Any provision in the Articles conferring
such a power on the Board of directors is repugnant to the various provisions in the Companies Act pertaining
to the rights of a member in a public limited company.

10. No power of the Tribunal to amend Articles. The Tribunal has no power to amend or rectify the Articles
even where there is a mistake or drafting error which the Tribunal would rectify in the case of any other
contract. The Tribunal can only declare some clause to be ultra vires.

11. Alteration may be with retrospective effect. The Articles may be altered with retrospective effect and the
fact that some members suffer a detriment does not make it void.

ARTICLES AND MEMORANDUM — THEIR RELATION

Memorandum of Association Articles of Association

1. It is the charter of the company indicating the
1. They are the regulations for the internal
nature of its business, its nationality, and its capital. It
management of the company and are subsidiary to
also defines the company's relationship with outside
the Memorandum.
world.
2. It defines the scope of the activities of the
2. They are the rules for carrying out the objects of
company, or the area beyond which the actions of the
the company as set out in the Memorandum.
company cannot go.
3. They are subordinate to the Memorandum. If there
3. It, being the charter of the company, is the supreme
is a conflict between the Articles and the
document.
Memorandum, the latter prevails.
4. A company limited by shares need not have
4. Every company must have its own Memorandum.
Articles of its own. In such a case, Table A applies.
5. There are strict restrictions on its alteration. Some
5. They can be altered by a special resolution, to any
of the conditions of incorporation contained in it
extent, provided they do not conflict with the
cannot be altered except with the sanction of the
Memorandum and the Companies Act.
NCLT.
6. Any act of the company which is ultra vires the 6. Any act of the company which is ultra vires the
Memorandum is wholly void and cannot be ratified Articles (but is infra vires the Memorandum) can be
even by the whole body of shareholders. confirmed by the shareholders.

DOCTRINE OF INDOOR MANAGEMENT

There is one limitation to the doctrine of constructive notice of the Memorandum and the Articles of a
company. The outsiders dealing with the company are entitled to assume that as far as the internal proceedings
of the company are concerned, everything has been regularly done.

They are presumed to have read these documents and to see that the proposed dealing is not inconsistent
therewith, but they are not bound to do more; they need not inquire into the regularity of the internal
proceedings as required by the Memorandum and the Articles. They can presume that all is being done
regularly. This limitation of the doctrine of constructive notice is known as the "doctrine of indoor management.
Thus, whereas the doctrine of constructive notice protects the company against outsiders, the doctrine of indoor
management seeks to protect outsiders against the company.

The gist of the rule is that persons dealing with limited liability companies are not bound to inquire into the
regularity of the internal proceedings and will not be affected by irregularities of which they had no notice. The
rule is based on public convenience and justice:

 First, the Memorandum and the Articles are public documents. They are open to inspection by
everybody. But the details of internal proceedings are not open to public inspection. An outsider is
presumed to know the constitution of a company, but not what may or may not have taken place within
the doors that are closed to him.
 Secondly, the lot of creditors of a limited liability company is not a particularly happy one: it would be
unhappier still if the company could escape liability by denying the authority of the officers to act on its
behalf.

Exceptions to the doctrine of indoor management

1. Knowledge of irregularity.

2. Negligence.

3. Forgery.

4. Acts outside the scope of apparent authority.

Prospectus: In order to finance its activities, a company needs capital which is raised by a public company
by the issue of a prospectus inviting deposits or offers for shares and debentures from the public. A private
company is prohibited from making any invitation to the public to subscribe for any shares in, or debentures of,
the company. Hence it need not issue a prospectus. The central theme of a prospectus, from the money raising
point of view, is that it sets out the prospects of the company and the purpose for which the capital is required.
The prospectus is the basis on which the prospective investors form their opinion and take decisions as to the
worth and prospects of the company.

DEFINITION: Sec. 2 defines a prospectus as "any document described or issued as a prospectus and includes
any notice, circular, advertisement or other document inviting deposits from the public or inviting offers from
the public for the subscription or purchase of any shares in, or debentures of, a body corporate." In simple
words, any document inviting deposits from the public or inviting offers from the public for the subscription of
shares or debentures of a company is a prospectus.

Prospectus to be in writing. A prospectus must be in writing. An oral invitation to subscribe for shares in, or
debentures of, a company, or deposits is not a prospectus. Likewise, an advertisement in television or a film is
not treated to be a prospectus.

Invitation to public. A document is not a prospectus unless it is an invitation to the public to subscribe for
shares in, or debentures of, a company. But if the document satisfies the condition of invitation to the public, it
is a prospectus even though it is issued to a defined class of the public. Thus an advertisement which stated that
"some shares are still available for sale according to the terms of the company which may be obtained on
application" was held to be a prospectus as it invited the public to purchase shares.

Dating of prospectus: A prospectus issued by or in relation to an intended company must be dated and that date
is, unless the contrary is proved, taken as the date of publication of the prospectus.
Signing of prospectus. In case the prospectus is issued by an intended company it has to be signed by the
proposed directors of the company or by their agents authorised in writing. In case of existing companies, the
prospectus has to be signed by every person who is named therein as director of the company or by his agent
authorised in writing.

Registration of prospectus: A prospectus can be issued by or on behalf of a company only when a copy thereof
has been delivered to the Registrar for registration. The registration must be made on or before the date of
publication thereof.

Penalty for non-registration of prospectus. If a prospectus is issued without a copy thereof being delivered to
the Registrar for registration, or without the necessary documents or the consent of the experts, the company
and every person, who is knowingly a party to the issue of the prospectus, shall be punishable with fine which
may extend to Rs. 50,000.

Objects of registration of prospectus. The objects of registration of a prospectus are:

(1) To keep an authenticated record of the terms and conditions of issue of shares or debentures, and

(2) To pinpoint the responsibility of the persons issuing the prospectus for statements made by them in the
prospectus.

STATEMENT IN LIEU OF PROSPECTUS: Where a public company does not invite public to subscribe for
shares, but arranges to get money from private sources, it need not issue prospectus to the public. In such a case
the promoters are required to prepare a draft prospectus known as a 'statement in lieu of prospectus', which
should contain the information required to be disclosed by Schedule III of the Act.

A company having a share capital, which does not issue a prospectus, shall not allot any of its shares or
debentures unless at least 3 days before the allotment of shares or debentures there has been delivered to the
Registrar for registration a statement in lieu of prospectus. The statement shall be signed by every person who is
named therein as a director or proposed director of the company or by his agent authorised in writing. It shall be
in the form and contain particulars set out in Schedule III of the Act.

Deemed Prospectus: Sec25(1) where a company allots/agrees to allot Any shares or debentures to issue house
with a view to offer them as sale to public, then Any document by which offer is made is DEEMED to be a
PROSPECTUS issued by the company..

Shelf prospectus :"Shelf prospectus" means a prospectus issued by any financial institution or bank for one or
more issues of the securities or class of securities specified in that prospectus. Any public financial institution,
public sector bank or scheduled bank whose main object is financing, shall file a shelf prospectus.

Abridged Prospectus: means the memorandum as prescribed in Form 2A under sub-section (3) of section 56 of
the Companies Act, 1956. It contains all the salient features of a prospectus. It accompanies the application
form of public issues.

Information memorandum:Sec. 2(19-B) as introduced by the Companies (Amendment) Act, 2000 means a
process undertaken prior to the filing of a prospectus by which a demand for the securities proposed to be issued
by a company is elicited, and the price and the terms of issue for such securities is assessed, by means of a
notice, circular, advertisement or document. Circulation of information memorandum prior to the opening of
subscription lists. A public company making an issue of securities may circulate information memorandum to
the public prior to filing of a prospectus.
"Red Herring Prospectus" is a prospectus which does not have details of either price or number of shares
being offered or the amount of issue. This means that in case price is not disclosed, the number of shares and
the upper and lower price bands are disclosed. On the other hand, an issuer can state the issue size and the
number of shares are determined later.

CONTENTS OF PROSPECTUS: The investor must be given a complete picture of the company's intended
activities and its position. This is done through prospectus which must secure the fullest disclosure of all
material and essential particulars and lay the same in; full view of all intending purchasers of shares. The
important contents of prospectus are as follows:

1. General information
2. Capital structure of the company
3. Terms of the present issue.
4. Particulars of the issue
5. Company, management and project,
6. Particulars in regard to the company and other listed companies under the same management
7. Outstanding litigation pertaining to
8. Management perception of risk factors
9. B. Financial information
1 Report by the auditors. 2. Reports by the accountants.
10. C. Statutory and other information

Declaration: That all the relevant provisions of the Companies Act, 1956 and the guidelines issued by the
Government have been complied with and no statement made in the prospectus is contrary to the provisions of
the Companies Act, 1956 and rules there under. The prospectus shall be dated and signed by the directors.

Statements by experts (Secs. 57 to 59): Experts to be unconnected with formation or management of company
(Sec. 57). Where a prospectus includes a statement made by an expert, he shall not be engaged or interested in
the formation, promotion or management of the company. The expression 'expert' includes an engineer, a
valuer, an accountant and any other person whose profession gives authority to a statement made by him.

MISSTATEMENTS IN PROSPECTUS AND THEIR CONSEQUENCES:

If there is any misstatement of a material fact in a prospectus or the prospectus is wanting in any material fact,
there may arise—

I. Civil liability. II. Criminal liability.

I. CIVIL LIABILITY: A person who has been induced to subscribe for shares debentures on the faith of a
misleading prospectus has remedy against the company, and the directors, promoters and experts.

1. Remedies against the company: If there is a misstatement or withholding of material information in

prospectus, and if it has induced any shareholder to purchase shares, he can —

(1) Rescind the contract, and (2) Claim damages from the company whether the statement is fraudulent /
innocent one.

