Contracts - Teaching Plan and Reading Material - B.A.LL.B. (Hons.) - Sem-III PDF

Teaching Plan
of
Specific Contracts (Contract-II)
for
B.A. LL.B. (Hons.)
Semester: III
Session: 2020-2021
Compiled By :
Utkarsh Kumar Mishra,

Assistant Professor of Law,
Dharmashastra National Law University, Jabalpur
Table of Contents
Sr. No. Contents Page No.
1. Preface 2
2. Objectives of the Course 4
3. Syllabus 5
4. Teaching Plan 5
5. Reference Material 7
6. List of Assignments/Projects 9
7. Important Instructions 12
8. Annexure A [Format of Project Consultation Record] 14
9. Annexure B [Format of First Page of Project 15
Submission]
1
1.0 Preface
My dear students,
Welcome to the next level of your academic journey in the study of Contract Law!
It is my pleasure to be once again engaging you all in an academic pursuit towards

brainstorming over the body of Law of Contract. In this academic session, the Course
of Contract II will be dedicated to the study of Specific Contracts or Special
Contracts. As such, it would be an advanced study of Specific Contractual
arrangements based on your foundations of basic principles of the Law of Contract
which you studied in the last semester. We have already discussed in details, the basic
principles governing formation of a valid contract, various limitations on the freedom
of contract; how a contract gets discharged and its peculiar situations and also a
preliminary understanding of elementary yet fundamental remedies in the law of
contracts. However, the body of Law of Contract is not limited to the study of its
basic principles.
It is also significant to understand and fathom the specific forms of contractual

obligations which exist and their nuances. As I mentioned in my foundational classes
on the subject last semester, one enters into numerous contractual obligations every
day knowingly or unknowingly. We witness many contractual relationships
happening around us, be it in the form of exchange of goods or services, business
relationships, commercial arrangements etc. It is pertinent to mention that all those
varieties of relationships or arrangements are governed by specific rules and laws and
have specific nuances attached to them.
While during the study of Law of Tort, you studied the dynamics of tortious liability
in specific relationships like those of Master-Servant relationship etc. You have a
basic understanding of what a relationship looks like when one does something on
behalf of other. Similarly, you must have come across a discussion of a specific
relationship of Principal and Agent where also one works for the another on his
behalf. But have you ever wondered as to what are specific situations which create
such a relationship? How is it different from a Master Servant relationship? Are there
any specific rules governing such a relationship and its nature? On a preliminary note,
I must mention that a Principal-Agent relationship forms the backbone of the stability
of most of the contractual arrangements in the current times. Because of Globalisation
and ceaseless privatization of various sectors of economy, the business world has
become so complex and humongous in terms of its work scope, economies of scale
and scope, its coverage and functioning that without an idea of Principal and Agent
relationship, it would almost collapse! As a law student, one must have the
understanding of such a relationship in commercial arrangements so that one may
demarcate the liabilities of individuals in that situation.
Similarly, the nature and scope of contractual arrangements today is not just limited to
exchange of goods or services. But because of an unprecedented growth of financial
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institutions and banking commerce, arrangements for ensuring the realisation of
contractual obligations have also emerged. To maintain the sanctity of contract and
fulfilment of contractual obligations, systems have emerged whereby people or
financial institutions can stand up as guarantor for the performance of contractual
obligations. On the same note, there are types of contract which recognize a promise
to indemnify a person from the losses suffered due to either own conduct or the
conduct of any other person. In this connection, you might have heard about
indemnity clauses or guarantee clauses or contracts. Such arrangements are quite
unique as compared to traditional forms of Contracts of exchange or Sale of goods
etc. Hence, it is also pertinent to look into such arrangements of indemnity and
Guarantee where determination of fixation of liability becomes very important. Such
contracts either are entered into as a separate document and sometime appear in the
form of clauses in the parent document. It will be an interesting fact for you to know
that in the current times, most of the large scale contractual arrangements contain such
kind of clauses like those of guarantee by a third party which ensure the performance
of the obligation concerned. And, most importantly these clauses have also been
successful in maintaining trust in parties as to performance and also reduce the
likelihood of failure of contracts.
Apart from above mentioned arrangements, the traditional yet contemporary forms of
contractual relationships exist in the form of Partnerships/Firms and that of Seller and
buyer of Goods. If you remember, we discussed in the previous semester as to why
certain sections/provisions from the Indian Contract Act, 1872 were repealed and
brought forth in the form of specific legislations like Sale of Goods Act, 1930 and
Indian Partnership Act, 1932. This course would cater to the study of both these
legislations in detail. As law learners, we often hear these terms like companies,
corporations, firms etc and we tend to group them synonymously into one category.
However, in fact and in law, they are different and governed by different rules. If two
people A and B wish to set up a business, it can be that of a company, or a firm or a
corporation. But how will one determine the true nature of the business? This is the
true question to be answered. The question is significant because every type of
business entails a peculiar nature of rights and liabilities of individuals and in a given
fact situation it is important to know the nature of the business in order to determine
the rights and liabilities of the individuals concerned. On the top of this, once we have
understood what constitutes a ‘Partnership Firm’, it would become necessary to
understand the nuances of relationships of Partners with each other and with third
parties.
Similarly, even though we have discussed in our foundational course various

examples of Sale and purchase of Goods, however, in this advanced course, we would
be looking into Sale of Goods Act, 1930 in order to understand what actually
constitutes ‘Sale’? What constitutes ‘Goods’? The whole jurisprudence of the law of
Sale hinges upon the discussion of these two terms and related concepts. This is a
subject which will introduce you to the jurisprudential basis of the term ‘Property’
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and how it is treated in law. To mention briefly, property can be both movable or
immovable, but in this course, we would be focussing on understanding the rules on
movable property. You will be specifically studying about the transfer of Immovable
Property in future semesters under the subject law of Transfer of Property Act. In the
same vein, we will be delving deep into discussions on rights and liabilities of a buyer
and seller. You might have heard about the traditional legal algorithm ‘Let the buyer
beware’ or ‘Caveat emptor’ as it has been traditionally given that significance in law
of transactions. However, you will be interested in knowing how the effect of this
doctrine has been almost reduced down by an emerging legal dimensions of ‘Caveat
Venditor’. We will be indulging ourselves in these discussions.
Up next, we will be looking into the various types of remedies on the breach on
contractual arrangements mentioned above. Last semester, we focussed on the
traditional remedies of Compensation under Section 73-74 of Indian Contract Act,
1872 and briefly looked into the remedy of Specific performance under the Specific
Relief Act, 1963. However, in this course we would be looking into detail, the
Specific Relief in the form of Specific Performance and Preventive Relief in the form
of injunctions which are given by the courts in cases of contracts under the Specific
Relief Act, 1963. On the top of this, the Specific Relief Act, 1963 has also undergone
a significant amendment which has introduced a modern remedy of ‘Substituted
performance’ and special provisions for Infrastructural projects. All these would be a
subject matter of discussion in this category. However, most interesting would be to
know and understand the force behind this amendment (2018) and the Law
Commission Report which recommended the changes. This discussion would also
open gates of your understanding the crisis happening in the current times due to
COVID-19 where contractual operations have been stalled and are facing
performance related issues.
Lastly, an intriguing portion of this course curriculum has been dedicated to learning
and understanding of basic tenets of Contract Drafting and various documents of
contractual nature which we see or hear about in our daily lives. For the purpose of a
better evaluation of your understanding of this portion, the project activity for
Contract II has also been dedicated to the clinical drafting of contractual documents
where a student would learn to draft contracts in various situations. This module is
significant because it will give you an edge in practically understanding the applicable
legislations to a particular situation and various clauses that become highly important
in constituting such documents.
So, students, I wish that we engage in good discussions on the various issues outlined
above and I must mention that before the beginning of classes on Contract II, you
must thoroughly revise the basic principles of Contracts discussed under sections 1 to
75 in the Indian Contract Act, 1872 so that it becomes easier for you to have an
advanced outlook of the various contractual arrangements.
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2.0 Objectives of the Course
As explained in the outline above, Contract II (Specific Contracts) is an advanced
study of Basic Principles governing the Law of Contracts applied in specific situations
and complex business arrangements. It aims to further enhance the understanding of
students on the Law of Contracts, while specifically focusing on various forms and
types of Specific Contracts and the laws relating to them. The course aims:
I. To give an exposure to the students of various nuances of Specific Contracts.

II. To encourage students to appreciate the relevant critical issues pertaining to
the peculiar cases of Specific Contracts.
III. To enable the students to understand the dynamics of Specific Legislations
like, Sale of Goods Act 1930, Indian Partnership Act, 1932, The Limited
Liability Partnership Act, 2008 and The Specific Relief Act, 1963 (as
amended by 2018 Amendment) in relation to the Indian Contract Act, 1872.
IV. To expose the students to peculiarities of Contractual documents and the
various clauses and payment systems in contractual obligations.
3.0 Syllabus
S. No. Name of the Module Contents of the Module

1 Special Contracts under the Indian 1. Significance of Specific Contracts
Contract Act, 1872. 2. Contracts of Indemnity and Guarantee
3. Doctrine of Subrogation
4. Contract of Bailment
5. Bailment of Pledges
2 Agency and the Nature of 1. Agency under the Indian Contract Act
Partnership 2. Partners, Partnership and Relationship
of Partners with other Partners
3. Relationship of Partners with Third
Parties
4. Registration of Firm
5. Dissolution of Firm
3 Contract of Sale and Agreement to 1. Concept of Goods and Contract of Sale
Sell 2. Stipulations: Conditions and
Warranties
3. Doctrine of Caveat Emptor and
Modern Constructions
4. Effects of Contract of Sale
5. Rights of unpaid Seller
4 The Remedies of Specific Relief and 1. Specific Performance of Contracts
Preventive Relief under the Specific 2. Amendments to SRA 1963: A Critical
Relief Act, 1963 Discussion
3. Substituted Performance of Contracts
4. Rescission of Contracts
5. Preventive Relief in Contracts:
Injunctions
5 Drafting of Contractual Documents 1.Basic Principles and Template of
and Specific Documents in Contract Drafting
5
Contracts 2. Types of Clauses in Contracts
3. Negotiable Instruments and the Parties
4. Letters of Credit
5. Bills of Lading and Charter Parties
4.0 Tentative Lecture/Teaching Schedule
Sr. No. Topic Number of

Lectures
Module I
1. Significance of Specific Contracts 1
2. Contracts of Indemnity and Guarantee 4
3. Doctrine of Subrogation 1
4. Contract of Bailment 4
5. Bailment of Pledges 2
Total Lectures 12
Module II
6. Agency under the Indian Contract Act 7
7. Partners, Partnership and Relationship of Partners with other 5
Partners
8. Relationship of Partners with Third Parties 3
9. Registration of Firm 1
10. Dissolution of Firm 3
Total Lectures 19
Module III
11. Concept of Goods and Contract of Sale 3
12. Stipulations: Conditions and Warranties 2
13. Doctrine of Caveat Emptor and Modern Constructions 2
14. Effects of Contract of Sale 4
15. Rights of unpaid Seller 2
Total Lectures 13
Module IV
16. Specific Performance of Contracts 2
17. Amendments to SRA 1963: A Critical Discussion 2
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18. Substituted Performance of Contracts 1
19. Rescission of Contracts 1
20. Preventive Relief in Contracts: Injunctions 2
Total Lectures 8
Module V
21. Basic Principles and Template of Contract Drafting 2
22. Types of Clauses in Contracts 1
23. Negotiable Instruments and the Parties 2
24. Letters of Credit 1
25. Bills of Lading and Charter Parties 2
Total Lectures 8
Total Lectures Proposed to be delivered 60
5.0 Reference Material
5.1 Module I
5.1.1 Legislation: Indian Contract Act, 1872. [Sections 124-181]

5.1.2 Books for reference: Nilima Bhadbhade (ed.), Mulla, Indian Contract
Act and Specific Reliefs, Butterworth’s India, New Delhi, Vol. I & II,
(12th Edn.- 2001); Dr. Avtar Singh, Law of Contract, EBC, Lucknow
(9th Edn. – 2005)
5.1.3 Case Discussions (Compulsory)
1. State Bank of India vs. Mula Sahakari Karkhana Ltd, AIR 2007 SC
2361
2. Bank of Bihar Ltd vs. Dr. Damodar, AIR 1969 SC 297
3. Sri Hanuman Steel Rolling Mill vs. CESC Ltd, AIR 1996 Cal 449
4. R. D. Saxena vs. Balram Prasad Sharma, AIR 2000 SC 2912
5.1.4 Case Discussion for reference:
1. Calcutta Credit Corpn. Ltd vs. His Royal Highness Prince Peter of
Greece, AIR 1964 Cal 374
5.2 Module II
5.2.1 Legislations: Indian Contract Act, 1872. [182-238]; Indian Partnership

Act, 1932 [Section 1 to 38; 39-72]
Act and Specific Reliefs, Butterworth’s India, New Delhi, Vol. I & II,
(12th Edn.- 2001); Dr. Avtar Singh, Law of Contract, EBC, Lucknow
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(9th Edn. – 2005); Pollock and Mulla, Indian Partnership Act, 1932,
Lexis Nexis, 2019.
5.2.3 Case Discussions (Compulsory)
1. K. D. Kamath and Co. vs. CIT, (1971) 2 SCC 873
2. Cox vs. Hickman, (1860) 8 HLC 268
5.3 Module III
5.3.1 Legislation: Sale of Goods Act, 1930. [Section 1 to 54]

5.3.2 Books for reference: Avtar Singh, Law of Sale of Goods, 8th edition,
2018; Pollock and Mulla, Sale of Goods Act, Lexis Nexis, 10th Edition, 2017,
Revised by Akshay Sapre.
5.3.3 Case Discussions (For reference)
1. Commr. of Sales Tax, M.P. v M.P. Electricity Board, Jabalpur, AIR 1970
SC 732
2. State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd., 1959 SCR 379
3. Vishnu Agencies (P) Ltd. v. Commercial Tax Officer, AIR 1978 SC 449:
(1978) 1 SCC 520
4. Coffee Board, Karnataka v. Commr. of Commercial Taxes, AIR 1988 SC
1487
5. Commr. of Commercial Taxes v. Hindustan Aeronautics Ltd., AIR 1972 SC
744: (1972) 1 SCC 395
6. Sentinel Rolling Shutters & Engg. Co. (P) Ltd. v. CST, AIR 1978 SC 545:
(1978) 4 SCC 260
7. Northern India Caterers (India) Ltd. v. Lt. Governor of Delhi (1978) 4
SCC 36 & (1980) 2 SCR 650
8. State of Karnataka v. Udipikrishna Bhawan (1981) 3 SCC 76
9. Larsen & Toubro Ltd. v. State of Karnataka, (2014) 1 SCC 708
10. Kone Elevators v. State of Tamil Nadu (2014) 7 SCC 1
11. State of Karnataka and Ors. v. Pro Lab and Ors. AIR 2015 SC 1098
12. Sundaram Finance Ltd. v. State of Kerala, AIR 1966 SC 1178: (1966) 2
SCR 828
13. Priest v. Last (1903) 2 KB 148
14. British Paints (India) Ltd. v. Union of India, AIR 1971 Cal. 393
15. Niblett v. Confectioners Material Co. Ltd. (1921) 3 KB 387
16. Jones v. Just (1868) 3 Q.B. 197
17. Richard Thorold Grant v. Australian Knitting Mill, Ltd. AIR 1936 PC 34
18. Bristal Tramways v. Fiat Motors Ltd. (1910) 2 KB 831
19. CIT v. Mysore Chromite Ltd. (1955) 1 SCR 849: AIR 1955 SC 98
20. Mysore Sugar Co. Ltd., Bangalore v. Manohar Metal Industries, Chikpet,
Bangalore AIR 1982 Kant. 283 278
21. Gopalakrishna Pillai v. K.M. Mani (1984) 2 SCC 83: AIR 1984 SC 216
8
5.4 Module IV
5.4.1 Legislations: Specific Relief Act, 1963 [Section 1-4; 9-14 A; 15-16;
20-24; 27; 29-30; 36-42]
5.4.2 Expert Committee Report on Specific Relief Act, 1963, May 2016,
Ministry of Law and Justice, Government of India.
Act and Specific Reliefs, Butterworth’s India, New Delhi, Vol. I & II, (12th Edn.-
2001); Dr. Avtar Singh, Law of Contract, EBC, Lucknow (9th Edn. – 2005)
5.5 Module V
5.5.1 Books for Reference: Bhashyam and Adiga, Negotiable Instruments

rd
Act, 23 Edition, 2020, Bharat Law House; Ashwin Madhwan and Rodney D.
Ryder, Legal Writing and Contract Drafting, Bloomsbury India, 2018.
5.5.2 Legislation: Negotiable Instruments Act, 1881.
Note: Supplementary Reading and Reference Material will be provided to the students
for reference which is also part of the curriculum.
6.0 List of Assignment/Project Topics
The Project work for this course has been dedicated to Drafting of Various types of
Contractual Documents (Specific Contracts/ Related Documents) where students are required
to understand the nuances of basic drafting and apply them in a context. The purpose of
conducting this project work is to enable them understand the basics of contract drafting and
also developing an understanding of Contractual obligation in the different transactions.
General Question for all students:
Q. Create a Fact situation. Clearly demarcate the parties, transaction details, type of
transaction and draft an agreement/document (while clearly including all possible
important clauses) on the given subject matter as mentioned in the list below.
Following is the list of subject matters, roll number wise:
Section A
S. Enrollment Contract Drafting Question/Subject Matter

No. No.
1. BAL/002/19 An Affiliation Agreement between DNLU and other entity
2. BAL/003/19 Independent Contractor Agreement
3. BAL/004/19 A Lease Agreement
4. BAL/005/19 A Letter of Agreement
5. BAL/006/19 A Letter of Intent by DNLU for other person/entity
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6. BAL/009/19 A Plagiarism Software Agreement between DNLU and Plagiarism
Software Company
7. BAL/011/19 A Memorandum of Understanding between DNLU and another
entity
8. BAL/014/19 Non-disclosure Agreement between a corporate body and an
employee
9. BAL/015/19 Statement of Work/Task Order/Work Order by DNLU
10. BAL/016/19 A Purchase order by DNLU and a Contractor for delivery of certain
goods
11. BAL/017/19 Master Services Agreement
12. BAL/018/19 A Sale Deed/Agreement
13. BAL/019/19 A Click Wrap agreement
14. BAL/020/19 A browse Wrap agreement
15. BAL/021/19 A Shrink Wrap agreement
16. BAL/022/19 A Partnership Deed between Four Partners for running a hotel
business across the State of Madhya Pradesh
17. BAL/023/19 Tender by DNLU (Invitation Document)
18. BAL/024/19 A Copyright Agreement between the Publisher of a book and you
who has contributed a chapter in the book for publication
19. BAL/025/19 Technology Transfer Agreement
20. BAL/026/19 A Performance Agreement
21. BAL/027/19 Educational Database Access agreement between DNLU and an
educational database
22. BAL/028/19 Addendum to the Original Contract
23. BAL/029/19 Modification Agreement
24. BAL/030/19 A Standard Form of a Contract between a Real Estate Giant and a
Client
25. BAL/031/19 A Construction Agreement
26. BAL/032/19 Employement Contract between a Private Institution and an
Employee
27. BAL/033/19 Employement Contract between a Contractual Employee and a
Government Institution
28. BAL/034/19 A Government Contract
29. BAL/035/19 A Contract of Indemnity
30. BAL/036/19 A Contract of Guarantee
31. BAL/037/19 A Pre-nuptial Agreement
32. BAL/038/19 A Post-nuptial Agreement
33. BAL/039/19 An Arbitration agreement between two parties
34. BAL/040/19 A Mediation agreement between two parties
35. BAL/041/19 A Contract for Repair Services
36. BAL/042/19 A Contract for Transportation Services
37. BAL/043/19 A Contract for Renovation Services
38. BAL/044/19 Loan Agreement
39. BAL/045/19 A Wedding Photograph Contract
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40. BAL/046/19 Service Contract between Service Provider and Customer
41. BAL/047/19 Catering Agreement between DNLU Cultural Committee and
Jabalpur Caterers
42. BAL/048/19 DJ Contract for providing DJ services at DNLU National Cultural
and Sports Fest
43. BAL/049/19 Contract for Marriage Function Planners
44. BAL/050/19 A Partnership Agreement between Five persons for conducting a
business of electronic goods
45. BAL/051/19 A Contract for Setting and installation of Cameras in DNLU
46. BAL/052/19 An Agreement to Sell future goods
47. BAL/053/19 DNLU Website maintenance Agreement
48. BAL/054/19 Performance Guarantee Agreement
49. BAL/055/19 Construction and Renovation Agreement
50. BAL/056/19 Painting Agreement
51. BAL/057/19 Landscaping Agreement between the Landscaper and the Client
52. BAL/058/19 Contract for Cleaning Services as DNLU
53. BAL/059/19 Contract For Security guard services at DNLU
54. BAL/060/19 Day Care Agreement
55. BAL/123/19 Internship Agreement between an Organisation and a Student
56. BAL/124/19 A Sale Agreement for Sale and purchase on goods through an online
purchase platform
57. BAL/125/19 An agreement between Gym Services provider and the Client
58. BAL/126/19 Personal Training Agreement
59. BAL/127/19 A Sub-contractor Agreement
60. BAL/130/19 A retainer Agreement
Section B
S.
Enrollment No.
No.
1. BAL/061/19 A MoU between DNLU and other entity.
2. BAL/063/19 Investment Contract
3. BAL/064/19 A Franchise Agreement for Setting up Dominoes Pizza outlet
in an area
4. BAL/065/19 Non-compete Agreement
5. BAL/066/19 Agreement to Hire a Nanny for taking care of two children
6. BAL/067/19 A Manager Agreement for a Singer in Bollywood Industry
7. BAL/068/19 A Singer Contract with a Producer of a Film
8. BAL/069/19 Brand Ambassador Agreement for a Product
9. BAL/070/19 Photography Services Contract for a cultural event at DNLU
10. BAL/071/19 A Purchase Order Document
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11. BAL/072/19 Catering Services Agreement between DNLU and Dumna
Caterers for an Annual Function
12. BAL/074/19 A Shrink Wrap Agreement
13. BAL/075/19 A retainership Agreement
14. BAL/076/19 A Partnership Agreement between three partners who are
going to start a educational services limited liability
Partnership.
15. BAL/077/19 Website Development Agreement
16. BAL/078/19 Sponsorship Agreement between Entity A and DNLU for
sponsoring a cultural event
17. BAL/079/19 Web Hosting Agreement between a Web Hosting Provider and
a software application owner.
18. BAL/080/19 An agreement to sell future goods
19. BAL/081/19 A Wedding Photography Agreement between Arun and a
company providing photography services.
20. BAL/082/19 Performance Guarantee Agreement
21. BAL/083/19 A Contract for setting up and installation of Student Lockers in
DNLU Campus
22. BAL/084/19 Contract for providing Agency Services
23. BAL/085/19 A Standard form of Contract
24. BAL/086/19 Contract for Catering Services at a marriage function
25. BAL/087/19 Contract for Security Guard Services at DNLU
26. BAL/088/19 An Agreement for Sale of Wooden Furniture
27. BAL/089/19 A Letter of Intent from A to B
28. BAL/090/19 Tender Documents for Stationary at DNLU Jabalpur
29. BAL/091/19 Contract for Water Supply Services at DNLU
30. BAL/092/19 Third Party Insurance Agreement for a Four Wheeler
31. BAL/093/19 Royalty Agreement
32. BAL/094/19 Loan Agreement
33. BAL/095/19 Modification Agreement
34. BAL/096/19 Addendum to Original Contract
35. BAL/097/19 Warehouse Storage Agreement
36. BAL/098/19 An Agreement of bailment of pledge
37. BAL/099/19 A Guarantee Agreement
38. BAL/102/19 Vendor Agreement between an Organisation and a Vendor
39. BAL/103/19 Arbitration Agreement
40. BAL/104/19 Contract of Bailment of Goods
41. BAL/105/19 Real Estate Agency Agreement
42. BAL/106/19 Mobile Application Development Agreement
43. BAL/107/19 Escrow Agreement
44. BAL/108/19 Insurance Contract for Motor Vehicle
45. BAL/109/19 Car Purchase Agreement
46. BAL/110/19 Royalty Agreement
47. BAL/111/19 Tender by DNLU
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48. BAL/112/19 Agreement for DNLU website Designing
49. BAL/113/19 Debt Settlement Agreement
50. BAL/114/19 A Letter of Intent Document
51. BAL/115/19 Internet Service Agreement at the DNLU Campus
52. BAL/116/19 A Pharmacy Services Agreement
53. BAL/117/19 A Partnership Agreement for a Restaurant
54. BAL/118/19 Pre-nuptial Agreement
55. BAL/119/19 Post-nuptial Agreement
56. BAL/120/19 Advertising Agreement
57. BAL/121/19 Joint Venture Agreement for establishing a business operation
58. BAL/122/19 Agreement between four partners for a Limited Liability
Partnership in the City of Jabalpur.
59. BAL/128/19 Profit and Loss sharing Agreement between Four Partners of a
Partnership Firm.
60. BAL/129/19 A Car Rental Agreement
7.0 Instructions to Students

 All students shall carry Bare Acts while attending the class (be it offline or
online).
 The reading material, including the scholarly documents, Case Laws referred in
the course structure are all part of the course curriculum.
 The books cited are for the purpose of supplementary reading by the students and
the students should, while studying, combine the class discussions and lectures
with the reading of relevant portions in the books referred in the course structure
above.
 The above teaching schedule is tentative and is subject to change as per the need
and requirements of the session.
 The list of judgments recommended is only illustrative and new judgements may
be added to it during class-room discussion.
 Formatting/Content requirements and Other Information regarding Project

Submission:
I. There is NO page limit for the project work. It will depend upon the type
and nature of draft a student is required to prepare.
II. Remember, different contractual arrangements require inclusion of clauses
peculiar to that transaction.
III. On further clarity on the assignment and the clauses, one consultation with
the course teacher is necessary. Students however, are allowed to take
more consultations. For the same, Students must maintain a Consultation
Record.The same record must be attached at the end of the project at
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the time of final project submission. The Format of the consultation
record has also been attached with this document as Annexure A.
IV. It must be clarified here, that, if a student loses his/her consultation
record which was duly signed by the course instructor, it is entirely
his/her responsibility and marks shall NOT be awarded for the same
category of evaluation.
V. While making the projects, students must avoid plagiarism of information
and similarity of text from various sources. This factor will be taken
seriously while evaluating the submissions.
VI. First page of the project should clearly mention your project topic, the fact
situation briefly (created by the student), Name, Class enrolment, Section,
and submission date. A format of the First page for the project has been
attached with document as Annexure B.
VII. The document must be numbered properly.
VIII. Text Font: Garamond, Font size: 12, Line Spacing 1.5; Headings Font
size: 14, All text Justified Alignment.
IX. There should NOT be any footnoting/end-noting in the document as it
would be an Agreement Draft.
X. There should NOT be any border or unnecessary watermark on the
document.
XI. Viva Voce on the project submission would be conducted on the type
and nature of contractual document/draft and the laws/rules
governing the same.
XII. Students are advised to avoid the usage of Plastic Folders to cover the
documents. Students shall properly staple the pages and submit the project.
XIII. Extension/Relaxation in project submission to students would be given
only in the cases where the student is representing the University in an
Event or in all those cases which are considered by the Head of the
Department for such purpose, with the permission of the Head of the
Department and the concerned Faculty-In-Charge of the event concerned.
In such cases, prior permission for project submission relaxation must be
sought by the student. In any case, prior permission is not sought, the
submission will not be considered.
XIV. Date of Project Submission and Viva Voce will be notified by the Office
of the Head of the Department. Delay in submitting the projects and
appearing for viva on scheduled date and time will attract a penalty of 1
mark per day of default.
I wish you all the best for your endeavours!
Utkarsh Kumar Mishra,
Course Instructor and Teacher: Contract II, DNLU Jabalpur
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Annexure A
Dharmashastra National Law University,

Jabalpur
Project Consultation Record
Subject: Contract II (Specific Contracts); Session 2020-21
Name:___________; Roll No:______________________________________
S. No Consultation Taken from the Date Signature of the

Course Teacher Course Teacher
1.
2.
3.
4.
5.
Signature of Course Teacher
Note: This Consultation record must be attached with the project copy at the time of
project submission. It must be duly signed by the Course Teacher before submission.
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Annexure B
[University Logo]
Session: 2020-2021 Project Submission: Contract II
CONTRACT DRAFT
Subject: (as mentioned before your roll number)
Brief Fact Situation (Not more than 100 Words)
____________________________________________________________
Submitted To:
Mr. Utkarsh Kumar Mishra, Assistant Professor of Law, DNLU, Jabalpur
SUBMITTED BY:
YOUR NAME
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16
DHARMASHASTRA NATIONAL LAW UNIVERSITY,
JABALPUR
READING AND REFERENCE MATERIAL
Subject: Specific Contracts (Contracts-II)
Course: B.A., LL. B (Hons.), Semester III, Session 2020-21
[This material is a compilation of some recommended Articles and Case

Material for Reading, Class Discussion and Deliberation in the Class]
Material Collected and Compiled by:
Utkarsh K. Mishra
[Assistant Professor of Law and Course Instructor, DNLU, Jabalpur]
{FOR EDUCATIONAL PURPOSES ONLY}

ACKNOWLEDGEMENT
I acknowledge my sincere thanks to- Hon’ble Vice-Chancellor Sir, Prof. Balraj

Chauhan for his continuous guidance in framing the course curriculum of this
subject and also encouraging me to make this course more and more innovative;
Head of the Department, Dr. V. S. Gigimon for the academic support and blessings;
Dr. Shilpa Jain (Associate Professor of Law) and Dr. Manwendra (Associate
Professor of Law) for the time they devoted towards reviewing of the course
contents and this reading material and also for giving their valuable suggestions; and
our Registrar, Shri Anand Kumar Tiwari, for the administrative support and
guidance.
I sincerely hope that this course would instil in the students, legal aptitude to
appreciate the various forms of Contracts, the legal nuances relating to the laws
governing such contracts and their practical significance as well.
Utkarsh K. Mishra,
DNLU, Jabalpur
INDEMNITIES AND THE INDIAN
CONTRACT ACT 1872
—Wayne Courtney*
The Indian Contract Act, 1872 (“the Act”) contains several provisions that
define the nature of a contract of indemnity and the rights of the promisee under
it.1 In English law the rules governing contracts of indemnity are largely a prod-
uct of case law; statute affects only some aspects, most notably indemnity insur-
ance. This is true also of a number of jurisdictions with a common law heritage,
such as Australia, Canada, New Zealand and Singapore. The purpose of this
article is to compare and contrast the treatment of contracts of indemnity under
Indian law with that under English law and other uncodified jurisdictions around
the Commonwealth. Indemnity insurance, with its statutory complications in
various jurisdictions, can conveniently be put to one side. The focus is on con-
tracts of indemnity as they exist in other contexts. Drawing upon developments
in England and other uncodified jurisdictions, I will also make some observations
about the indemnity reforms proposed by the Law Commission of India in its
Thirteenth Report on the Indian Contract Act (“the Report”).
To begin, some history. By 1872, when the Act came into force, the English
law on contractual indemnities could be said to have reached a stage of late ado-
lescence or early adulthood. In the common law courts the basic nature of the
claim on an indemnity had been established. Courts of equity also exercised a
jurisdiction to enforce contracts of indemnity. The origins of that jurisdiction
are murkier, though its nature was somewhat clarified by a raft of decisions in
the 1860s and 1870s concerning transfers of shares in companies on the London
Stock Exchange.2
*
Faculty of Law, University of Sydney.
1
Sections 124 and 125, Indian Contract Act, 1872. Sections 77 and 78 of the Malaysian Contracts
Act, 1950 are in almost identical terms.
2
See Evans v. Wood, (1867) LR 5 Eq 9; Shepherd v. Gillespie, (1867) LR 5 Eq 293 [affirmed
Shepherd v. Gillespie, (1868) LR 3 Ch App 764]; Hodgkinson v. Kelly, (1868) LR 6 Eq 496;
Hawkins v. Maltby, (1868) LR 6 Eq 505 [affirmed Hawkins v. Maltby, (1869) LR 4 Ch App 200];
Cruse v. Paine, (1869) LR 4 Ch App 441; Castellan v. Hobson, (1870) LR 10 Eq 47; Nickalls
v. Merry, (1875) LR 7 HL 530. Similar principles developed where the shares were held on
trust: National Financial Co. ex p Oriental Commercial Bank, In re, (1868) LR 3 Ch App 791;
Hardoon v. Belilios, 1901 AC 118 (PC).
Published in Articles section of www.manupatra.com

VOL. 27 INDEMNITIES AND THE INDIAN CONTRACT ACT 1872 67
Other features of the modern law were absent or inchoate. There was no real
theory of construction of contracts of indemnity. The concept of the ‘scope’ of an
indemnity, which is an integral part of modern thinking, was applied intuitively.
Many contractual indemnities, express or implied, were set-pieces in particular
contractual relationships: a principal might indemnify an agent; the drawer of an
accommodation bill of exchange might indemnify the acceptor against liability
upon it3, the assignee of a lease might indemnify the immediate assignor against
loss arising from the assignee’s non-performance or non-observance of covenants
in the lease.4 Those examples still remain relevant, but indemnities nowadays
are far more sophisticated devices and are used in a wider variety of contexts.
Contracts may have detailed liability regimes involving exclusions, indemni-
ties and insurance provisions. Promises of indemnity are often combined with
guarantees in banking or financial instruments. Questions of enforcement have
become more challenging: can an indemnity be enforced so as to protect third
parties? How do common law rules on remoteness or mitigation of damage affect
claims on indemnities? It is also probably fair to say that our understanding of
contractual construction and scope has advanced considerably.5
So far as it reflected the then-prevailing English law on indemnities, the Act

was in some respects deficient and in others ahead of its time. The Act does not,
for example, describe the rights of the promisor.6 It says little about enforcement
by the promisee except in relation to lawsuits and compromises. Even there, it
does not refer to equitable enforcement. Such deficiencies are not necessar-
ily an obstacle as the Act is not treated as an exhaustive statement of the law
of indemnity.7 Gaps have been filled by later Indian case law developments. On
the other hand, the Act was more forward-looking in its use of the concept of
scope. Section 125 opens by referring to acts by the promisee “within the scope
of his authority” and Section 125(1) refers to “any matter to which the promise of
indemnity applies”. Sections 125(1) and 125(3) also settled the position of a prom-
isee who is adjudged liable or who compromises an alleged liability. These points
were unsettled in English law when the Act came into effect and the controversy
remains unresolved.
3
See Reynolds v. Doyle, (1840) 1 Man & G 753 : 133 ER 536; W. Courtney, Contractual
Indemnities, 6-10 (Hart Publishing, 2014).
4
See note 34 and following.
5
But see Velugoti Sarvagna Kumara Krishna Yachendra Bahadur Garu v. Sobhanadri Apparao
Bahadur Zamindar Garu, (1948-49) 76 IA 120 : AIR 1949 PC 234.
6
But see Maharana Shri Jasvatsingh Fatesingji v. Secy. of State for India, ILR (1890) 14 Bom
299; SBI v. Moti Thawardas Dadlani, (2007) 109 Bom LR 483.
7
See Gajanan Moreshwar Parelkar v. Moreshwar Madan Mantri, AIR 1942 Bom 302; Khetarpal
Amarnath v. Madhukar Pictures, AIR 1956 Bom 106.

68 NATIONAL LAW SCHOOL OF INDIA REVIEW 27 NLSI R ev. (2015)
I. DEFINITION OF INDEMNITY

A. The subject for analysis
Section 124 defines a contract of indemnity as: “A contract by which one party
promises to save the other from loss caused to him by the conduct of the prom-
isor himself, or by the conduct of any other person”. At the outset we must be
clear about the concepts of ‘contract’ and ‘indemnity’. The definition given in
Section 124 is, in one sense, incomplete: a contract is bilateral in character yet
the definition accounts only for one party’s obligations and, even then, only for
one type of obligation. The expression ‘contract of indemnity’ is sometimes used
in the English cases in a more specific sense, to describe a contract in which the
only, or only substantial, executory promise of one party is to indemnify another.
However, the basic point is that the proper subject of analysis is a promise of
indemnity in a contract, not a contract of indemnity. A contract of indemnity, in
the specific sense just mentioned, can then be approached in much the same way
as a promise of indemnity that is merely one of many terms in a contract deal-
ing with a larger subject-matter. Perhaps for this reason, the technical distinction
between a contract of indemnity and a promise of indemnity appears not to have
troubled the Indian courts. Indeed, Sections 124 and 125 also refer to the ‘prom-
isor’ and ‘promisee’ and Section 125(1) refers to the ‘promise to indemnify’. The
same mixed usage can be found in other jurisdictions.
The term ‘indemnity’ is elastic and may be used more generally to describe
any arrangement under which a party is not to suffer loss. A distinction must be
drawn between two kinds of ‘indemnity’ arrangements: first, those in which the
essential concern of the undertaking is to protect the promisee exactly against
loss; secondly, those in which the essential concern of the undertaking is not of
that nature, though the promisee is incidentally or effectively indemnified against
a loss. This article, and Sections 124 and 125, are concerned with the former
arrangements. These are promises of indemnity in the strict sense. Usage of
‘indemnity’ in the latter sense is, nonetheless, quite common. It might be said
that A’s payment of damages for breach of a contract with B, of an amount equal
to B’s loss or B’s liability to another, ‘indemnifies’ B,8 or that A’s guarantee to
B provides an ‘indemnity’ to B against default by a third party, C,9 or that A’s
promise to B to pay C, a creditor of B, effects an ‘indemnity’ against B’s liability
to C.10
8
See A. Krishnaswami Iyer v. Thatha Raghaviah Chetti, AIR 1928 Mad 43; Birmingham and
District Land Co. v. London and North Western Railway Co., (1886) 34 Ch D 261, 276 (CA) (Fry,
LJ); Addis v. Gramophone Co. Ltd., 1909 AC 488, 491 (HL) (Lord Loreburn, LC); Wertheim v.
Chicoutimi Pulp Co., 1911 AC 301, 307 (PC); Lexmead (Basingstoke) Ltd. v. Lewis, 1982 AC 225,
273 : (1981) 2 WLR 713 : (1981) 1 All ER 1185 (HL) (Lord Diplock); AMEV-UDC Finance Ltd.
v. Austin, (1986) 162 CLR 170, 194 (Mason and Wilson, JJ.).
9
Harburg India Rubber Comb Co. v. Martin, (1902) 1 KB 778, 784 (CA) (Vaughan Williams, LJ);
Bofinger v. Kingsway Group Ltd., 2009 HCA 44 at para 7.
10
Wren v. Mahony, (1972) 126 CLR 212, 227 (Barwick, C.J.).

B. Scope of triggering events
The range of indemnities contemplated by Section 124 is much narrower than

the English common law conception of indemnity, even in the limited sense I
have just described. When read in conjunction with Section 125, which addresses
actions against the indemnified party, it seems that the principal concern was
with promises to indemnify against claims by or liabilities to third parties. This
is, perhaps, not surprising in light of the historical development of indemnity
contracts. Even in the late nineteenth century, most of the reported English cases
concerned indemnities in this general form or, more specifically, indemnities
against the promisor’s breach of contract where such breach was likely to lead to
a claim by a third party against the promisee.
From a theoretical perspective the choice of activating events is rather puz-

zling. Focusing on the activity of natural or juristic persons excludes losses
caused by natural events, as are often the subject of contracts of indemnity insur-
ance. Limiting the relevant actor to the promisor or third party is conceptually
untidy. It is entirely possible, although perhaps not very common outside of insur-
ance, for A to indemnify B against losses caused by B’s own conduct. It is also
possible for an indemnity from A to B to apply to losses attributable to concur-
rent causes, being acts or omissions of A, B and others. The definition would lead
to some difficult questions of characterisation. Fortunately, by accepting that the
statute is not exhaustive, these definitional problems seem not to have posed any
serious obstacles to the development of Indian law.
Another limitation which has been suggested is that Section 124 of the Act
covers only express promises of indemnity. Whether or not that interpretative
gloss is correct,11 implied indemnities have readily been recognised under Indian
law.12 In that respect the Law Commission’s recommendation13 to insert the words
‘expressly or impliedly’ after ‘promises’ in Section 124 is sensible and consist-
ent with the case law. By way of comparison Section 145 explicitly refers to an
implied promise by a principal debtor to indemnify the surety.14 Earlier in its
Report the Law Commission referred to an ‘implied contract’ of indemnity.15 An
11
In its Report, the Law Commission [at page 50] merely indicated that the amendment to the Act
should ‘provide clearly’ that a promise of indemnity could be implied.
12
Partab Singh v. Izzat-Un-Nisa Begam, ILR (1909) 31 All 583 (PC); Tilak Ram v. Surat Singh,
AIR 1938 All 297; Shanti Swarup v. Munshi Singh, AIR 1967 SC 1315 : (1967) 2 SCR 312. As to
whether Secy. of State for India v. Bank of India Ltd., (1938) 2 All ER 797 (PC) actually involved
an implied contract of indemnity, see note 53.
13
The Report, at 84.
14
Of course, there can also be an express promise from the debtor to indemnify the surety. Query
whether there is a difference in result if an indemnified surety enters a reasonable compromise
of a disputed claim by the creditor that was, in fact, invalid in law. But see Sections 125(3) and
145 (‘rightfully paid’). See Raghavendra Gururao Naik v. Mahipat Krishna, AIR 1926 Bom 244;
Tarachand Lakhmichand Chuhan v. Gopal Lachiramkumar, AIR 1959 MP 297. But see Courtney,
supra note 4, at paras 6-35.
15
The Report, at 48.

implied promise of indemnity may well appear in an implied contract, but it is

important to recognise that the two concepts are distinct.
In some situations the contract itself is ‘implied’ or inferred from the circum-
stances. Illustrations in English law include: where a party accepts an accommo-
dation bill of exchange upon the drawer’s request16; where a guarantor provides a
guarantee to the creditor upon the debtor’s request17; and, in some cases at least,
where one party requests another to perform some act which turns out to be inju-
rious to the rights of a third party.
It is also possible for a promise of indemnity from A to B to be implied as a term
into an express contract between A and B. This has been offered as one explana-
tion in English law for the agent’s (B’s) indemnity from the principal (A), at least
where the agency is contractual.18 The owner, B, of a vessel under charter may
undertake that the master will comply with directions given by the charterer, A,
as to employment of the vessel or signature of bills of lading. Often there is an
express indemnity from the charterer to the owner against the consequences of
compliance with such orders; in the absence of an express term, a term may be
implied.19 Other instances are where an employer, B, is rendered vicariously lia-
ble for a tort committed by a negligent employee, A20; and in some circumstances
where A promises B to perform precisely the same obligations B already owes
to C.21 These are all common law illustrations. An indemnity may also take the
form of a contractual term implied by a statute.22
C. Other obligations that resemble contractual indemnities but are

not
The examples given above are contractual in nature. Obligations to indemnify

arise in various other ways beyond the law of contract, whether by operation of
the common law (including equity) or under statute.23 Lord Wrenbury explained
in Eastern Shipping Co. Ltd. v. Quah Beng Kee:24
16
Reynolds v. Doyle, (1840) 1 Man & G 753 : 133 ER 536; Yates v. Hoppe, (1850) 9 CB 542.
17
A Debtor, In re, 1937 Ch 156 : (1937) 1 All ER 1 (CA).
18
P Watts and FMB Reynolds, Bowstead & R eynolds on Agency, paras 7-58 (19th edn., Sweet &
Maxwell, 2010). But see Sections 222 and 223 of the Act.
19
Telfair Shipping Corpn. v. Inersea Carriers SA, (1985) 1 WLR 553 : (1985) 1 All ER 243; Triad
Shipping Co. v. Stellar Chartering & Brokerage Inc. (The Island Archon), (1994) 2 Lloyd’s Rep
227 at 237 (CA) (Evans LJ). See note 44.
20
Lister v. Romford Ice and Cold Storage Co. Ltd., 1957 AC 555 : (1957) 2 WLR 158 : (1957) 1 All
ER 125 (HL).
21
Hornby v. Cardwell, (1881) 8 QBD 329 at 337 (CA) (Brett, LJ); Birmingham and District
Land Co. v. London and North Western Railway Co., (1886) 34 Ch D 261, 277 (CA) (Fry, LJ);
Travers v. Richardson, (1920) 20 SR (NSW) 367 (SC). See Courtney, supra note 4, at paras 10-7,
10-10–10-13.
22
See note 34.
23
A. Krishnaswami Iyer v. Thatha Raghaviah Chetti, AIR 1928 Mad 43.
24
Eastern Shipping Co. Ltd. v. Quah Beng Kee, 1924 AC 177 at 182-83 (PC).

“A right to indemnity generally arises from contract express or

implied, but it is not confined to cases of contract. A right to
indemnity exists where the relation between the parties is such
that either in law or in equity there is an obligation upon the
one party to indemnify the other. There are, for instance, cases
in which the state of circumstances is such that the law attaches
a legal or equitable duty to indemnify arising from an assumed
promise by a person to do that which, under the circumstances,
he ought to do. The right to indemnity need not arise by con-
tract; it may (to give other instances) arise by statute.”
Different sources of indemnity can overlap. In English law, for example, a

surety’s right to indemnity from the principal debtor can be justified in at least
three ways: (1) on equitable grounds; (2) on an express or implied 25 genuine
contract of indemnity; or (3) on the basis of unjust enrichment, deriving from
cases brought using the old form of action for money paid by the plaintiff to the
defendant’s use. Contemporary understanding of the law of obligations is more
sophisticated and so we can perceive differences in these juristic bases that were
not fully appreciated at the time of the Act.26
Care must, therefore, be taken in seeking analogies with some of the old
English decisions, particularly those where the result could be justified on the
basis of a real contract or, in the alternative, by a fictitious contract which sup-
ported a right to recoupment (‘indemnity’) on a basis that would now be labelled
unjust enrichment. To illustrate the dangers, I take as an example a passage from
the judgment of Willes J in Roberts v. Crowe27, which is referred to in Pollock
and Mulla’s leading treatise on the Indian Contract Act.28 Willes J observed that,
where shares were sold and then subject to calls, the liability of the (unregistered)
transferee to the transferor was ‘exactly analogous’ to the case of assignee and
lessee. In each case the latter was liable for the former’s failure to perform, but
the latter had a right to be recouped against the former. There then follows a
quote from Willes J’s judgment in Moule v. Garrett.29 Undoubtedly, the two sit-
uations share common elements: responsibility for the liability is thought prop-
erly to rest with the person who has the benefit of the property, even though the
other may be liable and have to pay first. But the juristic analysis can be quite
different.
25
A Debtor, In re, 1937 Ch 156 : (1937) 1 All ER 1 (CA).
26
Rough parallels might be drawn: between (1) and Section 145 of the Act (insofar as Section 145
allows the surety to obtain relief before payment: S.K. Mohideen Batcha Sahib v.K.A. Sheik
Dawood Sahib, AIR 1926 Mad 1035; Sripatrao Sadashiv Upre v. Shankarrao Sarnaik, AIR 1930
Bom 331; between (2) as it concerns implied indemnities and Section 145; and between (3) and
Section 69 of the Act.
27
Roberts v. Crowe, (1872) LR 7 CP 629.
28
F Pollock and D Mulla, The Indian Contract Act 1872, 1341 (Nilima Bhadbhade ed., 14th edn.,
LexisNexis, 2014).
29
Moule v. Garrett, (1872) LR 7 Ex 101.

These passages appear under the heading ‘Indemnity under Statutes’30, which
is somewhat misleading. Both ‘indemnities’ might be regarded as creations of
law, but they did not originate31 under statute. In the share transfer cases courts
developed several explanations of the indemnity. One perspective was that
there was an implied collateral contract to indemnify or an implied promise to
indemnify in the sale contract. That view was viable in courts of common law
and courts of equity. Courts of equity sometimes proceeded by analogy with the
position of a trustee who holds property wholly for the benefit of another: the
property (the shares) being subject to a liability (calls). A third – common law
– perspective, apparently suggested by the reference to Moule v. Garrett, would
nowadays be explained on the basis of unjust enrichment. These three perspec-
tives do not all possess the same characteristics. The indemnified party might, for
example, be entitled to relief in advance of payment under the first two of them
but not the third.
Moreover, the scope of the ‘indemnity’ may differ, as the lease situation
demonstrates. Where a lease is assigned, privity of contract joins the lessee and
immediate assignee. From at least the nineteenth century, English courts regu-
larly implied a promise by the assignee to indemnify the lessee against default
in payment of rent or non-performance of covenants in the lease.32 Sums paid by
the lessee to satisfy a liability which properly rested upon the assignee might,
alternatively, be recouped by way of a claim for money paid; nowadays, in unjust
enrichment. Moule v. Garrett was a significant case because it went further.
There was no privity of contract between the plaintiff lessee and the defend-
ants as second successive assignees. That decision stands on the basis of unjust
enrichment.
D. Actions upon request: scope and juristic basis
A point that has excited some interest under Indian law concerns indemnifica-
tion for acts performed upon request. There is a well-established line of author-
ity which is said broadly to support the following proposition. Where one person
requests another to perform an act which is not itself obviously (or known to
be) tortious or wrongful; the latter complies with the request; and the act turns
out to injure the rights of a third party; then the acting party is entitled to be
indemnified by the requesting party. There was a reasonable amount of support
for the proposition as at the time of the Act. The root of modern authority is
usually taken to be the later decision of the House of Lords in Sheffield Corpn.
30
Pollock and Mulla, supra note 28, 1341.
31
But see note 34.
32
Later, the indemnity came to be implied by statute. See Section 24(1)(b), Land Registration Act
1925;Section 77(1)(c), Law of Property Act 1925 (UK) (now repealed but unaffected in relation
to tenancies prior to 1 January 1996). That indemnity can cover payments reasonably made
in respect of alleged liabilities, even if the liabilities are actually invalid in law: Scottish &
Newcastle Plc v. Raguz, (2008) 1 WLR 2494 : (2009) 1 All ER 763 : 2008 UKHL 65.

v. Barclay.33 There have been numerous decisions since, including two of the
Privy Council: Secy. of State for India v. Bank of India Ltd.34 being of immedi-
ate relevance to Indian law, and Yeung Kai Yung v. Hong Kong and Shanghai
Banking Corpn.35, an appeal from Hong Kong. With reference to Sheffield and
Bank of India, the Indian Law Commission recommended that a new section 72A
be inserted into the Act, providing for an implied indemnity in substantially the
terms outlined above. The Law Commission also expressed the view that the
obligation could be regarded as quasi-contractual, drawing support from remarks
by Lord Davey in Sheffield, Lord Wright in Bank of India and by Professor
Winkfield in relation to a debtor’s liability to indemnify a surety.36 There are two
issues: the scope of the principle and its juristic basis.
Starting with scope, I will sketch three paradigms in which the principle was
developed. In the oldest group of cases, a party was directed to deal with goods
in a manner that infringed the interest of another, usually the true owner. The
acting party might be a sheriff or bailiff who, pursuant to a warrant, levied exe-
cution against goods at the direction of another; or some other person who dis-
trained goods at another’s request; or a commercial party who sold, delivered or
withheld delivery of goods upon instructions.37 This is familiar ground. Some of
these situations are described in the illustrations provided for the agent’s indem-
nity in s 223 of the Act. Other cases involved execution against the debtor per-
sonally, or by registration of charges over the debtor’s property.38
In the second line of cases the acting party has been requested to deal with
stock, shares or a negotiable instrument. A typical instance is an application to
register a transfer of stock or shares in a company, where the relevant documents
(the certificates or transfers) have been forged or stolen.39 The transfer is regis-
tered; the transferee sells the stock or shares to third parties; subsequently, the
company (or registrar) incurs a loss because it must honour the transfer but also
restore the stock or shares lost by the original holder. Sheffield itself was such a
33
Sheffield Corpn. v. Barclay, 1905 AC 392 (HL) (“Sheffield”).
34
Secy. of State for India v. Bank of India Ltd., (1938) 2 All ER 797 (PC) (“Bank of India”).
35
Yeung Kai Yung v. Hong Kong and Shanghai Banking Corpn., 1981 AC 787 : (1980) 3 WLR 950
: (1980) 2 All ER 599 (PC) (“Yung”).
36
The Report, at 49-50. Why the latter was relied upon to justify a new provision is not clear. The
point should already be covered by Section 145 or Section 69.
37
Adamson v. Jarvis, (1827) 4 Bing 66; Humphrys v. Pratt, (1831) 2 Dow & Cl 288; Betts v.
Gibbins, (1834) 2 Ad & E 57; Toplis v. Grane, (1839) 5 Bing NC 636; Dugdale v. Lovering,
(1875) LR 10 CP 196. More recent examples include Strathlorne Steamship Co. Ltd. v. Andrew
Weir & Co., (1934) 50 Lloyd’s Rep 185 (CA); A/S Hansen-Tangens Rederi III v. Total Transport
Corpn. (The Sagona), (1984) 1 Lloyd’s Rep 194; ED&F Man Ship Ltd v. Heng Holdings SEA Pte
Ltd., 1998 SGHC 205.
38
Collins v. Evans, (1844) 5 QB 820 : 114 ER 1459; Taylor v. Robertson, (1901) 31 SCR 615
(Canada SC).
39
But see Attorney General v. Odell, (1906) 2 Ch 47 (CA) (registration of a forged transfer of a
charge over land).

case, as was Yung v. HSBC.40 In a variation on the same theme, a stolen or fraud-
ulently-indorsed negotiable instrument may be presented for payment or renewal.
The instrument is accepted as valid; the true owner later sues one or more of
the parties involved for conversion; the party sued then claims indemnity from a
person who presented or passed on the instrument for payment or renewal.41 This
was the position in the Bank of India case.
Charterparties, particularly time charterparties, comprise a third set of deci-

sions. There may be an implied indemnity to the owner of the vessel against the
consequences of the master complying with the charterer’s instructions.42 The
decisions fall into two broad groups. In one group are situations where the mas-
ter signs a bill of lading presented by the charterer, which then imposes upon
the owner a responsibility more extensive than that which it has accepted, vis-
à-vis the charterer, under the charterparty.43 In the other group of cases, the
owner claims indemnity against the consequences of the master following some
direction of the charterer as to the employment of the vessel or the handling of
cargo.44
It is tempting to generalise the Sheffield principle to account for many other

circumstances in which an indemnity is recognised. The indemnity from a
debtor to a surety, and from a principal to an agent, are obvious candidates. Yet,
expressed simply in terms of an action upon request, the Sheffield principle is
40
See Westropp v. Solomon, (1849) 8 CB 345; Stuart v. Hamilton Jockey Club, (1911) 18 OWR
493 (Ontario SC); Bank of England v. Cutler, (1908) 2 KB 208 (CA); Guaranty Trust Co.
v. Richardson & Son, (1963) 2 OR 347 (Ont SC); Royal Bank of Scotland Plc v. Sandstone
Properties Ltd., (1998) 2 BCLC 429 (QB); Cadbury Schweppes Plc v. Halifax Share Dealing Ltd.,
2006 EWHC 1184 (Ch).
41
See Secy. of State for India v. Bank of India Ltd., (1938) 2 All ER 797 (PC); Middle Temple v.
Lloyds Bank Plc, (1999) 1 All ER (Comm) 193 (QB); Linklaters v. HSBC Bank Plc, 2003 EWHC
1113 (Comm). But see Guaranty Trust Co. of New York v. Hannay & Co., (1918) 2 KB 623 (CA)
(bill of exchange presented for payment accompanied by forged bill of lading).
42
See W Courtney, Indemnities in Time Charterparties and the Effect of the Withdrawal of the
Vessel’,30(3) Journal of Contract Law 243 (2013).
43
See Moel Tryvan Ship Co. v. Krüger & Co., (1907) 1 KB 809 at 823-824 (Sir Gorell Barnes P)
at 831-832 (CA) (Buckley, LJ); Krüger & Co. Ltd. v. Moel Tryvan Ship Co. Ltd., 1907 AC 272
at 276 (HL) (Lord Loreburn, LC); Elder Dempster & Co v. C.G. Dunn & Co. Ltd., (1909) 15
Com Cas 49 (HL); Canadian Transport Co. Ltd. v. Court Line Ltd., 1940 AC 934 at 943-944 :
(1940) 3 All ER 112 (HL) (Lord Wright); Telfair Shipping Corpn. v. Inersea Carriers SA, (1985)
1 WLR 553 : (1985) 1 All ER 243; Naviera Mogor SA v. Societe Metallurgique de Normandie
(The Nogar Marin), (1988) 1 Lloyd’s Rep 412 (CA).
44
See Strathlorne Steamship Co. Ltd. v. Andrew Weir & Co., (1934) 50 Lloyd’s Rep 185 (CA);
Newa Line v. Erechthion Shipping Co. SA (The Erechthion), (1987) 2 Lloyd’s Rep 180; Athanasia
Comninos, The, (1990) 1 Lloyd’s Rep 277; A/S Hansen-Tangens Rederi III v. Total Transport
Corpn. (The Sagona), (1984) 1 Lloyd’s Rep 194; Triad Shipping Co. v. Stellar Chartering &
Brokerage Inc. (The Island Archon), (1994) 2 Lloyd’s Rep 227 (CA); ED&F Man Ship Ltd. v.
Heng Holdings SEA Pte Ltd., 1998 SGHC 205 : (1998) 2 SLR(R) 630; Ullises Shipping Corpn. v.
Fal Shipping Co. Ltd. (The Greek Fighter), 2006 EWHC 1729 (Comm) : (2006) Lloyd’s Rep Plus
99, 296. Cf Aegean Sea Traders Corpn. v. Repsol Petroleo SA (The Aegean Sea), (1998) 2 Lloyd’s
Rep 39 (similar argument made in relation to bill of lading).

manifestly too broad. An agent’s indemnity is not complete and does not extend
to every loss or liability incurred in the course of the agency. The owner of a
vessel is not protected against every loss sustained or liability incurred because
the master complies with the charterer’s instructions. An employee is not enti-
tled to be indemnified by the employer against all costs incurred and injuries
suffered in the course of performing work according to instructions. Indeed, if
that were the case then regulation of safe working conditions and workers’ com-
pensation would have developed very differently in England. Furthermore, where
the employee’s act renders the employer vicariously liable to another, the common
law indemnity goes in the opposite direction.45 A person who enters a contract
with a third party at another’s request is not, for that reason alone, entitled to be
indemnified against liability for breach of it. It would be peculiar if, as a general
rule, an entity with a separate legal personality could obtain an indemnity from
its members who make requests for action.46
There are also some striking examples of claims for indemnity failing on par-
ticular facts. The seller of a business falsified accounts and then requested his
accountants to verify them; they did so in correspondence addressed directly to
the purchaser.47 The accountants were held liable to the purchaser in negligence
but were not entitled to an indemnity from the seller. A dentist complied with a
doctor’s request to extract teeth from an unconscious patient assuming, without
confirmation from the patient, that the patient had consented.48 She had not. The
dentist and doctor were held concurrently liable as tortfeasors with contribution,
not indemnity, ordered between them.
It is difficult to find a single rationale that explains all of the examples of,
and exceptions to, the Sheffield principle. I will not attempt to formulate one
here. It seems relevant to consider factors such as the appropriate allocation of
risk between the acting and requesting parties, the terms of any other contract
between them, the nature of the loss claimed, and any independent carelessness
by the acting party in complying with the request.
The proper juristic basis for the indemnity is, if anything, even more difficult
to identify. English authority on balance favours the view that it is usually con-
tractual49, though there are different perspectives on precisely what this entails.
Lord Davey in Sheffield ventured a distinction between a contract of indemnity
implied by law and a contract of indemnity implied or inferred from the cir-
cumstances. The former was relevant where the acting party was called upon to
45
Lister v. Romford Ice and Cold Storage Co. Ltd., 1957 AC 555 : (1957) 2 WLR 158 : (1957) 1 All
ER 125 (HL).
46
J.H. Rayner (Mincing Lane) Ltd. v. Deptt. of Trade and Industry, (1990) 2 AC 418 at 518 : (1989)
3 WLR 969 : (1989) 3 All ER 523 (HL) (Lord Oliver).
47
Downs v. Chappell, (1997) 1 WLR 426 : (1996) 3 All ER 344 (CA).
48
Parmley v. Parmley, 1945 SCR 635 (Canada SC).
49
See the summary given in Naviera Mogor SA v. Societe Metallurgique de Normandie (The Nogar
Marin), (1988) 1 Lloyd’s Rep 412 (CA).

perform a statutory or common law duty of a ministerial character. The latter

was, it seems, relevant for other acts. The reason for the distinction is not entirely
clear. Perhaps it stemmed from a concern about the voluntariness of the act of
acceptance. Another possible obstacle is the ‘existing duty’ rule, which might
deny the sufficiency of the consideration provided by the party acting in return
for the requesting party’s promise of indemnity. However, Lord Davey expressly
dismissed that rule.50
The approach in subsequent cases has been ambivalent. Bank of India is at one
end of the spectrum. Lord Wright said that the ‘fiction of a contract implied by
law adds nothing’51; he seems to have discounted the contractual analysis entirely.
Both Sheffield and Bank of India were referred to in the later Privy Council
decision of Yung v. HSBC. Lord Scarman quoted from the relevant part of Lord
Davey’s judgment without specifically addressing the point. Bank of India was
cited as a supporting authority. In Yung the acting party was performing a stat-
utory duty of a ministerial character, yet Lord Scarman’s judgment refers to fun-
damental elements of contract doctrine. There was an offer to indemnify, which
was accepted upon performing the request, and an intention to create legal rela-
tions.52 That is hardly consistent with Lord Wright’s view in Bank of India.
Whether characterised as an implication of law or fact, the contractual model

does not easily fit all cases. The problem is compounded by the tendency to for-
mulate the indemnity in terms of a positive rule and to recognise that it might
be implied ‘by law’. Dissatisfaction with the contractual analysis has prompted
attempts to rationalise the indemnity on a different basis.53 The law of unjust
enrichment accounts for some cases, such as that of a surety who pays the debt-
or’s debt. It is inadequate as a general explanation because the implied indemnity
is not confined to situations where the requesting party is enriched by the acting
party’s conduct. Rather, the acting party seeks compensation for loss sustained by
acting upon the request. The basis of liability does not seem to be tortious: the
request need not involve a fraudulent (or, nowadays, negligent) misrepresentation
by the requesting party.54 It might be said that the requesting party encouraged
50
Sheffield, at 404. His reasoning in this respect is far from compelling, though there are other rea-
sons for reaching the same conclusion.
51
Yung, at 800.
52
Yung, at 796, 798.
53
PS Atiyah, Essays on Contract, 292-293 (Clarendon Press, 1990). It proposes a test based prin-
cipally upon reliance and benefit. N McBride, A Fifth Common Law Obligation 14 Legal Studies
35 (1994) regards the liability as part of an additional class of obligations beyond the conven-
tional categories; that class also includes promissory estoppel and liabilities to pay for non-con-
tractual services (compare with Section 70 of the Act). J Gleeson and N Owens, Dissolving
Fictions: What to Do with the Implied Indemnity?, 25 Journal of Contract Law 135 (2009) argue
for a non-contractual obligation that the law attaches to relationships where one party acts for
another’s benefit. B Shaw, Indemnities for Acts Done at Another’s Request, 44 University of
British Columbia Law R eview 331 (2011) attributes the liability to the law of unjust enrichment.
54
Sheffield, at 399 (Lord Davey):“it makes no difference that the person making the request is not
aware of the invalidity in his title to make the request, or could not with reasonable diligence

the acting party to adopt an assumption as the basis for conduct, and that the act-
ing party relied upon that assumption to its detriment. Estoppel is, however, inapt
because the acting party’s objective is to obtain compensation for its loss in rela-
tion to a third party; it is not, as between itself and the requesting party, seeking
to prevent the latter from departing from that assumption. For want of a better
alternative, some commentators have concluded that the liability must be sui gen-
eris or belong to a novel class of obligations.55
The implied indemnity is a valuable but challenging concept. I would, there-

fore, respectfully suggest that close consideration be given to the wide range of
Commonwealth case law and academic analysis, including more recent material,
before implementing any amendment like that proposed as Section 72A. It might
also be useful to consider the relationship between such a provision and Section
223. With reflection, a provision in narrower and more specific terms might be
found to be more appropriate.
II. LIABILITIES, COSTS AND COMPROMISES

A. Section 125 of the Act provides:
Rights of indemnity-holder when sued.¯ The promisee in a contract of

indemnity, acting within the scope of his authority, is entitled to recover from the
promisor¯
(1) all damages which he may be compelled to pay in any suit in respect
of any matter to which the promise to indemnify applies;
(2) all costs which he may be compelled to pay in any such suit if, in
bringing or defending it, he did not contravene the orders of the prom-
isor, and acted as it would have been prudent for him to act in the
absence of any contract of indemnity, or if the promisor authorized
him to bring or defend the suit;
(3) all sums which he may have paid under the terms of any compromise
of any such suit, if the compromise was not contrary to the orders of
the promisor, and was one which it would have been prudent for the
promisee to make in the absence of any contract of indemnity, or if the
promisor authorized him to compromise the suit.
The sub-sections address two related but distinct points. Sub-section (1) estab-
lishes the conclusiveness of the liability, subject to the provisos mentioned. In a
general sense this is a matter of proof of actual or potential loss within the scope
have discovered it”.

