Guess Paper

Indian Contract Act- 1872- II

UNIT- I

1. What is contract of Indemnity? Explain the right of indemnity holder. Distinguish between contracts of
Indemnity & Contract of Guarantee.

2. Discuss the nature, rights and liabilities of a Surety.

3. Explain the essential feature of Guarantee. What are the liabilities & rights of the Surety? Can the
surety discharge from his liability? What is the difference between contract of Guarantee and
Indemnity?

4. Liability of surety is co-extensive with that of Principal debtor.

UNIT-II

1. Explain the standard of care required of a bailee in respect of goods bailed to him.

2. What can be pledged? Who can make the valid Pledge? Differentiate between Pledge & Lien.

3. What is bailment? What are the essentials of bailment? What are the duties & rights of Finder of lost
goods as a bailee?

4. What is Pledge? Distinguish between Pledge and Bailment.

UNIT – III

1. What is Agency? What are the various modes of creating Agency relationship? Also describe the
different kinds of Agent.

2. What are the circumstances in which agency is terminated?

3. Discuss fully the extent of Principals liabilities to third parties for the act of Agent.

4. Define the term sub-Agent. How for is principal bound by the acts of sub-agent? Distinguish between
sub-agent and substituted Agent.

UNIT- IV

1. Sharing of profits in business is not conclusive evidence of the existence of Partnership. Discuss with
the help of relevant case law.

2. How the firm is registered? What is the effect of Registration & Non registration of firm?

3. Distinguish between partnership business and joint Hindu family business.

4. Discuss the essentials of Partnership firm.

5. Define the principal of Holding out.

6. What are the provisions of dissolution of partnership Firm?

UNIT- V

Write short notes on the followings:-

i) Continuing Guarantee.

ii) Co-Sureties.

iii) Feature of Bailment.

iv) Rights of Pawnee to redeem.

v) Kinds of Agent.

vi) Agency by Ratification.

vii) Nature of Partnership.

viii) Registration of Firm.

ix) Termination of Agency.

x) Rights & duties of finder of lost goods.

xi) Modes of discharge of surety.

xii) Doctrine of Holding out.

xiii) Minor admitted to benefit of partnership.

xiv) Dissolution of firm.

xv) General lien & Particular lien.

xvi) Difference between Hypothecation & Pledge.

xvii) Co-ownership & Partnership.

xviii)Partnership at will.

xix) Dormant Partner.

xx) Ostensible authority.

xxi) Sub Agent & Substituted Agent.

xxii) Pledge &Mortgage.

1. Define the Contract of Indemnity. Distinguish between contract of Indemnity & contract of guarantee.
And explain the rights of indemnity holder.

Introduction: - A Contract of indemnity is a direct engagement between two parties whereby one
promises to save another from harm. According to section 124 of the Indian Contract Act a contract of
indemnity means,” 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.”

This gave a very broad scope to the meaning of indemnity and it included promise of
indemnity due to loss caused by any cause whatsoever. Thus any type of insurance except life insurance
was a contract of indemnity however Section 124 of Indian Contract Act 1872 makes the life insurance
was a contract of indemnity. However the Contract Act -1872 makes the scope narrower by defining the
contract of indemnity.

DEFINITION: - As provisions made in section 124 of the Indian Contract Act-1872 says that, “whenever
one party promises to save the other from loss caused to him by the conduct of the promisor himself or
by the conduct of other by the conduct of the any other person is called a Contract of Indemnity.”

New India Assurance Company Ltd. Vs Kusumanchi Kameshwra Rao & Others, 1997, A Contract of
indemnity is a direct engagement between two parties thereby one promises to save the other harm. It
does not deal with those classes of cases where the indemnity arises from loss caused by events or
accidents which do not or may not depend on the conduct of indemnifier or any other person.

ESSENTIAL ELEMENTS:- The following are the essentials of the Contract of Indemnity:-

1. There must be a loss.

2. The loss must be caused either by he promisor or by any other person.

3. Indemnifier is liable only for the loss.

Thus it is clear that this contract is contingent in nature and is enforceable only when the loss occurs.

RIGHTS OF INDEMNITY HOLDER

The promisee in a contract of indemnity acting within the scope of his authority is entitled to recover
from the promisor so under Section 125 of the Act defines the rights of an indemnity holder which are
as under :-

1. Right of recovering Damages: - All the damages that he is compelled to pay in a suit in respect of any
mater to which the promise of indemnity applies.

2. Right of recovering Costs: - All the costs that he is compelled to pay in such suit if in bringing o
defending it he did not contravene the orders of the promisor and has acted as it would have been
prudent for him to act in the absence of the contract of indemnity or if the promisor authorised him in
bringing or defending the suit.

3. Right of recovering sums :- All the sums which he may have paid under the terms of a compromise
in any such suite if the compromise was not contrary to the orders of the promisor and was one which
would have been prudent for the promisee to make in the absence of the contract of indemnity.

In another case of Mohit Kumar saha v/s New India Assurance Co.-1997 It was held that the indemnifier
must pay the full amount of the value of the vehicle lost to theft as given by the Surveyor. Any
settlement at the lesser value is arbitrary and unfair and violates art.14 of the constitution.

DIFFERENCE BETWEEN INDEMNITY & GUARANTEE

INDEMNITY

1. In indemnity there are two, one who is indemnified and the other indemnifier.

2. It consists of only one contract under which indemnifier promises to pay in the event of certain loss.

3. The contract of indemnity is made to protect the promise against some likely loss.

4. The liability of the indemnifier in a contract of indemnity is a primary one.

GUARANTEE

There are three parties, Principal debtor, surety and the Creditor.

There are three contracts between surety, principal debtor and creditor.

The object of contract of guarantee is the security of the creditor.

In guarantee the liability of surety is only a secondary, when principal debtor default.

CONCLUSTION:- It has been noted above that section 124 recognises only such contract as contract of
indemnity where there is a promise to save another person from loss which be caused by the conduct of
the promisor himself or by conduct of any other person. It does not cover a promise to compensate for
loss not arising due to human agency. If under a contract of insurance an insurer promises to pay
compensation in the event of loss by fire. Such contracts are valid contracts as being contingent
contracts under sec.31.

2. Discuss the nature, rights and liabilities of a surety.

INTRODUCTION:- The surety who is entitled to be reimbursed by the principal debtor for the amount
paid by him on his behalf. The liability of the surety is co-extensive with that of the principal debtor
unless it is otherwise provided by the contract under section 128.

NATURE OF SURETY:- Section 128 surety liability is co-extensive with that of the principal debtor which
means that on a default having been made by the principal debtor the creditor can recover from surety
the all what he could have recovered from the principal debtor.

Example:- The principal debtor makes a default in the payment of a debt of Rs.10,000.00, the Creditor
may recover from the surety the sum of Rs.10000/- plus interest becoming due thereon as well as the
amount spent by him in recovering that amount.

LIABILITY OF SURETY:- A bare perusal of section 128 of the Contract Act would make it clear that the
liability of a surety is co-extensive with that of he principal debtor. The word co-extensive denotes that
extent and can relate only to quantum of the principal debt. Refer a case of Industrial Financial
Corporation of India v/s Kannur Spinning & Weaving Mills Ltd, 2002: However the liability of the surety
does not cease merely because of discharge of the principal debtor from liability.

Bank of Bihar Ltd. v/s Damodar Prasad, 1969: The Supreme Court held that the liability of the surety is
immediate and cannot be defended until the creditor has exhausted all his remedies against the
principal debtor. Maharashtra Electricity Board Bombay v/s Official Liquidator and Another, 1982: under
a letter of guarantee the bank undertook to pay any amount not exceeding Rs.50000/- to the Electricity
Board. It was held that the Bank is bound to pay the amount due under the letter of guarantee given by
it to the Board.

RIGHTS OF SURETY:- The surety has certain rights against the principal debtor, the creditor and the co-
sureties. His right against each one of them are being discussed as under :-

1. Right of Subrogation: Under section 140 when a principal debtor makes a default in the
performance of his duty and on such default the surety makes the necessary payment or makes
performance of all what he is liable. Firstly the surety can claim indemnity from the principal debtor
secondly he is also entitled to the benefits of every security which the creditor has against the principal
debtor. Case of Mukesh Gupta v/s Sicorn Ltd. Mumbai, 2004.

2. Right of Indemnity against the principal debtor: Similarly as above when a principal debtor makes a
default the surety has to make the payment to the creditor. After making the payment he can recover
the same from him under section 145 of the act.

3. Right against Creditor to take back the securities deposited by the Principal debtor:- After making
the dues the surety has all the rights which are available to the creditor against the principal debtor
under section 141 of the act. He is entitled to the benefit of every security which the creditor has against
the principal debtor.

4. Surety has no right to goods in hypothecation:- In case there is hypothecation of the goods the
goods remain in the possession of the borrower the surety cannot invoke the provision of section 141 in
such case. Refer a case of Bank of India v/s Yogeshwar Kant Wahhera, 1987.

CONCLUSION:- Keeping in view the above facts it is revealed that the surety’s nature, liabilities and
rights are of such types once he stands surety for any debt he will remain bound till the amount is repaid
by the principal debtor. Although the surety has some rights such as right of subrogation, indemnity and
to taking back the securities but even though there are more complications in this regard. So one
should stand surety for a person who have some qualities of good pay master.
3 The liability of the surety is co-extensive with that of Principal debtor.

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

DEFINITION OF CO-EXTENSIVE:- Section 128 of the Indian contract Act provides the following definition
in respect of the surety liability:-

“It says that the liability of the surety is co-extensive with that of the principal debtor unless it
otherwise provided by the Contract.”

A case of law in this regard is of Andhra Bank Soryapeet v/s Anantnath Goel-1991: It was held by the
court that where there were joint promisors and consideration was paid by only one of them the other
piomisors were equally liable to pay amount. The liability of son was co-extensive with his father who
was principal debtor in view of section 127 and 128 of the Indian contract Act.