2. Remedies against the directors, promoters and experts: The persons who are liable to pay compensation for
any loss of damage to subscribers for any shares or debentures on the faith of prospectus containing untrue
statements are the
(a) Directors at the time of the issue of the prospectus; (b) Persons who have authorised themselves to be
named directors in the prospectus; (c) Promoters; and (d) Persons who have authorised the issue of the
prospectus.

CRIMINAL LIABILITY: Where a prospectus contains any untrue statement, every person who authorised the
issue of the prospectus is punishable with imprisonment which may extend to 2 years, or with fine which may
extend to Rs. 50,000 or with both. He will not be liable if he prove either—

(1) That the statement was immaterial, or (2) That he had reasonable ground to believe that the statement was
true.

The punishment for issuing an application for shares or debenture that is not accompanied with a memorandum
containing salient features of a prospectus is a fine which may extend to Rs. 50,000 [Sec. 63 (1)].

Issue and allotment of shares in fictitious names (Sec. 68-A) : A person shall be punishable with imprisonment
for a term writ may extend to 5 years if he—

(1) Makes in a fictitious name an application to a company acquiring, or subscribing for, any shares therein, or

(2) Otherwise induces a company to allot, or register any transfer shares to him, or any other person in a
fictitious name.

Meetings and Proceedings: The meetings of a company may be classified as follows:

I. General meetings which include—

(1) Statutory meeting.

(2) Annual general meetings, and (3) Extraordinary meetings.

These meetings are called general meetings of a company as these are meetings of all the members of the
company.

2. Class meetings of shareholders of different classes of shares where a company has more than one class of
shares.

II. Meetings of creditors and debenture-holders

(a) During the lifetime of the company, and

(b) At the time of winding up of the company.

III. Meetings of directors

I. GENERAL MEETINGS OF SHAREHOLDERS

1. STATUTORY MEETING (Sec. 165): Every company limited by shares and every company limited by
guarantee and having a share capital shall, within a period of not less than one month or more than six months
from the date at which the company is entitled to commence business, hold a general meeting of the members of
the company. This meeting is called the 'statutory meeting'. This is the first meeting of the shareholders of a
public company and is held only once in the lifetime of a company.
Statutory report. The Board of directors shall, at least 21 days before the day on which the meeting is to be
held, forward a report, called ‘the statutory report', to every member of the company. If the report is forwarded
later than 21 days before the day of the meeting, it shall be deemed to have been duly forwarded if it is so
agreed to by all the members entitled to attend and vote at the meeting. The notice of the meeting shall mention
that the meeting is a statutory meeting.

Contents of the statutory report. The statutory report of a company contains all the necessary information
relating to the formational aspect of the company. It sets out the following information:

(a) Total shares allotted (b) Cash received. (c) Abstract of receipts and payments (d) Directors and auditors
(e) Contracts (f) Underwriting contract (g) Arrears of calls.

Certification of report. The statutory report shall be certified correct by not less than 2 directors of the
company. One of the directors shall be a managing director, if there is one. After the statute report has been
certified, the auditors of the company shall also certify as correct as regards its first 3 contents.

A copy of the report to be sent to the Registrar. The Board shall deliver a copy of the certified statutory report
to the Registrar registration forthwith, after copies thereof have been sent to the members of the company.

Procedure at the meeting

(a) List of members. At the commencement of the statutory meeting the Board shall produce a list showing the
names, addresses; occupations of the members of the company and number of shares held by them respectively.
The list shall remain open and accessible to member of the company during the continuance of the meeting.

(b) Discussion of matters relating to formational aspect. Members present at the meeting shall be at liberty to
discuss any matter relating to the formation of the company. They may also discuss matter arising out of the
statutory report. Previous notice for such discussion is not necessary. However, no resolution may be passed
which notice has not been given in accordance with the provisions of the Act.

(c) Adjournment. The meeting may adjourn from time to time. At adjourned meeting, any resolution (of which
notice has been give whether before or after the former meeting, may be passed. An adjourned meeting shall
have the same powers as the original meeting. The objective of the adjournment may be to provide members
with additioinal information as to the company's affairs.

2. ANNUAL GENERAL MEETING (Sees. 166 and 167)

Every company shall in each year hold in addition to any other meetings a general meeting as its annual general
meeting and shall specify the meeting as such in the notice calling it. There shall not be an interval of more than
15 months between one annual general meeting of the company and the next. A company may hold its first
annual general meeting within a period of 18 months from the date of its incorporation. In that event it is not
necessary for the company to hold any annual general meeting in the year of its incorporation or in the next
year. Year means calendar year.

Ex: A company incorporated on October 1, 1998 may hold its first annual general meeting by April 1, 2000 and
then no other meeting will be necessary either for 1999 or 2000. Similarly, a company incorporated on January
1, 1999 may hold its first annual general meeting within 18 months, i.e., up to July 1, 2000. If the meeting is
held, say in June, 2000, the company need not hold any other meeting in the years 1999 and 2000.

The Registrar may, for any special reason, extend the time for holding any annual general meeting by a period
not exceeding 3 months. But no extension of time is granted for holding the first annual general meeting.
Time and place of meeting. Every annual general meeting shall be called during business hours on a day that is
not a public holiday. It be held either at the registered office of the company or at some place within the city,
town or village in which the registered office company is situate.

21 days notice (Sec. 171): A general meeting of a company may be ailed by giving not less than 21 days' notice
in writing. It may be called with a shorter notice if it is agreed to by all the members entitled to vote in the
meeting.

Consequences of failure to hold annual general meeting. If a company fails to hold an annual general
meeting—

(1) Any member can apply, under Sec.167, to the Company Law for calling the meeting.

(2) The company and every officer who is in default s punishable with fine.

Power of Tribunal to call annual general meeting (Sec 167). If default is made by a company in holding an
annual general meet accordance with Sec. 166, any member of the company may apply to the Tribunal for
calling such a meeting. In such a case, the Tribunal call, or direct the calling of, a general meeting of the
company, it also give ancillary or consequential directions as it thinks fit. By the direction of the Tribunal even
one member of the company present in person or by proxy shall be deemed to constitute a meeting. A general
meeting so held shall be deemed to be an annual general meeting of the company.

Importance of annual general meeting. It is only at the annual general meeting of a company that the
shareholders can exercise control over the affairs of the company. They can confront the direct their elected
representatives, at least once a year. They also get opportunity to discuss the affairs and review the working of
company. They can also take the necessary steps for the protection of their interests. They can also take up any
other business relating to affairs of the company for discussion. Appointment of auditors is made at the annual
general meeting. Annual accounts are made at the annual general meeting. Annual accounts are presented the
consideration of shareholders and declared in the annual general meeting.

3. EXTRAORDINARY GENERAL MEETING (Sec. 169) A statutory meeting and an annual general
meeting of a company are called ordinary meetings. Any meeting other than these meetings is called an
extraordinary general meeting. It is called for transacting some urgent or special business which cannot be
postponed till the next annual general meeting. It may be convened—

(1) By the Board of directors on its own or on the requisition of the members; or ,

(2) By the requisitionists themselves on the failure of the Board of directors to call the meeting.

(1) Extraordinary meeting convened by the Board of directors

The Board of directors may call an extraordinary general meeting –

(a) On its own. The Board of directors may call an extraordinary general meeting whenever some special
business is to be transacted which in the opinion of Board of directors cannot be postponed till the next annual
general meeting. Some of the examples of such a business are:

(i) Issue of right shares

(ii) Increase in the remuneration of managing director, whole time director, etc.
(b) On requisition of the members. The requisite number of members of a company may also ask for an
extraordinary general meeting to be held. In such a case the Board of directors shall proceed duly to call such a
meeting of the company. The requisition for such a meeting by members shall be signed—

(i) in the case of a company having a share capital, by holders of not less than 1/10th of the paid-up capital of
the company having the right of voting in regard to the matter of requisition ; or

(ii) In the case of a company not having a share capital, by members representing not less than 1/10th of the
total voting power in regard to the matter of requisition.

A requisition signed by one of the joint owners of shares has the same force and effect as if it had been signed
by all of them. The requisition shall set out the matters for the consideration of which the meeting is to be
called. It shall be deposited at the registered office of the company.

The Board shall proceed to call a meeting within 21 days from the date of the deposit of a valid requisition. The
meeting shall be held within 45 days from the date of the deposit of the requisition.

(2) Extraordinary meeting, convened by the requisitionists

Every shareholder of a company has a right to requisition an extraordinary general meeting. He is not bound to
disclose the reasons for the resolutions to be proposed at the meeting.

If the Board of directors fails to call a meeting as required by the requisition, the meeting may be called—

(a) By the requisitionists themselves;

(b) in the case of a company having a share capital, by such of the requisitionists as represent either a majority
in value of the paid-up share capital held by all of them or not less than 1/10th of the paid-up share capital of the
company having the right of voting, whichever is less ; or

(c) in the case of a company not having a share capital, by the requisitionists representing not less than 1/10th of
the total voting power of all the members of the company.

The meeting shall be called in the same manner as nearly as possible as that in which meetings are called by the
Board of directors but it shall not be held after the expiration of 3 months from the date of the deposit of
requisition. However, a meeting commenced before the expiry of 3 months may be adjourned to some day after
the expiry of that

Power of Tribunal to order meeting (Sec. 186)

If for any reason it is impracticable for a company to call, hold or conduct an extraordinary general meeting, the
Tribunal may call an extraordinary general meeting either of its own motion or 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. Any
meeting called, held and conducted in accordance with any order of the Tribunal shall for all purposes be
deemed to be a meeting of the company duly called, held and conducted.

