CONTRACT II

Model Answer Paper

Answer question number 9 and any other 5 questions:

1. Define contract of guarantee and discuss the modes of discharge of

surety from liability.

A contract of guarantee according to section 126 of the Indian Contract Act 1872, is a contract
to perform the promise, or discharge the liability, of a third person in case of his default. The
section further provides that, the person who gives the guarantee is called the “Surety”, the
person in respect of whose default the guarantee is given is called the “Principal debtor” and
the person to whom the guarantee is given is called the “Creditor”.

Example: ‘A’ takes a loan from a bank. ‘A’ promises to the bank to repay the loan. ‘B’ also
makes a promise to the bank saying that if ‘A’ does not repay the loan “then I will pay.” In this
case,

‘A’ is the Principal Debtor, who undertakes to repay the loan.

‘B’ is the Surety, whose liability is secondary because he promises to perform the same
duty in case there is default on the part of ‘A’.

The Bank is the Creditor in whose favour the promise has been made.

A contract of guarantee is a tripartite agreement which contemplates the principal

debtor called “P”, the creditor “C” and the surety “S” in it. There is a triangular relationship in
which the following there collateral contracts may be distinguished:

1. As between C and P, there is a contract out of which the guaranteed debt arises.
2. As between S and C, there is a contract by which S guarantees to pay to C, P’s debt in
case of his (P’s) default.
3. As between S and P, there is a contract that P shall indemnify S in case S pays in the
event of a default by P. this contract, if it is not expressed between the parties, is always
implied.
 Modes of his discharge of surety:

A surety is said to be discharged when his liability comes to an end. In other words,
when the liability of surety, which he had undertaken under a contract of guarantee, is
extinguished or comes to an end, he is said to be discharged from liability.

1.DISCHARGE OF SURETY BY REVOCATION:

(1) Revocation of surety by giving a notice (sec-130):A specific guarantee cannot be revoked
by the surety if the liability has already accrued. A continuing guarantee may at any time, be
revoked by the surety, as to future transactions, by giving notice to the creditor. But the surety
remains liable for transactions already entered into.

(2) Revocation by Death (sec-131): The death of the surety operates, in the absence of any
contract to the contrary, as a revocation of a continuing guarantee, so far as regards future
transactions.. The effect of the death of the surety is that it results in automatic revocation of
the guarantee as to future transactions. But such revocation does not affect the transactions
which were executed prior to the death of the surety.

(3) Revocation by Novation (sec-62):

Novation means substitution of a new contract of guarantee for an old one/ existing contract of
guarantee. The novation may be either between the same parties or between one of the old
parties and a new party. The surety is liable for old contract. According to section62 if the
parties to a contract agree to substitute a new contract for it, or rescind/ alter it the old contract
is need to be performed. The consideration for the new contract being the mutual discharge of
the old contract. The original contract of guarantee in such a case comes to an end.

2. DISCHARGE OF SURETY BY THE CONDUCT OF THE CREDITOR

(1) Variance in terms of Contract (sec-133):

If a variation is made in the terms of the contract between the principal debtor and the creditor,
without the surety’s consent, the surety is discharged from liability as to transactions made
after the variance. But the variance must be such as materially affects the position of surety.
Similarly, a surety will not be discharged by a variation if he has consented to the same. Surety
is discharged from the contract even if the alteration is innocently made for his benefit. If there
is a written contract of guarantee and there is no variance of the same in writing, the validity
of the contract is not affected.

example: (a) C agrees to appoint P as a salesman to sell goods at a yearly salary, upon S being
a surety to C for P’s duly accounting for money received by him as a salesman. Afterwards
without S’s knowledge or consent, C and P agree that P should be paid by a commission on the
goods sold by him and not by a fixed salary. S is not liable for subsequent misconduct of C.

(2) Release or Discharge of Principal Debtor (sec-134):

The surety is discharged by any contract between the creditor and the principal debtor, by
which the principal debtor is released. The surety is also discharged by any act or omission of
the creditor, the legal consequence of which is discharge of the principal debtor.

Example: A contract to build a house for B, on the condition that B will supply the necessary
timber. C guarantees A’s performance of the contract. B fails to supply the timber. It would
discharge of the principal debtor.

(3) Compounding by Creditor with Principal Debtor (sec-135):

According to section 135 “A contract between the creditor and the principal debtor by which
the creditor makes a composition or promise to give time or not to sue the Principal debtor
which discharge the surety unless the surety assent to the contract. This section provides three
modes of discharge from liability:

1. When the creditor makes composition with the principal debtor

2. When the creditor promises to give time to the principal debtor, and
3. When the creditor promises not to sue the principal debtor.
It may be noted that in the above stated circumstances, the surety is discharged if
the creditor and the principal debtor make such contract without the consent of
the surety. If such a contract is made with the consent of the surety, he would not
be discharged.

Example: A borrows Rs. 10,000 from B. C stands as a surety as regards the repayment of loan
by A to B. thereafter, A and B agree that A may repay Rs. 5,000 instead of Rs. 10,000. C is
thereby discharged from liability as a surety.

(4) Creditors act or Omission impairing surety’s eventual remedy (sec-139):

 A surety is discharged if the creditor does any act which is inconsistent with the rights
of the surety or omits to do any act which his duty to the surety requires him to do, and the
eventual remedy of the surety himself against the principal debtor is thereby impaired. It is the
duty of the creditor not to do anything which is inconsistent with the rights of the surety.

Example: P contracts to build a ship for C for a given sum to be paid by instalments as the
work reaches certain stages. S becomes surety to C for P’s due performance of the contract C,
without the knowledge of S, prepays to C the last two instalments. S is discharged by this
prepayment.

(5) Loss of Security (sec-141):

If the creditor loses or, without the consent of the surety, parts with any security given
to him at the time of the contract of guarantee, the surety is discharged from liability to the
extent of the value of security. If there are two or more debts each secured by separate security,
the surety for one of the debts is not discharged if the creditor loses or parts with the security
or securities relating to other debts.

Example: C advances to B his tenant Rs.2000 on the guarantee of A. C has also a further
security for a sum of Rs. 2000 by a mortgage of B’s furniture. C cancels the mortgage. B
becomes insolvent and C sues A on his guarantee. A is discharged from liability to the amount
of the value of furniture.

3. DISCHARGE OF SURETY BY INVALIDATION OF CONTRACT:

(1) Guarantee obtained by Misrepresentation (sec-142):Any guarantee which has been

obtained by means of misrepresentation made by the creditor, or with his knowledge and
assent, concerning a material part of the transaction, is invalid.

(2) Guarantee obtained by Concealment(sec-143): Any guarantee which the creditor has
obtained by means of keeping silence as to material circumstances is invalid.

(3) Failure of a co-surety to join a Surety(sec- 144): Where a person gives a guarantee upon
a contract that the creditor shall not act upon it until another person has joined in it as co-surety,
the guarantee is not valid if that other person does not join. A surety, who has agreed to become
so on the basis that he will be a co- surety with another, is wholly released, if the intended co-
surety does not join.
(4) Failure of consideration: Where in a contract of guarantee there is a failure of
consideration as between the creditor and the principal debtor, the surety is discharged.

2. Define pledge. Explain the right and duties of pledgee and pledgor.
A pledge is a bailment for security. It is a special kind of bailment. According
to sec 172 of the indiancontract act, the bailment of goods as security for payment of a
debt or performance of a promise of a promise is called pledge. The bailor is, in this
case, called the pledger or pawnor and the bailee is called pledgee or pawnee.
Example: A borrows Rs. 200 from B and keeps his watch as security for payment of
the debt, the bailment of watch is pledge.