55
See Gleeson and Owens, supra note 53.

of the indemnity. Sub-section (2) deals more directly with a matter of scope,
namely, that costs incurred in proceedings should be recoverable, again subject
to the provisos mentioned.56 Sub-section (3) could be read as addressing either
of these matters. That is, subject to the provisos, the compromise is treated as
conclusive proof of an actual liability; or the scope of the indemnity is extended
to cover a compromise of an alleged liability. The opening words of Section 125
and internal cross-reference in Section 125(3) to ‘any such suit’ favour the for-
mer interpretation.57 Strictly, Section 125(3) applies only when a suit has been
brought and not where a compromise is made beforehand. It has been accepted,
however, that the indemnifier may still be bound in the latter situation.58 It also
appears that Indian courts, drawing upon some remarks in older English cases,
have endorsed a further refinement which is not explicit in Section 125(3): if the
indemnified party gives due notice of the claim or action and the indemnifier
fails to intervene, then the indemnifier is precluded from asserting that the com-
promise was imprudent.59 It is true that some support for that proposition can be
found in those older decisions. Recent authorities are more circumspect; the prop-
osition probably overstates the present law in England.
The English law in this area is tortuous60, a product of attempting to resolve

fundamentally opposing policy concerns. Generally, the indemnifier should not be
bound by a judgment against the indemnified party if it is not a party or privy
to those proceedings. A fortiori, a settlement. Conversely, the indemnified party
should not be left stranded by conflicting judgments which establish, and then
deny, actual liability within the scope of the indemnity. A similar, albeit weaker,
argument could be made for settlements reasonably concluded by the indemnified
party. An additional factor, where the indemnifier fails to take advantage of an
opportunity to intervene at an earlier stage, is that it might be perceived to be
unfair61 for it subsequently to dispute the outcome.
The starting point for analysis is usually taken to be Buller J’s judgment in
Duffield v. Scott62, where the issues of costs and conclusiveness of judgments
were intertwined. In dispute was the indemnified plaintiff’s claim for costs and
56
But see Bhawani Prasad v. Gopal Singh, ILR (1888) 10 All 531; Venkatarangayya Appa Rao v.
Varaprasada Rao Naidu, ILR (1920) 43 Mad 898.
57
See Alla Venkataramanna v. Palacherla Manqamma, AIR 1944 Mad 457: “the compromise will
be treated as conclusive against the indemnifier subject only to its being attacked as an improv-
ident transaction provided, of course, the compromise has been entered into bona fide and with-
out collusion”).
58
Kali Charan v. Durga Kunwar, ILR (1913) 35 All 168.
59
Kali Charan v. Durga Kunwar, ILR (1913) 35 All 168; Alla Venkataramanna v. Palacherla
Manqamma, AIR 1944 Mad 457.
60
Courtney, supra note 4, at paras 6-30-6-52.
61
See Nallappa Reddi v. Vridhachala Reddi, AIR 1915 Mad 36; (‘monstrous’). But see Ben
Shipping Co. (Pte) Ltd. v. An Bord Bainne (The C Joyce), (1986) 2 All ER 177, 187.
62
Duffield v. Scott, (1789) 3 TR 374 : 100 ER 628 (“Duffield”). Pollock and Mulla, supra note 30,
at 1349, asserts that sub-s (1) states the law as summarised in Lampleigh v. Braithwait, 1615
Hobart 106 : 80 ER 255 (“Lampleigh”). That is incorrect. Perhaps this was originally intended as

expenses he had incurred in previous litigation brought by a third party. The

defendant indemnifier objected on the ground that the plaintiff had not given
notice of the action against him. Buller J said63:
“[T]here are cases which say that, to entitle a person to recover

on a bond of indemnity, he must shew that he was compelled
by law to pay the debt… The purpose of giving notice is not
in order to give a ground of action; but if a demand be made
which the person indemnifying is bound to pay, and notice be
given to him, and he refuse to defend the action, in consequence
of which the person to be indemnified is obliged to pay the
demand, that is equivalent to a judgment, and estops the other
party from saying that the defendant in the first action was not
bound to pay the money.”
That passage is not free from difficulty.64 From these rather uncertain origins
the two issues began to diverge. Indemnification for reasonable costs of litigation
is in English law nowadays approached as a question of the scope of the indem-
nity.65 Where an indemnity is given in contemplation of liabilities to third parties,
costs are usually regarded as included by implication if not mentioned expressly.66
The issue of conclusiveness of liability is more controversial. After Duffield there
developed a line of decisions accepting that a judgment against, and even a com-
promise by, the indemnified party could be conclusive as against the indemnifier,
provided that the indemnified party had given notice of the claim or action and
the indemnifier had refused to assume responsibility for the defence.67 In well-
known dicta in Parker v. Lewis68, Mellish LJ accepted that the principle encom-
passed compromises, while perhaps also eliminating the requirements of notice
and refusal to defend for judgments.
Reception of the conclusiveness principle has been mixed. It is useful to

compare three jurisdictions. Aspects of Duffield took root in the United States
and grew into a firm rule.69 According to Section 57(1) of the Restatement (2d)
Judgments:
“[W]hen… an action is brought by the injured person against

the indemnitee and the indemnitor is given reasonable notice
of the action and an opportunity to assume or participate in its
a reference to the extensive annotations to Lampleigh in JW Smith, Smith’s Leading Cases, 164-
166 (RH Collins and RG Arbuthnot edss, 8th edn., Maxwell & Son, 1879).
63
Duffield, at 630.
64
See Rust Consulting Ltd. v. PB Ltd., 2011 EWHC 1622 (TCC).
65
Courtney, supra note 4, at paras 4-75-4-77.
66
Courtney, supra note 4, at paras 4-76.
67
68
Parker v. Lewis, (1873) LR 8 Ch App 1035 at 1059-1060.
69
But see PS Ware, Vouching: In or Out?, (42 Washington & Lee Law R eview 121, 129 (1985).

defense, a judgment for the injured person has the following

effects on the indemnitor in a subsequent action by the indem-
nitee for indemnification:
(a) The indemnitor is estopped from disputing the existence and extent of
the indemnitee’s liability to the injured person; and
(b) The indemnitor is precluded from relitigating issues determined in the
action against the indemnitee if:
(i) the indemnitor defended the action against the indemnitee; or
(ii) the indemnitee defended the action with due diligence and reason-
able prudence.”
In Australia, Mellish LJ’s principle has been applied in a number of indem-

nity insurance decisions.70 English insurance decisions are opposed: notwithstand-
ing an adverse judgment against the insured, the insurer is entitled to require the
insured to establish actual liability to the third party.71
For non-insurance indemnities the position remains unsettled.72 The con-

clusiveness principle has not been well received in modern cases,73 but it might
survive in some weakened form as a set of factors that can raise an estoppel in
favour of the indemnified party against the indemnifier. The most recent detailed
consideration occurred in Rust Consulting Ltd. v. PB Ltd.74 The indemnifier and
indemnified party were part of the same corporate group. The indemnified party
faced a large claim by third parties and, in the interests of the corporate group, a
decision was made that the indemnified party would consent to judgment against
it. The figure was significantly higher than the likely result if the proceedings had
been contested. Two considerations underlying that decision were that the indem-
nified party, in any event, had no substantial assets to meet the claim, and that
the group had received legal advice that the indemnifier would not be liable under
the indemnity. The liquidators of the indemnified party later brought proceedings
to enforce the indemnity.
70
See JN Taylor Holdings Ltd. v. Bond, (1993) 59 SASR 432 at 440 (FC) (King, CJ); CE Heath
Casualty & General Insurance Ltd. v. Pyramid Building Society, (1997) 2 VR 256 at 291 (CA),
(Phillips JA); VACC Insurance Co. Ltd. v BP Australia Ltd., 1999 NSWCA 427 (Fitzgerald JA).
71
Astrazeneca Insurance Co. Ltd. v. XL Insurance (Bermuda) Ltd., (2014) All ER (Comm) 55 at
para 23 (Christopher Clarke, LJ).
72
73
See Ben Shipping Co. (Pte) Ltd. v. An Bord Bainne (The C Joyce), (1986) 2 All ER 177.
74
Rust Consulting Ltd. v. PB Ltd., (2011) 1 All ER (Comm) 951; Rust Consulting Ltd. v. PB Ltd.,
2011 EWHC 1622 (TCC); Rust Consulting Ltd. v. PB Ltd., 2012 EWCA Civ 1070.

On the basis that the indemnity covered only actual liabilities75, the argument
ran that the indemnifier was estopped from denying that the consent judgment
was conclusive of actual liability. Edwards-Stuart J held that there was no estop-
pel even though the indemnifier knew of the claim and gave approval to the
consent judgment. The actions of the indemnifier and indemnified party, at the
relevant time, were not referable to the enforcement of the indemnity. However,
the indemnifier’s involvement, or refusal to be involved, in the management
of the claim is still generally a factor relevant to establishing an estoppel. As
Akenhead J said:76
“The active participation of the guarantor or indemnifier in

the proceedings, may, depending on the circumstances, level
and scope of the participation, go much further to establish an
estoppel against it. The positive concurrence by the guarantor or
indemnifier with a consent judgment against the beneficiary will
go further still.”
Section 125 of the Act can thus be commended for providing some welcome
clarity when compared with English law.77
III. ENFORCEMENT OF THE INDEMNITY

BEFORE LOSS OCCURS
It is curious that the Act contains no further provisions about enforcement

of the indemnity by the promisee. The Act came into effect shortly before the
administration of law and equity was unified in England. At that time an indem-
nified party’s action to enforce the indemnity under English law depended, in
part, upon the nature of the loss.78 The promise to indemnify was usually con-
75
This point was reversed on appeal: Rust Consulting Ltd. v. PB Ltd., 2012 EWCA Civ 1070 at para
22 (Toulson, LJ).
76
Rust Consulting Ltd. v. PB Ltd., 2010 EWHC 3243 (TCC) at para 45. But see Frixione v.
Tagliaferro, (1856) 10 Moore 175 : 14 ER 459 (principals bound by foreign judgment against
agent when they were aware of the action and had undertaken to provide evidence to support
agent’s defence); Pettman v. Keble, (1850) 9 CB 701 : 137 ER 1067 (principal not involved in
defence but apparently authorising agent’s compromise of claim by third party); Nana Ofori Atta
II v. Nana Abu Bonsra II, 1958 AC 95 at 101-102 : (1957) 3 WLR 830 : (1957) 3 All ER 559
(PC).
77
Another possible difference concerns the position of the indemnified party in relation to the third
party. The English indemnity cases have focused primarily on indemnities against liabilities
where the indemnified party is the debtor/defendant. It is not clear whether the conclusiveness
proposition applies with equal force to situations in which the indemnified party is the creditor/
claimant. Section 125 of the Act applies to both situations: Ramaswami Sastri v. Kali Raghava
Aiyangar, (1917) 43 IC 124; Ramchandra B. Loyalka v. Shapurji N. Bhownagree, AIR 1940 Bom
315.
78
A fuller account is given in Courtney, supra note 4, at paras 1-18-1-23, 7-19. See Osman Jamal
and Sons Ltd. v. Gopal Purshottam, AIR 1929 Cal 208; Gajanan Moreshwar Parelkar v.
Moreshwar Madan Mantri, AIR 1942 Bom 302; Alla Venkataramanna v. Palacherla Manqamma,

strued to be a promise to keep the indemnified party harmless against the spec-
ified loss. Enforcement at common law was generally by way of a claim for
damages for breach of contract. The contract would only be broken when the
indemnified party actually sustained loss; at that point, by definition, the indem-
nifier had not kept the indemnified party harmless against loss. The damages
award corresponded to the amount of actual loss. The remedies provided by
the common law courts were, therefore, inefficacious to protect the indemnified
party before loss occurred. Where the loss was merely anticipated, the indemni-
fied party had to seek relief in a court of equity. Intervention in equity was said
to rest upon the power of a court of equity to compel specific performance of
a contract of indemnity. It would, however, be more accurate to say that equity
operated by specifically enforcing a particular term of a contract – the promise to
indemnify – rather than by way of ‘specific performance’ of the whole contract.79
The second piece of the puzzle is the concept of damnification. Identifying

the point at which a potential loss crystallises into an actual loss can be critical.
Before fusion, it could determine the appropriate forum – a court of law or equity
– for action. It also had, and still has, consequences for the application of limi-
tations statutes.80 Indeed, many of the early English cases on damnification were
limitations cases. There developed a default rule on damnification that applied to
indemnities against claims by or liabilities to third parties.81 In general, a mere
claim, demand or action against, or liability of, the indemnified party is not an
actual loss. Actual loss crystallises when the indemnified party pays money to
the third party in respect of the claim or liability or, perhaps, when the indem-
nified party’s property is seized and sold in satisfaction of a liability. Thus, in
practice, unless equitable relief is available, the indemnified party must pay first
and recoup later.
Indian law has adopted a substantially similar default rule on damnification.82

In its Thirteenth Report, the Law Commission was concerned by the failure of
AIR 1944 Mad 457; Chunibhai Patel v. Natha Bhai Patel, AIR 1944 Pat 185; Abdul Hussain
Shaikh Gulamali Jambawalla v. Bombay Metal Syndicate, AIR 1972 Bom 252.
79
But see Section 12 of the Specific Relief Act, 1963.
80
See Shanti Swarup v. Munshi Singh, AIR 1967 SC 1315 : (1967) 2 SCR 312; Abdul Hussain
Shaikh Gulamali Jambawalla v. Bombay Metal Syndicate, AIR 1972 Bom 252.
81
Courtney, supra note 4, at paras 6-23. Authorities include Collinge v. Heywood, (1839) 9 Ad &
E 633 : 112 ER 1352; Richardson; ex p Governors of St. Thomas’s Hospital, In re, (1911) 2 KB
705 (CA); British Union and National Insurance Co. v. Rawson, (1916) 2 Ch 476 (CA); Firma
C-Trade SA v. Newcastle Protection and Indemnity Assn. (The Fanti) (No. 2), (1991) 2 AC 1 :
(1990) 3 WLR 78 : (1990) 2 All ER 705 (HL). For other Commonwealth examples, see Official
Assignee v. Jarvis, 1923 NZLR 1009 (CA); McIntosh v. Dalwood (No. 4), (1930) 30 SR (NSW)
415 (FC); Wren v. Mahony, (1972) 126 CLR 212.
82
See Bhavani v. Anantha Kamthi, ILR (1916) 31 Mad 556; (actual loss by loss of title to land);
Kalavakolanu Seetamma v. Poduri Narayanamurthi, ILR (1920) 43 Mad 470 (no actual loss until
indemnified party compelled to satisfy judgment); Ranganath v. Pachusao, AIR 1935 Nag 147
(incurring liability without payment was not actual loss); Tilak Ram v. Surat Singh, AIR 1938
All 297 (loss sustained upon execution sale of property); Chunibhai Patel v. Natha Bhai Patel,
AIR 1944 Pat 185 (judgment without payment was not actual loss); Alla Venkataramanna v.

the Act to address the matter of enforcement of the indemnity before loss. That
concern seems to have been prompted by differences of opinion among Indian
courts as to whether such enforcement was possible.83 The Law Commission
accepted (in my view, correctly84) that it was, and recommended the addition of a
new section 125A as follows:
IV. “RIGHTS OF INDEMNITY-HOLDER.

(1) The promisee in a contract of indemnity acting within the scope of
his authority may, where a liability has arisen against him in favour
of a third party, obtain against the promisor, in an appropriate case,
a decree compelling the promisor to set apart a fund out of which the
promisor may meet such liability or directing the promisor to discharge
such liability himself.
(2) The promisee may institute a suit under this section even when no
such suit as referred to in section 125 has been instituted, and irrespec-
tive of whether any actual loss has been sustained by the promisee or
not.
Explanation ¯ The promisee is not precluded from obtaining

relief under this section merely on the ground that the promi-
see’s liability to the third party cannot effectively be enforced
against him.”
The section is directed at two distinct matters. The first is a matter of tim-
ing: at what point is the indemnified party able to enforce the indemnity? This
is addressed partly in sub-section (1) (“where a liability has arisen…”) and in
sub-section (2) and the explanatory comment. The second matter concerns the
form of the decree. Two forms are identified: setting apart a fund or compelling
the promisor to discharge the liability. The text of the section also suggests that
the appropriate order may vary depending upon the circumstances of the case.
There is, however, a critical prior consideration. Although a promise to indem-

nify generally signifies complete protection against a defined loss, the exact
nature of the promise varies. It depends upon the construction of the contract.
Palacherla Manqamma, AIR 1944 Mad 457 (payment constitutes actual loss but a mere demand
or judgment does not); Shanti Swarup v. Munshi Singh, AIR 1967 SC 1315 : (1967) 2 SCR 312
(loss occurring upon execution of mortgage decree and not merely upon it being issued). See
Gajanan Moreshwar Parelkar v. Moreshwar Madan Mantri, AIR 1942 Bom 302.
83
The Report, at 50–51. The relevant authorities are noted in Pollock and Mulla, supra note 4, at
1343.
84
Osman Jamal and Sons Ltd. v. Gopal Purshottam, AIR 1929 Cal 208 and Gajanan Moreshwar
Parelkar v. Moreshwar Madan Mantri, AIR 1942 Bom 302 contain useful discussions of the
English authorities recognising specific enforcement.

The two most common constructions are: to prevent loss to the promisee, and to
compensate the promisee for a loss after it has occurred.85 For convenience I will
refer to these as the ‘preventive’ and ‘compensatory’ constructions respectively.
There are statements in some English and Commonwealth cases to the effect that
the construction of the indemnity depended upon the court: common law courts
adopted compensatory constructions and courts of equity adopted preventive
constructions.86 This is misleading.87 There was no difference in construction,
only a difference in the effect given to the indemnity by way of remedy. Either
construction is possible, though the preventive construction is predominant for
indemnities against liabilities.
The order for specific enforcement compels performance of the prom-

ise of indemnity according to its terms. It is only available for, and consistent
with, promises that are preventive in nature. Street CJ explained the position in
McIntosh v. Dalwood (No. 4)88:
“In every case the contractual obligation must first be ascer-

tained… If the obligation is merely an obligation to indemnify
a person, in the sense of repaying to him a sum of money after
he has paid it, no equitable relief is needed. Damages will pro-
vide an adequate remedy. If, however, the obligation on its true
construction is an obligation to relieve a debtor by preventing
him from having to pay his debt, equity will in such a case give
relief in the nature of quia timet relief, and, instead of compel-
ling the party indemnified first to pay the debt, and perhaps to
ruin himself in doing so, will specifically enforce the obligation
by ordering the indemnifying party to pay the debt.”
So, if the promise to indemnify is construed as being one to compensate for

loss after the event, there is no cause for equity to intervene;89 the promisee
receives the full bargain by paying first and recouping later. This important dis-
tinction can, I suggest, be accommodated within the text of the proposed amend-
ment, by subsuming it within the expression ‘in an appropriate case’. A similar
distinction was recognised implicitly in Chunibhai Patel v. Natha Bhai Patel.90 It
was there contended that an indemnity in terms to ‘repay you the dues for which
you would be liable’ could not be enforced until the promisee actually paid and
so sustained a loss. Fazl Ali CJ appeared to accept that contention as correct in
85
See Courtney, supra note 4, Chapter 2.
86
See Law Guarantee Trust and Accident Society Ltd., In re, (1914) 2 Ch 617 at 638 (CA)
(Kennedy, LJ); Official Assignee v. Jarvis, 1923 NZLR 1009 at 1016 (CA) (Salmond, J).
87
See Courtney, supra note 4, at paras 6-7.
88
McIntosh v. Dalwood (No 4), (1930) 30 SR (NSW) 415 at 418 (FC). See Firma C-Trade SA v.
Newcastle Protection and Indemnity Assn. (The Fanti) (No. 2), (1991) 2 AC 1 : (1990) 3 WLR 78
: (1990) 2 All ER 705 (HL).
89
But see Section 14(1)(a) of the Specific Relief Act, 1963.
90
Chunibhai Patel v. Natha Bhai Patel, AIR 1944 Pat 185.

principle. It was, however, not decisive in the circumstances because the contract
also contained a promise of indemnity in terms ‘to remove the said liability’.
This leads to the timing and form of relief. I will address these in reverse
order for ease of analysis. The two types of order mentioned in Section 125A –
to set apart a fund and to discharge the indemnified party’s liability – are both
recognised forms of quia timet relief 91, though the former appears relatively
rarely nowadays.92 The function of the two orders is slightly different. The order
to establish a fund is, in general, calculated to safeguard the indemnified par-
ty’s position vis-à-vis the indemnifier. Of itself it is only an intermediate stage
of protection. The fund must later be applied to discharge the indemnified par-
ty’s liabilities. In contrast, an order to discharge the indemnified party’s liabil-
ity is a final and effective order for indemnification. When executed, the order
effects proper performance of the promise to indemnify in respect of the relevant
liability.
An order to discharge a liability is just one form of order for indemnification.

Other forms are also used in English law; relief is discretionary and the particu-
lar form chosen in any case depends upon the circumstances. The most general
kind of order directs the indemnifier to procure the release or discharge of the
indemnified party from the liability. The method is left to the indemnifier’s dis-
cretion. Section 125A(1) appears to be similar but slightly narrower, as it refers
only to discharge and not release. More particularly, the indemnifier may be
directed to pay a specific sum to the third party, so as to discharge the indemni-
fied party from the liability. In some circumstances, the indemnified party may
even be entitled to call for payment in advance to itself, so that it can then use
the funds to pay the third party. The exact scope of this last form of order is
unsettled.93 It is clear that such an order will not be made when the indemnifier
is itself ‘concerned’ or ‘interested’ in the application of the funds it provides by
way of indemnity.94 A typical instance is where the indemnifier is also liable to
91
Richardson; ex p Governors of St. Thomas’s Hospital, In re, (1911) 2 KB 705 (CA); British Union
and National Insurance Co. v. Rawson, (1916) 2 Ch 476 (CA); Firma C-Trade SA v. Newcastle
Protection and Indemnity Assn. (The Fanti) (No. 2), (1991) 2 AC 1 : (1990) 3 WLR 78 : (1990) 2
All ER 705 (HL); Osman Jamal and Sons Ltd. v. Gopal Purshottam, AIR 1929 Cal 208; Gajanan
Moreshwar Parelkar v. Moreshwar Madan Mantri, AIR 1942 Bom 302; New India Assurance
Co. Ltd. v. State Trading Corpn. of India, AIR 2007 Guj 517. But see S.K. Mohideen Batcha
Sahib v. K.A. Sheik Dawood Sahib, AIR 1926 Mad 1035 (Orders 7 and 8).
92
But see Rowland v. Gulfpac Ltd., (1999) 1 Lloyd’s Rep Bank 86; Papamichael v. National
Westminster Bank Plc, (2002) 1 Lloyd’s Rep 332; Starlight Shipping Co. v. Allianz Marine &
Aviation Versicherungs AG (The Alexandros T), 2011 EWHC 3381 (Comm) at paras 37-38.
93
See Courtney, supra note 4, at paras 7-43-7-50.
94
Law Guarantee Trust and Accident Society Ltd., In re, (1914) 2 Ch 617 (CA); British Union and
National Insurance Co. v. Rawson, (1916) 2 Ch 476 at 482 (CA) (Pickford, LJ); Osman Jamal
and Sons Ltd. v. Gopal Purshottam, AIR 1929 Cal 208; Khetarpal Amarnath v. Madhukar
Pictures, AIR 1956 Bom 106.

the third party, such that it would have to make payment again if the indemnified
party failed to discharge the liability.95
The timing of relief may depend upon the nature of the relief sought. The
position for final orders for indemnification is clearest. In English law an order
for specific performance may be made before the time for performance of one or
more contractual obligations has arrived.96 The form of the decree is moulded to
fit the circumstances, so that a party is not compelled to perform before perfor-
mance is due according to the contract. This perspective is not, however, directly
applicable to promises of indemnity that are preventive in nature. A striking fea-
ture of such promises is that there is usually no particular time fixed for per-
formance. So long as the indemnified party suffers no loss within scope, the
indemnity is not breached. The object of specific enforcement is to compel the
indemnifier to act so that loss – a breach – does not occur. This underscores the
point, made earlier97, that relief is best regarded as a kind of specific enforcement,
not specific performance in the strict sense. This does not mean that a contractual
promise of indemnity is specifically enforceable at will. In general terms, relief is
limited to situations in which loss is sufficiently imminent.98
The circumstantial factors identified in Sections 125A(1) and (2) are consist-
ent with English law99 and the position already reached by Indian courts.100 To
obtain an order for indemnification, there must be a clear, definite liability which
is presently accrued. It is not necessary that the liability be established by judg-
ment, nor that proceedings be commenced against the indemnified party. More
intriguing is the explanatory comment to Section 125A, which negates a precon-
dition that the liability can ‘effectively be enforced against him’. In Khetarpal
Amarnath v. Madhukar Pictures101, Gajendragadkar J accepted that the right to
enforce the indemnity arose once the indemnified party’s liability became abso-
lute, but later added that the indemnified party had to satisfy the court of “the
existence of a clear enforceable claim against him” (emphasis supplied).
‘Enforceability’ has been used in English and Commonwealth indemnity cases

in various senses. It may be just another way of saying that the liability must
be definite and presently accrued, rather than inchoate, future or contingent.
Alternatively, it may indicate a further requirement:
95
Rankin v. Palmer, (1912) 16 CLR 285; Osman Jamal and Sons Ltd. v. Gopal Purshottam, AIR
1929 Cal 208.
96
Hasham v. Zenab, 1960 AC 316 at 329-30 : (1960) 2 WLR 374 (PC).
97
Supra note 81.
98
See Alla Venkataramanna v. Palacherla Manqamma, AIR 1944 Mad 457.
99
See Courtney, supra note 4, at para 7-24.
100
Gajanan Moreshwar Parelkar v. Moreshwar Madan Mantri, AIR 1942 Bom 302; Khetarpal
Amarnath v. Madhukar Pictures, AIR 1956 Bom 106.
101
Khetarpal Amarnath v. Madhukar Pictures, AIR 1956 Bom 106.

(1) that the third party’s cause of action (and not merely the underlying
‘liability’) against the indemnified party has accrued (for example,
a procedural requirement for a demand by the third party upon the
indemnified party has been satisfied);
(2) that the indemnified party has the financial means to meet the liability
in full;
(3) that the liability can, in fact, be enforced against the indemnified par-
ty’s assets by legal process (for example, the indemnified party may
have no property at all or, at least, none which can be reached from
the jurisdiction in which judgment was given); or
(4) that there is, in fact, some prospect of the third party taking steps to
enforce the liability.
The position in English law seems to be as follows.102 (1) is not essential if the
only missing element (such as a demand) was intended to operate for the benefit
of the indemnified party. (2) is not essential. (3) and (4) are unsettled. One view
is, in essence, that if (2) is unnecessary then (3) should likewise be irrelevant.
The other view emphasises the sufficiently imminent threat of actual loss as the
reason for intervention: thus (4) and, by parity of reasoning, (3) might be relevant.
Thus, if amendments were to be enacted, it might be helpful to clarify which of
these senses of ‘enforceability’ (or some other sense) was intended by the explan-
atory comment.
The requirements for an order to set apart a fund are less stringent in some
respects. This is not surprising if such relief is regarded as a protective, interme-
diate step. Two points of difference can be noted. First, there must be a reason-
ably clear or arguable case that a liability will fall upon the indemnified party.103
This is consistent with Cozens-Hardy MR’s observation in Richardson, In re104
that the fund so established was to be used to meet liability ‘as and when it
arose’. This sets a lower threshold than the requirements of a clear and presently
accrued liability, which generally apply to orders for indemnification. Insofar as
the fund may be established before liability has arisen, it is slightly more gener-
ous to the indemnified party than Section 125A(1). Secondly, the exercise of the
discretion to grant relief requires a balance to be struck between the severity of
the protection and the perceived threat of dissipation of assets.105 One factor, for
102
See Courtney, supra note 4, at paras 7-32-7-36.
103
Rowland v. Gulfpac Ltd., (1999) 1 Lloyd’s Rep Bank 86 at 98; Papamichael v. National
Westminster Bank Plc, (2002) 1 Lloyd’s Rep 332 at paras 66, 68.
104
Richardson; ex p Governors of St. Thomas’s Hospital, In re, (1911) 2 KB 705, 709 (CA).
105
Rowland v. Gulfpac Ltd., (1999) 1 Lloyd’s Rep Bank 86 at 98; Papamichael v. National
Westminster Bank Plc, (2002) 1 Lloyd’s Rep 332 at paras 64, 66.

example, may be that there is a clear indication that the indemnifier intends to
ignore its obligations.
V. CONCLUSION
The Indian law on contractual indemnities has in some respects diverged from
English law and followed its own path. Such differences are, however, greatly
outweighed by their similarities. The degree of consistency more than one hun-
dred years after the Act is quite remarkable.
In this article I have endeavoured to provide some insights on developments

in English law and to suggest tentatively how these might inform and influence
Indian case law and any future amendments to the Act. In the Preface to the first
edition of his commentary, with DF Mulla, on the Act, Pollock noted the ten-
dency of Indian courts to follow too literally English decisions. He said: “The
best way to counteract such a tendency is not to neglect the letter of English
judgments… but to enter more fully into their spirit and distinguish their perma-
nent from their local and accidental elements.”
I hope this contribution continues that tradition.

CHAPTER VIII
The Indian Law of Guaranties and Securities

BY
VATHSALA M A N Í
PART I : GUARANTIES
The negotiable instruments and documents of commercial credit

no doubt provide for the credibility of payment by the buyer to the seller
as much international trade (the foreign exchange laws granted) as in
domestic trade. However, the main problem in international trade is not
simply the one relating to payment. It is also concerned with d;ie perfor
mance of the contract of trade. The institutions of guarantees and securi
ties perfoim the dual function of ensuring the seller of the payment on
one hand, and of the performance of the contract on the other. Both
guarantees and securities have as their common objective the protection
of the creditor-seller's interests in the event of default of the buyer-debtor.
However, since they possess different legal characteristics involving legal
problems of a distinct nature, they should be considered separately.
As regards the developing countries, the operational significance of
guarantees and securities is felt chiefly in the case of long-term credits
when financing is required for major projects and where the means of
bills of exchange and documentary credit cannot be used to guarantee
payments. The creditor-seller thus insists on a guarantee from an econo
mically reliable third party or a real security. Although one does rot
find large use of guarantees and securities in private international transac
tions—which are more often than not covered by bilateral trade agree
ments—in developing countries, yet a study of the problems concerned
with those modes of international payments will be useful as the countries
are progressively embarking on development programmes requiring long-
term credits, especially at a time when the prospects for financing them
through an immediate expansion of export trade of primary products are
not encouraging.
The use of guarantees and securities, as a means of ensuring payment
in international transactions, is also like the other two instruments—Nego
tiable Instruments and Banker's Commercial Credit—limited by the differ
ences in the laws governing the use of them. These differences arise not only
due to the use of different types of guarantees and securities but also due
to the difference in the meaning of the concept itself. Hence the need to
examine the concept and its interpretation in different countries is essential.
120 Law of International Trade Transactions
1. Guarantees
Guarantees or Suretyship: General Concept

The terms "guarantee" and "suretyship" have been used inter
changeably in Anglo-American legal systems and a sharp distinction bet
ween them does not seem to be possible.1 In Scotland, it appears, how
ever, that a contract of suretyship is known as a 'cautionary obligation',
the surety being styled as a 'cautioner'. 2
In primitive societies there was no credit between individuals. Credit,
as a concept, "presupposed a use, legal or moral, of the force of a fairly
organized society".8 In the absence of credit, the primitive societies suffer
ed from a serious defect that each transaction was considered final.4 His
torically, the concepts of guarantee and surety seem to have been of
recent origin. The origin of the idea of contract itself on which the idea of
guarantee is very much dependent may be found, as Wigmore discovered
at the end cf the last century, in at least four important bodies of law and
language. Thus he found that in the Scandinavian, Germanic, Latin and
Greek Laws and languages, the primitive word for the ideas of "pledge",
"bet" (or "forfeit") and "promise", was substantially the same.5 The
institution of suretyship might have emerged alongside the evolution of
the family system in primitive societies. It was for long the duty of mem
bers of the family to act as surety for one another. Thus this phenomenon
was perhaps an outgrowth of the concept of collective liability of the
family. It is also believed that in the middle ages, in certain cases, there
could have been a custom in existence, under which the vassal was ex
pected to act as pledge for his lord.6
The general concept of suretyship or guarantee centres round various
types of contracts in which a person (the surety) makes a promise in sup
port of the contractual liability or obligation of another person (the deb
tor) to a third person (the creditor). The promise consists in an under
taking of an obligation by the surety either to perform the debtor's obliga
tion in case of non-compliance by the latter or (b) to indemnify the credit-
tor for such non-compliance.
Thus the surety 'guarantees' the performance of the contract between
the debtor and the creditor. "The surety", it is said, "is a favoured
debtor." 7 Generally speaking, there is no moral obligation on the surety
1. Max Radin, Guaranty and Suretyship '8 California Law Review 21 at 23 ff(1929-30).
2. For a historical treatment of the terms like "guarantee" and "surety", see Max
Radin, Guaranty and Suretyship 17 California Law Review 605ft"(1928-29).
3. John. H. Wigmore, The Pledge-Idea : A Study in Comparative Legal Ideas 10
Harvard Law Review 321 at 322 (1896-97).
4. William H. Lloyd, The Surety 66 University of Pennsylvania Law Review 40 (1909-
1910).
5. Wigmore, supra note 3 at 322.
6. Lloyd, supra note 4 at 41-42.
7. Lloyd, supra note 4 at 40.
The Indian Law of Guaranties and Securities 121
beyond his legal obligation. That the surety is a "favored" debtor is more
pronouncedly true especially in view of the fact that the courts of law seem
to be actively sympathetic towards the surety.8 The reason for this favour
able disposition on the part of the courts towards the problems as regards
the rights and obligations of the surety is that a person who stands surety
for another aids the conclusion of the main transaction, although he does
not possess active interest in it—except his interest in assisting the debtor
in performance of the latter's obligations. This judicial attitude is indeed
to be appreciated in the light of the significant role the surety fulfils in the
commercial world facilitating credit for business transactions. 9 Viewed
from this perspective, the judicial policy tends to encourage co-operation
in commercial transactions by reducing the risk of the accessory, i.e., the
surety to the minimum.
In a commercial transaction suretyship forms a secondary obligation
to the principal contract to guarantee its performance or to furnish means
to indemnify the creditor in case of performance. In this sense suretyship
is of relatively recent origin.
Ancient Roman Law

The institution of suretyship under the Civil law has had a fairly
long trial in history going back to the ancient Roman Law.10 The
development of the concept of suretyship in the Continental jurisprudence
has been largely due to the doctrines established by the Roman Law which
had, through the centuries of experience, stripped them off their early forma
lism. There had been five types of contracts of suretyship in the Roman law,
namely, sponsio, fidepromiso, fidejussio, constitutum, and mandatum.11
Of these the sponsio and fidepromiso have been the most ancient ones,
the former being the ancient most. Both the forms are, however, verbal
contracts. In a sponsio the sponsor or surety could intervene only where the
parties were Roman citizens and the obligation was created by stipulation.
The formal verbal contract, typical of ancient civil law, consisted in the
solemn question and answer pattern. The heir to the surety was not, however,
bound.
The fidepromiso, though an ancient form, was a latter development.
This form was resorted to when one of the parties to the contract was an
alien. Like the sponsio, the fidepromiso also terminaetd on the death of the
surety and did not devolve upon his heirs.
The liability of the surety under both the sponsio and fidepromiso was
limited to two years. Where there were co-sureties, each surety was liable
only for his proportionate share of the debt secured. This state of law,
8. Ibid.
9. H P. De Colyar, Suretyship 8 Journal of the Society of Comparative Legislation 44
(1905).
10. See for example, Ernst Rabel, 2 The Conflict of Laws : A Comparative Study
353 ff (Ann. Arbor. Mich., 2nd (ed., 1964); Lloyd, supra note 4 at 45 ff.
11. Moyles (ed.), Ill Institutes of Justinian 20,
was, however, brought about under the lex Furia. By virtue of the lex
Apuleia, a co-surety who had paid more than his share of the debt, had a
right of action against other co-sureties. The surety was under lex Cicereia
entitled to be informed of the amount he became bound for, and of the
number of co-sureties.
Evolved during the later years of the Roman Republic, fidejussio was
commonly made in the form of a verbal stipulation. Yet it had a wider
canvass of operation than the sponsio and the fidepromiso. It could be
made accessory to contracts of every kind, i.e., obligations contracted
re, verbis, litteris consensu. It is, however, important to note that the surety
bound his heirs. Each co-surety was liable for the whole debt. This defect
was subsequently sought to be mitigated. Thus, where special permission
was granted by the Emperor, a surety, sued for the whole debt, could claim
to have the debt apportioned into proportionate shares among the solvent
co-sureties. Later on the practice developed in consequence of which the
payment by a co-surety was treated not as a discharge, but as a purchase
of the debt from the creditor by the paying co-surety. One restriction on
special permission was tint it had to be sought before the payment was
made. This limitation on special permission arose from the fact that the
whole debt on payment was considered to be extinguished. Thanks to
subsequent developments, the surety was made entitled to demand that the
creditor should sue the principal debtor, before taking recourse to the
surety, but the surety had the obligation to produce the debtor before the
court within a time limit fixed by the court.12
The fourth type of suretyship was the constitutum. It was an infor
mal agreement to discharge the debt of another on a fixe 1 day. It was
made actionable by the praetor.
The fifth and the most common form of suretyship was mandalum
qualificatum. In this form of surtyship, one person, the mandator, requested
another, the mandatorim, to lend money to a third person. The obligation
was cast on the first person to indemnify the second against any loss
consequent upon the failure on the part of the third person to redeem the
loan with interest. In most respects, the position of the mandator was
identical with that of the surety in the fidejussio. Yet the mandalum was
the nearest Roman approach to the idea of agency in contract. More
importantly, the contract between the surety and the creditor under the
mandalum was wholly distinct from the contract between the creditor and
the debtor.
The influence of the Roman law doctrines of suretyship on the
present day law, especially the continental law, has been considerable. It
is undoubtedly true that the growth of European law was partly through
the natural development of native institutions to meet new conditions,
and partly through the absorption of Roman law owing to its intrinsic
12. This was under Justinian's beneficium, ordinis or cliscussionis.

merits, and through the dominating influence of Latin-culture, thanks

mainly to the centuries-long political dominance of Rome over the entire
European continent.
The contribution of the Roman law in the realm of the concept of
suretyship may be well epitomized thus : The general idea that "the
surety is the sponsor for the representative of the creditor" emerged
significant. And, as the time passed by, the primary liability of the surety
became secondary "in law as in intention". 13 All this facilitated extensive
use of suretyship devices in commercial transactions in Europe.
D. Common Law
Halsbury defines guarantee as "an accessory contract, whereby the
promisor undertakes to be answerable to the promisee for the debt, default
or miscarriage of another person, whose primary liability to the promisee
must exist or be contemplated". 14
Some of the Common Law rules relative to suretyship were, for
the first time, given statutory basis through the English Statute of Frauds
of 1677. The pre-statute law did not require any writtens evidence of a
suretyship which could thus be proved in the same manner as any ordi
nary contract. The main purpose of the Statute of Frauds was to prevent
the danger of a suretyship being established through false evidence, or
by evidence of loose talk, when it was never meant really to make such
a contract. 15 Section 4 of the Statute of Frauds provided that no action
should be brought upon any special promise to answer for the debt,
default or miscarriage of another person unless the agreement upon which
such action should be brought on some memorandum or note thereof
should be in writing and signed by the party to be changed with it, or
some other person lawfully authorized. However, this provision was a
mere enactment as to evidence.16 Thus if the original written contract of
suretyship was lost, oral evidence was admissible to show that the written
contract had in fact existed.17 All that the statute did was to render an
unwritten contract of suretyship unenforceable by an action before a
court of law. It did not, by itself, render such a contract void.
The Statute, however, was not a comprehensive and foolfroof piece of
legislation. It could be evaded successfully, for it permitted, for instance,
treating the surety's oral promise to be answerable for another person as
a false representation, for which he could b¿ made liable in tort but not
in contract. 18 This necessitated further legislation which was brought in
13. Lloyd, supra note 4 at 46, 47.

14. Simonas, ed., 18 Halsbury's Laws ofEngland 411 (3rd ed., London, 1957).
15. Steel v M. Kinlay, (1880) 5 A.C. 754 H.L.
16. Halsbury's Laws of England, supra note 14 at 424.
17. Barras v. Reed Times, 28th March, 1898. Crays Gas Co. v. Bromly Gas Consumer's
Co. Times, 23rd March 1901.
18. Supra note 13 at 425 fn. 4.
through the Statute of Frauds Amendment Act of 1828. The 1828

Amendment Act (generally known as Lord Tenterden's Act), provided
that no representation or assurance as to the character, conduct, credit,
ability, trade or dealings of any other person in order to obtain him
credit, money or goods could be sued on unless it be in written form. To
render the maker of the representation liable, the representation should
have to be to his knowledge untrue, and been made with the intention of
inducing another to act upon it, with the latter acting upon it and thereby
sustaining damage.
The issue of consideration in the context of suretyship in commercial
transactions does assume a shape different from that in the contest of
an ordinary contract. The English Mercantile Law Amendment Act of
1856 stipulated that no "special promise" to answer for the debt, default,
or miscarriage of another person, if in writing and signed by the party
to be charged therewith (i.e., the surety), on some other person duly
authorized, was deemed invalid to support an action, suit or other pro
ceeding, by reason only that the consideration for such promise did not
appear in writing or by necessary inference from a written document. 19
Despite the Statute of Frauds, suretyship—which the statute described
as a "special contract"— did not come to be in vogue until the end of the
eighteenth century and the beginning of the nineteenth century. The
trend in America seemd to have followed closely that of England. 20
Guarantee in the sense of warranty both of lands and chattels seems
to be very old in the Anglo-Saxon law. The term 'surety' too is said to
have an unbroken lineage which is far older. Max Radin places the
crystalization of its earliest form perhaps as early as the thirteenth century. 21
The concept comprised an engagement by a person to answer for
another's performance. Later, the English cases failed to distinguish bet
ween suretyship so evolved, and guarantee 22 which denoted a contract
and also who made it. Although the Statute of Frauds spok of surety
ship or guarantee as a "special promise", the English took a long time to
classify the issue whether suretyship should be governed by the same law,
which governed the ordinary contracts. The reason probably was the
assumption that since a surety's obligation is a "accessory to the principal
debt and since its validity and extent depend on those of the principal
contractual obligation, it should be subject to the same law. There is an
English case as an authority to this assumption, even as late as 1875."
This assumption was, however, subsequently proved wrong, especially
19. See Holsbury's Laws of England, supra note 14 at 426.

20. Max Radin, supra note 2 at 606.
21. id. at 608.
22. The term 'guarantee' came into being at a late date, the reason being that the
lawyers and merchants had already been supplied with a convenient term, 'surety
ship', see Max Radin, supra note 2 at 608-609.
23. Rouquette v Overmann andSchon, L.R. (1875) 10 Q.B. 525.
because of the independent nature of the surety's obligations. A surety or

a guarantee is bound by his own agreement with the creditor, as distingui
shed from the undertaking giving rise to the obligation of the principal
debtor; and the suretyship is governed by its own law independently,
in principle, from that controlling the main debt. This continental legal
thought and the American practice seem to be consonant with this view of
the matter. 21 "Yet," as Ernst Rabel remarks, "while the law sued not
necessarily be the same for the debt and its guaranty, it is a reasonable
wish that it should be identical as often as possible. The problem of
establishing the adequate local connection for suretyship is similar to
that arising with respect to a contract to sell an immovable, for which
situs is not a compulsory but a desirable contract." 25
The problems in Anglo-Saxon law surrounding the question whether
the liability of the surety was primary or secondary, appear to have come
to the surface through the law reform by the Chancery. This denoted the
emergence of what were later known as the surety's 'equities'. Of the
several equities, the important are :
(1) The right to be indemnified or reimbursed for the loss sustained
through his principal's default. The right to be fully indemnified against
the loss arising out of his guarantee is in fact admitted not only by
the Anglo-Saxon countries but also by the Continental countries.26
(2) As soon as a definite sum has become payable, the surety may
apply to a court (of equity) for a decree directing ihe principal to pay the
creditor so that his own liability is brought to an end.
(3) The right of subrogation or substitution :—The surety, as soon
as he has paid off the creditor has a right to the benefit of all the securities
which the creditor has received from the principal whether known to him
or not at the time of his becoming surety.'·7 The same principle is applicable
against co-sureties to the extent of their liability to contribute.
(4) Right to contribution :—The surety who has paid more than his
share of the common liability is entitled to contribution from his co-sureties,
in regard to the excess, in proportion to the amounts in which they are
respectively liable. The equity here depends not on the contract, but upon
what is called the "equity of burden." 28
In this context, it appears to be pertinent to note the wide accept
ance in the continental law and not in Anglo-Saxon law of two important
privileges of the surety based chiefly on the Roman law :
(i) The benefit of division (beneficium divisionis) which arises where
there are several sureties for the same debt and one alone is sued for the
24. Rabel, supra note 10 at 353-55.
25. Id at 357.
26. See e.g., French Civil Code, section 2028; German, Civil Code, section 775; Spanish
Civil Code, section 1838.
27. See also French Civil Code, section 2029; German Civil Code, section 774.
28. See also French Civil Code, ssction 2033; German Civil Code, sections 426, 774.
whole. Under such circumstances, upon the demand by the surety sued,
the creditor is bound to divide and apportion his claim among the solvent
sureties. In modern civil codes the benefit of division is preserved, but this
privilege may be—and as a matter of fact, is quite frequently renounced.29
(«) The benefit of discussion (beneficium discussions) by virtue of
which the creditor, on demand of the surety and at his expense, is obliged
first to proceed to execution against the property of the principal debtor.30
E. Fundamental Divergency between the Civil Law System and the Common
Law System
The basic divergency between the two major systems of law in their
approaches to the norms of suretyship surrounds the question of form.
Under the Common law—especially under the Statute of Frauds - a
contract for suretyship must be in writing. In sharp contrast, the Civil
law distiguishes itself with a sanction of freedom of form as a basic
principle. Thus, under Civil law oral contracts are as much enforceable
as written contracts. As an exceptional case, contracts for suretyship by
a non-merchant are required to be in writing under the Civil codes; how
ever, a contract of guarantee or of suretyship made by a merchant is not
required to be in writing.™
F. Indian Law
The Indian Contract Act of 1872 appears to follow the general
Anglo-Saxon pattern in respect to the rules governing the contractual
relationship arising out of a contract for guarantee. However, it is impor
tant to bear in mind that although the relevant provisions of the Indian
Contract Act partake of the English law in many material particulars, tha
Act contains several points of divergency.
Section 126 of the Act defines the terms "contract of guarantee",
"surety", "principal debtor" and "creditor". A "contract of guarantee"
is a contract to perform the promise, or discharge the liability of a third
person in case of his default. The person who gives the guarantee is called
the "surety" and the "principal debtor" as the person in respect of whose
default the guarantee is given. The person to whom the guarantee is given
is, of course, the "creditor". The important stipulation, the said section
further makes is that "[«] guarantee may be either oral or written".
The definitions of the "surety", the "principal debtor", and the
"creditor", rightly find place in section 126 of the Indian Act. The sec
tion as a whole conveys the general idea of what a contract of guarantee
29. French Civil Code, section 2026; Belgian Civil Code, section 2026; Louisiana Civil
Code, section 3049; Italian Civil Code, section 1912, Spanish Civil Code, section 1837.
30 French Civil Code, sections 2021-2024; Louisiana Civil Code, section 3049, German
Civil Code, section, 771-773; Spanish Civil Code, sections 1831-1806; Italian Civil
Code, section 1907.
31. Robsrt Charles Kelso, International Law of Commerce 84,88, 89 (Buffalo, N.Y.,
1961).
is, and who are the actors in the transaction. A contract of guarantee, as
the section classifies, involves three parties, namely : the creditor, the
surety and the principal debtor, and a contract to which those parties are
privy. The foundation, indeed, is the contract between the principal
debtor and the creditor. Then there must be a contract between the
creditor and the surety by which the latter guarantees the debt. However,
in order to constitute a contract of guarantee, there must be a third con
tract, by which the principal debtor expressly or by necessary implication,
requests the surety to act as a surety.32 There can be no contract of
guarantee if liability does not exist. The liability of the guarantee presup
poses the existence of a separate liability of the principal debtor and his
liability is thus secondary, which comes into existence only in default by
the principal debtor.33
Further, as section 126 stipulates, a contract of guarantee need not
necessarily be in writting. It may be expressed by word of mouth or it
may be tacit or implied and may be inferred from the course of conduct
of the parties. Chapter VIII of the Act dealing with indemnity and
guarantee is not exhaushivc on the point.34
1· Contract of Guarantee and Contract of Indemnity

The distinction between a contract of gurantee and one of indem
nity is important and remains clarified in the Common Law system.
Although a contract of gurantee may be discribed as a contract of indem
nity in the widest sense of the term 'indemnity', points out Halsbury, yet
contracts of guarantee are distinguished from contracts of indemnity ordi
narily so called by the fact that a gurantee is a collateral contract, that is,
ancillary or subsidiary to another contract, whereas an indemnity is a
contract by which the provision undertakes an original and independent
obligation. In certain cases, where there is a primary and secondary
liability of two persons for one and the same debt, they may stand in
relationship to one another of principal debtor and surety, even though no
express contract of suretyship exists. The existence of such a primary and
secondary liability- as Halsbury observes—does not, however, in every
case necessarily create the relation of principal debtor and surety. Thus,
despite the fact that there is a primary and secondary liability, for instance,
between the transferee and the transferor of shares, the relation between
them is not that of principal debtor and surety.35
As pointed out earlier, there should be three sets of contractual
32. Ramchandra B Loyalka v. Shapurji N. Bhownazree, A.I.R. 1940 Bom. 315; Jan-
watory v. Jethmal, A.I.R. 1958 Rajaslhan 343; Major General Mahabir Shum Sher
Jung Bahadur Rana v. Lloyds Bank Ltd. and another, A.I.R. 19SS Cal. 371.
33. Brahmayya & Co. v. K. Srinivasan Thangirayar and others, A.I.R. 1958 Mid. 122.
34. Mir Niyamat Alikhan v. Commercial and Indusrtial Bank Ltd., A.I.R. 1969 Andina
Pradesh 294.
35. 18 Halsbury's Laws of England, supra note 13 at 416.
relationships in a contract of guarantee under Indian law, in contradistinc

tion to a contract of indemnity. One is between the creditor and the
principal debtor; the second, between the creditor and the surety; and the
third, between the principal debtor and the .surety. If the first two are the
only contracts, the case is "clearly one of indemnity. It is the third con
tract—the one where the principal debtor requests a third person expressly
or by necessary implication to act as surety—that constitutes a contract
of guarantee. 36 One of the essential elements for a transaction of a guar
antee, held the Allahabad High Court in a case, is the presence of three
different parties collaborating in the execution of a deed of guarantee.
Where this element is missing and the principal debtor is not taken into
consideration at all, clarified the Court, the deed is not one of a gurantee
but is only an indemnity bond.37 Thus if a person undertakes to re
imburse another for some loss which may be caused to him, say, by a third
party or by himself, but not at the request, express or implied, of a third
party, then the person who, having undertaken the liability and having
been called upon to make good the loss, will not be able to recover the
loss so caused to him from the principal debtor, the latter being not privy,
but virtually a stranger to the undertaking given to the promisee. Such a
contract is not a contract of guarantee but one of indemnity.38
Section 124 of the India Contract Act, 1872, defines a contract of
indemnity as a contract by which one party promises to save the other
from loss caused to him by the conduct of the promisee himself, or by
the conduct of any other person.
2. Consideration for Guarantee

Under Section 127 of the Act, anything done, or any promise made,
for the benefit of the principal debtor, may be a sufficient consideration
to the surety for giving the guarantee. Explaining this provision, the
Rajasthan High Court held in 1963 that in order to constitute a valid con
sideration for guarantee, the creditor must have done something for the
benefit of the principal debtor. Anything done or any promise made for
the benefit of the principal debtor must be contemporaneous to the surety's
contract of guarantee in order to constitute proper consideration there
for. A contract of guarantee executed afterwards without any considera
tion is therefore void. The Rajasthan High Court thus took the view that
the word "done" in Section 127 is not indicative of the inference that past
benefit to the principal debtor can be a good consideration.39
36. A.I.R. 1940 Bom. 315; A.I.R. 1958 Raj. 343; Municipal Committee, Buldana v.
Vishnu DamodarBhalrao, A.I.R. 1949 Nag. 48.
37. Ms. Radha Kunwar v. Ram Naroin and Others, A.I.R. 1952, All. 587.
38. A.I.R. 1953 Rajasthan 343.
39. Ram Naroin v. Lt. Col. Hari Singh and another, A.I.R. 1964 Raj. 76. But the Oudh
High Court, in 1940, held that the word "done" could be interpreted to mean that
past benefit to the principal debtor could be a good consideration for a contract of
guarantee, A.I.R. 1940 Oudh 346-
Consideration between the creditor and the principal debtor is a

valid and good consideration for the guarantee given by the surety. It is
not necessary that the consideration should flow from the creditor and be
received by the surety.40
3. Surety's Liability
Under Section 128 of the Indian Act, the liability of the surety is
co-extensive with that of the principal debtor, unless it is otherwise provid
ed by the contract.
The courts, as a general rule, adopt an attitude favourable to the
surety, for the reason that the liability incurred by the surety is only
secondary. Of the several rules of practice which courts follow in cases
involving liability of the surety in the Common law system, the impor
tant rules are: 41
(/) The liability of the surety being secondary, a creditor cannot,
before any default has been committed by the principal debtor, bring an
action quia timet against a surety to force him to set apart money to provide
for the prossibility of a debt becoming due from the principal debtor and
the principal debtor making default.
(//) The creditor has a heavy onus to prove the liability of the
surety. In an action against the surety by the creditor, a judgment or
award obtained by the latter against the principal debtor is not evidence
against the surety. Nor do the principal debtor's admissions of liability
bind the surety.
(in) The surety's contract must be strictly construed.42 His liabi
lity flows only from the terms of the contract and he cannot be made
liable for more than what he has undertaken.
(¡v) The surety cannot be made liable beyond the terms of the prin
cipal contract.
(v) The surety's liability cannot be unduly extended. However, it
comprises all transactions which naturally and reasonably are entered in
to on the faith of the guarantee.
Section 128 of the Indian Act requires the surety to specify clearly in
the contract that his liability is limited and that it is not co-extensive with
that of the principal debtor. In the absence of any such stipulation by
the surety, his liability, under the section, must be deemed co-extensive.
There is judicial authority on the statement that the burden to prove that
the liability is limited is cast on the surety.43 The only protection Section
40. A I.R. 1969 Andhra Pradesh 294.

41. Hahbury's Laws of England, supra note 14 at 443. ff.
42. A coatract of surety must be construed reasonably and strictly in favour of the
surety—Subhankhan Ramjanv. Lai Khan Haji Umakhan and others, A.I.R. 1948
Nag. 123.
43. Bharat National Bank Ltd. and another v. Thakar Das Madhok, A.I.R, 1935 Lahore
729.
128 can give him in this respect is that he cannot be asked to be liable for
which the principal debtor has not bound himself liable under the principal
contract.
The guarantees in trade transaction are usually given either to secure
the supply of goods on -credit or advances of money and may be limited
in amount, or absolutely unlimited, so far as the surety's liability there
under is concerned. Where títere is a pecuniary limit, the guarantee con
tinuing is not exhaustive by the first advance or credit equal to the pre
scribed amount. But a giirantee, though continuing and limited to a
given sum, may and sometimes does, stipulate that the surety shall only be
liable for a definite period of time and not longer. In the latter case, it is
obvious. It is often an interesting question of construction whether the
guarantee covers the transaction completed but not matured during the
time limit. The question whether a particular guarantee is a continuing or
non-continuing guarantee, is also a question of construction of the con
tract, where it is not clear either way from the face of the contract. Sec
tion 129 of the Indian Contract Act defines a continuing guarantee as a
guarantee which extends to a series of transactions. The important and
noteworthy point in this regard is the fact that the section does not define
nor lay down any criteria of practical value as to what exactly a "series
of transactions" means.44
However, the Madras High Court has for long been of the view that
a request to advance money to another person up to a certain limit for his
trade is a continuing guarantee.45 Revocation of a continuing guarantee
is possible in either of the two ways. Under Section 130 of the Indian
Act, it can at any time be revoked by the surety, as to future transac
tions, by notice to the creditor. Its revocation may also occur on the
death of the surety—under Section 131 —of course, only in the absence of
a contract to the contrary. It is worthwhile to note that both the revoca
tions operate as against "future transactions" only.
4. Discharge of Surety's Liability

Indian law, following Common law, provides for discharge of
surety in four different sets of circumstances. First, the surety is discharged
when any variance is effected to the main contract between the principal
debtor and the creditor.46 However, to cause discharge of the surety, the
variance must have been made "without the surety's consent". The Indian
law received authoritative expression on this point as early as 1934 through
a Privy Council decision in Pratap Singh v. Keshavlal.47 The case involved
44. Thus it lias been held that in consdering whether the bond constitutes a continuing
guarantee, surrcunding circumstances must be considered unless the wording in the
bond precludes it. Nedungadi Bank Lid. v. Daraikhaimu Animal, A I.R. 1941 Mad.
282.
45. T.N.S. Firm v. V.P.S. Muhammad Hussain and others, A.l.R 1933 Mad. 756.
46. Section 133 of the Indian Contract Act, 1872.
47. A.l.R. 1935 P.C. 21.
a guaranteed transaction of an advance of Rs. 1,25,000 on security of four

properties, whereas the real transaction carried out was one of an advance
of Rs. 1,000,000 on security of three properties. It was held by the Privy
Council that the sureties could not be held liable in respect of the perfor
mance of the latter transaction, which was not what they had contracted
to guarantee. The Council, speaking through Lord Atkin, clarified the
legal position thus :
the law on the discharge of sureties has been some what obscured by
the emphasis laid in the cases on an agreement between the parties
to vary in the terms of the original agreement. The principle is that
the surety, like any other contracting party, cannot be held bound to
something for which he has not contracted. If the original parties
have expressly agreed to vary the terms of the original contract no
further question arises. The original contract has gone, and unless
the surety has assented to the new terms, there is nothing to which
he can be bound, for the final obligation of the principal debtor will
be something different from the obligation which the surety guarante
ed. Presumably he is discharged forthwith on the contract being
altered without his consent, for the parties have made it impossible
for the guaranteed performance to take place.48
Lord Atkin, expounding the principle, was indeed circumspect. He

thus found it desirable to add that the application of this principle must
always depend upon a correct analysis of the contract in fact made. "Gua
rantees", he pointed out, "frequently relate to obligations without special
reference to any specific contract between the creditor and the debtor. In
such a case the doctrine referred to would have a very limited operation." 49
The second circumstance which discharges the surety under Indian
law is by release or discharge of principal debtor. Section 134 of the
Contract Act provides that the surety is discharged by any contract
bstween the creditor and the principal debtor, by which the principal
debtor is released or by any act or omission of the creditor, the legal
consequence of which is the discharge of the principal debtor. Mahanth
Singh v. U Ba F 50 was a case that arose out of a suit against principal
debtors and the surety, where the names of the original debtors were struck
out upon an application by the creditor. The Privy Council held that the
only result of the creditor's act was to preclude the bringing by the creditor
of a fresh suit in respect of the subject-matter against them, and is not to
release or discharge the principal debt. Lord Porter, speaking for the
Council, observed that "A surety is discharged if the creditor, without his
consent, either releases the principal debtor or enters into a binding
48. Id. at 24; the Council also referred with approval to Blest v. Brother, 6 L.T. 620 (of
1862); and Smith v. Wood, 130 L.T. 250 (of 1929).
49. Id. at 25.
50. A.I.R. 1939 P.C. 110.
arrangement with him to give him time. In each case the ground of
discharge is that the surety's right to pay the debt at any time and after
paying it, to sue the principal in the name of the creditor is interfered
with." 51 "While an absolute release is given," held his Lordship, "there
is no room for any reservation of remedies against the surety. ..Where,
however, the debt has not been actually released, the creditor may reserve
his right by notifying the debtor that he does and this reservation is effec
tive not only where the time of payment is postponed but even where the
creditor has entered into an agreement not to sue the debtor. In neither
case is there any deception of the debtor since he knows that he is still
exposed to a suit at the will of the surety."52 The Council found that if
the only result of striking out the original debtors from the action was to
preclude the bringing by the creditor of a fresh suit in respect of the sub^
ject-matter against them, and was not to release or discharge, the principal
debt, "then the debt remains a debt though the creditor by reason of a rule
of procedure cannot himself bring an action upon it".' 3 Thus it was held
that the surety could not be said to have been discharged under those
circumstances.
The third set of circumstances which may discharge the surety's
liability has been provided in Section 135 of the Contract Act, under
which a contract between the creator and the principal debtor, by which
the creditor makes a composition with, or prom:ses to give time to, or
not to sue, the principal debtor, discharges the surety, unless the surety
assents to such contract. Three different circumstances releasing the
surety of his liability have been envisaged in the section: (1) when a
creditor compounds with the principal debtor; (2) when the former pro
mises to give time to the latter; and (3) when the former agrees not to
sue the latter. In all these three situations, the conditioning factor is
undoubtedly "unless the surety assents to such contract". The principle is
derived from the English common law. 5 ' However, the provisions of
Section 135 have not been liberally construed by the Indian courts. In
Damodardas v. Muhammad, it was held that a mere gratuitous agreement
by a creditor to give time to the principal debtor could not discharge the
surety, but "the agreement must amount to a contract". 68 In fact, in
Lai Behari v. Allahabad Bank, it was even held that the section contemplat
ed a subsequent contract between the creditor and the principal debtor
whereby the time originally fixed was subsequently extended and that in
the absence of such a subsequent contract the section had no application.*6
51. «.at 111.