MEETINGS OF DIRECTORS (Secs. 285 to 288)

Directors of a company exercise most of their powers at the meetings of the Board. The Companies Act
contains the following provisions relating to Board meetings:
1. Number of meetings — once in every 3 months (Sec. 285). In the case of every company (whether public or
private) a meeting of its Board of directors shall be held at least once in every 3 months and at least 4 such
meetings shall be held in every year. The Central Government may by notification in the Official Gazette, direct
that this provision shall not apply in relation to any class of companies.

Ex: The meetings of Board of directors of Cherry Ltd., a public company, were held on 1st January, 30th June,
1st July, and 31st December, during the calendar year 1999. The requirements of Sec. 285 are met as one
meeting was held in each quarter and 4 such meetings were held during the year.

2. Notice of meetings (Sec. 286). Notice of every meeting of the Board of directors of a company shall be given
in writing to every director for the time being in India, and at his usual address in India.

3. Quorum for meetings (Sec. 287).The quorum for a meeting of the Board shall be 1/3rd of its strength (any
fraction contained in that 1/3rd being rounded off as one), or 2 directors, whichever is higher.

Want of quorum (Sec. 288). If a meeting of the Board cannot be held for want of quorum, it shall automatically
stand adjourned till the same day in the next week, at the same time and place unless the Articles provide
otherwise. If the day in the next week happens to be a public holiday, the adjourned meeting shall be held on the
day following the public holiday. Sec. 288 does not say what is to become of the adjourned meeting if there is
no quorum at that meeting also. Where a meeting of the Board is called but could not be held for want of
quorum, there shall be no contravention of Sec. 285.

REQUISITES OF A VALID MEETING

1. Proper authority: The proper authority to convene a general meeting (whether statutory, annual general or
extraordinary) of a company is the Board of directors. The Board should pass a resolution to call the general
meeting, at a duly convened meeting of the Board. If the directors do not call the meeting, the members or the
Company Law Board may call meeting. If some defect in the appointment or qualification of the directors
present at the Board meeting comes to light after the Board has acted bona fide, such a defect is not necessarily
fatal to the validity of the resolution to call the meeting.

2. Notice of meeting: A proper notice of the meeting should be given to the members all others who are entitled
to attend the meeting.

Length of notice (Sec. 171). A general meeting of a company may be called by giving not less than 21 days’
notice in writing to the members. The use of the word 'may’ in Sec. 171 does not mean that the notice be
dispensed with. A general meeting may be called by giving a notice of less than 21 days if it is so agreed—

(1) In the case of an annual general meeting, by all the members entitled to vote thereat. The members can
voluntarily consent to shorter notice either before or after the meeting.

(2) (a) In the case of any other meeting (e.g., a statutory meeting or an extraordinary general meeting) of a
company having a share capital, by members holding not less than 95 per cent of the paid-up share capital as
gives a right to vote, and

(b) In a company not having share capital, by members having not less than 95 per cent of the voting power
exercisable at the meeting.

Notice to whom. If notice of a meeting is not given to every person entitled to receive notice, any resolution
passed at the meeting will be of no effect. Notice of every meeting of a company shall be to—

(1) Every member of the company entitled to vote;

(2) The persons on whom the shares of any deceased or insolvent members may have devolved; and

(3) The auditor or auditors of the company.

Omission to give notice. Deliberate omission to give notice even single member may invalidate the meeting.
An accidental omission to give notice to, or the non-receipt of notice by, any member or other person to whom
it should be given, do not invalidate the proceedings at the meeting. 'Accidental omission’ means that the
omission must not be deliberate. The following is a case in point:

West Canadian Collieries, Ltd., Members of a company were not served with notice of a meeting,
addressograph plates containing the names and addresses of the members had been removed from the file
because the dividend warrants sent to those addresses had been returned or remained uncashed with the result
that the company wished to verify addresses. When the notices were sent out, these plates had not been
replaced. Held, this was an accidental omission and the meeting was valid.

Contents of notice. Every notice of a company calling a meeting shall specify the place and the day and hour of
the meeting. It shall also contain a statement of the business to be transacted at the meeting. The notice of a
general meeting must fairly and intelligently convey the purpose for which the meeting is called to enable a
person having the right to attend reasonably to make up his mind whether to attend or not. It should not be
misleading or equivocal.

Ordinary business and special business (Sec. 173): The notice shall contain a statement of the business to be
transacted at the meeting. The business may be ordinary business or special business.

Ordinary business. In the case of an annual general meeting, the following business is deemed as ordinary
business, viz., and business relating to—

(1) The consideration of the accounts, balance sheet and the reports of the Board of directors and auditors,(2)
The declaration of a dividend,(3) The appointment of directors in place of those retiring, and (4) The
appointment of auditors and the fixing of their remuneration.

Special business. In the case of an annual general meeting, any business other than the ordinary business, and in
the case of any other meeting, all business, is deemed special. Some of the examples of special business are—

(1) Removal of a director,(2) Issue of rights/bonus shares,(3) Election of a person (other than a retiring director)
as director.

If the notice does not specify the nature of the business to be special, it is bad in law. A meeting held in
pursuance of such a notice is not said to be duly convened and the resolutions passed thereat are void and ultra
vires.

3. Quorum for meeting (Sec. 174)

‘Quorum' means the minimum number of members who must be present in order to constitute a valid meeting
and transact business thereat. The quorum is generally fixed by the Articles. If the Articles of a company do not
provide for a larger quorum, the following rules apply:

(1) 5 members personally present in the case of a public company (other than a deemed public company), and 2
in the case of any other company, shall be the quorum for a meeting of the company. For the purpose of quorum
a person may be counted as 2 or more members if he hold shares in different capacities, e.g., as a trustee and
also in his own right. The representative of a body corporate appointed under Sec. 187 or the representative of
the President of India or a Governor of a state under Sec. 187-A is a member personally present for the purpose
of a quorum.

(2) If within half an hour a quorum is not present, the meeting, if called upon the requisition of members, shall
stand dissolved. In any other case, it shall stand adjourned to the same day, place and time the next week. The
Board of directors may adjourn the meeting to be convened on any particular day, time and place to be fixed on
the date of the meeting itself or at least before the commencement of the same in the next week. Where the
Board of directors fails to do so, the meet stands statutorily adjourned to the same day in the next week.

(3) If at the adjourned meeting also, a quorum is not present wit half an hour, the members present shall be the
quorum.

The Articles may provide for a larger quorum. The Articles cam provide for a quorum smaller than the statutory
minimum. For purposes of quorum, only members present in person and not by pi are to be counted. A
company cannot, by its Articles or otherwise provide for proxies being counted for purposes of a quorum.
Where total number of members of a company becomes reduced below the quorum fixed for a meeting, the
rules as to quorum will be satisfied if all the members of the company are present.

4. Chairman of the meeting (Sec. 175)

Presiding officer of the meeting. A chairman is necessary to conduct a meeting. He is the presiding officer of
the meeting. Unless the Articles of a company otherwise provide, the members personally present at the
meeting shall elect one of themselves to be the chairman of the meeting on a show of hands. If a poll is
demanded on the election of the chairman, it shall be taken forthwith. In such a case, the chairman elected on a
show of hands shall exercise all the powers of the chairman. If some other person is elected chairman as a result
of the poll, he shall be the chairman for the rest of the meeting. The Articles may provide some other method of
election of chairman.

Conduct of the meeting. The way in which a meeting is to be conducted is a matter for the chairman, with the
assent of the persons properly present, to be determined in the light of the general law and the company's
Articles of Association [Carruth v. Imperial Chemical Industries Ltd.,]

5. Minutes of meeting (Sees. 193 to 196)

Minutes are a record of what the company and directors do in meetings.

Minutes of Proceedings of meetings (Sec. 193). Every company shall keep a record of all proceedings of every
general meeting and of all proceedings of every meeting of its Board of directors and of every committee of the
Board. This done by making within 30 days of the conclusion of every such meeting concerned, entries of the
proceedings in the books kept for that purpose. These records are known as minutes.

Minutes book: The book in which the record of the proceedings of a meeting is kept is known as the minutes
book. Separate minute’s books are required to be kept for shareholders general meetings of the company
directors meetings and usually there are also separate for committee meetings of the Board of directors.

Numbering of pages. The pages of every minutes book shall be consecutively numbered. In no case is the
attaching or pasting of papers of proceedings of a meeting allowed in minutes book.

Signing of minutes. Each page of the minutes book which records proceedings of a Board meeting shall be
initialed or signed by the chairman of the same meeting or the next succeeding meeting, page of the record of
proceedings of each meeting in the minutes shall be dated and signed. This has to be done—
(a) In the case of a Board or a committee meeting, by the chairman of the same or the next succeeding meeting,
and

(b) in the case of a general meeting, by the chairman of the meeting within 30 days of the meeting, or in the
event of the inability of that chairman within 30 days of the meeting, by the duly authorised by the Board for the
purpose.

Fair and correct summary. The minutes of each meeting contain a fair and correct summary of the proceedings
at the meeting, so that the absentee shareholders may be in a position to form some reliable idea of what
transpired at these meetings. All appointment of officers made at any of the meetings aforesaid shall also be
included in the minutes of the meeting.

Evidentiary value of minutes (Sec. 194). Minutes of meetings kept in accordance with the provisions of Sec.
193 shall be evidence of the proceedings recorded therein and shall be conclusive of the facts; therein.

PROXIES: A member entitled to attend and vote at a meeting may vote either in person or by proxy. A proxy
is an authority to represent and vote for another person at a meeting. It is also an instrument appointing person
as proxy. The person so appointed is also called a proxy. If the Articles do not otherwise provide—

(1) A proxy can vote only on a poll.

(2) A member of a private company cannot appoint more than proxy to attend on the same occasion.
(3) A member of a company not having a share capital cannot appoint a proxy.