Rights of the pawnor/pledgor:

1. Right to Redeem the Goods Pledged: Under section 177, a Pledgor has the right to
redeem the goods pledged even after the expiry of the stipulated period. That is, if a
time is fixed for the payment of the debt or for the performance of the promise for which
the pledge is made, and if the Pledgor makes a default in payment of the debt or in the
performance of the promise at stipulated time, he may redeem the goods or properly
pledged at any subsequent date before the actual sale of the pledged goods by the
pledgee. Of course, in such a case, the Pledgor must pay, in addition to the amount
borrowed, the expenses incurred by the pledgee due to the pledgors default in payment.

In Lallan Prasad vs Rahmat Ali: The Court observed that the Pawnor has as
absolute right to redeem his property upon satisfaction or the debt or the promise. This
right is not extinguished by the expiry of the stipulated time for repayment of debt or
performance of the promise but only by the actual sale of the goods. If the Pawnor
redeems his goods after the expiry of the stipulated time, he is bound to pay the
expenses as have arisen on account of his default.

2. Right to Enforce Pledgee’s Duties: The duties of the pledgee are the rights of the
Pledgor. As such the Pledgor can enforce by suit all the pledgee as his rights. For
example, he has the right to receive back the goods pledged along with the natural
accretion, if any, on making the payment on the stipulated date. Again, if the pledgee
makes an unauthorised sale the Pledgor can file a suit for redemption of the goods,
treating the sale as void or for damages for conversion
 The Pawnor also has a right to take back any increase in the property. In M R
Dhawan vs Madan Mohan, certain shares of a company were pledged. During the
period of the pledge, the company issued bonus shares. Delhi HC held that the Pawnor
was entitled to those at the time of redemption.

3. Right to Enforce the Preservation and Maintenance of the Property Pledged: The
Pledgor can force the pledgee to maintain and preserve the property pledged properly.
In other words, the Pledgor can force the pledgee to take reasonable care of the property
pledged.

4. Legal Heir’s Right to Redeem: In case of death of a Pledgor, the pledge made by him,
can be redeemed by his legal heirs on meeting the liabilities concerning the pledge. In
KamiliSarojini vs Indian Bank, gold ornaments were pledged by the husband of the
petitioner with the respondent bank, as security for gold loan. During his life time, the
husband of the petitioner head executed a notarised will, where under she was to clear
the gold loan availed by the husband and take the ornaments pledged as a surety for the
loan, along with the balance amount existing in his account with the Bank. The bank
insisted on production of probate of will or obtaining succession certificate. Rejecting
the demand of the bank, the Andra Pradesh High Court directed the bank to permit the
petitioner to repay the loan amount and to hand-over to the petitioner the ornaments as
also amount lying in the deceased husbands account.

Duties of Pledgor:
The duties of the Pledgor are as follows:

1. Duty to Compensate the Pledgee:

Under Section 175 of the Indian Contract Act 1872, the Pledgor is bound to
compensate the pledgee for any extraordinary expenses incurred by the pledgee.Pawnor
has to bear the extraordinary expenses incurred by the pledgee in preserving the goods
pledged by taking extraordinary care.

2. Duty to meet the Obligation:

The Pledgor is required to meet his obligation at the stipulated time and comply
with the terms of the contract of pledge. It is the most important duty of the pledgor to
meet the necessary obligation within the time mentioned and also to be abide by the
 terms and conditions of the contract. If the pledgor fails to meet the required obligation
then the pledgor himself will be held liable and he must face the consequences of the
default.

Rights of Pawnee/Pledgee:

1. Right to retain the goods pledged: Under Section 173 the Pledgee or Pawnee has a right to
retain possession on the goods pledged till he obtains payment of his debt interest on that
debt and all other necessary expenses which he might have incurred for the preservation of the
goods pledged or in respect, of his possession. Although ordinarily a pledgee can retain the
goods pledged only as a security for that promise for which they are pledged, but there is a
presumption that if there are subsequent advances, they are also the part of the original debt,
and the Pledgee may retain the goods to recover subsequent advances also. This is merely a
presumption which could be rebutted by a contract to the contrary.

2. Right of Particular lien (Sec. 174): Pawnee has no right to retain his possession over the
goods pledged for any debt or promise other than the debt or promise for which they were
pledged unless otherwise provided for, by a contract. In short, the pledgee has the right of lien
over the goods pledged. It may be noted that the pledgee can exercise only the particular lien
over the goods. He cannot have a general lien. In other words, he cannot retain the goods
pledged for any debt other than the debt for which the security is given, unless there is an
express contract to the contrary.

3. Right to receive extraordinary expenses (Sec. 175): Pawnee is also entitled to

receive from the Pawnor any extraordinary expenses which he might have incurred for the
preservation of the goods pledged. For example, if the pledgee has to arrange for a bank locker
for the safety of the goods or he spends some amount for insuring them against theft, etc., he
can recover such expenses from the Pawnor. He can enforce this right by filing a suit.

4. Pawnee’s right in case of default of the Pawnor (Sec. 176): In the case of default by the
Pawnor in the payment of debt or the performance of promise at the stipulated time or on
demand or within reasonable time, the Pawnee can exercise the following two rights:
(a) He has a right to bring a suit on the debt or promise and can retain the goods pledged as a
collateral security.
(b) He has also a right to sell the goods pledged after giving reasonable notice of sale to the
Pawnor.
If the Pawnor makes a default in the payment of the debt, or performance of duty, as
agreed , the pawnee has also the right to sell the thing pledged, on giving Pawnor a reasonable
notice of the sale.
(c) He can retain the goods pledged as a collateral security till the debt is repaid or promise is
performed.
(d) He can file a suit for the sale of goods for the realisation of the money due.
(e) He can recover the deficiency if any, arising on the sale of the pledged goods from the
Pledgor, of course, if there is any surplus on the sale of the goods pledged he has to pay the
same to the Pledgor.
(f) He has a right to claim any deficit arising from the sale of the goods pledged from the
Pawnor. He will have to return to the Pawnor any excess obtained by the sale of goods pledged
beyond the amount necessary to pay the debt and other expenses due.
In State Bank of India vs Smt. Neela Ashok Naik, it was held that if an F.D.R. (Fixed
Deposit Receipt) has been pledged with a Bank, the bank is not obliged to adjust the instalments
of repayable instalments of loan against the F.D.R. He may retain F.D.R. as such, and bring a
suit to recover the loan.
5. Pawnee must not use the goods pledged: He must not use goods pledge unless they are
such as will not deteriorate by wear.
Besides the above rights and duties, all other rights and duties of the bailor and bailee apply
equally to Pawnor and the Pawnee.