52. Id. at 111-112.
53. Id. at 114.
54 Samuell v. Howarth, 3 Mer. 272; Polak v. Everett, 1 Q.B.D. 669. 673, 674.
55. I.I..R. 22 All. 351; see also LalBehari v. Allahabad Bank, 27 All. L.J. 1137; Maharaj
Bahadur v. Basanta, 17 C.W.N. 695.
56. 27 All. L.J. 1137.
However, the subsequent contract may be either express or implied, i.e.,

inferred from the acts of the parties.57
Section 135, it may be suggested, must be read along with Sections
136 and 137. The latter sections constitute exceptions to the general rule
of Section 135. Under Section 136, where a contract to give time to the
principal debtor is made by the creditor with a third person, and rot with
the principal debtor, the surety is not discharged. Section 137, on the
other hand, provides that mere forbearance on the part of the creditor to
sue the principal dedtor or to enforce any other remedy against him does
not, in the absence of any provision in the guarantee to the contrary, dis
charge the surety. Section 137 clarifies in express terms what is clearly
implied in Section 135,58 that what is needed to cause the discharge of the
surety is not "mere forbearance" on the part of the creditor to sue the
principal debtor, but a positive act, a promise or a contract, to give time, or
not to sue. Thus if the creditor shows simple neglect to sue the principal
debtor, in the absence of any contrary provision in the guarantee, that
does not by itself cause the automatic release of the surety.58 It has been
held in Mercantile Bank v. Tahilram*0 that in applying these provisions of
the law, a careful distinction must be made between a variation of a
contract and a mere forbearance.
Section 139 of the Indian Act in a broad sweep covers the rest of the
circumstances that cause discharge of the surety. By virtue of that provision,
if a creditor (1) does any act which is inconsistent with the rights of the
surety, or (2) omits to do any act which his duty to the surety requires him
to do, and the eventual remedy of the surety himself against the principal
debtor is thereby impaired, the surety is discharged. Thus the creditor, by
his act, or omission, may cause discharge of the surety the important
condition being that by such act or omission "the eventual remedy of the
surety himself against the principal debtor is thereby impaired". 01
57. In Rally Prosunnu v. Umbica, 18 W.R. 417, the credilor accepted, without thj
surety's knowledge, a sum of money on account of interest in excess of the interest
then due on a promissory note and gav: time to the debtor. It wis held thit the
surety was discharged.
58. Section 135 provides as follows :
A contract between the creditor and the principal debtor, by which the creditor
makes a composition with or promises to give time to or not to sue, the principal
debtor, discharges the surety, unless the surety assents to such contract".
Section 137 lays down the following conditions :
"Mere forbearance on the part of the creditor to sue the principal debtor or to
enforce any other remedy against him does not in the absence of any provision in
the guaraníes to the contrary, discharge the surety."
59. Oriental Financial Corporation v. Gunrey & Co., L.R. 7, Ch. 142 at 150; For Indian
cases see, Kali v. Abdul, 23 C.W.N. 545 (P.C.); Tulsidas v. Hashim, 78 I.C. 868;
Kali Prasad, v. Jotindra, I.L.R. 36 Cal. 626; Abid v. Lachmi, 154 I.C. 111.
60. I.C. 309.
61. Compare this provision with section 40 of th3 Indian Negotiable Instruments Act,
1881.
Joint and Several Liability of Co-sureties

Section 138 of the Indian Contract Act is significant in that its pro
visions are divergent from the English law. Under the section, where
there are co-sureties, a release by the creditor of one of them does not
discharge the others; neither does it free the surety so released from his
responsibility to the other sureties.82 The English law, on the contrary,
provides that when the creditor releases one of the co-sureties who have
contracted jointly and severally, the others are discharged, the joint surety
ship of the others being part of the consideration of each.63 Sections 44
and 138 of the Indian Contract Act have been drafted with a view to
modifying the English law.64
Section 138 makes it clear that the liability of the co-sureties in
India is joint and several. But the fact that the surety bond is enforceable
against each surety, severally, and that it is open to the creditor to release
one or more of the joint sureties does not alter the true character of an
adjudication of the court when the proceedings are commenced to enforce
the covenants of the bond against all the sureties. The case in point is
Sri Chand v. Jagdish Pershad.6& The Supreme Court held in that case that
the mere fact that the obligation arising under the covenant may be
enforced severally against all the covenantors, does not make the liability
of each covenantor distinct. It is true, the court pointed out, that in
enforcement of the claim of the decree-holder the properties, belonging to
the sureties individually, may be sold separately; but that is because the
properties are separately owned and not because the liability arises under
distinct transactions.68
The principle of contribution is recognized through Sections 146 and
147. Section 146 provides that where two or more persons are co-sure
ties for the same debt or duty, either jointly or severally and whether
under the same or different contracts, and whether with or without the
knowledge of each other, the co-sureties in the absence of any contract
to the contrary are liable, as between themselves, to pay each an equal
share of the whole debt, or of that part of it which remains unpaid by the
principal debtor. Where, however, the co-sureties are bound in different
sums, they are by virtue of Section 147, liable to pay equally as far as the
limits of their respective obligations permit. The co-surety's right to con
tribution has long been recognized on the basis of the principles of equity.67
At least on one important point the Indian judiciary has had occasion to
clarify it. The question was whether the surety could be allowed to work
62. See section 44 of the Contract Act of 1872 for the identical effect of release of one
joint promisor.
63. North v. IVakefield. 18 L.J. Q.B. 214; Wilkinson v. Lindo, 10 L.J. Ex. 94; Jenkins
v. Jenkins, (1928) 2 K.B. 501; Re E.W.A. (1901)2 K.B. 642, 652.
64. Krishna v. Sanat, I.L.R. 44 Cal. 162, 172.
65. A.I.R. 1966 S.C. 1427.
66. Id. at 1431.
67. Ibn Hasan and another v. Brijbhukan Saran, I.L.R. (1904) 26 All. 407 at 418 (KB.).
out his rights against his co-sureties and the principal debtor and release
the security in the same suit. In Kamal Chander v. Sushila Bala Dassee,™
Justice Panckridge answered the question in the affirmative.
Surety's Rights Against the Principal Debtor

It may be repeated, at this juncture, that by virtue of Section 128
the liability of the surety is co-extensive with that of the principal debtor,
unless it is otherwise provided in the contract. Section 140 enshrines the
general common law principle that where a guaranteed debt has become
due, or default of the principle debtor to perform a guaranteed duty has
taken place, the surety, upon payment or performance of all that he is
liable for, is invested with all the rights which the creditor had against the
principal debtor. This rule is also strengthened by the principle laid down
in Section 145 that in every contract of guarantee there is an implied pro
mise by the principal debtor to indemnify the surety; and the surety is en
titled to recover from the principal debtor whatever sum he has rightfully
paid under the guarantee, but sums which he has paid wrongfully. To
enable the surety to enforce his right under Section 140 against the princi
pal debtor, two conditions must, however, be fulfilled: first, that the debt
must subsist, and second, that his remedy against the principal debtor must
remain unimpaired. 89 In Darban Lai v. Mahbub70 the Allahabad High court
has held that Section 140 is open only to a surety who has done all he is
liable to do. If the surety does not pay the whole of the debt due to the
creditor, but pays only a part thereof, the section is not applicable.
Section 141 contains the most practical application of the principle
laid down in Section 140.71 For the section entitles a surety to the benefit
of "every security" which the creditor has against the principal debtor at
the time when the contract of suretyship is entered into whether the surety
knows the existence of such surety or not, the section also provided
that if the creditor loses, or, without the consent of the surety, parts with
such security, the surety is discharged to the extent of the value of the
security.72
Recently, the Supreme Court has had an opportunity to apply
its mind to the provisions of Section 141. The State of Madhya Pradesh
v. Kaluram,73 decided by the Supreme Court in 1966. was a case where
Kaluram, by executing a surety bond, had undertaken to discharge the
liability arising out of any act, omission, negligence or default of a forest
contractor. The proceedings had been started against the surety for re
covery of certain arrears of instalment payments due from the forest con-
68. 1801.C. 572^ ~
69. Babu v. Manak, 176 I.C. 786.
70. I.L.R. 49 All. 640.
71. Vyravan v. Official Assignees, Madras, 63 M.L.J. 615.
72. For the identical English doctrine, see Rees v. Barrington, 2 W. T.L.C. 4 ed. 1002,
cited in Wuliffv. Lay, L.R. 7 Q.B. 756, 764.
73. A.I.R. 1967 S.C.I 105.
tractor who had already removed almost the entire quantity of trees sold
to him. The surety then commenced an action against the State for a
declaration that he could not be held liable for the arrears of forest dues,
and for an injunction restraining the State from realizing or from con
tinuing the recovery proceedings. His chief contention, in the lower courts
as well as before the Supreme Court, was that the forest authorities had
given time to the contractor and omitted to take steps which their duty
to the surety required them to take—such as prompt siezure and sale of
the trees after the default of instalments; and that since on this account
the surety's eventual remedy against the principal debtor had been
impaired, he should beheld discharged from liability as surety. Upholding
this contention, the Supreme Court said, classifying the scope of Section
141:
[The expression "security" in Section 141 is not used in any techni
cal sense; it includes all rights which the creditor had against the property
at the date of the contract. The surety is entitled on payment of the debt
or performance of all that he is liable for, to the benefits of the rights of
the creditor against the principal debtor which arise out of the transaction
which gives rise to the right or liability: he is, therefore, on payment of the
amount due by the principal debtor entitled to be put in the same position
in which the creditor stood in relation to the principal debtor. If the
creditor has lost or has parted with the security without the consent of the
surety, the latter is, by the express provision contained in Section 141,
discharged to the extent of the value of the security lost or parted with. 74 ]
Following an English leading case76 on the point, the court was of the
opinion that, certain minor variations apart, Section 141 "incorporates the
rule of English law relating to the discharge from liability of a surety
when the creditor parts with or loses the security held by him".
It was, in fact, contended on behalf of the State that mere inaction
en the part of the authorities could not amount to parting with the security.
Turning down this argument squarely, the Court found : "But the terms
of the statute do not apply only to cases in which by positive action on the
part of the creditor the security is parted with. Even if security is lost by
the creditor, the surety is discharged."76
7. Invalid Guarantees
The Indian Act envisages two situations of invalidity of guarantees :
(1) Any guarantee which has been obtained by means of misrepresentation
made by the creditor or with his knowledge and assent, concerning the
material part of the transaction, is invalid."77 (2) Any guarantee which the
creditor has obtained by means of keeping silence as to material circum-
74. Id. at 1108-1109, emphasis supplied.
75. Wulff and Billing v. Jay, (1872) 7 Q.B. 756.
76. A.I.R. 1967 S.C.I 109.
77. Section 142, The Indian Contract Act, 1872.
stances is invalid.78
Concealment, under Section 143, is fraudulent. Indian law seems to
make a distinction between intentional concealment and mere non-dis
closure.79 To invalidate a guarantee, thus, two points will have to be
proved, first that there was misrepresentation as to a material part of the
transaction, or silence as to material circumstance. Second, that the guar
antee was in fact obtained by means of such misrepresentation or silence.80
Indian courts have, however, distinguished between fiduciary guarantees
by persons in favour of banks. In the first case, the requirement as to the
disclosure of all material circumstances has to be strictly satisfied. But,
where the suretyship is with regard to an advance to be made by a bank,
the bank need not disclose part indebtedness to the surety.81
Indian law does not, however, consider that a guarantee is invalid,
if a person gives it upon a contract that the creditor shall not act upon it
until another person has joined in it as co-surety, and if the other person
does not join.
8. Effect of Foreign Exchange Regulations on Guarantees
The Indian Foreign Exchange Regulation Act, 1947 and the Exchange
Control Manual contain several provisions dealing with export and import
guarantees and special provisions governing guarantees for persons residing
outside India.
(a) Export Guarantees : The Exchange Control Manual85, issued by the
Reserve Bank of India, permits authorized dealers—who are banks reco
gnized as authorized dealers in foreign exchange by the Reserve Bank—to
furnish performance bonds or guarantees (including those in lieu of earnest
money) in favour of overseas buyers on account of Indian exporters
without prior reference to the Reserve Bank provided they are satisfied
about the bonafides of the applicant and the terms agreed to between the
exporters and the foreign buyers are in accordance with the Excange
Control Regulation. In those cases where exporters find it necessary
to furnish a bank guarantee for an amount slightly in excess of what
is asked for in the tender invitation, authorized dealers may execute
guarantee of an amount up to one per cent above the percentage fixed in
the tender invitations. While furnishing performance guarantees in respect
of export of capital and engineering goods under deferred payment arrange
ment, authorized dealers should satisfy themselves that the exporter con-
78. Section 143, ibid.
79. Balkrishna, V. N Krithikar and others v. The Bank of Bengal, I.L.R. (1891) 15 Bom.
585 at 591.
80. The Secretary of State for India v. Nilamkam Pillai, I.L.R. (1883) 6 Mad. 406 at
408.
81. A.R. Krishnaiwamy Iyer and another v. Travancore National Bank, A.I.R. 1940
Mad. 437 at 439; Imperial Bank of India v. V.P. Avanasi Chettiar, A.I.R. 1930
Mad. 874 at 879.
82. Reserve Bank of India, Exchange Control Manual 37 (New Delhi, 7th ed., 1971).
cerned is in a position to undertake the transaction and that the deferreed

payment terms and other clauses in the contract involving foreign exchange
payments which require the approval of the Reserve Bank of India have
in fact been approved by the Reserve Bank. Authorized dealers are
required to submit to the Reserve Bank a monthly statement of such
bonds or guarantees in a prescribed form. Along with the statement
should be attached a certified copy of each of the bonds.
(b) Import Guarantees : The Exchange Control Manual requires that
applications from importers for guarantees in favour of foreign manufac
turers or suppliers of goods for payments against imports into India should
be referred to the Reserve Bank for prior approval. It is specifically
stipulated by the Manual that such applications will be ordinarily enter
tained only in respect of import of machinery and heavy equipment pro
posed to be imported under licences authorizing deferred payments and
should be supported by the necessary documents.
(c) Guarantees on behalf of Non-Residents : Under the Indian Foreign
Exchange Regulation Act, 1947, Section 18 (3-c), a person, resident in India,
can give a guarantee in respect of any debt or other obligation or liability
of a person resident outside India, only upon the general or special permis
sion of the Central Government or the Reserve Bank. The Reserve Bank,
however, has given authorized dealers a general permission83 to give guar
antees in favour of persons resident in India in respect of any debt or
other obligation or liability of persons resident outside India subject to
such instructions as the Reserve Bank may from time to time issue to
them. The general permission is also given to firms and companies
resident in India to give guarantees to income-tax officers and other
authorities under the Income-tax Act, 1961, in respect of taxes due by
nationals of foreign states in the employ of such firms or companies.
The Exchange Control Manual?* further authorizes dealers to give on behalf
of their overseas head offices/branches/correspondents performance bonds
or guarantees in favour of residents in India in support of tenders to be
submitted for the due performance of contracts, or for the refund, in the
event of contracts not being fulfilled of advance payments received. The
requirement, however, is that the bond of the guarantee is covered by the
counter-guarantee of the head office/branch/correspondent. The Manual
requires the authorized dealers to submit to the Reserve Bank a monthly
statement of such guarantees furnished by them.
PART II : SECURITIES
A. General Concept
The concepts of security interest and of guarantees have been,
through the long expanse of time, born out of the original, what Wigmore
83. Notification No. F.E.R.A. 230/65 R.B. of 1 April 1965.
84. See supra note 82.
calls, "the pledge—idea.*6 It should, therefore, be noted that the two

concepts owe very much to each other for their evolution and share in
many respects a single process of development.86
"The general concept of security", says Edward I. Sykes, an Austra
lian authority, "involves a transaction whereby a person to whom an
obligation is owed by another person called the 'debtor' is afforded, in
addition to the personal promise of the debtor to discharge the obligation,
rights exercisable against some property of the debtor in order to enforce
discharge of the obligation".87 Security, however, is not the transaction.
It is only its consequence. It is "the interest or aggregation of rights
which arises from such transaction. Such interest is essentially of a "real"
or "proprietary" character, not necessarily in the sense of a right amoun
ting to full ownership of a res or thing, but in the sense of involving rights
available against such res and not merely against a person". 88 Sykes
attempts a broad definition of security interest. According to this defini
tion, "security is an interest vested in a person (creditor) in certain pro
perty ownd by another (debtor), whereby certain rights are made availa
ble to the creditor over such property in order to satisfy an obligation
personally owed or recognized as being owed to the creditor by the debtor
or some other person". 89
The term "security" is being employed by the modern business com
munity to refer to the thing over which the security is given. It is also
often identified with capital issues made by modern business concerns.
Thus the term is used in a special and narrow sense while referring to
company or government "securities", where the term covers documents of
money value such as shares, stocks and bonds.
The general concept in Roman law

The concept of security seems to have been narrower under Roman
law.*0 Under the traditional trichotomy followed by the writers on Com
mon law, security can be devided into (1) mortgages, (2) possessory
securities, and (3) hypothecation. This classification has been chiefly based
on the Roman law transactions of fiducia, pignus and hypotheca, fiducia,
bearing great resemblance to the Common law concept of mortgages
involving a transfer of the res or thing to the creditor, with a supervening
contractual obligation, to retransfer the property to the debtor on redemp-
85. John H Wigmore, The Pledge—Wei : A Study in Comparative Leâl Ideas-!, 10

Harvard Law Review 321 (1896-97).
86. See generally Wigmore, Supra note 1; William H. Lloyd, The Surety 66 University
of Pennsylvania Law Review 40 (1909-1910) ; Max Radin, Guaranty and Suretyship
17 California Law Review 605 (1928-29); H.P. De Colyar, Suretyship Journal of the
Society of Comparative legislation 44 (1905).
87. Edward 1. Sykes, The Law of Securities 3 (Sydney/Melbourne/Brisbane, 1962).
88. Id. at 3.
89. Id. at 6.
90. W a t 10-11.
tion of the debtor. The fiducia transaction seems to have effected a full
transfer to the creditor of such rights of dosminium as were previously
vested in the debtor.
In a pignus transaction, the debtor does not transfer to the creditor
the sum total of proprietary rights bundled in his ownership. The transac
tion merely involved a transfer of possession of the property, the debtor
retaining the residum of his proprietary rights.
The hypotheca involved a transaction wherein the property (usually
an immovable property, especially under French law) was appropriated
to the creditor. The creditor could, on default on the part of the debtor,
pursue certain remedies against the property and not merely against the
debtor. He seems to have had certain proprietary rights with respect to
the property in question.
Sykes finds that though the Roman legal theory did not categorically
differentiate between pignus transactions involving right of the creditor to
possession of the property, but in the practice of hypotheca, the debtor was
invariably allowed to remain in occupation. At the same time the credi
tor, for not going into physical possession, was entitled to certain special
remedies. 91 This, of course, differentiated hypotheca from pignus.
Roman law influence on English law

It has already been pointed out, that the orthodox writers on the
English law of securities have followed the Roman law trichotomy of
security devices.82 Fiducia of Roman law seems to have paved the way
for the Common law concept of mortgage. Mortgage stricto sensu, under
the Common law, involves a total divesting by the mortgagor of what
rights he has so that after the transaction he has nothing left except the
rights of a mere contractual nature. He transfers all he has.
The second category of English Common law security devices is what
is called possessory security or pledge. In the case of possessory security,
resembling the Roman pignus, the debtor does not transfer all his proprie
tary rights on the property, but only transfers to the creditor the right of
possession over it. The transfer of right of possession is, however, manda
tory under Common law for transactions constituting a pledge or posse
ssory security.93
Hypothecation, after the Roman hypotheca, has become a Common
law security device. The concepts of charge and even lien seem to have
emerged from it.94 The former gives the chargee certain proprietary rights
that are jura in re aliena and their only objective is to enable him to
recover the debt due. Being jura in re aliena, they are not immediately
91. Sykes, Supra no'c 3 at 10-11.

92. Id. at 10.
93. V.C. Fo'sum, Chatlel Mortgage and Substitutes Therefor in Latin America 3
American Journal of Comparative Law 477-78 (1954).
94. See Sykes, Supra note 3 at 12-13, 14.
realisable or exercisable. The rights are only potential and become erysta-
lized only in the event of default, or in accordance with any contractual
stipulation. This is what essentially differentiates hypothecation from
mortgage stricto sensu and pledge under Common law. For, both in
mortgage and pledge, the creditor is entitled to certain present rights res
pecting the res and these rights take shape from the moment of the transac
tion. The chargee's rights, under hypothecation, have in fact three main
characteristics, namely: (1) they are only potentially exercisable; (2) being
jura in re aliena, they are not dominion rights; they are exercisable over
res aliena and not res propria; and (3) they do not comprise actual enjoy
ment rights over property.95
The concept of "floating lien" appears to have been a later develop
ment in Common law. It finds probably the best and broad expression
in Article 9 of the Uniform Commercial Code of the United States.86
Under that provision, "the property in which a security interest is to be
created may include property owned when the security arrangement is
entered into or property to be acquired thereafter. It is further provided
that the obligation secured will usually be one incurred to acquire the
specific property secured, or one incurred through the contemporaneous,
past, or future borrowing of money.
B. Modern security devices

Several new security devices other than those that traditionally go
under the categories of pledges and mortgages owe their emergence to
the genius of the business communities, particularly of countries where an
expanding economy requires sources of credit that are adaptable to modem
business relations. The Report of the Secretary-General to the UNCITRAL
in 1969 contains a comparative survey of security devices under a wide selec
tion of national laws.07 The Report, at the outset, notes that the approach
to securities, in most countries, has on the whole been "piecemeal and
fragmentary". 98 The important finding that the Report makes is that the
security devices adopted by several countries differ inter se both in form
and substance. Following are the devices most widely used.
Pledge without dispossession and chattel mortgage

Both pledge without dispossession, a characteristic of the Civil law
system, and chattel mortgage, especially of the Common law system, grew
95. Id. at 13.
96. See Petor F. Coogan, Article S of The Uniform Commercial Code : Priorities among
Secured Creditors and The Floating Lien 72 Harvard Law Review 838rT (1958-59).
97. UN Doc. A/CN. 9/20/Add. 1.
98. On a study of securities in developing countries one may be tempted to come to a
conclusion that the use of securities in those countries has be;n limited for several
reasons, such as (1) that the approach has been "piecemeal and fragmentary"; (2)
that laws exist only in certain limited areas; (3) that their external use is g iverned
by the foreign exchange laws which are understandably vigorous in those countries.
out of the traditional concept of pledge. The traditional concept of

pledge always involved transfer of possession by the pledgor to the
pledgee. The requirement of transfer of possession has often proved to
be an inconvenient method of securing credit in modern business practice.
As the Secretary-General's Report rightly points out, this traditional
requirement comes in the way of an attempted smooth business operation
in cases where credit is sought to acquire capital goods in order to develop
commercial, industrial or agricultural activities. For, these are the parti
cular cases where the debtor will obviously wish to utilize the goods for
that purpose, and the requirement of transfer of possession will naturally
defeat the very purpose of the credit transaction. The Civil law system,
therefore, developed the concept of pledge without dispossession." A
comparison may be made between the Civil law pledge without disposses
sion and the Common law chattel mortgage. The chattel mortgage sale
is sale of personal property upon chattel mortgage. The transaction
involves a double conveyance. Both the possession and title to the goods
pass to the buyer at the time of the sales contract. Full payment of the
purchase price is not made at that time. To secure the balance due, the
buyer then gives to the seller an instrument reconveying the title to the
goods to the seller as security for the unpaid purchase price. As a general
rule the reconveyance or what is called the chattel mortgage provides
for the mode of payment, most invariably payment of the balance due
in instalments. As the buyer finally pays up his dues, the chattel mortgage
is cancelled, or a release is given to the buyer, and along with it the title
to the goods is reconveyed to him.100 The Civil law pledge without dis
possession compares well with the Common law chattel mortgage in that
they both create a security interest in favour of the creditor without
involving the transfer of goods.
The Secretary-General's Report finds the diverse points of conver
gence among several laws relating to pledges. First, for the pledge to be
valid as against third parties, it must be in writing and entered in an
official register. Second, the pledge acquires priority over other creditors
(who had the notice of the pledge) and the assignee in bankruptcy in
respect of the goods pledged. Third, in the event of default of the pledgor,
the pledgee may sell for the account of the pledgor. Finally, as a general
rule the pledge is valid only if it secures the transaction specifie by the
relevant law.101
Floating charge
The Secretary-General's Report indentifies the Common law institu-
99. For various iorms of pledge without dispossession, see UN Doc, A/CN. 9/20/Add.
1, p. 3, footnote 6, see also Folsum, Supra note 10 at 477 ff.
100. Robert Charles Kelso, International Law of Commerce 152-53 (Buffalo, N.Y., 1961).
101. For Commercial pledges under French law, see Jacques M. RafHn, The Conmercial
Law of France, in the Digest of Commercial Laws of the World60 (Dobbs Ferry,
N.Y., 1966).
tion of "floating charge" as a security device. Floating charge on lien is

a legal concept whereby the indebtedness is secured by a charge or lien on
the assets of the debtor. The assets may be either present or future goods
The security attaches to any specific property when the "floating" charge
settles itself down and crystalizes.102 In other legal systems, it is noted,
the floating charge forms a specific type of lien.
Fiduciary transfer of property

Under German law, it has been pointed out by one authority, pledge
as a security device (although it has received elaborate treatment in the
Civil Code) "is without significance, in business practice because the code
prescribes that the possession of the chattel which shall be subject to the
pledge be transfered by the pledgor to the pledgee." Moreover a chattel
mortgage as a security device, it is further noted, is also unknown to
German law. However, the German Courts have developed another
device akin (at least functionally) to the Common law chattel mortgage,
which is known as the "sucherungsuebereignung". Under this device, an
express agreement is concluded whereby a debtor transfers to the creditor
the title to the goods as security for the payment of a debt due from him
to the transferee creditor, the possession of the goods usually remaining
with the debtor. 103 This device is chiefly known as fiduciary transfer of
property or fiduciary-ownership. It is chiefly put into use by financial
institutions in loan operations. The flexible nature of the device lies in
the fact that there are no rigid formal requirements to be observed. The
security interest of the creditor, of course, is his title to the goods. It is
widely in use in Germany, the Netherlands and Indonesia. However, as
the Secretary-General's Report notes, the absence of publicity has evoked
severe criticism of the device, especially in Germany and the Netherlands,
and a system of registration of the agreements has been recommended.
Conditional sale
Conditional sale envisages an agreement between the seller and the
buyer to sell goods on credit on the condition that the seller retains the title
to the goods until the buyer pays of his dues. Witholding by the seller
of the title to the goods produces the desired result to have the debt pro
perly secured. For, the seller will also have the right to repossess the goods
upon default of the buyer, such repossession entailing the termination of
the contract. The device prevents third parties (with notice) from acquiring
the goods from the debtor buyer. Though essentially a Common law
institution, the device has found acceptance, of course, with necessary
variations in several continental legal systems such as Austria, Germany,
102. Halsbury's Laws of England, 275 (London, 3rd (Simons; ed., 1957).
103. Dres Pfluger, Schon, Parn, Schnitter and Rabe, The Commercial Laws of
Germany in Digest and Commercial Laws oj the World 29 (Dobbes Ferry, N.Y.,
1966).
Switzerland, Denmark, the Netherlands, and Sweden.
The Uniform Commercial Code of the United States

The Uniform Commercial Code of United States is a unique piece of
legislation in that it attempts under section 9 to codify all security devices
supplanting them with a broad definition of security interest.104
Mentschikoff finds that in addition to its attempt at simplification and
classifications, it has been based on three basic policies: first, it recognizes
the importance of protecting the ongoing or current secured financing as
an element in expansion of trade and business; second, it attempts to
prevent monopoly of a debtor by a single lender; and finally, it endeavours
to prevent the overreaching of a debtor by a secured lender. The chief
advantage of the Uniform Commercial Code lies in the fact that thanks
to its codification, all security interests operate essentially the same way,
although there are certain variations to accommodate special requirements.
It recognizes the debtor's right to redeem and the right to the surplus on
sale of the collateral upon his default, while the creditor is given the right
to foreclose without judicial process the right to claim the defciency
after sale and the right to priority. A security instrument is "perfected"
usually byfilingwith the appropriate authorities or by taking possession of
the property. If imperfect, the instrument holds good as between the
parties to the transaction but superceded by a perfected instrument, and
defeated by a lien creditor without notice, by the debtor's trustee in bank
ruptcy, and by a good faith transferee who gives value. A buyer in the
ordinary course of business can, however, defeat even a perfected security
interest. The Code also recognizes a heirarchy of priorities among com
peting perfected security interests in the same property.
C Indian law
There are several security devices under Indian law and practice.
But the important security devices used in business transactions include
(1) pledges, (2) lien, and (3) conditional sale.
Pledges :—(a) Pledges without dispossession

The Indian Contract Act, 1872, does not contain any specific pro
vision to govern pledges without dispossission exclusively. Section 172 of
the Act defines a "pledge" as the bailment106 of goods as "security for
payment of a debt or performance of a promise". However, Indian law
is familiar with pledges without dispossession through the institution of
104. See, for instance, Calvin W. Comman, Sales and Secured Financing : Conditional
Sale Financing 483. See also Sria Mentschikoff, Commercial Transactions 901 If
(Boston, 1970).
105. A "bailment", under section 148 8f the same Act, is 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.
"hypothecation". Hypothecation, not accompanied by possession by the

pledgee, is a kind of pledge. It confers a good title upon the person in
whose favour it is made. The transaction is regarded as "security" and
equity gives effect to it.106 It has been held107 that in the absence of fraud,
there is no inherent illegality, immorality or opposition to public policy
in the nonpossession hypothecation of movables, and therefore, a contract
for such a hypothecation is a valid contract, for it is a transaction which
has become customary throughout the country and is suited to the circum
stances and business intercourse of the people.
The difference between "pledge" under the Act and hypothecation
lies in the requirement that in the case of the former the possession of
goods is actually delivered to the person for whose benefit the pledge is
made, 108 while in the case of the latter the goods are retained by the
owner. It is only certain rights in them that are transferred to the
creditor. 109 In order to determine whether a particular transaction of the
type of a pledge constitutes a hypothecation without dispossession from
the pledgor, one should find whether there was an intention to create a
security. If such an intention is evident, equity gives effect to it.110 Indian
Courts have also endorsed the English view that hypothecation may be
done not only of the movables existing at the time of the transaction,
but also of those movables which may be subsequently acquired or
bought. 111
The Indian law maintains a distinction between a hypothecation
and a hire purchase agreement. In the latter case, the test is whether the
transaction constitutes a bailment with an option to purchase. If it is does,
it is a hire-purchase agreement.112
The peculiar nature of hypothecation under Indian law becomes all
the more prominent in a case where a person accepts hypothecation of
movable property without obtaining possession, after which a subsequent
encumbrance obtains possession of the property. It has been held that
the former cannot claim priority over the latter if the latter had no notice
of the charge to which the former was entitled.113
106. Pramatha Nath Talukdar v. Maharaja Probirendra H. Tagore, A.I.R. 1966 Cal.
405 at 408; K. M. Ramaswami Chetty and Others v. P.K. Lakshmamma, A.I.R. 1963
Andh. Pra. 201 at 203.
107. (1911) 2 Nag. L.R. 72 at 77.
10S. Simla Banking and Industrial Co. Ltd. v. M/s. Pritamas, A.I.R. 1960 Punj. 42 at 43.
119. Bank of Maharashtra Ltd. v. Official Liquidator, A.I.R. 1969 Mys. 280 at 284.
110. See also Sri Harish Chandra and Others v. Punjab National Bank, A.I.R. 1958 All.
264 at 265; Haripada Sadhukhan v. Anath Nath Dey and Others, A.I.R. 1918 Cal.
165 at 166.
111. H.V.Low&Co.Ltd.,v.PulinbihariLalSingha and Others, A.I.R. 1933 Cal. 154
at 159.
112. V. Dakshina Murthi Mudaliar and Other v. General and Credit Corporation India
Ltd., A.I.R. 1960 Mad. 328 at 330, 331.
113. Moosa Abdul Halib v. Maung Tun Kyaing, 131 I.C. 723,
H. Pledges with dispossession

The Indian law relating to pledges closely follows its English counter
part. 114 The legal basis for pledges with dispossession is section 172 of
the Indian Contract Act of 1872, which provides that the bailment of
goods as security for payment of a debt or performance of a promise is
called "pledge". This is, of course, the Anglo-Saxon conception of pledge
as a security device. It is said that under the English law there are three
classes of securities: a simple lien, a mortgage passing the property out
and a security intermediate between a lien and a mortgage. The third
category covers a pledge where by a contract, a deposit of goods is made a
security for a debt, and the right to the property vests in the pledgee so far
as is neeessary to secure the debt.116 As section 172 defines a pledge as a
"bailment" of goods, it clearly means that a transaction to be identified as
a pledge should involve delivery of goods by the pledgor to the pledgee.116
A pledge is niether a mortgage nor a lien. It passes no title to the
goods but only the right to retain possession till payment.117 The onus
is on the pledgee to prove that his possession of anothet's property is by
way of a 'pledge' within the meaning of section 172.118
The Indian Contract Act makes a clear distinction between a lien
and a pledge properly so called. Under section 171, bankers, for instance,
may, in the absence of a contract to the country, retain, as a security for a
general balance of account, any goods bailed to them.
As has already been pointed out, delivery is essential to identify a
transaction as a pledge within the meaning of section 172. The delivery
may be either actual or symbolic (or constructive). It has been held by
the English courts that "in order to complete the pledge it is not necessary
that there should be an actual delivery of the chattel to the pledgee, it is
sufficient...if there be a constructive delivery". The reason is that the
property in goods may pass, even though they remain in the possession of
the pledgor, provided, of course, that "they do so by virtue of a contract
between the parties which makes the custody of the pledgor the custody of
the pledgee.119 The English ruling has been followed by Indian Courts. 120
Another characteristic of the Indian law—which is identical with the
English law—is that it is difficult to apply the law concerning powers such
as the one laid down in the Indian Contract Act to cover all classes of
pledges. Thus it is not exhaustive and does not cover documents like
deeds and government and company securities. These documents require
endorsement. In Joyti v. Mukhi, the Calcutta High Court held that a
114. HaUiday v. Holgóte, L.R. 3 Ex. 299.
115. See, Lallan Prasad v. Rahmat AH, A.I.R. 1967 S.C. 1322.
116. See, section 148 which defines a "bailment"; see also Jyoti v. Mukhi, 22 C.W.N.
297.
117. Krishna v. Kannarutra, I.L.R. 1941. Mad. 394.
118. Ram Krishendas v. Jasumal, 61 l.C.P. 305.
119. See, Meversteim v. Barber, L.R. 2 C.P. 38 at 51.
120. Narasiah v. Venkataramiah, I.L.R. 42 Mad. 59.
pledge to a bank of government securities was to be made by endorsement

and delivery.121
There can be a pledge of company shares in India. 122 However, the
transaction is always subject to the provisions of the Indian Companies
Act, 1956.123 For section 82 of that Act provides that the shares or other
interests of any member in a company shall be movable property, trans
ferable in the manner porvided by the articles of the company. The term
"securities", in this context, merely indicates a group of security devices
devices of security interest. The Indian Capital Issues (Control) Act, 1947,
is the law on the point. The Act. under section 2(e), defines "securities"
as meaning any of the following instruments issued or to be issued,
or created or to be created, by or for the benefit of a company, namely :—
(1) shares, stocks and bonds; (2) debentures,124 (3) mortage deeds, instru
ments of power, pledge or hypothecation and any other instruments
creating or evidencing a charge or lien on the assets of the company; and
(4) instruments acknowledging loan to or indebedness of the company and
guaranteed by a third party or entered into jointly with a third party. The
Act purporting to regulate the general use of securities in transactions
specifically provides, under section 5 paragraph (i), that no person shall
accept or give any consideration for any securities in respect of an issue of
capital 125 made or proposed to be made in the states or elswhere unless the
consent or recognition of the Central Government has been accorded to
such issue of capital.
In Mercantile Bank of India v. Central Bank of India Ltd.,12* the
Privy Coucii laid down that a railway receipt was a document of title, and
that a pledge of a railway receipt should operate as a pledge of the goods.
What is a "document of tittle to goods" has been defined by section 2 (4)
of the Sale of Goods Act, 1930, as including a bill of lading, dock-warrant,
warehouse-keeper's certificate, wharfinger's certificate, railway-receipt,
warrant or order for delivery of goods and any other documents used in
the ordinary course of business as proof of the possession or control of
goods, or authorizing or purporting to authorize, either by endorsement
or by delivery the possessor of the document to transfer or receive goods
121. 22C.W.N. 297!
122. Arjun PraSad and others v. Central Bank of India Ltd., A.I R. 1950 Pat. 32 at 37.
123. Nagabhushandm Tadepathi and others v. Siram Rama Chandra Rao and others,
A.I.R. 1923 Mad. 241 at 244.
124. The "debentures" under the Indian Companies Act, 1956, are only instruments
under seal evidencing a debt. It is not capital. Therefore it has been held that
the definition of "securities" in the Capital Issues (Control) Act, 1947, does not
govern the Companies Act. Sse Madan Lai Fakir Chand Dudhediya v. Changdeo
Sugar Mills, A.I.R. 1958 Bombay 491 at 498.
125. The Act, under section 2(b) defines "issues of capital" as the issuing or creation of
any securities whether for cash or otherwise, and it also includes the capitalization
of profits or reserves for the purpose of converting partly paid-up shares into fully
paid-up shares or increasing the paid value of shares already issued.
126. 172 I.C. 745 (PC).
thereby represented. Explanation to section 137 of the Transfer of Property

Act, 1882, gives almost an indentical definition for a "mercantitle docu
ment of title to goods."
Use of promissory notes as a security device is also well established
in Indian law. In T. Radhakrishna Chettiar v. Official Liquidator, Madras
People's Bank Ltd.,127 a bank, being unable to pay the amount due to a
fixed depositor, offered to endorse certain promissory notes to him as
security for its indebtedness. The lender was to be at liberty to collect the
amounts due on the notes and credit net realization towards the amounts
due by the bank, and on payment by the lender of any balance due to him,
he should transfer to the bank such of the notes as might be outstanding. It
was held by the court that the transaction amounted to a bailment of the
promissory notes security for a debt, and that all requirements for a valid
pledge had been fulfilled.
C. Pledgee's rights under Indian law

The Indian Contract Act, 1872, confers upon the pledgee three impor
tant rights. First, it recognizes the pledgee's right of retainer. He may retain
the goods pledged not only for payment of the debt or the performance of
promise, but for the interest of debt, and all necessary expenses incurred
by him in respect of the possession or for the preservation of goods
pledged.128 It has been held by the Supreme Court that the pledgee can
not maintain a suit for recovery of debt and at the same time retain the
pledged, property. 129 The right of retainer is limited by the prescription
under section 174 of the Act, that the pledgee cannot, in the absence of
a contractual stipulation, retain the goods pledged for any debt or promise
other than the debt or promise for which they are pledged, but such con
tract, in the absence of anything to the contrary, shall be presumed in
regard to subsequent advances made by the pledgee. In the view of the
High Court of Bombay, the pledge and subsequent advances raise a pre
sumption that there is a contract to hold the pledge for such advances.
Where, however, the later advance is separately secured, such presumption
does not arise.130 In the second place, the pledgee has a right to claim
expenses. Under section 175, he is entitled to receive from the pledgor
extraordinary expenses incurred by him for the preservation of the goods
pledged to him.
The most important right of the pledgee is his right to sue the
pledgor or sell the pledged property on default by the latter. Recognizing
this right, section 176 provides that if the pledgor makes default in pay
ment of the debt, or performance, at the stipulated time of the promise,
in respect of which the goods were pledged, (1) the pledgee may bring a
127. 1943 Comp. Cases 21,
128. Section 173.
129. Lallan Prasad v. Rahmat AH and Another, A.I.R. 1967 S.C. 1322 at 1326.
130. Cowsji Muncherji Banaji v. Official Assignee of Bombay, A.I.R. Bom. 507 at 508.
suit against the pledgor upon the debt or promise and retain the goods
pledged as a collateral security; or (2) he may sell the thing pledged on giving
the pledgor reasonable notice of the sale. If the proceeds of such sale are
less than the amount due in respect of the debt or promise, the pledgor is
still liable to pay the balance. If the proceeds of the sale are greater than
the amount due, the pledgee shall pay over the surplus to the pledgor. This
right of the pledgee to sue the pledgor or to put the goods on sale must be
read with the pledgor's right under section 177 to redeem at any time after
the stipulated time, but before the actual sale of the goods on payment of
his dues plus any additional expenses accrued on his default. Sections 176
and 177 have been designed to prevent any clog in the way of redemption
and they cannot be overridden by mutual agreement of parties. 131
The pledgee's rights either to sue on debt or to sell the goods are
concurrent.132 In Surajmal v. Fulchand,133 the Nagpur High Court held the
view that the case of an unpaid vendor who exercises a right of sale
in pursuance of his lien is not on par with that of pledgee exercising similar
right of sale. If the property fetches at the sale more than the amount
due, the vendee cannot claim the excess. But the pledgee sells the goods
pledged as the property of the pledgor. The notice of sale must be reaso-
able, having regard to the circumstances in each case.134 The object of
the notiee is to provide the pledgor with a reasonable opportunity to
exercise his right to redeem under section 177.13S
Section 178 permits, for faciliating business transactions, pledge
by a mercantile agent136 provided the pledgee acts in good faith and
has not at the time of the pledge any notice of any defect of the pledgor's
authority.
Lien
The Indian law relating to mercantile transactions introduces the
Common law concept of lien into the provisions of the Indian Sale of
Goods Act, 1930, and therefore a study of it seems to be relevant, as it
may be considered as one of the security devices through which business
transactions are secured in India. Indian law has borrowed the concept
131. Ningthoujan Tompak Singh, v. Moirangthen Kali Singh A I.R. 1962 Mmipur 1 at 2.
132. Jyoti Prokash Nanc/e v. Muti Prokash Nande and others A.I.R. 1918 Cal. 947 at
949; sse also Maridas Mundhra v. National and Grind/ay's Bank Ltd'., A.I.R. 1963
Ca!. 132 at 134.
133. A.I.R. 1951 Nag. 264.
134. Sankra Naiayana Iyer Saraswatty Ammalv. The Kotayyani Bank Ltd., A.I.R. 1950
Trav-co. 66 at 69; see also Hulas Kunwar v. Allahabad Bank Ltd., A.I.R. 1958 Cal.
644 at 649.
135. Bharat Bank v. Sheoji Prasad, A.I R. 1955 Pat. 288 at 290.
J36. A mercantile agent, under section 2 of the Sale of Goods Act, 1930, is an agent,
having in the customary course of business as such agent, authority either to sell
the goods, or to consign goods for the purpose of sale, or to buy goods, or to raise
money on the security of goods.
of seller's lien from the English Sale of Goods Act, 1893. 13 ' The English
law contemplates "lien" in two senses.128 In its primary sense, lien is a
legal right in one man to retain the property of another until the present
and accrued claims of the person in possession are satisfied. In its secon
dary sense, the word "lien" may be applied to a right subsisting in a
person who has no possession of the property concerned but who, neverthe
less, has a right against the owner analogous to a legal lien. This right
may arise (1) in equity, (2) by statute or, (3) under a court order.
The Indian Sale of Goods Act, 1930, through section 46(l)(a),
provides that, subject to the provisions of the Act and of any law for the
time being in force, notwithstanding that the property in the goods may
have passed to the buyer, the unpaid seller of goods, as such, has by
implication of law, "a lien on the goods, for the price while he is in
possession of them". Elaborating this provision, the subsequent section
of the Act states that, subject to the provisions of the Act, the unpaid
seller139 of goods who is in possession of them until payment or tender
of the price, in three cases, such as : (1) where the goods have been sold
without any stipulation as to credit; (2) where the goods have been sold
on credit, but the term of credit, has expired; and (3) where the buyer
becomes insolvent.140 This right of lien is available to the seller notwith
standing the fact that he is in possession of goods as agent or bailee for
the buyer.
The lien, as is clear both from section 46(l)(a) and section 47, is
based on the unpaid sellers' possession of the goods and not on title, and
it has been held by the Privy Council that unless there is possession there
is no lien.141 The lien can be taken advantage of only by an unpaid
seller. Jt necessarily follows, therefore, that where the seller is estopped
by his own conduct from denying that he had received payment for the
goods to which the delivery order relates he cannot exercise the lien under
this section,142 The Act requires that the unpaid seller, to be entitled
for the lien, should have possession of and no title to the goods he is hold
ing as against the buyer. In other words, existence of the lien pre-supposes
that the property in the goods has already passed. The simple reason is
that a person cannot have a lein on his own goods.143
137. See !he Statement of Objects and Reasons to ihe Indian Sale of Goods Bill, 1929,
Gazette of India, 1929, Part V, p. 163. See also Chalmers' (Paul Sieghart, ed.), Sale
of Goods Act, 1893, 128 IT (London, 14th ed.).
138. 24 Hatsbury's Laws of England 124-125 (London, 3rd ed., 1958).
139. Seciicn 45 deems the seller of goods as an "unpaid seller" (a) when the whole of
the price has not been paid or tendered, or (b) when a bill of exchange or other
negotiable instrument has been received as conditional payment, and the condition
on which it was received has not been fulfilled.
140. Compare section 41 of the English Sale of Goods Act, 1893.
141. Maneckjee v. Wadilal, A.I.R. 1926 P .C. 38 at 40.
142. Anglo-Indian Jute Mills Co, v. Omademull, 10 I.C. 879.
143. Nippon Yusen Kaisha v. Ramjiban, A.I R. 1938 P,C. 152.
Indian courts have given a broad interpretation to section 47 in

their attempt to determine as to when the unpaid seller's lien begins. Tn
Kalka Prasad Ram Charan v. Harish Chandra1**, the Allahabad High Court
was confronted with a contention that the seller's exercise of the right of
lien began when a demand for delivery was made from him by the buyer
and was followed by a refusal by him. Rejecting the contention as ill-
founded, the Court viewed it as putting "a very narrow interpretation"
on the language of section 47. "The result of accepting this interpreta
tion", according to the Court, "will be that by simply keeping quiet the
buyer could deprive the seller of his exercise of the right of lien. This
could never have been the intention of law." "Thus, where the goods
are ascertained by the buyer and are in a deliverable state", found the
court, "the property in goods passes to the buyer under section 20 as soon
as the contract was made; If the sailer is allowed to retain possession of
the goods till the payment of price and no period of credit is given to the
seller in respect of them, the case falls under sub-section (l)(a) of section
47 and the seller's lien commenced from the time of the making of the
contract". 145
Even where the unpaid seller had made part delivery of the goods,
he may, under section 48, exercise his right of lien on the remainder,
unless such part delivery has been made under such circumstances as to
show an agreement to waive the lien. The mere fact that the unpaid seller
has obtained a decree for the price of the goods, does not divest him of
his right of lien. This principle has been recognized under section 49(2).
The Indian law, under section 49(1) of the Act, envisages three
different situations effecting termination of the lien of the unpaid seller.
First, the unpaid seller loses his lien when he delivers the goods to the
carrier or other bailee for the purpose of transmission to the buyer with
out reserving the right of disposal of the goods. Second, his lien is teimi-
nated when the buyer or his agent lawfully obtains possession of the goods.
And finally, he waives the lien either expressly or by necessary implication.
His waiver may be taken to be implied by his conduct.1'16 There has,
however, been an Indian ruling to the effect that the mere taking of a
personal security is not tantamount to abandonment of the lien147
3. Conditional sales
The term 'conditional sale' is chiefly the contribution of the American
law. The idea behind the conditional sale is that a contract for sale may
be concluded under which possession of property is delivered to the buyer
144. A.I.R. 1957 AH. 25.

145. Id. at 27.
146. Jones v. Cliff, (1833) I C . & M. 540; Gun v. Cuthbert, (1843) L.J. 12 Ex. 309;
Boardmanv. Sill, (1808) 1 Comp. 410 ( K ) ; Yiuigmmm v. Briesemann, (1893) 67
E.T. 642 (C.A.).
147. Morion v. Wood fall, A.I.R. 1927 Lah. 103.
and the property in the goods is to vest in the buyer at a subsequent time
upon the payment of part or all the price, or upon performance of any
other condition or the happening of any contingency.148 The rules relevant
under the Indian Sale of Goods Act, 1930, are those relating to the
passing of property.
Section 4 of the Act distinguishes between a sale and an agreement
to sell. Where under a contract of sale the property in the goods is transfer
red from the seller to the buyer, the contract is called a sale. But where the
transfer of the property in the goods is to take place at a future time or
subject to some condition thereafter to be fulfilled subject to which the
property in the goods is to be transferred, the transaction is an agreement
to sell. An agreement to sell becomes a sale when the time lapses or the
conditions are fulfilled subject to which the property in the goods is to be
transferred. It has been held in Sahodeo Singh v. Kular Nathl·19, that the
distinction between a contract for sale and a contract to sell is that between
an executed contract and an excutory contract. Sale creates a jus in rent
as it passes ownership immediately when it has been exceuted, said the
Allahabad High Court, while a contract to sell is jus ad rent, for it only
creates an obligation attached to the ownership of property not amounting
to an interest therein. The criterion to decide whether there is a sale or
merely a contract to sell is whether another deed would be required to pass
the title or ownership. Daya Shanker Mehrotra v. Union of Indiauo was a
case where there was a purported sale (gram) to the Government at quoted
rates, property in the goods passing to the buyer only after the goods
were inspected and approved. Notification by the Government fixing it
price of dal was issued before the goods were inspected, approved and
accepted. It was held that the transaction was an agreement to sell and
that it did not constitute a sale, for the passing of property was arrested
till the goods were approved.
Whether a contract amounts to sale or an agreement to sell also
depends on the intention of the parties. Section 19 of the Act provides
clearly that property passes when intended to pass. The section prescribes
three rules. First, where it is a contract for the sale of specific or ascertained
goods, the property in them is transferred to the buyer at such time as the
parties to the contract intend it to be transferred. Second, for the purpose
of ascertaining the intention of the parties regard should be had to (1) the
terms of the contract, (2) the conduct of the parties, and (3) the circum
stances of the parties. And finally, unless a different intention appears, the
rules contained in sections 20 to 24 of the Act are the rules for ascertaining
the intention of the parties as to the time at which the property in the
148. See Uniform Conditional Sale Act (of the United States), section 1 which defines
a "conditional sale"
149. A I R . 1950 All 632.
150. (1968) Punj. L.R. 57 (Delhi Division).
goods is to pass to the buyer.151

The B.K. Wadeyar v. M/s. Daultram Rameswarlal1*2 was a leading case
involving an f.o.b. export contract. In that case the respondent firm claimed
exemption from sales tax under Article 286(l)(b) of the Constitution of
India, 1950, in respect of sales made by them of cotton and castor oil on
the ground that the sales were f.o.b. contracts, under which they continued
to be the owners of the goods till those crossed the customs' barrier and
entered the export stream. They also contested the purchase tax for which
they were assessed under section 10-B of the Bombay Sales Tax Act. The
Bombay High Court upheld the first contention, but found that they were
liable to pay the purchase tax. Both parties went on appeal to the Supreme
Court. The Supreme Court, dismissing the appeals, held that sales in
which the goods remain the sellers' property till they have been brought on
board the ship are exempt from sales tax under Article 286(l)(b) of the
Constitution of India. "The law is now well settled", declared the Court,
"that if property in the goods passes to the buyer after they have, for the
purpose of export to a foreign country, crossed the custom's frontier, the
sale has taken place "in the course of the export" out of the territory
of India. The normal rule in the f.o.b. contracts is that, in the absence
of special agreement, the property in the goods does not pass until the
goods are actually put on board the ship".
4. Effect of Indian law relating to foreign exchange regulations on use of

security devices
Indian law relating to foreign exchange regulations focusses its atten
tion mainly on one single category of security devices. The term "securi
ty" is used in the Indian Foreign Exchange Regulations Act, 1947, in a
special sense, which is commonplace in the modern business transactions.
Section 2(k) of the Act defines "security" as meaning shares, stocks, bonds,
debentures, debenture stock and Government securities, savings certifica
tes, deposit receipts in respect of deposits of securities, and units and sub-
units of unit trusts and including certificate of title to securities. "Sec
urities" do not, however, include bills of exchange or promissory notes
other than Government Promissory notes.
(a) Foreign Securities: "Foreign security", under section 2(e) of the
Act, means (a) any securities referred to in section 2(k) created or issued
151. Section 20 provides that in a contract for the sale of specific goods in a deliverable
state, the property in the goods passes to the buyer when the contract is made.
Under section 21 where the seller is required to do some hing to the goods to put
them to the deliverable state, property does not pass until such thing is dons and
the buyer is given notice thereof. Where the seller is required to do something
for the purpose of ascertaining the price, under section 22, property does not pass
until such act is done and the buyer is given notice thereof. Section 22 provides
for the sale of unascertained goods and appropriation, and section 24, for goods
sent on approval or "on sale or return".
152. A.I.R. 1961 S.C. 311.
elsewhere than in India and (b) any security, the principal of or interest
on which is payable in any foreign currency elsewhere than in India.
(b) Import of Securities : There are no restrictions on the import into
India of any securities whether Indian or foreign.
(c) Dealings in Securities: Domestic dealings in rupee securities are
not subject to any restrictions. Persons resident in India may deal in the
shares of sterling companies which are operating extensively in India and
which maintain two registers, one in India and the other in the United
Kingdom provided payment is made in rupees and the shares are on the
Indian register. Transactions in the shares of companies which do not
maintain registers in India require the prior approval of the Reserve Bank
of India. Persons resident in India who are or have become owners of
foreign securities are permitted to hold or retain such securities provided
they have been acquired in a manner not involving a breach of the Indian
Exchange Control Regulations. The prior approval of the Reserve Bank of
India is necessory before such securities can be sold, transferred or other
wise disposed of by the holder. Permission will be granted on application
through an authorised dealer for the sale of securities for re-investment or
for sale and repatriation of the proceeds to India.
Export or Transfer of Securities: The taking or sending out of India
of securities (including life or endowment insurance policies) is prohibited
under section 13 of the Foreign Exchange Regulation Act except with the
prior approval of the Reserve Bank. Persons, intending to send their
securities to their banker or agents abroad for sale, transfer, etc., should
apply to the Reserve Bank of for a licence through an authorised dealer in
foreign exchange.
(e) Transfer of securities to non-residents: The transfer of any security
or the creation or transfer of any interest in a security to or in favour of a
person resident outside India is prohibited except with the general or
special permission of the Reserve Bank of India. Similarly, the transfer
of securities from one register in India to another outside India and the
issuing whether in India or elsewhere, of securities which are registered or
to be registered in India to persons resident outside India, is also prohibi
ted except with the permission of the Reserve Bank of India.
( / ) Application for permission to hold foreign securities: All persons
resident in India (other than foreign nationals not domidled in India)
holding foreign securities, i.e., currency expressed to be payable in any
currency other than Indian rupees are required to apply to the Reserve
Bank of Tndia for permission to hold them. A foreign national resi
dent in India is, however, not required to make any application as he has
been granted general permission to continue to acquire, hold or dispose
of any foreign security if such security is acquired by him or his own pro
perty or is held by lien for or on behalf of any other person not domiciled
in India.
(g) Acquisition by the Government of foreign securities: The Foreign
Exchange Regulation Act, 1947, through section 16 empowers the Govern
ment of India (a) to order the transfer to itself of foreign securities specifi
ed in the official notification at a price which according to that Govern
ment is not less than the market value of the securities on the date of the
notification; or (b) to direct the owner of such foreign securities to sell
or procure the sale of securities and thereafter to offer the foreign ex
change to the Government of India or to the Reserve Bank at such price
as may be fixed by the Government not less than the market rate of the
foreign exchange. The Indian Government may act under this section
only "if it is of opinion that it is expedient so to do for the purpose of
strengthening its foreign exchange position."
LD/ 2109
(To be stamped as an agreement)
(Not to be attested)
AGREEMENT OF GUARANTEE
BY
______Insert the name of the Guarantor 1_______
IN FAVOUR OF
THE SOUTH INDIAN BANK LTD
Amount Rs.
This forms part of the Agreement of Guarantee executed by ______Insert the name of the
Guarantors ______ in favour of The South Indian Bank Ltd. dated ___________
GUARANTOR 1 GUARANTOR 2 GUARANTOR 3

LD/ 2109
THIS AGREEMENT OF GUARANTEE is made at the place and date as specified in Schedule I
(a) by the persons, whose name(s) and address(es) are as specified in Schedule I (b)
(hereinafter referred to as the “Guarantor(s)” which expression shall unless repugnant to the
context or meaning thereof include its successors and assigns and all persons deriving/
claiming title there under) IN FAVOUR OF The South Indian Bank Ltd,a banking company
incorporated under the Companies Act 1913 and having its Registered Office at “SIB House”,
T.B. Road, Mission Quarters, Thrissur and one of its Branch Offices at the place specified in
Schedule I (c) (hereinafter referred to as the “Bank” which expression shall unless repugnant
to the context or meaning thereof include its successors and assigns)
WHEREAS at the request of the persons, whose name(s) and address(es) are as specified in
Schedule I (d) (hereinafter referred to as the “Borrower(s)” which expression shall unless
repugnant to the context or meaning thereof shall be deemed to include his/her/their heirs,
legal representatives, executors, administrators, successors and assigns) and also on my/our
request the Bank has allowed/agreed to allow/continue/enhance credit facilities aggregating
the sum of more fully described under Schedule II (a) of this agreement, subject to such
terms and conditions stipulated in the sanction letter, credit facility agreement, demand
promissory note (if any) and/or other loan/security documents and the Borrower has
executed the required documents as stated in Schedule II (b) of this Agreement.
IN CONSIDERATION of the Bank allowing/continuing/enhancing credit facilities (both fund
based and non fund based) as mentioned in Schedule II (a) of this agreement, in the account
of the Borrower, the guarantor(s) hereby jointly and severally agree with and unconditionally,
absolutely and irrevocably guarantee to the Bank the due payment and discharge on
demand of all amounts due and payable to the Bank by the Borrower at any time and also of
all bills, promissory notes or guarantees held by the Bank in respect of the credit facilities
together with interest, commission, banking and other charges, costs, expenses etc. provided
nevertheless that the liability of Guarantor(s) under this guarantee shall not exceed in the
whole the sum of the amount more fully mentioned in Schedule III of this Agreement, apart
from and in addition to all interest, commission, banking, law and other charges, costs,
expenses etc. above referred to.
The guarantor(s) further agree with the bank as follows:-
1. This guarantee shall be a continuing security for all amounts advanced by the Bank to the
Borrower in respect of or under the aforesaid credit facilities as also for all interest, costs and
other monies which may from time to time become due and remain unpaid to the Bank
thereunder and shall not be determined or in any way be affected by any account or
accounts opened or to be opened by the Bank becoming nil or coming into credit at any
time or from time to time or by reason of the said account or accounts being closed and
fresh account or accounts being opened in respect of fresh facilities being granted within the
overall limit sanctioned to the Borrower. This guarantee shall be binding on the guarantor(s)
and heirs, legal representatives, executors, administrators, successors, assignees etc. The
guarantor(s) shall not be released from liability in respect of the credit facilities covered by
this guarantee in the event of any omission, delay or default in presentation of bill or in issue
of notice of dishonour on the part of the Bank. This guarantee shall continue in force
LD/ 2109
notwithstanding the discharge of the Borrower by operation of law or death of guarantor(s)

and shall cease only on payment of the amount guaranteed hereunder by the guarantor(s).
2. In the event of any default on the part of Borrower in payment/repayment of any of the
moneys referred to above, or in the event of any default on the part of the Borrower to
comply with or perform any of the terms, conditions and covenants contained in the Loan
Agreements/Documents, the Guarantor(s) shall, upon demand, forthwith pay to the Bank
without demur all of the amounts payable by the Borrower under the Loan
Agreements/Documents.
3. The Guarantor(s) shall also indemnify and keep the Bank indemnified against all losses,
damages, costs, claims and expenses whatsoever which the Bank may suffer, pay or incur of
or in connection with any such default on the part of the Borrower including legal
proceedings taken against the Borrower and/or the Guarantor(s) for recovery of the monies
referred above.
4. This Guarantee is additional and without prejudice to any securities or obligations which
the Bank may now or hereafter have in respect of any indebtedness or liabilities hereby
guaranteed and all rights and remedies in respect thereof are reserved.
5. The Guarantor(s) hereby agree that, without the concurrence of the Guarantor(s), the
Borrower and the Bank shall be at liberty to vary, alter or modify the terms and conditions of
the Loan Agreement/Documents and of the security documents executed by the Borrower in
favour of the Bank and in particular to defer, postpone or revise the repayment of the Loans
and/or payment of interest and other monies payable by the borrower to the Bank on such
terms and conditions as may be considered necessary by the Bank including any increase in
the rate of interest. The Guarantor(s) agree that the liability under the Guarantee shall in no
manner be effected by such variations, alterations, modifications, waiver, and that no further
consent of the Guarantor(s) is required for giving effect to any such variation, alteration,
modification or waiver. The Guarantor(s) expressly agree(s) that the Bank shall have full
discretionary power, without further assent or knowledge of guarantor(s) and without
discharging or in any way affecting the liability of guarantor(s) under this guarantee from
time to time AND at any time to negotiate with the Borrower and settle and/or alter the
terms and conditions, to promise, to grant time or indulgence to or not to sue the Borrower
or any person(s) liable with or for Borrower, whether as guarantor or otherwise or make any
other arrangement with the Borrower or any person(s) so liable with or for the Borrower as
the Bank may deem fit and to hold over, renew, vary, exchange or release in whole or in part
and from time to time any securities held or to be held by the Bank for or on account of the
moneys and liabilities intended to be hereby secured or any part thereof. The Guarantor(s)
also agree that the Guarantor(s) shall not be discharged from liability by the Bank releasing
the Borrower or by any of its act or omission the legal consequences of which may be to
discharge the Borrower or which would, but for this present provision, be inconsistent with
Guarantor(s) rights as surety or by the Bank’s omitting to do any act, which but for this
present provision its duty to Guarantor(s) would have required the Bank to do so. The
Guarantor(s) hereby consent to each and every of the acts mentioned above as the Bank may
think fit. Moreover, though as between the Borrower and the Guarantor(s) , the Guarantor(s)
are sureties only, the Guarantor(s) agree that as between the Bank and the Guarantor(s), the
Guarantor(s) is/are Principal Debtor(s) jointly with the Borrower and accordingly the
LD/ 2109
Guarantor(s) shall not be entitled to any of the rights conferred on sureties by Sections 133,
134, 135, 139 and 141 of the Indian Contract Act. And the Guarantor(s) further expressly
agree that the Bank shall also have discretionary power without further assent or knowledge
of Guarantor(s) or without discharging or in any way affecting the liability of Guarantor(s)
under the Guarantee from time to time and at any time to agree to the variations of the
terms and conditions of all or any of the terms and conditions of credit facilities granted/to
be granted to the Borrower. The Guarantor(s) hereby agree and give consent to the sale,
mortgage on prior, pari-passu or second charge basis, release etc. of any of the assets by the
Borrower from time to time as may be approved by the Bank or the transfer of any of the
assets of the Borrower from one unit to other or to the release or lease out by the Bank any
or whole of the assets charged to the Bank on such terms and conditions as the Lenders may
deem fit and this may be treated as standing and continuing consent for each and every
individual act of transfer, mortgage, release or lease of any of such assets by the Borrower.
The Guarantor(s) hereby declares and agrees that no separate consent for each such transfer,
mortgage, release or lease of any of such assets would become necessary in future.
6. The Guarantor(s) also agree that any admission or acknowledgement in writing by the
Borrower of the amount of indebtedness of the Borrower or otherwise in relation of the
subject matter of this guarantee, shall be binding on the guarantor(s) and the guarantor(s)
accept the correctness of any statement of account served on the Borrower by the Bank and
the same shall be binding and conclusive as against the guarantor(s) also and the
guarantor(s) agree that in making an acknowledgement or making a payment the Borrower
shall be treated as duly authorized agent of Guarantor(s) for the purposes of Section 18 and
19 of Indian Limitation Act, 1963.
7. The Bank may recover against the guarantor(s) to the extent herein before mentioned
notwithstanding that the Borrower or his agents, partners, directors or officers may have
exceeded his or their powers or that the arrangements with the Bank may have been ultra
vires and without being bound to enforce its claim against the Borrower or any other
person(s) or other security held by the Bank. The Bank shall not be bound to enquire into
the powers of the Borrower or his agents or partners, directors or officers purporting to act
on behalf of the Borrower and all moneys due or liabilities incurred shall be deemed to form
part of the present guarantee notwithstanding that the Borrower or his agents, partners,
directors and officers may have exceeded his/her or their powers or the arrangement with
the Bank may have been ultra vires.
8. The Guarantor(s) waive in favour of the Bank all or any of the rights of Guarantor(s) against
the Bank or the Borrower as may be necessary to give effect to any of the provisions of this
guarantee.
9. The Bank may enforce the guarantee contained herein and any other security created by
the Borrower in favour of the Bank simultaneously. In the event of the Bank obtaining a
decree against both the Borrower and the Guarantor(s) in respect of any other security
provided by it to the Bank and also against the Guarantor(s), the Bank shall not be bound to
first take steps for the execution/enforcement of decree against the assets of the Borrowers
and the Bank shall be entitled to proceed against the Guarantor(s) for
execution/enforcement of the decree obtained against the Guarantor(s) as the liability of the
LD/ 2109
Guarantor(s) is coextensive with that of the Borrowers and as between the Bank and the
Guarantor(s), the Guarantor(s) have agreed to be the principal borrowers.
10. The Guarantor(s) declare that the Guarantor(s) has/have not received any security from
the Borrower for the giving of this guarantee and the Guarantor(s) agree that so long as any
moneys remain owing by the Borrower to the Bank or any liability incurred by the Bank
remains outstanding, the Guarantor(s) will not take any security in respect of his/their liability
hereunder without first obtaining the Bank’s written consent and the Guarantor(s) agree that
in the event of taking any such security, the amount for which the Guarantor(s) is/are liable
under this Guarantee shall be increased by the amount by which dividend payable by the
Borrower to the Bank on a winding up is thereby diminished. The guarantors hereby
undertake that no commission, brokerage, fees etc in any form directly or indirectly will be
demanded or received by us as consideration for the guarantee from the borrower for
extending this guarantee.
11. The Guarantor(s) further agree that in respect of liability of Guarantor(s) hereunder the
Bank shall have a lien on all securities belonging to the Guarantor(s) now or hereafter held by
the Bank and all moneys now or hereafter standing to the credit of Guarantor(s) with the
Bank on current account or any other account.
12. As this guarantee shall be applicable to the ultimate balance that may become due to the
Bank from the Borrower and until repayment of such balance the Bank shall be entitled to
retain, realize, or otherwise dispose of in such manner as the Bank may think fit any securities
now or hereafter held by the Bank and without any liability to account to the Guarantor(s) for
any portion of such securities or of the proceeds thereof until all the claims of the Bank have
been fully satisfied, and in the meantime the Guarantor(s) will not take any steps to enforce
any right or claim against the Borrower in respect of any moneys paid by the Guarantor(s) to
the Bank hereunder. And further that if the Bank should receive payment from the Borrower
or any person(s) on behalf of the Borrower or from any security held by the Bank, or if the
Borrower shall become insolvent or go into liquidation or compound with his creditors, the
Bank shall be at liberty, without discharging the Guarantor(s) from liability, to make or assent
to any compromises, compositions or arrangements or to prove and to rank as creditor in
respect of the amount claimable by the Bank or any items thereof, and to receive dividends
thereupon and all such payments and dividends received shall be treated as payments in
gross and Guarantor(s) liability shall extend to the ultimate balance after deducting such
payments and to the entire exclusion and surrender of all rights of Guarantor(s) as sureties in
competition with the Bank, any rule of law or equity to the contrary notwithstanding.
13. The Bank shall have the right of set-off/net off on the deposits of any kind and nature
(including fixed deposits) held/balances lying in any accounts of the Guarantor(s) and on any
monies, securities, bonds and all other assets, documents, deeds and properties held
by/under the control of the Bank / their trustees or agents (whether by way of security or
otherwise pursuant to any contract entered/to be entered into by the Guarantor in any
capacity) to the extent of all outstanding dues, whatsoever, arising as a result of any of the
Bank' services extended to and/or used by the Borrower and/or as a result of any other
facilities that may be granted by the Bank to the Borrower. The Guarantor also notes the
banker’s lien available to the Bank on the aforesaid assets.
LD/ 2109
14. This guarantee shall be irrevocable and enforceable agains the Guarantor(s)
notwithstanding any dispute between the Bank and the Borrower
15. This guarantee shall not affect or be affected by any other or further securities taken or
held by the Bank or by any loss of any primary, collateral or other security nor by the Bank
failing to recover by the realization of securities or otherwise any such sum or sums due from
the Borrower or any other person(s) or any laches on the part of the Bank nor the Bank shall
be responsible to the Guarantor(s) for any such loss or laches.
16. The liability of the Guarantor(s) under this Guarantee shall not be effected by-
a. Any change in the constitution or winding up of the Borrower or any absorption, merger
or amalgamation of the Borrower with any other Company, Corporation or Concern; or
b. Any change in the management of the Borrower or take over of the management of the
Borrower by Central or State Government or by any other authority; or
c. Acquisition or nationalization of the Borrower and/or of any of its undertaking(s) pursuant
to any Law; or
d. Any change in the constitution of the Bank; or
e. Any change in the set up of the Guarantor(s) which may be way of change in the
constitution, winding up, voluntary or otherwise, absorption, merger or amalgamation or
otherwise;
f. The absence or deficiency of powers on the part of the Guarantor(s) to give guarantees
and/or indemnities or any irregularity in the exercise of such powers.
17. Should the Borrower be a limited company, corporate or unincorporated body,
committee, firm, partnership, trustees or debtors on a joint account, the provisions
hereinbefore contained shall be construed and take effect where necessary as if words
importing the singular number included, also the plural number. This guarantee shall remain
effective notwithstanding any death, retirement, change, accession or addition, as fully as if
the person or persons constituting or trading or acting as such body, committee, firm,
partnership, trustees or debtor on joint account at the date of the Borrower’s default or at
any time previously was or were the same as the date hereof.
18. In the event of there being more than one guarantor the liability of the remaining
guarantor(s) shall not be affected or released or given up by time or other indulgence to one
or more of the guarantors nor by the death of any one or more the guarantors until notice
shall have been given to the Bank as provided in Clause 1 hereof.
19. The Bank shall be entitled to fix with the Borrower a period for credit facilities and to alter
or extend such a period from time to time. The Bank shall be entitled from time to time to
periodically renew the credit facilities without the consent and knowledge of the guarantor(s)
and take renewals of loan and security documents, wherever necessary, from the Borrower
alone. The Bank shall be entitled to take single document for the whole amount hereby
guaranteed or to split up the amount and take separate documents for each part and take
any such documents from the Borrower alone or from the Borrower and other person(s)
whose identity may vary from time to time. The liability of Guarantor(s) shall not be
discharged or affected in any way by reason of any such or similar acts or dealings.
20. Any demand for payment or notice under this Guarantee shall be sufficiently given if sent
by post to or left at the last known address of the Guarantor(s) or their heirs, representatives,
LD/ 2109
successors or assigns, as the case may be, such demand or notice is to be made or given,
and shall be assumed to have reached the addressee in the course of post, if given by post,
and no period of limitation shall commence to run in favour of the Guarantor(s) until after
demand for payment in writing shall have been made or given as aforesaid and in proving
such notice when sent by post it shall be sufficiently proved that the envelope containing the
notice was posted and a certificate by any of the responsible officers of the Bank that to the
best of his knowledge and belief, the envelope containing the said notice was so posted
shall be conclusive as against the Guarantor(s), even though it was returned unserved on
account of refusal of the Guarantor(s)(s) or otherwise.
21. Notwithstanding anything herein before contained this guarantee shall extended to all
accounts of the borrower whether the same are his solely or are account on which he is or
may become liable jointly, any manner whatsoever, with any company or person or persons,
and in whatever name of firm the same may stand, and this guarantee, shall not be affected
by any change in the constitution of the bank, its successors or assigns, or by its absorption
of or by its amalgamation with any other bank or banks.
22. The Guarantor(s) agree/s as a pre-condition of the credit facility granted by the Bank to
the Borrower that in case any default is committed in the repayment of the loan/advance or
in repayment of interest thereon or any of the agreed instalment of the loan on due date/s,
the Bank and/or the Reserve Bank of India will have an unqualified right to disclose or
publish the name of the Guarantor/s or the names of his/her/their company/firm/unit and its
directors/partners/proprietors as defaulter in such manner and through such medium as the
bank or the Reserve Bank of India in their absolute discretion may think fit.
23. (a) The Guarantor(s) understand that as a precondition to the grant of the loans/
advances/other non-funded credit facilities to the borrower and furnishing of guarantee in
relation thereto, The South Indian Bank Ltd. requires consent of the guarantor(s) of the credit
facility, granted/to be granted, by the Bank for disclosure of, information and data relating to
the guarantor(s), any credit facility availed of by the guarantor(s), obligations assumed by the
guarantor(s), in relation thereto and default, if any, committed, in discharge thereof.
(b) Accordingly, the Guarantor(s) hereby agree and give consent for the disclosure by The
South Indian Bank Ltd. of all or any such;
(i) information and data relating to the guarantor(s).
(ii) the information and data relating to guarantor(s)’s obligations in any credit facility
granted/to be granted, by the Bank and guaranteed by the guarantor(s) ; and
(iii) default, if any, committed by the guarantor(s) in discharge of his/her/their obligations,as
The South Indian Bank Ltd. may deem appropriate and necessary, to disclose and furnish to
Credit Information Bureau (India) Ltd. and any other agency authorized in this behalf by RBI.
(c) The Guarantor(s) declare that the information and data furnished by him/her/them to the
South Indian Bank Ltd. are true and correct.
(d) The Guarantor(s) undertake that:
(i) the Credit Information Bureau (India) Ltd. and any other agency so authorized may use,
process the said information and data disclosed by the Bank in the manner as deemed fit by
them ; and
(ii) the Credit Information Bureau (India) Ltd. and any other agency so authorized may furnish
for consideration, the processed information and data or products thereof prepared by them,
LD/ 2109
to Bank/Financial Institutions and other credit grantors or registered users, as may be

specified by Reserve Bank India in this behalf.
IN WITNESS WHEREOF the Guarantor(s) have set his/her/their hands hereunto on the day
and year mentioned in Schedule I (a) hereunder
Guarantor 1 Guarantor 2 Guarantor 3
Signature
Name
LD/ 2109
SCHEDULE – I
a. Date and Place of Agreement of

