Before You Start
These notes are prepared from Business Legislation for
Management by MC & Vivek Kucchal, Rashid Sir’s
PPT’s and various other sources to which I am truly
thankful.​ ​The notes are made from examination point of
view and are restricted to the syllabus. However, for a
greater learning experience, it is better to study this
subject in-depth. Nevertheless, these notes might serve as
a starting point. I hereby do not take any responsibility for
any consequences that may result from this set of
information. (87 Pages of Material)
For any reviews or recommendations, contact me at
8826811598.​ ​Hope these serve your academic needs in
any manner possible. If helpful do circulate to your
juniors in coming years.
Resources
BMS-BFIA: ​bit.ly/NOTES-COUNCIL
BMS SEM-1 Resources:​ ​bit.ly/BMS-SEM1
BMS SEM-2 Resources:​ ​bit.ly/BMS-SEM2
MARKETING Notes: ​bit.ly/Marketing-BMS
HRM Notes: ​bit.ly/HRM-BMS
BR Notes: ​bit.ly/BR-BMS4
POM Notes: ​bit.ly/POM-BMS 
Note: Go to File-Download As-PDF/DOC (For Downloading) 

Past Year Question Paper Analysis 

As we can see the paper is divided into Part A, B, C & D.
Part A is a basic true and false question that tests the ​basic knowledge of
various laws. (20 Marks)
Part B is a question that tests the ​case-based knowledge​ of the laws. (15)
Part C is ​partially ​theoretical yet a bit narrow as some thinking may be
required. (30)
Part D is ​completely theoretical​ with little thinking required. (10)
The below notes do not contain as many cases as discussed by Rashid Sir
in class, however it contains the theoretical subject matter of all the laws
in syllabus with only the necessary depth from an Exam POV. For Part
B, class notes or thorough book reading may help, else you can rely on
your critical thinking and application abilities. (Only a few benchmark
cases mentioned here, for more refer to text-book)

 
 
 UNIT 1 
 
Indian Contract Act 1872 
 
Meaning & Essentials of Contract

The law of contract in India is contained in the Indian Contract Act, 1872. It extends to
the whole of the India except J&K and came into force on the first day of September
1872.
As per Section 2h of the Indian Contract Act: “An agreement enforceable by the law is a
contract”. A contract therefore is an agreement the object of which is to create legal
obligation i.e. a duty enforceable by law.

1. An Agreement: As per Section 2e, “Every promise & set of promises, forming the
consideration for each other is an agreement”.
Promise: As per Section 2b: “When the person to whom the proposal is made signifies
his assent thereto, the proposal is said to be accepted. A proposal when accepted,
becomes a promise.” An agreement is sum total of Offer and acceptance.
a. Plurality of Person: There must be 2 or more persons to make an agreement as one
person cannot enter into an agreement with himself.
b. Consensus-Ad-idem: Both the parties to an agreement must agree about the
subject matter of the agreement in the same sense and at the same time.

2. Legal Obligation: An agreement to become a contract must give rise to a legal

obligation i.e. a duty enforceable by law. “All contracts are agreements but all
agreements are not contracts”. Agreement that is enforceable by the law is a contract.

Essential Elements of a Valid Contract

As per Section 10, “All agreements are contracts, if they are made by the free consent of
the parties, competent to contract, for a lawful consideration with a lawful object, and not
hereby expressly to be void.”

I. Offer & Acceptance: There must be a lawful offer and a lawful acceptance, both must
satisfy the requirements of the Contract Act.

2. Intention to Create Legal Relations: In commercial agreements, an intention to create

legal relations is presumed.
E.g. M promises N a saree if she sings a song, she does but M refuses to buy the saree,
she can’t sue M. (Balfour vs. Balfour – separate case)
3. Lawful Consideration: Consideration is the price paid by one party for the promise of
other. Gratuitous promises are not enforceable by the law, same for unlawful or
fraudulent considerations.

4. Capacity of Parties: Parties must be competent to contract, otherwise the agreement

cannot be enforced by law. Age of Majority, Sound Mind etc. are forms of incompetence.

5. Free Consent: Consent means that the parties must have agreed upon the same thing in
the same sense. There is absence of Free Consent if agreement is induced by Coercion,
Undue Influence, Fraud, Misrepresentation, Mistake.
An agreement is voidable in case of the first 4 factors. In case of Mistake, the contract is
void.

6. Lawful Object: The object of agreement must not be fraudulent or illegal else it is void.

7. Writing & Registration: A contract may be oral or in writing, in some special cases it
must be written & registered.

8. Certainty: The agreement must not be vague or uncertain. E.g. Agreement to sell 100
tons of oil without any valid proof.

9. Possibility of Performance: It must be capable of performance. E.g. To sell land on

moon.

10. Not Expressly Declared Void: Sections 24-30, specify certain agreements which have
been expressly declared to be void.
E.g. Agreement in restraint of marriage, agreement in restraint of trade, an agreement by
way of wager have been expressly declared void.

Kinds of Contract
From POV of Validity
1. Valid Contract: An agreement enforceable by law, when all essential elements of a
valid contract are present.
2. Voidable Contract: Section 2(i), An agreement which is enforceable by law at the
option of one or more parties, but not at the option of the other or others, is a
voidable contract. A contract becomes voidable when the consent of one of the
parties to the contract is obtained by coercion, undue influence, misrepresentation
or fraud.
 3. Void Contract: A useless contract which has no legal effect at all. “A contract
which ceases to be enforceable by law becomes void, when it ceases to be
enforceable”.
4. Unenforceable Contract: A contract which is valid in itself, but is not capable of
being enforced because of some technical defect such as absence of writing,
registration, requisite stamp etc.
5. Illegal Contract: A contact whose object/consideration is illegal, and thus the
contract is void ab-initio.

From POV of Mode of Formation:

1. Express Contract: When both the offer and acceptance of agreement are made in
words, spoken or written.
2. Implied Contract: When the offer & acceptance are made not in words but by acts
and conducts of parties.
3. Constructive or Quasi Contract: The obligation of finder of lost goods to return
them back to the true owner or liability of person to whom money is paid under
mistake to repay it back are quasi contracts, as there is neither offer nor acceptance
nor consent.

From POV of Execution/Performance

1. Executed Contract: When both the parties to a contract have completely performed
their share of obligation and nothing remains to be done by either party under the
contract.
(Unilateral Contract: When only one of the parties has performed her share of obligation
and other one is yet to perform, then also it is called executed.)
2. Executory Contract (Bilateral Contracts): One in which both the obligations are
outstanding, either wholly or in part at the time of formation of contract.

Offer & Acceptance

Proposal or Offer
Section 2a of the Indian Contract Act (ICA) defines a ‘proposal’ as “when one person
signifies to another his willingness to do or abstain from doing anything, with a view to
obtaining the assent of that other to such act or abstinence, he is said to make a proposal”.
Essential of proposal:
- It must be an expression of the willingness to do or to abstain from doing
something.
- The expression of willingness to do or to abstain from doing something must be to
another person. There can be no ‘proposal’ to oneself.
 - The expression of willingness to do or to abstain from doing something must be
made with a view to obtaining the assent of the other person to such act or
abstinence.
The one making the proposal – promisor/offeror, one to whom offer is made is offeree,
one who accepts the offer is promisee or acceptor.

Types of Offer
1. Express Offer
2. Implied Offer
3. General Offer – Offer made to the public in general, hence anyone can accept and
do the desired act. (Section 8)
4. Specific Offer – When the offer is made to a definite person, it is known as a
specific offer and can be accepted by only that person.
5. Cross Offer – When two parties exchange identical offers in ignorance at the time
of each other’s offer.
6. Counter Offer – When the offeree offers to accept the original offer subject to
modifications, he makes a counter offer.

Rules of a Valid Offer

1. Offer may be expressed by words spoken or written (express offer), or can be implied
i.e. inferred from the conduct of a person or the circumstances of the case (implied offer).
2. An offer must intend to give rise to legal consequences and be capable of creating legal
relations, otherwise it is not a valid offer.
(An offer to one’s wife to show a movie is not a valid offer because in social agreements
the presumption is that parties do not intend legal consequences in case of breach of
agreement)
3. The terms of an offer must be definite and certain, and not lose or vague. (Taylor vs
Portington – Horse Case)
4. An invitation to offer is not an offer – A person who circulates information that he is
willing to deal with anybody who wants to enter into an agreement, is not making an
offer but is inviting for an offer. (Similarly, declaration of intentions or a statement of
price is not an offer)
5. An offer maybe specific (to a particular person) or can be general (made to the public,
advertisements, restoration of lost articles). (Carlill vs Carbolic Smoke BallCo.)
6. Offer must be communicated to the offeree – Doing anything in ignorance of offer can
never be treated as its acceptance, for there was never a consensus of wills. (Lalman
Shukla vs Gauri Dutt)
7. An offer should not contain a term the non-compliance of which amounts to
acceptance (e.g. an offeror saying that if the acceptance is not communicated up to 20​th
August, the offer will be presumed as accepted)
8. An offer can be made subject to any terms and conditions – Such as prescribing the
mode of acceptance, amount to be paid etc. There is no contract unless all the terms of
the offer are complied with and accepted.
Sec 7 (ICA) – Offeror (A) asks for sending acceptance via mail and the offeree (B) sends
it by text, then Offeror (A) may decline to treat the acceptance as valid provided he gives
a notice to the offeree (B) within a reasonable time after the acceptance is communicated
to him (A).
9. Two identical cross offers by two parties (in ignorance of each other’s offer) do not
constitute acceptance of one’s offer by the other and is not a contract.

Lapse & Revocation of Offer

1. An offer lapses, if acceptance is not communicated within the time prescribed in
the offer, or if not, time is prescribed then within a reasonable time. [Sec-6(2)]
(Reasonable time depends upon circumstance, if offer made by telegram that
suggest that a reply is required urgently then even a delay of 1-2-day results in
lapse of offer) (Ramsgate Victoria Hotel Co. vs Montefiore)
2. An offer lapses by not being accepted in the mode prescribed, or if no mode is
prescribed then in some usual or reasonable manner. (However, it is for the offeror
to insist that his proposal shall be accepted only in the prescribed manner)
3. An offer lapses by rejection of the offeree which maybe expressed
(spoken-written) or implied (where the offeree makes a counter offer or where the
offeree gives a conditional acceptance) (Hyde vs Wrench)
4. An offer lapses by the death or insanity of the offeror or offeree before acceptance
- If the ​offeror​ dies or becomes insane before acceptance, the offer lapses provided
the fact of his death or insanity comes to the ​knowledge​ of acceptor before
acceptance. [Sec-6(4)]
- Acceptance in ​ignorance​ of death or insanity of the ​offeror​ is a valid acceptance,
and gives rise to a contract. Thus, the fact of death or insanity of the offeror would
not put an end to the offer until it comes to the notice of the acceptor before
acceptance.
- An ​offeree’s​ death or insanity before accepting the offer puts an end to the offer
and his heirs cannot accept for him. (Reynolds vs. Atherton)
 5. An offer lapses by revocation: It is revoked when it is retracted back by the
offeror. It may be revoked any time before acceptance, by communicating to the
other party. [Section 6(1)]
6. Revocation by non-fulfilment of a condition by an offeree precedent to
acceptance. [Section 6(3)] E.g. A offers to sell his bike to B given B joins the
football team within 3 days, if B doesn’t do the same then offer is revoked.
7. Offer lapses by subsequent illegality or destruction of subject matter – An offer
lapses if it becomes illegal after it is made, and before it is accepted. An offer may
also lapse if the subject matter of the offer is destroyed or substantially impaired.

Acceptance
Section 2b states that “A proposal when accepted becomes a promise” and defines
‘acceptance’ as ‘when the person to whom the proposal is made signifies his assent
thereto, the proposal is said to be accepted’.

Legal Rules regarding Valid Acceptance

1. An offer can be accepted only by the person or persons to whom it is made and
with whom it imports an intention to contract, it cannot be accepted by another
person without the consent of the offeror. (An offer made to public can be
accepted by anyone with its knowledge)
2. Acceptance must be absolute and unqualified in all the terms of the offer. Even the
slightest deviation from the terms of the offer makes the acceptance invalid.
3. Acceptance must be expressed in some usual and reasonable manner, unless the
proposal prescribed the manner in which it is to be accepted [Section 7(2)].
Express acceptance is given by words spoken or written, while implied acceptance
is given by some required act (search of lost goods) or by accepting some service
(using public bus.
In case of deviated acceptances, the proposer may within a reasonable time insist that the
proposal shall be accepted in the prescribed manner, but if the proposer fails to do so,
then the he accepts the deviated acceptance.
Note: Silence cannot be a mode of acceptance

4. Acceptance must be communicated by the acceptor to be held valid.

5. Acceptance must be given within the specified time/reasonable time (in case
unspecified) and before the offer lapses and/or is revoked because an offer cannot
be kept open indefinitely.
 6. Acceptance must succeed an offer, it should not precede an offer.
7. Rejected offers can be accepted only if renewed. (Hyde vs. Wrench)

When Communication is complete

In case of Offer: The communication of offer is complete when it comes to the
knowledge of the person to whom it is made. [Section 4 Para 1]

In case of Acceptance [Section 4 Para 2]

i. As against the proposer – when it is put in course of transmission to him, so as to
be out of the power of acceptor.
ii. As against the acceptor – when it comes to the knowledge of proposer

Revocation
1. Revocation of Offer – A proposal is revoked at any time before the communication
of its acceptance is complete as against the proposer.
2. Revocation of Acceptance – Before the communication of acceptance is complete as
against the acceptor
Revocation can be done by Communication, Non-Fulfilment of a condition of Offeree,
Not being accepted in the prescribed mode, Lapse of Time, Death or Insanity,
Destruction, Subsequent Illegality, Counter Offer.

Consideration
As per Section 2d, “When at the desire of the promisor, the promisee has done or
abstained from doing, or does or abstains from doing, or promises to do or abstain from
doing something, such an act or abstinence or promise is called consideration for the
promise”.

Essentials of Valid Consideration

1. Consideration must move at the desire of the promisor: Acts done or services
rendered voluntarily or at the desire of the third party will not amount to valid
consideration so as to support a contract. (The logic is found in the worry and expense
to which one might be subjected, if he were obliged to pay for the services, which he
doesn’t need)
Moreover, the consideration can benefit any third party, only at the will of promisor.
2. Consideration may move from the promise or any other person. [Section 2d]
It is immaterial who has furnished it, as long as consideration exists. Even a stranger to
the consideration can sue on a contract, provided he is a party to the contract. (Doctrine
of Constructive Consideration) (Chinayya vs Ramayya)
Case: A an old lady (promisor) named a property to her Daughter R (promisee) with
direction that she must pay annuity to her uncle C (brother of A). Initially daughter
agreed, later on she declined to fulfil her promise, saying that no consideration had been
made by maternal uncle C, however the consideration moves from her mother A,
therefore the uncle could claim annuity.

Doctrine of Privity of Contract​ – A person maybe a stranger to the consideration, but if

he is a stranger to the contract, then as per “Privity of Contract” – ‘A stranger to a
contract cannot sue, only a person who is a party to contract can sue on it’/

Exceptions to Doctrine of Privity of Contract

i. Where an express or implied trust is created, the beneficiary can sue in his own
right, to enforce his rights under the trust, though he was not a party to the
contract. e.g. An addressee of an insured article is entitled to sue the post office in
case of loss of an article it was to be received, the Post office becomes a
constructive trustee. (Amir Ullah vs. Central Govt.)
ii. Family Settlement: In family separation, certain provisions are made for handling
expenses of female members, such members although not parties to the agreement
can sue. (Daughter agreed to take care of mother if her father transfers to her the
property, she later disagrees, in such case the mother can sue)
iii. When the defendant constitutes himself as the agent of the third party: If A
receives some money from B to be paid to C and he admits of this receipt to C,
then C can recover his amount from A who will be held agent of C.
iv. When a contract is entered into by an agent, the principal can sue on it.
v. In case of assignment of rights under a contract in favour of a third party either
voluntarily or by operation of law, the assignee can enforce the benefits of the
contract. (assignee of insurance policy)
3. Consideration maybe Past, Present or Future
4. Consideration must be ‘something of value’ – It need not be adequate. If C sells
his bike of 20k, only for 1k with free consent, then it is a valid contract.
5. Consideration must be real – It should not be physically impossible (revive a dead
man), illegal, uncertain or illusory.

No Consideration – No Contract
The general rule is ​ex nudo pacto non oritur actio, i.e.​ an agreement made without
consideration is void.

Exceptions ​(Section 25)

1. Natural Love & Affection: An agreement made without consideration is enforceable
if it is i. Expressed in writing ii. Registered under the law for the time (being in force
for the registration of documents), iii. Made on account of natural love & affection,
iv. Between parties standing in a near relation to each other
2. Compensation for Voluntary Services - A promise made to compensate wholly or in
part a person who has already voluntarily done something for the promisor.
3. Agreement to pay time barred debt – A time barred debt cannot be recovered and
therefore a promise to repay such a debt without consideration is an exception. (A
owes B 1000, but the debt is barred by the Limitation Act, A signs a written promise
to pay B 500 on account of the debt. This is a contract)
4. Completed Gift – A gift that does not require consideration in order to be valid. Any
gift made will be valid and binding even though without consideration.
5. Agency (Section 185) – No consideration is necessary to create Agency.
6. Contribution to Charity – A promise to contribute to charity is enforceable if on the
faith of the promisor, the promise takes definite steps to further the objective and
undertakes a liability, to the extent of the liability incurred, not exceeding the
promised amount of subscription. (Kedarnath vs. Gorie Mohammead) (Abdul Aziz
vs. Masum Ali)

Competency/Capacity to Contract (Contractual Ability)

A person must have the ability to give consent before he can be legally bound to an
agreement, thus Capacity is the ability to incur legal obligations and acquire legal rights.
Section 11 deals with the competency of parties and provides that every person is
competent to contract who is of age of majority, who is of sound mind, who has not been
disqualified by law from entering into a contract.