The gist of some the leading cases in which the liability of the surety is co-extensive are given below to
strengthening the answer of the question:-

· Kellappan Nambiar v/s Kanhi Raman-1957: In this case that if the principal debtor happens to be a
minor and the agreement made by him is void, the surety too cannot be made liable in respect of the
same because the liability of the surety is co-extensive with that of principal debtor. It has been held
that the guarantee of the loan or an overdraft to an infant is void because the loan to the infant itself is
void.

· That in case of State Bank of India v/s V.N. Anantha Krishnam-2005: that in view of the provision of
section 128 of Act the Presiding officer was not correct in giving directions to the Bank to proceed
against the property because cash credit facility and the liability of surety was co-extensive with that of
principal debtor.

· In a case of Bank of Bihar Ltd. v/s Dr.Damodar Prasad -1969: The Supreme Court held that the
liability of the surety is immediate and cannot be defended until the creditor has exhausted all his
remedies against the principal debtor.

· A case of Industrial Financial Corporation of India v/s Kannur Spining & Weaving Mills Ltd.-2002: It
was held that the liability of surety does not cease merely because of discharge of the principal debtor
from liability.

· In a case of Harigobind Aggarwal v/s State Bank Of India-1956: It was held that the principal debtor
liability is reduced e.g. after the creditor has recovered a part of the sum due from him out of his
property the liability of the surety is also reduced accordingly.

CONCLUSION:- On deeply going into depth of provisions laid down in the Act it is revealed that surety
liability is co-extensive with that of principal debtor means that his liability is exactly the same as that of
the principal debtor. Suppose if the default having made by the principal debtor the creditor can recover
the same from the surety all what he could have recovered from the principal debtor.
4. What do you understand by contract of guarantee? How does it differ from contract of Indemnity?
INTRODUCTION: - The contract of guarantee may be an ordinary or some different type of guarantee
which is different from an ordinary guarantee. Guarantee may be either oral or written. Basically it
means that a contract to perform the promise or discharge the liability of third person in case of his
default and such type of contracts are formed mainly to facilitate borrowing and lending money which
based on the following facts :-

i) Surety is the person by the whom the guarantee is given.

ii) Principal debtor is the person from whom the assurance is given.

iii) Creditor is the person to whom the guarantee is given.

DEFINITION: - “A contract of guarantee is a contract to perform the promise or to discharge the liabilities
of a third person in case of his default. The person who gives the guarantee is called surety, the person
in respect of whose default the guarantee is given is called Principal Debtor and the person to whom the
guarantee is given is called creditor. A guarantee may be either oral or written.”

ILLUSTRATION: - A promises to a shopkeeper C that A will pay for the items being bought by B if B does
not pay this is a contract of guarantee. In case if B fails to pay C can sue A to recover the balance the
same was held in the case of Birkmyr v/s Darnell-1704, the court held that when two persons come to
shop one person buys and to give him credit the other person promises, “ if he does not pay, I will”, this
type of a collateral undertaking o be liable for the default of another is called a contract of guarantee.

ESSENTIALS: - The following are the essential elements of Guarantee:-

1. Existence of Creditor, Surety, and Principal debtor: - The economic function of a guarantee is to
enable a credit-less person to get a loan or employment or something else. Thus there must exist a
principal debtor for a recoverable debt for which the surety is liable in case of the default of the
principal debtor. In the case of Swan v/s Bank of Scotland -1836, It was held that a contract of guarantee
is a triplicate agreement between the creditor, the principal debtor and the surety.

2. Distinct Promise of Surety: - There must be distinct promise by the surety to be answerable for the
liability of the Principal debtor.

3. Liability must be legally enforceable: - Only if the liability of the principal debtor is legally
enforceable, the surety can be made liable. For example a surety cannot be made liable for a debt
barred by Statute of Limitation.

4. Consideration: - As with any valid contract the contract of guarantee also must have a consideration.
The consideration in such contract is nothing but anything done or the promise to do something for the
benefit of the principal debtor. The section 127 of the Act clarify as under :-

“Anything done or any promise made for the benefit of principal debtor is sufficient consideration to the
surety for giving the guarantee.”
Illustrations: - 1. A agrees to sell to B certain goods if C guarantees for payment of the price of the goods.
C promises to guarantee the payment in consideration of A’s promise to deliver goods to B. This is
sufficient consideration for C’s promise.

2. A sells and delivers goods to B. C afterwards requests A to forbear to sue B for an year and promise if
A does so he will guarantee the payment if B not pay. A forbears to sue B for one year. This is sufficient
consideration for C’s guarantee.

5. It should be without misrepresentation or concealment: - Section 142 of the Act specifies that a
guarantee obtained by misrepresenting facts that are material to the agreement is invalid, and section
143 specifies that a guarantee obtained by concealing a material fact is invalid as well.

Illustration :- 1. A appoints B for collecting bills to account for some of the bills. A asks B to get a
guarantor for further employment. C guarantees B’s conduct but C is not made aware of B previous mis-
accounting by A. B afterwards defaults. C cannot be held liable.

Illustration: 2- A promise to sell Iron to B if C guarantees payment. C guarantees payment however, C is

not made aware of the fact that A and B had contracted that B will pay Rs.5/- higher that the market
price. B defaults. C cannot be held liable

A case of London General Omnibus V/s Holloway- 1912: A person was invited guarantee an employee,
who was previously dismissed for dishonesty by some employer. This fact was not told to the surety.
Later on the employee embezzled funds but the surety was not held liable.

CONCLUSION

It is noted from the above mentioned facts that the contract of guarantee is a triplicate agreement
between Creditor, Surety and the Principal debtor. A person who stands for surety known as guarantor
for a third person (principal debtor) who in case of his default to fulfil his promise or to discharge the
liabilities. The surety or guarantor has to make a distinct promise for payment of the liabilities of the
Principal debtor which must be legally enforced.

5. What is continuing Guarantee? Under what circumstances it can be revoked?

INTRODUCTION: - A guarantee which extends to a series of transactions is called continuing guarantee.

A guarantee may be an ordinary guarantee or a continuing guarantee is almost different from an
ordinary guarantee.
EXAMPLE:- A in consideration that B will employ C in collecting of Rent of B’s Zamidari. B promises that
he is responsible to the amount of Rs.5000/- for due collection and payment by C of those rents. This is
a continuing guarantee.

2. A guarantees payment to B, a tea-dealer, for any tea that C may buy from him from time to time
amount of Rs.100/-. Afterwards, B supplies C tea for the amount of Rs.200/- and C fails to pay. A’s
guarantee is a continuing guarantee and so A is liable for Rs.100/-.

It is clearly noted from the above examples that continuing guarantee is given to allow multiple
transactions without having to create a new guarantee for each transaction.

DEFINITION:- Section 129 of the Contact Act, continuing guarantee means a guarantee which extends to
a series of transactions without creating a new guarantee for another transaction is called continuing
guarantee.

Illustration:- A guarantees payment to B for 5 sacks of rice to be delivered by B to C over the period of
one month. B delivers sacks to C and C pays for it. Later on B delivers 4 more sacks but C fails to pay. A’s
guarantee is not a continuing guarantee and so he is not liable to pay for the 4 sacks.

REVOCATION OF CONTINUING GUARANTEE:- Section 130 of the Act a continuing guarantee can be
revoked at any time by the surety by a notice to the creditor. Once the guarantee is revoked the surety
is not liable for any future transaction however he is liable for all the transactions that happened before
the notice of revocation is given.

1. A promises to pay B for all groceries bought by C for a period of 12 months if he fails to pay. In the
next three months C buys 2000/- worth of groceries. After 3 months, A revokes the guarantee by giving
a notice to B. C further purchases 1000 Rs of groceries. C fails to pay. A is not liable for 1000/- rupees
of purchase that was made after the notice but he is liable for 2000/- of purchase made before the
notice

2. Lloyd’s v/s Harper-1880: It was held that employment of a servant is one transaction. The
guarantee for a servant is thus not a continuing guarantee and cannot be revoked as long as the servant
is the same employment. Wingfield v/s De St Cron-1919: it was held that a person who guaranteed the
rent payment for his servant but revoked it after the servant left his employment was not liable for the
rents after revocation.

3. A guarantees to B to the amount of Rs.10,000/- that C shall pay for the bills that B may draw upon
him. B draws upon C and C accepts the bills. Now A revokes the guarantee. C fails to pay the bill upon
its maturity. A is liable for the amount upto Rs. 10,000.00.

4. As per provisions laid down in Section 131 of the Act that the death of the surety acts as a
revocation of continuing guarantee with regards to future transactions if there is no contract to the
contrary.
 It is pertinent to mention here that there must not be any contract that keeps the guarantee
alive even after the death. In the case of Durga Priya v/s Durga Pada -1928 : It was held by the court
that in each case the contract of guarantee between the parties must be looked into to determine
whether the contract has been revoked due to the death of the surety or not. It there is a provision that
says that death does not cause the revocation then the contract of guarantee must be held to continue
even after the death of the surety.

Conclusion:- A guarantee which extends to a series of transactions is called continuing guarantee. A

guarantee may be an ordinary guarantee or a continuing guarantee is almost different from an ordinary
guarantee. In Contract of guarantee between the parties must be looked into to determine whether the
contract has been revoked due to the death of the surety or not. It there is a provision that says that
death does not cause the revocation then the contract of guarantee must be held to continue even after
the death of the surety.
UNIT-II

6 EXPLAIN THE STANDARD OF CARE REQUIRED OF A BAILEE IN RESPECT OF GOODS BAILED TO HIM.

INTROUCTION: - The standard of care is required is that of a reasonable man. The amount of care to be
taken should be such as a man of ordinary prudence would under similar circumstances take of his own
goods of the same bulk quantity and value as the goods bailed.

DEFINITION OF STANDARD OF CARE:- While going through the contents of the provisions laid down in
Section 151 of the Contract Act it is noticed that “in all cases of bailment the bailee is bound to take as
much as care of the goods bailed to him as a man of ordinary prudence would under similar
circumstances take of his own goods of the same bulk and quality and value and value as the goods
bailed.”