Guarantee
b. Details of the Guarantor(s)
Sl. No. Name of Guarantor Address of the Guarantor Constitution
1.
2.
3.
c. Name of the Branch

Address of the Branch
d. Name of the Borrower(s)

Constitution of the Borrower(s)
Name(s) of the signatories/ authorised

signatory(ies)
Address of the Borrower (s)
SCHEDULE – II
a. Total Credit facilities granted to the Rs.
Borrower(s) (Rupees _______________________ only)
b. Date of Execution of documents by
Borrower (s)
SCHEDULE – III
Amount of Guarantee Rs.
(Rupees ____________________________ only)
Guarantor 1 Guarantor 2 Guarantor 3
Signature _________________ ________________ ________________

07/08/2020 Nishith Desai Associates: Revisiting The Indemnity V/S Damages Debate
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REVISITING THE INDEMNITY V/S DAMAGES DEBATE
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I. INTRODUCTION
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Indemnity clauses are debated deeply and focused upon during negotiation of commercial contracts. combating multiplicity of arbitral
proceedings (Gammon India v
NDACLOUD Serious consequences can arise due to a poorly negotiated indemnity clause. But the question really is
National Highways Authority of
whether there is any reason to seek indemnity instead of resorting to claiming statutory damages under India)
CLIENT ACCESS
the Indian Contract Act, 1872 (“Contract Act”) which is anyways available under law. What is there in an Dispute Resolution Hotline : August 04, 2020
MEMBER ACCESS indemnity which is not covered under a remedy for damages? Is indemnity simply an agreement to cover
damages suffered by a party? Can damages be contractually limited? How do liquidated damages differ
from indemnity? What carve-outs and inclusions are necessary to have a water-tight indemnity or liability EVENTS
ジャパンデスク provision? This article focuses on answering few of such questions and outlining the negotiating
strategies to be borne in mind for an indemnification clause to achieve its end. WEBINARS
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II. SETTING THE FRAMEWORK the Counsel
At the outset, it is important to understand whether common law principles apply for interpreting August 06, 2020
How we perform indemnity clauses or is the Contract Act self-sufficient and exhaustive? The Bombay High Court in
Gajanan Moreshwar Parelkar v. Moreshwar Madan Mantri1 while interpreting indemnity provisions clearly SEMINAR
held that the Contract Act is not exhaustive and common law principles are to be relied upon. Hence, NASSCOM HR Forum: An interactive
workshop on "The Code on Wages 2019"
Knowledge anywhere, anytime unless there is a conflict with the Contract Act or any judicial decisions rendered by the Courts in India,
February 25, 2020
the common law principles pertaining to interpreting contracts will continue to be applicable to indemnity
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The statutory framework and the relevant sections in the Contract Act relating to damages and indemnity
are set out in Annexure A.
Up to date legal developments NEWS ROUNDUP
III. SPECIAL OBLIGATIONS THAT MAY ARISE PURSUANT TO AN INDEMNITY
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This section intends to highlight the distinction between an indemnity claim and a claim for damages.
combating multiplicity of arbitral
Firstly, third party claims are covered under an indemnity whereas damages can only be claimed against proceedings (Gammon India v National
the promisor or the party who has made a promise under the contract. Secondly, indemnity claims can be Highways Authority of India)
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made even prior to the party having suffered any actual loss. Thirdly, consequential, indirect and remote
losses can all be claimed under an indemnity clause whereas the same is not sustainable under a
damage claim. Fourthly, indemnity can be claimed for losses without demonstrating that the loss has QUOTES
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arisen on account of breach of contract event whereas for damages, a clear connection and sufficient
contracts misguided
nexus between the breach of contract event and damage suffered has to be demonstrated. All of the
August 05, 2020
above distinctions have been elaborated below:
A) Third Party Claims

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As per section 124 of the Contract Act, a claim for indemnity arises due to “the conduct of the indemnifier
or by the conduct of any other person”. This is a major benefit of an indemnity over damages. Indemnity DEAL CORNER
clauses shifts the entire risk of future loss to the indemnifier. Mubadala Invests $1.2 Billion in Jio
Platforms
B) When does the indemnification obligation kick in?
January 2011 June 05, 2020
Direct Taxes Code - Global Think Tank The courts in India have time and again taken the position that an indemnity holder is entitled to sue the
indemnifier even before incurring any actual damage or loss and that an indemnity is not necessarily M&A LAB
given by repayment after payment.2 Hence, an indemnified party can call upon the indemnifier to make Don’t Mind: You’ve been Acquired!
the payment once the liability has accrued. The concept of accrual of loss or liability and the attendant April 29, 2020
obligation to indemnify can be contractually agreed upon between the parties.
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C) Are consequential or remote/ indirect losses covered? Does reasonability and foreseeability
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Under a claim for damages, the Contract Act only permits seeking compensation for any loss ‘which the July 13, 2020
parties knew, when they made the contract, to be likely to result from the breach of it’ at the time of
entering into the contract3 which is commonly termed as the principle of contemplation of damages
between the parties. Reasonable foreseeability is construed as the serious possibility of occurrence of
loss and is often the test used for damages. Further, the damages claimed must be reasonable and
hence damages may not be sustainable for loss of profit or opportunity costs ordinarily.4 Section 73
specifically states that, “Compensation is not to be given for any remote and indirect loss or damage
sustained by reason of the breach.” Hence, it specifically excludes any claim for remote or indirect losses.
No such restriction applies for an indemnity claim.5 Section 124 of the Contract Act defines a contract of
indemnity as “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.” A claim for damages is subject to
DI S CL A I M ER CON TEN T FE EDthe
BAC K WA
ordinary L K Tof
rules HRremoteness
OUGH UB S CR IBEwhereas a claim for indemnity is not subject to the same Nishith Desai Associates 2013. All rights
Sdiscussed
reserved
www.nishithdesai.com/information/news-storage/news-details/article/revisiting-the-indemnity-vs-damages-debate.html#:~:text=“When a contract has been,have… 1/5
rules. Thus, consequential, remote, indirect, and third party losses can all be claimed by the indemnified
party unless specifically excluded in the indemnity clause.
D) Does duty to mitigate losses or the principles of causation/ onus to prove actual loss apply?
In the context of damages, the concepts of foreseeability, reasonability and remoteness bring along an
interlinked concept of duty to mitigate. It covers within its ambit two broad principles: a) The claimant
must take all reasonable steps to reduce or contain his loss; and b) The claimant must not act
unreasonably so as to increase his loss.6 Section 73 of the Contract Act itself embodies such a concept.
It states that, “In estimating the loss or damage arising from a breach of contract, the means which
existed of remedying the inconvenience caused by the non-performance of the contract must be taken
into account.”7
However, such an obligation may not arise in an indemnity unless specifically stated so in the indemnity
clause. There exists no clear Indian jurisprudence on this point. However, the courts in United States
have taken this position.8 The rationale behind it appears to be that in case of a claim under damages,
there is an obligation to mitigate damages following the breach of contract event. However, in the
instance of indemnity, a contract to indemnify is a separate contract in itself and hence the breach is
refusal to indemnify itself rather than the specific event which led the indemnified party to seek the
indemnity. The indemnity clause may therefore be construed as a claim for debt and not as a claim for
damages and hence the duty to mitigate does not apply.
Similarly, unlike a claim for damages, where a clear connection and sufficient nexus has to be
demonstrated between the breach of contract event and the damage suffered, the threshold to establish
is much lower in case of an indemnity and there is no onus to prove actual loss before claiming
indemnity. There is no direct case law on this point, however, this inference is drawn from the fact that an
indemnity holder in India is entitled to sue the indemnifier even before incurring any actual damage or
loss and that an indemnity is not necessarily given by repayment after payment.9
IV. LIQUIDATED DAMAGES V. CAPPED INDEMNITY CLAUSE
Section 74 of the Contract Act deals with the concept of liquidated damages and states that, “If a sum is
named in the contract as the amount to be paid in case of such breach, or if the contract contains any
other stipulation by way of penalty, the party complaining of the breach is entitled, whether or not actual
damage or loss is proved to have been caused thereby to receive from the party who has broken the
contract reasonable compensation not exceeding the amount so named or, as the case may be, the
penalty stipulated for” In such a case, there may not be any necessity of leading evidence for proving
damages, unless the Court arrives at the conclusion that no loss is likely to occur because of such breach
or the happening of such an event. In Fateh Chand v. Balkishan Das10, the Supreme Court held that in all
cases where there is a stipulation in the nature of penalty, the court has jurisdiction to award such sum
only as it considers reasonable, but not exceeding the amount specified in the contract.
However, a capped indemnity clause operates on a different footing as the concept of reasonability,
foreseeability and remoteness applicable to a damage claim is not applicable to the adjudication of an
indemnity claim. Hence, parties are likely to be able to claim far more through a capped indemnity clause
compared to a liquidated damage clause.
V. EXCLUSIVE REMEDY INDEMNIFICATION CLAUSE WITH LIMITATION OF LIABILITY:

EXCLUDES CLAIM FOR DAMAGES UNDER INDIAN LAW
In order to contractually determine the extent of liability, parties may agree to limit their exposure to a well
drafted and substantially limited indemnity provision largely immune from the discretion of the courts. An
illustration for such a clause is set out below:
(a) Exclusive Remedy Clause: The clause should state that, “indemnity provided under this clause shall
be its sole remedy in relation to the transactions contemplated under this agreement to the exclusion of
all other rights and remedies (including those in tort or arising under statute)”; and
(b) Limitation of Liability: Limitation of liability clause which states that the total liability under the
agreement shall be limited to the amount and conditions stipulated for the indemnity.
Currently there appears to be no clear jurisprudence that exists on the interpretation of exclusive remedy
clauses. In the above construct, damages as a statutory remedy may not be completely ruled out, but
since damages hinge on the principle of foreseeability, the courts may be inclined to rule that indemnity
be used as the benchmark while determining the extent of damages.
VI. NEGOTIATING AN INDEMNITY CLAUSE
a) From an indemnified party’s perspective
1. Usage of phrase “Hold Harmless” and “protect from liability”: It is important to avoid usage of
terms “make good” or “compensate” as the courts may interpret it as covering claims only due to
actual loss suffered by the indemnified party and not cover instances where the liability has accrued
but no payment has been made. Hence, it is advisable to use the notion “Hold Harmless” instead to
cover both the situations.11 Further, usage of phrase “protect from liability” ensures that the indemnifier
has an added obligation of duty to defend cast upon him which requires the indemnifying party to
defend the indemnified against covered third-party claims and potentially first party claims depending
on the language included in the provision.
2. Obligation to defend begins from the moment any claim is made: Indemnification is an equitable
remedy and is not to be merely used as a sword but also includes the obligation to shield the
indemnified party. Therefore, the clause may provide that the right to defend the indemnified party by
the indemnifying party shall kick in the moment any claim is made by any third party (whether the
liability has accrued or not accrued). Sometimes, the indemnified party may want the claim to be
settled instead of pursuing/prolonging the dispute as it may cause a reputational loss. In such an
instance, the duty to defend may be interpreted as taking within its ambit an obligation to settle such
claim and provide complete release to the indemnified party.
DI S CL A I M ER CON TEN T FE ED B A C K WA L K T HR O U G H S UB S CR IBE Nishith Desai Associates 2013. All rights

reserved
3. Give inclusive definition to phrases such as Losses or Liability: Since consequential, indirect and
remote losses can be claimed under the indemnity clause, it is important to not give an exhaustive
definition to Losses. Avoid usage of “Losses means” and rather use “Losses includes”.
4. Use “arising out of” instead of “result of” or “connection of”: Terms such as “a result of” or
“connection of” require close nexus to be established. Hence, arising out of should be used which is
given a broad interpretation by the courts and mere occurrence of the event would suffice.12
5. Tax Gross up: Since the indemnity payments are made due to breach of representations and
warranties or breach of covenants in an agreement, it may be argued and stated that the indemnifying
party absorbs the tax consequences of any indemnifiable loss. Indemnity payments may qualify as
other income and may be subject to a 30% tax. Hence, the indemnity payments are to be made in
such a manner that the actual payment is equal to the payment due under the indemnity claim plus the
amount of taxes payable with respect to its receipt. However, a counter argument may be made that
where actual loss is suffered by the indemnified party, then it actually reduces the amount to which the
indemnified party would have been liable to be taxed, and hence the indemnifying party cannot be
held liable for such an amount.
6. Claim Notice: Since an indemnity works very differently than a claim for damages, it is important to
draft an indemnity clause in such a manner that the indemnity payment obligation triggers on issue of
a claim notice. The clause should clearly state that upon the indemnified party giving a notice to the
indemnifying party of any claim that may arise out of an indemnity clause, the obligation of the
indemnifying party to make the payment shall become due and payable upon receipt of the notice or
within a period of X days of receipt of such notice. Further, it may be stated that any delay in making
any claims or giving a notice does not relieve the indemnifying party of such obligation.
7. Depositing the claim amount with the arbitrator: It may be stated that in case the claim amount is
disputed by the indemnifying party and arbitration or any other mode of resolving dispute as provided
in the agreement is invoked by the indemnifying party, then the claim amount shall be upfront
deposited with the arbitrator. This is to be done in order to ensure that the indemnifying party has the
capacity to pay if a successful award is decided in favor of the indemnified party.
8. Fraud and wilful negligence exclusion from any indemnity cap: Any wilful negligence, breach or
fraud committed by the indemnifying party may be considered to be excluded from the indemnity cap,
if any, agreed upon.
b) From an indemnifying party’s perspective
1. Setting out clearly the basket or deductible: Baskets and deductibles are designed to provide an
indemnifying party with an assurance that it will not be bothered for frivolous claims. It is a common
negotiating point between the parties to agree upon a basket or deductible. In the case of a
deductible, the indemnifying party is only liable for the amount over and excess the deductible
threshold whereas in case of a basket, the indemnifying party is liable for the entire amount once the
basket threshold is hit.
2. Ensure that specific limitations/ exclusions are expressly put in a LOL clause: A limitation of
liability clause is given an extremely strict interpretation since it is an exculpatory clause. Hence, any
exclusions that are to be made from an indemnity clause are to be expressly set forth. Some of the
exclusions that can be considered by the parties have been enlisted below:
Actual or Constructive knowledge qualifier: The indemnifying party may consider excluding claims
for breach of the agreement to the extent the facts, matters, information or circumstances relating to
the relevant claim is known to the indemnified party and hence, an actual or constructive knowledge
qualifier may be added.
Net Financial Benefit: The indemnifying party may consider carving out a specific exclusion that it
will not be liable for any net quantifiable financial benefit that could arise to the indemnified party
from any loss suffered. For instance, where the amount for which indemnified party would otherwise
have been accountable to be assessed for taxation is actually reduced or extinguished as a result of
the matter giving rise to such Loss, then the indemnifying party should not be liable for such amount.
Contingent Liability exclusion: It is advisable to clearly state that the indemnifying party shall not be
liable in respect of any liability which is contingent unless and until such contingent liability becomes
due and payable.
Recovery only once for the same matter and Recovery covered under insurance policy: Since
indemnity is a continuity obligation, it must be clearly stated that the indemnified party is not entitled
to recover more than once in respect of the same matter or the same event which has occasioned
the loss. Similarly, it may be clearly stated that the indemnifying party shall not be liable in respect of
any claim to the extent such losses are covered by a policy of insurance or can be recoverable from
a third person.
Exclusion where provisions have already been made: It can be stated that the indemnifying party
shall not be held liable in respect of any claim if proper allowance, provisions or reserve is made in
the accounts.
3. Duty to Mitigate: Unless specifically stated in the indemnity clause, there may not be any specific
obligation cast upon the indemnified party to mitigate losses. Hence, the indemnifying party may
negotiate and provide for a duty to mitigate in the indemnity clause.
4. Going for Limitation of Remedy clause: As mentioned earlier, contracts have limitation of liability
clauses which simply limit the liability of the indemnifier but does not rule out other contractual
remedies to be pursued against the indemnifier. However, if one is representing the indemnifier, it is
advisable to go in for a ‘limitation of remedy’ clause which takes into its ambit both the limitation of
liability and exclusive remedy clause and leaves no room for any ambiguity in interpretation.
5. Survival of Indemnity clause: While, parties may state that the indemnity clause will survive the
termination of the agreement. However, from an indemnified party’s perspective, it is important that the
survival clause is tailor made. For instance, it may be stated any indemnity claim arising out of breach
DI S CL A I M ER CON TEN T FE ED B Aof
C Krepresentations may
WA L K T HR O be
UGH valid
S UBforS CR
a limited
IBE period of three years post the closing of the agreement.
Nishith Desai Associates 2013. All rights
reserved
VII. REMITTANCE OF MONETARY DAMAGES FROM A RESIDENT TO A NON-
RESIDENT: CAPITAL ACCOUNT OR CURRENT ACCOUNT TRANSACTION
Quite often in instances of the indemnified party being a foreign entity, this question arises in India. Upon
a review of the definition of capital account and current account transaction, no clear answer emerges.
We briefly set out herein below the legal framework and our thoughts on this point.
Section 2 (e) of FEMA states that capital account transaction means:
“a transaction which alters the assets or liabilities, including contingent liabilities, outside India of persons
resident in India or assets or liabilities in India of persons resident outside India, and includes
transactions specified in sub-section (3) of section 6.”
Section 2(j) of FEMA states that a current account transaction means a transaction other than a
capital account transaction.
All current account transactions are permitted, unless specifically restricted by Central Government
whereas all capital account transactions are specifically prohibited unless specifically permitted. As
permitted transactions, current account transactions require no prior regulatory approval.
Remittance of monetary damages/ payment of indemnity to a person resident outside India would not
amount to alteration of resident Indian’s capital assets outside India. Therefore, it may not be construed
as a capital account transaction.
At this stage, it is pertinent to look at the Articles of Agreement of the International Monetary Fund (“IMF”)
(“IMF Regulations”) which has been adopted by India and forms the basis of adoption of partial
convertibility of Indian rupee by Reserve Bank of India (“RBI”). India joined the IMF in 1945, as one of the
IMF's original members. In 1994, India accepted the obligations of Article VIII of the IMF Articles of
Agreement on current account convertibility. Article VIII of the IMF Regulations states that no member
shall impose restrictions on the making of payments and transfers for current international transactions.
The Balance of Payments Manual published by IMF (“BOPM”) provides conceptual guidelines for
compiling balance of payments statistics according to international standards, and importantly, includes
detailed definitions for current and capital accounts and transactions. Indian authorities should place no
restrictions if a transaction in question is considered a current account transaction under applicable IMF
definitions.
BOPM identifies certain special characteristics of capital transfers to distinguish them from current
transfers. A transfer in kind without a charge is a capital transfer when it consists of (i) the transfer of
ownership of a nonfinancial asset (other than inventories, i.e., fixed assets, valuables, or non-produced
assets) or (ii) the forgiveness of a liability by a creditor when no corresponding value is received in return.
Also, a transfer of cash is a capital transfer when it is linked to, or conditional on, the acquisition or
disposal of a fixed asset (for example, an investment grant) by one or both parties to the transaction.
Current transfers are all transfers which cannot be stated to be capital transfers.
“Payment of compensation” is included within the definition of current transfers in the BOPM. Paragraphs
12.55 and 12.56 of the BOPM state that “payments of compensation” are current transfers. Included
within the definition of “payment of compensation” are settlements agreed out of court or compensation
for nonfulfillment of contracts not covered by insurance policies. Hence, an argument or view can be
taken that the indemnity payments and payments of compensation pursuant to a court order or arbitral
award are to be construed as current account transaction and not capital account transaction. However,
in practice, banks during remittance of money prefer to seek clarification/ approval of RBI which is
generally not denied.
– Satish Padhi, Ruchir Sinha & Vyapak Desai

You can direct your queries or comments to the authors
1 (1942) 44 BomLR 704.

2 See Jet Airways (India) Limited v. Sahara Airlines Limited and Ors, 2011 (113) Bom LR 1725, Khetarpal v.
Madhukur Pictures, AIR 1956 Bom 106. See also Osman Jamal and Sons Limited v. Gopal Purshattam, (1928)
ILR Cal 262. “Equity has always recognized the existence of a larger and wider right in the person entitled
to indemnity. He was entitled, in a Court of Equity, if he was a surety whose liability to pay had become
absolute to maintain an action against the principal debtor and to abtain an order that he should pay off
the creditor and relieve the surety (…) Indemnity is not necessarily given by repayment after payment.
Indemnity requires that the party to be indemnified shall never be called upon to pay”.
3 See Section 73 of the Indian Contract Act, 1872. See also Hadley v. Baxendale, [1854] EWHC J70 which forms the
basis of unliquidated damages under the Contract Act. The observations of the court are as follows: “Where
two parties
have made a contract which one of them has broken, the damages which the other party ought to receive
in respect of such breach of contract should be such as may fairly and reasonably be considered either
arising naturally, i.e., according to the usual course of things, from such breach of contract itself, or such
as may reasonably be supposed to have been in the contemplation of both parties, at the time they made
the contract, as the probable result of the breach of it.”
4 Ruxley Electronics and Construction Limited v. Forsyth, [1996] AC 344.
5 Total Transport Corporation v. Arcadia Petroleum Limited, [1998] 1 Lloyd’s Rep. 351. See observations of Lord Justice
Staughton wherein it is stated that, "Indemnity" may refer to all loss suffered which is attributable to a specified
cause, whether or not it was in the reasonable contemplation of the parties.”
6 See Law of Contract (Lexis Nexis) 3rd Edition (2007).
7 See Explanation to Section 73.
8 See Am. States Ins. Co v. Glover, 960 F. 2D (6th Circuit 1992) (“Failure
to mitigate is not a defense to indemnity
action”); See also Napier Elec. & Constr. Co.; 571 S.W.2.D 644 (“Indemnity Agreement terms determine nature of
indemnitors which terms allow reimbursement of all payments made in good faith”).
9 See
Jet Airways (India) Limited v. Sahara Airlines Limited and Ors, 2011 (113) Bom LR 1725, Khetarpal v.
Madhukur Pictures, AIR 1956 Bom 106. See also Osman Jamal and Sons Limited v. Gopal Purshattam, (1928)
ILR Cal 262. “Equity
has always recognized the existence of a larger and wider right in the person entitled
to indemnity. He was entitled, in a Court of Equity, if he was a surety whose liability to pay had become
absolute to maintain an action against the principal debtor and to abtain an order that he should pay off
reserved
the creditor and relieve the surety (…) Indemnity is not necessarily given by repayment after payment.
Indemnity requires that the party to be indemnified shall never be called upon to pay”.
10 AIR 1963 SC 1405
11 See Queen Villas Homeowners Association v. TCB Property Management, 2007 Cal. App. Lexis 470 wherein
it has been observed that, “The
words "indemnify" and "hold harmless" are not synonymous. One is offensive
and the other is defensive -- even though both contemplate third-party liability situations. "Indemnify" is
an offensive right, a sword which allowes an indemnitee to seek indemnification. Hold harmless" on the
other hand is defensive which simply provides for a right not to be bothered by the other party itself
seeking indemnification.”
12 See Samways v. WorkCover Queensland and Ors. [2010] QSC 127. The relevant observations made by
Applegarth J are enlisted as follows: “The words “arising out of” are wide. The relevant relationship should not
be remote, but one of substance albeit less than required by words such as “caused by” or “as a result
of”.

Annexure A
The law governing claim for damages is set out in Sections 73 and Section 74 of the Contract Act.
Section 73 of the Contract Act deals with unliquidated damages and reads as follows:
“When a contract has been broken, the party who suffers by such breach is entitled to receive, form the
party who has broken the contract, compensation for any loss or damage caused to him thereby, which
naturally arose in the usual course of things from such breach, or which the parties knew, when they
made the contract, to be likely to result from the breach of it.
Such compensation is not to be given for any remote and indirect loss of damage sustained by reason of
the breach.
Compensation for failure to discharge obligation resembling those created by contract: When an
obligation resembling those created by contract has been incurred and has not been discharged, any
person injured by the failure to discharge it is entitled to receive the same compensation from the party in
default, as if such person had contracted to discharge it and had broken his contract.
Explanation: In estimating the loss or damage arising from a breach of contract, the means which existed
of remedying the inconvenience caused by non-performance of the contract must be taken into account.”
Section 74 deals with liquidated damages and reads as follows:
“When a contract has been broken, if a sum is named in the contract as the amount to be paid in case of
such breach, or if the contract contains any other stipulation by way of penalty, the party complaining of
the breach is entitled, whether or not actual damage or loss is proved to have been caused thereby, to
receive from the party who has broken the contract reasonable compensation not exceeding the amount
so named or, as the case may be, the penalty stipulated for.
Explanation: A stipulation for increased interest from the date of default may be a stipulation by way of
penalty.”
Similarly, the law governing indemnity is set out in Sections 124 and 125 of the Contract Act.
Section 124 of the Contract Act defines a contract of indemnity as follows:
“A contract by which one party promises to save the other from loss caused to him by the conduct of the
promisor himself, or by the conduct of any other person, is called a "contract of indemnity".
Section 125 of the Contract Act gives the right of indemnity holder when sued and states that,
“The promisee in a contract of indemnity, acting within the scope of his authority, is entitled to recover
from the promisor (1) all damages which he may be compelled to pay in any suit in respect of any matter
to which the promise to indemnify applies; (2) all costs which he may be compelled to pay in any such
suit, if in bringing of defending it, he did not contravene the orders of the promisor, and acted as it would
have been prudent for him to act in the absence of any contract of indemnity, or if the promisor authorized
him to bring or defend the suit; and (3) all sums which he may have paid under the terms of any
compromise of any such suit, if the compromise was not contract to the orders of the promisor, and was
one which it would have been prudent for the promise to make in the absence of any contract of
indemnity, or if the promisor authorized him to compromise the suit.”

reserved
10/07/2020 Doctrine Of Equitable Subrogation In Indian Law - Insurance - India
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India: Doctrine Of Equitable Subrogation In Indian Law

28 April 2015
by Rahul Pandey
Singh & Associates
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The The term 'subrogation' in the context of insurance, has been defined in Black's Law Dictionary thus:
The principle under which an insurer that has paid a loss under an insurance policy is entitled to all the rights and
remedies belonging to the insured against a third party with respect to any loss covered by the policy.
'Right of Subrogation is statutorily recognized and described in Section 79 of the Marine Insurance Act, 19631.
Subrogation is the right or rights of the insurer to assume the rights of the insured. Legal rights or to step into
the shoes of. Rights of subrogation can arise three different ways:
(i). Subrogation by equitable assignment,
(ii). Subrogation by contract, and
(iii). Subrogation-cum-assignment.
Subrogation by contract commonly arises in contracts of insurance. The doctrine of subrogation confers upon
the insurer the right to receive the benefit of such rights and remedies as the assured has against third
parties in regard to the loss to the extent that the insurer has indemnified the loss and made it good. The
insurer is, therefore, entitled to exercise whatever rights the assured possesses to recover to that extent
compensation for the loss, but it must do so in the name of the assured. 2
Equitable right of subrogation arises when the insurer settles the claim of the assured, for the entire loss, i.e.
insurer stands in the shoes of the insured. Subrogation in this sense is a contractual arrangement for the
transfer of rights against third parties and is founded upon the common intention of the parties. But the term
is also used to describe an equitable remedy to reverse or prevent unjust enrichment which is not based
upon any agreement or common intention of the party enriched and the party deprived.3
Principles regarding doctrine of subrogation in India-4

The principles relating to subrogation can therefore be summarized thus:
(i) Equitable right of subrogation arises when the insurer settles the claim of the assured, for the entire
loss. When there is an equitable subrogation in favour of the insurer, the insurer is allowed to stand in
the shoes of the assured and enforce the rights of the assured against the wrongdoer.
(ii) Subrogation does not terminate nor puts an end to the right of the assured to sue the wrong-doer and
recover the damages for the loss. Subrogation only entitles the insurer to receive back the amount paid
to the assured, in terms of the principles of subrogation.
(iii) Where the assured executes a Letter of Subrogation, reducing the terms of subrogation, the rights of
the insurer vis-à-vis the assured will be governed by the terms of the Letter of Subrogation.
(iv) A subrogation enables the insurer to exercise the rights of the assured against third parties in the
name of the assured. Consequently, any plaint, complaint or petition for recovery of compensation can
be filed in the name of the assured, or by the assured represented by the insurer as subrogeecum-
attorney, or by the assured and the insurer as co-plaintiffs or co-complainants.
(v) Where the assured executed a subrogation-cumassignment in favour of the insurer (as contrasted
from a subrogation), the assured is left with no right or interest. Consequently, the assured will no longer
https://www.mondaq.com/india/insurance-laws-and-products/392864/doctrine-of-equitable-subrogation-in-indian-law?signup=true 1/3
10/07/2020
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Doctrine Of Equitable Subrogation In Indian Law - Insurance - India
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be entitled to sue the wrongdoer on its own account and for its own benefit. But as the instrument is a
subrogation-cum-assignment, and not a mere assignment, the insurer has the choice of suing in its own
name, or in the name of the assured, if the instrument so provides. The insured becomes entitled to the
entire amount recovered from the wrongdoer, that is, not only the amount that the insured had paid to
the assured, but also any amount received in excess of what was paid by it to the assured, if the
instrument so provides5.
The doctrine of subrogation and the concept of subrogation-cum-assignment is explained by the following
example:
The loss suffered by the insured/ assured is Rs. 1,00,000. The insurer settles the claim for Rs. 75,000. The
wrongdoer is sued for recovery of Rs. 1,00,000. Where there is no letter of subrogation and insurer relies on
doctrine of equitable subrogation. (Suit filed by the insured/ assured)
1. If the suit filed for recovery of Rs.1, 00,000/- is decreed as prayed, and the said sum of Rs.1, 00,000/- is
recovered, the assured would appropriate Rs. 25,000/- to recover the entire loss of Rs. 1, 00,000/- and the
doctrine of subrogation would enable the insurer to claim and receive the balance of Rs.75, 000.
2. If the suit filed for recovery of Rs.1,00,000/- is decreed as prayed for, but the assured is able to recover
only Rs.50,000/- from the Judgment-Debtor (wrong-doer), the assured will be entitled to appropriate
Rs.25,000/- (which is the shortfall to make up Rs.1,00,000/- being the loss) and the insurer will be entitled
to receive only the balance of Rs. 25,000/- even though it had paid Rs. 75,000/- to the assured.
3. Where, the suit is filed for recovery of Rs.1, 00,000/- but the court assesses the loss actually suffered by
the assured as only Rs.75, 000/- (as against the claim of the assured that the value of goods lost is
Rs.100,000/-) and then awards Rs.75,000/- plus costs, the insurer will be entitled to claim and receive the
entire amount of Rs.75,000/- in view of the doctrine of subrogation. Where the assured executes a letter
of subrogation entitling the insurer to recover Rs. 75,000/- (The suit is filed in the name of the assured or
jointly by the assured and insurer).
4. If the suit is filed for recovery of Rs.1,00,000/-, and if the court grants Rs.1,00,000/-, the insurer will take
Rs.75,000/- and the assured will take Rs.25,000/.
5. If the insurer sues in the name of the assured for Rs.75,000/- and recovers Rs.75,000/-, the insurer will
retain the entire sum of Rs.75,000/- in pursuance of the Letter of Subrogation, even if the assured has not
recovered the entire loss of Rs.1,00,000/-. If the assured wants to recover the balance of the loss of
Rs.25,000/- as he had received only Rs. 75,000/- from the insurer, the assured should ensure that the
claim is made against the wrongdoer for the entire sum of Rs.100,000/- by bearing the proportionate
expense. Otherwise the insurer will sue in the name of the assured for only for Rs. 75,000/-.
6. If the letter of subrogation executed by the assured when the insurer settles the claim of the assured
uses the words that the "assured assigns, transfers and abandons unto the insurer, the right to get
Rs.75,000/- from the wrong-doer", the document will be a 'subrogation' in spite of the use of words
'transfers, assigns and abandons'. This is because the insurer has settled the claim for Rs.75, 000/- and
the instrument merely entitles the insurer to receive the said sum of Rs.75, 000/- which he had paid to the
assured, and nothing more. Where the assured executes a letter of subrogation-cum-assignment for
Rs.100, 000/-
7. If the document executed by the assured in favour of the insured provides that in consideration of the
settlement of the claim for Rs.75,000/-, the assured has transferred and assigned by way of subrogation
and assignment, the right to recover the entire value of the goods lost and retain the entire amount
without being accountable to the assured for any excess recovered (over and above Rs.75,000/-) and
provides that the insurer may sue in the name of the assured or sue in its own name without reference to
the assured, the instrument is a subrogation-cum-assignment and the insurer has the choice of either
suing in the name of the assured or in its own name. Where the assured executes a letter of assignment
in favour of a third party to sue and recover from the carrier, the value of the consignment.
8. If the assured, having received Rs.75,000/- from the insurer, executes an instrument in favour of a third
party (not being the insurer) assigning the right to sue and recover from the carrier, damages for loss of
the consignment, such a document will be an Assignment. The assignee cannot file a complaint before
the consumer for a, as he is not a 'consumer'. Further, such a document being a transfer of a mere right
to sue, will be void and unenforceable, having regard to section 6(e) of Transfer of Property Act, 1882. It is
well settled that a right to sue for unliquidated damages for breach of contract or for tort, not being a
right connected with the ownership of any property, nor being a right to sue for a debt or actionable
claim, is a mere right to sue and is incapable of being transferred.
Maintainability of the complaint in the Consumer forum- [section 2(d) of Consumer Protection Act, 1986]6
a) The insurer, as subrogee, can file a complaint under the Act either in the name of the assured (as his
attorney holder) or in the joint names of the assured and the insurer for recovery of the amount due
from the service provider. The insurer may also request the assured to sue the wrong doer (service
provider).
b) Even if the letter of subrogation executed by the assured in favour of the insurer contains in addition to
the words of subrogation, any words of assignment, the complaint would be maintainable so long as the
complaint is in the name of the assured and insurer figures in the complaint only as an attorney holder or
10/07/2020 Doctrine Of Equitable Subrogation In Indian Law - Insurance - India
complaint is in the name of the assured and insurer figures in the complaint only as an attorney holder or
subrogee of the assured.
c) The insurer cannot in its own name maintain a complaint before a consumer forum under the Act, even
if its right is traced to the terms of a Letter of subrogation-cum-assignment executed by the assured.
d) Questions which fell for consideration before Hon'ble the Supreme Court of India in Oberai Forwarding
Agency's7case (supra) was as to whether the Insurance Company was subrogated to the rights of the
claimant consignors of the goods with respect to the lost consignment or whether the Insurance
Company who was the assignee of the rights in respect of the rights of insured thereof; and, if the latter,
whether it was a 'consumer' within the meaning of the Consumer Protection Act 1986 entitled to maintain
a complaint thereunder?
Conclusion:-
Supreme Court of India held that in the case of subrogation, Rights of Subrogation vests by operation of law
rather than as the product of express agreement. Right of Subrogation can be enjoyed by the insurer as soon
as payment is made, whereas an assignment requires an agreement that the rights of the assured be
assigned to the insurer. In the case of subrogation, the assignee can recover whatever amount has been paid
by him to the insurer whereas in the case of assignment, he can recover more than the actual loss from the
insurer/third party. Thus Supreme Court of India came to the conclusion that the letter styled as
"subrogation" was in fact assignment of the rights by the insured and, therefore, the insurer was not a
'consumer' within the meaning of the Consumer Protection Act, 1986 and, therefore, not entitled to maintain
the complaint.
Footnotes
1. (1) Where the insurer pays for a total loss, either of the whole, or in the case of goods of any apportionable part, of the subject-matter insured,
the thereupon becomes entitled to take over the interest of the assured in whatever may remain of the subject-matter so paid for, and he is
thereby subrogated to all the rights and remedies of the assured in and in respect of that subject-matter as from the time of the casualty causing
the loss.
(2) Subject to the foregoing provisions, where the insurer pays for a partial loss, he acquires no title to the subject matter insured, or such part of
it as may remain, but he is thereupon subrogated to all rights and remedies of the assured and in respect of the subject matter insured as from
the time of the casualty causing the loss, in so far as the assured has been indemnified, according to this Act, by such payment for the loss.
2. Oberai Forwarding Agency v. New India Assurance Co. Ltd. 2002 (2) SCC 407
3. House of Lords in Banque Financiere de la Cite v. Parc (Battersea) Ltd. 1999 (1) A.C. 221
4. Economic Transport Organization Vs. Charan Spinning Mills (P) Ltd. and Anr, 2010(3)ALD58(SC).
5. Economic Transport Organization Vs. Charan Spinning Mills (P) Ltd. and Anr, 2010(3)ALD58(SC).
6. Section 2(d) of Act was amended by Amendment Act 62 of 2002 with effect from 15.3.2003, by adding the words "but does not include a person
who avails of such services for any commercial purpose" in the definition of 'consumer'. After the said amendment, if the service of the carrier had
been availed for any commercial purpose, then the person availing the service will not be a 'consumer' and consequently, complaints will not be
maintainable in such cases. But the said amendment will not apply to complaints filed before the amendment.
7. Oberai Forwarding Agency v. New India Assurance Company Limited and Another reported in (2000) 2 SCC 407
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
AUTHOR(S)
Rahul Pandey
Singh & Associates
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(1969) 1 SCR 620 : AIR 1969 SC 297 : (1969) 39 Comp Cas 133
In the Supreme Court of India

(BEFORE S.M. SIKRI, R.S. BACHAWAT AND K.S. HEGDE, JJ.)
BANK OF BIHAR LTD. … Appellant;

Versus
DR. DAMODAR PRASAD AND ANOTHER … Respondents.
Civil Appeal No. 1109 of 1965† , decided on August 8, 1968††
Advocates who appeared in this case :
S. Mitra, Senior Advocate (R.C. Prasad, Advocate, with him), for the Appellant;
K.K. Sinha, Advocate, for Respondent 1.
The Judgment of the Court was delivered by
R.S. BACHAWAT, J.— The plaintiff Bank lent moneys to Defendant 1 Damodar
Prasad on the guarantee of Defendant 2 Paras Nath Sinha. On the date of the suit
Damodar Prasad was indebted to the plaintiff for Rs 11,723.56 nP on account of
principal and Rs 2769.37 nP on account of interest. In spite of demands neither he nor
the guarantor paid the dues. The plaintiff filed a suit against them in the Court of the
Subordinate Judge, 1st Court, Patna, claiming a decree for the amount due. The trial
court decreed the suit against both the defendants. While passing the decree, the trial
court directed that the “plaintiff bank shall be at liberty to enforce its dues in question
against Defendant 2 only after having exhausted its remedies against Defendant 1”.
The plaintiff filed an appeal challenging the legality and propriety of this direction. The
High Court dismissed the appeal. The plaintiff has filed the present appeal after
obtaining a certificate.
2. The guarantee bond in favour of the plaintiff bank is dated June 15, 1951. The
surety agreed to pay and satisfy the liabilities of the principal debtor up to Rs 12,000
and interest thereon two days after demand. The bond provided that the plaintiff
would be at liberty to enforce and to recover upon the guarantee notwithstanding any
other guarantee, security or remedy which the Bank might hold or be entitled to in
respect of the amount secured.
3. The demand for payment of the liability of the principal debtor was the only
condition for the enforcement of the bond. That condition was fulfilled. Neither the
principal debtor nor the surety discharged the admitted liability of the principal debtor
in spite of demands. Under Section 128 of the Indian Contract Act, save as provided in
the contract, the liability of the surety is coextensive with that of the principal debtor.
The surety became thus liable to pay the entire amount. His liability was immediate. It
was not deferred until the creditor exhausted his remedies against the principal
debtor.
4. Before payment the surety has no right to dictate terms to the creditor and ask
him to pursue his remedies against the principal in the first instance. As Lord Eldon
observed in Wright v. Simpson2 “But the surety is a guarantee; and it is his business
to see whether the principal pays, and not that of the creditor”. In the absence of
some special equity the surety has no right to restrain an action against him by the
creditor on the ground that the principal is solvent or that the creditor may have relief
against the principal in some other proceedings.
5. Likewise where the creditor has obtained a decree against the surety and the
principal, the surety has no right to restrain execution against him until the creditor
has exhausted his remedies against the principal. In Lachhman Joharimal v. Bapu
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Khandu and Surety Tukaram Khandoji1 the Judge of the Court of Small Causes,
Ahmednagar, solicited the opinion of the Bombay High Court on the subject of the
liability of sureties. The creditors having obtained decrees in two suits in the Court of
Small Causes against the principals and sureties presented applications for the
imprisonment of the sureties before levying execution against the principals. The
Judge stated that the practice of his court had been to restrain a judgment-creditor
from recovering from a surety until he had exhausted his remedy against the principal
but in his view the surety should be liable to imprisonment while the principal was at
large. Couch, C.J., and Melvill, J. agreed with this opinion and observed—
“The court is of opinion that a creditor is not bound to exhaust his remedy
against the principal debtor before suing the surety and that when a decree is
obtained against a surety, it may be enforced in the same manner as a decree for
any other debt.”
6. It is now suggested that under Order 20 Rule 11(1) and Section 151 of the Code
of Civil Procedure the Court passing the decree had the power to impose the condition
that the judgment-creditor would not be at liberty to enforce the decree against the
surety until the creditor has exhausted his remedies against the principal. Order 20
Rule 11(1) provides that “where and insofar as a decree is for the payment of money,
the Court may for any sufficient reason at the time of passing the decree order that
payment of the amount decreed shall be postponed or shall be made by instalments,
with or without interest, notwithstanding anything contained in the contract under
which the money is payable”. For making an order under Order 20 Rule 11(1) the
court must give sufficient reasons. The direction postponing payment of the amount
decreed must be clear and specific. The injunction upon the creditor not to proceed
against the surety until the creditor has exhausted his remedies against the principal
is of the vaguest character. It is not stated how and when the creditor would exhaust
his remedies against the principal. Is the creditor to ask for imprisonment of the
principal? Is he bound to discover at his peril all the properties of the principal and sell
them; and if he cannot, does he lose his remedy against the surety? Has he to file an
insolvency petition against the principal? The trial court gave no reasons for this
extraordinary direction. The Court rejected the prayer of the principal debtor for
payment of the decretal amount in instalments as there was no evidence to show that
he could not pay the decretal amount in one lump sum. It is, therefore, said that the
principal was solvent. But the solvency of the principal is not a sufficient ground for
restraining execution of the decree against the surety. It is the duty of the surety to
pay the decretal amount. On such payment he will be subrogated to the rights of the
creditor under Section 140 of the Indian Contract Act, and he may then recover the
amount from the principal. The very object of the guarantee is defeated if the creditor
is asked to postpone his remedies against the surety. In the present case the creditor
is a banking company. A guarantee is a collateral security usually taken by a banker.
The security will become useless if his rights against the surety can be so easily cut
down. The impugned direction cannot be justified under Order 20 Rule 11(1). Assuring
that apart from Order 20 Rule 11(1) the Court had the inherent power under Section
151 to direct postponement of execution of the decree, the ends of justice did not
require such postponement.
7. In the result, the appeal is allowed, the direction of the court below that the
“plaintiff-bank shall be at liberty to enforce its dues in question against Defendant 2
only after having exhausted its remedies against Defendant 1” is set aside. The
respondent Dr. Paras Nath Sinha shall pay to the appellant costs in this Court and in
the High Court.
———
† Appeal from the Judgment and Decree dated 3rd December, 1962 of the Patna High Court in Appeal from
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Original Decree No. 300 of 1959.
††Other citations: (1969) 1 SCR 620 : AIR 1969 S.C. 297 : (1969) 39 Comp Cas 133, Bank of Bihar v. Damodar
Prasad
1
(1869) 4 Bom High Court Reports 242
2 6 Ves Jun 714, 734 : 31 ER 1272, 1282
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1950-2020, © EBC Publishing Pvt. Ltd., Lucknow.

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1996 SCC OnLine Cal 147 : AIR 1996 Cal 449 : (1997) 2 ICC 745 (Cal) : (1996)
1 CHN 469
BEFORE SATYABRATA SINHA, J.
Sri Hanuman Steel Rolling Mill and another … Petitioners;

Versus
C.E.S.C. Ltd. … Respondents.
Matter No. 129 of 1993
Decided on April 12, 1996
ORDER
1. All these writ applications-involving common questions of law and fact
Page: 451
were taken up for hearing together and are being disposed of by this common
judgment.
2. The petitioners in all the cases are consumers of electrical energy having
obtained electrical connection from the respondent-company but their electrical
connection had been disconnected on diverse dates by the Officers of Loss Control Cell
of C.E.S.C. Ltd. upon surprise inspections and having allegedly found that the
petitioners have indulged in theft or pilferage of electrical energy.
3. In some matters, affidavits-in-opposition have been filed by the C.E.S.C. Ltd.
where in almost stereo type statements have been made that upon inspection the
meter body of the meter installed in the premises of the consumers were found
spurious and/or the seals of the service cut out were found missing or the seals on the
meter body were found tampered.
4. In almost all the cases the petitioners carry on business or trades and their
grievance is that by reason of an arbitrary action on the part of the C.E.S.C. Ltd. and
its Officers in disconnecting the electrical energy they have suffered immense loss and
injury. In some of the writ applications it has specifically been averred that the officers
of C.E.S.C. Ltd. sought for illegal gratification from them but on their refusal to pay the
same, the electrical connections had been disconnected and false First Information
Reports have been lodged. It is stated that thereafter the C.E.S.C. Ltd. had sent a bill
and in the cases where the consumers having no other alternative had paid the
amount and approached this Court and obtained an interim order, no further action
has been taken by the Respondents. It also appears from the records that in some of
the cases despite liberty granted to C.E.S.C. Ltd. to take off the meter from the
premises of the consumer no such action had been taken and supply of electrical
energy was continued through the old meter without taking any corrective measure or
without sending the meter to the Chief Electrical Inspector for his examination in
terms of Section 26(6) of the Indian Electricity Act. Moreover the criminal cases were
also not proceeded with. It was, therefore, contended that the plea of theft or pilferage
of electrical energy in most of the cases is merely a ruse or a ploy to extract a huge
amount from the consumer without any authority of law in an arbitrary manner which
is violative of the provisions of Indian Electricity Act and the rules framed thereunder.
5. It is also the case of the petitioners that in the letter issued to them, C.E.S.C.
Ltd. had acted mechanically and apart from the allegation of commission of an offence
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under Section 44 of the Indian Electricity Act, a violation of conditions of supply has
also been alleged. In that situation it has been submitted that the entire action on the
part of the respondent in disconnecting the electrical energy without any prior notice
must be held to be illegal being violative of the principles of natural justice and fair
play.
6. The fact of the matter, however, in one of the cases, namely, Matter No. 29/93
Sri Hanuman Steel Rolling Mills Co. may be noticed in a bit details.
7. The writ petitioners had a Rolling Mill at Howrah, it is consumer of high-tension
electrical energy wherefor an agreement had been entered into by and between the
petitioners and C.E.S.C. Ltd. So far as the supply of high-tension electrical energy is
concerned a meter book is provided and two meters i.e. COS meter and Sin meter are
installed in the meter board. The COS meter is meant for recording the power factor
whereas the Sin meter records consumption of units of electrical energy. The meters
are checked by competent engineers and any defect in the meter, if found, is duly
recorded in the meter book and corrective measures are taken.
8. According to the petitioners, the factory was closed from 6-12-1992 to 30-12-
1992 and during the said period the meters were inspected and found to be in order.
Again meters were inspected on 12-1-1993. In Annexure ‘B’ of the Affidavit-in-
opposition being an internal letter of C.E.S.C. Ltd. dated 12th January, 1993 it was
stated:—
“It is very difficult to reset D/I of COS
Page: 452
Meter as D/I knob is defective. (But it was reset with difficulty).
9. Thus, it is contended that the meters were being closely scrutinised. The
transformer of the factory got burnt on 17-1-1993. The petitioners sought for the
quotation form a Private Co. for repair of the Transformer. Again on 19-1-1993/29-1-
1993 the meters were inspected and found to be in order and no endorsement was
made in the meter book which also goes to show that no defect was found therein.
However, in an internal letter dated 30-1-1993 which appears at page 22 of the
affidavit-in-opposition it was stated that plastic seals fixed on the body cover of the
COS Meter was found to be spurious. According to the petitioner the said internal
letter is a manufactured one.
10. On 2-2-1993 the electrical connection was disconnected but no endorsement
was made stating the reason for such disconnection in the meter reading book. On the
same day a First Information Report was lodged. On 2-2-1993 the respondent issued a
letter to the petitioner alleging that during inspection it was revealed that the
arrangement of the meter in circuit had been tampered with by the consumer of
electricity by passing registration of consumption of electrical energy, which was, inter
alia, in violation of C.E.S.C's conditions of supply. The petitioner contends that as
consumption of electrical energy is recorded in the Sin meter, the question of stealing
of electricity by using spurious seal on the COS Meter appears to be absurd as in such
a meter only the power factor is recorded.
11. The petitioner thereafter filed writ application and on 10th Feb. 1993 an interim
order was passed by this court that on petitioner's depositing a sum of Rs. 1,50,000/-,
the electrical connection was divided to be restored and the respondents were given
liberty to remove the existing meter upon notice to the petitioner which was to be sent
to the Chief Electrical Inspector, Government of West Bengal for necessary checking
and the respondents were further given liberty to instal a new meter forthwith in the
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premises of the petitioner. The electrical connection was restored on 20th Feb. 1993
and the alleged spurious plastic seals were removed behind the back of the meter and
the new seals has been affixed. On 20th Feb. 1993 the Transformer was also replaced.
According to the petitioner the replacement of existing meter was delayed for 10
months which show mala fide on the part of the respondent.
12. It is not disputed that the repondent-corapany has framed conditions of supply
upon obtaining approval therefor in term of sub-section (2) of Section 21 of the Indian
Electricity Act. Clause 12 of the said conditions of Supply empowers the licensee to
require the consumer to enter into a written agreement. Clauses 26 and 27 of the said
condition read thus:—
26. “In the event of the consumer failing to comply with the provisions of these
conditions of supply or the terms of the agreement which have been approved by
Government under Section 21, sub-section (2) of the Indian Electricity Act, 1910,
or any revision thereof, then, in addition to the powers conferred on the Licensee by
this license and current legislation, it shall be lawful for the licensee after giving
seven days' notice in writing to the consumer to discontinue the supply of energy to
the consumer. The licensee shall, however, on the cessation of the act which
entitled him disconnect the supply and on payment by the consumer of the
expenses incurred by him in disconnecting and reconnecting the supply, reconnect
the supply with all reasonable speed.
27. Nothing in these conditions or in any agreement between the licensee and
consumers shall abridge or prejudice the right of the licensee under his license and
under the Acts of the Government of India or the Government of West Bengal, or
any rule thereunder.”
13. The contention raised by the learned Counsel for the petitioners is that
principles of natural justice must be complied with before disconnecting the electrical
connection for any reasons whatsoever inasmuch by reason thereof the consumers
suffer civil consequences. The learned counsel in this connection have referred to the
provision of
Page: 453
Sections 24(1), 26, 26(4) and 26(6) of the Indian Electricity Act and submitted that in
the event the meter installed at the premises of the consumer is found to be incorrect,
the only remedy open to the parties is to refer the matter to the Electrical Inspector in
terms of sub-section (6) of Section 26 of the Indian Electricity Act in the light of the
decision of the Supreme Court of India in Maharashtra State Electricity Board v.
Basantibai reported in AIR 1988 SC 71. Reliance has also been placed on a decision of
the Supreme Court in Municipal Corporation of Delhi v. Ajanta Iron and Steel Co. Pvt.
Ltd. reported in AIR 1990 SC 882. It was urged that the respondent, C.E.S.C. Ltd.
being a licensee and Indian Electricity Act and the rules framed thereunder exercises a
public function and being a public body must comply with the principles of natural
justice keeping in view the fact that supply of electrical energy is essential for human
existence. Reliance in this connection has been placed on a judgment of mine in
Dumraon Textiles Ltd. v. Bihar State Electricity Board reported in AIR 1995 Pat 43,
and various other decisions. It has, however, been contended that except the
allegations that the petitioners have tampered with the meter or similar such
allegations, they have been asked to pay a huge amount assessed by the respondents
without their being any guideline therefor. In one of the cases, it has been alleged by
the C.E.S.C. Ltd. that the charges were not in consonance with the load installed
therein which must be held to be ex face illegal inasmuch as the respondents had all
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along been aware of the load installed at the petitioner's premises and there having
been no change therein from the inception, the electrical connection could not have
been disconnected on such filmsy ground. Such an unilateral action, contends the
barred Counsel, being penal in nature must proceed investigation of charges levelled
as against the petitioner and adjudication thereof by an independent agency like the
Chief Electrical Inspector. It was submitted that the C.E.S.C. Ltd. being a monopolistic
profit making commercial organisation cannot be permitted to be a judge of its own
cause.
14. Mr. Samaraditya Pal, the learned Senior Counsel appearing on behalf of the
C.E.S.C. Ltd. on the other hand, submitted to the provisions of Sections 24 and 26 of
the Indian Electricity Act have no application whatsoever in the facts and
circumstances of this case. According to the learned counsel the right of licensee to
disconnect the electrical energy arises in terms of Paragraph (b) and (d) of Schedule
appended to the Indian Electricity Act. The learned Counsel would urge that on a
proper comparison of Clause (a) vis-a-vis clauses (b) and (d) of 2nd proviso appended
to Paragraph VI of Schedule it would be clear that whereas principle of natural justice
is required in one case, the same is not so required in the other cases. According to
the learned Counsel stealing of electrical energy of committing theft thereof being
penal offence in terms of the provision of Sections 39 and 44 of the Indian Electricity
Act, the supplier has a right of self-defence to prevent theft of such electrical energy
and/or to take recourse to such action in exercise of its rights under Sections 97 and
99 of the Penal Code, 1860. The learned Counsel contends that principle of natural
justice cannot have any application as the same cannot be put in a strait-jacket or
rigid formula in a case of urgency of emergency or in public interest. Having regard to
the importance of necessity of preservation of electrical energy it is open to the
licensee, contends the learned Counsel, to prevent theft thereof. Such principles
according to the learned Counsel is applicable also in case of tort. Reliance in this
connection has been placed on a decision of the Supreme Court of India in Ram Rattan
v. State of Uttar Pradesh reported in 1977 (1) SCC 188 : (AIR 1977 SC 619). The
learned counsel submits that the question as to whether a notice should priced such
disconnection would depend upon the relevant regulations. Distinguishing the case of
Municipal Corporation of Delhi v. Ajanta Iron & Steel Co. Pvt. Ltd. reported in AIR 1990
SC 882 it was pointed out that there existed such a provision under the agreement.
According to the learned counsel this aspect of the matter is also covered by a decision
of this Court in Waldorf Restaurant v. State of West Bengal reported in 1985 (2) CHN
(Note) 196 wherein this Court has categorically held that no such notice is necessary
before effecting disconnection of electrical energy. However, the said decision does not
appear to an authority on the aforesaid proposition.
15. Mr. B.P. Gupta, the learned Counsel appearing on behalf of C.E.S.C. Ltd. in
some
Page: 454
of the cases, raised some additional contention. It was submitted that the meter
installed by the respondent being the subject-matter of bailment the provisions of
Indian Contract Act shall apply and in this connection the learned Counsel referred to
the provisions of Sections 148, 193 and 154 of the Contract Act and submitted on the
basis thereof that in the event of misuse of the bailed property by the bailee the
contract of bailment can be terminated. The learned Counsel contends that upon
disruption of electrical energy, the contract, to supply electrical energy comes to an
end.
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16. It was further submitted that sale of electrical energy is sale of goods within
the meaning of provisions of Sale of Goods Act and reliance in this connection has
been placed in The Commissioner of Sales Tax v. M.P. Electricity Board reported in AIR
1970 SC 732, paragraph 9 and Associated Power Company Pvt. Ltd. v. Ramtaran Roy
reported in AIR 1970 Cal 75.
17. There cannot be any doubt that the conditions of supply of electrical energy is
governed by the provisions of Indian Electricity Act and thus the schedule appended to
the said Act, would be deem to be the conditions of license which includes the powers
and duties of the licensee vis-a-vis the consumer. The C.E.S.C. Ltd. as noticed
hereinbefore, has also framed conditions of supply. Supply of electrical energy is, thus,
governed by the said conditions of supply as also the rules framed thereunder. It is
true that before commencement of supply of electrical energy a written agreement has
to be entered into but the same does not mean that the rights and obligations of the
parties are governed under the terms and conditions of the said agreement. Such
agreement is statutory in nature. It cannot deviate or make any departure therefrom.
See Pyrites, Phosphates and Chemicals Ltd. v. Bihar Electricity Board reported in AIR
1996 Pat 1.
18. The Court while considering an action of the licensee in disconnecting the
electrical energy has to bear in mind that respondents are public utility concerns and
license has been granted to it to fulfil a basic need of the society. Electricity is not a
luxury but is a basic necessity so far as the consumers are concerned. In absence of
electricity the industries and business are not possible to be run or carried put and it is
also essential for domestic-purposes.
19. C.E.S.C. Ltd. is a licensee under the provisions of Indian Electricity Act. Its
rights and obligations to supply electrical energy are, therefore, governed by the
provisions of the said Act as also the rules framed thereunder and/or the conditions of
supply. Section 24 entitles the licensee to disconnect the electrical energy in the event
the consumers neglect to pay and charge of energy but such disconnection can be
effected only after service of a statutory notice of 7 clear days.
20. Section 26 of the Act provides that in the absence of agreement to the contrary
that the amount of electrical energy supplied to the consumer shall be ascertained by
means of correct meter.
21. A notice under Section 26(4) is not required to be given for the purpose of
reading of a meter. It empowers the licensee or any person duly authorised by it to
inspect and test the meter installed in the premises of the consumer in the event the
same is found to be necessary. In such an event it is open to the authorised emplyees
to enter the premises of the petitioner for the purpose of reading the meter but there
is no provision under the Act that when an employee enters the premises of the
consumer only for the purpose of reading a meter, prior notice is to be given. Sub-
section (4) of Section 26 contemplates a notice for the purpose of ‘testing’ and
‘inspect’. The said provision has to be read along with sub-sections (1), (2) and (3)
wherefrom it would be clear that the ‘inspection’ and ‘test’ ought to be conducted in
connection for verifying as to whether the meter is faulty or not. It is clear that the
‘test’ and ‘inspection’ are in relation to the purposes mentioned therein as in terms
thereof even costs therefor are to be borne by the consumer. Such as ‘inspection’ or
‘testing’ may be necessary in order to remove the meter for the purpose of
adjudicating the correctness thereof by the electrical inspector on the application of
either party as provided under sub-section (6) of Section 26 of the Indian Electricity
Act. Such reference can only be made if the meter is faulty and not in a case where
the meter records wrong reading of consumption of electrical energy because of other
reasons as for example defects in the line etc., Reference in this connection may be
made to Southern India Marine Products
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Page: 455
Pvt. Ltd. v. Kerala State Electricity Board reported in 1995 AIHC 4959.
22. In Bihar State Electricity Board v. State of Bihar reported in 1992 (2) BLJR
1272, a Division Bench of the Patna High Court of which I was a member, has held
that the power of Electrical Inspector is governed by the statute and he has to exercise
such power as provided under Sections 24(2), 26(6), 33(2), 37(2) (ii)(g), 37(2)(ii)(k),
50 and 55 and Clauses VI, XIII, XV, XVI and XVII of the Schedule appended to the
Indian Electricity Act, 1910 as also Rules 4 to 10 of the Indian Electricity Rules.
23. Sub-section (8) of Section 26 imposes an obligation on the part of the
consumer not to connect any meter with any electric supply line through which energy
is supplied by licensee or disconnecting the same from any such electric supply line
and for that purpose he has got to be given a notice of not less than 48 hours in
writing to the licensee requring it to connect or disconnect such meter and or receipt
of any such requisition the licensee shall comply with it within the period of such
notice.
24. Sub-section (6) of Section 26 provides for an adjudication by the Chief
Electrical Inspector where the meter, according to a party to a contract, was not
recording correct consumption of electrical energy.
25. Sections 24 and 26, therefore, do not deal with a situation where the consumer
is alleged to have committed pilferage and/or theft of electrical energy, Such a power
has specifically been conferred by the 2nd proviso, appended to paragraph VI of the
Schedule appeneded to the said Act.
26. It may be noticed that clause (a) of the said proviso requires service of 7 days'
notice by the licensee upon the consumer in the case of non-furnishing of security or
in the event such security has become invalid or insufficient.
27. Sub-clause (3) of the said provision provides for arbitration in the cases
specified thereunder, which includes:—
(a)………………………..
(e) improper use of energy, defect in any wires, fittings works or apparatus.
28. It is significant that Section 44 of the Indian Electrcity Act also makes improper
use of electrical energy as punishable. This aspect of the matter shall be dealt with at
a later stage.
29. Any dispute as to whether the action of the parties come within the purview of
“improper use of electrical energy” being involving question of fact would fall within
the scope of sub-clause (3) of paragraph VI of the Schedule despite the fact that the
said terminology is used also in Section 44 of the said Act.
30. The question as to whether a prior notice is required to be given in the
circumstances of this nature and compliance with the principles of natural justice go
hand in hand.
31. In Municipal Corporation of Delhi v. Ajanta Iron and Steel Co. Pvt. Ltd. reported
in AIR 1990 SC 882, there existed a specific provision for service of notice in the
condition of supply being condition No. 36 thereof. The Apex Court held that service of
notice is a pre-requisite for disconnection and the appellant cannot be allowed to go
back upon his words and refuse the consumer the benefits of notice as contemplated
by the agreement. However, the Supreme Court held that as the plaintiff of the said
suit was denying the allegation of theft; it is not possible to assume the accusation as
correct without a fullfledged trial on the said issue.
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32. The said decision has been followed by the Delhi High Court in Kuldeep Singh
Dhingra v. Municipal Corporation of Delhi, reported in AIR 1992 Delhi 228 wherein it
has been held that show cause notice is required to be issued in terms of Clause 36 of
the regulation which is mandatory in nature. Reference in this connection may also be
made to Hindustan Ferro Alloys Ltd. v. The Executive Engineer U.P. State Electricity
Board, reported in AIR 1995 All 209. Similarly in 1982 (1) Mad LJ 17 (Notes) it has
been held that principles of natural justice are required to be complied with before
disconnecting the electrical energy. Many decisions appear to have been rendered in
this jurisdiction and other jurisdiction also. In Auckland International Ltd. v. The CESC
Ltd., reported in 1992 (2) Cal LT HC 176, a learned single Judge took into
consideration the fact that a meter book is kept in the premises and endorsement are
made therein from time to time. The learned Judge relying on a decision of the
Supreme Court, inter alia, observed
Page: 456
that in the case of pilferage the allegation cannot reach any conclusion without having
a fullfledged trial. However, in that case the right of C.E.S.C. to disconnect the
electrical energy was not considered. However, it was held that CESC Ltd. being
complainant cannot be a Judge of his own cause and to deal conclusively that there
was pilferage. In the facts of that case and on the report of the police authority the
Court did not find that there was any justifiable reason to disconnect the supply
without notice in that case.
33. In Gautam Roy v. C.E.S.C. Ltd., reported in 1994 (1) Cal LT 444, this Court
again held:—
“If the petitioner has committed an act of pilferage the respondent-authorities must
proceed against him in accordance with law and without the decision of the
competent authority the allegations simpliciter cannot reach the finality.”
It was also observed:—
“It is also made clear that the allegations of pilferage would not be sustained unless
CESC pursues the matter and the case is decided before a competent forum of
criminal jurisdiction.”
34. In Ganges Manufacturing Co. Ltd. v. West Bengal State Electricity Board,
reported in 1993 (3) Cal LJ 210, a learned single Judge held that so long as the bills
are raised on the basis of the reading of a meter, correct or otherwise, no further
question arises and the consumer is bound to pay the amount of the bill raised in
accordance with the reading of the meter subject to the provisions of sub-section (6)
of Section 26 of the Indian Electricity Act.
The learned Judge further observed:—
“It is once again made clear that Court does not say that a licensee is not entitled
to realise its past dues for under charging a consumer but all that this Court says is
that such dues are to be realised through a procedure established by law and by
taking recourse to legal proceedings. Only in such a way the consumer is protected
from the vagaries and arbitrariness of a licensee.”
35. Although the fact of the matter is different, the said decision is at least an
authority for the proposition that the dues, if any, can be realised only by taking
recourse to law.
36. In Dumraon Textiles Ltd. v. Bihar State Electricity Board, reported in AIR 1995
Pat 43, a Division Bench of this Court of which I was a member, observed:—
“The Board being a public authority discharge Government function. A consumer
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depends upon the authorities of the Board for its day to day amenities which are
essential for human existence. It is the State within the meaning of Article 12 of
the Constitution of India. It thus require to act fairly, judiciously and in accordance
with the principles of natural justice. Its action thus must be fair and conform to
the standards of public morality. Its officers cannot act arbitrarily or raise demand
for substantial amount of money without affording opportunity of hearing to the
consumer.”
37. In Sankardas Paul v. State of West Bengal, reported in 1989 (2) Cal LJ 311, it
has been held that even a municipality is superseded on emergency ground rule of
natural justice to the minimum extent must be followed.
37A. The U.P. State Electricity Board made a regulation known as Electricity Supply
(Consumer) Regulation, 1994, Section 22A whereof conferred a right upon the licensee
to issue the bill for the value of the electrical energy so obstructed, consumed or used
beside the right to disconnect electrical energy without notice. Interpreting the said
provisions, the Allahabad High Court in AIR 1991 All 196 held that in a case of
extreme urgency where public interest is jeopardise by the delay involved in the
hearing, a hearing before condemnation would not be required. The Division Bench
distinguished the case of Municipal Corporation of Delhi (AIR 1990 SC 882) (supra)
stating that the regulations are the part of contract.
38. However, in the instant case, no regulation has been framed by the State and
in absence of such regulation the principles of natural justice are required to be
complied with as it is not disputed that disconnection of electric energy involves civil
consequences and thus the said principles have to be read into the statute.
39. As indicated hereinbefore, Clause (a) of the 2nd Proviso appended to paragraph
VI of the schedule provides for a notice whereas
Page: 457
clauses (b) and (d) which are attracted in the instant case do not provide for such a
notice. The question which arises for consideration is that whether in absence of an
express provision the principles of natural justice are required to be complied with. In
my opinion, the principles of natural justice are required to be complied with, be it pre
-decisional hearing or a post-decisional one depending on the facts and circumstances
of each case.
40. It appears that regulations have also been made by the State of Andhra
Pradesh with a view to empower the concerned authorities to disconnect the electrical
energy for mal-practice and payment for energy dishonestly used or abstracted. The
said regulations were made in exercise of its power under Section 49(1) read with
Section 79(1) of the Electricity Supply Act, 1948. From the perusal of the said
regulation it appears that a special post of Assistant Engineer was created therefor.
Regulation 10 provided for a forthwith disconnection of electrical energy by the
consumer was conducted and the commission of any mal-practice with reference to his
use of electrical energy including unauthorised alterations, installations, unauthorised
extensions and uses and devices to commit theft of electrical energy. The Board had
also made a regulation providing for procedures to be followed under the
aforementioned regulations as also the regulation 10 in terms whereof it is inter alia
provided that Assistant Engineer immediately disconnection the electrical energy shall
intimate the consumer the reasons of disconnection and invite his representation as
regards damage sustained by the Board. The Assistant Engineer was to submit his
proposal together with all necessary information to the concerned Superintendent,
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Engineer who was to estimate the damages after giving the opportunities to the
consumer to make his representation in that regard. The said regulation also provides
for the guidelines to be used in the matter of assessment of damanges. Thus the said
provisions set out in details the mode and manner of application thereof.
41. In the light of the aforementioned provisions the Andhra Pradesh High Court in
Matadin v. Assistant Engineer, DPE Hyderabad, reported in (1969) 1 Andh LT 313 and
S.M. Sanjeeva Rao v. Andhra Pradesh State Electricity Board, Hyderabad, reported in
1993 (1) Andh LT 293, held that prior notice is not necessary for such disconnection.
42. In C.G. Plastic v. Karnataka State Electricity Board, reported in AIR 1995 Kant
47 (sic), similar provision existed in Regulation 44.07 of Karnataka Electric Supply
Regulation, 1980 wherein it has been held that such a provision has been made in
consonance with the basic principles of natural justice. The learned Judges held that at
least a summary enquiry is necessary.
43. Although the said provision did not contemplate compliance of the provisions of
natural justice, the Division Bench held that keeping in view the fact that electricity is
a scare commodity, in emergent situation the electric connection can be disconnected
where after the aggrieved party can be heard in the matter and such a post decisional
hearing may also serve the requirement of the principles of natural justice. The
Division Bench observed:—
“Even while exercising the drastic power installation forthwith, liberty is reserved to
the Board to disconnect the electric line without notice and it is not bound to
disconnect. It depends on the facts and circumstances of each case. The consumer
would in that connection, inter alia, put forward own case against the theft alleged
at his premises and his version taken into consideration by the Board.”
44. The said decisions are, therefore, based on the interpretation of the regulations
framed by the State Governments. Even in the regulations, applicability of the
principles of natural justice have been ruled out altogether. The said regulations have
also been interpreted in the light of the said principles.
45. Principles of natural justice has a deep rooted foundation. It brings within its
sweep the concept of fair play and justice. However, it should be viewed in
circumstantial flexibility. There cannot be any doubt that the principles of natural
justice cannot be put in a strait-jacket or rigid formula. There are several except to the
principles of natural justice.
46. As the principles are well settled, it is not necessary to notice a large number of
decisions.
47. In R.S. Dass v. Union of India, reported in 1986 (Suppl) SCC 617, it has been
held:—
Page: 458
“The principles of audi alteram partem is a basic concept of principles of natural