Duties of the Pledgee or Pawnee:

A pledge is a special kind of bailment. As such, the duties of the Pledgee are the same as
those of a bailee. To be specific the Pledgee has the following duties:

1. He is bound to take reasonable care of the goods pledged with him:

The prime duty of the pledge is to take care of the goods pledged. In all cases of
pledge the pledgee is bound to take as much care of the goods pledged to him as a man of
ordinary prudence would, under similar circumstances, take of his own goods of the same
bulk, quality and value as the goods pledged. The pledgor when he has delivered the goods
to the pledgee it is the duty of the pledgee to look after the goods. To take care of the goods
as a prudent man, as a rational man he should look after those goods as if he is looking after
his own goods.
2. He must not make any unauthorised use of the goods pledged:
if the pledgee uses the goods pledged in a manner which is inconsistent with the
terms of the contract, he shall be liable for any loss even though he is not guilty of
negligence, and even if the damage is the result of an accident. When we say
unauthorised use, it means when the pledgor is delivering the goods to the pledgee he
might have mentioned that a pledgee can use the goods in a particular fashion or in a
particular way that is known as authorised way of using the goods.
3. He must not mix the goods pledged with his own goods:
The duty of the pledgee is that he should not mix up the goods of the pledgor
with this own goods, but must keep them separate from his own goods. Some time it
happens that pledgor have delivered the goods to the pledgee and pledgee should not
mix up those goods with his own goods. But if he mix those goods with his own goods
and goods can be separated and he has mix those goods of the pledgor with his own
goods with the consent of the pledgor then the separation charges will be mutually in
proportionate way will be borne by both the parties.

4. He must not do any act in violation of the terms of the contract of pledge:
The pledgee should not sell the goods pledged without a reasonable notice to
the Pledgor.
5. He must return the goods pledged on the realisation or receipt of the debt:
The pledgee should return the goods pledged to the pledgor without any demand from
the pledgor, on the expiry of the time fixed or after the purpose is accomplished,
according to the directions of the pledgor. If the pledgee does not return the goods
pledged according to the directions of the pledgor, he becomes liable for any loss,
destruction of the goods bailed, even if he has taken reasonable care.

6. He must deliver the natural accretion to the goods pledged to the Pledgor:
The pledgee should return to the pledgor the natural accretion to the goods pledged,
i.e., any natural increase or profit which may accrue from the goods bailed. For example:
A leaves a cow in the custody of B. the cow gets a calf. B is bound to return the calf as well
as well as the cow.

3. Define agent. Explain modes of creation of agency.

 According to sec 182 of Indian contract act, an agent is a person employed to do any act
for another, or to represent another in dealings with third person. The person for whom such
act is done, or who is so represented is called the principal.

The function of the agent is to bring his principal into contractual relations with third
persons. This means that an agent is merely a connecting link between the principal and third
parties.

The relationship of principal and agent may arise:

a) By express agreement,
b) By implied agreement,
c) By ratification,
d) By operation of law.

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

Agency by implied agreement: This type of agency comes into force by virtue of
relationship between parties or by conduct of parties.

For example: A and B are brothers, A has got settled in foreign country without any request
and remitting the amount of rent to A. Here automatically A becomes principal and B
becomes his agent.

Agency by implied authority is of three types as shown below;

a) Agency by Necessity
b) Agency by Estoppel
c) Agency by Holding out.

By Necessity: At times it may become necessary to a person to act as agent to the other. For
example: A has handed over 100 quintals of butter for transportation, to a road transport
company. Actually it is bailment contract, assume that in the transit all vehicles has got
stopped where it takes one week for further movement. So the transport company authorities
have sold away the butter in those nearby villages. Here agency by necessity can be seen.
By Estoppel: where a person by his conduct, or by words spoken or written, leads wilfully
another person to believe that a certain state of affairs exits and induces him to act on that
belief so asto alter his poistion, he is precluded from denying subsequently the fact of that
state of affairs.

Example: In presence of A , B says to C that he (B) is A`s agent though it is not so actually.
A has not restricted B from making such statement. Here agency by Estoppel can be seen.

By Holding out: agency of holding out is a branch of agency of estoppel In this case, a prior
positive or affirmative act on the part of the principal is required to establish agency
subsequently.

Example: B is A`s servant and A has made B accustomed to bring good on credit from C. On
one occasion A has given amount to B to bring goods from C on cash basis. B has
misappropriated that amount and has brought goods on credit as usually, Here is agency by
holding out and therefore A is liable to pay amount to C.

Agency by operation of law: At times contract of agency comes into operation by virtue of
law.

example: According to partnership act, every partner is agent of the firm as well as other
parties. It is implied agency. On account of such implied agency only a partner can bind over
firm as well as other partners, to his activities. In the same way according to companies act
promoters are regarded as agents to the company.

Agency by Ratification: Ratification means subsequent adoption of an activity. Soon after

ratification principal – agent relations will come into operation. The person who has done the
activity will become agent and the person who has given ratification will become principal.

Ratification can be express or implied. In case where adoption of activity is made by means
of expression, it is called express ratification. For example: Without A`s direction, B has
purchased goods for the sake of A. There after A has given his support (adoption) to B`s
activity, it is called Ratification. Now A is Principal and B is agent.

The ratification where there is no expression is called implied ratification. For example: Mr.
Q has P`s money with him. Without P`s direction Q has lent that money to R. There after R
has paid interest directly to P. Without any debate P has taken that amount from R. It implies
that P has given his support to Q`s activity. It is implied ratification.
 4. Explain conditions and warranties with examples.

A stipulation in a contract of sale with reference to goods which are the subject thereof
may be a condition or a warranty.

A condition is a stipulation which is essential to the main purpose of the contract. It goes
to the root of the contract. Its non-fulfilment upsets the contract. If there is a breach of a
condition, the aggrieved party can treat the contract as repudiated. Sec 12 (2).

A warranty is a stipulation which is collateral to the main purpose of the contract. It is not
of such vital importance as a condition is. If there is a breach of a warranty the aggrieved
party can only claim damages and it has no right to treat the contract as repudiated.

Example: a lady orders for a red saree, it being agreed between her and the seller that it will
be sent by a registered parcel, and that she will pay the price by 15th January, the day of her
marriage. In this illustration, the stipulations regarding the colour of the saree as well as the
date of supply are essential to the main purpose of the contract and are conditions whereas
stipulations regarding the time of payment of the price and the mode of despatch of the goods
are not essentials to main purpose of the contract but are only collateral, they are warranties.

Whether a stipulation in a contract of sale is a condition or a warranty depends in each

case on the construction of the contract as a whole.

When condition to be treated as warranty (Sec 13):

i. Voluntary waiver of condition where a contract of sale is subject to any

condition to be fulfilled by the seller, the buyer may (a) waive the condition,
or (b) elect to treat the breach of the condition as a breach of warranty. If the
buyer once decides to waive the condition, he cannot afterwards insist on its
fulfilment.
ii. Acceptance of goods by buyer- where a contract of sale is not severable and
the buyer has accepted the goods or part thereof, the breach of any condition
to be fulfilled by the seller can only be treated as a breach of warranty, unless
there is a term of the contract, express or implied to the contrary.

IMPLIED CONDITIONS.
Whether any express condition is made or not law presumes certain standards which are to be
ensured by the seller before selling the any product .These presumptions as to nature, quality,
and rightful ownership of the product are termed as implied conditions. The implied conditions
in sale of goods are laid down in sections 14 to 17.

1) Condition as to title

It is presumed in law that in the case of sale, the seller has the right to sell the Goods, and in
the case of an agreement to sell the, the seller will have the right to sell the goods at the time
of sale. In case a seller sells without the right to sell them, the buyer has the right to repudiate
the contract. The term “right to sell” infers that the seller should have a valid title to the
Goods. According to section 14 of the Act, In a contract of sale, unless the circumstances of
the contract are such as to show a different attention, there is an implied condition on the part
of the seller that-(a).in the case of a sale, the seller has the right to sell.
(b).in the case of an agreement to sell the seller will have a right to sell at the time of sale.