A. Minors – A Minor is a person who is under the age of 18 years old. As they have
less experience, the law tries to protect minors from situations where they might
enter into contracts which do not benefit them,
1. An agreement with and by minor is void (void ab initio). Since their mental faculties
are not mature, they don’t possess the capacity to make prudent judgement. (​Mohiri
Bibi vs Dharmodas Ghose) - Benchmark Case
2. His/her agreement cannot be ratified by him on attaining the age of majority.
Ratification means subsequent acceptance of an act or agreement.
3. He can be a beneficiary of an agreement under which he bears no obligation.
4. Rule of Estoppel does not apply to minor (Section 115 – When one person has by his
declaration, act or omission, intentionally caused or permitted another person to
believe a thing to be true and to act upon such belief, then neither he or his
representative shall be allowed to deny the truth of that thing.)
5. Minor’s liability for necessaries: “If a person incapable of entering into a contract or
any one whom he is legally bound to support, is supplied by necessaries suited to his
condition in life, the person who has furnished such supplies is entitled to be
reimbursed from the property of such incapable person”. A minor is not personally
liable, it’s his property which is liable, if a minor owns no property then supplier will
lose price of necessaries.
6. Minor as a partner: A minor cannot be a partner in a partnership firm, but can be
admitted to the benefits of partnership. (He shall not share losses except when
liability to third parties has arisen)
7. Position of Minor’s Parents – Parents are not liable for agreements made by a minor,
whether the agreement is for the purchase of necessaries or not. The parents can be
held liable when the child is contracting as an agent for the parents.
8. Minor Agent – A minor can be an agent (S-184), but cannot be held personally liable
for negligence or breach of duty.
9. Minor & Insolvency – Minor cannot be adjudicated as insolvent, for he is incapable of
contracting debts.
10. Contract by minor & adult jointly – Minor has no liability, but contract can be
enforced against the adult.
11. Minor’s Liability in Tort – Tort is a civil wrong for which the remedy is damages.
Minor is liable for his tort.
12. Contract of Apprenticeship – An employment contract to provide young workers with
training. 14 Year age and Guardians are necessary.

Person of Unsound Mind

Section 12 states that “A person is said to be of sound mind for the purpose of making a
contract, if at the time when he makes it, he is capable of understanding it and of forming
a rational judgement as to its effect upon his interests.
 1. Idiots – An idiot is a person, who is of unsound mind by birth. His incapacity to be
rational is permanent and therefore a contract with an idiot is void-ab-initio.
2. Lunatics – A lunatic person is one who is mentally disturbed due to some mental
strain or other personal experiences. In this case, the unsoundness is not permanent.
He can enter into a contract during lucid intervals i.e. during the period when he is of
sound mind.
3. Drunkard – A drunkard is a person who is under the influence of alcohol or
intoxicating substances. When he is drunk, he cannot understand the contract,
therefore cannot enter into a contract. Any agreement entered thereon will be void.

Other Persons Disqualified by Law from entering into a Contract

1. Alien Enemy (Suspended During War): A citizen of foreign country living in
India can enter into contract during peace time only.
2. Insolvent – He can enter only certain contracts – incur debts, purchase property
or be an employee
3. Convicted – One who is found guilty and imprisoned.
4. Married Women – Cannot enter contract with respect to their husband’s
properties. (They can enter into contract with respect to their separate property
i.e. Stridhan)
5. Foreign Diplomatic Staff & Representatives of Foreign States – They can sue
others to enforce the contracts, but cannot be sued themselves.
6. Company – A Company is an artificial person and cannot enter into contracts
outside the powers conferred upon it by its Memorandum of Association.

Free Consent
Section 13 defines Free Consent as “Two or more persons are said to consent when they
agree upon the same thing in the same sense” i.e. Consensus Ad idem.

Section 14 states that Consent is said to be free when it is not caused by:
Coercion (S-15)
Undue-Influence (S-16)
Fraud (S-17)
Misrepresentation (S-18)
Mistake (S-20, 21, 22)
 1. Coercion​: Section 15 defines Coercion as “Coercion is committing or threatening
to commit any act forbidden by the Indian Penal Code or the unlawful detaining or
threatening to detain, any property, to the prejudice of any person whatever, with
the intention of causing any person to enter into agreement.”
The act constituting coercion may be directed at any person, and not necessarily at the
other party to the agreement. It may proceed even from a stranger.
- Threat to file a suit (False Charge)
- Threat to commit suicide (Ammi Raju vs Seshamma)
The contract is voidable at the option of the party whose consent was obtained by
coercion. If the aggrieved party does not take any action against it than it works as a valid
contract.

2. Undue Influence​: The strong mind overpowers the weak mind of a person &
induces him to do which we would not have done if left to his own judgement.
(Mental Coercion)
Section 16: “A contract is said to be induced by undue influence where:
a. The relation subsisting between the parties are such that one of the parties is
in a position to dominate the will of the other.
b. He uses the position to obtain an unfair advantage over the other.
A person is deemed to be in a position to dominate the will of another:
i. Where a person holds a real or apparent authority over the other, say Master &
Servant, Moneylender & Borrower, Police Officer & Accused.
ii. When a person stands in a fiduciary relation (of trust & confidence) with the
other. E.g. Father-Son, Advocate-Client, Doctor-Patient. (Moody vs. Cox)
Pardanashin Woman​ – A lady (generally illiterate) who remains in complete seclusion
(parda) due to tradition of family or society and generally she does not come out her
home in general public.
If she claimed for undue influence, then the person entering into a contract with
Pardanishan woman has to prove that No undue influence is used, she had free and
independent advice, she fully understood the contents of contract, and she exercised her
free will.

Consequences of Undue Influence – The agreement becomes voidable at the option of the
aggrieved party, if the aggrieved party does not opt to set aside the contract, then it works
as a valid contract.
Difference between the two – Coercion – Threat, Physical, Intention to enter into a
contract, Criminal Act involved
Undue Influence – Dominate the will of other, Moral or Mental Pressure, Intention to
take unfair advantage, No Criminal Act is involved

3. Misrepresentation ​– A representation means a statement of fact made by one party,

either before or at the time of contract relating to some matter essential to the
formation of the contract. The statement must be innocent or without an intention
to deceive other.
E.g. X says to Y who intends to purchase his land that it produced 50 quintals of wheat
per acre. X believes the statement to be true although he did not have sufficient grounds
for the belief. Later it was found that the land produced only 30 quintals of wheat per
acre.

Essentials of Misrepresentation – There should be a representation of facts, The

representation is untrue, The representation induces the other party to enter into a
contract, The party who relied on the untrue statement suffers from loss.

Consequences of Misrepresentation – The contract is voidable at the option of aggrieved

party so he can ​rescind​ the contract, treating it as voidable or; He may affirm the contract
and insist that he shall be put in the position in which he would have been if the
representation made had been true.

4. Fraud​: When any person makes to another a statement which he does not himself
believe to be true to induce the latter to enter into the contract, he commits a fraud.
(Intentional mis-representation amounts to fraud)
Section 17 states that: “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:
i. The suggestion, as to a fact that which is true when it is not true by one who does
not believe it to be true
ii. The active concealment of a fact by one having knowledge or belief of the fact
iii. A promise made without any intention of performing it
iv. Any other act to deceive
v. Any such act or omission as to law specially declared to be fraudulent
Ordinarily Silent does not amount to fraud however there are two exceptions,
i. It is the duty of the person keeping silence to speak – in fiduciary (trust) relations,
contract of insurance, contract of marriage etc.
ii. When Silence is in itself equivalent to speech.
A sells by auction to B a horse which A knows to be unsound. B says to A – ‘if you do
not deny, I shall assume the horse is sound’. A says nothing, here A’s silence is
equivalent to speech.

Consequences of Fraud
1. Contract is voidable
2. Aggrieved party may claim damages
Restitution (Recompense for loss): To be put back in the position in which the aggrieved
would have been if the representation made had been true.

5. Mistake​: It can be of two types

A. Mistake of Law: “Ignorance of a law” is no excuse, Mistake of law therefore is no
excuse and it does not give the right to parties to avoid contract, and the contract is
thus not voidable.
Mistake of a Foreign Law: It is equivalent to Mistake of Fact, and the agreement is void
in case of bilateral mistake.

B. Mistake of Fact: It can further be of 2 types:

i. Bilateral Mistake – When both parties misunderstood each other. Here there is no
agreement at all, and there is entire absence of consent. The agreement is void
ab-initio. However, both the parties must be under mistake, and the mistake must
relate to some fact (essential to agreement) and not to judgement or opinion.
ii. Unilateral Mistake – “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”. Thus, the
contract remains valid.
If the unilateral mistake is caused by fraud or misrepresentation, on part of one party,
then the contract is voidable and can be avoided by the injured party.
Note: Mistake related to identity of person, or to the nature and character of written
document are void.
 Void Agreements
Section 2g: An Agreement not enforceable by the law is said to be void.

1. Agreements in restraint of marriage (Sec 26): Every individual enjoys freedom to

marry, and so every agreement in restraint of marriage of any person, other than a
minor is void.
Promise to marry a particular person is valid contract.
Exception: Remarriage of Widow

2. Agreement in restraint of trade (Sec 27)

Constitution of India guarantees freedom of trade and commerce to every citizen and
therefore every agreement by which any one is restrained from exercising a lawful
profession, trade or business of any kind, is to that extent void. Some of the exceptions
are:
i. Sale of Goodwill – As per explanation 1 of Sec 27, a seller of goodwill of a business
may agree with the buyer to restrain from carrying on a similar business within specified
limits of territories/time, so long as the buyer or any one deriving title to goodwill from
him (seller) carries on a like business.

ii. Agreements of Partners: Indian Partnership Act 1932 has also laid down certain
exceptions being:
a. As a partner in firm: Sec 11(2) of the act “A Partner shall not carry on business other
than that of the firm”
b. As an outgoing partner: Under Sec. 36(2) “An outgoing partner may agree with his
partners not to carry on a business similar to that of the firm within a specified
period or within specified local limits”
c. In case of dissolution of the firm: As per Sec 54, “Partners may upon or in anticipation
of the dissolution of the firm make an agreement that some or all of them will
not carry on a business similar to that of the firm within specified period or
within specified local limits.

iii. Trade Combinations: An agreement between traders not to sell their goods at a
price below the one agreed upon, and to share the profits in a certain proportion is
not void.
iv. Negative Stipulations in Service Agreement: An agreement of service by which a
person binds himself during the term of agreement not to take service with anyone
else.
3. Agreement in restraint of legal proceedings (Sec 28): Any agreement which absolutely
restricts/limits the time of legal proceedings.
 4. Agreement the meaning of which is uncertain (Sec 29): Any agreement with
uncertain, vague or indefinite words.
5. Agreement by way of wager (bet) (Sec 30)
Section 30 states that “Agreements by way of wager are void; and no suit shall be brought
for recovering anything alleged to be won on any wager, or entrusted to any person
to abide the result of any game or other uncertain event on which any wager is
made.”
Essentials of Wager
- There must be promise to pay money or money worth
- The promise must be conditional to pay on an event of happening or not
happening
- The event must be uncertain. If any party has the event in his own hands, the
transaction is not a wager
- Each Party must stand to win or lose under the terms of agreement
- The stake must be the only interest which the parties have in the game
(Govt. Authorized lotteries are valid/The prize depending on skill & intelligence is
valid/Insurance is valid/Share market transactions are valid)

6. Agreement to do impossible acts (Sec 56): Self Explanatory

7. Agreement Contingent on impossible events (Sec 36): A would pay B 1000 as a loan
if he marries C, but C is dead. Agreement is void.

Performance of Contract
Meaning: Performance of contract means that each party to a contract has done, whatever
he has required to do under the contract, within the prescribed time in a manner that no
party to the contract has any claim, grievance or right outstanding against the to the other
party and the contract has come to an end. (Sec 37)

Types of Performance:
i. Actual Performance
ii. Offer to Perform: The promisor has to offer performance of his obligation under the
contract at the proper time and place. If the promisee refuses to accept the performance,
the act is called ‘tender of performance’ or attempted performance. (If tender is before
due date, and promise does not accept it, then tender is not valid)
Essentials of Valid Tender
It must be i. Conditional ii. Tender of whole obligation iii. Made at proper time & Place
(as per contract or reasonable) iv. To proper person and by proper person v. Exact
Amount

Effect of Refusal to Accept Valid Tender: The contract is deemed to have been
performed by the promisor and the promisee can be sued for breach of contract. A valid
tender thus discharges the contract.

Who must perform the contract?

a. The promisor himself (personal nature – paint a picture)
b. His Agent (contract of goods)
c. His Legal Representative (in case of death, not in case of personal skill)
d. Third Persons
e. Joint Promisor (S:2-44): when several joint promisors make a promise with single
promisee, or a single promisor makes a promise with several joint promises, or
several with several.
Who can demand performance of Joint Promisors – Right to claim rests with all the
promisees jointly and a single promisee cannot demand performance.

Who must perform joint promise: (Assume A, B, C borrow 3k loan)

i. All promisors must jointly fulfil the contract (A-B-C pay 3k)
ii. Any one or more joint promisor maybe compelled to perform (A pay 3k)
iii. Right of contribution between joint promisors (A retrieve 1k from B, C)
iv. Sharing of loss by default in contribution (if C unable to pay, then A can claim B
an amount of 1500)
v. Effect of release of one joint promisor (say C leaves, the liability stays on C to A,
B but not on the creditor D, and the A, B are not discharged from their liability)

Who can demand performance of Contract

The promisor himself, His Legal Representative, Third Person (Beneficiary), Joint
Promisees

Time & Place of Performance: Where prescribed by the promisee, incase not prescribed
by the promises ​→​ Reasonable Time & Place
Reciprocal Promises – Promises which form the consideration for each other.
- Mutual & Independent (52): Where each party must perform his promise
independently and irrespective of whether the other party has performed or willing
to perform. E.g. Seller agrees to deliver on 5, Buyer agrees to pay on 15.
- Mutual & Dependent (54): Performance of promise by one party depends upon
prior performance of promise by other party. E.g. Buyer agrees to pay for goods
15 days after delivery. Hence unless seller deliver goods, buyer’s liability does not
arise.
- Mutual & Concurrent (51): Where the promises of both the parties must be
performed simultaneously. E.g. Buyer agrees to pay immediately on delivery of
goods.

Assignment of Contract: Transfer of contractual rights and liabilities under the contract to
a third party.
-Assignment by Operation of Law takes place in the event of death or insolvency of a
party to the contract. In case of death the rights and liabilities devolve upon the heir and
legal representatives of the deceased.
-Assignment by act of parties: The obligation or liabilities under a contract cannot be
assigned, but the rights and benefits under a contract may be assigned

Appropriation of Payments: When a debtor who owes several debts to the same creditor,
makes a payment which is insufficient to satisfy the whole indebtness, the following
techniques are used: (A debtor, B creditor)
-Debtor’s express instructions must be followed – A can direct B to discharge particular
debt, else B should not accept payment.
-Debtor’s implied intention must be gathered from the circumstance
-Appropriation by creditor
-Appropriation by law

Contracts which need not be performed

- When the contract is impossible to perform
- When parties mutually agree to novation, rescission or alteration
- When contract is illegal
- When promise neglects or refuses to afford the promisor reasonable facilities for
the performance of his promise
Discharge of Contract: When the rights and obligations arising out of a contract come to
an end, the contract is said to be discharged or terminated.
1. Discharge by Performance: When parties perform their share of promises.
2. Discharge by Attempted Performance (Discussed earlier)
3. Discharge by mutual consent or agreement – It can be discharged by the fresh
agreement between the same parties. A contract can be terminated by following ways:
a. Novation – The parties change part or whole subject matter of the contract, discharging
the old contract.
b. Alteration – When one or more terms of the contract are changed with the consent of
all the parties, the original contract is discharged, a new contract takes its place.
c. Rescission – Rescission means cancellation of contract by mutual consent. A contract
maybe cancelled by agreement between the parties at any time before the performance.
d. Waiver – Waiver means the intentional abandonment of a right, which a person is
entitled to under a contract. A party may waive her rights under the contract, by which it
is released from its obligations.
e. Remission: Acceptance of a lesser sum than what was contracted for a lesser
fulfillment of the promise is made.

4. Discharge by Subsequent Impossibility or Supervening Impossibility

I. Impossibility at the time of contract: An agreement to do impossible act is void
ab-initio. (if promisor knows and promisee does not then promisor must
compensate the promisee)
II. Supervening Impossibility – Impossibility supervenes after the contract is
made – Destruction of Subject Matter, Change of Law, Outbreak of War,
Death of Promisor, Failure of Ultimate Purpose (say H booked a room for
business meeting, but meeting got cancelled)
Causes not covered by ^
Increased Difficulty of performance, Commercial Impossibility (unavailability of raw
material), Impossible due to default of third person, Strikes/Lockouts, Failure of one of
the several objects.