justice. No one should be condemned without hearing is the essence of justice. Courts
of law apply this principle to ensure fair play and justice in judicial and quasi-judicial
matters. Of late these principles have been extended even to administrative action
also. However, the application of the audi alteram partem rule is not applicable to all
eventualities or to cure all ills. Its application is excluded in the interest of
administrative efficiency and expedition. Sometimes legislation itself excludes the
application of the rule. It is difficult to conceive exhaustively all eventualities and
circumstances for application or exclusion of the rule. In A.K. Kraipak v. Union of India,
a Constitution Bench of this Court held these rules operate only in areas not covered
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by any law validly made. In other words they do not supplant the law of the land but
supplement it. They are not embodied rules and their air is to secure justice or to
prevent miscarriage of justice.”
It was further observed:—

“It is well established that rules of natural justice are not rigid rules, they are
flexible and their application depends upon the setting and the background of
statutory provision, nature of the right which may be affected and the
consequences which may entail, its application depends upon the facts and
circumstances of each case. These principles do not apply to all cases and
situations. Application of these uncodified rules are often excluded by express
provision or by implication.”
48. Recently the Supreme Court in Delhi Development Authorities v. Skipper
Construction, reported in (1995) 8 JT (SC) 352 at 355 observed:—
“The rules of procedure and/or principles of natural justice are not meant to enable
the guilty to delay and defeat the just retribution.”
49. Section 39 of the Act as it stood prior to its amendment by Act 31 of 1986
raised a legal presumption to the effect that whoever dishonestly abstracts, consumes
or uses any energy shall be deemed to have committed theft within the meaning of
Penal Code, 1860 nd the existence of artificial means for such abstraction shall be
prima facie evidence of such dishonest abstraction. The said provision has since
undergone an amendment. Section 39, Indian Electricity Act as it now stands, reads
thus:—
“Whoever dishonestly abstracts, consumes or uses any energy shall be punishable
with imprisonment for a term which may extend to three years, or with fine which
shall not be less than one thousand rupees, or with both and if it is proved that any
artificial means or means not authorised by the licensee exist for the abstraction,
consumes or use of energy by the consumer, it shall be presumed, until the
contrary is proved, that any abstraction consumption or use of energy has been
dishonestly caused by such consumer.”
50. Burden of proof to prove theft of electrical energy lies on the prosecution.
Section 44 of the said Act which makes a consumer liable for punishment in the event
the conditions precedent laid down therefor are fulfilled.
51. On the other hand, Section 42 of the Indian Electricity Act makes the licensee
liable for punishment if it dishonestly discontinues supply of energy without any
reasonable burden of proof whereof would lie on him. The provision of the said Act
clearly manifest the intention of the Parliament that there should be continuous supply
of electrical energy to the consumers. It is also manifest that the right of the licensee
to disconnect electrical energy is under the statute and not under a contract qua
contract.
52. The contention of Mr. Pal that a licensee is entitled to exercise his right of
private defence as contemplated under Sections 97 and 99 of the Penal Code, 1860
cannot be accepted inasmuch as electrical energy is not an immoveable or moveable
property for the purpose of Penal Code, 1860 as has been held in a large number of
cases. See Abtar Singh v. State, of Punjab, reported in AIR 1965 SC 666 and
Ramsankar Sinha v. State of Bihar, reported in AIR 1968 Pat 131 although it may be a
property within the meaning of Sale of Goods Act.
53. If electrical energy is not a moveable property, the question of any trespass
being committed in relation thereto under the general law or tort may not arise.
Reference in this connection may also be made to Jagarnath Singh v. H. Krishna
Murthy, reported in AIR 1967 SC 947.
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Page: 459
54. Sale of electricity may come within the purview of Sales of Goods Act as has been
held in the Commission of Sales Tax v. M.P. Electricity Board, reported in AIR 1970 SC
732, para 9; Associated Power Company Pvt. Ltd. v. Ramtaran Roy, reported in AIR
1970 Cal 75 and Damodar Valley Corpn. v. Superintendent Commercial Taxes,
reported in AIR 1976 Cal 136 but the provisions of Sales of Goods Act in this case
have no application. This Court is only concerned at this stage as to whether electricity
is a moveable property so as to attract the provisions of Section 378 of the Penal Code,
1860. It is also pertinent to note that the amendment made in Section 39 of the
Indian Electricity Act, laid clearly stipulates that now there does not exist even the
legal fiction that theft of electricity will be deemed to be a ‘theft’ within the meaning
of Section 378 of the Penal Code, 1860. The said Act is a self-contained Code and
thus, the rights and obligations including the penal consequences are governed by the
said Act and reference to any other Act, therefore, is not warranted.
55. If it is not a moveable property within the meaning of aforementioned

provision, in my opinion, the question of exercising right of self-defence as has been
submitted by Mr. Pal would necessarily fail.
56. In Ramrattan v. State of U.P., reported in 1977 (1) SCC 1 : (AIR 1977 SC 898)
the Supreme Court was considering a different fact situation. It was a case of
immoveable property and in that case the Supreme Court was considering the
question as to whether the accused were entitled to exercise their right of private
defence.
57. It is also not possible to accept the contention of Mr. Gupta that the doctrine of
bailment will apply in the instant case. It is also not correct to contend that once the
electrical connection is disconnected, the entire agreement stands terminated.
58. The contract entered into by and between the petitioner and the licensees is for
supply of electrical energy. Such a contract is not a contract of bailment within the
meaning of Section 148 of the Indian Contract Act. Supply of meter is merely one of
the contractual obligations on the part of the licensee. Such a meter also be installed
by the consumer in terms of Section 26 of the Indian Electricity Act. Such meters are
required to be installed only for the purposes mentioned in the said provision and not
otherwise. In any event by disconnecting the electrical energy, the meter may or may
not be taken out.
59. Moreover Clause (d) of the 2nd Proviso appended to paragraph VI of the
schedule appended to the Act as also the Clause 26 the conditions of supply provide
for reconnection of electrical energy in the event of fulfilment of condition on the part
of the consumer relating to such disconnection.
60. In fact contention of Mr. Gupta if accepted, would run counter to the interest of
the licensee. As in case of termination of contract the consumer would not be liable to
pay the minimum guaranteed charges, meter rent and other charges, if any
61. It, therefore, must be held that by reason of such disconnection, supply of
electrical energy merely remains under suspension.
62. This aspect of the matter has been considered by the Supreme Court in Bihar
State Electricity Board v. Green Rubber Industries, reported in AIR 1990 SC 699 and
General Mariager-cum-Chief Engineer Bihar State Electricity Board v. Rajeswar Singh,
reported in AIR 1990 SC 706. It has categorically been held by the Supreme Court
that a supply agreement to a consumer makes his relation with the Board mainly
contractual, although basis of supply is a statutory rather than contractual.
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63. The said submissions appear to have been advanced n desperation. The right of
the licensee to take action for commission of a penal offence and disconnection of
electrical energy flow from statute. Only in the cases the conditions for exercise of
both the rights are satisfied, the licensee may do so. Disconnection of electrical energy
must be done in accordance with statutory provision.
64. Thus it must be held that principles of natural justice are applicable. The extent
and the stage of such opportunity shall, however, vary from case to case.
65. The question as regards the applicability of the principles of natural justice has
to ben viewed in the context of the Respondents' own case that they have been
exercising their power of disconnection of electrical energy in terms of paragraph VI of
the Schedule appended to the Act. The contention of the
Page: 460
respondents that they have such power by way of private defence or under the
contract of bailment has thus to be rejected.
66. The submission of the learned Counsel for the petitioner that the respondents
cannot be a Judge of their own cause is treated to be rejected. The respondents have
teen acting on the basis of the power conferred upon them under the statute and
when they do so, the question of their becoming Judge of their own cause does not
arise.
67. It is, thus, evident that principles of natural justice are required to be read into
the provisions of the statutes. A person cannot be deprived of the basic amenities like
supply of electrical energy without any authority of law.
68. The question as to whether such disruption or discontinuance of supply of
electrical energy on the part of the authorities of the licensee and/or board is
reasonable or not must be decided by the competent authorities at the first instance.
Such an action cannot be taken on the basis of pure subjective satisfaction. Such a
drastic action can be taken only on objective factors and thus in my opinion, it is
necessary to comply with the minimal requirement of the principles of natural justice.
69. In Waldorf Restraurant v. State of West Bengal, reported in 1985 (2) Cal HC
(Notes) 196, a learned single Judge of this Court held that when there are serious
allegations of pilferage or theft of electric supply where the meter does not actually
record actual consumption and in view of such allegations on the basis of conduct on
the part of the petitioner it was not obligatory on the part of the C.E.S.C. to give any
hearing before disconnection. The learned Judge held that there being disputed
questions or fact the same requires adjudication by the concerned authorities. The said
decison, therefore, was rendered in the fact of that case and particularly in view of the
fact that petitioner did not come before this Court with clean hands.
70. It has not been held in the said decision that principles of natural justice are
not required to be complied with at all. The question as to whether the prior notice is
required or not depends upon the statutory requirements or situations.
71. A person who has prima facie been held to be guilty of theft/pilferage of
electrical energy cannot be deprived of electrical energy, till the outcome of criminal
case unless one or, the more conditions as noticed hereinbefore is/are fulfilled the
authorities concerned, therefore, must act reasonably.
72. There cannot be any doubt that the principles of natural justice cannot be
viewed with rigid rules. Principles of natural justice have exceptions. See Wade and
Forsyth on Administrative Law, 7th Edition, page 519, Judicial Review of
Administrative Action by S.A. De-Smith, 5th Edition, paragraph 10.005 and paragraph
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10.015, Wiseman v. Burman, reported in 1971 App Cases 297, Union India v. W.N.
Chadda, reported in 1993 (Suppl) 4 SCC 260. Schwlz's Administrative Law, A case
book 3rd Edition, page 357 American Jurisprudence 2D 403, 406, Union of India v.
Tulsir Patel, reported in AIR 1985 SC 1416 at page 1462 as also a recent decision or
the Apex Court in Delhi Development Authority v. Skipp Construction, reported in
1995 (8) JT (SC) 352 at 358. But the question which arises for consideration would be
as to whether the compliance of principles of natural justice is to be ruled out
altogether. As indicated hereinafter the rules and regulations framed by different State
Electricity Boards vary. Even in cases where provision has been made for disconnection
of electrical energy, principles of natural justice have been directed to be followed by
taking recourse to post-decisional hearing. Some of the rules, as noticed hereinbefore
themselves provide for post-decisional hearing.
73. Although no such regulation has been framed, indeed the C.L.S.C. Ltd. in
paragraphs 26 of the Condition of Supply received (sic) itself its right to discontinue
the supply of energy to the petitioner after giving seven days' notice in the event the
consumer fails to comply with the provisions of the said conditions of supply or the
terms of agreement which have been approved by the State Government in exercise of
its power under sub-section (2) of Section 2 of the Indian Electricity Act.
74. In this view of the matter any disconnection of electrical energy for violation of
conditions of supply would require seven days' prior notice in writing.
75. In most of the cases apart from Section 44 of the Indian Electricity Act,
violation
Page: 461
of conditions of supply has also been mentioned. There cannot be any doubt that 7
days' prior notice therefor was required to be given on the respondents' own showing
inasmuch as the clause 26 of the conditions of supply as also the agreement provided
for giving of such notice before disconnecting electricity. By way of example it may be
stated that in Hanuman Steel Rolling Mill, the C.E.S.C. Ltd. in its letter dated 2nd
February, 1993, annexed with the affidavit-in-opposition stated that the alleged
tampering of the arrangement of the meter in circuit by the petitioners for which the
electricity was disconnected was, inter alia, in violation of C.E.S.C.'s condition of
supply.
76. However, it is difficult to agree with the submission of the learned Counsel that
principles of natural justice are not required to be complied with in the cases falling
within clauses (b) and (d) of Paragraph VI of the said Rule appended to the said Act.
Principles of natural justice are required to be complied with unless statute interdicts
the same. The said provisions do not exclude the application of the principles of
natural justice by necessary implication. For the purpose of interpretation of the 2nd
Proviso appended to paragraph VI of the schedule, the intention of the Parliament has
to be gathered upon considering the said Act as a whole and not only upon
consideration that whereas clause (a) of the said Second Proviso expressly speaks of
the principles of natural justice, Clauses (b) and (d) do not.
77. The question thus as to whether principles of natural justice are required to be
complied with, depend on facts and circumstances of each cases.
78. However, it is not possible for this Court to lay down exhaustively as to under
what circumstances, requirement of prior notice is required to be complied with.
79. It has also to be borne in mind that in many of the writ applications it has been
averred that the electrical energy had been disconnected by the officers of the
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respondents only because when demanded, the petitioners have refused to pay them
any amount by way of bribe. Such contingencies in the present socio-economic
scenario, cannot altogether be ruled out. Similarly Courts can also take judicial notice
of the fact that theft of electrical energy is rampant.
80. It may be recorded that Mr. Pal and Mr. Gupta althoush appeared for C.E.S.C.
Ltd. made contradictory submissions inasmuch as Mr. Gupta had taken the extreme
point that principles of natural justice are not required to be complied with at and the
contract of supply, in case of detection of pilferage or theft of electrical energy stands
terminated whereas Mr. Pal merely submitted that in such cases post-decisional
hearing would be the proper remedy.
81. In A.K. Kraipak v. Union of India, reported in AIR 1970 SC 150 : (1969) 2 SCC
262, upon which both Mr. Gupta and Mr. Pal relied upon, the Apex Court clearly held
that any administrative order which involves civil or evil consequences would require
the compliance of principles of natural justice. Reference in this connection may also
be made to D.K. Yadav v. J.M.A. Industries, reported in 1993 (3) SCC 259.
82. In Maneka Gandhi v. Union of India, reported in AIR 1978 SC 596 : 1978 (1)
SCC 248, the Supreme Court clearly held that for impounding a passport the principles
of natural justice have to be complied with but only in a case of extreme urgency, a
post-decisional hearing may be given.
83. However, in that case a post-decisional hearing was directed to be granted only
because the passport stood impounded. The Apex Court clearly stated that before
doing so, in law the petitioner was entitled to a pre-decisional hearing. It is now well
known that post-decisional hearing cannot be a substitute of pre-decisional hearing.
Reference in this connection may be made to in Government of India v. Kul Hind (All
India) Majlis-e-Millat, reported in 1995 AIHC 6128 and the decision of the Supreme
Court of India in AIR 1989 SC 568.
84. In Union of India v. Tulsiram Patel, reported in AIR 1985 SC 1416 the Supreme
Court was dealing with absolutely a different situation. In that case it was held that
principles of natural justice are excluded in terms of Second Proviso appended to
Article 311(2) of the Constitution of India but despite the same it observed that a
delinquent officer may produce all materials to show that the charges against him are
not which according to the Supreme Court would be a sufficient, compliance with the
requirements of natural justice. Second Proviso appended to
Page: 462
Clause (2) of Article 311 of the Constitution of India expressly ruled out the
applicability of natural justice in that sense, Karnataka Public Service Commission v.
B.M. Vijaya Shankar, reported in AIR 1992 SC 952 was also rendered in a different fact
situation.
85. Mr. Gupta has placed strong reliance upon a decision of Gauhati Htigh Court in
Deputy Secretary to the Govt. of Assam v. Maying C.H. Pegu, reported in AIR 1983
Gauhati 55, but in the said decision principles of natural justice was held to have no
application as it was found as of fact that no useful purpose would be served as ‘there
is complete stands till in the function of the Mahkuma Parishad’ and thereby the public
interest would be frustrated and public cause would suffer.
86. There cannot be any doubt that the application of the principles of natural
justice must also be in confirmity with the scheme of the act and with the subject-
matter of the case. The scheme of the act is to supply electrical energy and to prevent
discontinuance of such apply. Except by way of regulations framed by some State
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Electricity Boards principles of natural justice have not been excluded expressly. As
has been noticed even such regulations have been held to be in consonance with the
principles of natural justice.
87. Section 22 of the said Act mandates the licensee to supply electrical energy. It
can disconnect the electrical energy only in exercise of its power under the Act or
under the conditions of supply. A Division Bench of this Court in John Earnest Rajwade
v. Manager, Telephone Nigam Ltd., reported in AIR 1935 Cal 298 has held that
disconnection of electrical energy should be taken recourse to as a last resort. The said
decision has recently been followed by me in Dulichand v. Chief General Manager,
Calcutta Telephone, reported in 1995 WBLR (Cal) 289 : 1995 AIHC 6590.
88. Section 9 of the Contract Act upon which Mr. Pal relied upon, in my opinion,
cannot be said to have any application as admittedly a contract is made in writing and
the promise, if any, is express. For the same reasons, in my opinion, the decision in
Lister v. Ramford, reported in 1957 (1) All ER 125, cannot be said to have any
application inasmuch as therein the Court was dealing with the case of breach of duty
on the part of an employee.
89. In Glamorgan County Council v. Garter, reported in 1962 (3) All ER 866, it has
been held that ‘use’ means lawful use and does not include use that constitutes a
criminal or quasi criminal offence.
90. But in this case we are not concerned with the alleged acts of an offence by the
consumer. In the event they are found guilty of a commission of criminal act, they
may be punished.
91. It is pertinent to note that in terms of Clause (d) of the 2nd proviso appended
to paragraph VI of the schedule mandates the licensee to reconnect the supply with all
reasonable speed on the cessation of the Act or default or both, as the case may be,
which entitles him to discontinue it i.e. on the ground that if the consumer makes any
alteration of or addition to, any electrical wires, fitting, works and apparatus in such
property as notified and does not notify the same to the licensee before the same are
connected to the source of supply with a view to examine and tested.
92. If the allegations of the petitioner are correct, that they have allegedly violated
the conditions of supply, in my opinion, the consumers are required to be heard. In
the event, however, if the licensee comes to the conclusion that there has been an
improper extraction of electrical energy, necessarily the question of recovery of
damage would arise. Even in such an event, the petitioners are entitled to a fair
opportunity of being heard. In this view of the matter I am of the opinion that
principles of natural justice cannot be said to be totally excluded. In fact the
respondents by necessary implication have accepted that the principles of natural
justice are required to be complied with inasmuch as they themselves, after such
disconnection had called the consumers for discussions and according to Mr. Pal
himself such discussion would include the question as to whether the consumers have
committed unlawful extraction of electrical energy or not.
93. In a recent decision, this Court has inter alia held the importance of supply of
electrical energy in Sri Balasari Construction Private Ltd. v. C.E.S.C. Ltd., reported in
1996 (1) Cal High Court (Notes) 15, wherein this Court has quoted with approval and
observation of the Supreme Court in
Page: 463
Isha Marbles v. Bihar State Electricity Board, reported in 1995 (2) JT (SC) 626,
wherein it was observed:—
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“No doubt, dishonest consumers cannot be allowed to play tyrant with the public
property but inadequacy of the law can hardly be a substitute for over zealousness.
94. In Wade's Administrative Law, 6th Edition, page 497, the learned Author
observed:—
“The hypethesis on which the courts built up their jurisdiction was that the duty to
give every victim a fair hearing was just as much a canon of good administration as
of good legal procedure. Even where an order or determination is unchallengeable
as regards its substance, the Court can at least control the preliminary procedure so
as to require fair consideration of both sides of the case. Nothing is more likely to
conduce to good administration.”
95. Apart from the rules of Audi Alteram Partem, which means that no one shall be
condemned unheard, corollary of which is that he should be given reasonable notice of
the nature of the case to be met, there are other rules of common law to the same
effect. (See Franklin v. Minister, Town and Country Planning-194 AC 87 : (1987) 2 All
ER 289, John v. Rees, (1970) Chancery Division 345). In case any person has acquired
any right in any property or his right is being affected by the process, he would be
afforded reasonable opportunity of hearing and also to meet the cause against him.
96. In Cleveland v. Board of Education, (470) U.S. 532, 84 Lawyers Edition 2nd 494
(503), it was held:—
“An essential principle of due process is that a deprivation of life liberty or property
be preceded by notice and opportunity of hearing appropriate to the nature of the
case (See Mullane v. Central Hanover Bank and Trust Company-339 U.S. 306-94
L.Ed. 865). It has been described that root requirement of the due process clause
being that an individual be given an opportunity for hearing before he is deprived of
any significant property or interest.”
97. In S.L. Kapoor v. Jag Mohan (AIR 1981 SC 136) it was held that even where a
statute is silent in respect of observance of this rule, it shall be read into the statute as
an inbuilt provision. This rule must be held to be a necessary prerequisite in all the
cases where a decision is to be taken affecting a person's right or interest, unless such
rule is specifically excluded by the statute either expressly or by necessary implication.
98. Natural justice is a concept which has succeeded in keeping arbitrary action of
the State within limits. At the same time a Court has to be circumspect in deciding
whether it can extend the rule.
99. A question is always posed as to why the word ‘natural’ has been used and not
only the word ‘justice’ or ‘substantied justice’. The answer to the said question was
stated to be the (sic) that it is the inherent right of any person and the same to the
root of the matter and thus, the same is applicable unless statute interdicts.
100. In De-Smith's Judicial Review of Administrative Action, 5th Edition, at page
403 the learned Authors have referred to various decisions while emphasising the need
to comply with the principles of natural justice in a case of forfeiture or deprivation of
some right as also in the cases where applications are required to be filed as for
example the cases of license.
101. A disconnection takes place at the instance of an officer of C.E.S.C. who
detects the alleged irregularity and then files a con-plaint and thus, comes a Judge at
the same time. Once such disconnection comes into being, a consumer for the purpose
of running business would have no choice but subject to his ability would agree to
make payments of such amount as demanded of him. He may, however, only later on
file a case against such officer whereas in the event a genuine case of theft, a regular
inspection in presence of independent persons may be conducted. The meter or the
seals or any other articles or compliances used for wrongful abstraction of electrical
energy may be seized in accordance with law and then a complaint can be filed in
terms of the provision of Section 50 of the Indian Electricity Act. As indicated
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hereinbefore it is the specific case of the petitioner that in none of the cases where the
petitioners have deposited the amount or electrical connection has been restored. On
interim, orders passed by this Court, no action has been taken by the C.E.S.C.
authorities to proceed with the
Page: 464
Criminal Case or to get the meter and/or other appliances tested by the Chief
Electrical Inspector. The applicability of the principles of natural justice is required to
be viewed from this angle also.
102. In Liberty Oil Mills v. Union of India reported in AIR 1934 SC 1271, the apex
court while considering the provision of Import and Export (Control) Act and Import
Control Order 1955 held that when a right to obtain a licence or allotment of goods
becomes crystallised into a licence or an allotment, an order under Clause 8-A having
immediate and grave prejudicial repercussions on the person concerned it is desirable
that he should be heard before an order of suspension is made and thus the said
provision contemplates the pre-decisional hearing. Reference in this connection may
also be made to Neelima Mishra v. Harinder Singh Paintel reported in AIR 1990 SC
1402.
103. From the discussions made hereinbefore it is clear that principles of natural
justice are required to be complied with by issuing a prior notice unless a situation
comes into being as a result whereof it is not possible to comply with such principles
as for example a case of emergency or where there is a chance the evidence being lost
although the authorities concerned take all steps in that regard i.e. by seizure of the
offending articles etc.
104. The question which now arises is as to in case of such disconnection and in
case any pilferage is alleged whether the respondent can unilaterally assess the
alleged damages suffered by it. In my opinion it cannot do so in absence of any
regulation. The quantum of damages suffered depends on facts of each case. A
licensee in absence of any statute cannot make a unilateral demand purported to be
on the basis of a formula which is not within its authority to adopt. It is, therefore,
necessary that even in such a case principles of natural justice are required to be
complied with. However, as indicated hereinbefore the words “imporper use of
electrical energy” find place not only in Subparagraph of paragraph-VI of the schedule
appended to the Indian Electricity Act but also in Section 44 thereof. According to Mr.
Pal, the words “improper use of electrical energy” cannot amount to a matter which
comes within the purview of Sections 39 and 44 of the Indiin Electricity Act. The said
submission cannot be accepted in view of the fact that Clause (d) of Section 44 makes
improper use of energy of a licensee a punishable office. Thus, where the damages
suffered by a licensee is required to be quantified by such improper uses of energy,
evidently the Chief Electrical Inspector is entitled to consider as to whether here has
been an improper use of electrical energy or not in terms of sub-paragraph 3 of
paragraph-VI of the schedule appended to the Act and in all such circumstances,
where charge is made that the consumer has improperly used the electrical energy,
the Chief Electrical Inspector will have the jurisdiction adjudicate upon the said issue.
As a necessary corrollary he will also have the jurisdiction to decide the quantum of
losses suffered by the licensees as otherwise a finding on such improper use of
electrical energy may become academic Paragraph VI (3) of the schedule providing for
an adjudicatory forum should be construed liberaily.
105. A distinction has got to be made between the power of the Chief Electrical
Inspector under Section 26(6) of the Indian Electricity Act and Paragraph-VI (3) of the
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Schedule. Of course in a given case both the powers can be exercised simultaneously.
106. In Hamidullah Khan v. Chairman M.P. Electricity Board reported in AIR 1983
MP 1, the learned Chief Justice speaking for the division bench observed that clause 6
(3) of the schedule is a general provision.
107. In the cases before this Court the respondents have failed to show cause that
it was not possible for it to give any prior notice. In this view of the matter all these
applications are allowed and the respondents are hereby directed to give a post-
decisional hearing to the petitioners in view of the decisions of Supreme Court in
Maneka Gandhi's case, (AIR 1978 SC 596)(supra). However, in future it is expected
that they would abide by the law. These applications are therefore, disposed of with
the aforementioned directions and observations but in the facts and circumstarces of
these cases, there will be no order as to costs.
Applications allowed.
———
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Page 1 Sunday, July 12, 2020
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International Contacts II: Identify and Comparing the Trends in International

Contract Laws and Probing the Critical Issues for Multinational Contracting
Parties [Eds. Joshua Aston]
Chapter 14: Principle of Autonomy of Performance Guarantees
by
Utkarsh Agrawal and Shailja Agarwal1
1. INTRODUCTION
In contemporary times, the spatial distances across which business is carried out, has
seen a need for a third-party mechanism to ensure security of payment to parties.
Unconditional bank guarantee has arisen as an increasingly popular tool to reduce the
risk associated with trade, particularly in instances of international trade, where the
parties involved are located in different jurisdictions. Being a unilateral undertaking of
payment of a specified sum on demand, such guarantees provide security to the
beneficiary, in case the other party breaches the contract. Therefore, the effect is that
the risk is allocated to the principal debtor, who becomes the party which is out of
pocket pending resolution of a dispute between parties.
The reading of the principle of autonomy in unconditional bank guarantees has led
to cases where the beneficiary invokes the bank guarantee in abuse of his rights: to
tide over cash flow troubles, or to get an edge in negotiations, often taking benefit of
his own fault. The principal debtor, on the other hand, may be doubly prejudiced. The
beneficiary may not have paid him despite performance, and the guarantor bank
would have recovered the encashed amount of guarantee from him.
This paper explores the concept of autonomy in performance guarantee. While
discussing the apparent erosion of this principle over time, it proposes that
performance guarantees must not be considered to be independent of the underlying
contract. This would provide a solution to the prejudice faced by the principal debtor in
status quo, and will ensure
Page: 137
that the principle of immediate liability will continue to provide efficacy to performance
guarantees.
2. CONCEPT OF BANK GUARANTEES

Guarantee has been defined in Chitty as an undertaking by a third party (surety) to
“pay a specified sum of money to the creditor (beneficiary) on default of the
performance by the principal debtor.”2 A contract of guarantee is, thus, simply an
additional security for the creditor against the default of the principal debtor. For the
sake of simplicity, one may consider contracts of guarantee as “exceptionally stringent
contracts of indemnity”3 . A general contract of guarantee involves three parties: the
creditor, the principal debtor and the surety. It is a tripartite contract in which all the
aforementioned parties fall under the rule of privity of contract.4
On the basis of the surety's liability, bank guarantees, guarantees with the bank as
the guarantor, may be broadly classified into two categories: Conditional bank
guarantee and unconditional bank guarantee. A conditional bank guarantee is no
different from a normal contract of guarantee. The surety becomes liable only when
the creditor claims and subsequently proves the breach by the debtor. As it is
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primarily based on the underlying contract, that is, it remains a tripartite contract.
While the exact legal status of an unconditional bank guarantee appears to be
ambiguous, it is generally considered to be an autonomous agreement, that is, an
excepti onto the concept of a tripartite agreement.5 A performance guarantee is an
instrument to assure the importer or the employer of payment of a specified of money,
in case the exporter or the contractor has failed to fulfil his obligations arising from the
underlying contract.6 These guarantees generally take the form of unconditional bank
guarantees.
2.1 Principle of autonomy
In contracts of guarantee, the liability of the surety is dependent on that of the
principal debtor7 and the surety's liability remains coextensive
Page: 138
with that of the principal debtor. For example, if it is held that the principal debtor is
not liable for breach, the surety's liability is automatically extinguished. Therefore, the
contract of guarantee between the creditor and the surety is based on the underlying
main contract i.e. the contract between the principal debtor and the creditor. An
unconditional bank guarantee is, however, considered to be an independent,
autonomous contract, unconcerned with the underlying contract between the principal
debtor and the creditor. Lord Denning M.R. held them to be “virtually promissory note
payable on demand”8 .
Consequently, according to the principle of autonomy, an unconditional

performance guarantee is a separate contract between the person who has given the
guarantee and the beneficiary, to pay the beneficiary a specified sum of money, on his
demand, before the date of expiry of the contract. The principal debtor is not privy to
this contract, and the contract, in essence, is not a tripartite contract.
2.2 Principle of immediate liability
Principle of autonomy was introduced in unconditional bank guarantees to protect
the principle of immediate liability according to which “the course of action
(invocation) can be followed, not only when there are substantial breaches of contract,
but also when the breaches are insubstantial or trivial, in which case they bear the
colour of a penalty rather than liquidated damages: or even when the breaches are
merely allegations by the customer without any proof at all: or even when the
breaches are non-existent”.9
Therefore, the guarantee can be invoked not only in cases of unsubstantial default,
but also when there is no allegation of default, and just a simple demand.10 The effect
of the principle of immediate liability of the surety being supported by the autonomy
of the guarantee is that, material variation11 of the underlying contract, rescission12 of
the underlying contract or even frustration13 , does not discharge the obligations of the
Page: 139
surety like it does in normal contracts of suretyship. It is enforceable even if the

underlying contract is illegal.14 Therefore, the relationship between the bank and the
beneficiary is not that of suretyship,15 and the term “guarantee” actually becomes a
misnomer16 . Since these contracts are not contracts of guarantee, and the surety
becomes immediately liable for performance on demand, the only way to prevent this
immediate liability is to seek an injunction.
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Unconditional bank guarantees are standard tools of international trade and

commerce and the courts are wary of granting injunctions against it for it may end up
reducing its efficacy in the status quo. As Kerry, J. mentions it in R.D. Harbottle
(Mercantile) Ltd. v. National Westminster Bank Ltd.17 , “It is only in exceptional cases
that the courts will interfere with the machinery of irrevocable obligations assumed by
banks. They are the lifeblood of international commerce … Otherwise, trust in
international commerce could be irreparably damaged.”18 Further, the courts feel that
this provision of immediate liability of the surety is necessary for mercantile practices.
As Donaldson, L.J., puts it, “Irrevocable letter of credit and bank guarantee given in
circumstances that they are equivalent to irrevocable letter of credit have been said to
be the lifeblood of commerce. Thrombosis will occur if, unless fraud is involved, the
courts intervene and disturb the mercantile rights thereunder as being the equivalent
of ‘cash in hand’”19 . By comparing these guarantees to “cash in hand”, the courts have
given paramount importance to the principle of immediate liability. In order to protect
this principle, they have evolved the principle of autonomy in contracts of guarantee,
thereby minimising interference in mercantile transactions. The general rule, therefore,
is that no injunction will be granted against unconditional guarantees except in cases
of clear fraud or irretrievable injury.20
Page: 140
3. EXCEPTIONS TO THE PRINCIPLE OF AUTONOMY

3.1 Fraud
Shientag, J. in Sztejn v. J. Henry Schroder Banking Corporation21 laid down the
rationale behind the exception for fraud on the foundation that, “the principle of the
independence of the bank's obligation under the letter of credit should not be
extended to protect the unscrupulous seller.”22 This was based on the reluctance of the
courts to extend minimizing interference to support fraud.23 Lord Denning applied this
rule to unconditional performance guarantee in Edward Owen Engineering case24 .
There are “wholly exceptional case where an injunction may be granted is where it
is proved that the bank knows that any demand for payment already made or which
may thereafter be made will clearly be fraudulent. But the evidence must be clear,
both as to the fact of fraud and as to the bank's knowledge.”25 After Balfour Beatty
Civil Engineering v. Technical & General Guarantee Co. Ltd.26 and United City
Merchants v. Royal Bank of Canada27 , the rule stands that if the beneficiary knowingly
makes a dishonest claim and the bank has knowledge of it, it is a fraudulent demand
and qualifies for injunction. This requirement of a prima facie honest claim of breach,
therefore, completely eliminates cases where the beneficiary makes a demand without
the claim of a breach. Thus, this rule modifies the principle for invoking the guarantee
laid down by Lord Denning. With this exception for fraud, the beneficiary can no longer
claim the guarantee on simple demand without a claim of breach. Here it is pertinent
to note that in Czarnikow-Rionda Sugar Trading28 , Rix, J. took the view that there is an
implied contractual term that prohibits dishonest demands by the beneficiary. If that
were true, the bank should have an implied right to inquire into the demand. However,
such an inquiry has been specifically prohibited.29
However, by creating this exception for active dishonesty, the courts have violated
the autonomy of the unconditional bank guarantee. If the unconditional guarantee is
considered completely independent, the beneficiary is always entitled to the sum on
mere demand and there can be no exception for dishonesty based on the underlying
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primary contract, for
Page: 141
it violates the fundamental principle of privity of contract between the beneficiary and
the surety.30
3.2 Irretrievable Injury

The principle for irretrievable injury was laid down in Elian and Rabbath. v. Matsas
and Matsas31 . Lord Denning in his judgment recognised that “although the parties
arise such as to warrant interference by injunction.…the shippers (principal debtor)
were not parties to the bank guarantee, nevertheless they have a most important
interest in it”.He granted an injunction to prevent irretrievable injury to the shippers.
This established a new exception for transactions that will lead to irretrievable harm
tothe principal debtors.
Therefore, the courts once again violated the principle of autonomy in recognition of
the rights of the principal debtor. Since Elian and Rabbath's case, the principle of
irretrievable injury has been broadened into the general doctrine of
unconscionability32 . It was observed by the court in Eltraco International Pte Ltd. v.
CGH Development Pte Ltd.33 , equity's jurisdiction of unconscionability exception
ensures to a large extent that there is no unfair and/or abusive drawing in
documentary credit (Guarantee) by the beneficiary who may take advantage of the
inherent difficulties associated with proving fraud and its ingredients”34 . Therefore,
with creating this exception for irretrievable injury, the courts have opened doors for
interference on grounds of equity.
3.3 Other exceptions
Recent English judgments have also “adopted illegality of the underlying contract
as another ground for injunction”35 . The principle of illegality, first proposed by
Staughton, L.J. in Group Josi case36 , cannot be applied as an exception without relying
on the primary contract, thereby diminishing the independence of the performance
guarantee. It also exerts pressure on the courts to recognise other cases where the
primary
Page: 142
contract is voided like that of unilateral material variance and that of total failure of
consideration.
Lord Eveleigh in Potton Holmes Ltd v. Coleman Contractors Ltd.37 felt that there are
more reasons to consider than just fraud for injunction and that such injunction should
also be granted “when the contract is avoided or if there is total failure of
consideration”38 . In Themehelp Ltd. v. West39 , the court granted an injunction when
the primary contract was rescinded on the grounds of fraudulent misrepresentation.
The court here claimed that the primary contract was discovered void at an early
stage, before the question of enforcement of the guarantee could arise.
Further, in countries like France and Germany, the concept of autonomy has already
been eroded as the banks themselves have been given the power to refuse payment in
certain cases of rescission of the contract. The German courts have allowed refusal of
payment in cases where the bank, through any source, has knowledge that the
demand made is fraudulent.40 The standard used is that of “eye grabbing”
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obviousness. In fact, in France, courts have gone beyond just the exception of fraud,
and have allowed refusal of payment by the guarantor in case the nullity, rescission or
full performance is beyond dispute.41 If the courts purport to give the bank the power
to determine not just the existence of the contract itself, but also the nature of
performance by the parties, the same can only be done by the guarantor relying on
the underlying contract. In reality, they have already undermined the principle of
autonomy, even though they continue to hold performance guarantee as an
independent contract.
From a plethora of judgments creating exceptions to the principle of autonomy, it is
clear that, over the years, the courts have recognised the importance of the underlying
contract. However, they continue to hold dearly to the façade of the principle of
autonomy to provide the beneficiary the privilege of being able to “account later to the
seller”42 i.e. the immediate liability of the bank. It is to safeguard this right of the
seller, that the courts treat unconditional bank guarantee as an independent contract.
This puts an unfair burden on the principal debtor, who is liable
Page: 143
even in cases where the primary contract is discovered void, or has been rescinded
after a repudiatory breach by the beneficiary. In Edward Owen Case43 , the principal
debtor entered into a contract with the Libyans. Chase Manhattan Bank on behalf of
the principal debtor gave an unconditional bank guarantee to the Libyans. Upon breach
of contract by the Libyans, the principal debtor avoided the contract. However, Libyans
claimed the guarantee. The court refused to grant an injunction, even though it
recognised that there was no default on the part of the principal debtor, and they had
rightfully rescinded the contract.
4. TAKING AN ALTERNATIVE APPROACH

The courts have held on to the principle of autonomy to protect the principle of
immediate liability. However, it is not required for one to establish a principle of
autonomy to do so. Lord Eveleigh also did not support the view that the guarantee
being treated as “cash in hand” translated to it being considered a completely
independent contract outside the purview of suretyship.44
In the alternative, if the unconditional bank guarantee is not considered
autonomous, the principles of suretyship shall safeguard the interests of the principal
debtor. As per this approach, the beneficiary will continue to be the “sole judge not
only on the question of breach but also with respect to the amount of loss or
damages”45 , while still considering surety's liability as secondary. By virtue of
accepting the beneficiary as the sole judge, the surety will have waived off his right to
a proof of default, and the principle of immediate liability of the surety will remain
unaffected. The performance guarantee would thus only waive the surety's right to
“reasonable cause”46 and the liability is still immediate as proof of fault is still not
required. This is not a big deviation from the current stand. According to the current
principles, the beneficiary still needs to claim a breach (but not provide any proof of
such breach), and a simple demand will not suffice47 . For, if the beneficiary is allowed
to do so, “the fraud exception will be rendered meaningless”.48 The bank's liability is,
therefore, still not entirely independent of underlying contract.
Page: 144
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This principle of treating the guarantee as not autonomous, but dependent on the
primary contract, would have a twofold advantage in protecting the principal debtor.
First, in cases where the underlying contract never came into existence, or is void on
grounds of illegality, the bank will be able to refuse payment to the beneficiary, since
its liability is no longer independent of the underlying contract. Further, the interests
of the beneficiary would not be adversely affected as the banks which have a
reputation to maintain in the international market, will not refuse payment unless they
are reasonably convinced of the nullity of the underlying contract. Second, in the event
of disputes regarding performance, questions of rescission, total failure of
consideration and so on, there will be no interference by the banks, but the power of
the court to provide relief to the principal debtor would have increased. Since the court
will be able to adjudicate not just on the underlying contract, but also on the contract
of guarantee, they will have the power to grant punitive damages to the principal
debtor in cases of wrongful encashment by the beneficiary. This will also help to check
instances of abuse of the instrument of performance guarantee.
Therefore, in taking this approach, the integrity of unconditional performance
guarantee is maintained as the principle of immediate liability is safeguarded, while
the rights of the principal debtor is also protected by the general laws of suretyship.
5. CONCLUSION
In order to successfully perform their role as a tool of security for transactions in the
international market, bank guarantees must enjoy the trust of the beneficiaries.
However, this trust was established at the cost of risking the interests of the principal
debtor. The reality is that over the years, the courts have themselves diluted the
principle of autonomy to a huge extent by reading various exceptions, and the
continued application of the principle is merely leading to arbitrary decisions, and
unnecessary hassles to the principal debtor. Doing away with the principle of
autonomy would not in any way hamper the role of performance guarantees as certain
and prompt payment devices. The result will be that the banks will no longer be
compelled to pay the guarantee despite knowing that the invocation is baseless as
there is no underlying contract. In all other instances the bank will continue to be
immediately liable. The courts will be able to grant equitable relief to the principal
debtor if there has been an abuse of rights by the beneficiary. The efficiency of
performance guarantees will increase under such a model.
———
1. Students, IIIrd Year, BA LLB (Hons.), West Bengal National University of Juridical Sciences, Kolkata.
2. See 2 Chitty, Joseph & H.G. Beale, Chitty On Contracts 1644 (30th ed. 2008).
3. Edward Owen Engineering Ltd. v. Barclays Bank International Ltd., [1978] Q.B. 159.
4.
2 F. Pollock & D. Mulla, The Indian Contract and Specific Relief Acts 1355 (14th ed. N. Bhadbhade 2012).
5. Arguably outside the domain of Contract of Guarantee.
6. Roeland I.V.F. Bertrams, Bank Guarantees in International Trade 39 (2004).
7. See The Indian Contract Act, 1872, No. 9, Acts of Parliament, 1872, § 128, § 133, § 134 (India).
8. Edward Owen Eng'r Ltd. v. Barclays Bank Int'l Ltd., [1978] Q.B. 159.
9.Id. (Here Lord Denning differentiates between a case where the beneficiary invokes the guarantee by a mere
claim of breach not supported by proof and a case where there is no claim of breach but a simple demand).
10. See 2 F. Pollock & D. Mulla, The Indian Contract and Specific Relief Acts 1367 (14th ed. N. Bhadbhade 2012).
11. James O'Donovan & John Phillips, The Modern Contract of Guarantee 882 (2010).
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12. See Edward Owen Eng'r Ltd. v. Barclays Bank Int'l Ltd., [1978] Q.B. 159.
13.Emerson Electric Industries Controls v. Bank of America (unreported, Eng CA, July 10, 1979) in James
O'Donovan & John Phillips, The Modern Contract of Guarantee 882 (2010).
14.
See Standard Bank (London) Ltd. v. Canara Bank Unreported HC, May 22, 2002 in James O'Donovan & John
Phillips, The Modern Contract of Guarantee 882 (2010).
Wood Hall Ltd. v. Pipeline Authority, (1979) 141 CLR 443 at 445 in James O'Donovan & John Phillips, The
15.
Modern Contract of Guarantee 881 (2010).
Re Ward and MacCormack, (2000) 116 LQR 119 at 124 in 2 F. Pollock & D. Mulla, The Indian Contract and
16.
Specific Relief Acts (14th ed. N. Bhadbhade 2012) 1366.

17. [1978] Q.B. 146.
18. Id.
19. Intraco Ltd. v. Notis Shipping Corp of Liberia (The Bhoja Trader), [1981] 2 Llyod's Rep. 256.
20.U.P. State Sugar Corporation v. Sumac International Ltd., 1996 Indlaw SC 3580; U.P. Cooperative Federation
Ltd. v. Singh Consultants and Engineers (P) Ltd., (1988) 1 SCC 174.
21.
(1941) 31 N.Y.S. 2d 631.
22. Id.
23.See United City Merchant v. Royal Bank of Canada, [1983] 1 AC 168. But see Czarnikow-Rionda Sugar
Trading, [1999] 2 Lloyd's Rep. 187.
24.
Edward Owen Eng'r Ltd. v. Barclays Bank Int'l Ltd., [1978] Q.B. 159.
25.
Bolivinter Oil SA v. Chase Manhattan Bank, (1984) 1 All ER 351.
26. (1999) 68 Con. L.R. 180.
27.
[1982] Q.B. 208.
28.
[1999] 2 Lloyd's Rep. 187.
29. Bolivinter Oil SA v. Chase Manhattan Bank, (1984) 1 All ER 351.
30.See James O'Donovan & John Phillips, The Modern Contract of Guarantee 890 (2010) (Even a claim of breach
is not required but a mere demand of payment by the beneficiary should suffice).
31. [1966] 2 Lloyd's Rep. 495.
32. See HiapTian Soon Construction Pte Ltd. v. Hola Development Pte Ltd, [2003] 1 SLR 667.
33. [2000] 4 SLR.
34.Chumah Amaefule, The Exceptions To The Principle Of Autonomy Of Documentary Credits (August 2011)
(unpublished Ph.D. thesis, University of Birmingham).
35. Id. at 210.
36.
[1996] 1 Lloyd's Rep. 345.
37. (1984) 28 B.L.R. 19 in James O'Donovan & John Phillips, The Modern Contract of Guarantee 899 (2010).
38. Id.
39.
(1995) 4 All ER 215 (CA).
40.Freiherr von Marschall, Recent Developments in the Field of Standby Letters of Credit and Performance Bonds
in Current Problems of International Trade Financing 275 (1983).
41.Boris Kozolchyk, Bank Guarantees And Letters Of Credit: Time For A Return To The Fold Bank Guarantees And
Letters Of Credit: Time For A Return To The Fold, U. PA. J. INT'L BUS. L, 1, 41 (1989).
42.
Cargill International SA v. Bangladesh Sugar and Food Industries Corpn., [1998] 1 W.L.R. 461 in 2 Chitty,
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Joseph & H.G. Beale, Chitty on Contracts 1646 (30th ed. 2008).
43. Edward Owen Eng'r Ltd. v. Barclays Bank Int'l Ltd., [1978] Q.B. 159.
See Potton Holmes Ltd. v. Coleman Contractors Ltd., (1984) 28 B.L.R. 19 in James O'Donovan & John Phillips,
44.
The Modern Contract of Guarantee 899 (2010).
Hindustan Constn. Co. Ltd. v. State of Bihar, (1996) 5 SCC 34 : AIR 1996 SC 2268 in 2 F. Pollock & D. Mulla,
45.
The Indian Contract and Specific Relief Acts 1368 (14th ed. N. Bhadbhade 2012).
46.
State Trading Corpn. of India Ltd. v. ED & F Man (Sugar) Ltd., [1981] Com. L.R. 235.
47.
See Fraud.
48.
James O'Donovan & John Phillips, The Modern Contract of Guarantee 890 (2010).
© EBC Publishing Pvt.Ltd., Lucknow.