In Rowland v. Divall, {1923}2K.B.500, B bought a second hand car from S a car dealer. After
few months the car was taken away by the police as it was a stolen one. The court observed
that it was a breach of condition as to title as S had no right to sell the car. It was held that B
could recover full price from S.

In Niblett v. Confectioners Material Co,B bought 3000 tins of condensed milk from S. Out of
these 1000 tins were labeled as Nissly Brand.N, another manufacturer of the milk under the
brand name of Nestle, claimed that this was an infringement of his trademark. Consequently B
had to remove all the labels from the tins and had to sell them at loss. The court held that the
seller had breached the implied condition that he had a right to sell.
• When a person sells the goods by infringing the copyright or trademark of the others,
he is considered as not having the right to sell the goods.
• Where a seller having no title to sell the goods acquires a valid title to the goods after
the sale, but before the buyer seeks to terminate the contract, the implied condition as
to title is considered to be complied with.
Example: B buys a stolen car from S without knowing this fact .By the time B came to know
about it S had compensated the true owner and acquired a legal ownership of the car. Now B
cannot terminate the contract on the ground of breach of implied condition.
In Butterworth V. Kingsway Motors, Where a seller having no title to the goods at the time of
the sale, subsequently acquires a title, that title feeds the ,that title feeds the defective titles of
both the original buyer and the subsequent buyer.

2) Sale by description

“If you contract to sell peas, you cannot oblige a party to take beans.” This is the rule laid
down in section 15, where there is a contract for the sale of goods by description, there is an
implied condition that the goods shall correspond with the description. In Bowes v. Shand, it
was held that if the description of the article tendered is different in any respect, it is not he
article bargained for and the other party is not bound to take it. Goods are sold by description
when they are described in the contract, as farm wheat, Australian Apple, Indian silk etc and
the buyer contracts in reliance on that description. In Shepherd v. Kane, A ship was contracted
to be sold as “copper fastened vessel” to be taken with all faults, without any allowance for any
defects whatsoever. The ship turned to be partially Copper fastened .The court held that that
the buyer was entitled to reject the goods.
When a descriptive word or phrase is used in a contract of sale to describe the product it creates
an implied condition that the goods will correspond to the description. For example a sale of
Seedless Grapes, signifies that the fruit will have no seeds. If it turns that the fruit is with seeds
the buyer can reject the goods.

Sale of Goods by description may include the following situations,,

1) Where the buyer has not seen the goods and relies on their description given by the
seller.

In Varley v. Whipp, W bought a reaping machine which he had never seen V the seller
described “ to have been new the previous year and used to cut only 50 to 60 acres” .W found
the machine to be extremely old .It was held that W could return the machine as it did not
answer to the description.
 2) Where the buyer had seen the goods but relies not on what he had seen but on what was
stated to him by the seller.

In Nicholson&Venn v. Smith Marriot, in an auction sale of a set of Napkins and table clothes,
these were described as dating from the seventh century; the buyer bought the set after seeing
it. Subsequently it was found that the set was not of the seventh century but of the eighteenth
century, it was held that he could reject the goods.

3) Packing of goods may sometimes be part of the description.

In Moore &Co v. Landauver &Co, M sold to L 300 TINS OF Australian Apple packed in cases
containing 30 tins.M tendered a substantial portion in case containing 24 tins. It was held that
l could reject all the tins as the goods were not packed according to the description given in the
contract as the method in which the fruit was packed was an essential part of the description.

➢ Sale by description as well as by sample

Section 15 further provides that if the sale is by sample as well as by description then it is not
sufficient that it corresponds to the description but it should also correspond to the sample.
In Wallis v. Pratt, in a contract for the sale of a quantity of the sale of seed described as
“common English Sainfoin”, the seed supplied was of a different kind, though the defect was
not discoverable except by sowing the defect also existed in the sample. Held the buyer was
entitled to recover damages for the breach of contract.

3) Condition as to quality or fitness.

Ordinarily there is no implied condition that the goods supplied by the seller should be fit for
the particular purpose of the buyer. The rule Caveat emptor applies instead It means that while
buying it is the responsibility of the buyer to ensure that the goods corresponds to the particular
purpose he want to meet. However in the following situation the responsibility of the fitness as
to Goods falls on the seller.
i. the buyer make known to the seller the particular purpose for which he requires goods.
ii. The buyer and seller relies on the skill and judgment of the buyer.
 iii. The sellers business is to supply such goods whether he is the manufacturer or producer
or not.
Firstly the particular purpose for which goods are required must be known to the seller The
purpose may be made known explicitly or by implication. If the goods can be used for many
purposes, the buyer should make known the specific purpose to the seller; otherwise the
condition as to fitness would not apply.
In Re Andrew Yule &Co, a buyer ordered for Hessian cloth which is generally used for
packing purposes the cloth was supplied accordingly, on receiving the cloth, the buyer found
that the cloth was not suitable for packing food products as it had unusual smell He wanted to
reject the cloth. The court observed that the buyer had no right to reject the cloth because
although it was not fit for the specific purpose, it was fit for the purpose of packing otherwise
for which it was commonly used. There was no breach of condition of fitness in this case. In
this case had the buyer have informed to the seller that he needs the cloth for the packing of
food products, situation would have been different.
It is not necessary that the purpose should be expressed in words only. If the goods could only
be used for one purpose only, it is implied that the seller had knowledge about the purpose for
which the buyer need the goods.
In Priest v Last,B went to S a chemist and demanded a hot water bottle from him, S
gave a bottle to him telling that it was meant for hot water, but not boiling water. after few days
while using the bottle B’s wife got injured as the bottle burst out, it was found that the bottle
was not fit to be used as hot water bottle. The court held that the buyer’s purpose was clear
when he demanded a bottle for hot water bottle, thus the implied condition as to fitness is not
met in this case.

Secondly, the buyer must have relied upon the skill and judgment of the seller. B asked
S, he need a car for touring purpose, S supplies a car which is not fit for touring. A breach of
condition has been committed here.
However mere mention of a particular trade name by the buyer doesnot mean that he
has ordered for the product of that trade name only. He may still rely upon the skill and
judgment of the seller.

Thirdly, the seller should be a dealer of the kind of products transacted.