5. Discharge by lapse of Time: Time is of essence in a contract. The limitation act

lays down that the contract should be performed within the specified period. If a
contract is not performed and no legal action is taken by the promisee within the
period of limitation, he is deprived of his remedy at law. The contract is
terminated in such a case.
6. Discharge by operation of law:
 i. Insolvency – When a person is declared insolvent, he is then discharged from all
his liabilities, thus terminating his contracts.
ii. Merger – Merger takes place when an inferior right available to a party merges
into a superior right available to the same party under some other contract. As a
result of merger, the former contract stands discharged automatically.
iii. Unauthorized Material Alteration – Where a party to the contract makes any
material alteration in the contract without the consent of other party, then other
party can avoid the contract.
iv. Death: When contract is of personal nature, the death of promisor discharges the
contract. (Otherwise rights and liabilities pass on to the legal representative)

7. Discharge by Breach of Contract: When one party to contract breaks the contract
by non-performance of the promise or otherwise, the other party is discharged
from his obligations under the contract and has a right of action against the
responsible party.
-Actual Breach: It occurs when parties fail to perform his obligation upon the date fixed
for performance of the contract.

-Anticipatory Breach: Breach of contract occurring before the time fixed for the
performance of contract. It can take place in two ways:
i. Expressly by words spoken or written
ii. Implied by conduct (Selling a horse to B, although contract with C)
Effects: Promisee may treat the contract as rescinded (revoked), and sue the other party
for damage prior to performance date, or he can wait till the performance date.

Remedies of Breach of Contract: Whenever there is a breach of contract, the injured party
becomes entitled having the following remedies against the guilty party.
a. Rescission of Contract: Breach of contract by one party, other party can
rescind the contract and need not to perform, while is entitled to
compensation for any damage which he has sustained through
non-fulfilment of contract.
b. Suit for Damage: Damages are monetary compensation allowed to the
injured party for the loss of injury suffered by him as a result of breach of
contract. (Fundamental principal is not punishment but compensation) (look
below)
c. Suit upon quantum meruit: The phrase quantum meruit means “as much as
is earned” or in proportion to the work done. A right to use upon quantum
 meruit usually arises where after part performance of the contract by one
party, there is a breach of contract or the contract becomes void.
d. Suit for specific performance: Specific Performance is a court order that
requires a party to do that which he has already agreed to do in the contract,
because in such cases Monetary compensation is not an adequate remedy.
Cases where specific performance will not be ordered – When monetary
compensation is adequate relief, Contract is made by an agent in violation of his
power, Contract made by company in excess of its powers as laid down in MOA
e. Suit for Injunction: Injunction is an order of court restraining a person from
doing a particular act. It is a mode of securing the specific performance of
the negative terms of a contract. (where he is doing something which he
promised not to do)

Types of Damages
a. General or Ordinary Damages which naturally arise in course of things from such
breach of contract. (They can be claimed as a matter of right)
The aggrieved party must have suffered a loss by breach of contract and the damages
must be direct. E.g. Market Price & Contract Price. Amount of Damage can be
Difference between the contract price and market price, Price of Substitute
Product, Price of Product Made to order can be used.
(Say price rises from 500 to 550, and the seller refuses to sell, buyer can claim 50)
b. Special Damage: Unlike ordinary damages, special damages cannot be claimed as
a matter of right. These damages are recoverable only if the circumstances were in
knowledge of the parties at the time of making the contract, or if they were
brought to notice of the defaulting party at or before entering into contract.
(Simpson v. London & North Western Railway Company – S sent samples to an
exhibition via railway -told them it was urgent- they delayed- Railway held liable
for Special damages)
c. Exemplary or Vindictive Damage – Damages for mental or emotional suffering
caused by the breach. Such damages are awarded due to its difficulty in
measuring the amount of mental suffering or the extent of injury to the feelings of
the aggrieved party. They may be taken as an exception to the general principle.
Breach of a Contract to marry – The extent of injury to the party’s feelings is difficult to
ascertain, thus the court awards compensation of reasonable grounds.
Dishonour of Cheque by banker when there are sufficient funds – Actual amount of
damages will differ as per the status of property.
d. It is the duty to mitigate damage suffered as a result of the breach of contract. The
defaulter cannot recover any part of damage traceable to his own neglect.
e. Liquidated Damages & Penalty – In case of contracts, parties may agree in
advance to payment of a certain sum on breach of contract. When such
stipulations are made in the contract they are known as liquidated damages
Unliquidated Damages – These are awarded by the courts on an assessment of the loss or
injury caused to the party suffering such breach of contract.
f. Cost of Suit – Aggrieved can recover the cost of suit
g. Nominal Damages – These are for namesake only. If the breach of contract does
not cause any loss to the aggrieved party, no damages need to be awarded to him.
However, in order to record the breach, the court may award nominal or token
damages, the amount of which is very less (a rupee)

Quasi Contract
A contract is formed by an agreement, which is enforceable by
law. However, in some cases a contract is formed without any agreement. When there is
no offer and acceptance and the parties have no intention to enter into a contract, yet a
contract is formed, such a contract is called a Quasi Contract.

1. Supply of Necessaries – Section 68: “If a person has supplied necessary goods and
services to an incompetent person or to any one whom the incompetent person is legally
bound to support, then the person is entitled to be reimbursed from the property of the
incompetent person.”

2. Payment by an Interested Person (Section 69): A person who is interested in the

payment of money which another is bound by law to pay, and who therefore pays it,
is entitled to be reimbursed by the other.
3. Obligation to pay for Non-Gratuitous Act (70): When a person lawfully does
anything for another person or delivers anything to him, not intending to do it
gratuitously, and such other person enjoys the benefit, the latter is bound to make
compensation to the former in respect of, or to restore the thing so done or delivered.
If the person does something for the other gratuitously, then the latter is not bound to
compensate.
4. Responsibility of the Finder of Goods (71): A person who finds goods belonging to
another and takes them into his custody, then he is bound to take as much care of the
 goods as a man of ordinary prudence would under similar circumstances take of his
own goods of the same bulk, quality and value. He must also take all necessary
measures to trace its owner. In case the finder of good does not try to trace the owner
then he/she will be guilty of wrongful possession of goods. Till the owner is found,
the finder can retain the goods as his own property. (The finder has same duty as
bailee – read below)
When the good is found in perishable condition, then the finder has the right to sell it
before it perishes.
When the owner cannot be found with reasonable diligence, then the finder has right to
sell the good.
When the owner is found but refuses to pay lawful charges then the finder has right to
sell the good. (Right of Lien)
When the lawful charges amount to more than 2/3​rd ​ of the value of thing, the finder can
sell the good.
5. As per section 72 a person to whom money is paid or thing delivered by mistake or
under coercion, must repay or return it to the person who paid it by mistake or
coercion.

Contract of Indemnity & Guarantee

Contract of Indemnity​ (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.’
E.g. A promises to B that if you face any loss due to him (A) or C then he (A) will be
liable to pay that loss of B. (Insurance)

There are only two parties involved i.e. the person who promises to make good the loss
generally known as the ​indemnifier​ and the person whose loss is to be made good called
as the ​indemnified​.

There is only one contract between the parties. There is an undertaking on part of the
indemnifier to be answerable, and this contract is for the reimbursement of loss.

Essentials
1. All the essentials of a valid contract should be there
2. There must be a promise to save other from a loss
3. Loss may be due to conduct of the promisor himself or any other person.

Rights of Indemnity Holder (Indemnified) when sued (125)

1. Rights to recover damage – He is entitled to recover all damages which he might have
been compelled to pay in a suit in respect of any matter covered by the contract.
2. Rights to recover costs – He is entitled to recover all costs incidental to the institution
and defending of the suit.
3. Right to recover the sums paid under compromise of such suit.

Rights of Indemnifier
Not clearly available in this act.

Contract of Guarantee​ (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”
-It is a contract to perform the promise or discharge the liability of a third person in case
of his default.
-It is made to enable a person to get a loan or goods on credit or an employment
-There are three parties involved i.e. the person who gives the guarantee known as
surety​, the person is respect of whose default the guarantee is given known as the
principle debtor​. the person to whom the guarantee is given known as ​creditor​.
-There are three contracts: first between creditor and principle debtor, second between
principle debtor and surety, third between surety and creditor.
-The primary liability is of principal debtor, and the surety has a secondary liability
which means that the payment is to be made by the surety only if the debtor does not pay.

Essentials of Contract of Guarantee

1. Primary Liability
2. Essentials of Valid Contract
3. Writing not necessary
4. No concealment of facts
5. Consideration for the principal debtor, may be sufficient consideration to the surety for
giving the guarantee

Nature & Extent of Surety’s liabilities: The liability of surety is co-extensive with that of
the principal debtor, unless it is otherwise provided by the contract.
-Liability of surety is secondary and contingent
-Liability of surety arises immediately on default of principal debtor
-In case of security held by creditor, it has to be handed over to surety when debt is paid
by surety
-Surety will not be liable where creditor or Principle Debtor (PD) has obtained guarantee
by mistake or misrepresentation.

Continuing Guarantee – When a guarantee extends for a series of distinct and separable
transactions,
Ordinary Guarantee – When a guarantee is given for a single specific debt or transaction.
Revocation of Continuing Guarantee
- By notice of Revocation (130): “A continuing guarantee may at any time be revoked by
surety, as to future transactions, by notice to creditor”
-By death of surety (131): The death of surety operates, (in the absence of any contract to
the contrary), as a revocation of continuing guarantee, so far as regards to future
transactions.

Discharge of Surety
-By notice of revocation to creditor
-By death of surety
-Variance in terms of contract (133): Any variance made without the surety’s consent, in
the terms of the contract between PD & Creditor discharges the surety as to transactions
subsequent to the variance.
-Release or discharge of PD (134): The surety is discharged by any contract between the
creditor and principle debtor, by which the principle debtor is released, or by any act or
omission by the creditor, the legal consequence of which is the discharge of Principle
Debtor.
-Arrangement of principal debtor ​without surety’s consent​ (135) – A contract between
the creditor and principle debtor, by which the creditor makes a composition with, or
promises to give time to, or not to sue, the principle debtor, discharges the surety, unless
the surety agrees to such contract.
-Creditor’s act or omission impairing surety’s eventual remedy (139)
It is the duty of the creditor to do every act necessary for the protection of rights of
surety, and if he fails hi his duty then surety is discharged. (Say an employer continues to
hire an employee after his dishonesty, then surety say employee’s father is discharged)
-Loss of security (141)
-Invalidation: When the contract of guarantee is invalid or any essential element is
missing.

Rights of Surety
1. Against Creditors
-Right to get securities: If surety makes payment to creditor, surety can get all securities
into his possession from creditor.
-Right to ask for Set-off: Surety can give advice to creditor to sell away the security and
to utilize the amount thus realized for set-off.
-Right to advice to Sue Principal Debtors – Surety has right to give advice to creditor to
proceed legally against the principal debtor for the purpose for recovering the amount.
 -Right to insist on termination of services- Incase where guarantee is with regard to
conduct of an employee, surety can insist on termination of service of employee, here
employer status is equal to that of creditor, employee’s status is equal to that of PD.

2. Against Principal Debtor

-Right of Sub-rogation: If surety makes payment to creditor, surety gets all rights of
creditor by subrogation, and from then onwards surety can behave like a creditor.
-Right of Indemnity: Principal of indemnity operates between principal debtor and surety.
(Surety is indemnifier, and Principal Debtor is indemnified)
-Right to ask for Relief: From the date of guarantee, besides creditor, surety can also
bring pressure on principal debtor in connection with settlement of debt.

3. Against Co-Sureties
-Right to claim contribution – for the same debt for similar amount, or for the same debt for
different amount
-Right to share benefits of securities

Basis Indemnity Guarantee

Meaning Definition Definition
Defined in Section 124 Section 126
Parties Two Three
No. of Contracts One Three
Degree of Liability Promisor Promisor (primary), Surety
(Secondary)
Purpose To compensate for loss To give assurance to
promisee

Bailment & Pledge

Contract of Bailment​ (148-171)
Section 148: “A bailment is the delivery of goods by one person to another for some
purpose, upon a contract that they shall, when the purpose is accomplished, be returned
or otherwise disposed of according to the direction 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.
-​E.g. You deliver some gold to Jeweler B to make bangles, you are the bailor and B is the
bailee, a relationship of bailment is hence created.

Essential Features
- Delivery of Moveable Goods
- Goods are delivered for some purpose
- All essential elements of a valid contract
- Return of goods takes place when the purpose is accomplished

Kinds of Bailment
1. On the basis of benefits and rewards:
-Bailment for the exclusive benefit of the bailor, while the bailee does not derive any
benefit from it. (Going outstation while leaving your car with neighbor)
-Bailment for the exclusive benefit of the bailee, while the bailor does not derive any
benefit from the contract. (your neighbor borrows your car, to go outstation)
-Bailment for the mutual benefit of the bailor and bailee. (you go outstation, while your
neighbor uses your car that you dropped at his home for safety)

2. On the basis of Consideration: Bailment can be classified as gratuitous and

non-gratuitous on the foundation of whether the parties are getting or not getting
some value out of the contract of bailment.
Gratuitous – neither the bailor nor the bailee is entitled to remuneration (loan of book to
friend, deposit of goods for safe custody)

Non-gratuitous – bailment for reward, either bailor or bailee is entitled to remuneration

(bike for hire, cloth given for tailoring)

Rights & Duties

Duties of Bailor
-Duty to disclose fault in the good bailed
-Duty to repay the necessary expenses
-Duty to indemnify bailee (for any loss suffered by bailee) (Say A gives his father’s
scooter to B, father sues B, A indemnifies B)
-Duty to receive back goods

Rights of Bailor
-Enforcement of bailee’s duties (Rights of Bailor = Duties of Bailee)
-Right to terminate bailment if the bailee uses the goods wrongfully (153)
-Right to demand return of goods at any time in case of gratuitous bailment (not cause
loss to bailee) (159)
-Right to claim damage (151)

Duties of Bailee
-Duty to take reasonable care of goods delivered to him
-Duty not to make unauthorized use of goods
-Duty not to mix goods bailed with his own goods
-Duty to return the goods
-Duty to delivery any accretion (increase or profit accruing) to goods

Rights of Bailee
-Enforcement of the bailor’s duties (duty of Bailor = Rights of Bailee)
a. Right to claim damages for loss arising from the undisclosed faults in the goods
b. Right to claim reimbursement for extraordinary expenses incurred in relation to thing
bailed
c; Right to claim for any loss suffered due to defective title of bailor to goods bailed
(Defective title – title that cannot be legally transferred to another party)
-Rights to deliver goods to one of the several joint bailors (or as per the contract)
-Right to deliver goods in good faith, to bailor without title (without incurring any
liability to the true owner)
-Right of lien (general & particular): Right to retain possession of property or goods
belonging to other until some debt or claim is paid.

Particular Lien: Right to retain only that particular property in respect of which charge is
due.
General Lien: Right to retain all goods of other party until all claims of the holder against
the part are satisfied.

Bailee’s Particular Lien: S-170 confers the right of particular lien upon a bailee and
provides that “where the bailee has in accordance with the purpose of bailment, rendered
any service involving the exercise of labor and skill in respect of the goods bailed, he has
in the absence of a contract to the contrary, a right to retain such goods until he receives
due remuneration for the services he has rendered in respect of them”

Termination of Bailment
-If bailment is for specified period, bailment ends after the period.
-If bailment is for specific purpose, bailment ends as soon as the purpose is fulfilled.
-If the bailee acts in a manner with regard to the goods bailed which is inconsistent with
the terms of bailment, the bailment can be terminated by the bailor.
-A gratuitous bailment can be terminated by bailor at any time, subject that the
termination should not cause loss to bailee excess to the benefit derived by him, in that
case the bailor must indemnify the bailee for that amount.
-A gratuitous bailment is terminated by death of the bailor or bailee.

Contract of Pledge​ (172-179)

172 – ‘The bailment of goods as security for payment of a debt or performance is called
pledge.’ The bailor here is called the ‘pawnor’(pledger), the bailee is called ‘Pawnee’
(pledgee).

Rights of Pawnee
-Right of retainer (Particular Lien): Right to retain the goods pledged until his dues are
paid, which includes the payment of debt, interest and necessary expenses.
-Right to recover extraordinary expenses, but he cannot retain the goods, if such expenses
are not paid.
-Right to sue the pawnor or sell goods on default of pawnor
He must sell after giving a notice
He cannot sell to himself
If value of goods sold is less than his amount then he can recover the deficit from
pawnor, but if he gains surplus then he must pay.