On perusal of the definition it is revealed uniform duty of maintaining the standard of care in
respect of the goods bailed to him. However the following steps may also be taken to maintain the
standard of care:-

1. The Bialee should act as a prudent man: When the goods are bailed to him then he should take
such standard way of care as a man of ordinary prudence would like to take of his own goods. If the
bailee has not acted like an ordinary prudent man he cannot be excused. A case of Union Bank of India
v/s Udho Ram & sons-1963: It was held railway did not take proper care and failed to keep an eye on
wagons which resulted theft.

2. In Calcutta Credit Corportation Ltd. v/s Prince Peter of Greece-1964: A car was received for
repairs by a garage which was damaged by fire. The car was parked in a garage which was a partitioned
by wooden walls, it also stored the paint and thinners. When the fire open the car where it was kept
could not opened for fifteen minutes when the fire was notice. It was held that the bailee had not taken
a standard of care and he is liable.

3. Barbant & Comp. v/s King, 1895: The House of Lords held that the only cases where the bailee
would be immune are laid down expressly in section 152 of the contract act, If he has taken the amount
of standard of care of it as described in section 151 of act that the degree of care needed must be
maintained. 4. Laxmi Narayan v/s The Secretary for State for India:1923: that when a carrier of goods
transports jute in a boat which has leaks on its side and the goods get damaged as a results of un
attended and unsafe place and lack of standard of care.
CONCLUSION:- The facts and factors mentioned above it is observed that the degree of care needed
varies with the kind of engagement and therefore when a person undertakes such a job the law not only
requires that he should possess the requisite skill but also that he has the requisite plants and
appliances and well acquitted about maintaining the standard of care. and also that his premises are
also reasonable suitable for doing that job.

7. What can be pledged and who can make a valid pledge? Differentiate Pledge and Lien.

INTRODUCTION: - Section 172 says pledge is a bailment the delivery of the goods from the pawnor to
the pawnee which is essential. There must be delivery of the goods i.e. the transfer of possession from
one person to another. The delivery however, be either actual or constructive. Mere agreement to
transfer of possession in future is not enough to constitute a Pledge.

Revenue Athority v/s Sunderasanam Pictures, 1968: It was held that an agreement wherein the
producer of a film agrees to deliver final prints of the film under production when the same are ready to
a financier distributor in return for the finance provided by the latter is not pledge because there is no
deliver of goods.

WHAT CAN BE PLEDGED:- Pledge is a kind of bailment where the goods are delivered by one person to
another as security for payment or performance of a promise. If the goods are in the possession of a
third person there is deemed to be no delivery of the goods unless and until the third person
acknowledges to the transferee that he holds the goods. The following things can be pledged:-

i) Only the moveable goods can be pledged.

ii) The goods which are in possession of the True Owner should have a clear title and valid
documents.

WHO CAN MAKE A VALID PLEDGE:- Ordinarily he should be the owner of the goods, or any person
authorised by him in that behalf who can pledge the goods. If a servant has the custody of the goods or
a tenant gets the possession of a furnished house, the servant cannot pledge the goods nor can a tenant
pledge the furnishing materials in his possession.

A person obtaining the goods fraudulently does not have any right to pledge them as described in a case
of Purshotam Das v/s Union of India-1967. In the following exceptional cases a person who is neither the
owner nor having any authority from the owner for pledging the goods, but having possession with the
owner’s consent can make a pledge and confer rights on the pledgee. These are as under:-

1. Pledge by Mercantile Agent: Section 178 of the Act a mercantile Agent having the possession of the
goods with the consent of the owner but having no authority to pledge them can make a pledge
provided the pledgee or pawnee is acting in good faith. He must pledge the goods while acting in the
ordinary course of his business of a mercantile agent.
2. PLEDGE BY PERSON IN POSSESSION UNDER A VOIDABLE CONTRACT: The Act recognises another
exception to the rule that either the owner or his duly authorised agent can pledge the goods. According
to this a person who has obtained the possession of the goods under a voidable contract.

Voidable contract is a valid contract until it has been rescinded and becomes void after the same
has been rescinded. If the pawnor has obtained the possession of the goods under a voidable contract
but the contract has not yet been rescinded, the pledgee is capable of having a good title to such goods.
Thus if a person has obtained the possession of goods by fraud, misrepresentation, coercion or undue
influence, he could make a valid pledge of the goods if the same is done before the contract has been
rescinded. A case of Phillips v/s Brooks Ltd., 1919: It was in this case that pledge was valid.

3. Pledge by a person with a limited interest: - This Provision have been given in the section 179 of the
act that a person having limited interest in the goods may make a valid pledge. For example : A pledges
the goods to B for Rs.5000/- and B makes a sub pledge of those goods for Rs.8000/- A gets a right to
take back those goods only by paying Rs.5000/-as held in case of Belgawn Poiner Urban Co-op Credit
Bank v/s Satyaparmoda-1962.

Difference between Pledge & Lien

Pledge

Lien

Pledge is a kind of bailment and security.

In right of lien it is not so as in Pledge.

In a pledge pawne acquires a special interest in the property pledged.

Right to lien gives only a right to detain the subject matter of the lien until payment. Lien is not
transferable to a third person.

Pledge is deliver of goods to the creditor as security for the debt.

Lien is a right of a creditor to retain the goods until his debt is paid or satisfied

CONCLUSION:- In Pledge which a kind of bailment and also to be considered as security for the debt of
the creditor. It is also essential in the Pledge that there must be delivery of the moveable goods from
pawnor to pawnee and transfer of possession from one fellow to another. A person who is having the
possession of goods and consent of the true owner and acting in good faith can make a valid pledge.
8. What is bailment? Explain its essential ingredients of Bailment? What are the duties & rights of Finder
of the goods as a Bailee?

INTRODUCTION:-Means delivery of goods i.e. moveable property by one person who is generally the
owner thereof, to another person for some purpose. The goods are to be returned to the owner after
accomplished the purpose to take further action as per directions of the owner of the goods. A.T.Trust
Ltd., v/s Trippunhura Devaswomi-1954. In a contract of bailment the person who delivers the goods
called the “Bailor” and to whom the goods are delivered is called as “Bailee”.

DEFINITION:- Section 148 of the Indian Contract Act, A bailment is the delivery of goods by one person
to another for upon a contract that they shall when purpose is accomplished be returned or otherwise
disposed of according to the directions of the person delivering them. The person delivering the goods is
known as BAILOR and the person to whom goods are delivered is known as the BAILEE.

ESSENTIAL INGREDIENTS OF BAILMENT:- The following are the essentials of the bailment under the
Contract Act:-

(a) DELEVERY OF GOODS FOR SOME PURPOSE:- Delivery means transfer of the goods from the
possession of one person to another person. Delivery need not always be actual, sometimes it may be
constructive or symbolic as per instructions laid down in section 149 of the Act, and this section
recognises it other than actual delivery. However section 149 also provides below in this regard:-

The delivery to the bailee may be made by doing anything which has the effect of putting the goods in
the possession of the intended bailee or any other person authorized to hold them on his behalf.”
i) Jagdish chand Trikha v/s Punjab National Bank, 1998 : It was held by the court that the position of the
bank was that of a Bailee and it failed in its duty to take care of the goods and return them to the Bailor.
The Bank was held liable to pay the cost of Rs. 3,72,400/- along-with simple interest @12% from the
date of institution of the suit.

ii) Ultzen v/s Ni coles, 1894:- It was held that the defendant was the bailee of the coat as his servant had
assumed the possession of the same and he was therefore liable for its loss which was occurred due to
his negligence.
(b) IF THE OWNER MAINTAINS CONTROL OVER THE GOODS THERE IS NO BAILMENT: When the person
keeps his goods in the premises of others but himself continues to have the control over them, this is
not sufficient delivery for being considered to be bailment. Kaliaporumal Pillai v/s Visalakshmi, 1938 : It
was held that there was no bailment as she had not handed over the possession of the jewels to the
goldsmith, and therefore the goldsmith could not be made liable for the loss. Punjab National Bank v/s
Sohan Lal, 1962, It was held that the locker could be operated even without the key with the consumer.
The consumer’s control over the valuable things in the locker had gone and the same with the bank,
therefore the bank was liable being bailee and thus Bank is liable for the loss of the belonging of the
consumer in the locker.

(c) THERE CAN BE BAILMENT WITHOUT CONTRACT:- In some cases there can be a bailment when the
person obtains the possession without a contract of the bailment as it was done in the case of :Ram
Gulam v/s Govt. Of Uttar Pradesh- 1950, The court expressed that the property of plaintiff was stolen
and the same was recovered by the Police, Police kept the same in the Malkhana. Property was again
stolen from the Maalkhana and could not be traced out. Here the point of bailment raised since no
contract of bailment was made for which conviction is announced but the law itself recognises the
finder of the goods as bailee under section 71 of contract Act, hence it was held that bailment can be
even there when there is no contract of bailment. L.M. Co-operative Bank v/s Prabhudass HathiBhai-
1966:- It was held that the government stood in the position of a Bailee to take due care of the goods.
Govt., duty to prove that they had taken proper care as was possible for them and the damage was due
to reasons beyond their control.

RETURN OF GOODS AFTER THE PURPOSE IS ACHIEVED: OR

THEIR DISPOSAL ACCORDING TO THE BAILOR DIRECTIONS:- The delivery of the goods in a bailment is
only for some purpose i.e. for safe custody, for carriage, for repair etc., when the purpose is
accomplished the goods are to be returned or otherwise disposed of according to the directions of the
person delivering them. According to Section 148, the goods shall be when purpose is achieved returned
to the bailor or disposed of as per his directions i.e. when the cloth is given for being stitched in to suit
or gold for being converted into ornaments or wheat for being converted into flour there is a bailment in
each case. When the money is deposited into a Bank, when the agent receives some payment on behalf
of Principal, he is not the bailee thereof because he is only bound to pay an equivalent of it to the
principal rather than the same currency as done in the case of: - Secretary of State for India Council v/s
Sheo Singh-1880: Some notes were given to Treasury for being cancelled, there is no bailment as the
same notes are not to be returned. Constructive bailment does not confer any right to a stranger.
Bailment regarding hiring of a locker will not create relationship of Land lord and the tannent, as the
Bank can always open the locker with a Master Key. The hirer of the locker is not in a position to open
the locker without the assistance of the Bank. The Hirer has to operate the locker only within the Bank’s
time but the bank has no such limitation

CONCLUSION:- Keeping in view the above stated facts and the gist of the decisions of the Courts it is
noticed that the goods are to be returned to their original owner after the purpose is accomplished or
they are to be disposed of as per the directions of the Bailor in same condition as these were bailed.
POSITION OF FINDER OF GOODS

A person who finds goods belonging to another and takes them into his custody is subject to the same
responsibility as a bailee as provided in sec.71. Since the position of the finder of goods is that of a
bailee. He is supposed to take the same amount of care with regard to the goods as is expected of a
bailee under section 151. He is also subject to all duties of a bailee including a duty to return the goods
after the true owner is found.