Proxy to be in writing. The instrument appointing a proxy shall be in writing and signed by the appointer or his
attorney duly author writing.

Proxy to be deposited 48 hours before the meeting. A proxy, in order to be effective, shall be deposited with
the company 48 hours before the meeting. Any provision in the Articles of a public company or of a private
company which is a subsidiary of a public company which requires a longer period than 48 hours before a
meeting of the company for depositing a proxy shall have effect as if a period of 48 hours had been specified for
such deposit.

VOTING AND POLL

The motions proposed in a general meeting of a company are decided on the votes of the members of the
company. The members holding any equity share capital therein have the right to vote on every motion placed
before the company. Members holding preference shares can vote only on those motions which affect rights
attached to their capital (Sec. 87). A shareholder's vote is a right of property, and prima facie may be exercised
by him as he thinks fit in his own interest. He is not bound to exercise it in the best interests of the company.
The voting may be:

1 By a show of hands, or 2. By taking a poll.

1. Voting by a show of hands (Sees. 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].

Chairman's declaration of result of voting by a show of hands conclusive (Sec. 178). A declaration by the
chairman as evidenced by an entry in the minute’s book shall be conclusive evidence of the fact that a
resolution has, on a show of hands, been carried.
2. Voting by poll (Sec. 179). Before or on the declaration of the result of voting on any motion on a show of
hands, a poll may be taken by the chairman of the meeting of his own accord. It shall, however, be taken on a
demand made in that behalf by the persons specified below:

(a) In the case of a public company having a share capital, a poll shall be taken on a demand by any member or
members present in person or by proxy and holding shares in the company—

 which confer a power to vote on the resolution not being less than 1/l0th of the total voting power in
respect of the resolution, or
 on which an aggregate sum of not less than Rs. 50,000 has been paid up.

(b) In the case of a private company having a share capital, a poll shall be taken on demand 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 company, a poll shall be taken on demand by any member or members present in
person or by proxy and having not less than 1/ 10th of the total voting power in respect of the resolution.

The demand for a poll may be withdrawn at any time by the persons who made the demand.

Time of taking poll (Sec.180). A poll demanded on a question or adjournment or the appointment of a chairman
shall be taken forthwith. In any other case a poll shall be taken within 48 hours of the demand for poll.

Meeting in continuance until result of poll ascertained. A complete when its result is ascertained, and not on
an earlier day when the votes were cast. Where a poll is taken, the meeting is regarded as continuing until the
ascertainment of the result of the poll. A meeting reconstituted after a poll is in continuance of the same meeting
and a poll itself is part of the meeting.

Manner of poll and result thereof (Sec. 185). The chairman of the meeting has the power to regulate the
manner in which a poll is to be taken. However the method usually followed is that of a ballot, which members
record their decision, i.e., ‘For' or 'against' the motion.' The result of the poll shall be deemed to be the decision
of the meeting on the motion on which the poll is taken.

RESOLUTIONS: The questions which generally come for consideration at the general meeting of a company
are presented in the form of proposals motions. A motion may be proposed by the chairman of the meeting by
any other member of the company. Before it is placed before the meeting by the chairman for discussion, it
must be seconded by someone. The motion, after the close of discussion, is formally put to vote by a show of
hands. It may either be carried or rejected. If a sufficient number of members demand, the motion may be put to
poll. The result is declared after the poll is taken. If a motion is carried, it becomes a 'resolution'.

KINDS OF RESOLUTIONS : There are three kinds of resolutions under the Companies Act,

1. Ordinary resolution: An ordinary resolution is a resolution passed at a general meet a company by a simple
majority of votes (i.e., votes cast in favour the resolution exceed votes cast against it) including the casting vote
of the chairman, if any. The votes may be cast by members in person proxy, where proxies are allowed. The
required notice of the meeting should have been duly given. In ascertaining simple majority members, only the
votes cast, including the casting vote of the chairman if any, have to be taken into account.

Unless the Companies Act or the Memorandum or the expressly require a special resolution or resolution
requiring of notice, an ordinary resolution is sufficient to carry out any matter.
When is an ordinary resolution required? Ordinary resolution necessary for the following among other
purposes: (a) Rectification of name or adoption of new name by a company where in it resembles the name of
an existing company with the previous of the Central Government. (b) Issue of shares at a discount. (c)
Alteration of share capital. (d) Adoption of statutory report.(e) Passing of annual accounts and balance sheet,
along with reports of Board of directors and auditors. (f) Removal of a director and appointment of a director in
his place.(g) Appointment of auditors and fixation of their remuneration.(h) Appointment of managing/whole-
time director.

2. Special resolution: A special resolution is one which satisfies the following conditions:

(a) The intention to propose the resolution as a special resolution has been duly specified in the notice calling
the general meeting.

(b) The notice has been duly given of the general meeting.

(c) The votes cast in favour of the resolution by members entitled to vote are not less than 3 times the number of
votes cast against the resolution by members so entitled and voting. The members may vote in person, or where
proxies are allowed, by proxies.

(d) An explanatory statement setting out all material facts concerning the subject-matter of the special
resolution including, in particular, the nature of the concern or interest of every director and the manager, if any,
shall be annexed to the notice of the meeting.

A copy of every special resolution together with the copy of the explanatory statement shall, within 30 days of
the passing of the resolution to be filed with the Registrar. A object of requiring a majority of 3/4ths of the votes
for a special Ion is to protect the minority interests in important matters relating to the company's affairs.

When is a special resolution required? Special resolution is necessary for the following among other purposes:

(a) Alteration of Memorandum for changing the place of registered Board to one State to another with the leave
of the Company Law Board. Special resolution is also required for the 'objects clause' of the Memorandum. (b)
Change of name of a company with the consent of the Central Government. (c) Omission or addition of the
word 'Private' from, or to, the name of the company. (d) Reduction of share capital. (e) Alteration of the Articles
of a company. (f) Variation of shareholders' rights. (g) Payment of interest out of capital (i) Removal of a
company's registered office outside the local limits any city, town or village. (j) Applying to the Court to wind
up a company.

Company Management
DIRECTORS: A company in the eyes of the law is an artificial person. It has no physical existence. It has
neither soul nor a body of its own. As such, it cannot act in its own person. The directors are the brain of a
company. They occupy a pivotal position in the structure of the company. They are in fact the mainspring of the
company.

Definition: 'Director' includes any person occupying the position of director, by whatever name called. The
important factor to determine whether a person is or is not a director is to refer to the nature of the office and its
duties. It does not matter by what name he is called. If he performs the functions of a director, he would be
termed a director in the eyes of the law even though he may be named differently. A director may, therefore, be
defined as a person having control over the direction, conduct, management or superintendence of the affairs of
a company.
Only individuals can be directors. Nobody corporate, association or firm can be appointed director of a
company. Only an individual can be so appointed. Companies (Amendment) Act, 2006 has introduced
provisions with respect to Director Identification Number (DlN) w.e.f. 1.11.2006.

Newly inserted proviso to Section 253 makes it obligatory for companies to ensure that directors have been
allotted. Director identification Number (DIN) as required under newly inserted Section 266B of the Act. The
said proviso requires that fresh appointment of any individual as director of the company cannot be made unless
such an individual has been allotted DIN. Similarly, it requires that companies re-appoint its director unless he
has been allotted DIN.

Number of directors: Every public company (other than a deemed public company) shall at least 3 directors
and every other company (e.g., a private company, a deemed public company) at least 2 directors. [Sec. 252(1)].
However a public company having—

 a paid-up capital of Rs. 5 crore or more;

 one thousand or more small shareholders;

Shall have at least one director elected by such small shareholders in the manner as may be prescribed. "Small
shareholder" means a shareholder holding shares of nominal value of Rs. 20,000 or less in a public company to
which Sec. 252 (1) applies [Proviso to Sec. 252 (1) as introduced by the Companies (Amendment) Act. 2000].

Increase or reduction in number of directors (Sec. 258). Subject to the statutory minimum limit, the Articles of
a company may prescribe the maximum and minimum number of directors for its Board of directors. The
number so fixed may be increased or reduced within the limits prescribed by the Articles by an ordinary
resolution of the company in general meeting. If the number falls below the minimum, prima facie the Board
cannot act.

Sanction by the Central Government (Sec. 259). Any increase in number of directors beyond the maximum
permitted by the Articles shall be approved by the Central Government. But where the increase in number does
not make the total number of directors more than 12, if approval of the Central Government is needed.

APPOINTMENT OF DIRECTORS

1. First directors: (a) The Articles of a company usually name the first directors by their respective names or
prescribe the method of appointing them.

(b) If the first directors are not named in the Articles, the number of directors and the names of the directors
shall be determined in writing by the subscribers of the Memorandum or a majority of them.

(c) If the first directors are not appointed in the above manner, the subscribers of the Memorandum who are
individuals become directors the company. They shall hold office until directors are duly appointed in the first
annual general meeting.

2. Appointment of directors by the company. Directors must be appointed by shareholders in general meeting.
In the case of a public company or a private company which is 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 vacancies.

(1) 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 from office.
(2) 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.

(3) At the annual general meeting at which a director retires by rotation, the company may fill up the vacancy
appointing the retiring director or some other person.

(4) 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 re-appointed at the adjourned meeting.

3. Appointment of directors by directors. The directors of a company may appoint directors—

(1) As additional directors. Any additional director appointed by the directors shall hold office only up to the
date of the next annual general meeting of the company. 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.

(2) In a casual vacancy. 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.

(3) As alternate director. An alternate director can be appointed by the Board if it is so authorised 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 from 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 /3rd of the total number of directors, and they are not liable to retire by rotation.

5. Appointment by proportional representation. 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 empowers the Central Government to
appoint such number of directors on the Board of a company 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—

(a) Which is oppressive to any members of the company; or

(b) Which is prejudicial to the interests of the company or to interest.