Duties of Pawnee​ (Like Bailee)

-To take reasonable care of pledged goods
-Not to make unauthorized use
-Not to mix the pledge with his own goods
-To return the goods pledged on receipt of his full dues
-To delivery any accretion (addition or increase in profit) to the goods pledge

Rights of Pawnor
-Enforcement of Pawnee’s duties
-Right to claim back the security pledged on repayment
-In case of sale, the pawnor is entitled to receive any surplus
-If any mishandling or negligence on part of the Pawnee, the pawnor has right to claim
the same or claim damage

Duties of Pawnor
-Must disclose any material faults in goods
-Pawnor is responsible to pay any extraordinary expenses incurred by Pawnee
-In case of sale, if any shortfall occurs, then pawnor is liable to pay
Pledge by Non-Owners​:
-Mercantile Agents (Sales of Good Act)
-Person in possession under voidable contract can make valid pledge of goods (coercion)
-Pledger having limited interest, the pledge is valid to extent of that interest
-Seller in possession of goods after sale (Sales of Good Act)
-Co-owner in possession – With consent of other owners, one of them can pledge

Agency
Section 182 “Agent means a person employed to do any act for another or to represent
another in dealing with the third persons and a person for whom such act is done or who
is so represented is called principal”

General Rules of Agency

-Whatever a person competent to contract may do by himself, he may do through an
agent, except for acts involving personal skill.
-​ ​“Qui facit per alium facit per se” is a Latin term for “He who acts through another does
the act himself”
-Section 226: “Contract entered into through an agent, and obligations arising from acts
done by an agent, may be enforced in the same manner, and will have the same legal
consequences, as if the contracts had been entered into and act done by the principal in
person.
-Sec 182: A person who is age of majority, according to the law to which he is subject,
and who is of sound mind, may employ an agent.
-Sec 184: “As between the principal and the third person, any person may become an
agent” (Even a minor or person of unsound mind can be appointed as an agent)
-Sec 185: No consideration is necessary to create an agency. (Usually an agent is paid
remuneration for his services)

Kinds of Agent
-General Agent: One who is employed to do all acts connected with a particular business
or employment. E.g. Manager
-Specific Agent: To do some particular act or represent his principal in some particular
transaction. E.g. Agent for sale or purchase of car
-Universal Agent – An agent whose Authority unlimited
-Commission Agent – Who buy or sell goods for his principal on the best possible terms
in his own name, and receives commission for his labor
-Del Credere Agent: He is the one who is in consideration of extra commission,
guarantees his principal against the third person with whom the agent enters into contract
on behalf of the principal i.e. if buyer does not pay, he will pay. (Both surety and agent)
-Broker: He is the link between two parties for commission
-Factor: A factor is a type of trader who receives and sells goods on commission. A factor
is a mercantile fiduciary transacting business in his own name and not disclosing
principal
-Other: Advocates, Insurance Agent, Wife etc.

Creation of Agency
1. Express Agreement: Normally Agency is created by an express agreement, that
specifies the scope and authority of agent. It is written or oral.
2. Implied Agreement: There is no express agreement, but instead the existence of
agency is inferred from the circumstances of the case, from the conduct of the
parties on a particular occasion or the relationship between the parties. Its types
are:
-Agency by Estoppel: When an agent has without authority, done acts or incurred
obligations to third persons on behalf of his principal, the principal is bound by such
acts or obligations, if he has by his words or conduct induced such third persons to
believe that such acts and obligations were within the scope of agent’s authority. The
principal is estopped from denying subsequently his agent’s authority.

-Agency by Holding Out: Similar to estoppel, although here some affirmative or positive
act or conduct by the principal is required to establish the agency subsequently.

-Agency by Necessity: Agency by necessity is conferred by law in certain cases, where a

person is faced with an emergency in which the property or interest of another are in
danger, and it becomes necessary in order to preserve the property or interest, to act
before the instructions of Principal can be obtained,
i. There should be real necessity for acting on behalf of the principal.
ii. It should be impossible to communicate with the principal within the time available
iii. The alleged agent should act in the interest of the principal.

It arises in following cases:

-Where the agent exceeds his authority, in an emergency.
-Where the carrier of goods acting as a bailee, does anything to protect or preserve the
goods, in an emergency,
-Where a husband improperly leaves his wife without providing proper means for her
sustenance. (She has the authority of pledging her husband’s credit for necessaries, even
against her husband’s wishes. This rule does not apply where wife leaves the husband)
Agency by Ratification: Ratification means the subsequent adoption and acceptance of an
act originally done without instructions or authority. Thus, where principal affirms an
unauthorized act, he is said to have ratified the act.

Essentials:
-Agent must Act on behalf of the person ratifying the act (principal must be identified)
-Ratification of whole transaction (not one part)
-Principal must have capacity of making contract
-Ratification with full knowledge of facts
-Ratification within reasonable time
-Act must be lawful
-Ratification must be communicated

Agency by Operation of Law: According to partnership act, every partner is an agent of

the firm as well as other parties. It is implied agency. According to companies act,
promoters are regarded as agents to company.

Extent of Agent’s Authority

-Actual Authority: Agent can do all such acts which have been assigned to him either
expressly or impliedly, thereby bind the principal to third parties.
-Apparent Authority: Agent can bind the principal to third parties by act done using his
apparent authority, provided third party acts bona fide and without knowledge of the
limitation of agent’s apparent authority.
-Authority in emergency -Authority to do all such acts for the purpose of protecting his
principal from loss, as would be done by person of ordinary prudence.

Delegation of Authority (DOA): A Delegate cannot further delegate.

Exceptions:
-Principal has expressly permitted
-Implied by conduct of principal, allowed DOA, where principal knows that agent will
delegate but does not object to it
-Ordinary custom of trade (sub-agent may be employed)
-Unforeseen emergencies

Sub-Agent
191; “A sub agent is a person employed by, and acting under the control of, the original
agent in the business of the agency.”

Where the sub-agent is properly appointed:

-The principal is bound and liable to the third-party act of sub-agent
-The agent is responsible to the principal for the acts of sub-agent
-Incase the sub agent is guilty of fraud or willful wrong, he is directly liable to the
principal. Principal can sue anyone.

Where sub-agent is improperly appointed

-Principal is not represented by such sub-agent and is not liable to his acts
-The agent is responsible for sub-agent’s acts
-The sub-agent is not liable to principal at all

Substituted Agent​ – Principal asks agent to appoint another person to do some work, the
person appointed is not a sub-agent, but is agent of principal himself, and is called
Substituted Agent.
E.g. A directs B his solicitor to sell his estate by auction, B employs C an auctioneer, here
C is not a sub-agent but A’s agent.

(Sub-Agent & Substituted Agent can be differentiated on grounds of Appointment,

Responsibility, Direction & Control, Liability of Agent & Privity of Contract)
Privity of Contract: After the appointment of substituted agent, a privity of contract is
established between the principal and the substituted agent, hence both can sue each
other. But no such thing exists between the principal and the sub-agent

Duties of Agent
1. To carry out the work as per directions of principal or customs
2, To carry out work with reasonable care
3. To communicate with the principal in case of difficulty
4. Not to deal on his own account
5. To pay sums received to principal
6. To protect the interests of the principal in case of his death or insolvency
7. Not to use the information obtained during the course of agency against the principal
8. Not to make secret profit from agency
9. Not to delegate authority (exceptions stated previously)

Rights of Agent
1. Right to retain out of sum received all money due to himself
2. Right of remuneration
3. Right of lien: Right to retain goofs, until amount due to himself for commission has
been paid
4. Right of indemnification against consequences of all lawful acts done by him
5. Right of compensation for injuries due to Principal’s neglect
6. Right of stoppage in transit of goods if he has bought goods with his own money or if
the principal becomes insolvent
Rights & Duties of Principals
-The duties of agents are the rights of Principal
-The rights of agent are the duties of Principal

Principal Liability of Principal for acts of Agent

-Liable for acts of the agent done within the scope of his actual and apparent authority
-When agent exceeds his authority, the principal can disown the act or ratify the same
-Liable for agent’s misrepresentation and fraud done within the scope of his actual or
apparent authority
-A notice given to agent is equal to notice to principal (knowledge of agent is knowledge
of principal)

Personal Liability of Agent to Third Party

Agent is assumed to be personally liable in following cases:
1. When the contract expressly provides and agent expressly agrees to be personally
liable.
2. When agent acts for foreign principal, he is presumed personally liable.
3. When agent acts for un-named/undisclosed principal
4. When principal cannot be sued (Diplomat)
5. Where agent exceeds his authority

Termination of Agency
A. By act of parties:
1. Agreement between rincipal & Agent
2. Revocation of Authority of Agent by principal (before exercised by agent)
3. Revocation by Agent: He must give a reasonable notice, if he doesn’t then he is liable
for compensating any subsequent damage.
B. By operation of laws
1. Performance of contract
2. Death and Insanity of Principal or Agent
3. Expiry of time of agent
4. Insolvency of agent or principal
5. Destruction of subject matter (say House)
6. Principal becoming alien enemy
7. Dissolution of Company (if agent or principal is an incorporated company)

Irrevocable Agency: When authority given to agent cannot be revoked.

1. Where agent himself has interest in subject matter
2. Where the agent has incurred a personal liability (and would cause him personal loss)
3. Where the agent has partly exercised the authority
 UNIT 2 
Sales of Goods Act 1930

According to Sec 4(1) of Sales of Goods Act: “A contract of sales of goods is a contract
whereby the seller transfers or agrees to transfer the property in goods to the buyer for a
price” It thereby includes:
i. Sale (Property in goods is immediately transferred)
ii. Agreement to Sell (Transfer of Property in goods is to take place at a future date or
subject to some conditions thereafter to be fulfilled)

Essentials
1. Two parties
2. Transfer of property (means ownership)
3. Goods (moveable goods, transfer of immoveable property is not regulated by sales of
goods act)
4. Price (consideration should be money only)
5. Essential elements of Valid Contract must exist

Goods
As per Sec 2(7), “Goods means every kind of movable property other than actionable
claims and money and includes stocks and shares, growing crops, grass & things attached
to or forming part of land which are agreed to be served before the sale or under the
contract of sale”.
(Actionable Claim: Unsecured Debt, Loan)

Kinds of Goods
Existing Goods: Physically in existence and which are in seller’s ownership and/or
possession by seller at the time of entering the contract of sale are existing goods. Types:
Specific Goods (The goods which are identified and agreed upon at the time of contract
of sale) & Unascertained (Not identified…. contract of sale)

Future Goods: Goods to be manufactured or produced by the seller after making the
contract. E.g. Fruits that may grow on tree. (Agreement to Sell)

Contingent Goods: Acquisition of which by the seller depends upon a contingency which
may or may not happen. (Agreement to Sell) Contract is enforceable on the happening of
the event, otherwise it is void. E.g. A agrees to sell to B a specific rare painting provided
he is able to purchase it from its present owner. This is a contract for the sale of
contingent goods.

Basis Sale Agreement to Sell

Transfer of Property Immediately
Types of goods Existing and specific goods
Risk of Loss Buyer bears the loss if the
goods are destroyed
Consequence of If the buyer refuses to pay
Breach the price of goods, seller can
sue for price
Right to Re-Sell Seller can’t resell the goods
Insolvency of the Seller must return the goods
buyer before he pays to the official receiver
for the goods
Insolvency of Seller Buyer is entitled to recover
if buyer has already goods from official receiver
paid
Right Right against the whole
world
Type of Contract Executed
At a future date
Future & Contingent Goods
Seller bears the loss if goods are
destroyed
Seller can only sue for damages
and not the price if buyer breaks
his promise
Seller can sell the goods, buyer
can sue for damages because
ownership remains with seller
Seller is not bound to deliver as
ownership has not passed to him
Buyer can only claim rateable
dividend as a creditor if he had
paid for the goods
Right against the specific person
Executory

Price – Price may be expressly fixed on contract itself, it may be fixed in an agreed
manner provided by the contract (say market price on a prevailing date), It may be
determined by the course of dealings between the parties, Reasonable price may be used
for dealing

Conditions & Warranties

At the time of selling the goods, a seller usually makes certain statements or
representations with a view to induce the intending buyer to purchase the goods. Such
representations are generally about the nature and quality of goods and about their fitness
for buyer’s purpose. A representation which forms a part of the contract of sale and
affects the contract is called a stipulation. However, every stipulation is not of equal
importance.

Condition & Warranty (Section 12): A stipulation in a contract of sale with reference to
goods which are the subject thereof may be a condition or a warranty.
Condition​: A condition is a stipulation essential to the main purpose of the contract, and
the breach of which gives rise to a right to treat the contract as repudiated.
Essentials – Essential to main purpose of Contract, its non-fulfilment would defeat the
very purpose of contract, Aggrieved party can repudiate the contract

Warranty​: A stipulation collateral to the main purpose of the contract, the breach of
which gives rise to a claim for damages but not to a right to reject the goods and treat the
contract as repudiated.

When Condition is equal to Warranty?

-Voluntary Waiver by Buyer: Although on a breach of condition, the buyer has a right to
treat the contract as repudiated and reject the goods, but he is not bound to do so. He may
instead waive the condition and treat it as a breach of warranty, by which he can sue the
seller for damages.
-Acceptance of Goods by Buyer: Where the buyer has accepted the goods, and thereafter
discovers the breach of condition, then the breach of any condition can be treated as
breach of warranty and contract can’t be repudiated, although damages can be claimed.

Express Conditions – The conditions which are agreed upon between the parties in
express words, either written or oral are express conditions.

Implied Conditions:
-Condition as to title: Presumption that seller is the true owner of goods. (Seller’s right to
sell the goods is termed as a Condition as to title)

-Sale by Description: When the goods are sold by describing their qualities & the buyer
relies on that description.
-Condition as to quality or fitness: The goods should be reasonably fit for which the
buyer wants them. (The buyer should make known to the seller the purpose for which
goods are required and the buyer should rely on the seller’s skills or judgement)
-Condition as to merchantability: The implied condition is that goods must be in
merchantable quality i.e. a condition in which a reasonable man acting reasonably would
accept them under the circumstance. Applicability of this condition arises when:
a. The seller must deals in goods of that description, whether he be manufacturer or not.
b. The buyer must not have any opportunity of examining the goods or there must be a
latent defect in the good which would not be apparent on reasonable examination of the
same.
(If the buyer had an opportunity to examine the good but avoids it, or if he has examined
the goods, then there is no implied condition as to merchantability)
-Condition in sales by sample as well as by description: The condition is that the bulk of
the goods shall correspond to the sample and description
-Condition in a sale by sample: The goods must correspond with sample in quality. (The
buyer shall have a reasonable opportunity of comparing the bulk with sample)
-Condition as to wholesomeness: For eatables, the goods shall be wholesome.

Implied Warranties
-Warranty of quiet possession: Buyer shall have and enjoy quiet possession of the goods.
-Warranty of freedom from encumbrances (burden): The goods shall be free from any
charge or encumbrance in favor of any third party not declared.
-Warranty of disclosing the dangerous nature of goods to the ignorant buyer: Where the
goods are dangerous and buyer is ignorant of danger, the seller must warn the buyer of
probable danger.

Caveat Emptor (let the buyer beware)

When the seller displays their goods in open market, it is for the buyer to make a proper
selection or choice of the goods. If the goods turn out to be defective, he cannot hold the
seller liable. The seller is in no way responsible for bad selection of the buyer.

Exceptions:
-Where seller makes a misrepresentation or fraud and buyer relies on it (Voidable)
-Seller actively conceals the defects so that the same could not be discovered one
reasonable examination
-Where the goods are purchased by description and they do not correspond to description
(implied condition)
-Where goods are bought by sample, and the bulk does not correspond with same, or no
opportunity given to compare or hidden latent defect
-Condition in a sale by Sample & Description
Condition as to fitness and quality

Transfer of Property
A contract of sale of goods by a seller involves 3 steps i.e. the transfer of property
(ownership) of the good, the passing or the risk and finally transfer of possession of the
goods (i.e. Delivery)

Significance of Transfer of Property

i. Risk follows ownership: Risk of the loss of goods is prima-facie in the person of whom
the property is.
ii. Action against third parties: If after contract of sale the goods are damaged by a third
party, then only the person in whom the property vests can take action.
iii. Suit for Price – Seller can sue the buyer only after the ownership in transferred but
remains unpaid
iv. In case of Insolvency of buyer or seller, the question whether Official Receiver can
take over the goods depend upon in whose property the good is.

Transfer of Property in specific or ascertained goods

1. When goods are in a deliverable state, property of goods will pass as soon as the
contract is made. (Time of payment of the price or delivery of goods is
immaterial) (Deliverable state is a state where the buyer would under the contract
be bound to take delivery of them)
2. When the goods have to be put in a deliverable state: The property does not pass
until the seller has put the goods in a deliverable state.
3. When the goods are to be measured (seller is bound to weight, measure, test or do
some other act or thing with reference to the goods for ascertaining the price) the
property does not pass until such act is done, and the buyer has its notice.
4. When the goods are delivered on approval the property passes to buyer:
-When he signifies his approval
-If he does not signify his approval, but retains the foods without giving notice of
rejection beyond the time fixed for the return of goods.

Transfer of Property in future or unascertained goods​: The property in goods does not
pass to the buyer unless and until the goods are ascertained or unconditionally
appropriated to the contract to bring them in a deliverable state, either by the seller with
the assent of buyer, or vice-versa. (Assent maybe expressed or implied, either before or
after appropriation)

Ascertainment or Appropriation:​ It involves separating, weighing, measuring, counting or

similar acts done in relation to goods with an intention to identify and determine the
specific goods to be delivered under the contract. (Ascertainment can be unilateral act of
seller, appropriation may involve mutual consent of seller and buyer)

Valid Appropriation
-The appropriation must be of goods of contract, both as to quantity and quality
-The appropriation must be intentional, not due to accident or mistake
-It must be made either by seller with assent of buyer or vice-versa.
-It must be unconditional (seller shouldn’t reserve to himself the right of disposal of
goods unless certain condition is met)
Delivery to Carrier​: “Where in pursuance of the contract, the seller delivers the goods to
the buyer, or to a carrier or other bailee (whether named by the buyer or not) for the
purpose of transmission to the buyer, and he does not reserve the right of disposal, he is
deemed to have unconditionally appropriated the goods to the contract.
E.g. If goods are loaded, and railway receipt (buyers name) is sent to buyer directly, the
ownership is passed on delivery of goods to railway company.
But if the railway receipt is sent to banker with instructions to deliver the same on
payment, the ​right of disposal is said to be reserved.