Section 168 and 169 confer certain rights on the finder of goods which are as under:

1. May sue for specific reward offered: The finder of goods has no right to sue the owner for
compensation or trouble and expenses voluntarily incurred by him to preserve the goods, but he may
retain the goods until he receives such compensation and a specific reward offered by the owner for
return of the goods. Refer sec. 168 of the Act.

2. If true owner is diligence not found or he refuses to pay the lawful charges of the finder of the
goods, the finder may sell it on the following conditions:-

i) When the thing is in danger of perishing or losing part of its value.

ii) When the lawful charges of the finder, in respect of the found goods amount to two-third of
its value.

iii) Right of Lien: He can retain the Lien on the found goods until his expenses on find goods are
paid.

iv) Right to sell the goods found:- Finder of the goods has the right to sell the goods found by him
under certain circumstances provided in section 169 of the act with a reasonable notice mentioning the
intention to sale the goods found.
9. Define Pledge and distinguish between Pledge and Bailment.

INTRODUCTION:-- Section 172 of the Act: Since pledge is a bailment the delivery of the goods from the
pawnor to the pawnee which is essential. There must be delivery of the goods i.e. the transfer of
possession from one person to another. The delivery however, be either actual or constructive. Mere
agreement to transfer of possession in future is not enough to constitute a Pledge.

Revenue Athority v/s Sunderasanam Pictures-1968: It was held that an agreement wherein the producer
of a film agrees to deliver final prints of the film under production when the same are ready to a
financier distributor in return for the finance provided by the latter is not pledge because there is no
deliver of goods.

DEFINITION OF PLEDGE:- Section 172 of the Contract Act, “Pledge is the bailment of goods as security
for the payment of a debt or for the performance of a promise.” The delivery may be actual or
constructive. The possession in a pledge must be judicial possession. Mere physical possession in not
sufficient.

DEFINITION OF BAILMENT:- The delivery of the goods by the bailor to the bailee is the essence of the
bailment. Unless there is actual delivery there is no contract of bailment.

Section 148 of the contract act defines bailment as under:- “ A bailment is a delivery of goods by one
person to another for some purpose upon a contract that they shall when the purpose is accomplished
be returned or otherwise disposed of according to the directions of the person delivering them.”

DIFFERENCE BETWEEN PLEDGE & BAILMENT

 PLEDGE

Pledge is a species of bailment.

Pledge is bailment of goods as security for the payment of debt or for the performance of a promise.

Moveable property is subject-matter of pledge under the contract Act.

BAILMENT

Bailment is a genus.

Bailment is a delivery of goods by one person to another for some purpose upon a contract.

In the contract of bailment after the accomplishing of the purpose the goods are to be returned or
otherwise disposed of according to the directions of the Bailor.

CONCLUSION:- In Pledge which a kind of bailment and also to be considered as security for the debt of
the creditor. It is also essential in the Pledge that there must be delivery of the moveable goods.
Whereas in the contract of bailment there is a delivery of goods by one person to another for some
purpose and when the purpose is accomplished the goods are to be returned or to disposed of as per
the directions of the Bailor.

10. Explain the Rights and the Duties of BAILEE.

INTRODUCTION: - Bailee is one of the most important character of the Bailment Contract. Bailee is of
that to whom the goods are delivered by the Bailor with some directions and to complete some certain
purpose. Bailee receives only the moveable things and he has to returned the goods which he receives
after accomplishing the purpose or he has to disposed of that things with the directions of the owner of
that goods.

RIGHTS OF BAILEE:- Under the provisions of Indian Contract Act 1872, the following are the rights to the
bailee in Bailment contract:-

1. RIGHT TO RECOVER NECESSARY EXPENSES INCURRED ON BAILMENT:- According to section 158 of

the Act when a contract of bailment is made some remuneration is to be paid to the bailee for the
services he renders in respect of them. So he has the right to recover the same. In case of gratuitous of
bailment the bailee has no right even not entitled to receive any remuneration for the services he
renders.

Section 158 says that, “Where by the conditions of the bailment the goods are to be kept or to be
carried or the work to be done upon them, the bailee for the bailor and the bailee is to receive no
remuneration the bailor shall pay the necessary expenses incurred by the bailee for the purpose of
bailment.”

Illustration: - A leaves his horse with the neighbour for safe custody for a week. B is entitled to recover
the expenses incurred by him in feeding the horse.

2. RIGHT TO RECOVER THE COMPENSATION:- According to section 164 of the act, “The Bailor is
responsible to the Bailee for any loss which the bailee may sustain by reason that the bailor was not
entitled to make the bailment or to receive back the goods or to give directions in respect of them.”

From the definition it is noticed that when the Bailor sometime not entitled to make the bailment
or to receive back the goods which may results a loss to the bailee, then the bailee is entitled to recover
the loss from the Bailor.

3. RIGHT OF LIEN ON THE GOODS BAILED:- According to section 170-171 of the Act the bailee can
retain the lien on the goods of the Bailor and can refuse to deliver them back to Bailor until his due
remuneration for services he renders or any amount due is paid by the Bailor.

4. Compensation for the loss caused by non-disclosure of faults in goods Bailed:- The goods so bailed
contain a fault which is known to the bailor but he does not convey it to the bailee and as a result
thereof bailee sustains some injury. The bailee can ask for the compensation.

5. Loss caused by the defects of thing bailed:- When the things bailed for hire or on rent the bailee can
ask for compensations for the loss or injury caused by both latent or patent defects of the thing bailed
irrespective of awareness of bailor about those defects as provided in sec.150 of the Act.

6. Right to sue: The bailee has the right to sue the wrong-doer who wrongfully deprives the bailee of
the use or possession of the goods bailed or does them any injury on the basis of instructions in Sec.180
of the Act.

DUTIES OF THE BAILEE:- A bailee has to observe the following duties:-

1. Duty to take reasonable care of the goods bailed: under section 151-152 of the act bailee is bound
to take reasonable care of goods bailed to him as man of ordinary prudent under similar circumstances
as he is taking care of his own goods.

2. Duties not make unauthorised use of the goods bailed: Section 153-154 of the act bailee is not
authorised to make unauthorised use of the goods bailed to him.
3. Duty not to mix bailor’s goods with his own goods: Act says through its section155 and 157 that
bailee may not mix the bailed goods with his own goods which will create a problem at the time of
return of the goods to bailor.

4. Duty to return the goods on fulfilment of the purpose: Section 159-161and 165-167 provides that
when the purpose is accomplished the bailee has to return the goods to bailor or to disposed of as per
his directions.

5. Duty to deliver to the bailor increase or profit on the goods bailed:- Under secion 163 of the Act it is
the duty of the bailee to pay to bailor the profits earned through the goods bailed or any increase
thereby.

CONCLUSION:- If the bailee performed his duties with entire of his dedications, honesty and in good-
faith and also to enjoy his rights on the basis of the provisions laid down in the Contact Act then there
will be no creation of any problem and the agreement will also be fulfilled.

UNIT- III

11. Explain various ways in which an agency relationship is created. Also describe about the different
kinds of Agent?

INTRODUCTION:- An agent is a person employed to do any act for another or to represent another in
dealing with third parties. The person for whom such act is done or who is so represented is called the
principal. Where one person mere gives advice to another in matter of business agency does not arise
because of such advice only does not create an Agency. Sayed Abdul Khader v/s Rami Reddy,1979.

The following are the various ways in which a relationship of agency is created:-

WHO MAY EMPLOY AGENT:- No person can employ an agent if he does not possess capacity to
contract. So a minor or person of unsound mind cannot become the principal under section 183 of the
Indian Contract Act.

WHO MAY BE AN AGENT:- According to section 184 of the Act any person can be appointed as an agent
but a person who is not of age of majority and of sound mind cannot be made personally liable for the
act done on behalf of the principal. Minor can create contractual relation but a minor agent cannot be
made personally liable to the principal for the misconduct like an adult agent.

CONSIDERATION: No consideration is required for the creation of an Agency under section 185 of the
Act. A case of Digvijay Cement Co.Ltd. v/s State Trading Corpn., 2006.

KINDS OF AGENT:- On the basis of provisions available in the Contract Act the following are kinds of
Agent in the business of Agency:-

1. Del-Credere Agent:- Such type of Agent who for extra remuneration undertakes the liability of
guarantee the due performance of the contract by the other party. He is also responsible for the
solvency and performance of their contracts by the other parties.

2. COMMISSION AGENT:- A commission agent is person who purchases and sells goods in the market
on behalf of his employer on the best possible terms and who gets commission for his labor.

3. FACTOR:- He is such type of agent who is given the possession of the goods for the purpose of
selling them. He is entitled to sell the goods in his own name. A factor has a right to retain the goods for
a general balance of accounts.

4. BROKER:- He is also to be known in the name of Mercantile Agent employed for the purpose of sale
and sale of goods. The main duty of a broker is to establish privity between two parties for a transaction
and he gets commission for his labour. He is not entrusted with the possession of the goods. He merely
brings two parties together and if the deal is materialized he becomes entitled to the commission.

5. CO-AGENT:- Where several persons are expressly authorized with no stipulation that anyone or
more of them shall be authorized to act in name of the whole body. They have a joint authority and they
are called co-Agents.