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 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.

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
principles of the law of principal and agent regulate in most respects the relationship between the company and
its directors.

Directors as employees. Although the directors of a company's its agents, they are not employees or servants of
the company for entitled to privileges and benefits which are granted under Companies Act to the
employees. But there is nothing to prevent a director from being a servant of the company under a special
contract 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 Company Act, the directors are treated as officers of the
company. As such they are liable to certain penalties if the provisions of Companies Act are not strictly
complied with.

Directors as trustees. Directors are treated as trustees—

(1) Of the company's money and property; and

(2) Of the powers entrusted to them.

Trustees for the company. Directors are trustees for the company and not for third persons who have made
contracts with the company or for the individual shareholders. The leading case on the point is:

Quasi-trustees. Directors are really only quasi-trustees because—

(1) They are not vested with ownership of the company's property;
(2) Their functions are not the same as those of trustees;
(3) Their duties of care are not as onerous as those of trustees.

To sum up: "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."

NUMBER OF DIRECTORSHIPS: No person to be a director of more than 15 companies. A person shall not
hold office at the same time as director in more than 15 companies.

Exclusion of certain directorships. In calculating the number of companies of which a person may be a director,
the following companies shall be excluded, viz.,

(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 a
dividend ; and
(d) a company in which such person is only an alternate director.
DISQUALIFICATIONS OF DIRECTORS: A director must be—

 be an individual,
 be competent to contract, and
 hold a share qualification, if so required by the Articles.
The following persons are disqualified for appointment as directors of a company:

(a) A person of unsound mind.

(b) An undischarged insolvent
(c) A person who has applied to be adjudicated as an insolvent and his application is pending.
(d) A person who has been convicted by a Tribunal of any offence;
(e) A person whose calls in respect of shares of the company held for more than 6 months have been in
arrear.
(f) A person who is disqualified for appointment on the ground of fraud or misfeasance in relation to the
company.

Removal of directors: Directors may be removed by—

1. Shareholders. The shareholders may remove a director before the expiry of his period of office by passing
an ordinary resolution.

2. Central Government. The Central Government may, in certain circumstances, remove managerial personnel
from office on the recommendation of the Tribunal.

3. Removal by Tribunal. Where, on an application to the Tribunal for prevention of oppression or mis-
management, the Tribunal finds that the relief ought to be granted, it may terminate, set aside or modify any
agreement between the company and the managing director or any other director or the manager.

POWERS OF DIRECTORS: General Powers of the Board. The Board of directors of a company is entitled
to exercise all such powers and to do all such acts and things as the company is authorised to exercise and do.
This means the powers of the Board of directors are co-extensive with those of the company. This proposition
is, however, subject to two conditions:

 First, the Board shall not do any act which is to be done by the company in general meeting.
 Second, the Board shall exercise its powers subject to the provisions contained in the Companies Act, or
in the Memorandum or the Articles of the company or in any regulations made by the company in
general meeting.

Powers to be exercised at Board meetingsSec. 292). The Board of directors of a company shall exercise the
following powers on behalf of the company by means of resolutions passed at the meetings of the Board, viz.,
the power to—

(a) Make calls on shareholders in respect of money unpaid on their shares;

(b) Issue debentures;
(c) Borrow moneys otherwise than on debentures (say through public deposits);
(d) Invest the funds of the company; and
(e) Make loans.
Powers to be exercised with the approval of company in general meeting. The Board of directors of a public
company, or of a private company which is a subsidiary of a public company, shall exercise the following
powers only with the consent of the company in general meeting:

(a) To sell, lease or otherwise dispose of the whole, or substantially the whole, of the undertaking of the
company.
(b) To remit or give time for repayment of any debt due to the company by a director
(c) To invest (excluding trust securities) the amount of compensation received by the company.
(d) To borrow moneys where the moneys to be borrowed (together with the moneys already borrowed by the
company) are more than the paid-up capital of the company and its free reserves.

Political contributions (Sec. 293-A): With a view to permitting the corporate sector to play a legitimate role
within the defined norms in the functioning of our democracy, Sec. 293-A allows companies to make
contributions to political parties or for political purposes to any person, directly or indirectly, out of their profits.
Sec. 293-A however prohibits political contributions (to any political party or for any political purpose to any
person, whether directly or indirectly) in the case of (a) Government companies, and (b) Companies which have
been in existence for less than 3 financial years.
Any other company may contribute any amount or amounts, directly or indirectly, (a) to any political party, or
(b) for any political purpose to any person.

DUTIES OF DIRECTORS

The statutory duties of directors have been discussed at appropriate places. Again, there are certain duties of a
general nature of the following type: 1. Fiduciary duties, and 2. Duties of care, skill and
diligence.

1. Fiduciary duties. As fiduciaries, the directors must—

(a) Exercise their powers honestly and bonafide for the benefit of the company as a whole; and

(b) Not place themselves in a position in which there is a conflict between their duties to the company and their
personal interests. They must not make any secret profit out of their position. If they do, they have to account
for it to the company.

Fiduciary duties owed to the company. The fiduciary duties of directors are owed to the company and not to the
individual shareholders.

2 Duties of care, skill and diligence. Directors should carry out their duties with reasonable care and exercise
such degree of skill and diligence as is reasonably expected of persons of their knowledge and status. He is not
bound to bring any special qualifications to his office.

Standard of care. The standard of care, skill, and diligence depends upon the nature of the company's business
and circumstances of the case.

Other duties of directors. The other duties of a director are —

 To attend Board meetings,

 Not to delegate his functions except to the extent authorised by the Act or the constitution of the
company, and
 To disclose his interest.
LIABILITIES.OF DIRECTORS

The liabilities of directors may be discussed under the following four heads:

1. Liability to third parties. This may arise—

(1) Under the Act. Liability of directors to third parties may arise in connection with the issue of a prospectus
which does not contain the particulars required as per the Companies Act, or which contains material
misrepresentations.

Directors may also incur personal liability—

a) On their failure to repay application money if minimum subscription has not been subscribed (Sec. 69).
b) On an irregular allotment of shares to an allottee if loss or damage is sustained (Sec. 71).
c) On their failure to repay application money if the application for the securities to be dealt in on a
recognised stock exchange is not made or is refused (Sec. 73).
d) on failure by the company to pay a bill of exchange, hundi, promissory note, cheque or order for money
or goods wherein the name of the company is not mentioned in legible characters (Sec. 147).

(2) Independently of the Act. Directors, as agents of a company, are not personally liable on contracts entered
into as agents on behalf of the company.

But there are a number of exceptions to this rule. If a director fails to exclude personal liability, for instance, by
signing a negotiable instrument without mentioning the company's name and the fact that he is signing on
company's behalf, he is personally liable to the holder of such instrument. He is also personally liable if he acts
in his own name.

2. Liability to the company. The liability of directors towards the company may arise from—

(1) Ultra vires acts. Directors are personally liable to the company in respect of ultra vires acts and it is not
necessary to prove fraud in such cases, e.g., when they pay dividends out of capital or when they dissipate the
funds of the company in ultra vires transactions. They are liable jointly and severally and, inter se. they have a
right to rateable contribution.

(2) Negligence. A director may incur liability for the negligence in the exercise of his duties. There is no
statutory definition of negligence, and as such each case has to be decided after due consideration of the
particular facts thereof. The question to be answered in each case is : "Has the director exercised the necessary
care and shown the necessary diligence in the discharge of his duties ?" If he has not, he is liable. If he has,
there can be no question of liability. It is essential in an action for negligence that the company suffers some
damage, as negligent) without damage or damage without negligence is not actionable.

(3) Breach of trust. Directors of a company, being in a fiduciary position, hold the position of trustees as
regards its money and property which comes into their hands and of the powers entrusted to them by the
Articles. They must discharge their duties as such trustees in the be interest of the company. They are liable to
the company for any loss resulting from breach of trust. Directors are also accountable to the company for any
secret profit they might have made in transactions on behalf of the company.

(4) Misfeasance. Directors are liable to the company for misfeasance which means 'wilful misconduct' of
directors for which they may be sue in a Court. In case of misfeasance proceedings the directors may apply for
relief under Sec. 633.
3. Liability for breach of statutory duties. There are numerous statutory duties of directors which they must
carry out. Most of these duties relate to maintenance of proper accounts, filing of returns or observance of
certain statutory formalities. If they fail to perform these duties, they render themselves liable to penalties.

4. Liability for acts of his co-directors. A director is not liable for the acts of his co-directors provided he has
no knowledge and he is not a party. His co-directors are not his servants or agents who can by the acts impose
liability on him.

MANAGING DIRECTOR: A managing director means a director who is entrusted with substantial poiuers of
management which would not otherwise be exercisable by him. These powers may be conferred upon him by
virtue of an agreement with the company or a resolution passed by the company in general meeting or by its
Board of directors or by virtue of its Memorandum or Articles of Association.

The term 'managing director' includes a director occupying the position of a managing director, by whatever
name called. But the power 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 to 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 transfer of any share, shall not be deemed to be included within substantial
powers of management. Further, the managing director shall exercise his powers subject to superintendence,
control and direction of its Board of directors [Sec. 2 (26)]. He is a whole-time director and is the chief
executive of the company.

Appointment (Sec. 269). Compulsory appointment of managing or whole-time director or manager. 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 shall have a managing or whole-time director or a manager.

Prior approval of the Central Government unless appointment is in accordance with the conditions specified in
Schedule XIII. No such appointment shall be made except with the prior approval of the Central Government.
However, no such approval is required where the appointment is made in accordance with the conditions
specified in Schedule XIII.