Rules regarding transfer of title on Sale

If the title of the seller is defective, the buyer’s title will also be subject to the same
defect. (no one can give what he has not got)

Transfer of title by non-owners:

Exceptions to above rule are-
1. Sale by Mercantile Agent: An agent having agent authority to sell goods or consign
goods for the purposes of sale, or to buy goods or to raise money on the security of
goods.
2. Sale by Joint Owners: With other joint owners’ permission, one of the owners can
transfer the title to another person.
3. Sale by person in possession under voidable contract: Buyer would obtain good title to
the goods sold to him by a seller, who had obtained possession of them by a contract
voidable on grounds of coercion/fraud/misrepresentation/fraud given the contract has not
be rescinded till then.
4. Sale by buyer in possession after “agreement to buy”: Where a buyer with consent of
seller obtain possession of goods before the property has passed to him, he may sell,
pledge or dispose to third person, who gets a good title.
5. Sale by unpaid seller – Unpaid seller who had exercised the right of lien or stoppage in
transit resells the goods, the buyer acquires good title over the original buyer.
6. Sale by finder of lost goods under circumstances
7. Sale by Pawnee under certain circumstances
8. Sale by Official Receiver (insolvency of individual/liquidation of company)

Performance of Contract of Sale

It is the duty of the seller to deliver the goods and of the buyer to accept and pay for them
in accordance with the terms of the contract of sale. Thus, the performance of contract of
sale implies ​deliver of goods by seller, acceptance of delivery of goods and payment for
them by buyer.

Delivery​: Delivery means voluntary transfer of possession from one person to another.
Kinds of Delivery
1. Actual/Physical Delivery: Seller delivers the goods physically to buyer for his
possession. If seller has received price, but does not deliver then buyer can sue the seller
for price.
2. Symbolic Delivery: If the key of store is delivered to any person, it will be symbolic of
delivery of the goods in store.
3. Constructive Delivery: When there is a change in the legal character, without any
visible change in actual and visible custody. (Delivery by attornment)
(A rent a bus to B, he sells it to C, but the custody remains with B although owner is now
C)

Rules of Delivery of Goods

1. Delivery may be either actual, symbolic or constructive.
2. Delivery and Payment are concurrent condition i.e. simultaneously unless otherwise
agreed.
3. Buyer to apply for delivery: Seller of goods is not bound to deliver, unless buyer
applies for delivery
4. A delivery of part of goods (made with intention of delivering the rest) is equivalent to
passing the property of goods.
5. Time of Delivery: When no time is fixed, then seller is bound to send within a
reasonable time.
6. Place of Delivery: Either it is stated in the contract, else in case of sale the goods are to
be delivered at the place at which they are at the time of the sale. (same for agreement to
sell), whereas for future goods they must be delivered at the place where they are
manufactured.
7. Third Person: When the goods at the time of sale are in possession of a third person,
there is no delivery by the seller unless the third person acknowledges to the buyer that he
holds the goods on his behalf. (Constructive Delivery)
(Consent of all 3 parties are required, in case the goods have been sold by transfer of
document of title to goods e.g. Bill of lading, the buyer is deemed to be in possession of
the goods, and assent of third party is not required)

8. Delivery of wrong quantity or different quality:

-Quantity less than contracted – buyer may reject, if he accepts, he shall pay at contract
rate
-Larger than contracted- buyers may accept the goods included in contract and reject the
rest (or reject the whole) (if accepts the whole then pay at contract rate)
-Mixed with other goods – accept the goods and reject rest, or reject whole

9. Installment Deliveries: Unless agreed, buyer of goods isn’t bound to accept delivery by
installments
 10. Delivery to Carrier – Delivery of goods to a carrier, for the purpose of transmission,
or to a wharfinger (safe keeper), it is prima-facie deemed to be delivery of goods to
buyer,

Acceptance of Delivery by Buyer

- The buyer is deemed to have accepted the goods when he intimates to the seller that he
has accepted them. (or)
-When the goods have been delivered to him and he does any act in relation to them
which is inconsistent with the ownership of ​seller​, (or)
-When after the lapse of reasonable time, he retains the goods without intimidating the
seller that he has rejected them

Rights of Unpaid Seller

Unpaid Seller​: The seller of the goods is deemed to be an unpaid seller:
a. when the whole of the price has not been paid (unpaid wholly or partly)
b. where a bill of exchange or other negotiable instrument has been received as a
conditional payment and the same has been dishonored

Rights of unpaid seller against the goods

i. Where the property in goods has passed
1. Right of Lien: Lien is the right to retain possession of goods and refuse to deliver
them to the buyer until the price due in respect of them is paid or tendered. Unpaid
seller is entitled to exercise his lien in following cases:
a. Where the goods have been sold without any stipulation like credit
b. Where the goods have been sold on credit, but the term of credit has expired
c. Where the buyer becomes insolvent, even though the period of credit may not have yet
expired
Rules regarding Lien
-The Seller must not have lost the possession
-Lien depends on actual possession not title
-It can be used only for non-payment of price and not for other charges
-When unpaid seller has made part delivery of goods, he may exercise right of lien on the
remainder

When Lien is lost?

-Lien depends on physical possession of goods, once that’s lost, lien is also lost
-When the seller delivers the goods to carrier for purpose of transmission without
reserving the right of disposal of goods
-When the buyer or his agent lawfully obtain possession
-When seller expressly waives of his right of lien

2. Right of stoppage in transi​t: Right of stopping the goods while they are in transit, to
regain possession and to retain them till full price is paid. (the goods should be in
possession of a middleman between the seller who has parted with and buyer who is
yet to receive them)
When to exercise​: The Seller must have parted with the goods, the goods must be in
course of transit and the buyer must have become insolvent.

Duration of Transit​: Goods are deemed to be in course of transit from the time when they
are delivered to a carrier or other bailee for the purpose of transmission to the buyer or
his agent in that behalf takes delivery of them from such carrier or bailee.
Note: Carrier must hold the goods in capacity of independent person/If carrier holds
goods as an agent of seller, there is no question of exercising right of stoppage as seller
can exercise right of lien/If the carrier hold goods as an agent of buyer, the seller cannot
exercise the right of stoppage in transit because the delivery to carrier amounts to
delivery to buyer.

Termination of Stoppage in Transit

-When buyer or agent take delivery after it reaches them/before it arrives at destination
-When goods arrived at destination and carrier holds goods on behalf of buyer
-When carrier wrongfully refuses to deliver the goods to buyer or agent

Basis Lien Stoppage in Transit

Activation of Right Buyer Does not Pay Buyer is Insolvent
Possession of Goods In Possession Not in Possession
End/Start of Right When possession ends When stoppage in transit starts
Purpose of Right Retain possession Regain Possession

3. Right of resale​: Right can be exercised when

-Goods are of perishable condition
-Where seller gives notice to buyer of his intention to resell and the buyer does not pay
within a reasonable time after notice
-Where the seller has expressly reserved his right of re-sale in case the buyer should
make default
 Note: If on resale there is a loss to seller, he can recover from defaulting buyer but if
surplus on resale, he can keep it. / If no notice given by seller, goods are not perishable in
nature and seller cannot recover any loss from the buyer then he is obligated to hand over
the surplus amount to the buyer

ii. Where the property in goods has not passed

-Right of withholding the deliver gets active when the property in goods has not passed to
buyer (lien)
-Right of stoppage in transit

Rights of unpaid seller against the buyer personally

1. Suit for Price: Where property in goods has passed to the buyer, or where the sale
price is payable ‘on a day certain’ and the buyer wrongfully neglects or refuses to
pay the price as per the terms of contract, then the seller is entitled to sue the buyer
for price irrespective of delivery of goods. (In case not delivered, the seller suits for
price normally)
2. Suit for damages for non-acceptance: Where the buyer wrongfully neglects or
refuses to pay the price for goods, the seller may sue him for damages for
non-acceptance. The seller’s remedy is suit for damages rather than for the full price
of the goods.
(Damages are calculated in accordance with the rules of Sec 73, the measure of damages is
the estimated loss arising directly and naturally from the buyer’s breach of contract)
-Where the goods have a ready market, the principle applicable is that the seller may
recover damages equal to difference between the contract price and market price. If
difference is nil. Seller can get only nominal damages (say rupee). / Where there is
no ready market, measure of damage depends on facts of each case.
3. Suit for Special Damage: Which the parties knew when they made the contract, to be
likely to result from the breach of it.
Buyer’s Rights Against Seller
a. Suit for Damages for Non-Delivery
b. Suit for Specific Performance: Court may direct that the contract shall be performed
specifically
c. Suit for breach of warranty: Buyer can suit for damages, but if price has already been
paid then he may ask seller for reasonable reduction in price.
d. Suit for rescission of contract and damages for breach of condition
e. Suit for recovery of price together with interest
 Negotiable Instruments Act 1881 
 
Definition
The word negotiable means ‘transferable by delivery’ and the word instrument means ‘a
written document by which a right is created in favor of some person’.
The term ‘negotiable instrument’ means ‘a written document transferable by delivery’.

As per Section 13 of the Negotiable Instruments Act, “a negotiable instrument means a

promissory note, bill of exchange or cheque payable either to order or to bearer.”
Section 13(2): A negotiable instrument may be made payable to two or more payees
jointly, or it may be made payable in the alternative to one of two, or one or some of
several payees”

The instruments are declared to be negotiable if they are payable in the following forms:
a. Payable to Order: A note, bill or cheque is payable to order when it is expressed to
be ‘payable to a particular person or his order’. E.g. Pay A, Pay A or order, pay to the
order of A, Pay A & B are various forms in which an instrument may be made payable to
order. (It should not contain any words prohibiting transfer such as ‘Pay to A only or Pay
to A and one else’ as it restricts negotiability)
b. Payable to Bearer: It means payable to any person whoever bears it. A note, bill or
cheque is payable to bearer which is expressed to be payable or on which the only or last
endorsement is an endorsement in blank. Thus, a note, bill or cheque in the form “Pay to
A or bearer, Pay A, B or bearer or Pay bearer” is Payable to Bearer.
(Also, if an instrument is originally payable to order it may become payable to bearer if
endorse in blank by the payee)

Section 31 of RBI ACT

I. No person in India other than RBI or Central Govt. can make/issue a promissory note
‘payable to bearer’.
ii. No person in India other than RBI or Central Govt. can draw or accept a bill of
exchange ‘payable to bearer on demand’
iii. A cheque ‘payable to bearer on demand’ can be drawn or a person’s account with a
banker.

Characteristics of Negotiable Instruments

1. Easy Negotiability: Transferable from one person to another without any
formality. The property rights (ownership) passes in these instrument passes either
by endorsement and delivery (payable to order) or only delivery (payable to
bearer) and no further evidence of transfer is needed.
2. Transferee can sue in his own name without giving notice to the debtor: A bill, note or
cheque represents a debt i.e. an “actionable claim” and implies the right of the creditor to
recover something from his debtor which he can reserve for himself or transfer to another
person. In case he transfers his right, the transferee or a negotiable instrument is entitled
to sue on the instrument in his own name in case of dishonor, without giving notice to the
debtor of the fact that he has become holder.
(Notice to debtor is necessary to make the transferee entitled to sue in his own name,
otherwise he has to join his transferor i.e. the original creditor before he can
recover his claim from debtor)

3. Better title to a bonafide transferee for value: A bonafide transferee of a negotiable

instrument for value gets the instrument “free from all defects”. He is not affected
by any defect of title of the transferor or any prior party.
(If a stolen radio set is sold by A to B, then the true owner X may claim it back from B
even if B bought it in “good faith” with consideration, however if instead of radio
it was a NI, then once transferred then B would obtain a “good title”)

4. Presumption: Certain Presumption apply to all NI’s. (Section 118-119)

a. that every NI was made, drawn, accepted, endorsed, or transferred for
consideration
b. that every NI bearing a date was made or drawn on such date
c. That every bill of exchange was accepted within a reasonable time after its date
and before its maturity
d. That every transfer of a NI was made before its maturity
e. That the endorsements appearing upon a NI were made in the order which they
appear thereon
f. That a lost NI was duly stamped
g. That the holder of a NI is a holder in due course (doesn’t hold if the holder
obtained the instrument from its lawful owner, or from any other person in lawful
custody, by means of an offence, fraud or unlawful consideration, in such case the holder
has to prove that he is a holder in due course)
h. That the instrument was dishonored, in case a suit upon a dishonored instrument is
filed with the court and the fact of the ‘protest’ is proved
(Protest: a written declaration, that a bill has been presented and payment or acceptance
refused)

Types of Instruments
Negotiable Instruments: Bills of Exchange, Promissory Notes, Cheques, Treasury Bills
Dividend/Share Warrants, Hundis, Railway Bonds payable to bearer
Non-Negotiable Instruments: Money Orders, Postal Orders, Fixed Deposit Receipts,
Letters of Credit etc.

Quasi-Negotiable Instrument: They are capable of being transferred by endorsement

and/or delivery, but the transferor of such documents cannot give to the holder any better
title to the goods than he himself possesses. E.g. Bills of Lading, Railway Receipts,
Dock Warrants, Wharfinger Certificates

Promissory Note
As per Section 4: A Promissory note is an instrument in writing, containing an
unconditional undertaking signed by the maker, to pay a certain sum of money only to or
to the order of, a certain person, or to the bearer of the instrument.
- A Promissory note payable “only to a particular person’ is valid if it satisfies the
requirements of the definition, but it shall not be a negotiable instrument as its
transferability is restricted.
- As per Section 31 of RBI Act, 1934 RBI and Central Govt. can only make a
promissory note payable to bearer.
- Bank Notes (promissory notes issued by a banker payable to bearer on demand)
and Currency Notes (promissory notes issued by the RBI/Central Govt. payable to
bearer on demand) are excluded from the definition of promissory notes because
both are treated as money.
- The person who makes the promise to pay is called the ‘maker’. He is the debtor
and must sign the document, whereas the person to whom the payment is made is
the creditor and is called the ‘payee’.

Essentials of Promissory Notes

1. It must be in writing: An oral promise to pay does not become a promissory note. The
writing maybe on a paper, or on any book, written with a pencil or in ink and includes
printing or typing.
2. It must contain a promise or undertaking to pay: Undertaking may be gathered either
from express words or by necessary implication. A mere acknowledgement of
indebtedness is not a promissory note, although is a valid agreement which may be
sued upon.
3. The promise to pay must be unconditional: Certainty is very necessary, a promissory
note must contain an unconditional promise to pay, and this promise must not depend
upon the happening of some uncertain event.
4. It must be signed by the maker.
5. The maker must be a certain person: The instrument itself must indicate with certainty
who is the person or are the person engaging himself to pay. In case the person signs
in an assumed name, he is liable as a maker because a maker is taken as certain if
from his description sufficient indication follows about his identity.
6. The payee must be certain: Like the maker, the payee of a pronote must also be
certain on the face of the instrument. A note is valid even if the payee is misnamed or
indicated by his official designation only, provided he can be ascertained by evidence.
7. The sum payable must be certain: The sum must be certain and definite, and must not
be capable of contingent additions or subtractions.
8. The amount payable must be in legal tender money of India: A document containing a
promise to pay a certain amount of foreign money or to deliver a certain quantity of
foods is not a promissory note.
9. Other Formalities: It is proper to state in a note the place and date where it is made.
The word “value received” area also not an essential part of pronote, because
consideration is presumed until the contrary is proved. A pro-note must be properly
stamped.

Bill of Exchange

Section 5 of Negotiable Instrument Act

“A bill of exchange is an instrument in writing containing an unconditional order, signed
by the maker, directing a certain person to pay a certain sum of money only to, or to the
order of, a certain person or to the bearer of the instrument.”
Note​:
- A BOE directing to pay ‘only to a particular person’ is not a NI within the NI Act
as its transferability is restricted.
- Although a BOE may be originally draw ‘payable to bearer’ but in such a case it
must be payable otherwise than on demand (say 3 months after date). In other
words, a bill cannot be drawn ‘payable to bearer on demand’. If it is ‘payable on
demand’ then it must be ‘payable to order’ (Section 31 of RBI Act)
Parties to a BOE
- Drawer: Person who makes the bill
- Drawee: Person who is directed to pay
- Payee: Person to whom the payment is to be made
The drawer, or if the bill is endorsed to the payee, the endorsee 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 drawee accepts the bill, by writing the words ‘accepted’ and
then signing it, he is called the ‘acceptor’.

One person maybe​:

‘drawer and payee’ – when the bill is drawn ‘pay to me or my order’
‘drawee and payee’ – when the bill is subsequently endorsed in favor of the drawee
‘drawer and drawee’ – when one draws the bill upon himself
Drawee in case of need​ – Sometimes the name of another person maybe mentioned in a
BOE as the person who will accept the bill if the original drawee does not accept it, he is
known as ‘drawee in case of need’

Acceptor for Honor​ – When a BOE has been noted or protested for no-acceptance or for
better security, and any other person accepts it ​supra protest​ for honor of the drawer or
any one of the endorsers, then such a person is called an ‘acceptor for honor’ – section 7

Essential of a BOE
1. It must be in writing
2. It must contain an ​Order to Pay (​ not request)
3. The order to pay must be unconditional
4. It must be signed by the drawer
5. The drawer, drawee and payee must be certain (where liability lies, no ambiguity
must lie)
6. The sum payable must be certain
7. The bill must contain an order to pay ​money only
8. It must comply with the formalities like date, consideration, stamps etc.