6. Sub-Agent:- The sub-agents are usually appointed by the original Agent in the business of Agency.
He works under the control of original Agent.

7. PACCA- AARTIA:- He is also known by this name only and he works in the open market to sell the
goods on commission basis. He only sells the goods.

CONCLUSION:- As regards to determine whether relationship is that of Agent and Principal or that of
Master and servant. Agent has to remain faithful to his principal and has work in good faith in the
business of Agency. There must be relation in between principal and the agent. Merely giving advice to
another person in the matter of business does not arise any business of agency. The main object of the
agency business that the agent makes the principal answerable to third person.
12. What are the circumstances in which Agency is terminated?

INTRODUCTION:- Contract entered into through an Agent and obligations arising from the acts done by
an agent be enforced in the same manner and will have the same legal consequences as if the contract
has been entered into and the acts done the principal in person as described in section 226 of the Act.
Where a Agent does not work in good faith and is not loyal to his principal and tries to commit fraud or
misrepresent in the business of Agency then principal is bound to take steps towards termination of the
agency.

The following may the reasons which can be responsible for the termination of the Agency:-

1. By the principal revoking his authority: Under section 203 of Contract Act-1872 lays down that, the
principal may save or otherwise revoke the authority given to his agent at any time before the authority
has been exercised so to bind the principal.

2. By the Agent renouncing the business of the Agency:- Section 206 of Indian Contract Act, 1872
provides that, principal can revoke the agent’s authority so also the agent can renounce the agency by
giving a reasonable notice of renunciation otherwise he will be liable to make the loss good for any
damage. Sec. 207 further mentions that like revocation the renunciation may also be express or implied
in the conduct of agent.

3. By the business of the agency being completed:- In term of contract where the period of completion
of the business is made the agency automatically stands terminated.

4. By either the principal being adjudicated an insolvent: Section 201 of the Act clearly indicates that,
the agency which may be validy created stands revoked in the event of different situations including the
death or insanity of the principal or the agent or by insolvency of the principal.

5. Principal should give reasonable notice of revocation:- Provisions says that a reasonable notice of
the revocation when he have the justification to revoke the authority under sec.206.
6. By either the principal or Agent dying or becoming unsound mind: Section 201 also describes that,
when principal dying or becoming of unsound mind agent is bound o take on behalf of the
representatives of his late principal all reasonable steps for the protection of interests of agency.

7. By the happening of any event rendering the agency unlawful: - Whenever there is declaration of
war the principal and agent may become alien enemies also comes in the way of termination of the
agency.

8. If a limited period is given:- If the agency is for a fixed term, although with the possibility of fresh
appointment after the expiry of the term it automatically terminates on expiry of the said term such
agency cannot be said to be irrevocable as in the case of P. sukhdev v/s Commissioner of Endowments-
1997. Under sec.205.

9. MANNER AND CIRCUMSTANCES OF REVOCATION:- The principal may have where the agent has
himself an interest in the property which forms the subject matter of the agency, revoke the authority
given to his agent at any time before the authority has been exercised so as to bind the principal under
section 203 of the Act.

The Principal cannot revoke the authority given to his agent after the agent has partly exercised his
authority so far as regards such acts and obligations as arise from acts already done in the Agency as laid
down in the section 204 of the Act.

The reasonable notice of revocation is essential. Revocation may be express or implied in the Contract of
the business under section 206 of the act.

The revocation and renunciation may be expressed or may be implied in the conduct of the principal or
agent respectively under section 207 of the act.

ILLUSTRATION: - A empowers B to let A’s house. Subsequently A lets it himself. This implied revocation
of B’s authority.

CONCLUSION:- The effect of termination of Agency is on the maximum level to the Agent about his
earnings and also put the principal in financial losses. Agent must remain faithful in the business of
Agency. He should rendered the accounts, financial matters, appointment of sub-agents and other
activities relating to Agency to the notice of his principal failing which it leads to termination of Agency.
13. Discuss fully the extent of Principals liabilities to third parties for the Act of the Agent.

INTRODUCTION:- Agent is a person employed to do any act for another or to represent another in
dealing with third persons. There one of the most essential characteristics of Agency is that the agent
makes the principal answerable to third persons. Principal is held bound by the obligations incurred on
his behalf by his agent. Section 226 to 228 of the Act deals with the law regarding the obligations of
principal for the contract of his Agent.

We will find from the following provisions and illustrations that how the Principal’s liabilities and is
bound answerable to the third parties for the acts done by his agent:-

1. Principal’s obligation for acts of Agents:- Section 226 of the Indian Contract Act provides that
contract entered into through an Agent and obligations arising from acts done by an Agent and will have
the same legal consequences as if the contract has been entered into and the acts done by the principal
in person. This section is based on the principle act as in Maxim which means that the act of an Agent is
the act of the principal.
ILLUSTRATION:- A being B’s Agent with the authority to receive money on his behalf receives from C a
sum of money due to B. C is discharged of his obligation to pay the sum in question to B.

2. When an agent does more than he is authorized to do and when the part of what he does, which is
within his authority, can be separated from the part which is beyond his authority the principal is liable
only for so much part of what he does as is within Agent’s authority as provided in Section 227 of the
Act.

ILLUSTRATION:- A being the owner of a ship and cargo authorizes B to procure an insurance for
Rs.4000/- on the ship. B procures a policy for Rs.4000/- on the ship and another for the like sum on the
cargo. A is bound to pay the premium for the policy on the ship but not the premium for the policy on
the cargo.

3. An agent does more than he is authorized to do and what he does beyond the scope of his authority
is not separable from what is within it the principal is not liable for the transaction as provided in the
section 228 of the Act.

ILLUSTRATION:- Where A authorizes B to buy 5000 sheep for him and B buys 5000 sheep and 200 lambs
for a sum rupees 6000/- . A may repudiate the whole transaction.

4. OSTENSIBLE AUTHORITY:- Section 237 of the Contract Act embodies the principle of ostensible
authority. The section lays down 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
the words or conduct induced such third persons to believe that such acts and obligations were within
the scope of the Agent’s authority.”

ILLUSTRATION:- A being B’s agent for the sale of goods induces C to buy them by misrepresentation
which he was not authorized by B to make. The contract is voidable as between B and C, at the opinion
of C. Under section 238 of the Act misrepresentation or fraud committed by an Agent may be classified
into two categories:-

i) Under his actual or ostensible authority.

ii) Which is not covered within his authority, the principal is liable for the acts which fall under
actual or ostensible authority.

5. A leading case on this subject is of Lloyds v/s Grace Smith in which it was held that a principal is
liable for the fraud of his agent within the scope of his authority whether the fraud is committed for the
benefit of the Principal or for the benefit of Agent.

CONCLUSION:- On the perusal studies of the above provisions and the illustrations it is seen that the
liabilities of the Principal towards third persons are based on the acts done by his agents. However in
some cases it is also seen and Principal is not liable for any wrongful act or omission of his Agent while
acting without the principal authority outside the ordinary course of employment or while not acting nor
purporting to act on his principal’s behalf.
14. Define the term Sub-Agent. How for is principal bound by the acts of Sub-Agents. Distinguish
between Sub-Agent and Substituted Agent.

INTRODUCTION:- A rule which based on the principle that Agency is a contract based on trust and
mutual confidence between the parties. A principal may have the mutual confidence in his Agent but
not in the subsequent sub Agent appointed by the Agent. There is a provision regarding ‘delegates non-
protest delegare’ which means of this maximum is that an agent to whom another has delegated his
own authority cannot delegate that authority to a third person.

PROVISIONS MADE IN THE ACT:- Under section 190 of the Contract Act which deals with delegation of
an authority by the Agent describes as under:-

“An agent cannot lawfully employ another to perform acts which he has expressly or impliedly
undertaken to perform personally unless by the ordinary custom or trade a sub-agent may or from the
nature of the agency a sub-agent must be employed.”

However the general principle is that the agent cannot delegate his authority to a third person but there
are two exceptions to this general rule. These are:-

i) When the ordinary custom of trade permits employment of a sub-agent.

ii) When the nature of agency demands that employment of a su-agent is necessary by the Agent.

Although there are two exceptional conditions no agent is authorized to delegate his authority it the
nature of his act is purely managerial and he is supposed to use his personal skill in discharge of his duty
or where he is personally required to perform his duties.

SUB-AGENT:- Sub agent is a person employed by and acting under the control of the original Agent in
the business of Agency under section 191 of the Act.

LEGAL POSITION OF SUB-AGENT PROPERLY APPOINTED:- Sub Agent may be either properly appointed or
improperly appointed. If he is appointed by the Agent with the authority of his principal he is called sub-
agent properly appointed. If he is appointed without the authority of principal he is improperly
appointed.

When the sub-agent is appointed properly with the consent of the principal, the principal is bound by his
acts and is responsible for his action as if he was an agent appointed by the principal.

The sub-agent is not responsible for his acts to principal. He is responsible only for such acts to the
original Agent.

But if the sub-agent is guilty of fraud or willful wrong against the principal he becomes directly
responsible to the principal under section 192 of the Act.

Difference between sub-Agent & substitute Agent

SUB-AGENT

Sub Agent is a person employed by and acting under the control of the original agent in the business of
agency.

A sub-agent is not generally responsible to the principal but he is responsible to the agent.

There is no privity of contract between sub-agent and principal.

SUBSTITUTED AGENT

Substituted agent can be nominated by the original Agent to act for the principal for a certain part of the
business of agency.

A substituted agent by his mere appointment becomes immediately responsible to his principal.

A privity of contract is created between the principal and the substituted Agent.