Schedule XIII prescribes conditions to be fulfilled for the appointment of a managing or whole-time director or
manager without the approval of the Central Government. It also lays down the remuneration payable to
managerial personnel. Approval of the Central Government is not required in the case of appointment of
managerial personnel made on or after 15th day of June, 1988 (the date when the amended provisions of Sec.
269 were enforced), in accordance with the conditions specified in Schedule XIII to the Act.

Disqualifications of managing director (Sec. 267). No person shall be appointed a 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 hi; creditors, or makes, or has at any time made,
composition with them; or
(c) Is, or has at any time been, convicted by a Tribunal of an offence involving moral turpitude.
The disqualifications which apply to directors also apply to a managing director.

Number of managing directorships (Sec, 316). It cannot exceed two. Any person may be appointed as a
managing director in a public company or in a private company which is a subsidiary of a public company,
provided he is not holding the office of the managing director or the manager in any other company (including a
private company which is not a subsidiary of a public company). He can, however, hold such office in any
number of private companies which are not subsidiaries of public Companies.
A public company or a private company which is a 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 not more than one, other
company (including a private company which is not a subsidiary of a public company). But any such
appointment shall be approved by a resolution passed at a meeting of the Board of directors with the consent of
all the directors present at the meeting. Specific notice of such a meeting and the resolution shall also be given
to all the directors then in India.

The object of this provision is that efficiency of a person who is managing a company should not be affected by
his being in management of more than two companies. Thus a person may hold the office of managing director
in not more than two companies simultaneously.

Central Government may permit a person to be managing director of more than two companies. The Central
Government may permit any Person to be appointed as a managing director of more than two companies if it 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.

Term of office (Sec. 317). It cannot exceed 5 years at a time. The maximum term of appointment of a managing
director can be 5 years at a time. There is nothing to prohibit reappointment, re-employment or the extension of
the term of office of the managing director. But any such new term shall not be sanctioned earlier than 2 years
from the date on which it is to come into force. Sec. 317 does not apply to a private company which is not a
subsidiary of a public company.

WINDING UP

Winding up or liquidation of a company represents the last stage in its life. It means a proceeding by which a
company is dissolved. The assets of the company are disposed of, the debts are paid off out of the realised assets
(or from contributions from its members), and the surplus, if any, is then distributed among the members in
proportion to their holdings in the company. The two terms ‘winding up’ and ‘liquidation’ are used
interchangeably. According to Prof. Gower, winding up of a company is a process whereby its life is ended and
its property administered for the benefit of its creditors and members. An administrator, called liquidator, is
appointed and he takes control of the company collects its assets, pays its debts and finally distributes any
surplus among the members in accordance with their rights.

MODES OF WINDING UP
There are three modes of winding up of a company, viz.,
1. Winding up by the Court (Section 433 to 483).
2. Voluntary winding up (Section 484 to 521). This may be -
a. members’ voluntary winding up, or
b. creditors’ voluntary winding up.

WINDING UP BY THE COURT (Sections 433 to 483)

Winding up of a company under the order of a Court is also known as compulsory winding up.

GROUNDS FOR COMPULSORY WINDING UP (Section 433)

A company may be wound up by the Court in the following cases:

1. Special resolution of the company. Winding up order under this head is not common because normally the
members of a company prefer to wind up the company voluntarily for in such a case they shall have a voice in
its winding up. Moreover, a voluntary winding up is far cheaper and speedier than a winding up by the Court.

2. Default in delivering the statutory report to the Registrar or in holding statutory meeting. A petition on
this ground can be made either by the Registrar or by a contributory. In the latter case the petition for winding
up can filled only after the expiry of 14 days from the day on which the statutory meeting ought to have been
held. The Court may, instead of making a winding up order, direct that the statutory report be delivered or that a
statutory meeting be held.

3. Failure to commence, or suspension of, business. The Court exercises power in this case only if the
company has no intention of carrying on its business or if it is not possible for it to carry on its business.

4. Reduction in membership: If, at any time, the number of members of a company is reduced in the case a
public company, below 7 or in the case of a private company, below 2, the company may be ordered to be
wound up by the Court. If the company carries on business for more than 6 months while the number is so
reduced every member who is cognizant of the fact that it is carrying on business with members fewer than the
statutory minimum, will be severally liable for the payment of the whole of the debts of the company contracted
after those 6 months.

5. Inability to pay its debts: A company may be wound up by the Court if it is unable to pay its debts. The test
is whether the company has reached a stage where it is commercially insolvent— that is to say, that its existing
and probable assets would be insufficient to meet the existing liabilities. “Commercially insolvent” means that
the company is unable to pay debts or liabilities as they arise in the ordinary course of business.

6. Just and equitable. The words ‘just and equitable’ are of the widest significance and do not limit the
jurisdiction of the Court to any particular case.

What is ‘just and equitable’ clause? It depends upon the facts of each case. The Court 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 except at a loss, or the existing and possible assets
are insufficient to meet the existing liabilities.
2. The substratum of a company disappears:
a) When the very basis for the survival of the company is gone.
b) When the main object of the company has substantially failed or become Impracticable
c) 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.
d) When the existing and probable assets of the company are insufficient to meet its existing
liabilities.
3. 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.
4. Where there is 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 for winding up on the just and equitable
ground.
5. Where public interest is likely to be prejudiced. Having regard to the provisions of section 397 and
398 where the concept of prejudice to public interest is introduced, 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.
6. When the company was formed to carry out fraudulent or illegal business or when the business of
the company becomes illegal.
 7. When the company is a mere bubble and does not carry on any business or does not have any
property.

PETITION (Section 439): An application to the Court for the winding up of a company is made by a petition.
A petition for the winding up of a company may be presented, subject to the provisions of this Section, in the
following cases

1. Petition by the company: A company may itself present a petition to the Court for winding up after it has
passed a special resolution.
2. Petition by any creditor or creditors: A petition to the Court for the winding up of a company may be filed
by any creditor or creditors. The term ‘creditor’ is not limited to one to whom a debt is due at the date of the
petition and who can demand immediate payment.
3. Petition by any contributory or contributories. A contributory means a person liable to contribute to the
assets of the company on the event of its being wound up and includes the holder of shares which are fully paid
up.
4. Petition by all or any of the prior parties whether together or separately: A petition for the winding up
of a company under section 433 may be presented by all or any of the parties, namely, the company, the
creditors or the contributories specified in section 433 (a), (b) and (c) whether together or separately.
5. Petition by the Registrar: The Registrar can present a petition for winding up a company on the following
grounds only, viz.
(a) If default is made by the company in delivering the statutory report to the Registrar or in holding the
statutory meeting.
(b) If the company does not commence its business within a year from its incorporation
(c) If the number of members is reduced
(d) If the company is unable to pay its debts.
(e) If the Court is of opinion that it is just and equitable that the company should be wound up.

6. Petition by the Central Government. Under section 243 the Central Government may cause to be presented
to the Court by any person authorized a petition for the winding up of a company where it appears from the
report of inspectors appointed to investigate the affairs of the company under section 235 that :
(1) The business of the company is being conducted with intent to defraud its creditors, members, or any other
persons; or otherwise for a fraudulent or unlawful purpose; or in a manner oppressive of any of it members, or
that the company was formed for any fraudulent or unlawful purpose: or
(2) Persons concerned in the formation of the company or the management of its affairs have been guilty of
fraud, misfeasance or other misconduct towards the company or towards any of its members.

COMMENCEMENT OF WINDING UP: 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
shall be deemed to have commenced from the date of the resolution. In all other cases (i.e., where the company
has not previously passed a resolution for voluntary winding up) the winding up of the company by the Court
shall be deemed to commence at the time of the presentation of the petition for the winding up. When an order
is made for winding up, it relates back to the date of the presentation of the petition. If no order for winding up
is made and the winding up petition is dismissed, the date of the presentation of the winding up petition has no
relevance. As such until winding up order is made company has to comply with the requirements of the
Companies Act 1956 as are required of a company not wound up.

Advertisement of petition: Every petition for winding up a company shall be advertised 14 days before the
hearing, stating the date on which the petition was presented and the names and addresses of petitioners.

CONSEQUENCES OF WINDING UP ORDER

Once the Court makes an order for the winding up of a company, its consequences date back to the
commencement of wining up. The other consequences of winding up by the Court are as follows:
1. Intimation to Official Liquidator and Registrar: Where the Court makes an order for the winding up of a
company, it shall forthwith cause intimation to be sent to the Official Liquidator and the Registrar of the order
of winding up.
2. Copy of winding up order to be filed with the Registrar. On the making of the winding up order it shall be
the duty of the petitioner and of the company to file with the Registrar within 30 days a certified copy of the
order.
3. Order for winding up deemed to be notice of discharge: The order for winding up shall be deemed to be
notice of discharge to the officers and employees of the company, except when the business of the company is
continued. Where a servant of the company is on a contract of service for a fixed term and that term has not
expired on the date of the order of the winding up of the company, the order operates as a wrongful discharge
and damages are allowed for breach of contract of service and the servant is free from his agreement not to
compete with the company.
4. Suits Stayed. When a winding up order has been made, no suit or other legal proceeding shall be commenced
against the company except by leave of the Court. Similarly pending suits shall not be proceeded with except by
leave of the Court.
5. Powers of the Court: The Court which is winding up the company shall have jurisdiction to entertain, or
dispose of— (a) any suit or proceeding by or against the company; (b) any claim made or against the company;
(c) any application made under section 391 for compromise with creditors and/or members; (d) any question of
priorities or any other question whatsoever, whether of law or fact, which may relate to or arise in course of the
winding up of the company.
6. Effect of winding up order: 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 their joint petition.
7. Official Liquidator to be Liquidator: 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.