Specific Benefits of BOE​:

- It is a double secured instrument, if dishonoured by acceptor, the holder or the payee
may look to the drawer of the bill for payment
- In case of immediate need of money, a bill can be discounted with a bank by the
payee
- Two separated trade debts can be discharged by a single BOE.
E.g. A buys good on credit from B from 1k, B buys good on credit from C for 1k, an
order by B to A to pay the sum of 1k to C will discharge two separate trade debts.
 Cheque

Section 6 defines cheque as​:

“A cheque is a bill of exchange drawn on a specified banker and not expressed to be
payable otherwise than on demand and it includes the electronic image of a truncated
cheque and a cheque in the electronic form”

Thus, a cheque is always drawn on a bank and is always payable on demand

Note​:
1. A cheque is always drawn on a baker
2. A cheque can only be drawn payable on demand
3. A cheque drawn ‘payable to bearer on demand is valid.
4. A cheque does not require any acceptance by the drawee before payment can be
demanded.
5. It does not require any stamp
6. Cheques can be crossed
7. There is no system of Noting or Protest in case of a cheque

Bank Draft​ – An order issued by one bank on another bank or on its own branch
instructing the latter to pay a specified sum of money to a specified person or his order. It
is a NI and very much like cheque, point of difference lies in:
a. It can be drawn only by a bank on another bank, or on its another branch and not by an
individual as in case of cheque
b. It cannot be so easily countermanded(revoked) as a cheque
c. It cannot be made payable to bearer
Inchoate Instruments – An incomplete or blank negotiable instrument properly stamped
and signed is termed as an ‘inchoate instrument”. The drawer of a NI may sign the
instrument to another person in his such capacity leaving the instrument wholly blank or
having written on it the word incomplete. The person signing and delivering the inchoate
instrument is liable to a holder and holder in due course.

Maturity of NI – Maturity means the date on which the payment of instrument falls due.
An instrument payable on demand such as cheque becomes payable immediately on the
date of its execution and there is no question of its maturity. Every pro-note or a bill of
exchange is expressed to be payable on a specified day, or at a certain period after date or
after sight or at a certain period after the happening of an event which is certain to happen
is at maturity on the ​third day ​after the day on which it is expressed to payable.

Hundis​ – The negotiable instrument written in Hindustani Language. Sometimes they are
in the form of a promissory note but are usually like the bills of exchange is form and
substance. The provisions of NI act apply to Hundis unless there is a local usage to the
contrary. They have been popular among the Indian Merchants from the very old days.
(They have no legal status, and are not covered under the act)
-Darshani Hundi: Hundi payable at sight.
-Miadi Hundi: One payable after a specified period of time
-Shahjog Hundi: Made payable only to a shah (respectable person on financial worth and
subtance in market)
-Namjog Hundi: Payable to the party named in hundi or his order. (BOE payable to
order)

Parties to Negotiable Instruments

Holder​: Any person entitled to the possession of the instrument in his own name and to
receive or recover the amount thereon from the parties liable thereto, He must satisfy the
following two conditions:
1. He must be entitled to the possession of the instrument in his own name: Actual
possession of the instrument is not essential, only a legal or valid title is required. He
must be named in the instrument as the payee or the indorsee, or he must be the bearer
thereof, if it is a bearer instrument.
2. The person must have the right to receive or recover the amount of the instrument and
give a valid discharge to the payer.

Holder in Due Course​: It means any person who for consideration became the possessor
of a negotiable instrument if payable to bearer, or the payee or indorsee thereof if payable
to order, before the amount mentioned in it became payable without sufficient cause to
believe that any defect existed in the title of the person from whom he derived his title.

Requirements to be a Holder in Due Course​:

1. He must be a holder (meet the conditions of holder described above)
2. He must be a holder for valuable consideration (a donee who acquires title to
instrument by way of gift is not older in due course, although he is a holder)
3. He must have become the holder of the NI before its maturity
4. He must take the NI complete and regular on the face of it (examine the NI’s form and
contents, with NI not being incomplete)
5. He must have become holder in good faith (without having sufficient cause to believe
that any defect existed in the title of the transferor)

Privileges of a Holder in Due Course

1. He gets a better title than that of transferor (defenses on part of a person liable that the
instrument has been lost or obtained by offence/fraud/unlawful consideration cannot be
pleased against holder in due course) (better title i.e. a good title free from all defects but
also serving as a channel to protect subsequent holders)
2. Privilege in case of inchoate stamped instrument: The defense that the amount filled by
holder (in inchoate instrument) was in excess of the authority give to him cannot be taken
against a holder in due course.

3. Liability of Prior Parties: All prior parties to NI (maker, acceptor, intervening

indorsers) continue to remain liable to holder in due course (for holder only preceding
party is liable)

4. Privilege in case of fictitious bill: When a BOE is drawn in fictitious name and is made
payable to the drawer’s order it is a fictitious bill. It is not a good bill and cannot be
enforced. But the acceptor of such bill is liable to a holder in due course.

5. Privilege when instrument delivered conditionally (for collateral security, safe custody
and not for transferring absolute property) is negotiated, it does not affect the rights of a
holder in due course

Capacity of Parties
-Minor may draw, endorse, deliver and negotiate a NI so as to bind all parties except
himself. Minor can be a party to NI but he does not incur any liability himself, although
other parties remain liable.
-Insolvent is not competent to draw, make, accept or indorse a NI so as to bind his estate
which now stands vested in the Official Receiver.
-Joint Stock Company: Company is an artificial person, and is competent of executing a
NI if authorized by its MOA.
-Agent: Can execute NI

Negotiation of Negotiable Instruments

(Section 14): “When a promissory note, bill of exchange or cheque is transferred to any
person, so as to constitute that person the holder thereof, the instrument is said to be
negotiated.”
Negotiation implies a transfer of negotiable instrument so as to constitute the transferee a
holder thereof, who should be entitled in his own name to sue on the instrument and
recover the amount due thereon

Who can negotiate: Every maker, drawer, payee or endorsee, all of them jointly can
negotiate an instrument. But the above parties cannot negotiate an instrument unless he is
in lawful possession or is a holder thereof. The case when a maker or drawer has to
endorse an instrument arises where the instrument Is made or drawn payable to his own
order. E.g. ‘pay to myself or order’
Duration: It may be negotiated until payment or satisfaction thereof by the maker,
drawee, or acceptor at or after maturity, but not after such payment. (Negotiation stops
only after the party ultimately liable thereon pays it at or after maturity)

Modes of Negotiation​:
i. Negotiation by mere delivery: A negotiable instrument payable to bearer is negotiable
by delivery thereof. Thus, a bearer instrument maybe negotiated by delivery only. It does
not require signature of transferor (i.e. endorsement) and the transferee becomes the
holder thereof by mere possession. (The transferor of a bearer instrument is not liable on
its dishonor because by not signing as endorser he has not added his credit to the
instrument)
ii. Negotiation by endorsement & delivery: A negotiable instrument payable to order, is
negotiable by the holder by endorsement and delivery thereof. Thus, the negotiation of an
order instrument requires two formalities, first the holder should endorse it, and then
deliver to his endorsee.
(Only the intro portion is covered here, from exam pov)

Dishonor & Discharge of Negotiable Instruments

Dishonor of NI
1. By Non-Acceptance (only for BOE)
-When drawee or one of drawees does not accept the bill within 48 hours from the time
of presentment for acceptance
-When the presentment for acceptance is excused but bill remains unaccepted
-When drawee is incompetent to contract
-If drawee is fictitious person
2. Dishonor by non-payment: When the maker of the note, acceptor of the bill or drawee
of the cheque makes a default in payment upon being duly required to pay the same.

Notice of dishonor​: It means a formal communication of the fact of dishonor. It is given

to the party sought to be made liable.
By Whom: Must be given by the holder or by some party to instrument who remains
liable thereon. Further, any party receiving the notice must also transmit the same within
reasonable time to all prior parties in order to render them liable to himself.

To Whom​: Notice of dishonor must be given to all parties to whom the holder seeks to
make liable or their agents. No notice needs to be given to the maker of a note, or
acceptor of a bill, or drawee of cheque who are the principal debtor and have themselves
dishonored the instrument. (Mode of giving notice maybe oral or written, and within
reasonable time)
Noting​: Noting is the authentic and official proof of presentment and dishonor of a NI.
When a Pro-Note or BOE has been dishonored, the holder may cause such dishonor to be
noted by a Notary Public.

Protest​: Protest is a formal certificate of dishonor issued by the notary public to the
holder of bill or note, on his demand.

Discharge of NI​: When it becomes completely useless, i.e. no action o that will lie, and it
can not be negotiated further. After its discharge, the rights of all parties come to an end,
and no party can claim the amount of instrument.
It takes place when:
- When party primarily liable makes the payment in due course to holder
- When a bill of exchange has been negotiated is held by the acceptor in his own right
- When the party primarily liable becomes insolvent
- When the holder cancels the instrument with an intention to release the party primarily
liable

Discharge of one or more person

- By cancellation: When holder cancels the name of any party
- By release: When holder releases any party by method other than cancellation of
name
- By payment (primarily liable party is discharged along with all parties)
- By material alteration – renders the NI void
- By not giving notice of dishonour

Crossing of Cheque
An Open cheque is payable at the counter of the drawee bank on presentation of cheque,
while a crossed cheque is payable only through a collecting banker and not directly at the
counter of bank (more security). A cheque is said to be crossed when two parallel
transverse line are drawn on left hand top corner. (no effect on negotiability)
When the holder of a crossed cheque has no account in any bank then either he may open
an account with some banker and deposit the cheque in that account to enable the banker
to collect its payment on his behalf or he may obtain payment by indorsing the cheque in
favor of someone who has got an account in bank

Types of Crossing:
1. General Crossing: Cheque bears across its face two parallel transverse lines w/o word
or with words “and company, or & Co or Not Negotiable” written between the lines
(Here the banker on whom it is drawn shall not pay it otherwise than to a banker,
therefore the holder may get the cheque collected through some bank)
2. Special Crossing: Where cheque bears across its face an addition of the name of
banker, either with or without words “not negotiable”.
(Here the banker on whom it is drawn shall not pay it otherwise than to the banker to
whom it is crossed, or his agent for collection)

-Account payee crossing: The words account payee only are added between the lines
-Not Negotiable crossing: The words ‘not negotiable’ are written on both side of cheque

Who may cross a cheque?

-Where a cheque is uncrossed, holder may cross it generally or specially
-Where a cheque is crossed generally, the holder may cross it specially
-Where a cheque is crossed generally or specially, the holder may add the words “not
negotiable”
-Where a cheque is crossed specially, the banker to whom it is crossed may again cross it
specially to another banker as his agent for collection

Types of Cheque
- Bankers Cheque: cannot be bounced
-Cancelled Cheque: cannot be used
-State cheque: 90-day cheque
-Mutilated Cheque: cheque being tampered
-Gift Cheque – provision of bank
-Traveler’s Cheque -issued by bank for traveller’s
 UNIT 3 
 
The Companies Act 2013 
 
Meaning & Types
Company ​– “A company formed and registered under this Act, or an existing company
formed and registered under any of the former Companies Acts”
A company is meant an association of many persons who contribute money or money’s
worth to a common stock and employ it in some trade or business, and who share the
profit and loss arising therefrom. The common stock so contributed is denoted as money
and is the capital of the company. The person who contribute it 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. Due to
transferability of shares, the life of the company is independent of the lives of its
members.”

Characteristics
1) Incorporated Association: A company must be incorporated or registered under the
Companies Act. Minimum no. of people is 7 for public company, 2 for private and
one for one-person company.
2) Artificial Person: A company is created with the sanction of law, and is not itself a
human, it is therefore called artificial, and since it has certain rights and
obligations it is therefore called a person.
3) Separate Legal Entity: Company is distinct from the persons who constitute it.
(Salomon vs Salomon & Co. Ltd.)
4) Limited Liability: The company being a separate person, its members are not as
such liable for its debts. Hence in case of a company limited by shares, the liability
of members is limited to the nominal value of shares held by them. Companies
may be formed with unlimited liability of members.
5) Separate Property: Shareholder are not part owners of the company, he is only
given certain rights by law to vote or attend meetings.
 6) Transferability of Shares: Since business is separate from its members in a
company, it facilitates the transfer of shares in a manner provided in Articles of
Company
7) Perpetual Existence: Company being an artificial person cannot die, members may
come and go but company can go on forever.
8) Common Seal: Company does not have a body of natural being, it has to work
through the agency of human beings namely the directors and other officers and
employees. But it can be held bound by only those documents which bears its
signature. Common seal is the official signature of the company
9) Company may sue and be sued in its own name (Due to it being a separate legal
entity)
Lifting of the Corporate Veil
The advantages of the incorporation are allowed to be enjoyed by only those who want to
make an honest use of the company. In case of dishonest and fraudulent use of the facility
of incorporation, the law lifts the corporate veil and identifies the person who are behind
the fraud. Following are the cases:
-For the protection of revenue: Court may not recognise the separate existence of a
company, where the only purpose for which it appears to have been made is tax
evasion.
-Where the company is acting as agent of the shareholders – then the shareholders will be
held liable for its acts
-Where a contract has been formed by people to avoid their own contractual obligation.
-Where the company has been formed for some fraudulent purpose
-Where the company formed is against public interest or public policy
-Where holding company holds 100% shares in a subsidiary company and latter is
created only for purposes of holding company

Types of Companies

Public Company​: Section 2(71) states that a public company means a company which:
a. is not a private company
b. has a minimum paid-up share capital of 5 lakh rupees or such higher paid-up capital as
may be prescribed.
It may be formed by 7 or more persons. The securities of a public company may quote on
stock exchange. The provisions contained in the law for the free transferability of shares
in a public company is found on the principle that members of the public must have the
freedom to purchase and every shareholder the freedom to transfer.

Private Company
Section 2(68): “Private Company means a company having a minimum paid up share
capital of one-lakh rupees or such higher paid up share capital as may be prescribed. The
words private limited must be added at the end of its name by a private limited
company.”

One-Person Company: ​A single person can constitute a company under the OPC concept.
Central Govt. provides a simpler compliance regime for small companies. OPC is a one
shareholder corporate entity, where legal and financial stability is limited to the company
only. An OPC shall have a minimum of one director, and may be formed as a company
limited by shares or limited by guarantee, or an unlimited liability company. Only a
natural person who is an Indian citizen and resident in India is eligible to incorporate an
OPC and shall be a nominee for the sole member of the company.

Small Company​: As per section 2(85): “A small company means a company other than a
public company” whose paid up capital ranges from 60 lakh to 5 crore and turnover
ranges from 2 crores to 20 crores.

On-Basis of Incorporation
-Statutory Company – Constituted by special act of Parliament or State Legislature. (RBI,
CIC)
-Registered Company – Companies registered under the Companies Act 2013 or under
any previous law

On-Basis of Liability
-Unlimited Liability Company-The members of such companies are liable for the
company’s debts in proportion to their respective interests in the company and their
liability is unlimited
-Companies limited by guarantee – The members of a guarantee company are in effect
placed in the position of guarantors of the company’s debts up to the agreed amount.
-Companies limited by shares – A company that has the liability of its members limited
by the memorandum of association, to the amount if any, unpaid on the shares
respectively held by them is termed as a company limited by shares.

Other forms of Companies

-Associations not for profit, having license under Section 8 of Companies Act, 2013.
-Government Companies
-Foreign Companies
-Holding & Subsidiary Companies
-Associate Companies
-Investment Companies
-Producer Companies
-Dormant Companies

Incorporation
Incorporation is the legal process used to form a corporate entity or company. A
corporation is a separate legal entity from its owners, with its own rights and obligations.
Steps:
1) Reservation of Company Name: First the applicants are required to apply for a
name in the form no. INC-1. The fee for seeking a name approval is Rs. 1000 as
prescribed and 60 days are allowed for incorporating the company. The name
should not be undesirable i.e. identical, resembling, restricted or prohibited.
(Validity of name is approved by Registrar of Companies (ROC))
2) Preparation of MOA & AOA: Drafting of MOA & AOA is generally a step
subsequent to the availability of name made by the Registrar. It should be noted
that the main objects should match with the objects. These two documents are
basically the character and internal rules and regulations of the company.
Therefore, it must be drafted with utmost care and with the advice of the experts
and the other object clause should be drafted in a very broad sense.
3) Application for incorporation of private company: After obtaining the availability
of name approval ‘certificate’, applicants should file form no. INC-7 for other than
OPC and in form no. INC-2 (for OPC) with jurisdictional ROC along with
required information in attachments along with prescribed fee.
 4) Documents to be filled for incorporation: Section 7 prescribes the various
documents and information to be filed with ROC for registration of a new
company as under:
-MOA & AOA duly signed and verified
-Declaration by professionals (INC-08)
-Declaration form Director, Manager or Secretary
-Affidavit from each subscriber and first directors (INC-09)
-Address for correspondence
-Complete details of subscribers with proof of identity
-Complete details of first directors with proof of identity
-Particulars of interest of first directors in other firm/body corporate and NOC.