CONCLUSION:- There is lot of difference in between sub-agent and substituted agent one is appointed
by the original agent is immediate responsible to the original whereas the substituted agent is directly
responsible to the principal. He is appointed for some part of the business of agency.
UNIT-IV

15. Sharing of Profits in business is not conclusive evidence of the existence of partnership.

INTRODUCTION:- The object of every partnership must be to carry on a business for the sake of profits
and share the same. Therefore clubs, societies which do not aim at making profits are not said to be a
partnership. The definition of term ‘Profits’ in the Partnership Act is that ‘net- gains’ i.e. he excess of the
returns over outlay. At one time it was thought that a person who shared the profits must incur the
liability also as he was deemed to be a Partner as it was held in a case of Grace v/s Smith, 1775. This
principle was again confirmed in a case of Waugh v/s Carver, 1793, it was held that the person sharing
the profits does not always incur the liability of partners unless the real relation between them is that of
partners.

ESSENTIALS:- Although sharing of profits is one of the essential elements of every partnership but every
person who shares the profits need not always be a partner.

Example No.1: - I may pay a share of profits to the manager of my business instead paying him fixed
salary so that he may takes more interest in the progress of the business, such person sharing the profits
is simply my servant or agent but not my partner. Example No. 2:- A share of profits may be paid by a
business man to a money-lender by way of payment towards the return of his loan and interest thereon,
such a money-lender does not thereby become a partner.

a. The principle laid down in Cox v/s Hickman-1860: this principle forms the basis of the provisions of
section 6 of the Partnership Act which gives a caution that the presence of only some of essentials of
partnership does not necessarily result in partnership. For determining the existence of partnership
there must be had to the real relation between the parties after taking all the relevant facts into
consideration.

b. In determining whether a group of persons is or not a firm or whether a person is or is not a

partner in a firm. To answer this query an explanation is given below:
(i) Sharing of profits or of gross returns arising from property by persons holding a joint or common
interest in that property does not of itself make such persons as partners.

(ii) Receipt by a person of a share of the profits of a business or of a payment contingent upon the
earning of profits or varying with the profits earned by a business does not of itself make him a partner
with the persons carrying on the business and in particulars the receipt of such a share by a servant or
agent as remuneration a case of McLaren v/s Verschoyle-190l, or by a widow or child of a deceased
partner.

(iii) Mollow March & Co. v/s Courts of Wards-1872: In this case a Hindu Raja advanced a large amount to
a firm. Raja was given extensive powers of control over the business and he was to get commission on
profits until the repayment of loan with 12% interest. It was held by the Raja could not be made liable
for the debts contracted in the agreement was not to create Partnership but simply to provide security.

(iv) In a case of Walker v/s Hi4sch-1884: A person was working as clerk. The served a notice by the
defendants terminating his services. Clerk contented that he was a partner and claimed dissolution of
firm. I was held that though he shared the profits he was having the capacity of a servant only. He was
not a partner and could not see dissolution of the firm.

CONCLUSION:- On nut-shell it could be concluded that just sharing the profits in the business is not
conclusive existence of the partnership till it create some relationship between the persons who have
entered into Partnership.

16. How the firm is registered? What is the effect of Registration & Non-Registration of firms?

INTRODUCTION: - In the Contract Act it is not necessary that the firm should be registered at the time of
its formation. However a firm may be got registered at any-time after the creation of Partnership. Act
does not lay down any-time limit within which the firm should be registered provided in section 63 of
Partnership Act. The act does not impose any penalties for non registration of firms.There are some
disabilities are provided in sec.69 of the Act for unregistered firms and their partners.

HOW THE FIRM IS REGISTERED:- The partnership agreement or any transaction between the partners
and third parties is void on the basis of non-registration of partnership firm and the partners
themselves. In addition to the above no prudent partner or firm should hesitate to get his or its name
registered at the earliest possible opportunity. The procedure of registration is very simple as provided
in section 58 and 59 of the Act.
A registration of firm may be affected by submitting to the Registrar of Firms a statement in the
prescribed form and accompanied by the prescribed fee. The application must bear the following
information:-

The firm’s name. Place of business and the name of other places where the firm can carry on business.
Date of joining of each partner with their permanent addresses. The duration of the firm.

When the Registrar is satisfied that the above mentioned requirements have been complied with and
then he shall record an entry of statement in the register. This amounts to the registration of the firm.

Section 69 of the Act imposes certain claims in the Civil Courts. This section provides pressure which is to
be brought to bear on partners to have the firm and themselves registered. The pressure consists in
denying certain right of litigation to the firm or partners not registered under this act. A cause of action
arose when the firm was unregistered but was registered at the time of filing the suit. It was held in the
case of State of U.P., v/s Hamid Khan & Bros. and othrs-1986: it was held that section 69 to be
inapplicable in this case.

EFFECTS OF NON-REGISTRATION& REGISTRATION

ON REGISTRATION OF FIRM

ON NON-REGISTERED FIRM

Any partner, nominee and authorized agent can bring a suit to enforce a right arising from a contract
against any past or present partner and for the third parties too.

No partner, nominee and agent can bring a suit to enforce a right arising from a contract against any
firm or any past or present partner of the firm or third parties.

Registered firm can claim of set-off or other proceedings to enforce a right arising from a contract u/s 69
of the Act.

The disabilities as provided in sec.69 of the act i.e.to claim of set-off or other proceedings to enforce a
right arising from a contract.

Filing of the return every year is necessary.

It is not required to file the return by the un-registered firm.

Loonkaran v/s Ivan E. John, 1977, it was held that sec.69 is mandatory and unregistered partnership
firms cannot bring a suit to enforce a right arising out of a contract falling within the ambit of sec.69
void.
In M/s Balaji Constructions co., Mumbai v/s Mrs. Lira Siraj Sheikh, 2006 It was observed that the firm
was not registered on the date of filing of suit and person suing as partners were not shown in register
of firm and suit by such firm hit by section 69(2) of Partnership Act and was liable to be dismissed.

CONCLUSION :- It is very well established that the partnership agreement or transaction between the
partners and third parties is void on the ground of Non-Registration of the firm as well as of Partners. To
enforce any right arising out of a contract the registration of both firm and partners are necessary for
the benefit of the both.

17. Distinguish between partnership business and Joint Hindu family business.

INTRODUCTION: According to Partnership Act persons who have entered into partnership are
individually called partners and coactively a firm and the name under which their business is carried on
Is called firm name. In the eyes of law a firm is merely a collective name of individuals who have
entered into a partnership.

Whereas in Joint Hindu family business it is based on status of persons by virtue of his being born in the
particular family. The distinctions between these two can be made on the basis of following facts:-

DIFFERENCE

ORDINARY PARTERNSHIP

JOINT HINDU FAMILY BUSINESS

An agreement between the parties to join the partnership is necessary.

No such agreement is required. A joint family business is created by operation of law.

The members of ordinary partnership have no interest in the partnership by birth.

The members of the joint family have their interest & become shareholders and entitled to profits in the
business by birth.
The partnership in ordinary partnership is automatically dissolved in case of death of any partner.

On the death of one or more members the joint family business does not dissolve.

In case of ordinary partnership each partner has to render accounts to his co-partners.

In case of joint family business there is no accounting between the member and neither any of them can
ask for the account regarding profits and losses of the business.

In ordinary partnership each partner is the agent of the firm for the purpose of business of the firm.

In joint family business the manager or managers has as implied authority to contract, debts and pledge
the property and credit of the family for the ordinary purposes of family business.

In case of ordinary partnership the relationship between partners arises out of a contract.

In joint family business the coparceners are the joint owners of the family property and their mutual
rights are the result of a status and not a contract.

CONCLUSION:- After going through the facts mentioned above it are clear that there are lot and lot of
difference in between an ordinary Partnership and Joint Hindu family business. Ordinary partnership is a
result of agreement between the parties to join partnership to share the profits earned by the business
being carried out from partnership whereas in joint family business there is no need of an agreement it
is created by operation of law. In ordinary partnership each of the partners has to render the account
and to work as an agent. In joint business there is no need to render account of profit and loss.

18. Discuss the essentials of Partnership Firm.

INTRODUCTION: - Indian partnership Act was enacted in 1932 and it came into force on Ist day of
October, 1932. A partnership arises from a contract and therefore such a contract is governed not only
by the provisions of the Partnership Act but also by general law of contract.

DEFINITION OF PARTNERSHIP:- Kent’s view “Partnership as a contract of two or more competent

persons to place their money, efforts, labour and skill or some of them in lawful commerce or business
and to share the profit and bear the loss in certain proportions. “Dixon defines partnership as, “Group of
Persons”. According of Pollock, “Partnership is a relation which subsists between persons who have
agreed to share the profits of a business carried on by all or any of them on behalf of all of them.”
Definition:- Section 4 of the Indian Partnership Act defines the ‘Partnership’ as under:-Partnership is the
relation between persons who have agreed to share the profits of a business carried on by all or any of
them acting for all.”

NATURE OF PARTNERSHIP:- Partnership is a form of business organization, where two or more persons
join together for jointly carrying on some business. It is an improvement over the ‘Sole-trade’ business,
where one single individual with his own resources, skill and effort carries on his own business. Any two
or more persons can join together for creating Partnership.

In certain respects a partnership is a more suitable form of business organization than a Company. For
the creation of partnership just an agreement between various persons is required. Whereas in the case
of company there are a lot of procedural formalities which have to be gone through to create a
Company. In the case of company the control over regarding distribution of profits, holding of meetings,
maintaining of accounts runs through a statutory control. Whereas in partnership firm the partners are
the master of their affairs.

ESSENTIALS OF PARTNERSHIP: THE FOLLOWING ARE THE ESSENTIALS OF THE PARTNERSHIP:-

1. PERSONS WHO HAVE AGREED:- A question is arises at the preliminary stage is that, “ who are
the persons and who can agree for partnership:

(i) MINORS: - A minor is incompetent to contract case of Mohori Bibi v/s Damodardass Ghosh-
1903: Minor may not become partner but he can be admitted to benefit of partnership and can share
the profits. He cannot be liable for the losses.

(ii) CORPORATION: - A corporation is a legal person therefore corporation may enter into a
partnership with the condition only if the constitution of the corporation must empowers it to form a
partnership and not otherwise.

(iii) FIRM: - Firm is also recognized as a legal person in India and it cannot enter into a partnership.
A firm which is proprietorship firm or a company registered under the Company’s Act can very well
enter into a partnership but here is mentioned that partnership firm is not a legal person therefore it is
not competent to enter into a partnership. Duli chand v/s CIT, 1956.