VOLUNTARY WINDING UP (Section 484 to 520) Voluntary winding up means winding up by the members
or creditors of a company without interference by the Court. The object of a voluntary winding up is that the
company, i.e. the members as well as the creditors, are left free to settle their affairs without going to the Court.
They may however apply to the Court for any directions, if and when necessary. Circumstances in which a
company may be wound up voluntarily: A company may be wound up voluntarily —

(1) By passing an ordinary resolution: When the period, if any fixed for the duration of a company by the
Articles has expired, the company in general meeting may pass an ordinary resolution for its voluntary winding
up. The company may also do so when the event, if any, on the occurrence of which the Articles provide that
the company is to be dissolved, has occurred.
(2) By passing a special resolution: A company may at any time pass a special resolution that it be wound up
voluntarily. No reasons need be given where the members pass a special resolution for the voluntary winding up
of the company. Even the Articles cannot prevent the exercise of this statutory right.

Commencement of voluntary winding up (section 486): A voluntary winding up shall be deemed to

commence at the time when the resolution (ordinary or special, as the case may be) for its voluntary winding up
is passed. Advertisement of resolution (Section 485): Within 14 days of the passing of the resolution for
voluntary winding up of the company, the company shall give notice of the resolution by advertisement in the
Official Gazette, and also in some newspaper circulating in the district of the registered office of the company.
TYPES OF VOLUNTARY WINDING UP
A voluntary winding up may be a:

1. Members’ voluntary winding up, or 2. creditors’ voluntary winding up.

Members’ Voluntary Winding Up: This type of winding up is carried out when the company is solvent and is
able to pay its liabilities totally. The important aspects of members’ voluntary winding up are as follows −

a. Declaration of Solvency: For the winding up of a company, it is needed for the directors to conduct a
meeting, where the majority of the directors make a declaration approved by an affidavit that they have
made a full assessment of the company and the company is able to pay all its debts within three years of
the winding up of the company. It is necessary for such a declaration to be made at least 5 weeks before
the resolution to become effective. It should be necessarily delivered to the registrar’s office.

b. Appointment and Remuneration of Liquidators: The company, in a general meeting, must exercise
the following things

 Appointment of liquidators for the purpose of winding up of the company as and when the company is
about to be wound up and for the distribution of the assets of the company
 Fixing an adequate remuneration to be paid to the liquidators. This fixed remuneration cannot be
changed in any circumstances. The liquidator does not take charge of his office unless the remuneration
is fixed.

c. Board’s Power to Cease: During the course of liquidation, all the powers of the directors and managers
are ceased. However, the power to give notices and the power to make appointments to the registrar is
not ceased.

d. Notice of Appointment of the Liquidator Is Given to the Registrar

e. Duty of Liquidator to Call Creditors’ Meeting in Case of Insolvency: If the liquidator, for any
reason, realizes that the company is on the verge of insolvency, i.e., thinks that the company will be
unable to pay its debts and liabilities within the limited time as specified by the declaration of
insolvency, he must summon a meeting of the creditors where the statement of all the assets and
liabilities is laid before them.

f. Duty of the Liquidator to Inform the Income Tax Officer: Upon the appointment of a liquidator, the
income tax office must be informed of the appointment of the liquidator. This must be done within 30
days of the appointment of the liquidator. The tax assessment of the company is to be carried out.

g. Duty of the Liquidator to Call General Meeting at the End of Each Year: In case the process of
winding up takes more than one year, the liquidator must call for general meetings at the end of each
year. The meetings should be held within three months from the end of each year or as specified by the
central government of India. The liquidator must present a brief account of his actions and the matters he
is dealing with and the progress of the winding up at the general meeting before all the other members of
the company.

h. Final Meeting and Dissolution: When the affairs of the company are fully finished, the liquidator must
do the following things −

 Make a report on how the process of winding up progressed, ensuring all the property of the company
has been disposed.
  Conduct a general meeting of the company for laying the report before the company and provide
justification of the steps he has taken for the successful winding up of the company.
 Send a copy of the report to the registrar’s office and meet the registrar to return the report within one
week and make a report to the tribunal about the conduct of the winding up to ensure that that the
liquidation went as per the members of the company’s interest.

i. Dissolution of the Company

Creditors’ Voluntary Winding Up: Creditors’ voluntary liquidation is a procedure in which the company's
directors choose to voluntarily bring the business to an end by appointing a liquidator (who must be a licensed
insolvency practitioner) to liquidate all its assets. The important provisions of the creditors’ voluntary winding
up are as follows −

a. Meeting of the Creditors: A creditors’ meeting must be called up within two days of the day when the
resolution for winding up of the company, as proposed by the creditors, is passed. A notice of the
creditors’ meeting along with the notice of the general meeting of the company must be delivered to all
the creditors of the company. A full-fledged report on the company’s affairs, the list of the creditors of
the company and the estimated amount of claims made by the creditors should be presented by the
directors before the creditors of the company.

b. Notice of Resolution to Be Given to the Registrar − When a resolution of winding up of a company,

as proposed by the creditors, is passed, a notice of the resolution must be delivered at the registrar’s
office within 10 days from the day when the resolution is passed.

c. Appointment of the Liquidator: A liquidator for the purpose of the winding up of the company may be
nominated by the creditors of a company at the creditors’ meeting. However, if there are different
persons nominated at the general meetings of the company and the creditors meeting of the company,
then the person nominated by the creditors is appointed as the liquidator of the company.

d. Appointment of the Inspection Committee: if the creditors wish, they may appoint an inspection
committee for watching over the entire process of winding up of the company.

e. Remuneration of the Liquidator: The creditors fix the remuneration of the liquidator. If the creditors
fail to fix the remuneration of the liquidator, the remuneration shall be fixed by the tribunal. No
liquidator shall join unless a respectable remuneration is fixed. Once fixed, the remuneration cannot be
changed.

f. Power of the Liquidator: The liquidator enjoys all the powers as vested on a director. Further the
liquidator enjoys all the powers as vested on a liquidator in case of members’ voluntary winding up
according to section 494 of the Companies Act, 1956.

g. Duty of the Liquidator to Call General Meeting at the End of Each Year: In case the process of
winding up takes more than a year, the liquidator must call for general meetings and creditors’ meetings
at the end of each year. The meetings should be held within three months from the end of each year or as
specified by the Central Government of India. The liquidator must present a brief account of his actions
and the matters he is dealing with and the progress of the winding up at the general meeting before all
the other members of the company.

h. Final Meeting and Dissolution: When the affairs of the company are fully finished, the liquidator must
do the following things −Make a report on how the process of winding up went, ensuring all the
property of the company has been disposed. Conduct a general meeting of the company for laying the
report before the company and give certain explanation about the justification of the steps he has taken
 for the successful winding up of the company. Send a copy of the report to the registrar’s office and
meet the registrar to make a return of the report within one week and make a report to the tribunal about
the conduct of the winding up to ensure that the liquidation went as per the members of the company’s
interest.

i. Dissolution of the Company: Bringing an end to the life of a company is termed as dissolution. No
property can be held by a dissolved company. The company cannot be sued by the court after
liquidation. If any property of the company still remains after the dissolution of the company, the
property will be taken over by the government immediately.
Module VI: Consumer Protection Act 1986 and Torts
Need for Consumer Protection – Meaning of Consumer – Different redressal Forums for Consumers, Rights of
Consumers, Unfair Trade Practices, and Procedure for Filing Complaints. Meaning of tort, Application of
Tortuous Liability in Business Situations.

EXTENT AND COVERAGE OF CONSUMER PROTECTION ACT

-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.
-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.
-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.

Need for Consumer Protection

The consumer protection Act, 1986, provides 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, award relief and 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.

Meaning of Consumer

WHO IS 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".
(A) For the purpose of "goods", a consumer means a person belonging to the following categories:
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;
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.

(B) For the purpose of "services", a "consumer" means a person belonging to the following categories:
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.
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.

RIGHTS ENJOYED BY CONSUMER

1-Right to be protected against the marketing of goods and service that is hazardous to life and property.
2-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-Right to choice wherever possible , access to a variety of goods and services at competitive prices.
4-Right to be heard and to be assured that consumers' interests will receive due consideration at appropriate
forums;
5-Right to seek redressal against unfair trade practices unscrupulous exploitation of consumers.
6-Right to consumer education.
7-Right to clean and healthy environment.

Different redressal Forums for Consumers

The Act envisages a three- tier quasi-judicial machinery at the National, State and District levels.

National Consumer Disputes Redressal Commission - known as "National Commission" deals with complaints
involving costs and compensation higher than Rs. One Crore.

State Consumer Disputes Redressal Commissions - known as "State Commission, deals with complaints
involving costs and compensation higher than Rs. Twenty Lakhs and less than Rs. One Crore.

District Consumer Disputes Redressal Forums - known as "District Forum, deals with complaints involving
costs and compensation less than Rs. Twenty Lakhs.