Special Contracts
K. D. Kamath & Co. v . CIT
(1971) 2 SCC 873
[The entire deed must be considered to decide the existence of partnership]
The appellant was a firm consisting of six partners and the partnership was constituted under the
document, dated March 20, 1959, The business of the partnership, as recited in the deed, is stated
to have been carried on in partnership from October 1, 1958. The partnership was registered
under the Indian Partnership Act, 1932, (the Partnership Act) on or about August 11,1959. For the
assessment year 1959-60, corresponding to the previous year ending March 31, 1959, the
appellant filed an application to the ITO under Section 26-A for registration of the partnership in
the name of M/s K. D. Kamath and Company. The ITO declined to grant registration on the
ground that there was no genuine partnership brought into existence by the deed of March 20,
1959 and that the claim of the firm having been constituted was not genuine. The ITO further
held that the business should be held to be the sole concern of K. D. Kamath. The sum and
substance of his finding was that there was no relationship of partners inter se created under the
said document. The Department did not challenging the genuineness of the document. On appeal
of the assessee, the AAC confirmed the order of ITO.The Appellate Tribunal came to the
conclusion that the two essential requirements as laid down by the Courts for determining
whether there was a partnership, namely, an agreement between the parties to share profits and
each of the parties acting as agent of all were fully satisfied in this case. The Tribunal held that
the partnership deed made it clear that profits and losses were to be shared between the parties
and that, subject to the over-riding authority of K. D. Kamath, the other partners could act for the
firm. In this view, the Appellate Tribunal held that the deed did create a relationship of partners
inter se between the parties and directed the ITO to register the firm under Section 26-A of the
Income-Tax Act.
The CIT made an application under Section 66(1) of the Income-lax Act praying for a reference
being made by the Appellate Tribunal to the High Court of the question of law mentioned in the
application. The Tribunal referred to the High Court for its opinion the following question of law:
“Whether, on the facts and in the circumstances of the case, M/s K.D. Kamath & Co., could be
granted registration under Section 26-A of the Act for the assessment year 1959-60?”
The High Court answered the question against the assessee.
Partnership deed:“Instrument of partnership.—Articles of agreement made at Hubli, this 20th

day of March, 1959, among (1) Shri Krishnarao Dadasaheb Kamat, hereinafter called the party
2 K. D. Kamath & Co. v . CIT
hereto of the 1st part, (2) Shri Narayan Ganesh Kamat hereinafter called the party hereto of the
2nd part, (3) Shri Shripadrao Damodara Kamat, hereinafter called the party hereto of the 3rd part,
(4) Shri Dayanoba Jotiram Mohite, hereinafter called the party hereto of the 4th part, (5) Shri
Shankar Govind Joshi, hereinafter called the party hereto of the 5th party, and (6) Shri Yashavant
Bhawoo Kate, hereinafter called the party of the 6th part. All Hindu inhabitants, residing at Hubli,
and whereas the parties from 2 to 6, who have been serving with party No.,1 since a very long
time and in view of the appreciation of their honest and sincere services which the above parties
have rendered in past and with the object that the above parties should also have their material
and economical progress, party No. 1, i.e., Shri K.D. Kamat has been pleased to convert his sole
proprietory concern, as a partnership concern, by admitting the above parties from 2 to 6 as
working partners and the party No. 1 shall be the main financing and managing partner and the
business of the partnership is agreed and is being carried on accordingly in partnership as from
1st day of October, 1958, as !Contractors" or any other business that the parties may think fit
under the name and style of !Messrs. K. D. Kamat & Co., Engineers and Contractors, Hubli" and
it is hereby agreed by and among the parties to this Agreement as under.
2. That the business of the partnership is running under the name and style of !Messrs. K. D.
Kamat & Co., Engineers and Contractors, Hubli" as from the 1st day of October 1958, and this
agreement shall take retrospective effect and shall be deemed to have come into operation as from
the commencement of October 1, 1958.
3. That the duration of the partnership shall be at will.
4. That the business of the partnership is running at Hubli and shall run at Hubli or at such other
place or places, as the case may be under the name and style of !Messrs. K. D. Kamat & Co.,
Engineers and Contractors" or in such other name or names that the parties may from time to time
decide and agree upon.
5. That the final accounts of the partnership firm shall be made up on the last day of each year of
account, which shall generally be on 31st day of March every year of account and the accounts
shall be taken up to that date of all the stock-in-trade and after providing for all the working
expenses, the remaining net profits or losses, as the case may be, shall be shared by the parties
hereto as under omitted).
6. That it is agreed among the partners that the party No. 1, i. e., Shri K. D. Kamat, shall be the
principal and financing partner and the rest of the partners, i.e., from 2 to 6 are admitted only as
working partners contributing labour.
7. That the good-will of the firm shall be wholly and solely belong to party No. 1, i.e., Shri K.D.
Kamat.
K. D. Kamath & Co. v . CIT 3
8. That the party No. 1, i.e., Shri K.D. Kamat, who is the principal and financing partner and by
virtue of his having the longstanding experience in the line of business together with the technical
knowledge of Engineer, shall have full right of control and management of the firm"s business
and in the best interest of the firm, it is thus decided and agreed upon among all the partners that
all the working partners from 2 to 6 shall always work according to the instructions and directions
given from time to time by Shri K. D. Kamat, in the actual execution of works and in any other
matter connecting thereof, pertaining to this partnership business. The decision of the principal
partner on the aspect of taking any new business or giving tenders for new works, shall always
vest with him, whose decision shall be final and binding upon all the working partners,
9. That it is also agreed among the partners that no working partner or partners is/are authorised
to raise a loan for and on behalf of the firm or pledge the firm"s interest directly or indirectly and
such an act shall not be binding on the firm, except under the written authority of the principal
partner.
10. That it is further expressly agreed that excepting the parties No. 1 and 2, i.e. Shri K.D. Kamat
and Shri N.G. Kamat, the other parties from 3 to 6 shall not do contract business, so long as they
are partners in this firm and this clause is inserted in the betterment of the firm"s business and
with the object that the firm"s business should not suffer and the works if taken or standing in the
name of the said parties from 3 to 6, the same shall be the business of the firm.
11. That it is also further agreed that the Managing Partner Shri K.D. Kamat shall alone operate
the Bank accounts and in case of any need for convenience, the partner authorised by him in
writing and so intimated to the Bank or Banks, shall operate the Bank accounts.
12. That in the course of the business or during the existence of the firm"s business, the principal
partner has reason to believe that any working partner or partners is/are not working and
conducting to the best interest of the firm, the principal partner shall have a right to remove such
a working partner or partners from the partnership concern and in such an eventuality the out-
going working partner or partners, shall have only right of the profit or loss up to the date of his
retirement, as may be decided by the principal partner in lump sum either by paying or receiving,
regard being had to the progress of the business or otherwise up to the date of retirement, only on
the completed works.
13. That proper books of accounts shall be kept by the said parties and entries made therein of all
such matters, transactions and things as are usually entered in the books of accounts kept by the
persons engaged in business of a similar nature; all books of accounts, documents, papers and
things shall be kept at the principal place of business of the firm and each partner shall at all
times, have free and equal access to them.
14. That each partner shall be just and faithful to the other or others in all matters relating to the
business of the firm, shall attend diligently to the firm"s business and give a true account and shall
give information relating to the same without fail.
15. That each partner shall withdraw such sums as will be mutually determined by the partners
from time to time, in anticipation of the profit falling to their individual share and in case of loss,
the same shall be made good by the partners.
16. Thus subject to the provisions herein mentioned and laid down and made thoroughly known
by each of the parties to this Agreement with sound mind and body, the firm"s affairs be carried
on for mutual gain and benefit and if any questions which may arise or occur touching to the
conduct or management or liability of the firm, the same shall be amicably settled among the
parties with the consent of principal partner, whose decision in the matter shall be final and
binding on all partners# ).
C.A. VAIDIALINGAM, J. - 8. The High Court has generally considered the effect of Clauses 5
to 9, 12 and 16 of the partnership deed. The High Court also considered the question whether the
partnership deed satisfies the two essential requisites to constitute the partnership, namely: (1)
whether there is an agreement to share profits as well as the losses of the business, and (2)
whether each of the partners under the deed can act as agent of all. From the discussion in the
judgment, the learned Judges, so far as we could see, have not thought it necessary to consider
elaborately the question whether there is an agreement in the partnership deed to share the profits
and losses of the business. Obviously, the High Court must have been satisfied from the recitals
in the partnership deed that this requirement is amply satisfied in this case. That is why we find
that the learned Judges have focussed their attention as they themselves say in the judgment on
the question whether it is possible to hold from the recitals in the partnership deed that each
partner is entitled to act as agent of all. In considering this aspect, the learned Judges have
referred particularly to Clauses 8, 9 and 16 of the partnership deed and have held that it is clear
from these clauses that the management, as well as the control of the business, is entirely left in
the hands of the alleged first partner K.D. Kamath and that the other partners are only to work
under his directions and share profits and losses in accordance with the proportions mentioned in
Clause 5. It is the further view of the High Court that it is not within the power of the other five
parties to act as agent of the other partners as they cannot accept any business except with the
consent of K.D. Kamath; nor can they raise any loan or pledge the firm"s interest. On this
reasoning the High Court has come to the conclusion that there is no relationship of partners
created under the partnership deed and as this essential element of agency is lacking, the appellant
was not eligible to be granted registration under Section 26-A.
9. Mr S.K. Venkataranga lyengar, learned counsel for the assessee appellant, referred us to the
various clauses in the partnership deed and urged that the view of the High Court that the
essential element of agency is absent in this case, is erroneous. The counsel further urged that the
partnership deed, read as a whole, leaves no room for doubt that there is an agreement to share the
profits and losses of the business in the proportion mentioned in the deed. Therefore, one of the
essential ingredients to constitute a partnership is satisfied in this case. He further urged that
though a large amount of control regarding the conduct of business may have been left in the
hands of the first partner K. D. Kamath, that circumstance, by itself, does not militate against the
view of one partner acting as agent of the other partners. He referred us in this connection, to
certain decisions of the High Courts as well as of this Court, where under circumstances similar
to the one existing before us, it has been held that the mere fact that more control is to be
exercised only by one of the partners is not a circumstance which militates against the parties
having entered into a partnership arrangement as understood in law.
10. Mr S.K. lyer, learned counsel for the Revenue, supported the reasoning of the High Court in
its entirety. According to the learned counsel, the question whether there is an agreement to share
the profits and the losses of the business and the further question whether each of the partners is
entitled to act as agent of all are to be determined by looking into all the facts as borne out by the
deed of partnership. He urged that on a consideration of all such facts, the High Court has held
that one of the essential conditions, namely, the right of one partner to act as agent of all, does not
exist in the present case. If so, the opinion expressed by the High Court that the appellant is not
eligible for registration under Section 26-A is correct.
11. In considering the question whether the partnership deed creates the relationship of partners
as between the parties thereto, as understood in law, it is desirable to have a complete picture of
the entire document.
12. The High Court has rested its decision on five circumstances for holding that there is no
relationship of partners as between the parties inter se created under the partnership deed. They
are based on consideration in particular of Clauses 8, 9 and 16. The following are the
circumstances, which according to the learned Judges militate against holding in favour of the
assessee: (1) The management as well as the control of the business is entirely left in the hands of
the alleged first partner K. D. Kamath; (2) The other partners can merely work under his
directions and share in the profits and losses in accordance with the proportion mentioned in
Clause 5; (3) It is not within the power of the parties Nos. 2 to 6 to act as agent of other partners;
(4) The said parties cannot accept any business except with the consent of K.D. Kamath; and (5)
Those parties cannot raise any loan or pledge the firm"s interest, directly or indirectly except
under the written authority of K.D. Kamath. In view of all these circumstances, according to the
High Court, one of the essential element to constitute partnership, namely, agency is lacking.
16. From a perusal of the partnership deed one thing is clear, namely, under clause (1) what was
originally the sole proprietary concern of K.D. Kamath has been converted as partnership
concern by admitting parties Nos. 2 to 6 as working partners, alone with party No. I, and party
No. 1 is the main financing and managing partner of the business. That clause has to be read
along with clause (6) whereunder the partners have agreed that K. D. Kamath shall be the
principal and financing partner and the rest of the partners, namely, parties Nos. 2 to 6 are
admitted only as working partners contributing labour. Clause (4) deals with the running of the
partnership business at Hubli as also other place or places or with such other name or names that
the parties (which means partners Nos. 1 to 6) may from time to time decide and agree upon.
From clauses (1), (2) and (3), it is clear that the business of the partnership is that of Engineers
and Contractors. We are referring to this aspect because it will have a bearing regarding the
control of the business agreed to be vested in K. D. Kamath. There does not appear to be any
controversy that party No. 1 has been carrying on such business as a proprietary concern for a
long time before the partnership was formed and as such he is considerably experienced in the
said technical type of business. Clause (5) provides that final accounting is to be taken as on
March 31 of every year and the net profits and losses are to be shared by the parties thereto in the
proportion of the shares specified in the said clause.
17. Under clause (11), apart from the managing partner, K. D. Kamath operating the bank
accounts, any other partner authorised by him is also eligible to operate the bank accounts. Clause
(12) entitles a partner, when he ceases to be a partner to be paid his share of profit or loss, up to
the date of his so ceasing to be a partner. Clause (13) provides that books of accounts are to be
properly maintained and each partner has a right at all times to have free and equal access to
them. Clause (14) enjoins on each partner to be just and faithful to the other partners in all matters
relating to the business of the firm and each of them has got a duty to diligently attend the
business of the firm. Each of them has also an obligation to give a true account and information
regarding the business of the firm. Clause (15) enables the partners to withdraw the amounts in
anticipation of profits falling to their individual share; and in case of loss, each of them is also
liable to make good the same in proportion to his share in the partnership. Clause (16) enjoins on
the partners to carry on the affairs of the firm for mutual gain and benefit.
18. All the above clauses clearly, in our opinion, establish that the sole proprietary concern of
K.D. Kamath has vanished. The above clauses also establish the right of each of the partners to
share the profits and also to bear the losses in the proportion of their shares mentioned in clause
(5). Therefore, one of the essential ingredients to constitute partnership, namely, that there should
be an agreement to share the profits and the losses of the business is more than amply satisfied in
this case.
19. Then the question is whether the circumstances pointed out by the High Court and referred to
by us earlier, necessarily lead to the conclusion that no relationship of partners, as understood in
law, has been created as between the parties under the partnership deed.
23. In certain decisions of the High Courts the two essential conditions necessary to form the
relation of partnership have been stated to be:(l) that there should be an agreement to share the
profits and losses of the business, and (2) that each of the partners should be acting as agent of all.
Though, these two conditions, by and large, have to be satisfied when the relationship of partners
is created between the parties, we would emphasise that the legal requirements under Section 4 of
the Partnership Act to constitute a partnership in law are: (1) there must be an agreement to share
the profits or losses of the business; and (2) the business must be carried on by all the partners or
any of them acting for all. There is implicit in the second requirement the principle of agency.
28. From a review of the above decisions, it is clear that the mere nomenclature given to a
document is by itself not sufficient to hold that the document in question is one of partnership.
Two essential conditions to be satisfied are: (1) that there should be an agreement to share the
profits as well as the losses of business; and (2) the business must be carried on by all or any of
them acting for all, within the meaning of the definition of $ partnership# under Section 4 of the
Partnership Act. The fact that the exclusive power and control, by agreement of the parties, is
vested in one partner or the further circumstance that only one partner can operate the bank
accounts or borrow on behalf of the firm are not destructive of the theory of partnership provided
the two essential conditions, mentioned earlier, are satisfied.
29. In the light of the principles laid down by this Court in Steel Brothers and Co. Ltd. v.
Commissioner of Income-tax [AIR 1958 SC 315], the reasons given by the High Court for
holding that the relationship of partners has not been created under the deed of partnership before
us, cannot be sustained. As the control and management of business can be left by agreement in
the hands of one partner to be exercised on behalf of all the partners, the other consequence by
way of restriction on the rights of the other partners lose all significance. In fact the clauses
providing that the working partners are to work under the directions of the managing partner and
the further clause restricting their right to accept business or raise any loans or pledge the firm"s
interest except with the consent of the managing partner K.D. Kamath, have all to be related with
the agreement entered into by the partners regarding the management and control by K.D.
Kamath. We are of the opinion that under the partnership deed the relationship which has been
brought into existence between the six parties is a relationship of partners who have agreed to
share the profits and losses of business carried on by all or any of them acting for all and it
satisfies the definition of $ Partnership# under Section 4 of the Partnership Act. We have already
pointed out that there is a sharing of the profits or losses of the business by the partners in the
ratio of the proportion mentioned in clause (5). That clause read with other clauses already
discussed by us clearly shows that the first condition, namely, all persons agreeing to share profits
or losses is satisfied". Even on the basis that the entire control and management of the business is
vested in K. D. Kamath, party No. 1, and that parties Nos. 2 to 6 as working partners have to
work under his direction, from all the other circumstances it is clear that the conduct of business
by party No. 1, is done by him acting for all the partners. There is no indication to the contrary in
the partnership deed. Therefore, even without anything more, it is clear that as the partnership
business is carried on by party No. 1, acting for all, the second condition of agency in also
satisfied. This- idea is reinforced by clause (16) which provide that the firm"s affairs are to be
carried on for mutual benefits. That clause is to the effect that the firm"s affairs which are
managed by party No. 1 is really for the mutual gain and benefits of all the partners.
30. It is, no doubt, true that the second essential test of the business being carried on by all or any
of the partners acting for all must be satisfied. The provisions in the partnership deed clearly
establish that K.D. Kamath, the managing partner, carries on the business, acting for all the
partners.
31. Much stress has been laid by the High Court on the fact that under clause (9) parties Nos. 2 to
6 have no right to raise loans for and on behalf of the firm or pledge the firm"s interest. This
circumstance, according to the High Court, is destructive of the element of partnership. We have
already held that the management and control of the business done by party No. 1, is carrying on
of the business on behalf of all the partners. No doubt under Section 18 of the Partnership Act, a
partner is the agent of the firm for the purpose of the business of the firm. But that section itself
clearly says that it is subject to the provisions of the Act. It is open to the parties under Section 11
to enter into an agreement regarding their mutual rights and duties as partners of the firm and that
can be done by contract, which in this case is evidenced by the deed- of partnership. Further
Section 18 will have to be read along with Section 4. If the relationship of partners is established
as a $ partnership# as defined in Section 4, and if the necessary ingredients referred to in that
section are found to exist, there is no escape from the conclusion that in law a partnership has
come into existence. It is in the light of these provisions that Section 18 will have to be
appreciated. Section 18 only emphasises the principle of agency which is already incorporated in
the definition of $ partnership# under Section 4.
32. It should be remembered that so far as the outside world is concerned, so long as the parties
Nos. 2 to 6 are held out as partners of this firm, as has been done under the partnership deed, their
acts would bind the whole partnership. The provision in clause (9) in our opinion, is only an inter
se arrangement entered into by the partners, in and by which, the working partners have agreed
not to raise loans or pledge the firm"s interest.
33. Mr S.K. lyer, learned counsel for the Revenue, placed some reliance on Section 14 of the
Partnership Act. According to the counsel, there is no contract to the contrary in the partnership
deed that the assets brought in by party No. 1, do not belong to the partnership. It is his further
contention that under Section 14, those assets will belong to the partnership, in which case, it will
be open to any partner, as agent of the other partners to pledge the firm"s interest or raise loan for
partnership purposes. This right, according to the counsel is restricted by clause (9) and that
clause negatives the theory of agency. In our opinion, this contention of the learned counsel
cannot be accepted. Section 14 of the Partnership Act itself clearly shows that the provisions
contained therein are subject to the contract between the parties. We have already held that the
provision regarding the control and management vesting in party No. 1 is not by itself destructive
of the theory of partnership. Clause (9) in our opinion, itself shows that the theory of agency is
recognised. But the parties, by mutual agreement, have placed a restriction on the working
partners" right to borrow on behalf of the firm or pledge the firm"s interest without the written
authority of the principal partner.
35. To conclude, we are of the opinion that all the ingredients of partnership are satisfied under
the partnership deed, dated March 20, 1959 and that the view of the High Court that the
appellant-firm cannot be granted registration under Section 26-A of the Income-tax Act for the
assessment year 1959-60, cannot be sustained.
36. In the result, we answer the question of law in the affirmative in favour of the assessee.
* * * * *
Cox v. Hickman
(1860) 8 H.L.C. 268
[Mode of determining the existence of a partnership –sharing of profits – creditor-debtor

relationship]
Smith and Smith carried on business under the name of B. Smith & Son. They got into difficulties
and called a meeting of their creditors. Later they executed a deed of arrangement in favour of
their creditors. The parties to the deed being S. and S. of the first part, five of the creditors
(including Cox and Wheatcroft) of the second part, and the general body of creditors of the third
part, and the deed provided that the five creditors of the second part were to carry on the business
of S. and S. as trustees for the creditors under the name of $ The Stanton Iron Company,# and to
divide the net income of the business, after paying the expenses, among the general creditors of
S. and S., such net income to be deemed to be of the creditors to be held, and that at any such
meeting a majority in value of the creditors present was to have power to make rules as to the
mode of conducting the business, or to order its discontinuance, and that when all the debts had
been paid the trustees were to hold the property assigned under the deed in trust for S. and S.
themselves. The deed also contained a covenant by the parties who executed it, not to sue S. and
S. for their debts. Cox never in fact acted as a trustee, and Wheatcroft resigned six weeks after
the deed, and before the goods for which bills now sued were given had been supplied, and no
new trustees were appointed in place of Cox and Wheatcroft. The remaining three of the five
creditors who were the parties to the deed, of the second part, carried on the business under the
provisions of the deed, and goods were supplied to the business by Hickman. Hickman drew
three bills of exchange for the goods supplied by him, those bills were accepted on behalf of the
Stanton Iron Company by one of the above-mentioned three creditors. Hickman sued Cox and
Wheatcroft on those three bills, and alleged that they were liable upon them as partners in the
business of the Stanton Iron Company because they were two of the five creditors who were the
original parties to the deed of the second part and had executed the deed accordingly.
THE LORD CHANCELLOR (LORD CAMPBELL) - The only question in these cases is
whether the defendants by executing the deed of 13th November, 1849, as creditors of Messrs.
Smith & Co., rendered themselves liable to the creditors who should afterwards deal with the
trustees appointed by this deed to carry on the concern of Messrs. Smith & Co., under the new
firm of $ The Stanton Iron Company.# The Plaintiff alleges that although the Defendants never
acted or held themselves out as partners in this new firm, and the creditors of the new firm are
entitled to sue the creditors of the old firm as partners in the new firm.
Cox v. Hickman 11
It is quite clear that the creditors of the old firm, by executing the deed, never intended to
incur such a liability, and I think that the creditors of the new firm cannot be supposed to have
dealt with this firm in the belief that they could have a remedy against all or any of the creditors
of the old firm.
Is there such a participation in the profits of the new firm by the creditors of the old firm,
as to make them partners in the new firm? They certainly are not partners inter se, as was
properly held by the Master of the Rolls and they could derive no profits from the new business,
beyond the payment of the debts due to them from the old firm. There was a formal release of
these debts; but we must look at the real nature of the transaction, according to the
understanding of all who were parties to it. The business of Messrs. Smith & Co. was to be
carried on by the trustees till the debts of that firm were paid, and then the business was to be
transferred back to Messrs. Smith & Co.
I am of opinion that the creditors of the old firm cannot be considered, by executing the
deed, as having authorised the trustees as their agents either to purchase the goods or to accept the
bills....
I must, therefore, advise your Lordships to reverse the judgment of the Court of Common
Pleas, and to adjudge that the Defendants below are not liable, as acceptors of the bills of
exchange, on which the action is brought.
LORD CRANWORTH - In the first place let me say, that I concur with those of the learned
Judges who are of opinion that no solid distinction exists between the liability of either defendant
in an action on the bills, and in an action for goods sold and delivered. If he would have been
liable in an action for goods sold and delivered, it must be because those who were in fact
carrying on the business of the Stanton Iron Company, were carrying it on as his partners or
agents, and, as the bills were accepted, according to the usual course of business for ore supplied
by the plaintiff, I cannot doubt that if the trade was carried on by those who managed it as
partners or agents of the defendant, he must be just as liable on the bills as he would have been in
an action for the price of the goods supplied. His partners or agents would have the same
authority to accept bills in the ordinary course of trade, as to purchase goods on credit.
The liability of one partner for the acts of his co-partner is in truth the liability of a
principal for the acts of his agent. Where two or more persons are engaged as partners in an
ordinary trade, each of them has an implied authority from the others to bind them all by contract
entered into according to the usual course of business in that trade. Every partner in trade is for
the ordinary purposes of the trade, the agent of his co-partners, and all are therefore liable for the
ordinary trade contracts of the others. Partners may stipulate among themselves that some one of
them only shall enter into particular contracts, or into any contracts, or that as to certain of their
contracts none shall be liable except those by whom they are actually made; but with such private
12 Cox v. Hickman
arrangements third persons, dealing with the firm without notice, have no concern. The public
have a right to assume that every partner has authority from his co-partners to bind the whole firm
in contracts made according to ordinary usages of trade. This principle applies not only to
persons acting openly and avowedly as partners, but to others who, though not so acting, are by
secret or private agreement, partners with those who appear ostensibly to the world as the persons
carrying on the business.
In the case now before the House, the Court of Common Pleas decided in favour of the
respondent that the appellant, by his execution of the deed of arrangement, became, together with
the other creditors who executed it, a partner with those who conducted the business of the
Stanton Iron Company. The Judges in the Court of Exchequer Chamber were equally divided so
that the judgment of the Court of Common Pleas was affirmed. The sole question for
adjudication by your Lordships is, whether this judgment thus affirmed was right.
In the first place there is an assignment by Messrs. Smith to certain trustees of the mines
and all the engines and machinery used for working them, together with all the stock in trade, and
in fact, all their property, upon trust to carry on the business, and after paying its expenses, to
divide the net income rateably amongst the creditors of Messrs. Smith, as often there shall be
funds in hand sufficient to pay one shiling in the pound; and after all the creditors are satisfied,
then in trust for Messrs. Smith.
Upto this point the creditors, though they executed the deed are merely passive, and the
first question is, what would have been the consequence to them of their executing the deed if the
trusts had ended there? Would they have become partners in the concern carried on by the
trustees merely because they passively assented to its being carried on upon the terms that the net
profits should be applied in discharge of their demands. I think not; it was argued that as they
would be interested in the profits, therefore they would be partners. But this is a fallacy. It is
often said that the test, or one of the tests, whether a person not ostensibly a partner, is
nevertheless, in contemplation of law, a partner, is whether he is entitled to participate in profits.
This, no doubt is in general, a sufficiently accurate test; for a right to participate in profits affords
cogent, often conclusive evidence that the trade in which the profits have been made, was carried
on in partnership for or on behalf of the person setting up such a claim. But the real ground of the
liability is that the trade has been carried on by persons acting on his behalf. When that is the
case he is liable to the trade obligations, and entitled to its profits, or to a share of them. It is not
strictly correct to say that his right to share in the profits, makes him liable to the debts of the
trade. The correct mode of stating the proposition is to say that the same thing which entitles him
to the one makes him liable to the other, namely, the fact that the trade has been carried on his
behalf, i.e., that he stood in the relation of principal towards the persons acting ostensibly as the
traders by whom the liabilities have been incurred and under whose management the profits have
been made.
Cox v. Hickman 13
Taking this to be the ground of liability as a partner, it seems to me to follow that the
mere concurrence of creditors in an arrangement under which they permit their debtor, or trustees
for their debtor, to continue his trade, applying the profits in discharge of their demands, does not
make them partners with their debtor, or the trustee. The debtor is still the person solely
interested in the profits, save only that he has mortgaged them to his creditors. He receives the
benefit of the profits as they accrue, though he has precluded himself from applying them to any
other purpose than the discharge of his debts. The trade is not carried on by or on account of the
creditors; though their consent is necessary in such a case, for without it all the property might be
seized by them in execution. But the trade still remains the trade of the debtor or his trustees; the
debtor or the trustees are the persons by or on behalf of whom it is carried on.
I have hitherto considered the case as it would have stood if the creditors had been merely
passively assenting parties to the carrying on the trade, on the terms that the profits should be
applied in liquidation of their demands. But I am aware that in this deed special powers are given
to the creditors, which, it was said, showed that they had become partners, even if that had not
been the consequence of their concurrence in the previous trust. The powers may be described
briefly as, first, a power of determining by a majority in value of their body, that the trade should
be discontinued, or, if not discontinued, then, secondly, a power of making rules and orders as to
its conduct and management.
These powers do not appear to me to alter the case. The creditors might, by process of
law, have obtained possession of the whole of the property. By the earlier provisions of the deed,
they consented to abandon that right, and to allow the trade to be carried on by the trustees. The
effect of these powers is only to qualify their consent. They stipulate for a right to withdraw it
altogether; or, if not, then to impose terms as to the mode in which the trustees to which they had
agreed should be executed; I do not think that this alters the legal condition of the creditors. The
trade did not become a trade carried on for them as principals, because they might have insisted
on taking possession of the stock, and so compelling the abandonment of the trade, or because
they might have prescribed terms on which alone it should be continued. Any trustee might have
refused to act if he considered the terms prescribed by the creditors to be objectionable. Suppose
the deed had stipulated, not that the creditors might order the discontinuance of the trade, or
impose terms as to its management, but that some third person might do so, if, on inspecting the
accounts, he should deem it advisable. It could not be contended that this would make the
creditors partners, if they were not so already; and I can see no difference between stipulating for
such a power to be reserved to a third person, and reserving it to themselves.
I have on these grounds, come to the conclusion that the creditors did not, by executing
this deed, make themselves partners in the Stanton Iron Company, and I must add that a contrary
decision would be much to be deprecated. Deeds of arrangement like that now before us, are, I
believe, of frequent occurrence; and it is impossible to imagine that creditors who execute them,
have any notion that by so doing they are making themselves liable as partners. This would be no
14 Cox v. Hickman
reason for holding them not to be liable, if, on strict principles of mercantile law, they are so; but
the very fact that such deeds are so common, and that no such liability is supposed to attach to
them, affords some argument in favour of the appellant. The deed now before us was executed
by above a hundred joint creditors; a mere glance at their names is sufficient to show that there
was not intention on their part of doing anything which should involve them in the obligations of
a partnership. I do not rely on this; but, at least, it shows the general opinion of the mercantile
world on the subject. I may remarks that one of the creditors I see is the Midland Railway
Company, which is a creditor for a sum of £ 39, and to suppose that the directors could imagine
that they were making themselves partners is absurd.
LORD WENSLEYDALE - The question is whether either of the defendants, Cox or

Wheatcroft, was liable as acceptor of certain bills of exchange... drawn by the plaintiff below on
the Stanton Iron Company, and accepted by one James Haywood as $ per Pro# that Company.
And the simple question will be this, whether Haywood was authorised by either of the
defendants, as partner in that Company, to bind him by those acceptances. Haywood must be
taken to have been authorised to accept for them by those who actually carried on business under
that firm. Were the appellants partners in it? The case will depend entirely on the construction of
the deed... There is no other evidence affecting either of them. And the question is whether the
subscription of both, as creditors of the Smiths, made them partners in the business carried on by
the trustees in the name of the Stanton Iron Company. Wheatcroft could not be liable in the
character of trustee, for he had ceased as such before the bills were drawn, and the plaintiff knew
it.
One of the provisions in the deed was this: that it gave authority to the trustees to execute
all contracts and instruments in carrying on the business, which would certainly authorise the
making or accepting bills of exchange. The question then is, whether this deed makes the
creditors who sign in partners with the trustees, or what is really the same thing, agents, to bind
them by acceptances on account of the business.
The law as to partnership is undoubtedly a branch of the principal and agent; and it would
lend to simplify and make more easy of solution, the questions which arise on this subject, if this
true principle were more constantly kept in view. Mr. Justice Story lays it down in the first
section of his work on Partnership. He says, $ Every partner is an agent of the partnership, and his
rights, powers, duties, and obligations, are in many respects governed by the same rules and
principles as those of an agent; a partner virtually embraces the character of both a principal and
agent.#
A man who allows another to carry on trade, whether in his own name or not, to buy and
sell and to pay over all the profits to him, is undoubtedly the principal, and the person so
employed is the agent, and the principal is liable for the agent"s contracts in the course of his
employment. So if two or more agree that they should carry on a trade, and share the profits of it,
Cox v. Hickman 15
each is a principal, and each is an agent for the other, and each is bound by the other"s contract in
carrying on the trade, as much as a single principal would be by the act of an agent, who was to
give the whole of the profits to his employer. Hence it becomes a test of the liability of one for
the contract of another, that he is to receive the whole or a part of the profits arising from the
contract by virtue of the agreement made at the time of the employment. I believe this is the true
principle of partnership liability. Perhaps the maxim that he who partakes the advantage ought to
bear the loss, often stated in the earlier cases on this subject is only the consequence, not relation
of principal, agent, and partner.
Can we then collect from the trust deed that each of the subscribing creditors is a partner
with the trustee and by the mere signature of the deed constitutes them his agents for carrying on
the business on the account of himself and the rest of the creditors? I think not. It is not true that
by this deed the creditors will gain an advantage by the trustees carrying on the trade; for if it is
profitable, they may get their debts paid, but this is not that sharing of profits which constitutes
the relation of principal, agent and partner.
If a creditor were to agree with his debtor to give the latter time to pay his debt till he got
money enough out of his trade to pay it, I think no one could reasonably contend that he thereby
made him his agent to contract debts in the way of his trade; nor do I think that it would make any
difference that he stipulated that the debtor should pay the debt out of the profits of the trade.
The deed in this case is merely an arrangement by the Smiths to pay their debts, partly
out of the existing funds and partly out of the expected profits of their trade; and all their effects
are placed in the hands of the trustees, as middlemen between them and their creditors, to effect
the object of the deed, the payment of their debts. These effects are placed in the hands of the
trustees as the property of the Smiths, to be employed as the deed directs, and to be returned to
them when the trusts are satisfied. I think it is impossible to say that the agreement to receive this
debt, so secured, partly out of the existing assets, partly out of the trade, is such a participation of
profits as to constitute the relation of principal and agent between the creditors and trustees. The
trustees are certainly liable, because they actually contract by their undoubted agent; but the
creditors are not, because the trustees are not their agents. I, therefore, advise your Lordships to
reverse the judgment. Judgment reversed.
*****
The Lost Rationale of Agency Law
Daniel Harris1
ABSTRACT
The legal academy has lost sight of the rationale of agency law and tried to recast
agency doctrines in the image of other areas of the law, such as contracts or torts. The
misunderstanding hampers scholarship and poses a danger to the important values that
agency law protects.
The law of agency sets the rules for such basic concepts as representation, authority,
vicarious responsibility and the loyalty duties of agents. The field rests on a simple idea: the
metaphoric identification of agent with principal: the notion that, within the scope of the
agency, the agent acts as the principal so that the actions of the agent are treated as the
actions of the principal and the two are as one.
This article reintroduces this metaphor, shows how the idea explains the law of agency
and argues that the law needs the concept and the doctrines based on it to create a place for
group action and team values in a legal system designed for individuals.
TABLE OF CONTENTS
ABSTRACT ............................................................................................. 1
TABLE OF CONTENTS ............................................................................ 1
INTRODUCTION...................................................................................... 2
I. THE METHAPHOR AND THE CONCEPT OF REPRESENTATION. ........... 4
A. Conceptualizing Groups .................................................... 4
B. Metaphoric Origins ............................................................ 6
C. Changed Thinking in the Academy ................................... 11
II. THE METAPHOR AND RESPONDEAT SUPERIOR .............................. 15
A. The Agency Basis of Vicarious Liabilty ............................ 15
B. Traditional Rationale........................................................ 16
C. Scholarly Criticism ........................................................... 19
D. Persistence of Tradition in the Courts .............................. 22
1
Adjunct Professor of Agency Law, Chicago-Kent College of Law. The Author would like
to thank Christopher Schmidt, Greg Reilly and the early stage faculty workshop at Chicago-
Kent College of Law, Arthur Laby, Stephen P. Turner, June Carbone, Jeffrey Lipshaw, Eric
J. Mitnick, James Nelson, Adam Hofri, Donald Langevoort, Stephen Galoob, Scott Davis,
Lionel Smith, Z. Jill Barclift, Dan Farber, Gary Johnson, Paula Dalley, Lyman Johnson,
Robert Post, Paul Miller, Carolyn Shapiro and the Chicago-Kent faculty workshop,
Josephine Nelson, Evan Criddle and Ethan Leib for their comments on earlier versions of
this article.
November 2019 Vol. 3 No. 1
1
2 THE BUSINESS & FINANCE LAW REVIEW [Vol. 3:1]
III. OTHER AGENCY DOCTRINES BASED ON THE METAPHOR ............ 27

A. The IntraCorporate Conspiracy Doctrine ........................ 27
B. The Rights and Liabilities of Undisclosed Principals ...... 28
C. Defining Agency................................................................ 29
D. Vicarious Admissions........................................................ 31
E. Government Speech .......................................................... 33
F. Duties of Agents to Principals .......................................... 36
1. Duty of Loyalty ........................................................... 37
2. Duty to Act Only as Authorized ................................. 39
3. Duty of Confidentiality ............................................... 41
4. Limited Scope ............................................................. 42
IV. IN DEFENSE OF THE METAPHOR ................................................... 43
A. Virtues of the Metaphor .................................................... 43
B. Responding to the Critics.................................................. 45
CONCLUSION ....................................................................................... 48
INTRODUCTION
Following the terrorist attacks on September 11, 2001, the U.S.

Department of Justice arrested hundreds of undocumented aliens and held
them in detention while it investigated their possible ties to terrorism. After
they were released, some detainees sued the officials who formulated the
detention policy, charging the officials with conspiracy to violate the
detainees’ constitutional rights and demanding that the officials be held
personally liable for money damages. In 2017, the U.S. Supreme Court
rejected the conspiracy claim. The Court reasoned that a conspiracy requires
at least two parties and that officers acting for the same employer are acting
as a single person, their employer. The Court said that “[w]hen two agents
of the same legal entity make an agreement in the course of their official
duties . . . as a practical and legal matter their acts are attributed to their
principal.”2
The decision illustrates the law of agency, the body of law that sets the
rules for representation, authority, and vicarious responsibility. Agency law
provides the legal foundation for business organizations, employment, and
the practice of law. The Court’s rationale further highlights an idea at the
heart of agency law: the identification of the agent with the principal.
This idea takes several forms: the theory that an agent assumes the legal
persona of the principal thereby becoming the principal’s alter ego; the
notion that an agent acts as the principal so that the actions of the agent are
2
Ziglar v. Abbasi, 137 S. Ct. 1843, 1867 (2017).
[2019] THE LOST RATIONALE OF AGENCY LAW 3
the actions of the principal; the construct “that, within the scope of the
agency, principal and agent are one.”3 For lawyers and judges, this metaphor
of identification is an essential idea that provides the conceptual frame for
dealing with groups.
However, due to changes in the intellectual understanding of the law
more than a century ago,4 the construct has largely gone missing in the
academy.5 As a result, there is no grand theory uniting agency law and the
subject now receives little attention in teaching and scholarship.6 This article
seeks to restore agency law to its proper place in legal thought by showing
the conceptual unity of the subject. The article reintroduces the metaphor of
identification and explains how that idea makes sense of the area, including
doctrines that now puzzle scholars.7
There are also policy reasons for a renewed understanding of the lost
rationale of agency law. The concept justifies exceptions to the realm of
contract, so it could limit the recent tendency of the U.S. Supreme Court to
favor market freedom over fiduciary loyalty.8
More generally, the metaphor of identification offers a needed
supplement to the legal philosophies that prioritize equality,9 individual
3
Oliver Wendell Holmes, Jr., Agency, 4 HARV. L. REV. 345, 345 (1891) [hereinafter
Holmes, Jr., Agency]; see OLIVER WENDELL HOLMES, JR., THE COMMON LAW 232 (photo.
reprt. 2009) (Boston, Little, Brown, and Co. 1881) [hereinafter HOLMES, JR., THE COMMON
LAW].
4
See Wesley Newcomb Hohfeld, Some Fundamental Legal Conceptions as Applied in
Judicial Reasoning, 23 YALE L.J. 16, 46 (1913); Harold J. Laski, The Basis of Vicarious
Liability, 26 YALE L.J. 105, 107–08 (1916) [hereinafter Laski, Vicarious].
5
See Paula J. Dalley, All in a Day’s Work: Employers’ Vicarious Liability for Sexual
Harassment, 104 W. VA. L. REV. 517, 528 (2002) [hereinafter Dalley, All in a Day’s Work];
Paula J. Dalley, A Theory of Agency Law, 72 U. PITT. L. REV. 495, 499 n.4 (2011)
[hereinafter Dalley, A Theory of Agency Law].
6
See Randy E. Barnett, Squaring Undisclosed Agency Law and Contract Theory, 75 CALIF.
L. REV. 1969, 1970 (1987) (referring to the “current dearth of American agency law
scholarship”); id. at 1970 n.4 (noting “the current neglect of agency law in the American
law school curriculum”); Lyman P.Q. Johnson & David Millon, Recalling Why Corporate
Officers Are Fiduciaries, 46 WM. & MARY L. REV. 1597, 1612 (2005) (“[L]aw schools
today appear to devote significantly less time and attention to agency law principles than
they did, say, thirty or forty years ago.”).
7
See Dalley, A Theory of Agency Law, supra note 5, at 497 (describing the basis of agency
law as a “mystery” for scholars, courts, and lawyers).
8
See Daniel Harris, Loyalty Loses Ground to Market Freedom in the U.S. Supreme Court,
10 WM. & MARY BUS. L. REV. 615, 618 (2019).
9
See, e.g., Mark Tushnet, The Dilemmas of Liberal Constitutionalism, 42 OHIO ST. L.J. 411,
424 (1981) (stating that if he were a judge, he would push whatever “result is, in the
circumstances now existing, likely to advance the cause of socialism”).
autonomy,10 or economic efficiency.11 As part one of this article explains,

the metaphor sees people as social beings with a sense of self that includes
shared identities.12 Starting from this premise, the metaphor builds a legal
foundation for ideals like faithful representation, legitimate authority, and
loyalty; notions that the other philosophies ignore, redefine,13 or dismiss as
outmoded.14 Therefore, preserving the metaphor matters because it has an
impact on the types of morality that will be recognized as law.
Part one of this article discusses the metaphor’s purpose, origins, uses,
and critics. Part two shows how the metaphor explains vicarious liability
rules far better than the explanation now presented by tort scholars. Part three
shows how the metaphor explains other doctrines that have troubled
scholars, such as the evidence rules for vicarious admissions, the government
speech doctrine, and the agency duties of loyalty and confidentiality. Part
four argues that the metaphor is an essential idea and the doctrines based on
it strike a fair balance between individual rights and social responsibility.
I. THE METAPHOR AND THE CONCEPT OF REPRESENTATION
A. Conceptualizing Groups
To conduct business, people often must work in teams. This group
action, while essential for society, presents conceptual challenges for a legal
system designed for individuals and based on notions of individual rights
and responsibilities. What does it mean for a group to acquire property, enter
into a contract or commit a tort? Who owns what? Who bears responsibility
for which actions? To address these issues, the law needs some way to think
about groups and fit them into the system.
The law of agency meets this need. It provides a conceptual framework
for understanding groups and assigning rights and responsibilities when
10
See, e.g., Evelyn Brody, Entrance, Voice, and Exit: The Constitutional Bounds of the
Right of Association, 35 U.C. DAVIS L. REV. 821, 824 (2002) (“[O]ur broader political
structure . . . enshrines individual autonomy as its core norm.”).
11
See, e.g., Frank H. Easterbrook & Daniel R. Fischel, Contract and Fiduciary Duty, 36 J.L.
& ECON. 425, 426 (1993).
12
See E. Merrick Dodd, Jr., Dogma and Practice in the Law of Associations, 42 HARV. L.
REV. 977, 981, 984 (1929).
13
See, e.g., Easterbrook & Fischel, supra note 11, at 427 (arguing that the duty of loyalty is
just a possible, implied contract term with “no moral footing”).
14
See, e.g., Gabriel Rautenberg & Eric Talley, Contracting Out of the Fiduciary Duty of
Loyalty: An Empirical Analysis of Corporate Opportunity Waivers, 117 COLUM. L. REV.
1075, 1119 (2017) (disparaging the duty of loyalty as a “long-hallowed ‘sacred cow’ of
fiduciary principles”); Steven D. Smith, Hart’s Onion: The Peeling Away of Legal
Authority, 16 S. CAL. INTERDISC. L.J. 97, 133 (2006) (concluding that under “modern
assumptions . . . ‘legitimate’ or normatively attractive authority--seems impossible, almost
inconceivable”).
groups are in the picture. The framework is built on a definition of agency

now set forth in section 1.01 of the Restatement (Third) of Agency (the “
Third Restatement”): “Agency is the fiduciary relationship that arises when
one person (a ‘principal’) manifests assent to another person (an ‘agent’) that
the agent shall act on the principal’s behalf and subject to the principal’s
control, and the agent manifests assent or otherwise consents so to act.”15
One word in this definition deserves special attention because it
expresses an idea that is both essential to agency law and very difficult to
understand. That word is behalf. This word is what distinguishes the
common law definition of agency from the definition of agency used in
economics and social science. Because of the word behalf, an agent is not
simply an economic actor, or a fiduciary employed to act in the best interests
of the principal. An agent is a special type of fiduciary, one who is
empowered to “act on the principal’s behalf.”16
According to the Restatement commentary, the phrase “act on the
principal’s behalf” means that the agent “acts as a representative of or
otherwise acts on behalf of another person with power to affect the legal
rights and duties of the other person.”17 In 2014, the Restatement reporter
Deborah DeMott, amplified on this thought, explaining that representation
by an agent effectuates a “legally-salient extension of the principal’s
personality.”18
What these abstractions mean is that the agent does not simply act for
the principal. Within the scope of the agency, the agent acts as the principal.
In other words, in the contemplation of the law, it is as though principal and
agent are the same person.
Of course, this metaphoric unity is not literally true: principal and agent
are not really the same person. Two human beings do not suddenly occupy
the same physical body. The metaphor of identification is, after all, just a
metaphor. However, it is a necessary thought because the metaphor conveys,
in understandable human terms, an idea that is hard to comprehend any other
way.19
What is more, the metaphor is not simply the figurative counterpart of
an abstract doctrine. As we shall see, the metaphor came first; the
15
RESTATEMENT (THIRD) OF AGENCY, § 1.01 (AM. LAW. INST. 2006).
16
Id.
17
Id. at cmt. c.
18
Deborah A. DeMott, The Contours and Composition of Agency Doctrine: Perspectives
from History and Theory of Inherent Agency Power, 2014 U. ILL. L. REV. 1813, 1833
(2014).
19
See GEORGE LAKOFF & MARK JOHNSON, METAPHORS WE LIVE BY 3 (1980); Thomas
Ross, Metaphor and Paradox, 23 GA. L. REV. 1053, 1053 (1989) (“The mystery of
metaphor begins with its paradoxical nature.”).
abstractions followed. It was the metaphor of identification, in various forms,

that provided the conceptual basis for the law of agency and the vital force
for its expansion.
B. Metaphoric Origins
A key to this evolution is the concept of representation, which is central

both to the metaphor and to the idea of agency. Recall the Third Restatement
commentary that the agent acts as a “representative” of the principal. To
explore the idea of representation, consider how people use the word
“represent.”
We might say that a lawyer represents her client. Employees represent
their corporation. Olympic athletes represent their country. This legislator
represents her constituents while that other legislator represents the special
interests. The prosecutor represents the government. The painting represents
the scene. X represents the unknown.
In all these contexts, the word “represent” describes the making present
of something that is not actually present. As Professor Hanna Fenichel Pitkin
explained: “‘representation’ means ‘re-presentation,’ a making present of
something absent—but not making it literally present. It must be made
present indirectly, through an intermediary; it must be made present in some
sense, while nevertheless remaining literally absent.”20 Thus, “in
representation something not literally present is considered as present in a
nonliteral sense.”21
This means that the word “represent” involves a paradox or fiction—the
making present of something that is not literally present—that is very similar
to the fiction expressed by the metaphor of identification. Moreover, the
concept of representation did not just happen. It was a legal construct
developed, through a process of metaphoric expansion, by jurists and
theologians in the middle ages to explain the nature, justification, limits, and
legal effect of delegated power.
In classical Latin, the word representare (meaning “to make present or
manifest or to present again”) was used to refer to inanimate objects.22 The
word was used literally, as we might today talk about re-presenting a
previously dishonored check to the bank for payment (meaning physically
presenting the check to the bank again). The word could also be figuratively,
20
Hanna Fenichel Pitkin, Introduction: The Concept of Representation, in REPRESENTATION
1, 16 (Hanna Fenichel Pitkin ed., 1969).
21
HANNA FENICHEL PITKIN, THE CONCEPT OF REPRESENTATION 9 (1967).
22
Id. at 241.
as we might say that a sculpture represents the virtue of courage.23 Later, the
concept expanded to include representation by people and of people. In the
thirteenth and fourteenth centuries, the Catholic Church used representare
to refer to the mystic embodiment by the Pope and the cardinals of Christ
and the Apostles.24
At the same time, jurists began to use the word representare “for the
personification of collectivities: a community was said to be a representative
person—not really a person but nevertheless to be considered as one.”25 The
word was also used to describe “the way in which a magistrate or attorney
[stood and acted] for the community.”26 According to Professor Pitkin,
English legal theorists also used the word representation to refer to
representation by political institutions. For example, because Parliament was
the representative of the English people, Parliamentary consent to taxes
levied on the people was the legal equivalent of the consent of the people.27
In the fourteenth century, the concept of representation also entered
English common law, probably from canon law,28 through the Latin maxim
of Qui facit per alium, facit per se, meaning, “he who acts through another,
acts himself.”29 The qui facit maxim is the classic expression of the metaphor
of identification. As Deborah DeMott stated: “[o]f venerable lineage, this
maxim identifies the agent with the principal.”30
At first, English law used the maxim to justify masters taking title to
property acquired through the efforts of their servants.31 Over time, through
broader and broader metaphoric use, the maxim expanded to permit other
forms of attribution, such as holding masters responsible for contracts
negotiated for them by their servants and the like.32
23
Id.
24
Id. at 241–42.
25
Pitkin, supra note 20, at 2.
26
PITKIN, supra note 21, at 242.
27
Id. at 246.
28
See R. H. Helmholz, Magna Carta and the ius commune, 66 U. CHI. L. REV. 297, 321
(1999) (referring to “the principle of the Roman and canon law of agency: Qui facit per
alium … facit per se”); see also Ramon Casadesus-Masanell & Daniel F. Spulber, Trust and
Incentives in Agency, 15 S. CAL. INTERDISC. L.J. 45, 71 (2005) (“By 1200, Canon law had
introduced a form of agency relationship to solve the representation problem in all except
legal matters.”).
29
Dalley, A Theory of Agency Law, supra note 5, at 517 n.84.
30
Deborah A. DeMott, Our Partners’ Keepers? Agency Dimensions of Partnership
Relationships, 58 LAW & CONTEMP. PROBS. 109, 121 (1995).
31
See Dalley, A Theory of Agency Law, supra note 5, at 518 n.87 (servant allowed to
represent master for purposes of claiming ownership according to 1311 case from the fair of
St. Ives).
32
See, e.g., United States v. Gooding, 25 U.S. 460, 472 (1827).
In a related development, jurists invented the idea of legal personality,

as something separate from the personality of a natural person, by using the
word persona to describe artificial entities such as a corporation.33 The
concept gave the common law a theory for converting groups into something
more familiar, legal persons.34 The idea of incorporation creating a new legal
person out of previously separate individuals became part of the culture. For
instance, in Shakespeare’s Romeo and Juliet, Friar Laurence told the couple
not to be alone until “holy church incorporate two in one.”35
In 1651, Thomas Hobbes brought these ideas together to justify a strong
central government in a world of atomistic individuals. Using agency ideas,
Hobbes argued that the state represents the people and derives its authority
from them. A key step in this argument was the notion (a form of the
metaphor of identification) that the representative bears the persona of the
represented.
In chapter 16 of Leviathan I, Hobbes noted that one person sometimes
represents other people, in which case the actions of the representer are
attributed to the represented.36 Hobbes explained that the very word person
comes from the Latin persona, which originally referred to the mask worn
by an actor during a performance.37 “So that a person, is the same that an
actor is . . . and he that acts another, is said to bear his person, or act in his
name; . . . and is called . . . a representer, or representative, . . . an attorney,
. . . an actor, and the like.”38 Tellingly, the word agent comes from a Latin
word meaning to act.
Hobbes further explained that when a person is acting as a representative
of another, “then the person is the actor; and he that owns his words or
actions, is the author: in which case the actor acts by authority.”39 If “the
actor makes a covenant by authority, he binds thereby the author, no less
33
See J.P. Canning, The Corporation in the Political Thought of the Italian Jurists of the
Thirteenth and Fourteenth Centuries, 1 HIST. POL. THOUGHT 9, 15 (1980) (“[I]t was
medieval jurists who invented the concept of ‘legal person’ by being the first to apply the
term, persona, to the corporation.”).
34
See Dodd, Jr., supra note 12, at 981 (1929) (“[The early common law] required a theory
by which the group could be regarded as a unit and as the kind of unit to which the formal
rules of the medieval common law could readily be applied. Persons the common law knew,
and the canonist view of the corporation as a fictitious person seemed to solve that
problem.”); id. at 984 (“[G]radually expanding ideas of agency . . . enabled certain
authorized individuals to act for the group.”).
35
WILLIAM SHAKESPEARE, ROMEO AND JULIET act 2, sc. 6 (Cambridge University Press
1969).
36
THOMAS HOBBES, LEVIATHAN: PART I 152 (E. H. Plumptre, trans., Henry Regnery Co.
1956) (1651).
37
Id.
38
Id.
39
Id.
than if he had made it himself; and no less subjects him to all the
consequences of the same.”40
Hobbes then explained that people could (and in his reconstruction, did)
lift themselves out of the atomistic state of nature into collective unity by
designating a single person as their collective representative. 41 In other
words, through representation, a group of people can become as if they were
a single person. “For it is the unity of the representer, not the unity of the
represented, that makes the person one.”42
The language in Leviathan is old, but it still describes how we think. It
is common to treat the represented and the representer (or, as we would say
now, principal and agent) as if they were the same person. We say, for
example, that a corporation did something when, in fact, the actions were
taken by employees of the corporation acting on its behalf. Or a court might
say that a plaintiff made a particular argument when, in fact, the argument
was made by the plaintiff’s lawyer speaking on behalf of the plaintiff.
In summary, the unity of principal and agent started as a legal fiction
but became a social construct that is now part of our culture.43 In the past,
judges used this construct, much as Hobbes did, to reconcile the
individualistic premises of the common law with group action.44 After
Hobbes, as before, judges expanded the realm of the idea through reasoning
by analogy or metaphoric reasoning.45
For example, beginning in the late seventeenth century, English judges
used the metaphor of identification and the associated maxim qui facit per
alium facit per se to justify a holding that employers are vicariously
responsible for the torts of their servants acting to serve the master within
the scope of their employment.46 Under this concept, courts treated the
40
Id. at 153.
41
See id. at 154–55.
42
HOBBES, supra note 36, at 155.
43
See Eric J. Mitnick, Law, Cognition and Identity, 67 LA. L. REV. 823, 839 (2007)
(discussing how people understand the world through cognitive schema or categories that
lack clear boundaries and often overlap).
44
See Dalley, All in a Day’s Work, supra note 5, at 521–22 (“The identification doctrine . . .
solved a number of problems in agency law because it allowed the agent’s state of mind, as
well as his actions, to be imputed to the principal.”).
45
See Jeffrey M. Lipshaw, Metaphor, Models, and Meaning in Contract Law, 116 PENN ST.
L. REV. 987, 1036 (2012) (“Reasoning by analogy . . . is an ordinary mode of category
extension.”); see also Deborah A. DeMott, Beyond Metaphor: An Analysis of Fiduciary
Obligation, 1988 DUKE L.J. 879, 879 (“[T]he law of fiduciary obligation has developed
through analogy . . . .”) [hereinafter Beyond Metaphor].
46
See Jones v. Hart, (1698) 90 Eng. Rep. 1255, 1255; 2 Salk 441; 1 WILLIAM BLACKSTONE,
COMMENTARIES ON THE LAWS OF ENGLAND 429-30 (photo. reprt. 2009) (1765); see also
Francis Bowes Sayre, Criminal Responsibility for the Acts of Another, 43 HARV. L. REV.
689, 693 (1930) (“During the nineteenth century the doctrine of respondeat superior
emerges in its modern form. The old requirement of express command or procurement
actions of employees within the scope of the employment as the actions of

the employer. Therefore, vicarious liability simply meant that the law was
holding employers accountable for their own conduct.47
The metaphor also provided a frame for thinking about the role of
agents. If an agent donned the persona of a principal, it was only natural that
the agent should be required to stay in the assumed character and act as the
principal would act. The law viewed departures from this norm, stepping out
of character while still wearing the principal’s persona, as breaches of
fiduciary duty. In 1880, for example, the Supreme Court condemned a
conflict of interest transaction between the Union Pacific Railroad and a
company secretly owned by the executive directors of the railroad,
explaining that the directors’ “character as agents forbade the exercise of
their powers for their own personal ends against the interest of the
company.”48
The law used the model in a variety of settings. Lawyers could see
themselves as “mouthpieces” for their clients.49 Judges could see themselves
as
“servants”50 or “instruments of the law.”51 Indeed, the metaphor helped
legitimize judicial power by identifying judges with the law they
articulated.52
One hundred plus years ago, scholars accepted the metaphor of
identification as the basis of agency law. As Holmes wrote in 1881 in The
Common Law: “the characteristic feature which justifies agency as a title of
the law is the absorption pro hac vice of the agent’s legal individuality in
that of his principal.”53 Floyd Mechem added in 1906: “[b]y the creation of
the agency, the principal bestows upon the agent a certain character. For
disappears; and implied command gives place to ‘course of business’ and ‘scope of
employment.’”).
47
See Dalley, All in a Day’s Work, supra note 5, at 528 (“Originally, vicarious liability was
thought to be based on the ‘identification’ theory, the idea that the master and servant are
the same person in the eyes of the law, but that formalistic view has been rejected for at
least a century.”); see also Laski, Vicarious, supra note 4, at 107.
48
Wardell v. R.R. Co., 103 U.S. 651, 657–58 (1880).
49
Andrew S. Pollis, Trying the Trial, 84 GEO. WASH. L. REV. 55, 76 (2016).
50
Confirmation Hearing on the Confirmation of John G. Roberts, Jr. to be Chief Justice of
the United States: Hearing Before the Comm. on the Judiciary, 109th Cong. 55 (2005)
(statement of John G. Roberts, Jr.).
51
Osborn v. Bank of the United States, 22 U.S. 738, 866 (1824).
52
See M.H. Hoeflich, Regulation of Judicial Misconduct from Late Antiquity to the Early
Middle Ages, 2 LAW & HIST. REV. 79, 80 (1984) (“Judges themselves must not be lawless;
they must follow the substantive law they are intended to administer.”).
53
HOLMES, JR., THE COMMON LAW, supra note 3, at 232.
some purpose, during some time and to some extent, the agent is to be the
alter ego,—the other self, of the principal.”54
Courts often expressed the concept by citing the qui facit maxim. For
example, a 1927 U.S. Supreme Court opinion stated: “[t]he general rule of
the law is, that what one does through another’s agency is to be regarded as
done by himself.”55 The legal principle, “’Qui facit per alium, facit per se,’
is of universal application, both in criminal and civil cases.”56
In 1920, Warren Seavey, the principal drafter of the Second Restatement
of Agency (the “Second Restatement”), tied the various formulations
together: “‘[r]epresentative’ is an expression different only in form from
‘alter ego’ and other phrasing connoting the identity of principal and agent.
It is the modern ‘qui facit per alium facit per se.’”57
To be sure, the qui facit maxim was not the end of analysis. Courts often
gave pragmatic reasons for choosing to apply the identification doctrine,
such as the need to protect public safety58 or ensure corporate
responsibility.59 But the identification metaphor provided a frame for
thought.60 Scholars reinforced that conceptual structure with statements like:
“throughout the law of agency we are continually met with the notion that
the constituent and the representative are one and the same person”61 and the
origins of agency law doctrines are “to be found in the fiction of the identity
of principal and agent.”62
C. Changed Thinking in the Academy
The old ideas fell out of favor in the legal academy after the legal
intellectual climate changed around the turn of the century. “Nineteenth
century conceptualism gave way to twentieth century instrumentalism. Law
54
Floyd R. Mechem, The Nature and Extent of an Agent’s Authority, 4 MICH. L. REV. 433,
436–37 (1906).
55
Ford v. United States, 273 U.S. 593, 623 (1927).
56
Id. at 624.
57
Warren A. Seavey, The Rationale of Agency, 29 YALE L.J. 859, 860 (1920).
58
See, e.g., Phila. & Reading R.R. Co. v. Derby, 55 U.S. 468, 487 (1852).
59
See, e.g., St. Louis, Alton & Chi. R.R. Co. v. Dalby, 19 Ill. 353, 368–69 (1857).
60
DeMott, supra note 30, at 122 (“The qui facit maxim itself does not specify limits to
vicarious liability. It suggests, instead, a line of further inquiry, aimed at the question
whether by its nature a particular wrongful act makes its unfair or implausible to identify the
actor with the partnership and other individual partners.”).
61
FRANCIS B. TIFFANY, HANDBOOK OF THE LAW OF PRINCIPAL AND AGENT 11 (West
Publishing Co. 1903).
62
Walter Wheeler Cook, Agency by Estoppel, 5 COLUM. L. REV. 36, 39 (1905); see Everett
V. Abbot, Of the Nature of Agency, 9 HARV. L. REV. 507, 507 (1896) (“Men may and do act
through other men in accomplishing results, which, when accomplished, are their acts, to be
attributed to them rather than to their instrumentalities.”).
was viewed as a means to an end, as purposeful human activity aimed at

achieving social goals.”63 The new approach rejected the notion of judges
finding law using traditional legal reasoning,64 believing instead that law
should be made to benefit society65 using modern social science by “a
progressive and enlightened caste whose conceptions are in advance of the
public.”66 The new philosophy judged legal rules by their results, not by their
scholastic justification,67 and believed that the underlying postulates of the
law should be “brought to light and interrogated as to their usefulness.”68
The metaphor of identification was an early target of the new thinking.
The opening salvos came from Justice Holmes, who attacked the metaphor
and the doctrine of vicarious liability of employers in two separate articles.
In the first article, Justice Holmes noted that agency law is based on a fiction:
“[t]hat fiction is, of course, that, within the scope of the agency, principal
and agent are one.”69 That fiction guided thought because according to
Justice Holmes, “[i]f ‘the act of the servant is the act of the master,’ or master
and servant are ‘considered as one person,’ then the master must pay for the
act if it is wrongful, and has the advantage of it if it is right.”70 He then argued
that this way of thinking led courts to unscientific results:
the mere habit of using these phrases, when the master is

bound or benefitted by his servant’s act, makes it likely
that other cases will be brought within the penumbra of the
same thought on no more substantial ground than the way
of thinking which the words have brought about.71
In the second article, Justice Holmes made his feelings on the subject
more explicit, making it plain that he did not like the fiction of agency or the
doctrine of vicarious liability. Justice Holmes said: “I assume that common-
sense is opposed to making one man pay for another man’s wrong, unless he
actually has brought the wrong to pass according to the ordinary canons of
63
T. Alexander Aleinkoff, Constitutional Law in the Age of Balancing, 96 YALE L.J. 943,
956 (1987); see generally STEPHEN B. PRESSER, LAW PROFESSORS: THREE CENTURIES OF
SHAPING AMERICAN LAW (2017).
64
See Kristen David Adams, Blaming the Mirror: The Restatements and the Common Law,
40 IND. L. REV. 205, 241–42 (2007).
65
Id. at 242.
66
Curtis Nyquist, Re-Reading Legal Realism and Tracing a Genealogy of Balancing, 65
BUFF. L. REV. 771, 784 (2017).
67
Id. at 785.
68
Jerome Frank, Mr. Justice Holmes and Non-Euclidean Legal Thinking, 17 CORNELL L.
REV. 568, 576 (1932).
69
Holmes, Jr., Agency, supra note 3, at 345.
70
Id. at 351.
71
Id.
legal responsibility . . . .”72 In other words, the employer should only be held
liable if “he has induced the immediate wrong-doer to do acts of which . . .
wrong was the natural consequence under the circumstances known to the
defendant.”73 Holmes concluded, “I therefore assume that common-sense is
opposed to the fundamental theory of agency . . . .”74
Other legal scholars did not agree with Justice Holmes that vicarious
liability was unfair to innocent employers. John Henry Wigmore, for
instance, thought the law was fine as it stood and that the fiction of
identification merely gave judges “an easy, lazy reason” for a doctrine that
could also be justified on policy grounds.75
Progressive scholars went further, believing that the shifting of losses
from hapless tort victims to enterprise owners was such a good idea that
employer liability should be expanded.76 They attacked the metaphor of
identification because it provided a weak, fictitious, and limiting rationale
for employer liability. In a 1916 article in the Yale Law Journal, Harold J.
Laski argued that employer liability was justified by rational “public policy”
in an increasingly complex society as “an attempt to calculate the minimum
social loss in a social situation where some loss is inevitable.”77 Professor
Laski criticized the more limited qui facit rationale as an “antique legend”
and “a stumbling-block in the pathway of juristic progress.”78
Professor Laski posited that law should be made based on scientific
calculations of public policy and that judicial unwillingness to do so reflected
outmoded distrust of government interference. The fiction identifying
principal and agent was not an adequate substitute. Laski said: “[i]f judges
continue to apply general principles founded on a dangerous and
72
Oliver Wendell Holmes, Jr., Agency II, 5 HARV. L. REV. 1, 14 (1891) [hereinafter Agency
II].
73
Id.
74
Id.
75
John H. Wigmore, Responsibility for Tortious Acts: Its History. II Harm Done by
Servants and Other Agents: 1300-1850, 7 HARV. L. REV. 383, 398–99 (1894) (“But very
often the judicial mind gave up the troublesome task of accurately expressing a reason, and,
quite content with the policy of the rule, took refuge, when it came to naming a reason, in a
fiction or other form of words. . . . The favorite expressions of this sort, however, were ‘the
act of the servant is the act of the master,’ when done in the execution of authority . . . .”)
(citations omitted); id. at 399 (“[T]o employ a fiction to sanction a rule which we thoroughly
believe in, but lazily prefer to evade accounting for openly and rationally.”); id. (“[T]he
above fiction of Identification . . . was merely a reason, an easy, lazy reason, which was put
forth to sanction and support a rule of whose practical expediency the Courts were perfectly
satisfied . . . [and] the rule would have stood substantially as it does now, if all reference to
the Identification fiction were wanting.”).
76
See, e.g., Young B. Smith, Frolic and Detour, 23 COLUM. L. REV. 444, 460 (1923).
77
Laski, Vicarious, supra note 4, at 111, 116.
78
Id. at 107.
unsatisfactory fiction, only confusion of a lamentable kind can result.”79