4) Condition as to merchantability
 Section 16 (2)-Where goods are bought by description from a seller who deals in goods of
that description whether he is not the producer or manufacturer or not, there is an implied
condition that the goods shall be of merchantable quality
The above provision reveals that the condition of merchantability is applicable when,
a) The goods are sold by description
b) The seller deals with such goods
Thus when Mohan a blacksmith sells to Das his old car, no implied condition as to
merchantability applies.
Merchantable means that the goods must be fit for the ordinary purpose for which such
goods are used. For example, when shoes are sold, merchantability requires that the shoes have
their heals attached well enough, that they will not break of under the normal use.
In Jones v. Just, B&Co a firm of merchants contracted to buy from S some bales of Manila
Hemp. This was to arrive from Singapore. The hemp arrived wetted with sea water. It was so
damaged that it was not possible to sell it as Manila hemp in the market. The court held that
the hemp was not of merchantable quality and it was entitled to be rejected.
But where the buyer examines the goods and the defects are such which can be revealed
by ordinary examination, the condition of merchantability does not apply to the extent of such
defects.
Where the product has some latent defects which cannot be revealed by ordinary
examination, the condition of merchantability would apply when even if the buyer has
examined the goods.
In Thornet v. Beers, B wanted to purchase some glue. The glue was stored in the seller’s
warehouse in barrels. B was given every facility to open the barrels and inspect them but B did
not open the barrels. Liter on the glue was found to have defects which B could have noted if
he had opened the Barrels. The court held that there is no breach of implied condition as to
merchantability in this case and B was not entitled to any relief.
In Grant v. Australian Knitting Mills, B bought underwear from S, B examined it while
purchasing .Later on it turned out to be harmful for his skin because of the presence of hidden
sulphites in the underwear which could not have been revealed by ordinary examination. The
court held that the implied condition of merchantability is applicable in this case.
Now what amounts to an examination is a question of fact in each case. In Thornet’s
case the buyer had the product before him to examine but he chose not to examine it. Here as
against the seller the examination is deemed to be made by the buyer.
Packing of goods is an equally important consideration in judging their merchantability.
In Morreli v Fitch &gibbons, M asked for a bottle of Stones Ginger Wine at S’s shop. Which
was licensed for the sale of wines.while M was drawing the cork, the bottle broke and M was
injured. Held the sale was by description and M was entitled to recover damages as the bottle
was not of merchantable quality.

5) Condition as to wholesomeness

In the case of food products the condition of fitness or merchantability requires that the
goods should be wholesome, that is it should be fit for consumption. In Chapronier v.
Mason, C brought a Bun from a baker’s shop .The bun contained a stone which broke of C’s
teeth. The court held that the seller was liable to pay damages as he breached the condition of
wholesomeness.

6) Implied condition as to fitness and quailty

An implied condition as to quality or fitness for a particular may be annexed by the usage
of trade. Section 16(3), there are instances where the purpose of purchasing goods may be
ascertained from the conduct of parties to the sale. Or from the nature of description of the
thing purchased. For, example if a water bottle is purchased the purpose for which it is bought
is implied in it; in that case the buyer need not tell the seller the purpose for which he buys it.
In Dr.Baretto v. T.R.Price, A bought a set of false teeth from a dentist. The set did not fit into
A’s mouth. Held A could reject the set as the purpose for which anybody would buy it was
implicitly known to the seller, here the dentist.
In Priest v Last, P asked for a hot water bottle to S ,retail chemist ,he was supplied one
which burst after few days use and injured P’s wife. The court held that S was liable for the
breach of implied condition because P had made known to the Chemist the purpose for which
he buys the goods.

7) Sale by sample
A contract of sale by sample is a contract for sale by sample where there is a term
express or implied in the contract, to that effect. (Section 17).In the case of contract of sale
by sample, there is an implied condition –
 1.That the bulk shall correspond to the sample in quality.
2. That the buyer shall have a reasonable opportunity of comparing the bulk with the
sample.
3. That the goods shall be free from any defect, rendering them unmerchantable.The
defect should not however be apparent on a reasonable examination of the sample.
In the case of patent defect there is no breach of implied condition as to merchantability.
In Mody v. Gregson, in a contract for the sale of brandy, by sample brandy colored with a dye
was supplied. The court held that the buyer was not bound to the contract even though the
goods supplied were equal to the sample. As the defects were not apparent on the reasonable
examination of the sample.

IMPLIED WARRANTIES:

The implied warranties in a contract of sale are as follows:

1. Warranty of quiet possession: there is an implied warranty that the buyer shall have
and enjoy quiet possession of the goods. If the buyer is in any way disturbed in the
enjoyment of the goods in consequence of the seller’s defective title to sell, he can
claim damages from the seller.
2. Warranty of freedom from encumbrances: in addition to the previous warranty, the
buyer is entitled to a further warranty that the goods are not subject to any change or
right in favour of a third party.
3. Warranty as quality or fitness by usage of trade: an implied warranty as to quality or
fitness for a particular purpose may be annexed by the usage of trade.
4. Warranty to disclose dangerous nature of goods: where a person sells goods, knowing
that the goods are inherently dangerous or they are likely to be dangerous to the buyer
and that the buyer of the probable danger, otherwise he liable in damages.

5. Who is an unpaid seller? Discuss the rights of an unpaid seller

towards the goods and buyer?

The seller of goods is deemed to be unpaid seller (Section 45) :

(a) When the whole of the price has not be paid or tendered; or
 (b) When a conditional payment was made by a bill of exchange or other negotiable
instrument, and the instrument has been dishonored
The following conditions must be fulfilled before a seller of goods can be deemed to be an
unpaid seller:
(1) He must be unpaid and the price must be due.
(2) He must have an immediate right of action for the price.
(3) A bill of exchange or other negotiable instrument was received but he same has been
dishonored.
When payment is made by a negotiable instrument it is usually a conditional payment, the
condition being that the instrument shall be duly honored. If the instrument is not honored, the
seller is deemed to be an unpaid seller. ‘Seller’ here means not only the actual seller, but also
any person who is in the position of a seller, e.g. an agent of the seller to whom a bill of lading
has been endorsed, or a consignee or agent who has himself paid for the goods or is directly
responsible for the price.

1. RIGHTS OF AN UNPAID SELLER AGAINST THE GOODS

An unpaid seller's right against the goods are:
(1) Right of Lien(Sections 47-49 and 54)
An unpaid seller in possession of goods sold may exercise his lien on the goods,
i.e., keep the goods in his possession and refuse to deliver them to the buyer until the
fulfillment or tender of the price in cases where:
(i) The goods have been sold without stipulation as to credit; or
(ii) The goods have been sold on credit, but the term of credit has expired; or
(iii) The buyer becomes insolvent.
The lien depends on physical possession. The seller's lien is possessory lien, so
that it can be exercised only so long as the seller is in possession of the goods. It can
only be exercised for the non-payment of the price and not for any other charges. A
lien is lost..

(i) When the seller delivers the goods to a carrier or other bailee for the purpose of
transmission to the buyer, without reserving the right of disposal of the goods;
(ii) When the buyer or his agent lawfully obtains possession of the goods;
(iii) By waiver of his lien by the unpaid seller.

(2) Stoppage in Transit (Sections 50-52)

The right of stoppage in transit is a right of stopping the goods while they are
in transit, resuming possession of them and retaining possession until payment of the
 price. The right to stop goods is available to an unpaid seller
(i) when the buyer becomes insolvent; and
(ii) the goods are in transit.

The buyer is said to be insolvent if he has ceased to pay his debts in the
ordinary course of business, or cannot pay his debts as they become due. It is not
necessary that he has actually been declared insolvent by the Court.The goods are in
transit from the time they are delivered to a carrier or other bailee like a wharfing or
warehouse keeper for the purpose of transmission to the buyer and until the buyer
takes delivery of them.
The transit comes to an end in the following cases:
(i) If the buyer obtains delivery before the arrival of the goods at theirdestination;

(ii) If, after the arrival of the goods at their destination, the carrier acknowledges to
the buyer that he holds the goods on his behalf, even if further destination of the
goods is indicated by the buyer.
(iii) If the carrier wrongfully refuses to deliver the goods to the buyer.