(iv) ALIEN: - A national of other country may be a friendly alien or an enemy alien. A friendly Alien
can enter into Partnership but latter Cannot except when he is under the protection of that country.

2. TO SHARE THE PROFITS OF A BUSINESS:- This line consists the two parts: 1. To share the profit and
2. Of a business. However the explanation of these two terms are as under :-

(i) Business:-This definition is not exhaustive. The existence of business is essential unless there is
no intention to carry on business and to share the profits, there can be no partnership. Therefore the
objects of the partnership and business must be lawful. Case of R.R.Sharma v/s Ruben, 1946.
(ii) Sharing of Profits:- A case of Cox v/s Hickman, 1860: though sharing of the profits of business is
essential. The definition leave it opens as to how and when these profits are to be shared. In order to
continue the partnership the actual existence of a business carried on by partners with an agreement to
share profits of such business is essential.

(iii) Sharing of losses Grace V/s Smith-1775, Mutual Agency and Acting for all and to carry on the
business are the essential terms of the partnership.

CONCLUSION:- In order to constitute partnership there must not only be sharing of profits but there
must be also the relationship and the principle of agency. Section 4 of the act that there must be actual
existence of a business carried on by the partners with an agreement to share the profits of such
business is essential.

19. Principle/Doctrine of Holding Out.

INTRODUCTION:-Every partner is liable for all acts of the firm done while he is a partner. Therefore
generally a person who is not a partner in the firm cannot be made liable for an act of the firm. In
certain cases however a person who is not a partner in the firm may be deemed to be a partner or held
out to be a partner for the purpose of his liability towards a third party.

The basis of liability of such a person is not that he was himself a partner or was sharing the profits o4
was taking part in the management of the business but the basis is the application of the law of
estoppels because of which he is held out to be a partner or deemed to be a partner by “holding out”

DEFINITION OF HOLDING OUT Section 28 of the Partnership Act makes the following provision under
this doctrine:-

(1)Anyone who by words spoken or written or by conduct represents himself or knowingly permits
himself to be represented to be a partner in a firm is liable as a partner in that firm to anyone who has
on the faith of any such representation given credit to the firm, whether the person representing
himself or represented to be a partner does or does not know that the representation has reached the
person so giving credit.

(2) Where after a death of the partner the business is continued in the old firm name the continued use
of that name or of the deceased partner’s as a part thereof shall not itself make his legal representative
or his estate liable for any act of the firm done after his death.

ESSENTIAL INGREDIENTS: 1. Representation: - The representation may be in any of the three ways:-
 i) By words written or spoken: - In case of Bevanv/s The National Bank Ltd., a person permitted his name
to be used in the title of the firm. Therefore he was held liable under this principle.

ii) By conduct:- In the case of Parter v/s Lincell: a person by his conduct represented as a partner and
was held liable. Martyn v/s Gray-1863: It was held that by knowingly permitting himself or suffering
himself to be represented as a partner.

iii) Alleged Representation relied:- In the case of Munton v/s Rutherford: it was held that Mrs.Ruherford
was not liable as a partner by estoppels or holding out.

iv)Credit to Firm on Representation:- In the case of Oriental bank of Commerce v/s S.R.Kishore & Co.-
1992: It was held he was liable for the acts of the firm on the basis of the principle of “holding out”.
Section 28 of the Act is based upon the principle of estoppels by conduct. Where a man holds himself
out as a partner or allows others to do it, he is then properly stopped from denying the character he has
assumed, and upon the faith of which creditors may be presumed to have acted. A man doing so may be
rightly held liable as a partner by estoppels as held in a case of Mollwo March & Co. v/s Court of Wards-
1872.

The representation on which a case of “Holding Out” is sought to be established may be express or
implied it may consist of verbal or written statements or even may be by conduct. Form of
representation is not material in such case.

EXCEPTIONS TO THE DOCRINE OF HOLDING OUT:-

1. Tort: The principle of holding a person liable for act of a firm on the ground of holding out cannot be
extended to include liability arising out of tort.

2. Liability of Retired Partner: - The rule of holding-out provided in this section is also applicable to the
retired partner who retires from the firm without giving proper public notice of his retirement. In such
case person who even subsequent to the retirement give credit to the firm on the belief that he was a
partner will be entitled to hold him liable as held in a case of Scrarf v/s Jardine-1882.

3. Insolvency of Partner: - Insolvency of the partner extinguished as the liability of a partner and he
cannot be held liable even upon this doctrine.

4. Dormant Partner: His retirement does not require a public notice for bringing end to his liability.
According to proviso to section 45(1) of the partnership Act a dormant partner is not liable for the acts
done after the date on which he ceases to be a partner.

CONCLUSION: Anyone who by words spoken or written or by conduct represents himself or knowingly
permits himself to be represented to be a partner in firm is liable as a partner in that firm to anyone who
has on the faith of any such representation given credit to the firm, he must bear the consequences
u/s28.
REGISTRATION OF PARTNERSHIP FIRM

In the Act of Partnership there are provisions of registration of the partnership firm but there is no
where mention about the penalties for non-registration of firm. It is therefore quite optional for a firm
to get itself registered or not. It is also obvious that registration of the partnership firm will not less than
a boon when there arisen of the legal consequences at the later stage.

Section 69 of the Partnership Act imposes certain claims in the Civil Courts, this section also
provides the pressure which is to be brought to bear on the partners to have the firm and themselves
registered. The pressure consists denying of certain rights of litigation to the firm or partners not
registered under this Act. A case of State of U.P v/s Hamid Khan & Bros and others-1986.

In a case of Vatyapuri v/s M. Sundaresan-2002: It was held by the Court that the suit is not
maintainable as one of two remaining partners of an un-registered firm retired resulting in dissolution of
the firm and surviving sole partner filed suit for recovery of dues to dissolved partnership.

In another case of CIT v/s Jayalakshmi Rice and Oil Mills-1971: It was held by the Court that the
unregistered firm can bring a suit after getting the firm registered.

It was held by the Court that in the case where the suit is brought by the un-registered firm subsequent
registration of firm while suit is pending would cure this defect in the case of M/s Samy Uktha Cotton
Trading Co. v/s B.V.Suhhaiah-2005.

CONCLUSION:- Registration of the firm as well as of the partners is quite essential part of the business of
partnership. It also held the firm and the partners to avoid un-necessary hurdles for smooth running of
the business. The registration of the firm as well as of the partners is optional in the Partnership Act.

CONTINUING GUARANTEE:- A guarantee may be an ordinary guarantee or a continuing guarantee. A

continuing guarantee is different from an ordinary guarantee, as described in a case of Syndicate Bank
v/s Channaveerappa Beari-2006: in this case in ordinary guarantee the surety is liable only in respect of
a single transaction whereas in case of continuing guarantee the liability of the surety extends to any
successive transactions which come within its scope.

DEFININATION:- Section 129 of the Contract Act which provides that, “A guarantee which extends to a
series of transactions is called a “continuing guarantee.”

· Such guarantee may be in respect of a series transactions during a fixed period e.g. for one year. It
has been done in the case of Eastern Bank Ltd., v/s Parts Services of India Limited-1986:

· A in consideration that B will employ C in collecting the rent of B’s zamidari promises B to be
responsible, to the amount of Rs.5000/- for due collection and payment by C of those rents. This is a
continuing guarantee.

· A guarantees payment to B, a tea-dealer, to the amount of 100 pounds for any tea he may from
time to time supply to C. B supplies C with tea to the above value of l00 pounds and C pays B for it.
Afterwards B supplies C with a tea to the value of 200 pounds. C fails to pay. The guarantee given by A
was a continuing guarantee and he accordingly liable to pay extent of l00 pounds.

· A guarantees payment to B of the price of five sacks of flour to be delivered by B to C and to be paid
for in a month. B delivers five sack to C. C pays for them. Afterwards B delivers four sacks to C which C
did not pay for it. The guarantee given by A was not a continuing guarantee, and accordingly he is not
liable for the price of the four sacks.

CONCLUSION

No doubts the continuing guarantee is a different from the from an ordinary guarantee. In continuing
guarantee the liability of surety extends to a series of transactions. In continuing guarantee the surety
has been empowered to revoke a continuing guarantee for future transactions by giving a notice to the
creditor as it has been provided in section 130 of the Act. However his liability in respect of the
transactions which have already been made continues to exists. Whereas his liabilities for the future
transactions comes to an end.

CO-SURITIES
Sometimes there may be conditions in a contract of guarantee that there shall be a co-surety also.
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 the other person does not join. (It has
also been provided in section 144 of the act.) It means that in such a contract liability of the surety is
dependent on the condition precedent that a co-surety will join. The surety can be made liable under
such a contract only if the co-surety joins, otherwise not. On the basis of provision under section 128.

LIABILITY OF CO-SURETY

From the above statement it has been noticed that the liability of sureties is co-extensive with that of
the principal debtor. It implies that the creditor can proceed against the principal debtor or the surety
at his discretion unless it is otherwise provided in the contract.

The same principle is applicable with regard to the rights and liabilities of the co-sureties. Since the
liability of the co-surety is joint and several a co-surety cannot insist that the creditor should proceed
either against the principal debtor or against any other surety before proceeding against him.

A case in this regard is of State Bank of India v/s G.J.Herman-1998: It was held that neither the court nor
a co-surety can insist that the creditor should first proceed against another surety before proceeding
against him. Such direction would go against the co-extensiveness.

In the case of Bank of Bihar Ltd. v/s Dr. Damodar Prasad-1969: It was held that the liability of the surety
is immediate and cannot be defended until the creditor has exhausted all his remedies against the
principal debtor.

CONCLUSION

It has already been noted that section 128 declares that the liability of the surety is co-extensive with
that of principal debtor. The word co-extensive denotes that extent and can relate only to the quantum
of the principal debt. However the liability of the surety does not cease merely because of discharge
principal debtor from liability. Refer a case of Industrial Financial Corp. of India v/s Kannur Spinning &
Weaving Mills Ltd.-2002.
FEATURE OF BAIMENT:- Bailment consists in delivery of goods i.e. movable property by one person who
is generally the owner thereof to another person for some purpose. The goods are to be returned to
their owner after the purpose is accomplished or they are to dispose of according to the directions of
person delivering the goods.