Laski also called for “a frankly communal application of the law,”80 arguing
that “[t]he fiction of implied authority is no more than a barbarous relic of
individualistic interpretation.”81 He concluded: “[w]e would base our legal
decisions not on the facts of yesterday, but on the possibilities of to-
morrow.”82
In summary, the metaphor of identification came under attack from two
sides: those who wanted to eliminate vicarious employer liability and those
who wanted to expand it. The two sets of critics might not agree on much
else, but they did share a dislike for the metaphoric construct at the heart of
agency law.
The traditional rationale of agency law also came under attack in the
contractual setting. A seminal 1913 article by Wesley Newcomb Hohfeld
posited that agency should be understood in terms of the agent’s power to
alter the principal’s legal relations and argued that the qui facit metaphor of
identification obscured the true basis of agency law.83
A 1920 article by Warren Seavey, titled The Rationale of Agency,
conformed to the new thinking. Professor Seavey, who later became the
reporter for the Second Restatement, provided pragmatic rationales for much
of agency law. Professor Seavey did not propose any major substantive
changes in the law. However, he argued that the effect of fiction in shaping
the law had been overestimated, doctrines could be justified without the use
of presumptions, and decisions in particular cases could be tested by judicial
sense and “the needs of commerce.”84
The new rationale quickly became dominant in the academy. Scholars
explained agency doctrines as based on the needs of commerce and the
judicial sense of what is “socially desirable and expedient.”85 The academy
dismissed the old rationale as an “irksome fiction”86 and then pretty much
forgot about it. This oblivion has persisted (within the academy) for nearly a
79
Id. at 121.
80
Id. at 121.
81
Id. at 121–22.
82
Id. at 135; see also Harold J. Laski, The Personality of Associations, 29 HARV. L. REV.
404, 414 (1916) (criticizing the doctrine of agency “as a means of avoiding the metaphysical
problem of what is behind the agent”).
83
See Hohfeld, supra note 4, at 46 (“By the use of some metaphorical expression such as
the Latin, qui facit per alium, facit per se, the true nature of agency relations is only too
frequently obscured.”).
84
Seavey, supra note 57, at 859.
85
Note, Vicarious Liability: Statutes as a Guide to Its Basis, 45 HARV. L. REV. 171, 175
(1931).
86
Id. at 175.
century. As Paula Dalley said in 2002: “[t]he identification doctrine is now

largely ignored, except as an historical artifact.”87
Agency did not prosper as a discipline with its new rationale. Perhaps
because judicial sense, social expediency and the needs of commerce are
such amorphous bases for legal doctrines or perhaps because those
considerations do not distinguish agency from other areas of the law,
scholarly interest in the field declined. Seventy years ago, most law schools
required students to take courses in agency or agency and partnership.88 In
the past several decades, however, the subject has received little attention in
teaching or scholarship.89
II. THE METAPHOR AND RESPONDEAT SUPERIOR
A. The Agency Basis of Vicarious Liabilty
Despite the changed intellectual climate, agency has remained an

important concept in the courts. After all, the law of agency sets the rules for
such pervasive questions as representation, authority, notice, attribution,
vicarious responsibility, and the agency duties of loyalty, obedience, and
confidentiality. In the administration of justice, agency issues are
inescapable.
As theoretical constructs, social expediency and the needs of commerce
do not provide much in the way of guidance. Nor do they explain the law.
Judges still see the subject through the traditional lens. Courts continue to
use the metaphor of identification and doctrines based on it, preferring their
formal structure to open-ended, policy-based balancing tests.90 Questions of
attribution and responsibility still depend on judgments as to the capacity in
which a particular player was acting. The mental process of treating the
conduct of agents acting within the scope of their agency as the conduct of
87
Dalley, All in a Day’s Work, supra note 5, at 522.
88
See Paula Dalley, Destroying the Scope of Employment, 55 WASHBURN L.J. 637, 660
n.167 (2016) (“In 1949, 62 of 100 law schools included either Agency or Agency and
Partnership in their required curricula.”).
89
See Barnett, supra note 6, at 1970 (referring to the “current dearth of American agency
law scholarship”); id. at 1970 n.4 (referencing “the current neglect of agency law in the
American law school curriculum”).
90
See Paul B Miller, The Fiduciary Relationship, in PHILOSOPHICAL FOUNDATIONS OF
FIDUCIARY LAW 63, 63 (Andrew S. Gold & Paul B Miller eds., 2014) (“The conceptual
structure of private law is, to a considerable extent, formal in nature. Principles of private
liability are mediated by relatively stable forms of action, interaction, and organization.”);
see also Gregory S. Alexander, A Cognitive Theory of Fiduciary Relationships, 85 CORNELL
L. REV. 767, 769 (2000) (“[C]ourts possess a fairly well-developed schema of the fiduciary
role.”).
the principal remains the same habit of mind that it was in Holmes’ day. For
judges, the benefits of using the familiar frame outweigh any possible costs.
The most striking example of the persistence of the metaphor is that
courts still follow the traditional, middle ground approach to vicarious
liability that Holmes and Laski condemned for being based on the fiction of
agency. Innocent employers are held liable for some torts of those they
employ, but their vicarious liability is limited by the scope of employment
test and the independent contractor doctrine.91 Respondeat superior does not
apply to all torts proximately caused by the employment relationship, even
though the modern academic rationale for the doctrine says that it should.92
This area of law provides a good illustration of how agency law in the courts
departs from the current academic understanding.
B. Traditional Rationale
By way of background, holding employers responsible for the torts of

their (often judgment-proof) employees no doubt advances public policy, at
least in certain circumstances. Employer liability gives the victims a source
of compensation and employers an added incentive to make sure that
accidents do not happen.93 Costs incident to the corporate enterprise are
shifted from hapless tort victims to those better able to manage the costs and
build them into the price of products. In addition, vicarious liability is often
necessary for the regulation of corporations, which can act only through
agents.94
In the formative years of the employer liability doctrine, from 1698 to
1922, public policy alone was not considered a sufficient justification for
vicarious liability. The law, after all, had to respect the rights of the
individual. For example, holding A responsible for B’s misconduct, without
A’s consent and when A had done nothing wrong, clashed with the common
law sense of justice. Even if A had deeper pockets and even if making A pay
for something that B did wrong might be said to advance the common good,
91
See, e.g., Stone v. Pinkerton Farms, Inc., 741 F.2d 941, 946 (7th Cir. 1984).
92
See, e.g., Copeland v. County of Macon, 403 F.3d 929, 932 (7th Cir. 2005).
93
See William O. Douglas, Vicarious Liability and Administration of Risk I, 38 YALE L.J.
584, 585 (1929).
94
See, e.g., N.Y. Cent. & Hudson River R.R. Co. v. United States, 212 U.S. 481, 495 (1908)
(“[S]tatutes against rebates could not be effectively enforced so long as individuals only
were subject to punishment for violation of the law, when the giving of rebates or
concessions enured to the benefit of the corporations of which the individuals were but the
instruments.”); see also Phila. & Reading R.R. Co. v. Derby, 55 U.S. 468, 487 (1853)
(noting that if the disobedience of the servant were a defense to vicarious liability of railroad
companies, “the remedy of the injured party would in most cases be illusive, discipline
would be relaxed, and the danger to the life and limb of the traveller greatly enhanced.”).
the practice resembled too much of the guilt by association, collective

responsibility, and punishment of innocents associated with tyrannies.
The metaphor of identification, together with the concept of
representation that it expressed, solved this problem. If the actions of
employees within the scope of their employment were the actions of the
employer, then the vicarious liability of employers simply meant that
employers were being held accountable for their own conduct, which was
how the law is supposed to work.95 The maxim qui facit per alium, facit per
se justified holding corporations accountable for what its employees did on
behalf of the company. As the U.S. Supreme Court said in 1908 to explain
how a corporation could have the mens rea to commit a crime: “Since a
corporation acts by its officers and agents their purposes, motives, and intent
are just as much those of the corporation as are the things done.”96
Moreover, the fiction did describe a type of reality. As a 1911 article put
it: “[a] corporation is as visible a body as an army; for though the commission
or authority be not seen by every one, yet the body, united by that authority,
is seen by all but the blind.”97 Thus, “when a jurist first said, ‘A corporation
is a person,’ he was using a metaphor to express the truth that a corporation
bears some analogy or resemblance to a person, and is to be treated in law in
certain respects as if it were a person, or a rational being capable of feeling
and volition.”98
However, the fiction had its own logic that had to be honored. It was not
enough that the employment relationship was a cause of the tort or that the
employer derived some benefit from the actions of the wrongdoer. To justify
vicarious liability, there needed to be representation. The wrongdoer must
have been acting as the employer.99 This generally meant that the errant actor
had to have been an employee of the defendant who was on the job and trying
to do the job at the time of the tort.100
A 1902 decision illustrates the old rationale.101 A man named Keenan
got into an accident while driving a horse and wagon. Keenan’s immediate
employer was in the transportation business, owned the horse and wagon and
paid Keenan his wages.102 At the time of the accident, Keenan was carrying
95
See V.S. Khanna, Corporate Criminal Liability: What Purpose Does It Serve?, 109
HARV. L. REV. 1477, 1482 (1996) (“In order to hold corporations liable for misfeasance,
courts imputed agent conduct to corporations, and such imputation would have been
theoretically troublesome without the doctrine of respondeat superior.”).
96
N.Y. Cent. & Hudson River R.R. Co., 212 U.S. at 493.
97
Arthur W. Machen, Jr., Corporate Personality, 24 HARV. L. REV. 253, 261 (1911).
98
Id. at 263.
99
See, e.g., Fioccio v. Carver, 137 N.E. 309, 311 (N.Y. 1922).
100
See id.
101
See Driscoll v. Towle, 181 Mass. 416 (1902).
102
See id. at 417.
property owned by the Boston Electric Light Company (pursuant to an

arrangement between his employer and the Boston Electric Light Company)
and was following general orders given to him by an employee of the Boston
Electric Light Company that day.103
In an opinion by Justice Holmes, the Massachusetts Supreme Judicial
Court held Keenan’s negligence was attributable to his employer and not to
the Boston Electric Light Company.104 The mere fact that Keenan followed
orders given to him by the Boston Electric Light Company was not enough
“to take him out” of his relationship with his employer and
make him a voluntary subject of a new sovereign. . . . . . .
There is not that degree of intimacy and generality in the
subjection of one to the other which is necessary in order to
identify the two and to make the employer liable under the
fiction that the act of the employed is his act.105
The Court went on to explain that even though a driver may be given
instructions by those who have made a bargain with his employer, “he
remains subject to no orders but those of the man who pays him. Therefore,
he can make no one else liable if he negligently runs a person down in the
street.”106
A 1922 decision from New York also illustrates the traditional
approach.107 A truck driver was supposed to bring his truck back to a garage
at Twenty-Third Street and Eleventh Avenue on the west side of Manhattan.
Instead, he drove across town to Hamilton Avenue on the east side of the city
to join in a neighborhood carnival where he allowed children to ride on the
truck.108 Just as the driver was leaving the carnival to go back to the garage,
a child was injured by the truck’s wheel while trying to get down from the
truck.109
The New York Court of Appeals held that the driver’s employer was not
liable because the driver had left the scope of employment.110 The opinion
by Justice Cardozo explained that “[w]e are not dealing with a case where,
in the course of a continuing relation, business and private ends have been
coincidentally served, [but rather] [w]e are dealing with a departure so
manifest as to constitute an abandonment of duty, exempting the master from
103
See id.
104
See id. at 418–19.
105
Id.
106
Id.
107
See Fioccio v. Carver, 137 N.E. 309 (N.Y. 1922).
108
Id. at 310.
109
Id.
110
Id.
liability till duty is resumed.”111 The fact that the driver was heading back
to the garage at the time of the accident was not enough to bring him back
into the scope of employment because “the homeward trip was bound up
with the effects of the excursion, the parts interpenetrated and commingled
beyond hope of separation. Division more substantial must be shown before
a relation, once ignored and abandoned, will be renewed and re-
established.”112
A more recent example of the traditional rationale may be seen in a 1999
case from Virginia.113 A police officer, working as a guard at an amusement
park, arrested a customer for allegedly passing a bad check. The charges
were later dropped and the customer sued the park for false arrest.114
The U.S. Court of Appeals for the Fourth Circuit, applying Virginia law,
held that the vicarious liability of the park depended on what capacity the
officer was acting in when she arrested the plaintiff.115 If the officer was
engaged in the performance of her duty as a police officer “such as the
enforcement of general laws” then the park would incur no liability, but if
the officer was “engaged in the protection of the employer’s property,
ejecting trespassers or enforcing rules and regulations promulgated by the
employer” then there was a jury question as to whether the park should be
held liable.116 The Court went on to hold that because the plaintiff “presented
no evidence that [the officer] acted other than in her capacity as a public
officer in effecting” the plaintiff’s arrest, the park could not be held liable.
117
C. Scholarly Criticism
Most of the scholarly literature on agency (referenced earlier) focused

on the question of vicarious liability. In the nineteenth century, scholars
scorned the vicarious liability rules as inconsistent with the individualist
premises of the common law and going much too far in imposing liability on
corporate employers.118 The articles by Holmes, discussed above, are
illustrative.119 Additionally, one article observed in 1923 that “[n]o legal
111
Id. at 311.
112
Id.
113
Austin v. Paramount Parks, Inc., 195 F.3d 715 (4th Cir. 1999).
114
Id. at 718.
115
Id. at 731.
116
Id.
117
Id.
118
See Smith, supra note 76, at 452-53.
119
See Holmes, Jr., Agency, supra note 3, at 345; Agency II, supra note 72, at 1.
doctrine has been so generally criticized and yet so generally adhered to by

courts as the doctrine of respondeat superior.”120
Some scholars still believe that courts imposing vicarious responsibility
“rely on simplistic notions of agency”121 and “legal fictions”122 and go too
far in imposing liability on corporations.123 However, since the early
twentieth century, most scholars have taken the opposite tack, arguing that
the vicarious liability rules adhere too closely to the laissez faire attitude of
the common law and do not go far enough in imposing liability on
corporations.
Harold Laski’s 1916 article, discussed above, led the way, with its thesis
that public policy alone was a sufficient justification for vicarious employer
liability, so the limiting “fiction of implied authority” should be discarded as
“a barbarous relic of individualistic interpretation.”124 Young B. Smith made
a similar point in his 1923 article, arguing that the same public policy that
supported the workers’ compensation laws also justified vicarious liability
of employers. The article reasoned that “[i]f it is socially expedient to spread
and distribute throughout the community the inevitable losses occasioned by
injuries to employees engaged in industry, is it not also socially expedient to
spread and distribute the losses due to injuries to third persons which are
equally inevitable?”125 The article then went on to argue that judges applying
the doctrine should keep this justification in mind “and seek to reach
conclusions which will further the policy upon which the justification
rests.”126
In 1929, then-Professor William O. Douglas took a similar position,
arguing that the employer is in the best position to administer the risks of the
enterprise.127 The employer can decide whether it is most efficient to avoid
the costs by not engaging in the activity likely to create the risks, prevent the
costs by taking added safety measures, shift the risks to an insurer (and then
build the cost of insurance into the price of the products) or assume the risk
(and build self-insurance into the price of the products). Douglas urged that
vicarious liability be expanded to fit this new rationale.128
120
Smith, supra note 76, at 452.
121
William S. Laufer, Corporate Bodies and Guilty Minds, 43 EMORY L.J. 648, 649 (1994).
122
Daniel R. Fischel and Alan O. Sykes, Corporate Crime, 25 J. LEGAL. STUD. 319, 320
(1996).
123
See, e.g., Jennifer H. Arlen and William J. Carney, Vicarious Liability for Fraud on
Securities Markets: Theory and Evidence, 1992 U. ILL. L. REV. 691, 694 (“enterprise
liability results in large wealth transfers from one group of innocent investors to another”).
124
Laski, Vicarious, supra note 4, at 121-22.
125
Smith, supra note 76, at 457.
126
Id. at 460.
127
Douglas, supra note 93, at 585, 588.
128
Id. at 587-88.
In 1961, Guido Calabresi argued that vicarious employer liability

promoted the efficient allocation of resources in society by forcing
enterprises to internalize their costs and reflect those costs in the prices that
they charged. The theory was that if prices did not reflect true costs there
would be overuse and overinvestment in products with large negative
externalities.129 Alan O. Sykes made a similar economic argument in favor
of vicarious liability in 1984, but with qualifiers about the need to take into
account the positive externalities of employment.130 In 2011, Paula Dalley
argued that the whole point of agency law was to allow enterprises to
internalize their benefits and force them to internalize their costs.131
In his treatise on the law of torts, William Prosser summarized the
scholarship:
[T]he modern justification for vicarious liability is a rule of policy,

a deliberate allocation of risk. The losses caused by the torts of
employees, which as a practical matter are sure to occur in the
conduct of the employer’s enterprise, are placed upon the enterprise
itself, as a required cost of doing business.132
Prosser went on to express the hope that, in accordance with this

rationale, the exemption of independent contractors from vicarious liability
rules would be substantially reduced, so that it only applied to “a limited
group of cases” in which the employer “is not in a position to select a
responsible contractor, or the risk of any harm to others from the enterprise
is slight.”133
For scholars, the identification basis for vicarious liability was ancient
history. In the words of a 2011 article, “[o]nce legal fictions became suspect,
the identification doctrine fell out of favor and it is not a useful doctrine
today.”134
129
See Guido Calabresi, Some Thoughts on Risk Distribution and the Law of Torts, 70 YALE
L.J. 499, 500 (1961).
130
Alan O. Sykes, The Economics of Vicarious Liability, 93 YALE L.J. 1231, 1244 (1984);
see also Jennifer Arlen & Reiner Kraakman, Controlling Corporate Misconduct: An
Analysis of Corporate Liability Regimes, 72 N.Y.U. L. REV. 687, 698 (1997) (“Forcing
firms to pay for all components of product cost (including expected misconduct) helps
ensure that product prices reflect the full social cost of the product. Production is socially
optimal because customers will purchase the product only if its value to them equals or
exceeds its full cost of production, as reflected in the product price.”).
131
See Dalley, A Theory of Agency Law, supra note 5, at 499-500.
132
WILLIAM PROSSER, HANDBOOK OF THE LAW OF TORTS 500 (5th ed. 1984).
133
Id. at 509.
134
Dalley, A Theory of Agency Law, supra note 5, at 518.
D. Persistence of Tradition in the Courts
The “modern justification” for vicarious employer liability taught by

scholars would hold employers accountable for the torts of those employed
by the enterprise whenever the tort was a proximate result of the enterprise,
regardless of whether the wrongdoer was an employee on the job, trying to
do the job or otherwise acting within the scope of his or her employment at
the time of the tort. As the Prosser treatise indicates, this would require a
modification of existing law.135 Indeed, in his 1929 article, then-Professor
William Douglas explained how the scope of employment test and the
independent contractor doctrine should be changed to expand employer
liability in order to fit the modern rationale.136
This broader approach to liability is sometimes followed in a few
jurisdictions137 and by occasional judges.138 For the most part, however,
courts still go by the traditional standard for vicarious employer liability, a
iscrepancy from theory that has drawn scholarly comment139 and criticism.140
Thus, for example, vicarious liability under respondeat superior is
limited to employees and does not extend to independent contractors even if
the enterprise had a regular relationship with the errant worker and could
have established a right of control if it wished to do so.141 This doctrine does
not appear to be going away. On the contrary, the California Supreme Court,
one of the most liberal in the country, held in 2014 that Domino’s Pizza was
not vicariously responsible for the misconduct of an employee of one of its
franchisees.142 Domino’s was shielded from liability, the Court ruled,
because the worker and the franchisee were independent contractors of
Domino’s, and not the company’s employees.143
135
See PROSSER, supra note 132, at 509-10.
136
See Douglas, supra note 93, at 593.
137
See, e.g., Sugimoto v. Exportadora De Sal, S.A., 19 F.3d 1309, 1311-12 (9th Cir. 1994).
138
See, e.g., Ira S. Bushey & Sons, Inc. v. United States, 398 F.2d 167, 171-72 (2d Cir.
1968).
139
See, e.g., Alan O. Sykes, The Boundaries of Vicarious Liability: An Economic Analysis
of the Scope of Employment Rule and Related Legal Doctrines, 101 HARV. L. REV. 563,
609 (1988) (“[S]ome of the rules that have developed to define the scope of employment …
are difficult to reconcile with a view of the tort law as promoting efficiency”); Alan O.
Sykes, Note, An Efficiency Analysis of Vicarious Liability Under the Law of Agency, 91
YALE L.J. 168, 169 (1981) (“The existing law of agency differs significantly from the
normative implications of the proposed economic model.”).
140
See, e.g., Martha Chamallas, Vicarious Liability in Torts: The Sex Exception, 48 VAL. U.
L. REV. 133, 137 (2013); Dalley, All in a Day’s Work, supra note 5, at 568 (“A rote
application of an overly-simplified purpose-to-serve test to determine that harassment is
necessarily outside the scope of employment applies the wrong law to the wrong facts.”).
141
See, e.g., Stone v. Pinkerton Farms, Inc., 741 F.2d 941, 944-45 (7th Cir. 1984).
142
See Patterson v. Domino’s Pizza, LLC, 177 Cal. 4th 474, 503 (Cal. 2014).
143
See id. at 499-501.
And it is not enough that the tortfeasor is an employee of the defendant

corporation. For respondeat superior liability to attach, the wrongdoer must
also have been acting in his or her capacity as an employee of the defendant
at the time of the wrongdoing. A 1998 U.S. Supreme Court decision provides
a good illustration.144 The government sued a parent company to recover the
cost of cleaning up hazardous waste generated by a subsidiary corporation.
Among other things, the government argued that the parent should be
considered an operator of the facility (enough to trigger liability under the
statute) because officers and directors of the parent also served as officers
and directors of the operating subsidiary.145 The Supreme Court rejected this
argument, explaining that the parent and subsidiary have distinct legal
personalities, so that “directors and officers holding positions with a parent
and its subsidiary can and do ‘change hats’ to represent the two corporations
separately, despite their common ownership.’”146 The Court went on to say
“[s]ince courts generally presume ‘that the directors are wearing their
“subsidiary hats” and not their “parent hats” when acting for the subsidiary,’
. . . it cannot be enough to establish liability here that dual officers and
directors made policy decisions and supervised activities at the facility.”147
In determining whether an employee is wearing the employer’s “hat” at
the time of a tort (and thus bears the employer’s persona for purposes of
respondeat superior), courts continue to use the traditional scope of
employment doctrine. Under that doctrine, (to quote a 1998 U.S. Supreme
Court decision quoting Section 228(1) of the Restatement (Second) of
Agency), conduct is within the scope of employment if it is “‘of the kind [a
servant] is employed to perform,’ occurring ‘substantially within the
authorized time and space limits,’ and ‘actuated, at least in part, by a purpose
to serve the master,’ [except when the conduct involves] an intentional use
of force ‘unexpectable by the master.’”148
It is worth noting that this doctrine is inconsistent with what Prosser
described as the modern justification for vicarious liability and allows
employers to avoid liability for employee torts that were proximately caused
by the employment relationship. For example, under this test, employers are
normally not liable for road rage attacks by their employees even if the tort
was provoked by the employee’s service.149
144
See United States v. BestFoods, 524 U.S. 51 (1998).
145
Id. at 57.
146
Id. at 69 (quoting Lusk v. Foxmeyer Health Corp., 129 F.3d 773, 779 (5th Cir. 1997)).
147
Id. at 69-70.
148
Faragher v. City of Boca Raton, 524 U.S. 775, 793 (1998).
149
See, e.g., Williams v. Hall, 288 Ill. App. 3d 917, 920-21 (Ill. App. Ct. 1997).
The test also allows employers to escape liability for vigilante action by
their employees, even when the employment enabled the tort. Consider a
2005 decision from Illinois,in which a jail guard deliberately opened the cell
door of an accused child molester and invited other prisoners to attack him.150
The U.S. Court of Appeals for the Seventh Circuit held that the guard’s
employer was not liable because the guard’s role “in arranging the beating
of a pre-trial detainee was not the type of conduct that he was authorized to
perform nor was his conduct actuated by a purpose to serve his master, the
County of Macon.”151
The scope of employment test also allows employers to avoid liability
for employee torts that occur while they are commuting152 or engaged in
personal activities at the office,153 even if the job was a proximate cause of
the tort.
Another important implication of the traditional standard is that
employers are generally not vicariously responsible for work-related sexual
torts by their employees.154 As the U.S. Court of Appeals for the Seventh
Circuit explained in 2017, in accordance with Section 228 of the Restatement
(Second) of Agency, the employer is not liable “for the acts of an employee
where the acts complained of were committed solely for the benefit of the
employee . . . [I]n the specific context of sexual assault, the sexual nature of
the misconduct generally disqualifies the employee’s act as being taken in
furtherance of the employer’s interest.”155 The Court went on to note that this
rule of non-liability applies “even where the employment provided the
opportunity for the employee to engage in the misconduct.”156
To be sure, respondeat superior is not the only basis for employer
vicarious liability. Employers may also be liable if the wrongdoer was acting
with the apparent authority of the employer and the victim relied on that
apparent authority.157 In limited circumstances, the employer may also be
liable if it had a non-delegable duty to protect the victim.158 However, these
long-standing exceptions to the general rule do not change the fact that,
normally, vicarious liability is limited to misconduct by employees acting
within the scope of employment.
150
See Copeland v. County of Macon, 403 F.3d 929, 931 (7th Cir. 2005).
151
Id. at 932.
152
See, e.g., Hamm v. United States, 483 F.3d 135, 136 (2d Cir. 2007).
153
See, e.g., Delfino v. Agilent Techs., Inc., 145 Cal. App. 4th 790, 813-14 (6th Dist. 2006).
154
See, e.g., Poe v. Domino’s Pizza, Inc., 139 F.3d 617, 619 (8th Cir. 1998).
155
Richards v. U.S. Steel, 869 F.3d 557, 565 (7th Cir. 2017).
156
Id. at 566.
157
See, e.g., Gleason v. Seaboard Air Line Ry., 278 U.S. 349, 355 (1929).
158
See, e.g., Doe v. Celebrity Cruises, Inc., 394 F.3d 891, 913 (11th Cir. 2004).
There are economic arguments why the traditional test may be sound.
Employment has positive as well as negative externalities. For example,
people with legitimate jobs are less likely to commit crimes. Employers
cannot capture these positive externalities. They cannot charge fees to the
people whom their employees would have victimized in another life.
Therefore, expanding vicarious liability to make sure that the employers pay
for all the negatives caused by the employment relationship when the
employers are not compensated for all the positives may deter socially
beneficial employment.159
However, judges do not usually give an economic rationale for
following tradition, nor do they try to shape the doctrines to fit an economic
justification. Rather, the traditional scope of employment and independent
contractor rules developed more than a century ago, back when the metaphor
of identification was the acknowledged basis of doctrine, are simply stated
and followed. Additionally, when explanations are offered, they tend to be
jurisprudential. They reveal that judges, for the most part, do not accept
Laski’s thesis that courts should be updating the law to reflect proper public
policy.160 Instead, judges seem to think that courts should follow traditional
agency law unless the legislature clearly commands otherwise.
In 1998, for example, the U.S. Supreme Court held that the traditional
rules for imputing the liability of a subsidiary to a parent corporation were
incorporated into a federal environmental statute that said nothing on the
subject.161 The Court explained that in order to “‘abrogate a common-law
principle, the statute must speak directly to the question addressed by the
common law,’”162 so that against the “venerable common-law backdrop, the
congressional silence is audible.”163
In another 1998 decision, the U.S. Supreme Court held that the
traditional scope of employment test was incorporated into Title VII of the
Civil Rights Act of 1964.164 The Court reasoned that the statute’s use of the
word “agent” in the statute “expressed Congress’s intent that courts look to
traditional principles of agency law in devising standards of employer
liability”165 and “there is no reason to suppose that Congress wished courts
to ignore the traditional distinction [between acts falling within and outside
159
Employers should only be forced to internalize the net externalities. See Sykes, supra
note 130, at 1244.
160
See, e.g., Faragher, 524 U.S. at 798.
161
BestFoods, 524 U.S. at 70.
162
Id. at 63.
163
Id. at 62.
164
Faragher, 524 U.S. at 798.
165
Id. at 791.
of the scope of employment].”166 The Supreme Court reached a similar

conclusion in 2003, holding that traditional vicarious liability rules were
incorporated into the Fair Housing Act because Congress had not specified
otherwise.167
The general judicial preference for leaving policymaking to the
legislature may also be seen in the dissenting opinions in the (relatively
unusual) cases in which State Supreme Courts decide to expand vicarious
liability. In a 2018 Delaware case, for example, the dissenters argued that the
court’s decision to hold the government vicariously liable for a police
officer’s sexual tort usurped the function of the legislature because it was
based on the “court’s own policy determinations.”168 The dissenters said that
the issue before the court was “laden with policy questions” so the court
should have respected “the General Assembly’s policy-making function”
and not changed the law based on its own policy view, particularly when the
court did so “without any evidentiary showing that the public will benefit by
spreading the cost of a rogue employee’s conduct,” rather than letting it
remain “on the wrongdoer alone.”169
The dissenters in a 2016 Connecticut case made a similar point when
the State Supreme Court expanded the vicarious liability of hospitals for
malpractice. The dissenters argued that it was the function of the legislature,
and not the court, to set the policy for the State.170 The dissenters noted that
the legislature was set up to make policy decisions because it could consult
outside experts, elicit input from regulators and “enact comprehensive
reform, establishing boundaries of liability and providing predictability to
health-care institutions and their insurer[s].”171 Moreover, the dissenters
observed, since the allocation of the cost of medical malpractice involves a
value judgment, “the legislature, as an elected body, may be held accountable
if the allocation is not in line with societal values.”172 By contrast, the
dissenters went on, judges are only able to decide the case before them based
on the evidence presented by the parties. Therefore, “they develop policy in
an ad hoc basis and on the basis of the facts presented in each case, which
creates uncertainty.”173 Furthermore, the dissenters noted, “members of this
166
Id. at 798.
167
See Meyer v. Holley, 537 U.S. 280, 286-87 (2003).
168
Sherman v. State of Delaware, 190 A.3d 148, 194 (Del. 2018) (Valihura, J., dissenting).
169
Id. at 198-99.
170
Cefratti v. Aranow, 141 A.3d 752, 776 (Conn. 2016) (Zarella, J., dissenting).
171
Id.
172
Id.
173
Id. at 777.
court, unlike the elected bodies of government, cannot be held accountable

for the value judgments they reach.”174
In a sense, the metaphor of identification is also judge-made law and
expands liability. Yet the metaphor has been around for so long, and the
doctrines developed pursuant to it are so well established, that judges regard
the metaphor as law and not as policymaking. Therefore, the metaphor can
be used to hold corporations accountable for (at least some) of the
misconduct of those they employ.
III. OTHER AGENCY DOCTRINES BASED ON THE METAPHOR
There are many other examples of agency law doctrines that puzzle
scholars but can be explained and justified by the metaphor of identification.
A. The IntraCorporate Conspiracy Doctrine
The intracorporate conspiracy doctrine provides that agreements

between agents of the same corporation, acting within the scope of their
agency, do not constitute a conspiracy.175 The theory underlying the doctrine
is that a conspiracy requires multiple parties and the agents are acting as a
single person, their employer. As the Eleventh Circuit explained in 2000, the
doctrine is based on agency principles that, “[w]hen two agents of the same
legal entity make an agreement in the course of their official duties . . . as a
practical and legal matter their acts are attributed to their principal.”176
The doctrine has significant costs because it impedes the effective
prosecution of claims against individual wrongdoers operating within a
corporation for the benefit of that corporation.177 The persistence of the
doctrine shows much value the law places on using the metaphor of
identification as an anchor for its conceptual framework for dealing with
groups.
174
Id.
175
See Dickerson v. Alachua Cty. Comm’n, 200 F.3d 761, 767 (11th Cir. 2000).
176
Ziglar v. Abbasi, 137 S. Ct. 1843, 1867 (2017).
177
For policy arguments against the doctrine, see J.S. Nelson, Paper Dragon Thieves, 105
GEO. L.J. 871, 910 (2017); J.S. Nelson, The Corporate Conspiracy Vacuum, 37 CARDOZO L.
REV. 249, 250 (2015).
B. The Rights and Liabilities of Undisclosed Principals
Another illustration of the continuing vitality of the metaphor of

identification is the doctrine that generally treats undisclosed principals as
parties to contracts entered into by their authorized agents. As a Kansas
federal court stated in 2017, “[a] contract executed by an authorized agent in
his own name, but in fact in behalf of his principal, is the contract of the
principal and suit may be brought against him to enforce its provisions.”178
Before Randy Barnett reconciled the doctrine with contract theory in
1987,179 scholars criticized the doctrine, saying it ignored fundamental legal
principles180 and describing it as clearly anomalous.181 According to one
article, “[n]o . . . textbook omits to call [the doctrine] . . . ‘an anomaly in the
law of contracts.’.182 A treatise said that the “rules governing the undisclosed
principal have often been described as anomalous.”183
Through the lens of the metaphor of identification, the doctrine makes
perfect sense. In 1858, the U.S. Supreme Court explained why an
undisclosed principal could sue to enforce a contract made by his authorized
agent. The Court noted that, “[t]he contract of the agent is the contract of the
principal, and he may sue or be sued thereon, though not named therein . . .
by reason that the act of the agent is the act of the principal.”184 In 1883,
Justice Holmes, speaking for the Massachusetts Supreme Judicial Court,
explained that an undisclosed principal is liable on a contract for the same
reason “which is usually given for the liability of a master for his servant’s
torts, that the act of the agent is the act of the principal; . . . the meaning of
which . . . is . . . that master and servant are ‘fained to be all one person.’”185
The application of the same rule in positive law is illustrated by the
prosecution of John Gooding in 1827 for violation of a federal statute that
178
Rezac Livestock Comm’n Co., Inc. v. Pinnacle Bank, 255 F. Supp. 3d 1150, 1158 (D.
Kan. 2017) (quoting C.A. Karlan Furniture Co. v. Richardson, 324 P.2d 180, 183 (Kan.
1958)).
179
See Randy E. Barnett, Squaring Undisclosed Agency Law with Contract Theory, 75
CALIF. L. REV. 1969 (1987).
180
See James Barr Ames, Undisclosed Principal -- His Rights and Liabilities, 18 YALE L.J.
443, 443 (1909).
181
See P.F.P. Higgins, The Equity of the Undisclosed Principal, 28 MOD. L. REV. 167, 167
(1965).
182
See W. Muller-Freienfels, The Undisclosed Principal, 16 MOD. L. REV. 299, 299 (1953).
183
See HAROLD REUSCHLEIN & WILLIAM GREGORY, HANDBOOK ON THE LAW OF AGENCY
AND PARTNERSHIP § 95 (1979).
184
See Ford v. Williams, 62 U.S. 287, 289 (1858). See also Agency II, supra note 72, at 2
(the rules imposing liability on undisclosed principals follows “from the identification of
agent and principal”).
185
Byington v. Simpson, 134 Mass. 169, 170 (Mass. 1883).
made it a crime to outfit a ship for the international slave trade.186 Since
Gooding was the ship’s owner, and not one of the workers, he argued he was
entitled to a jury instruction that he could be convicted only if he personally
did the work and not if he merely caused the work to be done by others in
his employ.187 The Supreme Court, in a rare procedure of addressing pre-trial
issues, rejected this argument, holding that the statute did not require
Gooding to have done the work personally.188 In an opinion by Justice Joseph
Story, the Court explained that “[i]f done by others under the command and
direction of the owner, with his approbation and for his benefit, it is just as
much in contemplation of law his own act, as if done by himself . . . qui facit
per alium, facit per se.”189
In 2016, the U.S. Court of Appeals for the Tenth Circuit held that a
search of email attachments for child pornography by a corporation acting as
a government agent should be treated as a search by the government for
purposes of the Fourth Amendment.190 The Court of Appeals reasoned that
“for what would have been the point of the Amendment if the government
could have instantly rendered it a dead letter by the simple expedient of
delegating to agents investigative work it was forbidden from undertaking
itself?”191
Thus, the rules governing rights and liabilities of undisclosed principals,
based on the qui facit metaphor of identification, have persisted in the courts
from the nineteenth century to the twenty first century despite criticism by
twentieth century scholars that the doctrines were anomalies in the law.
C. Defining Agency
Courts also used the metaphor of identification in determining whether

a particular person is an agent. Consider, for example, the 2003 Delaware
Chancery Court decision in Fasciana v. Electronic Data Systems
Corporation.192 John Fasciana worked as an outside attorney for Electronic
Data Systems Corporation (“EDS”) and was later indicted for alleged
misconduct in that role.193 Some of the actions involved advice he provided
to EDS that allegedly defrauded the company. Other actions involved
186
Gooding, 25 U.S. at 467.
187
Id. at 472.
188
Id. at 469-70.
189
Id. at 472.
190
United States v. Ackerman, 831 F.3d 1292, 1308 (10th Cir. 2016).
191
Id. at 1300.
192
829 A.2d 160 (Del. Ch. 2003).
193
Id. at 164-65.
representations that he made on behalf of EDS.194 The company had a

corporate bylaw that promised to advance the litigation expenses of
corporate agents to the fullest extent permitted by Section 145 of the
Delaware Corporation Law.195 Fasciana asked for advances pursuant to the
bylaw, but EDS refused to pay and Fasciana sued.196 The Delaware Chancery
Court held that Fasciana was only entitled to indemnification for the
expenses connected to the representations that he made on behalf of the
company.197 The work that he did advising the company, the court held, was
not done in the capacity of agent.
The Chancellor explained that “[t]he term agent is thrown around in
many legal contexts and often without great precision.”198 Yet in the context
of Section 145 of the Delaware Corporation Code, it is reasonable to interpret
the term “in the more precise sense characteristic of its primary common law
definition, which embraces the ‘essential’ requirement that an agent has the
power to act on behalf of the principal with third persons.’”199 The
Chancellor noted that “[t]he heart of agency is expressed in the ancient
maxim: Qui facit per alium, facit per se [one acting by another is acting for
himself].”200 Reiterating that same point, the opinion noted that “[t]he
essence of an agency relationship is the delegation of authority from the
principal to the agent which permits the agent to act not only for, but in place
of, his principal in dealings with third parties.”201
The Chancellor went on to say that “[i]n this traditional context, the acts
of the agent within the scope of the agency are fairly said to be the actions
of the principal,”202 so that the agent might fairly expect indemnity under
Section 145 of the Corporation Code. By contrast, when a lawyer is
providing advice to a client, the lawyer might well owe fiduciary obligations
to the client, but the provision of advice “does not … make the lawyer the
agent of the corporation in the sense that [Section] 145 intends.”203
The Fasciana decision illustrates the definition of agency in Section
1.01 of the Restatement (Third) of Agency, which lists as one of the
requirements of agency that “the agent shall act on the principal’s behalf.”204
Comment g. to Section 1.01 explains that “[t]he common-law definition of
194
See id.
195
See id. at 167.
196
See id. at 168.
197
Id. at 167.
198
Fasciana, 829 A.2d at 168.
199
Id. at 169.
200
Id. at 169 n.30 (internal quotation marks omitted).
201
Id.
202
Id. at 171.
203
Id.
204
RESTATEMENT (THIRD) OF AGENCY § 1.01 (AM. LAW. INST. 2007).
agency requires as an essential element that the agent consent to act on the
principal’s behalf . . . [f]rom the standpoint of the principal, this is the
purpose of creating the relationship.”205
The metaphor of identification simply translates into understandable
human terms what it means for one person to act on behalf of another.
Namely, that the agent is not simply acting for the principal’s benefit, subject
to the principal’s control, but also is acting as the principal, so that the actions
of the agent, within the scope of the agency, are the actions of the principal.
D. Vicarious Admissions
The continuing vitality of the metaphor of identification may also be

seen in the vicarious admission doctrine, whereby certain statements by
agents or co-conspirators of parties are treated as party admissions and are
therefore, not subject to the hearsay rule. The following cases206 show the
conceptual basis of the doctrine.
In the 1827 slave trade prosecution of John Gooding, discussed above,
the government wanted to put on a witness who would testify about a
conversation that he had with the ship’s captain in which the witness asked
who would pay the crew if things went wrong and the captain replied, “Uncle
John,” referring to the defendant John Gooding.207 The defendant objected
to the proposed testimony, but the Supreme Court held that the statement
was admissible against Gooding in just the same way that Gooding’s own
statements would be admissible against him (in modern parlance, the
statement was not hearsay because it was a party admission). The Court
noted that there was independent evidence that the captain was Gooding’s
agent and the statement he made was within the scope of his agency.208
The Court then explained that where “the fact of agency” has been
proven “the act of the agent, co-extensive with his authority, is the act of the
principal, whose mere instrument he is” so that “whatever the agent says
within the scope of his authority, the principal says, and evidence may be
given of such acts and declarations as if they had been actually done and
made by the principal himself.”209
A similar rule applies to statements by co-conspirators made within the
scope of the conspiracy. The statements are admissible against members of
the conspiracy, notwithstanding the hearsay rule, as vicarious party
205
Id. § 1.01 cmt. g.
206
Gooding, 25 U.S. at 460; Van Riper v. United States, 13 F.2d 961 (2d Cir. 1926).
207
Gooding, 25 U.S. at 468.
208
Id. at 469-70.
209
Id. at 470.
admissions. The rationale, as Judge Learned Hand explained in 1926, is that

under the substantive law of conspiracy when people “enter into an
agreement for an unlawful end, they become ad hoc agents for one another,
and have made a ‘partnership in crime.’”210 As a result, “[w]hat one does
pursuant to their common purpose, all do, and, as declarations may be such
acts, they are competent against all.”211 Or as the U.S. Supreme Court
explained in 1974, “[t]he rationale for both the hearsay-conspiracy exception
and its limitations is the notion that conspirators are partners in crime . . .
[a]s such, the law deems them agents of one another.”212
The vicarious admission doctrine is taught in law schools as part of the
law of evidence. Perhaps as a result, modern scholars have been critical of
the co-conspirator vicarious admission rule since the doctrine is based on
agency ideas and not on the principles underlying the law of evidence in
general. One note, for example, asserted that the “criminal agency rationale
is not conceptually persuasive . . . [i]t is a fiction.”213 Another note argued
that the agency rationale was not an adequate justification because
“[a]lthough coconspirators are treated as agents for each other, this is little
more than a legal fiction”214 Or as Paul Marcus put it in 2015, “the entire
grounding of the exception is a legal fiction”215 so that the determination to
admit the statement of a coconspirator will not be based on a belief that the
statement is “reliable, but rather on the agency fiction. Resolving such an
important matter on a legal fiction seems dubious at best.”216
However, the courts are fine with following a rule of evidence based on
the fiction of agency. The vicarious admission rule for agents is codified in
Rule 801(d)(2)(D) of the Federal Rules of Evidence, which treats “a
statement by a party’s agent or servant concerning a matter within the scope
of the agency or employment, made during the existence of the relationship”
as a party admission exempt from the hearsay rule.217 Rule 801(d)(2)(E)
codifies the exemption for statements by co-conspirators, defining as a party
210
Van Riper, 13 F.2d at 967.
211
Id.
212
Anderson v. United States, 417 U.S. 211, 218 n.6 (1974).
213
David Calabrese, Note, Federal Rule of Evidence 801(d)(2)(E): Admissibility of
Statements from An Uncharged Conspiracy That Does Not Underlie the Substantive
Charge, 52 FORDHAM L. REV. 933, 943 (1984).
214
S. Douglas Borisky, Note, Reconciling the Conflict Between the Coconspirator
Exemption from The Hearsay Rule And the Confrontation Clause of The Sixth Amendment,
85 COLUM. L. REV. 1294, 1308 (1985).
215
Paul Marcus, The Crime of Conspiracy Thrives in Decisions of the United States
Supreme Court, 64 KAN. L. REV. 373, 397 (2015).
216
Id. at 398.
217
FED. R. EVID. 801(d)(2)(D). As the Advisory Committee Notes explain, the rule for
agents represent an expansion of the older rule by permitting the admission of unauthorized
statements that relate to the subject matter of the agency.
admission “a statement by a coconspirator of a party during the course of

and in furtherance of the conspiracy.”218
Courts recognize that the vicarious admission rules, particularly for co-
conspirators, are based on a fiction. As one decision put it, “Rule 801(d)(2)
treats coconspirator statements as a category of party admissions. It does so
because of the legal fiction that each conspirator is an agent of the other and
that the statements of one can therefore be attributable to all.”219 Courts
accept the rule as law, despite its tension with the scholarly rejection of legal
fictions.220
E. Government Speech
The cornerstone of the vicarious admission rule is the notion that the
words of the agent, within the scope of the agency, are the words of the
principal. This same idea illuminates the First Amendment government
speech doctrine, which treats speech by government agents within the scope
of their agency as government speech that the government naturally has a
right to control.221
Scholars looking at this doctrine from the perspective of First
Amendment policy have been critical, calling the doctrine “dangerous,”222
“muddled,”223 “confused,”224 “not only unnecessary but actually harmful,”225
“troubled,”226 and “a disaster.”227 But at least some of the government speech
decisions make sense when seen as applications of the metaphor of
identification.
Consider Garcetti v. Ceballos.228 Richard Ceballos, a deputy district
attorney for the Los Angeles County District Attorney’s Office, was working
218
FED. R. EVID. 801(d)(2)(E).
219
United States v. Ammar, 714 F.2d 238, 255-56 (3d Cir. 1983).
220
See United States v. Didomenico, 78 F.3d 294, 303 (7th Cir. 1996).
221
See Robert C. Post, Subsidized Speech, 106 YALE L.J. 151, 151-52 (1996).
222
Joseph Blocher, Viewpoint Neutrality and Government Speech, 52 B.C. L. REV. 695, 698
(2011).
223
Jessica Pagano, The Elusive Meaning of Government Speech, 69 ALA. L. REV. 997, 1000
(2018).
224
Mark Strasser, Government Speech and Circumvention of the First Amendment, 44
HAST. CONST. L. Q. 37, 37 (2016).
225
Steven G. Gey, Why Should the First Amendment Protect Government Speech When the
Government has Nothing to Say, 95 IOWA L. REV. 1259, 1313-14 (2010).
226
Mary-Rose Papandrea, Free Speech Foundations Symposium: The Government Brand,
110 NW. U. L. REV. 1195, 1197-98 (2016).
227
Mark Strasser, Ignore the Man Behind the Curtain: On Government Speech, 21 B.U.
PUB. INT. L.J. 85, 126 (2011).
228
Garcetti v. Ceballos, 547 U.S. 410 (2006).
as a calendar deputy (a semi-managerial role) for the Pomona branch.229

While he was on the job, Ceballos wrote a memorandum recommending that
a case in the Pomona branch be dropped because of inaccuracies in an
affidavit used to obtain a search warrant.230 The recommendation was
rejected and the memorandum was later used against the government.231
Afterwards, Ceballos claimed he was subject to adverse employment actions,
including reassignment, transfer and denial of promotion, in retaliation for
what he said in his memorandum.232
Ceballos sued for violation of this First Amendment rights.233 The U.S.
Supreme Court held that the case involved speech that the government had
the right to control, not speech by a private citizen that was protected from
government regulation by the First Amendment. The Court explained that
“[t]he controlling factor in Ceballos’ case is that his expressions were made
pursuant to his duties as a calendar deputy.”234 The Court went on to hold
“that when public employees make statements pursuant to their official
duties, the employees are not speaking as citizens for First Amendment
purposes, and the Constitution does not insulate their communications from
employer discipline.”235
In Legal Services Corp. v. Velazquez,236 the Supreme Court reviewed a
statute prohibiting federally funded Legal Services Corporation lawyers
from filing suits challenging the constitutionality of welfare laws.237 The
Supreme Court held that the statute violated the First Amendment.238 The
government was not regulating its own speech because the federally funded
LSC “attorney speaks on behalf of the client in a claim against the
government for welfare benefits. The lawyer is not the government’s
speaker.”239
Another government speech case240 involved a student religious
organization applying for monies from the University of Virginia’s student
activity fund.241 The U.S. Supreme Court held that the University could not
discriminate against the group based on the group’s religious mission and
229
Id. at 413.
230
Id. at 413-14.
231
Id. at 414.
232
See id. at 415.
233
Id.
234
Id. at 421.
235
Id.
236
531 U.S. 533 (2001).
237
See id. at 536-37.
238
See id. at 537.
239
Id. at 542.
240
Rosenberger v. Rector and Visitors of the Univ. of Va., 515 U.S. 819 (1995).
241
See id. at 825-27.
theory that the University itself considered the student group’s speech to be
government speech.242 The Court noted that student organizations applying
for funds were required to sign an agreement with the University that
declared that student groups receiving monies from the student activity fund
“are not the University’s agents, are not subject to its control, and are not its
responsibility.”243
In each of these cases, the Supreme Court used the metaphor of
identification and principles of agency to determine whether the true speaker
was the government or a private person. 244 A 2007 article by Luke Meier
made a similar point in an analysis of whether religious speech by students
in a school setting should be classified as government speech prohibited by
the Establishment Clause or private citizen speech protected by the Free
Exercise Clause.245 Professor Meier argued that the true “identity of the
speaker is really a question of agency law,”246 so “agency law seems to
provide a useful conceptual approach to addressing these issues.”247
It is noteworthy here that the very term government speech is
metaphoric. Governments do not have actual voices. Further, the Supreme
Court’s analysis in these cases followed the categorization and logic
characteristic of metaphor of identification case law rather than the balancing
of competing interests more commonly associated with the First
Amendment.
Nevertheless, the Supreme Court’s use of agency principles can be
reconciled with First Amendment doctrine. In his 1996 article on
government speech, Robert Post said state regulation of speech is normally
subject to strict requirements of neutrality “because we wish to use the First
Amendment to establish a realm of public discourse in which people are
regarded as autonomous and self-determining.”248 The government speech
doctrine falls within an exception to this general purpose. Government
agents speaking within the scope of their agency are not autonomous and
self-determining individuals.249 They are acting as the government.
242
See id. at 834-35.
243
Id. at 835.
244
Velazquez, 531 U.S. at 533-34; see also Rosenberger, 515 U.S. at 838-39.
245
Luke Meier, Using Agency Law to Determine the Boundaries of the Free Speech and
Establishment Clauses, 40 IND. L. REV. 519, 519 (2007).
246
Id. at 522.
247
Id. at 528.
248
Robert C. Post, Subsidized Speech, 106 YALE L.J. 151, 193 (1996).
249
See generally Garcetti, 547 U.S. at 418-19.
F. Duties of Agents to Principals
The metaphor of identification also shapes the fiduciary duties of agents.

Here, however, it is harder to draw a sharp contrast with dominant academic
theories. That is because there are so many academic approaches in this area;
the metaphor is consistent with some and at odds with others.250
By way of background, in recent years, there has been a surge of
scholarly interest in fiduciary theory251 with a spate of articles seeking to
define,252 expand,253 rationalize,254 justify,255 or find the bases for256 the
fiduciary principle. Many scholars have tried to come up with a unified
theory applicable to all fiduciaries. For example, some have argued that the
duties of fiduciaries are merely contractual and can be understood through
contract norms.257 Others, by contrast, argue that fiduciary duty is imposed
as a matter of public policy to protect the weak and vulnerable from the
strong and opportunistic.258
One problem with these two general theories is that fiduciary duties vary
depending on the type of fiduciary.259 A related problem with the two
theories is that they do not do a good job of explaining the fiduciary duties
of agents. For example, the idea that fiduciary duties are merely contractual
does not fit with cases in which intentional breach of fiduciary loyalty or
250
For an example of modern scholarship that does apply agency theory, see Eric W. Orts,
Shirking and Sharking: A Legal Theory of the Firm, 16 YALE L. & POL’Y REV. 265, 299
(1998) (“Firms of more than one person are better described not as a nexus of contracts, but
as a nexus of agency relationships.”).
251
See Paul B. Miller & Andrew S. Gold, Fiduciary Governance, 57 WM. & MARY L. REV.
513, 516 (2015) (“Fiduciary theory is undergoing a renaissance”); Lionel D. Smith,
Contract, Consent and Fiduciary Relationships, in CONTRACT, STATUS AND FIDUCIARY LAW,
517, 517 (Paul B. Miller & Andrew S. Gold eds., 2016).
252
See, e.g., D. Gordon Smith, The Critical Resource Theory of Fiduciary Duty, 55 VAND.
L. REV. 1399, 1400 (2002).
253
See, e.g., Issac D. Buck, Furthering the Fiduciary Metaphor, 104 CALIF. L. REV. 1043,
1093-94 (2016); D. Theodore Rave, Politicians as Fiduciaries, 126 HARV. L. REV. 671, 677
(2016).
254
See, e.g., Beyond Metaphor, supra note 45, at 908-15; Tamar Frankel, Fiduciary Law, 71
CALIF. L. REV. 795, 810 (1983) (justifying fiduciary duties based on the entrustor’s
vulnerability to opportunistic behavior by the fiduciary).
255
See, e.g., Evan J. Criddle, Liberty in Loyalty: A Republican Theory of Fiduciary Law, 35
TEX. L. REV. 993, 995 (2017).
256
See, e.g., Robert H. Sitkoff, An Agency Costs Theory of Trust Law, 89 CORNELL L. REV.
621, 678 (2004).
257
See, e.g., Easterbrook & Fischel, supra note 11, at 425-26.
258
See, e.g., Eileen A. Scallen, Promises Broken vs. Promises Betrayed: Metaphor,
Analogy, and the New Fiduciary Principle, 1993 U. ILL. L. REV. 897, 922 (1993).
259
See, e.g., Beyond Metaphor, supra note 45, at 879 (“Recognition that the law of fiduciary
obligation is situation-specific should be the starting point for any further analysis”);
Johnson & Millon, supra note 6, at 1597, 1601-02.
confidentiality has been treated as a crime.260 The notion that fiduciary duty
is designed to protect the weak does not fit with the rule that at-will
employees are, though relatively weak, nevertheless fiduciaries.261
The fiduciary duties of agents are better explained as arising out of their
status as agents262 and more particularly, their alter ego relationship with the
principal.263 Donning the principal’s persona requires the agent to abnegate
the agent’s personal self and assume what has been described by Margaret
Blair and Lynn Stout as a “second self” including “a ‘cooperative’ or ‘other-
regarding’ personality.”264 As a result, agents have special obligations
consistent with some general fiduciary theories but not readily explained
either by the law of contracts or the public policy in favor of protecting the
weak.
1. Duty of Loyalty
Consider, for example, the duty of loyalty which was defined in Section
387 of the Restatement (Second) of Agency as: “[u]nless otherwise agreed,
an agent is subject to a duty to his principal to act solely for the benefit of
the principal in all matters connected with his agency.”265 As the
commentary to Section 8.01 of the Restatement (Third) of Agency explains,
this duty “requires that the agent subordinate the agent’s interests to those of
the principal and place the principal’s interests first as to matters connected
with the agency relationship.”266 The idea lies at the heart of agency law.
Indeed, the word “principal” comes from a Latin word meaning “first.”
Fiduciary relationships are often created by contracts. But it is the
relationship, rather than the contract, that creates the duty of loyalty.267 The
260
See, e.g., Carpenter v. United States, 484 U.S. 19, 23-24 (1987).
261
See RESTATEMENT (THIRD) AGENCY §1.01 cmt. c, illus. 17, 18-9, 33 (AM. LAW. INST.
2006); Marian K. Riedy & Kim Sperduto, At-Will Fiduciaries: The Anomalies of a “Duty of
Loyalty” in the Twenty-First Century, 93 NEB. L. REV. 267, 283-88 (2014).
262
See Johnson & Millon, supra note 6, at 1652 (“Agency law reminds us that officers are
agents of the corporate principal and, as such, are subject to a well-developed set of
fiduciary obligations that are inherent in the agency relationship”).
263
See Arthur B. Laby, Current Issues in Fiduciary Law: S.E.C. v. Capital Gains Research
Bureau and Investment Advisers Act of 1940, 91 B.U. L. REV. 1051, 1055 (2011)
(discussing that a fiduciary has a duty “when acting on the principal’s behalf, to adopt the
objectives or ends of the principal as the fiduciary’s own”); Ramon Casadeus-Masanell &
Daniel F. Spulber, Trusts and Incentives in Agency, 15 S. CAL. INTERDISC. L.J. 45, 48 (2005)
(“the fundamental nature of the agent as an intermediary between the principal and third
parties creates the need for trust”).
264
See Margaret M. Blair & Lynn A. Stout, Symposium Norms & Corporate Law: Trust,
Trustworthiness, and the Behavioral Foundations of Corporate Law, 149 U. PA. L. REV.
1735, 1762 (2001).
265
RESTATEMENT (SECOND) OF AGENCY § 387, 200, 201 (AM. LAW INST. 1958).
266
RESTATEMENT (THIRD) OF AGENCY § 8.01 cmt. b, 249, 250 (AM. LAW. INST. 2006).
267
See, e.g., Huong Que, Inc. v. Luu, 58 Cal. App. 4th 400, 412 (Cal. Ct. App. 2007).
duty flows from the metaphor of identification. Under the metaphor, agents
acting within the scope of their agency become their principal and act as that
principal. To borrow from Hobbes, the agents are actors wearing the mask
of the principal whom they are representing on stage.268 Like actors, agents
have a duty to stay in character and in role.269
Staying true to their role of alter ego requires agents to subordinate their
personal interests and selves,270 as well as adopt the interests and ends of the
principal as their own.271 This is the same idea of loyalty that coaches try to
instill through the adage: “There is no I in team.”272
This concept of selfless loyalty may be seen in Justice Cardozo’s
canonic opinion in Meinhard v. Salmon.273 To explain why the defendant
Walter Salmon had a duty to inform his joint venture partner of a business
opportunity, Justice Cardozo said “Salmon had put himself in a position in
which thought of self was to be renounced, however, hard the abnegation . .
. For him and for those like him the rule of undivided loyalty is relentless
and supreme.”274
As a recent article by Matthew Bodie observed that “[t]his self-
abnegation is a critical aspect of the agency relationship, because it balances
out the agent’s power to step into the shoes of the principal and act on the
principal’s behalf.”275 Or as Victor Brudney explained in 1997: “[t]he notion
is that the fiduciary’s duty of loyalty requires the trustee or agent to act as
268
See HOBBES, supra note 36, at 152. See also June Carbone & Nancy Levit, The Death of
the Firm, 101 MINN. L. REV. 963, 976 (2017).
269
See James D. Nelson, The Freedom of Business Associations, 115 COLUM. L. REV. 461,
494 (2015) (“Individual identification with an association involves psychological
attachment to group goals and adoption of group perspectives.”); Blair & Stout, supra note
264, at 1770-71 (“[G]roup identity is an important component of most individuals’
psychological makeup” and “in situations in which group identity is brought into play,
individuals appear to adopt preference functions that consider the group’s welfare...”).
270
See Amy J. Sepinwall, Guilt by Proxy: Expanding the Boundaries of Responsibility in the
Face of Corporate Crime, 63 HAST L.J. 411, 442 (2012) (“[T]eam membership demands
deindividuation: the team member must act so as to underscore the softening of boundaries
between the self and others.”); Neal Kumar Katyal, Conspiracy Theory, 112 YALE L.J.
1307, 1312 (2003) (psychologists have found that “groups cultivate a special social
identity.”).
271
See Arthur Laby, The Fiduciary Obligation as the Adoption of Ends, 56 BUFF L. REV. 99,
103 (2008).
272
See Lyman Johnson, After Enron: Remembering Loyalty Discourse in Corporate Law, 28
DEL. J. CORP. L. 27, 52-53 (2003) (noting inconsistency between loyalty and a world view
based on the primacy of the autonomous self); Blair & Stout, supra note 264, at 1770
(“group identity” fosters intra-group trust).
273
164 N.E. 545, 546 (N.Y. 1928).
274
Id. at 548.
275
Matthew T. Bodie, Employment as Fiduciary Relationship, 105 GEO. L.J. 819, 826
(2017). See also Paul B. Miller, Justifying Fiduciary Remedies, 63 U. TORONTO L.J. 570,
615 (2013) (“The duty of loyalty reflects the substitutive character of fiduciary power.”).
the beneficiary’s (or principal’s) alter ego and act only as the latter would act
for himself.”276
The duty to stay in character, playing the assigned role of alter ego rather
than remaining a separate person, also accounts for rules against conflicts of
interest. As the Supreme Court explained in 1914, “[t]he intention is to
provide against any possible selfish interest . . . which can interfere with the
faithful discharge of the duty which is owing in a fiduciary capacity.”277
2. Duty to Act Only as Authorized
The metaphor of identification also explains other agency law doctrines

that may seem anomalous when viewed from the perspective of contract or
tort law. Consider, for example, a 1999 North Dakota Supreme Court
case.278 Burlington Northern, a railroad company, had an agency agreement,
terminable on a ninety-day notice, with a company called Meridian.279 The
agreement gave Meridian the authority to manage Burlington’s oil and gas
rights.280 The contract also gave Meridian the right to deal with Burlington
on its own account and to acquire Burlington’s oil and gas rights on terms
consistent with ordinary business judgment and usage.281 The relationship
between the companies soured. Burlington gave Meridian a notice of
termination. Approximately two months after receiving the notice, (that is,
before the termination became effective) Meridian, while acting as
Burlington’s agent, negotiated a deal with itself whereby Meridian
purchased oil and gas rights from Burlington on terms that were consistent
with the prevailing prices in the area.282
Burlington sued to undo the transaction. The trial court ruled for
Meridian, on the grounds that there was no proof that the deal terms were
unfair. 283 The North Dakota Supreme Court, however, reversed.284 Among
other things, the Court said that Meridian, as agent, had a duty to act in
276
Victor Brudney, Contract and Fiduciary Duty in Corporate Law, 38 B.C. L. REV. 595,
601 (1997). See also Criddle, supra note 255, at 1000 (“A fiduciary’s power to exercise
entrusted power for and on behalf of her principal . . . would engender domination but for
the fact that fiduciary law compels a fiduciary to honor her principal’s instructions and her
beneficiaries’ interests.”).
277
Magruder v. Drury, 235 U.S. 106, 119 (1914).
278
Burlington N. & Santa Fe Ry. Co. v. Res. Oil & Gas Co., 590 N.W.2d 433 (N.D. 1999).
279
Id. at 435
280
Id.
281
Id.
282
Id. at 436.
283
Id.
284
Burlington, 590 N.W.2d at 440.
accordance with its best understanding of the current wishes of its principal
even if the contract gave Meridian greater rights.
The Court noted that agency “involves both a contractual and a fiduciary
relationship.”285 The fiduciary aspects of the relationship limit what an agent
can do while acting as agent. Citing Section 33 of the Restatement (Second)
of Agency and its commentary, the Court explained that an agent is only
authorized to do “what the agent reasonably infers the principal desires the
agent to do in light of the principal’s manifestations and the agent’s
knowledge when the agent acts.”286 Thus, the agent’s authority is limited by
the principal’s current will because
[w]hatever the original agreement or authority may have been,

[an agent] is authorized at any given moment to do, and to do only, what
he reasonably believes the principal desires him to do, in light of what
he knows or should know of the principal’s purpose and the
existing circumstances.287
As a result, the Court explained, if the agent “knows facts which should
lead him to believe that his authority is restricted or terminated, he has a duty
to act only within the limits of the situation as it is currently known to
him.”288 The Court further noted that “[t]he fact that in changing his mind
the principal is violating his contract with the agent does not diminish the
agent’s duty of obedience to it.”289
The decision of the North Dakota Supreme Court is inconsistent with
the notion that fiduciary duty is simply a matter of contract. Nor does the
decision in favor of Burlington Northern match up well with the idea that
fiduciary duties are designed to protect the weak from the strong. However,
the opinion does fit well with the metaphor of identification. For if the agent
is playing the role of principal, then it makes sense that the principal’s current
will should be the guide to what the agent can do as principal.
285
Id. at 437.
286
Id. at 439 (quoting RESTATEMENT (SECOND) OF AGENCY § 33 (AM. LAW INST. 1958).
287
Id. at 439-40 (quoting RESTATEMENT (SECOND) OF AGENCY § 33 cmt. a (AM. LAW INST.
1958)).
288
Id.
289
Id. at 440.
3. Duty of Confidentiality
The U.S. Supreme Court’s decision in Carpenter v. United States290 is

another example of a decision (and doctrine) best understood through the
lens of the metaphor of identification. Foster Winans, a reporter for the Wall
Street Journal, was one of the writers of the Heard on the Street column,
which expressed insights and opinions about various stocks. According to
company policy, the content of the column prior to publication was
confidential information of the Journal.291 Yet, Winans revealed to a couple
of confederates what he was planning to say in the column in exchange for a
share of the profits they made in stock market trades using the information.292
The scheme was uncovered and Winans was convicted of mail fraud and
wire fraud.293
Winans argued before the U.S. Supreme Court that what he had done
was simply a violation of workplace rules and should be treated like a breach
of contract, not criminal fraud. The U.S. Supreme Court unanimously
rejected this argument, holding that the information about the forthcoming
columns was the property of the Wall Street Journal and Winans’
misappropriation of that information was criminal fraud. The Court
explained: “[t]he concept of fraud includes the act of embezzlement, which
is the fraudulent appropriation to one’s own use of money or goods entrusted
to one’s care by another.”294
The decision does not sit well with the theory that fiduciary duties are
merely contractual or that they are designed to protect the weak.295 Nor, for
that matter, does the decision make much sense when viewed from the goal
of ensuring that all investors operate with equal information.296 As one article
noted, “[f]rom the standpoint of investors, the role of fiduciary breach in
information acquisition is meaningless.”297
Nevertheless, the opinion is readily understood as an application of the
metaphor of identification. If the agent becomes the principal, then the
290
484 U.S. 19 (1987).
291
Id. at 23.
292
Id.
293
Id. at 23-24.
294
Id. at 27 (internal quotation marks omitted) (citing Grin v. Shine, 187 U.S. 181, 189
(1902)).
295
See John P. Anderson, The Final Step to Insider Trading Reform: Answering the “It’s
Just Not Right” Objection, 12 J.L. ECON. & POL’Y 279, 285 (2016).
296
See Stephen M. Bainbridge, Insider Trading Regulation: The Path Dependent Choice
Between Property Rights and Securities Fraud, 52 S.M.U. L. REV. 1589, 1589 (1999)
(arguing that the Supreme Court “took an area in which the law made a certain amount of
policy sense … and made hash of it”).
297
Kimberly D. Krawiec, Fairness, Efficiency, and Insider Trading: Deconstructing the
Coin of the Realm in the Information Age, 95 NW. U. L. REV. 443, 475 (2001).
information that the agent acquires in that role is the property of the principal.
The knowledge may be inside the agent’s head. But it does not belong to the
agent personally. The information belongs to the agent’s other self, the
principal, just as other property that the principal entrusts to the agent is the
property of the principal even when it is the agent’s possession. That is why
Winans’ personal use of information about what he was planning to write for
the Journal, contrary to the policy of Journal, was considered a form of
embezzlement.
The decision shows that there is more to agency relationships than can
be calculated using contract norms. The metaphoric identification of agent
with principal imposes moral obligations on the agent to be true to the
assumed persona and faithful to the group embraced by that persona.
4. Limited Scope
An important qualification is in order. The metaphor of identification is

the dominant mode for understanding the fiduciary duties of common law
agents. Outside that realm, its impact on fiduciary law is occasional.
There is a prominent line of authority in which courts have used the
metaphor’s frame to understand the duties of non-agent fiduciaries. Justice
Cardozo’s canonic opinion in Meinhard v. Salmon298 referenced earlier falls
into this category. Other examples include the U.S. Supreme Court’s
opinions in Pepper v. Litton299 and S.E.C. v. Capital Gains Research
Bureau,300 both of which require of non-agent fiduciaries the type of selfless
loyalty associated with the metaphor and with the loyalty duties of servants.
But that is not the only approach courts follow in cases involving non-
agent fiduciary. Often, in these cases, courts follow the equity approach
championed by scholars such as Tamar Frankel301 and impose fiduciary
duties on dominant parties to protect weaker, vulnerable parties who have
reposed trust in them. The metaphor of identification does not play a role in
these cases. Often, in non-agency cases, courts follow the alternative
approach championed by Judge Frank Easterbrook, Daniel Fischel,302 and
John Langbein303 and treat fiduciary relationships as essentially contractual
and with no moral dimension.
298
Meinhard, 164 N.E. at 545.
299
308 U.S. 295, 306-07 (1939).
300
375 U.S. 180, 201 (1963).
301
See Frankel, supra note 254, at 810.
302
See Frank H. Easterbook and Daniel R. Fischel, Contract and Fiduciary Duty, 36 J.L. &
ECON. 425, 427 (1993).
303
See John H. Langbein, The Contractarian Basis of the Law of Trusts, 105 YALE L.J. 625,
658 (1995).
The latter, contract-oriented approach is gaining strength. For example,

in the last twenty years in non-agency cases governed by federal law, the
U.S. Supreme Court has repeatedly loosened the restrictions on fiduciaries
with conflicts of interest by narrowing the scope of their fiduciary duty304 or
by putting the burden of proving substantive unfairness on the complaining
party,305 rather than following the traditional approach of requiring the
conflicted fiduciary to demonstrate complete fairness. These recent decisions
do not follow the metaphor of identification. They are also inconsistent with
the Supreme Court’s twentieth century precedents306 and with the approach
to fiduciary conflicts still followed by the State courts.307
Therefore, the metaphor of identification is not the only way that courts
see economic relationships, but it is the leading frame for seeing agency
relationships. And it is often used for other types of fiduciary relationships
as well, although the law for such cases is in flux.
IV. IN DEFENSE OF THE METAPHOR