If the goods are rejected by the buyer and the carrier or other bailee holds them, the

transit will be deemed to continue even if the seller has refused to receive them
back.The right to stop in transit may be exercised by the unpaid seller either by taking
actual possession of the goods or by giving notice of the seller's claim to the carrier or
other person having control of the goods. On notice being given to the carrier he must
redeliver the goods to the seller, who must pay the expenses of the redelivery.The
seller's right of lien or stoppage ,in transit is not affected by any sale on the part of the
buyer unless the seller has assented to it. A transfer, however, of the bill of lading or other
document of seller to a bona fide purchaser for value is valid against the seller's right.

(3)Right of Re-Sale (Section 54):

The unpaid seller may re-sell:

(i) where the goods are perishable;

"

(ii) where the right is expressly reserved in the contract;

(iii) where in exercise of right of lien or stoppage in transit, the seller gives notice to the buyer
of his intention to re-sell, and the buyer, does not pay or tender the price within a
reasonable time. '
 If on a re-sale, there is a deficiency between the price due and amount realised, the
re-seller is entitled to recover it from the buyer. If there is a surplus, he can keep it. He will
not have these rights if he has not given any notice and he will have to pay the buyer any
profits.

(4) Rights to withhold delivery:

If the property in the goods has passed, the unpaid seller has right as described above.
If, however, the property has not passed, the unpaid seller has a right of withholding delivery
similar to and co-extensive with his rights of lien and stoppage in transit.

2. RIGHTS OF AN UNPAID SELLER AGAINST THE BUYER(SECTIONS 55 AND

56)

An unpaid seller may sue the buyer for the price of the goods in case of breach of contract where
the property in the goods has passed to the buyer or he has wrongfully refused to pay the price according
to the terms of the contract.The seller may sue the buyer even if the property in the goods has not
passedwhere the price is payable on a certain day.Under Section 56, the seller may sue the buyer for
damages for breach of contract where the buyer wrongfully neglects or refuses to accept and pay for
the goods.
Thus unpaid sellers rights against the buyer personally are:
(1) A Suit for the Price (Section-55):
Where the property has passed, under a contract of sale the property in the goods
has passed to the buyer and the buyer wrongfully neglects or refuses to pay for the goods,
the seller may sue him for the price of the goods. Where the property has not passed under
the contract of sale, the price is payable on a certain day irrespective of delivery and the
buyer wrongfully neglects or refuses to pay such price, the seller may sue him for the price.
It makes no difference even if the property in the goods has not passed and the goods have
not been appropriated to the contract.
(2) Suit for Damages for Non- Acceptance (Section
56):
Where the buyer wrongfully neglects or refuses to accept and pay for the goods,
the seller may sue him for non- acceptance. As regards measure of damages, Sec-73 of
the Indian Contract Act 1872 applies. Where the buyer wrongfully neglects or refuses
to accept the goods and pay for them, the seller may sue the buyer for damages for non-
acceptance. Where the seller wrongfully neglects or refuses to deliver the goods to the
buyer, the buyer may sue him for damages for non-delivery.
 (3) Repudiation of Contract Before Due Date (Section 60):
Where the buyer repudiates the contract before the due date of delivery, the
seller may either—
(a) Treat the contract as subsisting and wait till the date of delivery, or
(b) He may treat the contract as rescinded and sue for damages for the breach;
this rule is known as “rule of anticipatory breach of contract”.
(4) Suit for Interest (Section 61):
Where there is a specific agreement between the seller and the buyer as to interest
on the price of the goods from the date on which payment, becomes due, the seller may
recover interest from the buyer. If, however there is no specific agreement to this effect,
the seller may charge interest on the price when it becomes due from such day as he may
notify to the buyer.
In the absence of a contract to the contrary, the Court may award interest to the seller
in a suit by him at such rate as it thinks fit on the amount of the price from the date of
the tender of the goods or from the date on which the price was payable.

6. What is meant by dissolution of firm? What are the different modes

of dissolution?

The partnership may be voluntarily dissolved at any time with the mutual consent of
the partners. In such an eventuality, the withdrawing partner should move reasonably swiftly
to facilitate the liquidation. In case a partner was to die, the remaining partners will have the
option to either liquidate the partnership or to buy out the share of the deceased
partner.Dissolution of a firm implies dissolution of the partnership between all partners of a
firm. It may be by agreement, compulsory, due to contingency, by will and by the court.
Definition of dissolution of firm:
Section 39 of the Indian Partnership Act lays down that the dissolution of partnership
between all the partners of a firm is called the “dissolution of the firm”. This is different from
the dissolution of partnership. A partnership may be dissolved without dissolution the firm. But
dissolution of firm involves dissolution of partnership. In the firm of A, B and C, if C dies or
retires the firm will be dissolved. But A and B may take in D and continue doing the business.
This new firm of A, B and D is called the new or reconstituted firm.
 Dissolution of partnership means coming to an end of the relation known as partnership,
between various partners. When one or more partners cease to be partners but others continue
the business in partnership, there is dissolution of partnership between the outgoing partners
on the one hand and remaining partners on the other.

DISSOLUTION WITHOUT THE ORDER OF COURT:

It may takes place in one of the following ways:

1. BY AGREEMENT (Section40) :
A firm may be dissolved either:-
(i) With the consent of all the partners, or
(ii) In accordance with a contract between the partners.
As partners can create partnership by making a contract as between them, they
are also similarly free to end this relationship and thereby dissolve the firm by their
mutual consent. When all the partners so agree, they may dissolve the firm at any time
they like. Sometimes there may have been a contract between the partners indicating as
to when and how a firm may be dissolved, a firm can be dissolved, in accordance with
such a contract. For example, if the contract between the partners provides that on a 6
months’ notice by a partner the firm may be dissolved, then in accordance with this
contract, a partner could give 6 months notice and get the firm dissolved.

2. BY COMPULSORY DISSOLUTION (Section 41):

A firm is compulsorily dissolved:-

(a) By the adjudication of all partners or all the partners but one as insolvent. The reason
for this is simple. A partner on, being adjudicated insolvent ceases to be a partner on
the date on which the order of adjudication is made. If therefore, all or all the partners
but one are adjudicated insolvent, the firm can no longer exist, for there must be at least
two partners to constitute a firm.
(b) By the happening of any event which makes it unlawful for the business of the firm
to be carried on, or for the partners to carry it on in partnership.
 Example. A, a resident in India, and B, a resident in Pakistan, are partners. War
breaks out between India and Pakistan. The partnership becomes un lawful and is
dissolved automatically on the outbreak of war.
If the business of a partnership is unlawful from its very inception such
partnership is void and no question of its dissolution arises. If some out of the several
businesses or adventures of a partnership become unlawful, the illegality of one or more
of the businesses or adventures will not of itself cause the dissolution of the firm in
respect of its lawful businesses or adventures.

3. DISSOLUTION ON THE HAPPENING OF CERTAIN CONTINGENCIES:

Section 42 mentions certain contingencies on the happening of which the firm
is dissolved, unless there is a contract to the contrary. Unlike the dissolution under
Section 41, which is compulsory, the dissolution contemplated under Section 42 is not
compulsory. Even on the happening of the contingencies mentioned in Section 42,
partners may agree that the firm will not be dissolved, but the business of the firm will
be continued as before. The contingencies mentioned in the Section are:

1. Expiration of the Partnership Term: -

When the partnership had been constituted for a fixed term, it continues
obviously for the contemplated term and would be dissolved on the expiry of such term.
If the partners so like they may agree to the contrary and continue the business even
beyond that time. Such an agreement may be express or implied. If a fresh term is not
stipulated, then it will be considered to be a partnership at will.