5) Notice of Situation of Registered Office: The particulars of the registered office of

the company should be filled in the form no. INC-22.
6) Payment of Fee: While uploading various documents prescribed fee can be paid
online including stamp duty for MOA.
7) Certificate of Incorporation: After the ROC is satisfied that all documents and
information which is required has been filled in the prescribed manner and along
with prescribed fee, the certificate of incorporation shall be issued by the
Registrar. Every company must have a registered office from the day it starts it
business or within 30 days of getting the certificate of Incorporation.
Memorandum of Association
The MOA is a document which sets out the constitution of a company and is therefore the
foundation on which the structure of the company is built. It defines the scope of the
company’s activities and its relations with the outside world.
-MOA is one of the most essential pre-requisites for incorporating, any form of company
under the Act
-Section 3 of the Act, which provides the mode of incorporation of a company state that a
company may be formed for any lawful purpose.
-According to section 2(56) of the Companies Act, 2013, “Memorandum means the
Memorandum of Association of a company as originally framed and altered from time to
time in pursuance of any previous company law or this act.”
-Section 4(6) of the Companies Act 2013 provides that the MOA should be in any one of
the forms specified in Tables A, B, C, D, or E of Schedule 1 to Act, as may be applicable
in relation to types of company proposed to be incorporated or in a form as near thereto
as the circumstances admit.

Contents of MOA
As per the Section 4(1), the MOA of a ltd. Company must state the following:
1) Name Clause: A company being a legal entity must have a name of its own
to establish its separate identity. The name of the company is a symbol of
its independent corporate existence. The first clause in MOA of the
company state the name by which a company is to be known. The company
may adapt any suitable name provided it is not undesirable. Section 4(2)
provides that the name stated in the memorandum shall not be such that its
use by the company, in the opinion of the central govt. is undesirable. A
name which is identical to or too nearly resembles the name by which a
company in existence has been previously registered, will be deemed to be
undesirable.
2) Situation Clause: This specifies that state in which the registered office is
situated. Companies have to register office within 15 days of incorporation.
3) Object Clause: This clause sets out the objects for which the company has
been formed and its capacity. Under Section 4(1c), all companies must state
in their memorandum the objects for which the company is proposed to be
incorporated and any matter considered necessary in furtherance thereof.
Doctrine of Ultra Vires​ – Incase of a company, whatever is not stated in the
memorandum of understanding as the objects or powers is prohibited by the doctrine of
ultra vires. An act which is ultra vires is void and does not bind the company.

4) Liability Clause: In case of a company limited by shares, that liability of

members of the company is limited to the amount unpaid, if any, on the
shares held by them.
5) Capital Clause: This clause must state the amount of capital with which the
company is registered. The shares into which capital is divided must be
fixed value which is commonly known as the nominal value of the share.
The capital is variously described as nominal, authorised or registered.
Declaration for Subscription​: The statutory requirements regarding subscription of
memorandum are that:
-Each member must take altleast one share
-Each subscriber must write opposite his value, the number of shares which he agrees to
take

Articles of Association
- According to Section 2(5) of the Companies Act, 2013, ‘articles’ means the article of
association of a company as originally framed or as altered from time to time or
applied in pursuance of any previous company law or this act.
- The article regulates the internal management of the affairs of the company, by way of
defining the powers of its officers and establishing a contract between the company
and the members and between the members inter se.
- In terms of Section 5(1) the articles of a company shall contain the regulations for
management of the company. The AOA of a company are its bye-laws or rules and
regulations that govern the management of its internal affairs and the conduct of its
business
- Contents of AOA​:
Adoption of preliminary Contracts
No. & value of shares
Issue of preference share
Every info about shares and issue of debentures
Meetings & Rights of the committee and the directors

Distinction b/w MOA & AOA

1. MOA is the charter of the company and defines the fundamental conditions and objects
for which the company is granted incorporation. AOA are the rules and regulations
framed to govern the internal management of the company.
2. Clauses of MOA cannot be easily altered. They can be altered in accordance with the
mode prescribed by the Act or by the permission of Central Govt. or the court. In the case
of AOA, members have a right to alter the articles by a special regulation.
3. MOA cannot include any clause contrary to the provisions of the Companies act. The
AOA is subsidiary both to the Companies Act & the MOA.
4. The MOA generally defines the relation between the company and outsiders, while the
AOA regulate the relationship between the company and its members and between the
members inter se.
5. Acts done by a company beyond the scope of the MOA are absolutely void and ultra
vires and cannot be ratified. But the acts of the directors beyond the AOA can be ratified
by the shareholders.

Share
Section 2(84) defines a Share as “A Share in the share capital of the company, and
includes the stock except where a distinction between stock and shares is expressed or
implied.” According to section 45, Company having a share capital shall be distinguished
by its distinctive members but this provision shall not apply to a share held by a person
whose name is entered as holder of beneficial interest in such share in the records of a
depository.

Kinds of Share – Equity & Preference (Described later)

Issue of Securities at premium​: A company may issue securities at a premium, where it is

able to sell them at a price above par or above nominal value. The Companies Act, 2013
does not stipulate any condition or restrictions regulating the issue of securities by a
company at premium.

Issue of Shares at Discount​: Section 53 states that except as provided in section 54 (issue
of sweat equity shares), a company shall not issue shares at a discount. Any share issued
by a company at a discounted price shall be void.

Sweat Equity Shares​: According to Section 2(88), sweat equity shares means equity
shares issued by a company to its director or employees at a discount or for consideration
other than cash for providing know how or making available rights in the nature of
intellectual property rights or value additions by whatever name called. The special
resolution authorizing the issue of sweat equity shares shall be valid for making the
allotment within a period of not more than 12 months from the date of passing of special
resolution. The company shall not issue sweat equity shares for more than 15% of the
existing paid up equity share capital in a year or shares of the issue value of rupees 5
crore, whichever is higher.

Bonus Shares​: A company may, if its article provides, capitalize its profits by issuing
full-paid bonus shares. When a company is prosperous and accumulates large
distributable profits, it converts them into capital and divides the capital among the
existing members in proportion to their entitlements. Members do not pay any amount for
such shares.

Rights Issue​: A Right issue means an issue of capital to the existing shareholder of the
company through the letter of offer on pro-rata (proportional) basis. The offer made to
the existing shareholders is not binding upon them, they can remove this right in favor of
any other person.

Prospectus
A prospectus is an invitation issued to the public to offer purchase/subscribe any
securities of the company.
Section 2(70): “Any document described or issued as a prospectus and includes a red
herring prospectus referred to in Section 32, or shelf prospectus referred to in Section 31
or any notice, circular, advertisement or any other document inviting offers from the
public for the subscription or purchase of any securities of a body corporate.

Conditions
-There must be an invitation to the public
-The invitation must be made ‘by or on behalf of the company or in relation to any
intended company’
-The invitation must be to subscribe or purchase
-The invitation must relate to any securities of the company

Types​:
i. Red Herring Prospectus: When a company decides to attract investors to invest in their
company, they use red herring prospectus. The price and quantum are not mentioned or
disclosed.
ii. Abridged Prospectus: It contains all the salient features of a prospectus (which might
be too large), it gives them a basic idea of the company and contain all the important and
materialistic information.
iii. Shelf Prospectus: Only selected companies bring this prospectus as all companies are
not eligible for the same. (Normally finance companies are eligible) It has a validity of
one year. Every time a company wishes to raise funds, they must file their prospectus to
the regulators for approval (Stock Exchange & ROC). If a company submits their Shelf
Prospectus, they don’t have to file the prospectus again and again while raising funds for
that particular year.
iv. Deemed Prospectus: When a company agrees to allot shares to an issuing house
(which is a different company) which they will later sell to the public, then the document
by which the offer is made is deemed to be a prospectus.
(The issuing house should issue the share to the public 6 months after the agreement with
the company whose shares are to be issued)

Role of Directors
1. Act in accordance with the articles of the company.
2. Act in good faith in order to promote the objects of the company, for the benefit of its
members as a whole, and in the best interest of the company, its employees, the
shareholders, the community and for the protection of environment.
3. Exercise his duties with due and reasonable care, skill and diligence and shall exercise
independent judgement.
4. Not involve in a situation in which he may have a direct or indirect interest that
conflicts, or possibly may conflict with the interest of the company.
5. Not achieve or attempt to achieve any undue gain or advantage either to himself or his
relatives, partners or associates.
6. Not assign his office and any assignment so made shall be void.

Company Meetings
These meetings are general meetings as they are attended by all the members, the
management of the company is undertaken through meetings of the company’s
shareholders where major decisions are to be taken. Types of general meetings are:
1. Statutory meeting: The first meeting of the members of the company after it
commences the business. It is held once in the lifetime of the company.
2. Annual General meeting: AGM is a required meeting under the ordinance. It is an
annual meeting through which the shareholders control the affairs of the company. They
may raise questions about the affairs of the company including its accounts. It is
therefore, the annual general meeting of the company that protects the interest of the
shareholders and must be held every year.
3. Extraordinary General Meeting: All general meetings other than AGM & Statutory
meetings of the company are called ^. Such meetings are called to deal with some urgent
special business that cannot be postponed till AGM. The notice of such meeting shall be
sent to the members at least 21 days before the date of meeting.
 Left Topics
Share Certificate​: A Share is a moveable property transferable in the manner provided by
the articles of the company, on the other hand a share certificate is a certificate under the
common seal of the company specifying any shares held by any member and serves as an
evidence of title of the member to such shares.

Equity Share Capital​ has voting rights or differential rights as to dividend, voting or
otherwise in accordance with such rules and subject to such conditions as may prescribed.

Preference Share​: A preference share is one which carries the following two rights over
the holders of equity:
i. Preferential right in respect of dividends at a fixed amount or at a fixed rate
ii. Preferential right in regard to repayment of capital on winding up
(It can be participating/non-participating, cumulative/non-cumulative,
redeemable/irredeemable)

Participating Preference Share​ carries either one or both the following rights
i. to participate further in the profits either along or after payment of certain rate of
dividend on equity shares
ii. to participate in the surplus assets at the time of winding up
(If not then non-participating)
Cumulative Preference Share​: If a preference share carries the right for payment of
arrears in dividend from future profit. (If not then non-cumulative)

Winding Up of a Company
A company can be wound up if it is unable to pay its debts, if it has by special resolution
resolved that it would be wound up by a tribunal, if tribunal has ordered winding up of
company, if it has not filled financial statements and annual returns for preceding five
consecutive years, if affairs of company have been conducted in fraudulent manner.
(Tribunals are less formal versions of court)

Steps
1.Conduct a board meeting with 2 director and pass a resolution that company has no
debt or it will be able to pay debt from proceeds of sale of assets
2. Issue notice to call a general meeting proposing above resolution
3. Pass ordinary resolution for winding up by majority
4. Conduct a meeting of creditors
5. Within 10 days, file a notice with registrar to appoint liquidator
6. Within 14 days, give notice of resolution in official gazette
7. File certified copies of ordinary or special resolution
8. Wind up the affairs of company, and prepare liquidators account (and get it audited)
9. Conduct a general meeting and pass a special resolution for disposal of books and
documents
10. Within 15 days, submit a copy of accounts and file an application to tribunal for
passing an order for dissolution
11. After verification, tribunal shall pass an order for dissolving company within 60 days
of receiving such application
12. Appointed liquidator would file a copy of order with registrar, after which registrar
will publish a notice in official gazette declaring company dissolved.

The Limited Liability Partnership Act 2008 

Meaning & Nature of Limited Partnership

Section 2(1) of the LLP Act define LLP as “Limited Liability partnership means a
partnership formed and registered under this Act.”
A limited liability partnership is a body corporate, which is an artificial person, having a
separate legal entity, with a perpetual succession, a common seal and carrying limited
liability.

Characteristics of LLP
1) Body Corporate – A body corporate is generally taken to be a legal entity distinct and
separate from its constituents and having perpetual existence and a common seal with
capacity to hold property, sue and be sued in its own name.
2) Artificial Legal Person – A LLP is artificial legal person in the sense that it is created
by a process other than natural birth and is clothed with many of the rights of a natural
person. As a rule, LLP may enter into contract through the agency of natural persons.
3) Separate Legal Entity – A LLP is a legal person having the right to own and transfer
property. No partner can either individually or jointly claim any ownership rights in
the assets of LLP during its existence or in its winding up. It can sue and be sued in its
own name by its partners and outsiders.
4) Perpetual Existence – A LLP’s life does not depend upon the death, insolvency,
retirement of any or all partners. The transferability of economic rights of a partner
helps to preserve the perpetual existence of LLP.
5) Common Seal – It is optional for LLP to have a common seal. The name of LLP shall
be engraved on the seal and shall be used as a substitute of its signature.
6) Limited Liability – Every partner of LLP for the purpose of business of LLP, would
be an agent of LLP but not of other partners. Liability of partners shall be limited only
to the extent of their investment except in case of unauthorized acts, frauds or
negligence.

Nature of LLP (Section 3)

1. An LLP is a body corporate formed and incorporated under the LLP Act and as such
it is a legal entity separate from that of its partners.
2. An LLP shall have perpetual succession.
3. Any change in the partners of an LLP shall not affect the existence, right or
liabilities of the LLP.

Formation
Formation or Incorporation of LLP is described briefly below:
1) Before incorporation, find out the availability of proposed name from the ROC,
the name chosen must have Limited Liability Partnership or LLP as last word of
its name, and must not be undesirable in the opinion of Central Govt., or a name
which is identical or too nearly resemble to that of any other partnership form, or
LLP or body corporate.
2) The application for reservation of name is to be registered to ROC having
jurisdiction where the registered office of LLP is to be situated.
3) Once the name is registered, two or more person associated for carrying lawful
business will be required to subscribe their name to an Incorporation Document. It
shall be filled in such manner with such fees as prescribed with ROC of state. A
statement stating that all requirements of LLP act and rules have been complied
with, shall be filled. (signed by a CA or cost accountant or Company Secretary)
4) Contents of Incorporation Document: Name, Proposed Business, Address, Name
& Address of each of persons who are to be partners, Name & Address of
 designated partners, such other information concerning the proposed LLP as may
be prescribed.
5) ROC will scrutinize the documents, and if they are in order, he will register LLP
within a period of 14 days. On registration, ROC shall issue a Certificate of
Incorporation which serves as a conclusive evidence of the fact that the LLP is
duly registered.
Partners & their relations
Any individual, An Indian company, any other LLP, a foreign LLP and a foreign
Company can be partners in an LLP. Every LLP shall have at least 2 partners, with no
upper limit on the number of partners. There should be at least 2 designated partners.

Designated Partner’s Identification Number (DPIN):​ Every partner is required to obtain a

DPIN which means an identification no. which the Central Government may a lot to an
individual intending to be appointed as designated partner. (Directors’ Identification No.
is issued to individual for becoming a director of a company under Companies Act)

Liabilities of Designated Partner:​ He is responsible for doing all acts, matters and things
as are required to be done by the limited liability partnership in respect of compliance
with provisions of the Act. He is liable to all penalties imposed on LLP for any
contravention of any provision of Act

Schedule I ​(Contains provisions regarding matters relating to mutual rights & duties of
partners)
1. All partners of LLP are entitled to share equally in capital, profits and losses of the
LLP.
2. LLP shall indemnify each partner in respect of payments made and personal liabilities
in the ordinary conduct of business.
3. Every partner shall indemnify the LLP for any loss caused to it by his fraud in conduct
of business.
4. Every partner may take part in management of LLP.
5. No partner shall be entitled to remuneration for acting in the management of LLP.
6. No partner maybe introduced as a partner without the consent of all the existing
partners.
7. Any matter relating to LLP shall be decided by a resolution passed by majority of
partners, with each partner having one vote.
8. Each partner shall render true accounts and full information of all things affecting the
LLP to any partner.
(6 more points, kindly refer to Schedule I or text-book)

Extent & limitation of Liability

Extent of LLP’s Liability​: An obligation of the LLP, whether arising out of contract or
otherwise, will solely be the obligation of LLP. The liabilities of LLP shall be met out of
the property of LLP. This is the greatest advantage of LLP, conferring limited liability
upon its partners as compared to the traditional partnership, where the partners are
exposed to unlimited personal liability.

Extent of Partner’s Liability​: Partner is not personally liable, directly or indirectly for an
obligation of the LLP, whether arising out of contract or otherwise, solely by reason of
his being a partner of LLP. A partner of LLP would be personally liable for his wrongful
act or omission done without its authority, but would not be liable for any other partner’s
wrongful act or omission.

Unlimited Liability in case of Fraud​: Where an act by an LLP or a partner is done with
intent to defraud creditors or any other person, the liability of partners who acted with
intent to defraud shall be unlimited for all or any of the debts or other liabilities of LLP.

Winding Up
1) Resolution & Affidavits: Obtain a resolution for voluntary winding up of LLP
along with affidavits for winding up from the partners of LLP.
2) LLP Liquidator: Appoint an LLP liquidator for liquidation and settlement of the
LLP’s liabilities and Partner rights.
3) Winding Up Report: Pass a resolution approving the report filed by the LLP
liquidator for winding up of the LLP
4) Dissolution of LLP: If the Tribunal is satisfied about the LLP winding up report
and the resolutions, the LLP would be dissolved by the tribunal.
 