For example :- When you take a fan on hire or give your suit for dry cleaning or you give your wrist
watch for repairs or give a parcel to a carrier for being transported to some place there is bailment in
each of above cases. DEFINITION:Section 148 of the Indian Contract Act defines the bailment as under:-

The bailment is a delivery of goods by one person to another for some purpose upon a contract
that they shall return the goods bailed to him when the purpose of contract is accomplished or to
disposed of the goods as per the directions of the bailor.

FEATURE OF BAILMENT:-The following are the feature of the bailment:-

1. Delivery of the goods for some purpose:- The delivery to the bailee may be made by doing anything
which has the effect of putting the goods in the possession of the intended bailee or of any person
authorised to hold them on his behalf. Refer a case of Jagdish Chandra Trikha v/s Punjab National
Bank:1998: the plaintiff deposited the jewellery worth Rs 3,72,000/- the bank as a bailee failed to take
due care of the goods hence bank was held liable to pay a sum of Rs.3,72,000.00 plus interest @ 12%
p.a.

2. There can be bailment without a contract:- In a case of Ram gulam v/s Govt. Of UP-1950: The
property of the plaintiff was stolen and recovered by the bank and kept in Maalkhana. It was again
stolen and could not be traced out. The court in point of decision in the case that bailment contract
cannot arise without a contract. The law itself recognises the finder of goods as bailee in some
subsequent cases so it was held that the bailment can be there even without a contract.

3. Return of goods after the work is achieved: Section 148 says that the bailee has to return the goods
as and when the purpose is accomplished or to disposed of them as per the directions of the bailor. Case
of Secy. Of State for India in Council v/s Sheo Singh-1880.

It is very easy to make sure that in the bailment of contract there is a delivery of the goods by one
person to another for some purpose. When the work or the purpose is accomplished it is the duty of the
Bailee to return back the goods so bailed to the Bailor.
KINDS OF AGENT:- ‘Agent’ is a person employed to do any act for another or to represent another in
dealing with third person. The person for whom such act is done or who is so represented is called the
‘Principal’. The agent acts on behalf of the principal depending upon on the authority he has been
given. The agent is of following kinds:-

1. Auctioneers: - Auctioneer is an agent whose business is to sell goods or other property by auction
i.e. by open sale. The authority vested in him is to sell the goods only and not to give warranties on
behalf of the seller.

2. Del credere Agent: - Such type of agent who works for extra remuneration. He takes the liability to
guarantee the due performance of the contract. He is responsible for the solvency and performance of
their contracts by the other parties and thus indemnifies employer against loss.

3. Commission Agent: Such type of agent who purchases and sells goods in the market on behalf of his
employer on the best possible terms and who paid commission for the labour of this agent.

4. Factor :- A Factor is an agent who is given the possession of goods for the purpose of selling them.
He entitled to sell the goods in his own name. He has the right to retain the goods for a general balance
of accouts.

5. Broker :- Broker is a mercantile agent employed for the purpose of sale and sale of goods. The main
duty of a broker is to establish privity between two parties for a transaction and he gets commission for
his labour.

6. Co-Agent: Where several persons are expressly authorised with no stipulation that anyone or more
of them shall be authorised to act in the name of whole body. They have a joint authority and they are
called co-agents.

7. Sub-Agent: such type of a person who employed and acting under the control of original agent in
the business of agency.

8. Pacca Artia: He also works on commission basis. He gets the goods from his principal and sells them
in the market.

Keeping in view the above facts we can conclude that an agent is a person employed to do any act for
another or represent another in dealing with third persons. Where one person mere gives an advice to
another in matter of business of agency does not arise because of such advice agency does not create.
NATURE OF PARTNERSHIP:- Section 4 of Indian Partnership Act 1932, That partnership
is the relations which subsist between persons who have agreed to combine their property, labour and
skill in some business and to share the profits thereof between them. The Present definition is wider
than one contained in the Partnership Act.

DEFINITION:- According to Partnership Act 1932 the definition of the Partnership is as under:
“Partnership is the relation between persons who have agreed to share the profits of business carried
on by all or any of them acting for all.”

NATURE OF PARTNERSHIP

On the basis of provisions laid down in the act of partnership the nature of the partnership is of the
following aspects :-

i) There should be an agreement between the persons who wants to be partners.

ii) The purpose of creating partnership should be carrying on of business.

iii) The motive of creating of partnership should be earning and sharing of the profits.

iv) The business of the firm should be carried on by all of them or any of them acting for all.

The partnership Act is very much clear about it concept and it gives the directions regarding creation of
a partnership by having an agreement for sharing of their property, labour and skill in some business
which aimed to share the earning and profits.

TERMINATION OF AGENCY
INTRODUCTION:- The agency which may be validly created stands terminated in the event of different
situations as the principal revoked his authority, or by the agent renunciation of business of the agency
or the death or unsound mind any of the i.e. principal or of the agent. Even when the principal being
adjudicated in insolvent.

DEFINATION OF TERMINATION OF AGENCY

On the basis of provisions laid down in the Act under section 20, “That the agency is terminated by the
principal revoking his authority or by the Agent renouncing the business of the agency being completed
or either the principal or agent dying or becoming of unsound mind or by the principal being adjudicated
an insolvent under the provisions of any act for the time being in force in the relief of insolvent
debtors.”

DIFFERENT MODES OF TERMINATION OF AGENCY

The following are the modes under which an Agency can be terminated:-

1. By Revocation of Agent’s Authority:- The revocation of agent’s authority can be made by the
principal subject to the condition:-

i) Revocation may be express or implied as provided in section 207 of the Act.

2. By the Principal revoking his authority: Provisions have been made in the section 203 of the Act that
Principal may revoke his authority given to his agent.

3. By the Agent renouncing the business of the Agency:- Under section 207 of the Act, It is mentioned
that theAgent should give a reasonable notice to his Principal, otherwise Agent can be made liable to
make good any damage caused to Principal.

4. By the completion of Business of Agency:- When the agency is created for the fixed time by an
express or implied contract and after expiry of the term it automatically terminates on the expiry of the
said term u/s 205 of Act.

5. By either death or Unsound mind of Principal or of Agent:- Section 201 of the Act laid down that the
agency is stands terminated on the death of the Principal or of the Agent.

6. By the Principal being adjudicated an Insolvent:- Section 201 also says that the agency can be
terminated if principal being adjudicated as an insolvent.

In addition to above as provided in section 210 that all the sub-agencies shall remain terminated on the
termination of original agency.

CONCLUSION:- Agency can be terminated on the above mentioned reasons.

Extraaaaaaaaaaaaaaaa

Question No.6: What are the provisions regarding dissolution of partnership firm?

INTRODUCTION:- Dissolution of partnership means coming to an end of the relation known as

Partnership between various partners. It may also can be defined as the breaking up or extinction of the
relationship which subsisted between all the partners of the firm as held in a case of Santdas v/s
sheodyal-1971:

Here we are to note the significance of words in definition is, “between all partners “means every one of
the members of the firm cease to carry on business of partnership. Thus where one or more members
ceased to be partners in such firm while others remain the firm is not said to be dissolved.

DEFINITION: - The term dissolution of the Partnership firm has been defined in Section 39 of the
Partnership Act which lies as, “the dissolution of partnership between all the partners of a firm is called
the, ‘dissolution of the firm’.”

MODES OF DISSOLUTION: - There are five different modes of the dissolution of a firm:

Dissolution: = I without the interference of Court.

Ii. With the orders of the Court.

1. Without the interference of the Court: - there are four modes of dissolution of firm:-1.By Agreement
under section 40 of the Act. 2, Compulsory dissolution u/s-41. 3. on the happening of certain
contingencies u/s 42. 4. by Notice u/s 44 of Act.

1. Dissolution by Agreement: - 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.

Sometimes there may have been a contract between the partners indicating as to when and how a firm
may be dissolved, such firm can be dissolved in accordance to such contract. A firm may be dissolved
with the consent of all the partners or in accordance with a contract between the partners as provided
in section 40 of the Act. A case in this regard is of, EFD.Mehta v/s MFD Mehta-1971.

2.Compulsory dissolution:- Under Section 41 of the Act, if by the happening of any event which makes it
unlawful for the business of the firm or for the partners to carry it on in partnership.

(a)If by the adjudication of all the partners or of all the partners but one as insolvent declared by the
court.
3.On he happening of certain contingencies:- On the grounds of the gist of contract made between the
partners of a firm may dissolved :- i) If the partnership firm constituted for a fixed term. By the expiry of
the term firm can be dissolved. Ii) By the death of a partner may results dissolution unless rest of
partners agrees to contrary. iii) It firm is constituted to carry out one or more adventures or undertaking
by the completion thereof. On completion of the same firm may be dissolved.

4.Dissolution by Notice of Partnership:- If the partnership is azt will the firm may be dissolved by any
partner giving notice in writing to all the other partners of his intention dissolve the firm as provided in
section 44 of this act, with the following conditions:-

a). The notice for dissolution of partnership must contain the clear intention of dissolving the firm which
must be a final one. The date on which firm is dissolved must be indicated in the notice. A case of Mir
Abdul Khaliq v/s Addul Gaffar Serifff-1985.

b). Notice must be given in writing.

c). Written notice must be given to all other partners of the firm.

5. Dissolution By Court:- A firm may be dissolved at the suit of a partner on any of grounds which
provided in Section 44 of Act:-

i. That the partner has become of an unsound mind.

ii. That the partner has become in any way permanent incapable of performing his duties as a partner
but in the case of Whitewell v/s Arthur- 1885: it was held partial incapacity cannot be a ground for
dissolution of partnership firm.

iii. That a partner is guilty of such misconduct as would prejudicially affect the business of the firm, a
case of Harrison v/s Tenent-1856.

iv. That the business cannot be carried on except at loss.

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