2. Completion of the Adventure:-

Partnership created for some specific adventures or undertakings comes to an

end on the completion of such adventures or undertakings. Thus, when the partnership
was created specifically for carrying out contract of construction of a road and the road
was completed on 24.7.63 and final bill prepared on 18.2.65, the partnership stood
dissolved on 18.2.65. The suit for dissolution filed within 3 years of 18.2.65.Was held
to be within time.

There can, however, be an agreement by which the partnership may not be

dissolved and the business may be continued for some other adventures or undertakings
 after the completion of the earlier ones. Unless otherwise agreed, the same mutual rights
and duties between the partners continue in respect of their relationship for the new
adventures and undertakings also.

3. Death of a Partner:-

Death of a partner results in the dissolution of the firm unless the remaining
partners agree to the contrary. Section 42 of the Partnership Act, 1932 provides that a
firm stands dissolved on the death of a partner. However, the firm would not stand
dissolved if there is a contract to the contrary between the partners. It is not necessary
that such a contract must be express. The contract may be implied and can also be spelt
out from the conduct of the partner subsequent to the death of a partner.

4. Insolvency of Partners:-

When a partner is adjudicated insolvent, he ceases to be a partner. The firm is

also dissolved unless there is an agreement between the remaining partners to the
contrary. This provision has to be read along with. When all or all except one partner
become insolvent, there is compulsory dissolution of the firm. If, therefore, there are
only two partners and one of them is adjudicated insolvent, there is compulsory
dissolution under section 41 and there is no question of there being a contract to the
contrary making the firm to continue.

4. DISSOLUTION BY NOTICE (Section-43):-

Where the partnership is at will, the firm may be dissolved by any partner giving notice
in writing to all the other partners of his intention to dissolve the firm. The firm, in such a case,
is dissolved as from the date mentioned in the notice as the date of dissolution or, if no date is
so mentioned, as from the date of the communication of the notice. The notice should be an
unambiguous intimation of a final intention to dissolve the partnership, and should be served
on all the other partners. Notice once given cannot be withdrawn unless all the other partners
agree to it.

➢ DISSOLUTION BY THE ORDER OF COURT (Section-44):-

 Section-44 mentions certain grounds on which a suit can be filed for the
dissolution of a firm. A sit for the dissolution for the firm, may be filed, by the innocent
partners and not by the partner whose conduct, is the subject-matter for the suit.
The need for dissolution by the Court arises when all the partners do not want
the dissolution. The partner or partners who want dissolution can file a suit and the
other partners may contest the same. It may be noted that Section 44 which permits a
partner to invoke the jurisdiction of the court for the dissolution of the firm, is not
subject contract between the partners permitted under Section 11. Therefore, a partner
can always file a suit for the dissolution of the firm if his case is covered under Section
44.
A suit for dissolution can be filed only when one or the other ground mentioned
in section 44 is there. Even when there is a valid ground for filing the suit for dissolution
and a partner accordingly files the suit, the Court is not bound to decree dissolution as
this section clearly provides that “At the suit of a Partner,the Court may dissolve the
firm.”
The grounds which justify the filing of suit by a partner for the dissolution of
the firm as mentioned in Section 44 are as under:
1. Unsoundness of Mind:-
When a partner becomes of unsound mind, a suit for the dissolution of
the firm can be filed. Such a suit may be filed either on behalf of the partner
who has become of unsound mind, or by any other partner.
2. Permanent Incapacity to Perform Duties:-
When a partner becomes permanently incapable of performing his duties
as a partner that is a good ground for applying to the court for the dissolution of
the firm. When the incapacity is not permanent, the court would not grant relief.
In Whitwell vs Arthur, one partner filed a suit for the dissolution of the firm
when the other suffered from the paralytic attack and was thereby incapacitated
from performing his duties as a partner. It was found from medical evidence
that the incapacity was not likely to be permanent as the defendants health was
improving. The court did not grant the dissolution of the firm.
3. Misconduct of the Partners:-
When a partner is guilty of conduct which is likely to effect the carrying
on the business of the firm, the court may dissolve the firm on that ground.
Misconduct need not be with regard to the partnership business, but the conduct
should be such as should prejudicially affect the partnership business. The acts
of adultery by a partner in a firm of banker’s partnership business. The acts of
adultery by a partner in a firm of banker’s ha s been considered to be no ground
for seeking dissolution by the other partners but that may be so if it is a firm of
medical practitioners. Conviction for a breach of trust or the adultery by one
partner, with another partner’s wife are grounds for dissolution of the firm.
4. Persistent Breach of Partnership Agreement:-
Where a Partner other than the partner suing, wilfully or persistently
commits breach of the Partnership agreement relating to the management of the
affairs of the firm or the conduct of its business, or otherwise so conducts
himself that it is not reasonably practicable for the other partners to carry on the
business of the firm with him, the Court may, at the instance of any of the other
partners, dissolve the firm. Thus if one of the partners keeps erroneous accounts
and omits to enter receipts or if there is continued quarrelling between the
partners or there is such a state of animosity that all mutual confidence is
destroyed, the Court may order for the dissolution of the firm.
5. Transfer of Interest:-
Where a partner has in any way transferred the whole of his interest in
the firm to a third party or where his share has been attached under a decree, or
sold in the recovery of arrears of land revenue, the court may dissolve the firm
at the instance of any other partner.
6. Business Working at Loss:-
Where the business of the firm cannot be carried on except at a loss, the
Court may dissolve the firm at the suit of a partner. This clause gives discretion
to the Court to dissolve a firm for a fixed term even though the term has not
expired, if the business thereof cannot be carried on except at a loss. A
partnership is formed essentially to earn and share profits of the partnership. If
the business can be carried on only at a loss, the attainment of the common end,
with a view to which the partnership was formed, becomes impossible. In such
a case, the Court may dissolve the firm.
7. When Dissolution is Just and Equitable:-
The Court has been given wide power of dissolution. Apart from
ordering the dissolution of the firm on the grounds stated above, the court has
 been vested with the power of dissolving the firms on any other ground which
renders it just and equitable that the firm should be dissolved.

7. Explain the procedure for registration of a firm. What is the effect of

non-registration of firm?

REGISTRATION OF PARTNERSHIP FIRMS

Registration of a firm is not compulsory, though usually done as registration brings many
advantages to the firm. Since Partnership Act is a concurrent subject as per the constitution of
India, the registration firms and the related works are handled by the State government in each
state. Section 71 authorises State government to make rules for prescribing fees for filing
documents with registrar prescribing forms of various forms of various statements and
intimations are to be made to registrar and regulating procedures in the office of the registrar.

Registration of a partnership firm is not compulsory under law. The Partnership Act, 1932
provides that if the partners so desire they may register the firm with the Registrar of Firms of
the State in which the main office of the firm is situated.

Procedure for Registration: In order to get a partnership firm registered an application in the
prescribed form must be filed with the Registrar of Firms. The application should contain the
following information:

(i) The name of the firm

(ii) The principal place of business of the firm.

(iii) Names of other places where the firm's business is carried on.

(iv) Names in full and permanent addresses of the partners.

(v) The date on which each partner joined the firm,

(vi) Duration of partnership, if any.

The application should be signed and verified by each partner. A small amount of registration
fee is also deposited along with the application. The application submitted to the Registrar is
examined.
If everything is in order and all legal formalities have been observed, the Registrar shall make
an entry in the register of firms. He will also issue a certificate of registration.