 UNIT 4 
 
 
The Consumer Protection Act 1986 
 
The Consumer Protection Act, 1986 is intended to protect a large body of consumers
from exploitation. It aims to protect the interests of consumers by recognizing them in the
form of rights. The various ​Rights of the Consumers​ are (Section 6 – a to f)
1. Right to Safety: The right to be protected against the marketing of goods and service
which are hazardous to life and property. The law seeks to ensure physical safety of
consumers. Incase of dangerous/risky goods, the consumers should be informed of
the risk involved in the improper use.
2. Right to information: Right to be informed about the quality, quantity, potency, purity,
standard and price of goods and services, as the case may be, so as to protect the
consumer against unfair trade practices.
3. Right to Choose: The right to be assured wherever possible, access to variety of goods
and services at competitive prices. Shoppers and Buyers guide should be made
available to consumers.
4. Right to be heard: Right to be heard and to be assured that consumers interests will
receive due consideration at appropriate forums, by providing a three-stage redressal
machinery to consumers namely District Forum, State Commission and National
Commission. Every consumer has the right to file complaint and be heard in that
context.
5. Right against exploitation: The right to seek redressal against unfair trade practices or
restrictive trade practices or unscrupulous exploitation of consumers.
6. Right to education: Right to consumer education is a right which ensures that
consumers are informed about the practices prevalent in the market, the rights and
remedies available to them because unless they are informed, the protection of
interest shall remain a myth.

Consumer
Consumer means:
a. any person who buys any goods for a consideration which has been paid or promised
or partly paid and partly promised, or under any system of deferred payment and includes
any person who uses such goods with the approval of the buyer. It does not include a
person who buys goods for resale or for any commercial purpose.
b. any person who hires or avails any services for a consideration which has been paid of
promised or partly paid and partly promised or under any system of deferred payment,
and includes any person who is a beneficiary of such services with the approval of the
hirer. It does not include a person who avails of such services for any commercial
purposes.
(Buying goods for consideration, use of goods with the approval of the buyer, Goods
should not be purchased for resale or any commercial purpose, Person buying goods for
self-employment is a consumer.)

Complaint​: Complaint means a formal allegation against a party. Here a complaint is an

allegation made in writing to a National Commission, the State Commission or the
District Forum by a person competent to file it with a view to obtain relief provided under
act.
(Complaint can be filed by a consumer, a recognized consumer association, one or more
consumers, central/state government, legal heir of dead consumer)

Defect​: It means any fault, imperfection or shortcoming in the quality, quantity, potency,
purity or standard which is required to be maintained by or under any law for the time
being in force or under any contract, express or implied, or as claimed by the trader in
any manner whatsoever in relation to any goods.

Deficiency​: It means any fault, imperfection, shortcoming, or inadequacy in the quality,

nature and manner of performance which is required to be maintained by or under any
law for the time being in force or has been undertaken to be performed by a person in
pursuance of a contract or otherwise in relation to any service.

Consumer Disputes Redressal Agencies

Objective​: The Consumer Protection Act, provides for a three-tier remedial machinery for
speedy redressal of consumer disputes. According to section 9, the following agencies
have been established for such purpose:
(short notes)
 1) District Forum
Each District Forum shall consist of:
a. a person who is or has been, or is qualified to be a District Judge, as President
b. two other members one woman, with following qualifications
-be not less than 35 years
-possess a bachelor’s degree
-be a person of ability, integrity and standing and have knowledge and experience of at
least 10 years dealing with problems relation to economics, law, commerce, accountancy,
industry, public affairs or administration

Appointing Authority consists of President of State Commission, Secretary of Law

Department of State as Member, Secretary in charge of the Department dealing with
consumer affairs in state as member

Term of Office – Term of 5 years, up to 65, eligible for reappointment

Jurisdiction (authority or legal power to hear and decide cases): TO entertain complaints
where the value of goods and services does not exceed 20 lakhs.

Time Limit for disposal of complaints – within 3 Months

2) State Commission
Each State Commission shall consist of:
a. a person who is or has been, High Court Judge, as President
b. at least two other members or more, one woman with following qualifications
-be not less than 35 years
-possess a bachelor’s degree
-be a person of ability, integrity and standing and have knowledge and experience of at
least 10 years dealing with problems relation to economics, law, commerce, accountancy,
industry, public affairs or administration

Appointing Authority consists of: Judge of SC, Secretary of Law Department of State as
Member, Secretary in charge of the Department dealing with consumer affairs in state as
member
Term of Office – Term of 5 years, up to 67, eligible for reappointment

Jurisdiction (authority or legal power to hear and decide cases): TO entertain complaints
where the value of goods and services exceeds 20 lakhs but is less than 1 crore

3) National Commission
Each District Forum shall consist of:
a. a person who has been judge of Supreme Court, as President
b. at least 4 other members or more, one woman

Appointing Authority consists of Judge of Supreme Court (nominated by CJI) -

Chairman, Secretary in Department of Legal Affairs in Govt. of India (Member),
Secretary of Dept. dealing with consumer affairs in Govt of India. (Member)

Term of Office – Term of 5 years, up to 70, eligible for reappointment

Jurisdiction (authority or legal power to hear and decide cases): T entertain complaints
where the value of goods and services exceeds 1 crore.

Time Limit for disposal of complaints – within 3 Months

Consumer Protection Council​ (CPC): CPC are established at central, state and district
level. The council works towards the promotion of the rights of consumers, give publicity
to the matters concerning consumer interests, take steps towards furthering consumer
education and protecting consumer from exploitation. They also advice to govt. in
matters of policy formation.

Central Consumer Protection Council:​ Section 4 empowers the Central government to

establish the Central Consumer Protection Council (Central Council) consisting of
Minister in-charge of Consumer Affairs in the Central Government as its Chairman, and
such number of other official and non-official members representing such interests as
may be prescribed. However, the Consumer Protection Rules, 1987 restricts the number
of members of Central Council to 150 members. The term period is of 3 years.
Key points:
- Minister in Charge of Consumer Affairs is Chairman
- Minister of State
- 8 MP’s (5 from Lok Sabha, 3 from Rajya Sabha)
- The secretary of national commission for SC/ST
- Representative of Central Govt. Dept (not more than 20)
- Registrar of National Commission
- Representative of consumer organizations or consumers (not less than 35)
- Representative of women (not less than 10)
- Representative of farmer, trade and industries (not more than 20)
- Person capable of representing consumer interests (no specified above) (<15)
- Secretary in-charge of consumer affairs in central government
Meeting – Section 5 of the Act requires Central Council to meet as and when necessary,
but at least once in every year.
Objective – Right of Safety, Right of Information, Right to Choose, Right to be Heard,
Right against Exploitation, Right to Education

State Consumer Protection Councils​ – The State Government shall, by notification

establish with effect from such date as it may specify in such notification, A council to be
known as Consumer Protection Council. It shall consist of the following members
namely:
-Minister in charge of consumer affairs in State Government (Chairman)
-Such number of other official or non-official members representing such interest as may
be prescribed by State Government
-Such number of other official or non-official members, as maybe nominated by the
Central Government (<10)
-The State Council shall meet as and when necessary but not less than two meetings shall
be held every year (Shal meet at such time and place as the Chairman may think fit)

District Council​ – Established by state govt. for every district by notification. The district
collector of the district will be the Chairman. No. of member prescribed by the govt. &
No. of meeting not less than 2 in a year.
 
 
 The Right to Information Act 2005 

Preamble​: An act to provide for setting out the practical regime of right to information for
citizens to secure access to information under the control of public authorities, in order to
promote transparency and accountability in the working of every public authority, the
constitution of a Central Information Commission and State Information Commission and
for matters connected therewith or incidental thereto.

RTI Act​: The RTI Act 2005 was enacted by permission and authority of President of
India and was enacted by the Parliament on 15 June 2005. It extends to whole of India
except the state of J&K.

Definitions
a. ​Appropriate Government​: It means in relation to public authority which is established,
constituted, owned, controlled or substantially financed by funds provided directly or
indirectly:
i. by the Central government or the Union territory administration
ii. by the State Government,

b. ​Information​ means any material in any form including records, documents, memos,
emails, opinions, advices, press releases, circulars, orders, logbooks, contracts, report,
papers, samples, models, data material held in any electronic form and information
relating to any private body which can be accessed by a public authority under any other
law for the time being in force.

c. ​Right to Information​ means the right to information accessible under this Act which
held by or under the control of any public authority and includes the right to:
i. inspection of work, documents, records
ii. taking notes, extracts or certified copies of documents or records
iii. taking certified samples of material
iv. obtaining information in the form of floppies, tapes, video cassettes or in any other
electronic mode or through printouts where such information is stored in a computer or in
any other device.
 Features of RTI Act, 2005
1. RTI Act 2005 empowers every citizen to:
Ask any questions from the Government or seek any information. Take Copies of any
government documents, inspect any government documents/work, take samples of
materials of any government work.
2. You can seek information from any department of central or state govt. from
Panchayati raj institutions, and from any other organization or institution (including
NGO) that is established, constituted, owned, controlled or substantially financed directly
or indirectly by the state or central govt.
3. In each dept. at least one officer has been designated as Public information officer
(PIO) he/she accepts the request forms and provides information.
4. Person seeking information should file an application in writing or electronic form
(English/Hindi/Local Language) along with application fee to PIO/APIO.
5. If request cannot be made in written, the PIO is supposed to render all the reasonable
assistance to the person making orally or to reduce it in written.
6. If the person is deaf, blind or otherwise impaired, then public authority is supposed to
give assistance.
7. Besides the contact of applicant, he isn’t required to give any details like purpose,
motive etc.
8. Reasonable application fee of Rs.10, no fee is chargeable to BPL or if the information
is given after the prescribed time.
9. Fee will be charged for obtaining the copy of documents (Rs,2/page) if the information
is not provided in the given time then it is for free.
10. If PIO feels that information is not related to his department then he will forward this
application to other dept. within 5 days and he will also inform to the applicant. (35
Days)
11. Information will be supplied within a time period of 30 days. However, it has been
stated that if the information concerns the life and liberty of a person, it will be supplied
in 48 hours.

Central Information Commission

-Under the provision of Section 12, Central Government shall constitute a body known as
Central Information Commission
-It shall consist of the ​Chief​ Information Commissioner and ​Central​ Information
Commissioner (such no. of Central Information Commissioners should not exceed 10.)
Eligibility Criteria
i. The Prime Minister shall be the chairperson of the committee.
ii. The Leader of opposition in the Lok Sabha and
iii. A union cabinet minister to be nominated by the Prime Minister

- Section 12 (5) provides that the Chief Information Commissioner and Information
Commissioners shall be persons of eminence in public life with wide knowledge and
experience in law, science & technology, social service, management, journalism,
mass media or administration and governance.
- The Chief Information Commissioner shall not be a MP or MLA of State or UT, or
hold any other office of profit or connected with any political party or carrying on any
business or pursuing any profession.
- Chief Information Commissioner shall hold office for a term of five years and is not
eligible for re-appointment
- The salaries and allowances and other T&C of service of Chief Information
Commissioner shall be same as that of Chief Election Commissioner.
State Information Commissioner​: SIC will be constituted by the State Govt. through a
Gazette Notification. It will have one State Chief Information Commissioner (SCIC) and
not more than 10 State Information Commissioners (SIC) to be appointed by the
Governor.

Composition​:
- 1 SCIC & ten SIC
- They are appointed by the Governor on the recommendation of the committee
consisting of Chief Minister as Chairperson
- The Leader of Opposition in Legislative Assembly and a state Cabinet Minister are
nominated by Chief Minister
- They should be person of eminence in public life and should not hold any other office
or profit or connected with any political party or carrying on any business or pursuing
profession
- SCIC & SIC hold office for a term of 5 years, or until they attain the age of 65 years,
not eligible for reappointment
Powers & Function of Information Commissions
1. The Central & State information commission has duty to receive complaints from any
person – who has not been able to submit an information request because a PIO has not
been appointed.
-Who has been refused information that was requested
-Who has received no response to her information request within the specified time limits
-any other matter relating to obtaining information under this law

2. Power to order inquiry if there are reasonable grounds

3. CIC/SCIC have powers of Civil Court such as:
-Summoning & enforcing attendance of persons, compelling them to give oral or written
evidence on oath and to produce documents or things
-requiring the discovery and inspection of documents
-receiving evident on affidavit
-requisitioning public records or copies from any court or office

4. All records covered by this law must be given to CIC/SCIC during inquiry for
examination
5. Power to secure compliance of its decisions from the public authority including-
-Providing access to information in a particular form
-Directing the public authority to appoint PIO/APIO where none exists
-Publishing information or categories of information.
-making necessary changes to the practices relating to management, maintenance and
destruction of records
-Enhancing training provision for officials on RTI
-Seeking an annual report from the public authority on compliance with this law
-Impose penalties under this law
-Reject the application

Public Authorities​ (Section 2h): A Public authority means any authority or body or
institution of self-government established or constituted –
by or under Constitution
by any other law made by Parliament
by any other law made by State Legislature
by notification issued or order made by the appropriate Government and includes
anybody owned, controlled or substantially financed, NGO substantially financed,
directly or indirectly by funds provided by apt government

Obligation of Public Authorities

-Maintain records catalogued, and indexed, computerized and networked for easy access
=Publish certain particulars within 120 days
=Publish relevant facts while formulating policies/decisions affecting public
-Provide reasons for administrative/quasi-judicial decisions to affected persons
-Provide information to minimize need for resorting to RTI
-Form of dissemination – easily accessible
-In 100 days, designate PIO’s & APIO’s
-Info should be free or at cost of medium only

Particulars to be Published
-Particulars, Functions & Duties of the organization
-Powers, duties of officers and employees
-Procedure followed in decision making including channels of supervision
-Rules, regulations, instructions, manuals, records used
-Statement of boards, councils, committees constituted as its part or for advising it,
meetings, minutes accessible to public
-Directory of officers and employees
-Their monthly remuneration
-Budget, plans, proposed expenditure
-Name, designation, particulars of PIO
-Details of info held in electronic form

Public Information Officers

Section 5(1) of the Act requires a Public Authority to designate as many officers as
Central Public Information Officer or State Public Information Officer, as the case may
be, in all administrative units and offices under it as may be necessary to provide
information to persons requesting for the same.
This is to ensure that the public can apply for information in their own local areas,
without the need for travelling long distances to the offices of Public Information
Officers
Duties & Responsibilities
- To deal with requests from person seeking information and render reasonable
assistance to the persons
- To render all ‘reasonable assistance’ where request for information cannot be made in
writing, to the person making the request orally to reduce the same into writing
- To dispose request for information under the Act, either providing the information
requested on payment of prescribed fee or rejecting the request for reasons to be
specified within the time period stipulated under the Act

Procedures for request for information​ - Section 6 of Act stipulates that the request for
information may be made to the Central Public Information Officer or State Public
Information Officer or to public authority. The request for information can be made as
follows:
i. In writing or through electronic means in English or Hindi or in the official language of
the area in which the application is being made
ii. Oral request to be reduced to writing with the assistance sought from Public
Information Officer, where such request cannot be made in writing.
iii. To be accompanied by fee as prescribed under the rules made under the Act
iv. Applicant not to be required to give reason for requesting the information or any other
personal details except those that may be necessary for the purpose of contacting

Disposal of Request for Information​ (Section 7)

-Request for information shall be disposed off by the PIO within 30 days of receipt in
general cases and 48 hours of receipt in cases where the information sought for concerns
the life or liberty of a person.
-A period of 5 days shall be added in computing the response time where an application
for information is given to other authority or department.
-Where a decision is taken to provide the information on payment of any further fee,
representing the cost of providing the information, the PIO shall send an intimation to the
person making the request, giving the details of further fees
-For information provided in a floppy or diskette – Rs. 50/floppy

Fees: Rs.2/page (A3 or A4 paper created or copied) & Actual charges or cost of a copy in
larger size paper
Steps for Disposal of Requests
The procedure to be followed by the PIO right from the stage of receipt of application for
information till the disposal involves a number of steps as follows:
1. Receives application along with application fees
2. Scrutinizes the application received and fees prescribed
3. If required, renders reasonable assistance to the applicant by reducing the oral request
in writing
4. Record the application in the inward register
5. Issues acknowledgement/receipt to the applicant
6. Transfers the application/part of it to another public authority, if required.
7. Informs the applicant about such transfers
8. Makes necessary entries into the register being maintained
9. Considers the representation of a third party if any
10. In case of rejection, conveys reason for it, the period within which the appeal may be
preferred and the details of the Appellate Authority to whom appeal can be preferred
11. Send intimation to the applicant the further fee, representing the cost of providing
information, to be paid along with its calculations
12. Also intimates about the modalities (mode) of deposit of fee, the right of the applicant
for review of the fees charged and appeal against the calculation or the form of access
13. Wherever required, provides assistance to citizens for inspection of works,
documents, records and taking samples of material
14. Waives fees for citizens below Poverty Line
15. Retains record on each application, disposal etc. so that materials as required maybe
furnished to appellate authorities incase first/second appeal is preferred.

Section 8: Exemption from Information Disclosure (brief)

Notwithstanding anything Contained in Act, there shall be no obligation to give any
citizen:
I. Information disclosure that would prejudicially affect the sovereignty and integrity of
India
2. Information which has been expressly forbidden to publish by any court of law
3. Information the disclosure of which would cause a breach of privilege of Parliament or
State Legislature
4. Information received in confidence from foreign government
5. Information which would impede the process of investigation or prosecution of
offenders.
6. Information the disclosure of which would endanger the life or physical safety of any
person
7. A public authority may allow access to information, if public interest in disclosure
outweighs the harms to protected interests.

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