JURISDICTION
If the cost of goods or services and compensation asked for is up to rupees twenty lakh ,then the complaint can
be filed in the District Forum which has been notified by the State Governmentfor the district where the cause
of action has arisen or where the opposite party resides. A complaint can also be filed at a place where the
branch office of the opposite party is located.
If the cost of goods or services and compensation asked for is more than rupees twenty lakh , but less than
rupees one crore then the complaint can be filed before the State Commission notified by the State Government
or Union Territory Concerned.
If the cost of goods or services and compensation asked for exceed rupees one crore then the complaint can be
filed before the National Commission at New Delhi

COMPOSITION

Each District Forum shall consist 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, one of whom shall be a woman, who shall have the following qualifications, namely:-
(i)be not less than thirty-five years of age,

(ii) posses a bachelor's degree from a recognized university,

(iii) be persons of ability, integrity and standing, and have adequate knowledge and experience of at least ten
years in dealing with problems relating to economics, law, commerce, accountancy, industry, public affairs or
administration:

Each State Commission shall consist of -

(a) a person who is or has been a Judge of a High Court, appointed by the State Government, who shall be its
President : Provided that no appointment under this clause shall be made except after consultation with the
Chief Justice of the High Court;

(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 :
The National Commission shall consist of-
(a) a person who is or has been a Judge of the Supreme Court, to be appointed by the Central Government, who
shall be its President:1[Provided that no appointment under this clause shall be made except after consultation
with the Chief Justice of India;

(b) not less than four, and not more than such number of members, as may be prescribed, and one of whom shall
be a woman, who shall have the following qualifications, namely:-

(i) be not less than thirty-five years of age;

(ii) possess a bachelor's degree from a recognized university; and

(iii) be persons of ability, integrity and standing and have adequate knowledge and experience of at least ten
years in dealing with problems relating to economics, law, commerce, accountancy, industry, public affairs or
administration:

RELIEF AVAILABLE TO CONSUMER

Depending on the facts and circumstances, the Redressal Forums may give order for one or more of the
following relief.
1-Removal of defects from the goods,
2-Replacement of the goods;
3-Refund of the price paid;
4-Award of compensation for the loss or injury suffered;
5-Removal of defects or deficiencies in the services;
6-Discontinuance of unfair trade practices or restrictive trade practices or direction not
to repeat them;
7-Withdrawal of the hazardous goods from being offered to sale; or
8-Award for adequate costs to parties

LIMITATION
The District Forum, the State Commission or the National Commission shall not admit a complaint unless it is
filed within two years from the date on which cause of action has arisen

Unfair Trade Practices

unfair trade practice" 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.

Procedure for Filing Complaints

Procedures for filing complaints and seeking redressal are simple. There is no fee for filing a complaint before
the District Forum, the State Commission or the National Commission. ( A stamp paper is also not required).
Three to five copies of the complaint on plain paper are required to be submitted by the complainant or his
authorized agent in person or could 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.

Torts Law
Definition of Tort
The term tort is the French equivalent of the English word ‘wrong’ and of the Roman law term ‘delict’. The
word tort is derived from the Latin word tortum which means twisted or crooked or wrong and is in contrast to
the word rectum which means straight. Everyone is expected to behave in a straightforward manner and when
one deviates from this straight path into crooked ways he has committed a tort. Hence tort is a conduct which is
twisted or crooked and not straight. As a technical term of English law, tort has acquired a special meaning as a
species of civil injury or wrong. It was introduced into the English law by the Norman jurists.

Tort now means a breach of some duty independent of contract giving rise to a civil cause of action and for
which compensation is recoverable. In spite of various attempts an entirely satisfactory definition of tort still
awaits its master. In general terms, a tort may be defined as a civil wrong independent of contract for which the
appropriate remedy is an action for unliquidated damages. Some other definitions for tort are given below:
Winfield and Jolowicz- Tortuous liability arises from the breach of a duty primarily fixed by law; this duty is
towards persons generally and its breach is redressible by an action for unliquidated damages.

Nature of Torts

Historically tort had its roots in criminal procedure. Even today there is a punitive element in some aspects of
the rules on damages. However tort is a species if civil injury or wrong. The distinction between civil and
criminal wrongs depends on the nature of the remedy provided by law.

A civil wrong is one which gives rise to civil proceedings. A civil proceeding concerns with the enforcement of
some right claimed by the plaintiff as against the defendant whereas criminal proceedings have for their object
the punishment of the defendant for some act of which he is accused. Sometimes the same wrong is capable of
being made the subject of proceedings of both kinds. For example assault, libel, theft, malicious injury to
property etc. in such cases the wrong doer may be punished criminally and also compelled in a civil action to
make compensation or restitution.

Not every civil wrong is a tort. A civil wrong may be labeled as a tort only where the appropriate remedy for it
is an action for unliquidated damages. Thus for example, public nuisance is not a tort merely because the civil
remedy of injunction may be available at the suit of the attorney general, but only in those exceptional cases in
which a private person may recover damages for loss sustained by him in consequence thereof. However it has
to be born in mind that a person is liable in tort irrespective of whether or not an action for damages has been
given against him. The party is liable from the moment he commits the tort. Although an action fro damages is
an essential mark of tort and its characteristic remedy, there may be and often other remedies also.

A. Difference between crime and tort

Being a civil injury, tort differs from crime in all respects in which a civil remedy differs from a criminal one.
There are certain essential marks of difference between crime and tort they are:
# Tort is an infringement or privation of private or civil rights belongigng to individuals, whereas crime is a
breach of public rights and duties which affect the whole community.
# In tort the wrong doer has to compensate the injured party whereas in crime, he is punished by the state in the
interest of the society.
# In tort the action is brought about by the injured party whereas in crime the proceedings are conducted in the
name of the state.
# In tort damages are paid for compensating the injured and in crime it is paid out of the fine which is paid as a
part of punishment. Thus the primary purpose of awrding compensation in a criminal prosecution is punitive
rather than compensatory.
# The damages in tort are unliquidated and in crime they are liquidated.

Some of the distinctions between tort and contract are given below:
# A tort is inflicted against or without consent; a contract is founded upon consent.
# In tort no privity is needed, but it is necessarily implied in a contract.
# A tort is a violation in rem (right vested in some person and available against the world at large.); a breach of
contract is an infringement of a right in personam( right available against some determinate person or body).
# Motive is often taken into consideration in tort, but it is immaterial in a breach of contract.
# In tort the measure of damages is not strictly limited nor is it capable of being indicated with precision; in a
breach of contract the measure of damages is generally more or less nearly determined by the stipulations of the
parties.

Constituents of Tort
Every wrongful act is not a tort. To constitute a tort,
# There must be a wrongful act committed by a person;
# The wrongful act must be of such a nature as to give rise to a legal remedy and
# Such legal remedy must be in the form of an action for unliquidated damages.

III. Remedy
The law of torts is said to be a development of the maxim ‘ubi jus ibi remedium’ or ‘there is no wrong without a
remedy’. If a man has a right, he must of necessity have a means to vindicate and maintain it and a remedy if he
is injured in the exercise or enjoyment of it; and indeed it is a vain thing to imagine a right without remedy;
want of right and want of remedy are reciprocal.

Where there is no legal remedy there is no wrong. But even so the absence of a remedy is evidence but is not
conclusive that no right exists.

BUSINESS TORTS
The type of tort caused by a business or involving a business is a business tort. Businesses become involved in a
tort action in several common ways.

Product Liability. Manufacturers of products incur potential liability in tort for injuries caused by the products.
A person injured through the use or condition of a product could sue on the basis of the manufacturer’s
negligence in the preparation or manufacture of the article. The plaintiff must go (figuratively) into the
defendant’s plant or factory, learn how the article was made, and prove negligence. Unless the plaintiff can
show negligence in the design of the manufacturer’s product or the general method of manufacture, it is
unlikely the plaintiff will be able to prove negligence.

Whenever a manufacturer, as a reasonable person, should foresee that a particular class of persons would be
injured by the product, the manufacturer is liable to an injured member of that class without regard to whether
such member purchased from the manufacturer or from anyone else. The difficulty of proving negligence has
helped lead the courts to expand a doctrine called strict tort liability. This doctrine makes a manufacturer liable
without proof of negligence. It applies to anyone injured because of a defect in the manufacture of a product
when such defect makes the use of the product dangerous to the user or persons in the vicinity of the product.
The person injured or killed must be a user or person in the vicinity.

Business Activity. Several other business activities have been widely recognized as tortious. They are
intentional torts and may be based on state law, federal law, or the common law. While some variation exists
among the states, an injured party may recover damages on the basis of conduct that causes two general types of
harm:

1 Interference with a contract or economic advantage: the tort of interference with a contract or economic
advantage basically occurs when a business relationship has been formed and in some way a third party causes
one party to break up that business relationship. If injured, the other party to the business relationship may have
a cause of action against the party causing the breakup. This tort could also be the result of unjustified
interference with a person’s reasonable expectation of future economic advantage.

Traditionally, proof of this tort only required a showing that the defendant knowingly interfered with a business
relationship. However, more and more states require that the intentional interference be improper. Improper
interference can occur because of an improper motive, an improper means, or by acting other than in the
legitimate exercise of the defendant’s own rights. A defendant who protects its economic or safety interests or
asserts an honest claim is not acting improperly. In a free market economy, competitors inevitably injure one
another. Courts do not hold such injury tortious, even when intentional, if the action was taken to advance a
person’s economic interest and results from the competitive economic system.

2 Confusion about a product

A person may commit a tort by intentionally causing confusion about another’s product. This could be done by
making false statements about another’s product or by representing goods or services as being the goods or
services of someone else.

Injurious Falsehood. When a person makes false statements of fact that degrade the quality of another’s goods
or services, the tort of injurious falsehood occurs. The false statement must be made to a third person. This is
called communication. The hearer must understand the statement to refer to the plaintiff’s goods or services and
to degrade their quality. The injured party must also show the statement was a substantial element in causing
damage. In some states the plaintiff must identify specific customers lost as a result of the statement.

Confusion of Source. The tort that occurs when a person attempts to represent goods or services as being the
goods or services of someone else is confusion of source. The law assumes customers would be confused as to
the source of the goods or services. Actual confusion need not be shown. This tort occurs from trade mark or
trade name infringement or unfair competition.

Trademarks. Federal law defines a trademark as a word, name, symbol, device, or any combination adopted
and used by a person to identify and distinguish goods, including a unique product, from another’s goods and to
indicate the source of the goods. A trademark indicates that goods carrying that mark all come from one source.
A trademark or trade name gives the owner the exclusive right to use a word or device to distinguish a product
or a service.

Most of the torts claim as liabilities are referred in business practice to consumer protection act.