Any change in the information submitted at the time of registration should be communicated
to the Registrar. Registration does not provide a legal entity to the partnership firm.

Consequences of Non-Registration: An unregistered partnership firm suffers from the fol-

lowing limitations:

1. It cannot enforce its claims against a third party in a court of law.

2. It cannot claim adjustment for any sum exceeding Rs. 100. Suppose an unregistered firm
owes Rs. 1200 to A and A owes Rs. 1000 to the firm the firm cannot enforce adjustment of
Rs. 1000 in a court of law.

3. It cannot file a legal suit against any of its partners.

4. Partners of an unregistered firm cannot file any suit to enforce a right against the firm.

5. A partner of an unregistered firm cannot file a suit against other partners. Non-registration
of a firm, however, does not affect the following rights:

(i) The right of a partner to sue for the dissolution of the firm or for the accounts of a
dissolved firm or to enforce any right or power to realise the property of a dissolved firm.

(ii) The power of an Official Assignee or Receiver to realise the property of an insolvent
partner.

(iii) The rights of the firm, or its partners, having no place of business.

(iv) Any suit or set off in which the claim does not exceed rupees one hundred.

(v) The right of a third party to sue the unregistered firm or its partners.

Non-registration of the partnership firm has no legal bearing on the criminal case

The menace of bouncing cheques has been tackled by an amendment to the Negotiable
Instruments Act, 1881, providing for imprisonment of the offender and victims can approach
courts under Section 138 of the Negotiable Instruments Act, 1881.
However, so far as a partnership firm is concerned, its rights would depend upon its legal status.
In a recent case, the Karnataka High Court considered this issue in the case of a complaint filed
by an unregistered firm Beacon Industries v Anupam Ghosh. After receipt of the complaint
filed by Beacon (revision petitioner in the aforesaid case), the Trial Court at Bangalore
dismissed the complaint by holding that there was a bar under section 69 of the Act and that an
unregistered firm could not prosecute any person or a firm.

The High Court observed that even a plain reading of section 69(2) of the Act, left no scope
for doubt that what was barred by the said section was the institution of a suit. The court further
observed that enforcing a right arising from a contract or conferred by the Act and suing, as a
partner in a firm against the firm or any partner in the firm would not be possible unless the
firm was registered firm.

The High Court remarked that a careful reading of section 69(2) of the Act clearly showed that
an unregistered partnership firm was barred from filing a civil suit, while there was no such bar
so far as filing of a private complaint was concerned.

The Court noted that in the case of a bounced cheque, there was purely criminal liability on the
part of the person who had issued the cheque. The Court held that even if the cheque had been
issued by a partner of an unregistered firm for a legally recoverable debt and if such a cheque
was dishonoured, it would amount to a criminal liability.

Thus the contract by the unregistered firm referred to in section 69(2) must not only be one
entered into between the firm and the third party-defendant but must also be one entered into
by the plaintiff firm in the course of the business dealings of the plaintiff’s firm with such third
party-defendant.

8. Answer any two of the following:

a) Partnership at will

Partnership at Will

A partnership at will is a partnership where there is no fixed term agreed for the duration of
the business. Unless there is any indication to prove otherwise, a partnership of this sort can
begin and dissolve relatively informally.
The difficulties of a partnership at will

Unless there is agreement to the contrary, a partnership at will also calls for equal division of
all of the business profits and losses in income and capital. This means that all partners are
liable for any debts incurred by the business which could result in repaying creditors out of
personal assets.

It can take very little for a partnership at will to be dissolved, for example any partner has a
right to serve a notice to dissolve the partnership at any time.

b) Sub-agent-

A sub agent is a person employed by and acting under the control of the original agent
in the business of the agency. This means he is the agent of the original agent. The relation of
the sub agent to the original agent is that of the principal and the agent.

The general rule is that an agent is not entitled to delegate his authority to another person
without the consent of the principal. “delegatus non potest delegare” is the maxim which means
that a person to whom authority has been given cannot delegate that authority to another. Sec
190 prohibits such delegation.

Sec190 also provides certain expectations to this general rule, they are:

i. There is a custom of trade to that effect,

ii. The nature of work is such that a sub agent is necessary. Example: a banker authorised
to let out a house and collect rent may entrust the work to an estate agent.
iii. Where the principal is aware of the intentions of the agent to appoint a sub-agent but
does not object to it.
iv. Where unforeseen emergencies arise rendering appointment of a sub-agent necessary.
v. Where the act to be done is purely ministerial not involving confidence.
vi. Where the power of the agent to delegate can be inferred from the conduct of the the
principal and agent.
vii. Where the principal permits appointment of a sub-agent.

c) Pledge by non-owners.
The general rule is that it is the owner who can ordinarily create a vaild pledge. But in
the following cases even a non-owner can create a valid pledge.
 i. Pledge by mercantile agent: where a mercantile agent is, with the consent of
the owner, in possession of goods or the documents of title to goods, any
pledge made by him, when acting in the ordinary course of business of a
mercantile agent is as valid as if he were expressly authorised by the owner of
the goods to make it. But the pledge is valid only if the pawnee acts in good
faith and has no notice that the pawnor has not the authority to pledge. Sec
178.
ii. Pledge by seller or buyer in possession after sale: a seller left in possession
of the goods after sale and a buyer who obtains possession of the goods with the
consent of the seller before sale, can create a valid pledge provided the pawnee
acts in good faith and has no notice about the previous sale of goods or lien of
the seller over the goods. Sec 30.
iii. Pledge where pawnor has a limited interest: where a person pledges goods
in which he has only limited interest, the pledge is vaild upto the extent of that
interest. Sec 179.
iv. Pledge by co-owner in possession: one of the several co-owners of goods in
possession thereof with the assent of the other co-owners may create a valid
pledge of the goods.
v. Pledge by person in possession under a voidable contract: the pledge created
by him is valid provided: a) the contract has not been rescinded before the contract of
pledge, and b) the pawnee acts in good faith and without notice of the pawnors defect
of title. Sec 178-A.

9. Solve any two of the following:

a) A advances to B a minor, Rs. 1,00,000/- on the guarantee of C. A demands for
repayment from B, B refuses to pay on the ground of his minority. Can A recover
the amount from C?

Yes, A can recover the amount from C who is the surety. In Kashiba vs Shripat, it was
held that the surety is regarded as the principal debtor and is personally liable to pay even
though the principal debtor (who is a minor) is liable to pay.
b) A, B and C are partners of a partnership firm. C who is an active partner retires
without giving public notice. X supplies the goods to the firm after C’s retirement.
Advise X as to the recovery of goods supplied.

After retirement the partner is required to issue a public notice of his retirement. If he
doesn’t not issue a public notice after his retirement ,the retired partner along with the other
partners will continue to be liable for all the acts done after his retirement until he a public
notice of his retirement is given. Sec 32(3). Thus X can hold C also liable along with his
other partners.

c) A entrusted some books to B for binding. B promised to complete the work and
return the same within ten days. B failed to return the books within the agreed
time. Subsequently the books were burnt in an accidental fire. Can A recover
damages for the loss from B? Decide.
Yes, A can recover the damages for the loss from B. The bailee was responsible
to return the goods according to the bailors directions and if he fails to do so he will be
responsible for any loss. Sec 161.
This above illustration question is similar to Shaw & co vs. Symmons & sons case,
where the baliee was held liable for the loss even though he was not negligent, but
because o his failure to deliver the books within reasonable time.