The current controversy over fiduciary loyalty serves as preface to a
larger question. Is the metaphor of identification a good idea? The answer
is yes. At least in cases involving agency relationships, courts should
follow the metaphor and doctrines based on it in the absence of specific
legislative direction to the contrary.
A. Virtues of the Metaphor
The metaphor performs an essential function in our legal system. A

virtue of the common law is its focus on individuals and general aversion to
punishing one person for the wrongdoing of others or treating people as if
they were part of a collective. Yet, even virtues need exceptions. The
practical fact of life is that people often choose to work in teams. These
groups want the benefits that come from operating under a single legal
persona. The needs of commerce require that they be given this privilege,
particularly now that these collective persons have become the most
important players in the economy.
So how can a legal system designed for individuals be applied to teams?
The metaphor of identification allows the law to make this conceptual leap
304
See generally Pegram v. Herdrich, 530 U.S. 211, 214 (2000).
305
See generally Jones v. Harris Assocs., L.P., 559 U.S. 335, 347 (2010); see also Metro.
Life Ins. Co. v. Glenn, 554 U.S. 105, 115 (2008).
306
See, e.g., Pepper, 308 U.S. at 306.
307
See, e.g., Hein v. Zoss, 887 N.W.2d 62, 66 (S.D. 2016); see also Brooks v. Horner, 344
P.3d 294, 301 (Alaska 2015).
and does so in a way that recognizes groups and yet preserves the common
law’s tilt in favor of the individual.
The metaphor and the doctrines based on it have been doing this
balancing act so well that courts and legislatures have been using the ideas
for centuries. There is no good reason to stop (except when legislatures
clearly mandate different rules). A primary function of the common law is
the protection of liberty, property and the social order through the
preservation of the shared norms, traditions, expectations and legal concepts
that hold society together.308 The metaphor of identification qualifies for
preservation on all these counts.
The metaphor also resonates with common intuitions. The habit of mind
that Holmes criticized309 is not limited to judges. People in general equate
the conduct of a corporation with the behavior of its employees acting within
the scope of their employment. Indeed, it is hard to think of corporate
conduct any other way. Similarly, the metaphor’s approach to loyalty is
consistent with popular understanding. Psychologists have found that the
basis for loyalty is identification. People tend to be loyal to the groups with
which they identify.310 Our loyalties are a form of self-love to expanded
versions of ourselves.
Moreover, the metaphoric construct has generated workable doctrines
that lead to middle ground results that both liberals and conservatives can
accept as fair, if not ideal. The construct provides a mode of thought
considered legitimate on both sides of the political divide. In an increasingly
polarized country, ideas that Americans can share should be cherished, not
pushed aside in favor of something with more of an ideological edge.
Another advantage of the metaphor is that it justifies treating loyalty (at
least for agents) as a legal and moral duty, and not simply an option or
possible contract term. This notion could be used to counter, or at least limit,
the growing tendency of the U.S. Supreme Court and financial elites to see
economic relationships solely as a matter of contract and to back away from
ideas of fiduciary loyalty.311 Given current trends, the idea of loyalty could
use some legal reinforcement.312
308
See W.T. Murphy, The Oldest Social Science? The Epistemic Properties of the Common
Law Tradition, 54 MOD. L. REV. 182, 200 (1991).
309
See Holmes, Jr., Agency, supra note 3, at 351.
310
See Carbone & Levit, supra note 270, at 976 (“Modern media theory, when applied to
organizational behavior, describes institutions as supplying an identity associated with a
firm that in turn commands loyalty from those who embrace the identity.”).
311
See Harris, supra note 8, at 618.
312
See Adam S. Hofri-Winogradow, Contract, Trust and Cooperation: From Contrast to
Convergence, 102 IOWA L. REV. 1691, 1716 (referencing “the social alienation and
relationship commodification of current society”).
Teaching the metaphor is particularly appropriate in law schools, and

not just because the metaphor is an essential part of the law. Lawyers often
act as agents for their clients. Students should be taught what it means to be
an agent.
B. Responding to the Critics
Yet another reason for returning to the metaphor is that its critics were
and are wrong. Justice Holmes attacked the metaphor because its flexibility
allowed common law judges to develop doctrines imposing vicarious
liability on innocent employers and holding corporations accountable for the
misdeeds of employees acting within the scope of employment.313 The now
widespread acceptance of these doctrines shows that the metaphor’s
flexibility is a plus, not a minus. The common law needed a theory to allow
for exceptions to individualism when dealing with groups. The qui facit
maxim and the metaphor of identification provided that theory, creating
room for a more communitarian approach. Justice Holmes’ attack on the
metaphor should be rejected just as his effort to abolish respondeat superior
was rejected.
Harold Laski condemned the metaphor because the concept constrained
judges and kept them from turning progressive, frankly communal public
policies into law.314 Yet, Laski confused the role of courts and legislatures.
Judges do not have the data, time, expertise or political accountability to
engage in freewheeling social engineering.315 Generally speaking, they also
lack the inclination and ideological certainty needed to sweep away
individual rights and engage in the wholesale lawmaking that Laski urged
upon them. Further, an approach that required judges to base rulings on
public policy or notions of fairness or the anticipated consequences of their
decisions would make the law less predictable, reduce agreement among
judges and lead to more politically disparate results. Judges are much better
at maintaining consensus and consistency when they work with the existing
system.316
It is also worth noting that legislatures generally accept the doctrines
generated by the metaphor. Agency ideas are often codified and rarely
313
See generally Holmes, Jr., Agency, supra note 3, at 351; see also Agency II, supra note
72, at 20, 22.
314
See Laski, Vicarious, supra note 4, at 121.
315
See Jonathan T. Molot, An Old Judicial Role for a New Litigation Era, 113 YALE L.J. 27,
32, 59-63 (2003).
316
See id. at 32.
modified.317 So even though the metaphor has not led to the progressive
policies Laski advocated, it has come close enough to satisfy the people’s
chosen representatives.
Holmes, Laski and others criticized the metaphor because it is based on
a legal fiction, the unity of principal and agent. But a legal fiction is just a
type of useful social construct. Corporations are legal fictions, so are law
schools, and so is the United States of America. Courts use the fictions all
the time. In 2018, for example, the Third Circuit used what it described as a
“legal fiction” to justify tenancy by the entirety318 and the Sixth Circuit
defended the use of a “legal fiction” established by regulation that fifteen
years of exposure to coal dust caused black lung disease.319
There is nothing wrong with legal fictions so long as they are useful. As
Justice Holmes said on behalf of the U.S. Supreme Court in 1930, in the
course of rejecting an argument that the corporate fiction should be ignored:
“it leads nowhere to call a corporation a fiction. If it is a fiction it is a fiction
created by law with intent that it should be acted on as if true.”320
The metaphor of identification is a useful construct because it gives
lawyers and judges an intuitive handle on the concepts underlying agency
law and leads them through questions they can answer (such as, in what
capacity was a particular player acting?) to sensible, centrist results.
Deborah DeMott (the nation’s leading agency scholar) criticized the
metaphor of identification in the commentary to the Third Restatement,
calling the metaphor “potentially misleading and not helpful as a starting
point for analysis.”321 However, Professor DeMott’s preferred approach of
relying exclusively on abstractions, such as the agent acts “on behalf” of the
principal322 or the agent is a “representative” of the principal “with power to
affect the legal rights and duties of the” principal323 or “agency relationships
enable the legally-salient extension of a principal’s personality through an
agent’s representation”324 simply rephrases the same idea in less
understandable language.
And how is the metaphor of identification potentially misleading? Back
in the heyday of the metaphor, no one imagined that agents ceased to exist
317
See RESTATEMENT (THIRD) AGENCY, supra note 261, at INTRO. 3, 6; see also Seavey,
supra note 57, at 859.
318
See Clientron Corp. v. Devon IT, Inc., 894 F.3d 568, 579 (3d Cir. 2018).
319
See Zurich Am. Ins. Grp v. Duncan, 889 F.3d 293, 305 (6th Cir. 2018).
320
See Klein v. Board of Tax Sup’rs of Jefferson County, Ky, 282 U.S. 19, 24 (1930).
321
See RESTATEMENT (THIRD) AGENCY, supra note 261, at § 1.01, cmt. c, 17, 20.
322
Id. at § 1.01.
323
Id. at § 1.01, cmt. c.
324
Deborah A. DeMott, Larry Ribstein Memorial Symposium: The Contours and
Composition of Agency Doctrine: Perspectives from History and Theory of Inherent Agency
Power, 2014 U. ILL. L. REV. 1813, 1833 (2014).
as separate human beings or thought that people became civilly dead when
they entered an agency relationship. Identification was understood as
metaphoric.325 To avoid confusion, it is enough to call the metaphor of
identification a metaphor.
Professor DeMott had it right a decade before the Third Restatement of
Agency when she described the qui facit maxim as an “analytically more
elegant” justification of vicarious liability, noted that the “maxim identifies
the agent with the principal” and said that the maxim’s “power is its
usefulness as a figurative or heuristic device to help understand an agency
relationship.”326
However, the power of the metaphor goes beyond its heuristic value.
The qui facit metaphor of identification gives the law of agency the clear and
distinctive organizing theme that the subject needs in order to survive in the
academy as a separate title of the law. When it is taken away, and the
metaphor is rejected even as a starting point for analysis, scholars have no
grand theory to explain the law.
Amorphous considerations of social expediency and the needs of
commerce cannot replace the metaphor. It would be like trying to understand
a version of the First Amendment that replaced the word freedom with the
phrase public policy. The general subject matter might still be discernible but
the guiding idea would be lost. Just as the idea of freedom is an essential
part of the First Amendment, the metaphor of identification is needed to
make sense of the law of agency.
Consider where agency law came from. Agency principles are not
derived from a statute that was originally written in abstractions. As we have
seen, the law of agency began in metaphor and figurative use of language.
The qui facit maxim was a metaphor.327 The concept of representation (to
make present something that is not literally present) began in metaphor.328
The concept of legal personality (with persona being the mask worn by
actors on stage) began as metaphor.329 Therefore, referring to the founding
metaphors is like analyzing a literary text by reading the text, not just the
commentaries, or like supplementing a review of glosses on a statute with a
reading of the statute itself.
To be sure, the application of the metaphor requires the exercise of
judgment on such matters as the existence and scope of an agency
325
See, e.g., Mechem, supra note 54, at 436-37.
326
See DeMott, supra note 30, at 121.
327
See id.
328
See Pitkin, supra note 20, at 20; see also PITKIN, supra note 21, at 9.
329
HOBBES, supra note 36, at 123.
relationship. But judges and juries can answer these questions fairly,
particularly because the doctrines have been developed to guide in their
determination. There is no reason to replace this structure with vague
considerations of social expediency.
CONCLUSION
The law of agency provides courts with a conceptual framework for
dealing with groups. The metaphor of identification is central to this frame.
For legal scholars who want to understand how courts deal with issues of
representation and responsibility, the concept is essential. Moreover, the
construct’s justification of social virtues makes it an important idea for today
and one that deserves support. It is time for the legal academy to end the
exile and welcome back the metaphor of identification.
07/08/2020 Partnerships and the Effects of Non-Registration: Section 69(2A) declared unconstitutional - IndiaCorpLaw
HOME SUBMISSION GUIDELINES 
Partnerships and the

E ects of Non-Registration:
Section 69(2A) declared
unconstitutional
By Mihir Naniwadekar / March 26, 2009 / 6 Min read / Add comment
In a judgment delivered last week, V. Subramanium v. R. Rao (Civil Appeal 7438/2000;

MANU/SC/0417/2009), the Supreme Court declared unconstitutional a significant state
amendment to the Partnership Act, 1932.
Section 69 of the Partnership Act reads:

69. Effect of non-registration.
(1) No suit to enforce a right arising from a contract or conferred by this
Act shall be instituted in any court by or on behalf of any person suing as a
partner in a firm against the firm or any person alleged to be or to have
been a partner in the firm unless the firm is registered and the person suing
is or has been shown in the Register of Firms as a partner in the firm:
(2) No suit to enforce a right arising from a contract shall be instituted in
any court by or on behalf of a firm against any third party unless the firm
is registered and the persons suing are or have been shown in the Register
of firms as partners in the firms.
Through a state amendment, the State of Maharashtra introduced sub-section (2A). This
new sub-section read:
(2A) No suit to enforce any right for the dissolution of a firm or for
accounts of a dissolved firm or any right or power to realize the property
of a dissolved firm shall be instituted in any court by or on behalf of any
person suing as a partner in a firm against the firm or any person alleged
https://indiacorplaw.in/2009/03/partnerships-and-effects-of-non.html 1/6
to be or have been a partner in the firm, unless the firm is registered and
the person suing is or has been shown in the Register
HOMEof Firms as a partner
SUBMISSION GUIDELINES 
in the firm:
Provided that the requirement of registration of firm under this Sub-
section shall not apply to the suits or proceedings instituted by the heirs or
legal representatives of the deceased partner of a firm for accounts of a
dissolved firm or to realize the property of a dissolved firm.
Till the introduction of sub-section (2A), a partner in a firm could file a suit for
dissolution of an unregistered partnership firm, or for accounts of the dissolved firm, or to
recover the properties of the dissolved firm. With the coming into force of the sub-section
in 1985, a partner in an unregistered partnership firm in Maharashtra could not file even
those types of suits. The question regarding the constitutionality of the sub-section was
referred to the Bombay High Court, which upheld the section. An appeal was preferred
against this judgment before the Supreme Court.
The Supreme Court (Markandey Katju and G.S. Singhvi JJ.) struck down the impugned
sub-section (2A) as violative of Articles 14, 19(1)(g) and 300A of the Constitution.
The Court reasoned that not allowing a partner to file a suit for accounts and recovery of
property essentially deprived a partner of an unregistered firm of his right to property in
the firm without any compensation. Therefore, the sub-section was in violation of Article
300A of the Constitution (“No person shall be deprived of his property save by authority
of law”). Following a line of precedents, it was held that “law” contemplated in Article
300A cannot include a law which is arbitrary in nature. Additionally, the stringency of the
law meant that it violated Articles 14 and 19 as well. The reasoning of the Court is seen
through the following paragraph from the judgment:
“The primary object of registration of a firm is protection of third parties who were
subjected to hardship and difficulties in the matter of proving as to who were the
partners. Under the earlier law, a third party obtaining a decree was often put to
expenses and delay in proving that a particular person was a partner of that firm. The
registration of a firm provides protection to the third parties against false denials of
partnership and the evasion of liability. Once a firm is registered under the Act the
statements recorded in the Register regarding the constitution of the firm are conclusive
proof of the fact contained therein as against the partner. A partner whose name appears
on the Register cannot deny that he is a partner except under the circumstances provided.
Even then registration of a partnership firm is not made compulsory under the Act. A
partnership firm can come into existence and function without being registered. However,
the Maharashtra Amendment effects such stringent disabilities on a firm as in our
opinion are crippling in nature. It lays down that an unregistered firm cannot enforce its
claims against third parties. Similarly, a partner who is not registered is unable to
enforce his claims against third parties or against his fellow partners. An exception to
this disability was a suit for dissolution of a firm or a suit for accounts of a dissolved firm
or a suit for recovery of property of a dissolved firm. Thus a partnership firm can come
into existence, function as long as there is no problem, and disappear from existence
without being registered. This is changed by the 1984 Amendment extending the bar of
the proceedings to a suit for dissolution or recovery of property as well. The effect of the
Amendment is that a partnership firm is allowed to come HOMEinto SUBMISSION
existence and function
GUIDELINES 
without registration but it cannot go out of existence (with certain exceptions). This can
result into a situation where in case of disputes amongst the partners the relationship of
partnership cannot be put an end to by approaching a court of law. A dishonest partner, if
in control of the business, or if simply stronger, can successfully deprive the other partner
of his dues from the partnership. It could result in extreme hardship and injustice. Might
would be right. An aggrieved partner is left without any remedy whatsoever…the
restrictions placed (by the impugned section) are arbitrary and of excessive nature and
go beyond what is in the public interest. Hence the restrictions cannot be regarded as
reasonable.”
Accordingly, Section 69(2A) introduced by the Maharashtra state amendment was
declared to be unconstitutional.
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239
Chapter - 16
THE SALE OF GOODS ACT, 1930
The Sale of Goods Act, 1930 (hereinafter referred as the "Act") deals with
sale of goods regarding which provisions were earlier contained in sections
76-123 of the Indian Contract Act, 1872. The provisions of the Act covered
under the head: Condition and Warranties, comprising sections 11 to 17, are
very significant from the point of view of consumers. The Act is mainly
based on the provisions of the erstwhile English Sale of Goods Act, 1893.
In England, this Act had been modified by the Supply of Goods (Implied
Terms) Act, 1973 and Unfair Contract Terms Act, 1977. Then the Sale of
G o o d s Act was reframed in 1979. 1 The [Indian] Sale of Goods Act
continues to apply as earlier without any modifications. The Law
Commission of India in its 103 rd Report (1984) on "Unfair Terms in
Contracts" has recommended that the Indian Contract Act, 1872 should be
amended to protect consumers against unfair terms in contracts imposed by
business houses. So far the recommendation has not been translated into
practice.
The conditions and warranties in a contract of sale of goods as
incorporated in the Sale of Goods Act, are primarily aimed at protecting the
interests of consumers in the matters of:
(a) the time for payment and delivery of goods;
(b) right to reject the goods or claim damages in certain situations;
(c) protection of title and possession of goods purchased;
(d) merchantability and fitness of goods, for the purpose of their
sale; and
(e) correspondence of the goods sold with the description or sample
as offered by the seller.
In contrast to the English Act on Unfair Trade Terms, 1977, the Indian
Act gives precedence to the terms of the contract which may exclude
1. T h e modified section 55 of the English Act, 1979 provides that any terms in the
contract exempting the seller from liability for the breach of implied conditions and
w a r r a n t i e s , in case of a consumer sale, would be void. Section 6 of the Unfair
C o n t r a c t T e r m s Act, 1977 restricts exclusion of liability for breach of implied
conditions and warranties relating to title, conforming of goods with description or
sample or quality or fitness for a particular purpose. Section 5(1) of the Act gives
protection to consumers by prohibiting exclusion or restriction of liability of any
manufacturer or d i s t r i b u t o r arising out of supply of defective goods or due to
negligence.
240 A TREATISE ON CONSUMER PROTECTION LAWS
implied terms and conditions regarding title, possession, peaceful enjoyment

of goods etc. Section 12 of the Act defines a "condition" as a stipulation
essential to the main purpose of the contract, the breach of which gives rise
to a right to treat the contract as repudiated.2 A "warranty" is defined as a
stipulation collateral to the main purpose of the contract, the breach of
which gives rise to a claim for damages but not a right to reject the goods
and treat the contract as repudiated. 3
The conditions and warranties in sale of goods may be either express or
implied. Express conditions and warranties are those which are agreed upon
by the parties to the contract either orally or in writing and are to be
performed in accordance with the terms of the contract. The conditions and
warranties which are not express are termed as implied. Certain implied
conditions and warranties are laid down by the Act itself.
Whether a stipulation is a condition or warranty also depends upon its
nature as reflected by the construction of the contract rather than it is
literally called so in a contract. 4 At the discretion of the buyer a condition
may be treated as a warranty. The Act guarantees protection for the breach
of these conditions and warranties under separate provisions.
I. Time of Payment and Delivery of Goods

Section 11 of the Act lays down that ordinarily time is not of essence to the
contract of sale, but it depends upon the terms of a contract whether any
stipulation is of essence to the contract of sale or not. Accordingly, in a
transaction, if the buyer fails to pay in time, the seller would not be entitled
to repudiate the contract unless he unequivocally states so in the contract.
In Sundara Bayamma v. Venkateswara & Co.,s the court has held that if the
parties treat the payment of advance as a vital element to the contract and
the actual payment of the advance takes place only after the offer has been
revoked, no enforceable contract would be there. If the seller acquiesces the
delay in payment the time of payment cannot remain of essence to the
contract. Same is the case if the buyer accepts the delayed supply of goods
without protest. In Burn & Co. Ltd. v. Morvi State,6 there was a contract
about supply of wagons and the payment of the price was to be made in
three stages. The buyer made a default at the second stage, but the supplier
still supplied the part of the wagons. After such a conduct of the supplier,
the delay in payment was not accepted as a ground for rescission of the
contract. In Hind Techno Machines (P) Ltd. v. Jaipur Wire Industries (P) Ltd.,7
1. The Sale of Goods Act, 1930, sec. 12(2).

3. Id., sec. 12(3).
4. Id., sec. 12(4).
5. AIR 1955 N O C (Andh.) 5825.
6. (1926) 30 Cal WN 145.
7. (1988) 2 Raj LR 56.
THE SALE OF GOODS ACT, 1930 241
there was delay in deliveries of the goods but the buyer continued to accept
t h e m w i t h o u t p r o t e s t at the a p p r o p r i a t e time. T h e b u y e r was, therefor,
deemed t o have waived his right to sue for delay and thereby repudiate the
contract.
In Orissa Textile Mills v. Ganesh Das,s it has been observed that whether
t i m e of d e l i v e r y of g o o d s is of essence t o a c o n t r a c t d e p e n d s u p o n the
circumstances of each case. T h e reason for this is that a "mercantile contract
is n o t always an isolated t r a n s a c t i o n " but a part of chain of events and
t h e r e b y any lapse in delivery m a y result in h a r m t o the b u y e r . In such a
situation, delay in delivery of goods operates as an injury to the b u y e r and
the time w o u l d be of essence to the contract. In the instant case, there was
a contract of sale about five bales of dhotis. The seller supplied only one bale
and that also w i t h a delay of one m o n t h and offered the remaining o n new
excise terms. T h e buyer was held entitled to reject the supply because where
the prices are liable t o fluctuate and result in harm to the buyer, the time of
delivery is of essence t o the contract. It is, therefore, obvious that the time
of d e l i v e r y is of essence t o a c o n t r a c t if the n a t u r e and necessity of the
contract requires it to be so or the parties have expressly agreed to treat it
so.
W h e r e t h e t i m e for t h e p e r f o r m a n c e of contract has been m u t u a l l y
extended, the extended time also becomes an essence to the contract. 9
II. Treating Breach of Condition as Breach of Warranty

A c c o r d i n g t o section 13 of the Act, if a contract of sale is subject t o any
condition t o be fulfilled by the seller, the buyer may, at its discretion, waive
the c o n d i t i o n or elect t o treat the breach of the c o n d i t i o n as a breach of
w a r r a n t y a n d n o t as a g r o u n d for treating the c o n t r a c t as repudiated. 1 C
Similarly, if a contract of sale is not severable and the buyer has accepted the
goods o r part thereof, the breach of any c o n d i t i o n to be fulfilled by the
seller can only be treated as a breach of warranty and not as a g r o u n d for
rejecting the goods and treating the contract as repudiated. 1 ' H o w e v e r , this
m u s t n o t be in any w a y c o n t r a r y t o the express or implied t e r m s of the
contract. 1 2
Regarding enforcement of conditions and warranties, it has been made
clear u n d e r the Act that w h e r e fulfilment of any condition or w a r r a n t y is
excused by law by reason of impossibility or otherwise, the seller can vahdlv
8. AIR 1961 Pat 107.

9. British Paints (India) Ltd. v. Union of India, AIR 1971 Cal. 393.
10. Supra note 2, sec. 13(1).
11. Id., sec. 13(2).
12. Ibid.
rely upon the ground of impossibility of performance in any action by the

buyer.13
If the buyer after receiving the goods resells them, that would put an
end to his right to reject the good, because by resale he cannot put the
goods at the disposal of the seller immediately on rejection. This was
explained by the Calcutta High Court in Jitendera Banerjee v. Murlidhar,14 a
case of purchase of black Italian cloth by sample, observing that if the buyer
after taking delivery exercises ownership rights (like resale) over the goods,
he cannot claim a refund of the purchase money on the ground that the
goods were damaged and not saleable. He may, however, be entitled to
damages.
If the goods, after receipt, are dealt with by the buyer like an owner,
and are taken to some other place and exposed to possible risks, the buyer
would lose his right to reject them as in a case of resale. In Nagardas
Mathurdas v. N.V. Velmahomed,15 the defendants purchased from the
plaintiffs konda (rice bran) and received the supply in certain bags. The bags
were unloaded and the buyer's marks were put on them. They were then
taken for shipping to another place. At this stage the buyer found that the
bags contained ground paddy husks and not rice bran. On finding this the
buyer rejected the goods while the seller sued for the price. The court held
that the proper place of inspection and rejection of the goods was the place
of delivery. Since, at that time, the goods were marked in the name of the
buyer and carried to the dock, he could not take the plea of breach of
condition.
In another case, Shah Thilokchand Possaji v. Crystal & Co.,16 relating to
sale of pens of a particular description, the supplied goods were not
answering the given description. The court held that where supplied goods
are not answering to the description contracted for, the buyer has a right to
either of the following alternative remedies:
(a) reject the goods and obtain a refund of the price if paid in
advance and sue for damages for non-delivery; or
(b) waive the condition and accept the goods and sue for damages
for a breach of warranty.
In the former case, the damages would be equivalent to the difference
between the contract price and the market price of the goods on the date of
the breach if the latter were higher. While, in the later situation, he has to
pay the contract price less by any claim for set off for the breach of
warranty.
13. Id., sec. 13(3).

14. AIR 1926 Cal 749.
15. (1930) 32 Bom LR 454.
16. AIR 1955 Mad. 481.
Section 59 of t h e A c t enables the b u y e r t o seek remedy for breach of

any warranty. In case of breach of a warranty by the seller, the buyer is not,
as stated above, b y reason of such breach entitled t o reject the goods. Same
is t h e position w i t h respect to the buyer w h o opts or is constrained to treat
any breach of a condition o n the part of the seller as a breach of w a r r a n t y . ' 7
T h e b u y e r m a y , however, in either case set-up against the seller the breach
of w a r r a n t y in d i m i n u t i o n o r extinction of the price, o r sue the seller for
d a m a g e s for b r e a c h of w a r r a n t y . 1 8 A b u y e r w h o has set-up a b r e a c h of
w a r r a n t y in d i m i n u t i o n o r e x t i n c t i o n of price can also sue for t h e same
breach of w a r r a n t y if he has suffered further damage. 1 9 Section 59 does n o t
state the principle on w h i c h the damages claimed should be c o m p u t e d .
It can be inferred that once a buyer elects t o reject the goods, he divests
his title o n the goods and the property thereupon reverts to the seller. If the
divesting of t h e p r o p e r t y from a b u y e r and the vesting of it in t h e seller
takes place as a result of the conjoint action of the buyer and the seller, the
buyer cannot subsequently, by any unilateral act of his own, divest the seller
of h i s t i t l e t o t h e p r o p e r t y a n d p u r p o r t t o a c c e p t t h e g o o d s as in
performance of t h e original contract.
It has been judicially established that section 59 comes i n t o play only
after the buyer elects t o treat any condition in a contract as warranty. In City
and Industrial Development Corpn. of Maharashtra Ltd. v. Nagpur Steel and Alloys
(P) Ltd.,20 u n d e r a c o n t r a c t for s u p p l y of bars, t h e s u p p l i e d bars w e r e
oversized. T h e buyer, however, used t h e m as such on their delivery. T h o u g h
t h e s u p p l y of oversized bars w o u l d have been a breach of c o n d i t i o n , t h e
goods, after t h e y were c o n s u m e d by t h e buyer, could not be rejected. This
a m o u n t e d t o waiver because of which the buyer got disentitled t o insist o n
the condition. Since remedies u n d e r section 59 are not absolute and cannot
be resorted to at any strategical point suitable to the buyer, he is duty b o u n d
to give notice of his intention at p r o p e r time. T h e appropriateness of time,
f o r m a n d m a n n e r w o u l d , of c o u r s e , d e p e n d u p o n t h e facts a n d
circumstances of each case. T o hold otherwise, would amount to placing the
seller in an a w k w a r d and uncertain position w h i c h m a y not be w a r r a n t e d
either b y law or by equity.
E x p l a i n i n g t h e p o s i t i o n t a k e n b y t h e parties in t h e instant case, t h e
court observed that t h e b u y e r accepted the major instalments of the goods
supplied w h i c h did n o t strictly c o n f o r m t o the specifications given in t h e
purchase order a n d the contract. T h e goods were consumed and p a y m e n t s
of all the bills h a d been made but of the last t w o bills which were withheld
o n the ground that there was a breach of warranty, the goods supplied being

18. Ibid.
19. Id., sec. 59(2).
20. AIR 1992 Bom 55.
not as per specifications. N o notice of b u y e r ' s i n t e n t i o n to claim

compensation for a breach of warranty or to set-up the breach in diminution
or extinction of price has been given and there was no evidence to that
effect adduced by the buyer. The court held that in these circumstances, the
buyer being fully aware of the so called oversize of the goods, did not reject
them though specifically provided for in the contract. He must be deemed
to have voluntarily waived the condition as to the size of the goods supplied.
The goods were consumed without giving any opportunity to the seller to
replace the same and even the price was paid for major quantity of the
goods supplied.
The buyer had also not adduced any proof of actual damages or its
likelihood in future. Thus, the buyer was not held entitled to withhold the
payment of full price by invoking section 59 which, according to the court,
comes into play only when the buyer does not waive the condition, but
elects to treat the breach of condition as a breach of warranty.
III. Implied Conditions as to Title and Possession

Section 14 of the Act relates to the implied condition as to title of goods.
This is to the effect that in every contract of sale, unless the circumstances
of the contract show a different intention, there is an implied condition on
the part of the seller that he has a right to sell the goods and in case of an
agreement to sell, he will have a right to sell the goods on the fulfilment of
the stipulation. 21 Section 14 lays down an implied warranty that the buyer
would have and enjoy peaceful possession of the goods, which will be free
from any charge or incumbrance in favour of any third party not declared or
known to the buyer before or at the time when the contract is made."
IV. Goods should be True to their Description

Section 15 of the Act provides that in a contract for the sale of goods by
description, there is an implied condition that the goods should correspond
with the description. If the sale is by sample, as well as by description, it is
not sufficient that the bulk of the goods corresponds with the sample if the
goods do not also correspond with the description. This implies that there is
an implied term that the goods should correspond with their description and
the seller should comply with express terms. In view of the consumer
interest, section 15 requires that if the description of the goods does not,
according to ordinary principles, amount to a term of the contract but is
merely a representation, such description should be treated as a term of the
contract. It, therefore, converts the 'description' into a 'term of the contract'
and obliterates the distinction between terms of the contract and
representations in contracts of sale of goods.
21. Supra note 2, sec. 14(a).

11. Id., sec 14(b) and (c).
Whether puffs can be treated as terms of a contract would depend on

the circumstances of each case. A mere puff is a vague and extravagant
statement so preposterous in its nature that nobody could believe that
anyone was misled by it. While categorising a statement as a mere puff, the
court would have to examine its degree of untruth, the circumstances in
which it was made and the knowledge and experiences of the persons to
w h o m it was made. 2 3 Section 15 provides for the advancement of the
principles of fundamental obligation of the contract and the seller in every
case is supposed to deliver the specific commodity only. There cannot be
any unilateral change in the specifications. For example, if a seller has
delivered very comfortable chairs in place of sofas, he cannot defend a suit
for having committed a breach of his fundamental duty under the express
terms of the contract and section 15.
Seen in the context of practical realities, the expression "sale by
description" must apply to all cases where the purchaser has not seen the
goods but is relying on the description alone. Likewise, if the sale is about
future or unascertained goods, it must undoubtedly be a sale by description.
Even in many cases where the buyer has seen the goods, the sale can be
treated as sale by description. In Grant v. Australian Knitting Mills Ltd?4, Lord
Wright has made it clear that "there is a sale by description even though the
buyer is buying something displayed before him on the counter - a thing is
sold by description, though it is specific, so long as it is sold not merely as
the specific thing, but as a thing corresponding to a description ,..."25
The expression "sale by description" covers even those sales in which
during transaction no verbal communication takes place as in a self service
store with descriptive labels on goods spread over on the floor. In Varley v.
Whipp,lb to the advantage of the consumer, this principle has been applied
even though the goods were not sold by a person dealing in goods of that
description. 27
The requirements of section 15 have in certain cases been treated as
very rigorous and followed in a strict sense. Dealing with the matter, Lord
23. Pollock and Mulla, Sale of Goods Act, Ub-127 (2002).

24. (1936) AC 85.
25. Id, at 100.
26. (1900) 1 QB 513.
27. Ibid.; in this case, the defendant agreed to buy from the plaintiff a second hand
reaping machine, which was stated to be one year old and was hardly used. On
delivery, the buyer found that the claim of the seller was a gross misdescription, and
the defendant declined to accept it or pay for it. Though the buyer could not rely on
section 14 (section 16 under the Indian Act) because the plaintiff was not a dealer in
reaping machines, but as the goods did not correspond with the description it was
held that there was a breach of section 13 (section 15, of the corresponding Indian
Act).
Atkin followed this trend in Across Ltd. v. E.A. Ronaasen & Sons,28 in which
the buyers agreed to buy staves for making cement barrels. Under the
contract, the staves were to be of a specified thickness, but on delivery only
about 5 per cent of the materials conformed to this requirement. The rest of
the supply included the staves of lesser thickness, though they were found
to be commercially merchantable and reasonably fit for the purpose for
which they were needed. In spite of these findings, Lord Atkin took the
view that the buyers were entitled to reject the goods for the breach. He did
not agree with the view that in all commercial contracts, the question was
whether there was a "substantial" compliance with the contract leaving
scope for some margin, and it was for the tribunal to determine whether the
margin was exceeded or not. He opined that if the written contract specifies
conditions of weight, measurement and the like, those conditions of weight,
measurement and the like should be followed as they have been agreed. He
observed that "a ton" does not mean "about a ton" or "a yard" just "about
a yard." 29 In view of the practical situations, it was noted that undoubtedly
"there may be microscopic deviations which business men and, therefore,
lawyers will ignore... But apart from this consideration the right view is that
the conditions of the contract must be strictly performed. If a condition is
not performed the buyer has a right to reject".30
P.S. Atiyah has remarked that unlike other kinds of dealings, a sale by
description is a special kind of contract in which the buyer stands for strict
adherence of the description of the goods. Also in case of sale by
description every statement, which forms part of the description, is a
condition, and breach of that makes the buyer entitled to reject the goods,
even if the statement might be of a trivial nature only. 31 On the contrary,
when a person buys specific goods not by description, any statements made
by the seller respecting the quality of the goods may constitute a term of the
contract, but he will be entitled to reject the goods on the breach of the
terms only if that is a condition. If such a statement is made by the seller
with respect to any minor matter, on its breach the buyer can claim only
damages and cannot reject the goods.
In cases of sale by description, there are probabilities of confusing
'description' with 'quality'. For example, in Steels and Busks, Ltd. v. Bleecker
Bik & Co. Ltd., 32 a part of goods were supplied to the buyer as per the
description. The goods supplied later contained some new chemicals, not
present in the original deliveries, which rendered the goods unfit for the
buyers purposes. In spite of the presence of such a chemical, the goods were
28. (1933) AC 470.

29. Id. at 479-80.
30. Ibid
31. See P.S. Atiyah, Sale of Goods Act, 59 (1967).
32. (1956) 1 Lyoyds' Rep. 228.
held to be in accordance with the description. This was a case of confusing

quality with description. The fact is that even if the goods in this case might
have been of perfectly good quality but it was difficult to say that how they
could be held to comply with their description.
It needs to be emphasised that the description of the goods may go
beyond the mere physical state of goods and include the way they are
packed and labelled. The Court of Appeal explained the issue in Re Moore &
Co., Ltd. v. Landaver & Co.,i3 in which the buyer agreed to buy from the
seller 3000 tins of Australian canned fruit packed in cases each containing 30
tins. O n actual delivery, it was found that half of the goods were delivered
in cases each containing only 24 tins. The buyer was held to be entitled to
reject the goods though the total number of tins was the same and there was
no difference in value between the tins as they were packed and as they
should have been packed. The court held this change in packing as a breach
of description.
The case establishes the rule that if there has been a breach of
condition, the buyer is entitled to reject the goods even though he suffers no
damage therefrom. Generally, a breach of condition occurs causing some
damage, but there can be situations when the breach of description may not
cause damage and yet the buyer is entitled to reject the goods invariably.
Under the new commercial regime goods are generally identified by
trade names. If some goods have acquired a trade name they may
correspond to their description even if they are different from what their
trade name literally means. This was explained by Justice Darling in Lemy v.
Watson ,34 observing that "if anybody ordered Bombay ducks and
somebody supplied him ducks from Bombay the contract to supply Bombay
ducks would not be fulfilled."35 In Grenfell v. E.B.Meyrowitz, Ltd.,ib the
defendants were held not to be in breach of description when they supplied
goggles of "safety-glass" to the plaintiff which subsequently splintered in an
accident, as it was proved that "safety-glass" had acquired a technical trade
meaning and the goggles in fact conformed to the normal design. In
another case, Peter Darlington Partners, Ltd. v. Gosho Co., Ltd?7, there was a
contract for the sale of seeds on a "pure basis". Buyers refused to accept
goods as they were not 100 per cent pure. They were held to be at fault for
not accepting the goods as it was found that the highest standards of purity
in case of seeds was 98 per cent and in trade there was no such thing as 100
per cent pure.
33. (1921) 2 KB 519.

34. (1915) 3 KB 731.
35. W., at 732.
36. (1936) 2 All ER 1313.
37. [1964] 1 Lloyds' Rep. 149.
It is notable that any term in a sale of goods by description, having the

effect of, excluding seller's liability for defects in the goods, cannot prima
facie be read to exclude the requirements of description though it may
exclude the requirement "of merchantability. In Robert A. Munro & Co., Ltd.
v. Meyer,is the defendant agreed to buy goods " with all faults", but this
clause was held by Justice Wright not to exclude the requirement of the
goods to conform to their description. The clause only protected the sellers
from the obligation to supply merchantable goods because the seller could
not have contracted himself out of the requirements of the description of
goods. It thus becomes clear that the seller in a contract of sale of goods
by description is duty bound to supply the goods which correspond to the
description, and any clause which purports to exempt the seller from this
obligation goes against the main spirit of the legislation and hence void. The
instant case serves a good example of adopting a pro-consumer approach by
a judge in cases of sale by description.
V. Caveat Emptor and Caveat Venditor

The common law rule caveat emptor means "buyer beware". It implies that the
buyer should himself be careful while purchasing goods; he should himself
ascertain that the goods suit his purpose, and if found unsuitable, he cannot
blame the seller. The implied terms as to quality and fitness laid down in
section 16 of the Act provide a protective measure against this common law
rule of caveat emptor. This section makes the seller liable for all the defects in
the goods supplied to the buyer, whether he is a manufacturer or producer
of goods or not. The buyer should make known to the seller the purpose for
which the goods are required, relying upon his skill or judgment and they
should of a description in the course of his business to supply/ 9 If the
buyer purchases goods under a patent or trademark, the question of implied
condition does not arise.40 Section 16 further lays down that if the goods
are purchased by description and seller deals in the goods of that
description, the goods should be of merchantable quality. 4 1 In such a
situation, if the buyer examines the goods, there exists no implied condition
as regards the defects which could have been p o i n t e d out by such
examination. 4 2 However, latent defects are not covered under this
provision. To widen the scope of implied condition or warranties, section 16
expressly provides that an implied condition or warranty as to quality or
fitness for a particular purpose can also be established by the usage of any
trade. 43 The section applies whether the purpose for which the goods are
38. (1930) 2 KB 312.

40. Id., proviso to sec. 16(1).
41. Id., sec. 16(2).
42. Id., proviso to sec. 16(2).
43. Id., sec. 16(3).
required is made known to the seller either expressly or by implication.

The provisions of section 16 are obviously consumer-centric. The
conditions laid down in the Act are basically a series of duties obligating the
seller to the buyer regarding the goods which may be the subject of
transaction. This has converted the principle of caveat emptor into caveat
venditor, that is, seller beware. The buyer, however, cannot afford to remain
totally passive. To take the benefit of these obligations, the buyer has to be
himself careful. For example, the implied condition that the goods must
correspond with their description cannot afford a great deal of protection to
the buyer if the description of the goods is not detailed. In a contract for
supply of goods in which the details about the subject matter of sale have
not been reflected sufficiently, the supplied goods may be of the same kind
but with defects. For example, a photocopier supplied to a buyer under a
contract without sufficient description may be a photocopier, but the
supplied article, of course, may be with serious defects since no description
has been given, which may put the buyer in a state of loss.
Consumer interest requires that besides corresponding with their
description, the goods should be merchantable as well as suited to the
purpose for which the buyer bought them. Therefore, the implied condition
that the goods must be fit for the purpose for which they are bought is
being formally treated as the first exception to the rule of caveat emptor, and the
implied condition of merchantable quality is being considered as the second
exception to this rule. To look into the complexities involved in the matters of
suitability and merchantability of goods, they are examined below separately.
VI. Suitability of Goods to the Purpose for Which They are

Purchased
Sub-section (1) of section 16 of the Act provides that where the buyer
makes known to the seller the particular purpose for which the goods are
required, showing that he relies on the seller's skill or judgement, there is an
implied condition that the goods should be reasonably fit for such purpose.
The sub-section would, however, not apply if the goods are of a description
which are not in the course of the seller's business to supply, whether he be
their manufacturer or not. The condition also does not apply in the case of
sale of a specified article under its patent or other trade name. The particular
purpose for which the goods are required may be made known to the seller
either expressly or by implication. Taking a note of the realities in Grant v.
Australian Knitting Mills, Ltd.,** it has been observed in this respect that "the
reliance on the seller is seldom express. It is usually by implication from the
circumstances. It, however, needs to be noted that such inferences cannot
be drawn in the case of raw material or material manufactured in bulk and
44. Supra note 24 at 99.

capable of being used for a large variety of purposes". 45

If the buyer relies only partially on the skill or judgment of the seller,
then it must be ascertained that whether the complaint is in respect of
matters which have been left to the seller. To be more explicit, the reliance
must be such as to constitute a substantial and effective inducement which
leads the buyer to agree to purchase the goods. This principle is reflected in
Cammel Laird & Co. Ltd. v. Manganese Bronze & Brass Co., Ltd.4b where two
propellers were to be constructed for two ships regarding which certain
specifications were given by the plaintiffs, but certain other matters had
been left to the defendants. One of the propellers was found defective in
some matter other than the specifications. The House of Lords held that
"there was a substantial area outside the specifications which ...was,
therefore, necessarily left to the skill and judgment of the seller". 4/ Thus,
where the buyer has relied partially on the skill or judgment of the seller, he
can claim benefit under implied conditions only if his reliance was such as to
constitute a substantial and effective inducement leading the buyer to agree
to purchase the commodity.
The plea can, however, not be stretched too far. A buyer knowing that
the seller supplies only a particular brand of goods cannot be said to have
relied on the seller's skill or judgment in each case. Thus, in Wren v. Holt,4S
the plaintiff had bought the beer in a public house 'which he knew to be
tied', the Court of Appeal held the buyer not having relied on the seller's
skill or judgement. However, in case of a mere suspicion that a seller could
supply only a particular kind of goods, the buyer may claim benefit under
the implied condition that the goods should be suited to the purpose. In
Manchester Liners, Ltd. v. Rear,49 a case related to coal supply, it was held that
even if the consumer could suspect that due to railways strike, the seller
could not supply the coal of a type other than the supplied, the seller could
not claim exclusion of liability from implied conditions.
In practice, it so happens sometimes that a third party is invited by the
buyer to inspect the goods on his behalf who reports favourably to him
relying on seller's skill and judgment. In such a situation, the buyer can be
treated to have himself relied on the seller's skill and judgment. Same will
be the position with respect to a buyer who may purchase goods on the
basis of the information received through his employee. Section 16(1) can,
therefore, apply in such situations. Since section 16(1) requires that the
goods should be fit for the purpose for which they are purchased, and they
45. See also Steel Busks, Ltd. v. Bleecker Bik & Co. Ltd., [1956] ILloyd's Rep. 236.
46. (1934) AC 402.
47. Id. at 414.
48. (1903) 1 KB 610.
49. (1922) 2 AC 74.
should be so in case of goods having only one particular use even in the
absence of any specification of purpose having been made. In Priest v.
Last,50 the plaintiff wanted to purchase a hot water bottle from a chemist.
The plaintiff sold him an American rubber bottle, saying that it would stand
hot but not boiling water. The plaintiff purchased the bottle for his wife and
while she was using it burst and scolded. The seller was held liable to
compensate for breach of implied condition because the hot-water bottle
was not fit for the particular purpose for which it had been purchased.
Where the goods have only one particular use, there is no need to specify
that because it is the only purpose for which anyone would ordinarily want
the goods. 51
If the goods can be utilized for a variety of purposes known to the
supplier, then unless he is informed about the particular purpose for which
these goods are wanted, there is no condition of fitness that they shall be fit
for the particular purpose. In Re Andrew, Yule & Co.,52 which dealt with a
dispute relating to 3,00,000 yards of hessian, contained in 150 bales. The
goods were sold F.A.S. They were sold by the buyers to sub-buyers who
purported to reject 100 bales because while going through a batching
process they had acquired smell rendering them unfit for packing of food
stuffs, the main purpose for which they could be used. The buyer could not
reject the supply, because he had not disclosed the particular purpose to the
seller. The court observed, "If the buyers expressly communicate to the
sellers the p u r p o s e for which the goods are wanted (and the o t h e r
conditions are present) then there is an implied condition of fitness. Apart
from express communication, that knowledge may be imputed to the sellers
by reason of the circumstances of the case.
In Bombay Burmab Trading Corporation v. AGA Mahomed Khaleel Shirazee,53
the agents of the suppliers had committed a breach of contract with the
buyers regarding the delivery of teakwood sleepers to a railway company of
a particular measurement and quality, reasonably fit for its purposes. In
defence to an action for damages, the suppliers relied on a provision
contained in the contract that "the passing by the suppliers at the port of
shipment was as usual final as regards both measurement and quality". They
pleaded that the sleepers in question had been declared fit for the given
purpose in the impartial and honest exercise of their judgment by two
experts employed by them for that matter. The court, however, held that
there had been no decision by the experts that the sleepers were in
conformity with the contract but merely that they were fit to be sent out as
their employers' manufacture. So the buyer company was allowed to reject
50. (1903) 2 KB 148.

52. AIR 1932 Cal 879.
53. (1911) 38 IA 169.
the supply as being not of the quality ordered.

In Joseph Mayer v. Phani Bhusan Ghose5*, the plaintiff (buyer) was carrying
on a business of ink and sealing wax and wished to start the manufacture of
carbon paper. He consulted the defendant (seller), who advised him to use
a steam boiler. Plaintiff placed the order for the same with the defendant
and having made known the purpose for which it was required relied upon
the skill and judgment of the defendant to supply him with a boiler which
was reasonably fit for the purpose. The boiler was accordingly delivered to
the plaintiff who installed it in his workshop. It was later discovered by the
boiler inspecting authorities that the boiler did not satisfy the statutory
requirements and was, therefore, discarded. The court held that the
defendant was guilty of breach of contract as the boiler was not reasonably
fit for the purpose for which it was ordered and supplied. The plaintiff was,
therefore, entitled to claim damages from the defendants under the heads
(1) expense incurred in removing the boiler in question and in installing
another suitable one in its place; (2) the difference between the price of the
replaced boiler suitable for the purpose and the discarded one; and (3) a sum
of money estimated to be the overhead charges in respect of the carbon-
paper plant only, during the time necessarily taken up in removing the
unusable boiler and installing a suitable one.
The provision dealing with suitability of good to the purpose for which
they are purchased applies to both manufactured and non-manufactured
goods. Thus, it covers even food stuffs.
The goods sold under a "patent or trade name" are not covered by
section 16(1) because of a clear proviso to that effect. In Bristol Tramways
Co. Ltd. v. Fiat Motor Ltd.,55 the plaintiffs ordered from the defendants a
vehicle mentioning its trade name and chassis thereof without any mention
in the written contract about the requirement of the vehicles for heavy
passenger traffic. The Court of Appeal did not provide relief to the buyer
on the ground that the sellers knew the buyers requirement. 56 In Baldry v.
Marshall,57 the buyer ordered a specific model car on the recommendation
of the defendants as being a comfortable car for touring, but the car did not
suit the buyers purpose at all. The proviso was held as not applicable, the
reason being that it applied only where the buyer ordered the goods under
their trade name in such a way as to show that he did not rely on the seller's
skill or judgment.
To illustrate it further it may be pointed out that where the buyer asks a
seller for an article which can fulfil some particular purpose, and in answer
54. AIR 1939 Cal 210.

55. (1910) 2 KB 831.
56. Ibid.; the proviso has been omitted in the English Act by the Supply of Goods
(Implied Terms) Act, 1973.
to that request the seller sells him an article by a well-known trade name,
there the proviso to section 16(1) does not apply. If the buyer buys an
article after saying to the seller, "I have been recommended such and such
an article [mentioning it by its trade name] will it suit my particular
purpose?" naming the purpose, there the proviso has no application. But
where the buyer says to seller, " I have been recommended so and so [giving
its trade name] as suitable for the particular purpose for which I want it.
Please sell it to me", in that case the proviso would apply. 58 The test of an
article having been sold under its trade name within the meaning of the
proviso is whether the buyer specified its trade name in such a way as to
indicate that he was satisfied (rightly or wrongly) that it would suit his
purpose, and that he was not relying on the skill or judgment of the seller.59
As regards the latent defects in goods not discoverable by any amount
of diligence or care, the seller must be liable under section 16(1). Quite
logically in Frost v. Aylesbury Dairy Co. Ltd.,60 the argument was made that
the buyer "could not be said to rely on the skill or judgment of the sellers in
a case in which no skill or judgment would enable them to find out the
defect" in the goods supplied. The subject of sale in this case was the milk
infected with typhoid and it was not at the time of purchase practicable to
test it. The sellers were held liable, though a reason for this appears to have
been that they warranted the milk 'free from germs and disease'.
It the goods are fit for the purposes normally required but are not suited
to the buyer's purpose owing to some special circumstances on his part of
which the seller is unaware, the buyers claim would fail. In Griffiths v. Peter
Conway Ltd.61, the plaintiff, with an unusually sensitive skin, contracted
dermatitis from a cloth bought from the defendants. She failed to hold the
seller liable on the plea that the cloth was not fit for the purpose for which
it was required, that is, her personal use. The Court of Appeal, observed
that, if a person suffering from such an abnormality requires an article of
clothing for his or her use and desires to obtain the benefit of the implied
condition, he or she should make known to the seller the particular purpose
not only saying that he or she needs the article of clothing for personal use
but also by informing the seller about the abnormality or idiosyncrasy from
which the buyer suffers. Without such knowledge, the seller would not be
able to exercise his skill or judgment. 62
An important matter that needs mention is that a person having no
contractual relationship with the seller of unmerchantable and possibly
57. (1925) 1 KB 260.

58. Id., at 266.
59. Ibid.
60. (1905) 1KB 608.
61. (1939) 1 All ER 685.
62. Ibid.
dangerous goods has remedy available not under the Act, but in tort. For
remedy in the tort, the plaintiff must prove negligence, because in such torts
there is no strict liability. There must be either negligence or contractual
relation with the seller, otherwise the claim will fail.63
VII. Goods Must be Merchantable

It has been pointed out above that where goods are bought by description
from a seller who deals in goods of that description (whether he is the
manufacturer or producer or not), there is an implied condition that the
goods should be of merchantable quality. In case the buyer has examined
the goods, there would be no implied condition as regards defects which
could be detected on such examination.64 The implied condition, however,
continues to exist as regards the defects which are not apparent on their
reasonable examination rendering the goods unmerchantable. 6 3 The
proviso to section 16(2), excludes the implied condition that the goods must
be merchantable in a sale by description if the buyer has actually examined
the goods.
The language of the proviso is very important. It reads that "if the
buyer has examined the goods, there shall be no implied condition as
regards defects which such examination ought to have revealed." 66 As
regards the "examination of goods", the examination should actually have
been made, not that it might or ought to have been made. If the buyer,
however, tells to the seller or makes him believe that he has examined the
goods, he may not be later allowed to take a plea that he had not examined
them. In Tbornett & Fehr v. Beers and Son,67 the proviso was applied though
the buyer, being pressed for time, examined some barrels of glue only from
the outside, although the seller offered him every facility for a more
complete examination. The court took the view that the examination need
not be full and complete in order to exclude the implied condition, because
the very fact that the section refers to the possibility of defects which ought
to have been revealed by the examination shows that it contemplates a case
where the examination has not been sufficiently thorough. The court, thus,
decided the case in favour of the seller.
On this point Atiyah 68 has differed from Chalmers. 69 Chalmers holds
the position that the examination was in effect waived, but Atiyah holds the
63. Supra note 31 at 73-74.

64. Supra note 2, sec. 16 (2).
65. Id., sec. 17(2), this condition applies even in case of second hand goods: Barttett v.
Sydney Marcus, Ltd, [1965]1 WLR 1013.
66. With respect to sale by sample, similar provisions are found in section 17(2)(c).
67. (1919) 1KB 486.
69. Chalmers, The Sale of Goods, 57 (14th ed.)
view that "the words of the section and the language of the judgment are
both clearly inconsistent with the possibility that the proviso may apply
unless there is in fact some sort of examination, however, incomplete and
unsatisfactory". 70 Atiyah's view is sound because this section modified the
common law rule which was that the implied condition was excluded by the
mere opportunity for examination, even if in fact the opportunity was not
taken. Chalmers reading fails to take a note of the legislative modification of
the common law position.
It is quite probable that at times the defects may not be discoverable by
a reasonable examination. O n this ground, in Wren v. Holt/1 damages had
been granted to the plaintiff for breach of the condition of merchantability
of beer c o n t a m i n a t e d by arsenic. Since such a defect could not be
discovered by reasonable examination, the seller could not take benefit of
the exempting proviso from liability. Similarly, in Godley v. Perry,72 in which
a child's catapult broke in ordinary use, the defect was held as not
discoverable on reasonable examination.
The seller's obligation in such cases depends broadly upon what is
meant by "merchantable quality" of goods which includes their state or
condition. 73 The state or condition of goods covers both the condition of
the labels as well as packing. 74 According to Farwell, LJ, "merchantable"
means that the subject of purchase is of such quality and in such condition
that a man of ordinary prudence acting reasonably would after a full
examination accept it whether he buys it for his own use or to sell again.75
The goods are not merchantable only because they looks all right. So an
article is unmerchantable, if it is defective and not fit for its only proper use
though the defects may not be apparent on ordinary examination. 76
In the celebrated Australian case, Grant v. Australian Knitting Mills Ltd.,77
the buyer brought an action against the seller and the manufacturer of
garments claiming damages on the ground that he had contracted dermatitis
by reason of the improper condition of an underwear purchased by him
from the seller. He alleged that the disease was caused by the presence of
certain irritating chemical, in the cuffs or ankle ends of the under-pants,
which was due to negligence in manufacturing. The facts in the case
revealed that the disease was external and the buyer's skin was normal. Free
sulphite was present in the garment in major quantities making the garments
defective.
71. Supra note 47.
72. (1960) 1 WLR 9.
73. Supra note 2, sec. 2£12).
74. Niblett v. Confectioners'Materials Co., Ltd. [1921] 3 KB 307.
75. Bristol Tramways Co., Ltd. v. Fiat Motors, Ltd. [1910] 2 KB 841.
77. Ibid..
The privy council, on the basis of these facts, held that the sellers were
liable on the ground that the under-pants were not merchantable in the
statutory sense because their defect rendered them unfit to be worn next to
the skin. The court further held that the manufacturers were liable under
tort as the presence of the deleterious chemical in the pants was due to the
negligence in manufacture. It was immaterial that the buyer had a claim in
contract against the seller because that was quite an independent cause of
action based on different considerations, even though the damages may be
the same.
In Raghava Menon s/o Kasturi Amma v. Kuttappan Nair,7S a layman
purchased a watch of a particular make from the defendant company which
was the exclusive dealer for watches of that make. Along with the watch a
guarantee certificate was given for a period of one year "unless the watch
was unfairly used or damaged by accident". The watch being found to be
defective, was returned to the seller for repairs twice or thrice but it was
given back without any improvement in it. The plaintiff filed a suit for the
refund of the price or its replacement. Defendant denied liability contending
that the guarantee covered only free servicing. The court examined the
guarantee certificate which provided: "This is to certify that the under
mentioned Kenson Watch which has been sold this day is guaranteed for a
period of one year, unless unfairly used or damaged by accident, water or
perspiration". The court held on the construction of the guarantee clause
that it included repair as well as the replacement and the defendant was
liable to replace the watch or refund its price. The watch was obviously not
merchantable.
In V.P. Peer Mohamad Rowther v. Dalooram Jayanarayan,79 the subject of
sale was the bales of yarn which were damaged by white ants rendering them
unmerchantable. The goods had been inspected by the buyer before
purchase. The Madras High Court held in this case that where goods are
sold by description, there is an implied w a r r a n t y that t h e y are of
merchantable quality, though they might have been inspected before
purchase. If, however, the buyer has examined the goods, there is no
implied condition as regards defects which such examination ought to have
revealed.
Existence of defects makes the goods unmerchantable and it cannot be
assumed that certain goods may be defective and yet merchantable. In
Bartlett v. Sydney Marcus, Ltd.,80 the buyer was made aware of the defects in
goods but he agreed to have them put right at his own expenses. In this case
the implied condition as regards those defects got automatically negatived.
78. AIR 1962 Ker 318.

79. (1918) MWN 658.
80. (1965) 1 WLR 1013.
From this, however, no inference can be drawn that the goods even if
defective are merchantable.
The interest of consumers requires that the goods should not only be
merchantable at the time when they are purchased but should remain
merchantable for a reasonable time thereafter so that they can be put to use.
The time period may vary in each case depending upon the circumstances of
each case. This is most important in case of perishable commodities. In this
context, in Mash & Murrel v. Joseph I. Eannel Ltd., 81 it has been observed
that a seller cannot argue that he had loaded sound potatoes on a ship if
they were rotten when they arrive at their destination.
VIII. Implied Terms by Trade Usage

Section 16(3) of the Act provides that "an implied warranty or condition as
to quality or fitness for a particular purpose may be annexed by the usage of
trade". In all contracts, the intention of the parties must be ascertained in
the light of the existing circumstances. If the transaction is connected with
a particular trade, the custom and usage of that trade must be considered as
a part of the background against which the parties contracted. That is the
basic reason that in commercial transactions, extrinsic evidence or custom
and usage is admissible to annex incidents to written contracts in matters
with respect to which they are silent.82 In Peter Darlington Partners Ltd. v.
Gosho Co., Ltd., a case regarding canary seed, the trade practice was that if
there were impurities in the seed, the buyer was entitled to proportionate
rebate on impurities but not the rejection of goods. The court held that the
contract was governed by this trade custom. 83
For consumer consciousness, it is very important to take a note of the
fact that in terms of impact there is no difference between express and
implied terms, both being part of the contract. There is no clear line of
distinction between the two, they rather tend to merge into one another.
The express terms are proved from what the parties said or wrote while
implied terms are proved by drawing inferences from what the parties said,
wrote or did. If a clear line is drawn between the express and implied terms,
the result can be hardship for buyers in transactions with express terms as to
quality or fitness of the subject of sale. This is so because the court cannot
read any implied warranty in such contracts where the seller does not deal in
such commodities or articles. This is most relevant for sale of goods taking
place as a private affair, like sale of second hand cars etc. In such situations,
the buyer would be at a loss and the courts would not imply any terms in his
favour.
81. (1961) 1 All ER 485.

82. Hutton v. Warren (1936) 1 M&W 466, 475.
83. [1964] 1 Lloyds' Rep. 149.
To take a practical view of things, let us take the example of those who
purchase second hand swing machines, agriculture and horticulture
accessories, computers and other mechanical devices without having seen
them. They may be called sale by description and goods must correspond to
the description. But in such cases, the sellers are not dealers in these articles
but are merely users themselves trying to dispose of the old items. That is
the limit of their obligations. If a seller has been prudent enough to sell the
articles without actually stating that these are in good working order, no
term can be implied to this effect by the court. 84
Where in such cases, the buyer has been supplied with goods of no
worth, the courts may be of some help to them taking some advantage out
of section 15, dealing with sale by description. Guidance in this respect can
be taken from decision of the Court of Appeal in Karsales (Harrow), Ltd v.
Walks,85 in which a car had been delivered in such a condition as to be
incapable of self-propulsion except after a complete overhaul. The court
held that it was not "in the true meaning of words" a car at all.
The above analysed provisions of the Act appear at the first reading as
not lucid. The complexity lies in the basic drafting of those provisions. To
be specific, it may be pointed out that the Act excludes all implied terms
where the buyer does not rely on the seller's skill or judgment and where the
sale is not by description. These are the raminents of the maxim caveat
emptor, and in the interest of the consumers, it is necessary to eliminate them
from the provisions of the Act.
IX. Goods Must Correspond with Sample

The provisions of section 17 of the Act, dealing with the cases of sale by
sample provide that whether a sale is by sample or not depends upon the
terms of the contract. 8 6 In a sale of goods by sample, the said section
requires that the bulk of goods should correspond with the sample; s7 and
buyer can, of course, claim a reasonable opportunity of comparing the bulk
with the sample.88 The goods should be free from every latent defect which
may not be apparent on reasonable examination of the sample. 89
Thus, under section 17 any contract of sale would be a contract for
"sale by sample" only if there is a term in the contract, express or implied,
to that effect.90 It means that the mere providing of a sample by the seller
for the buyer's inspection does not make the sale a sale by sample. To
84 Supra note 31 at 79-80.

85 (1956) 1 WLR 936.
86 Supra note 2, sec. 17(1).
87 Id., sec. 17(2)(,i).
88 Id., sec. 17(2)(b).
89 Id., sec. 17(2)(c).
9C Id., nee. 17(1).
THE SALE OF GOODS ACT, 193C 259
qualify to be a sale by sample, there must be proof of an intention to that

effect. The essence of a sample is to give to the buyer a real view of the
article and make him aware of the subject matter of sale which may not be
possible to convey by words. However, it is important to note that a buyer
may not be able to examine the sample in such a way as the one who deals
in the goods of that kind. A thorough examination may reveal some more
secrets about the article or subject of sale but it is difficult to have an all-
revealing examination by a buyer exercising due care and diligence. The use
of a sample can, therefore, not protect the seller form liability in respect of
defects not reasonably discoverable on the examination of the sample,
although the bulk may in fact correspond perfectly with the sample.
Sub-section (2) (a) of section 17 contains the words "that the bulk shall
correspond with the sample in quality." It implies that the obligation of the
deliver)' of article will be fulfilled only when it will be in accordance with the
sample. If under the general trade practices, the sample is usually shown
merely for visual examination, and the supplied goods appear to correspond
to the sample on such examination, the buyer cannot complain that the bulk
does not correspond with the sample, even though there may be some
differences. In Hookway & Co. v. Alfred Isaacs?1 it has been held in the same
perspective that if the sample is only intended for a simple visual
examination, the buyer cannot be said to have been misled if the differences
in the sample and the article could only have been discovered by
microscopic examination.
T h e subsection (2) (b) of section 17, providing for the b u y e r ' s
reasonable opportunity of comparing the bulk with the sample is in fact a
special instance of the buyer's right of examination under section 41 of the
Act, which provides that where goods are delivered to the buyer which he
has not previously examined, he is not deemed to have accepted them
unless and until he has had a reasonable opportunity of examining them for
the purpose of ascertaining whether they are in conformity with the
contract. This section further provides that unless otherwise agreed, when
the seller tenders delivery of goods to the buyer, he is bound, on request, to
afford the buyer a reasonable opportunity of examining the goods for the
purpose of ascertaining whether they are in conformity with the contract.
It implies that the buyer is not to be deemed to have accepted the goods
until he has had an opportunity of examining them. The effect of the
acceptance is that the buyer can no longer reject the goods for breach of
condition, but is relegated to his right to claim damages.
Regarding examination of goods in case of a sale by sample, however,
section 17(2) (c)92 excludes the implied condition that the goods should be
91. [1954] 1 Lloyd's Rep. 491.

92. Section 15 (2)(c) of the Corresponding English Act.
merchantable if the defect could have been discovered by reasonable

examination of the sample whether or not it has in fact been examined. The
seller can assume that the buyer will examine the sample, and would not
complain of defects which he could have discovered by the simple process
of examining the sample. Thus, if the buyer on an actual examination of the
sample finds it defective but decides to accept the goods, corresponding
with the sample, he thereby looses his right to go against the sale. It may be
noted that in a sale by sample accepting goods with all faults, it only
excludes the requirement of merchantability, but does not override the
fundamental duty of the seller to ensure that the goods correspond with the
description / sample. In Champanhac & Co., Ltd. v. Walter & Co., Ltd.,9-'' the
defendant sold some balloons to the plaintiff by sample "with all faults and
imperfections". This clause could not protect the defendant from the
consequences of the bulk not corresponding with the sample. Same is the
position in sale by description.
X. Exclusion of Implied Terms and Conditions

It has become obvious that the above mentioned provisions of the Act
envisage various implied terms in favour of buyers, but in various contracts,
as in standard form contracts, there exist some clauses which exempt the
seller from liability and negative the pro-buyer implied terms. This is
permissible under section 62 of the Act, which provides that any right, duty
or liability arising under a contract of sale by implication of law can be
negatived or varied by express agreement or by the course of dealing
between the parties, or by any usage binding on both parties to the contract.
In this regard, there are certain principles which can be of considerable
interest to consumers. For example, if a seller tries to rely on an exemption
clause, he cannot do so without proving that the given clause was a part of
the original contract rather it will have to be shown that it was part of his
offer, which was accepted by the buyer. The buyer should have actually
signed the contract incorporating the clause in question or the clause was
brought to the notice of the buyer. Where the buyer has signed the
contract, he cannot take the plea that he has not read or understood the
contract or the exemption clause. If the seller has whether fraudulently or
innocently, misrepresented the effect of the clause, he will not be allowed
any benefit out of it against the buyer. Consequently, an express oral
statement of the seller can also be treated as a condition or warranty
overriding the exemption clause. In certain circumstances, the buyer may
even take the plea that the whole contract was void because of his having
been mistaken as to the transaction. Presence of fraud can make this plea
stronger. Where the seller claims that the clause was brought to the notice
93. [1948] 2 All ER 724.

of the buyer, he can rely on such a clause only if he proves that the buyer
did actually know of it. If the notice excluding the implied terms was fixed
in the shop, the seller will have to show that it was actually seen by the
buyer and not merely that it was fixed at a place.
The general principle is that the exemption clauses are to be construed
strictly against the parties relying on them. In view of this the courts are
supposed to attribute precise legal meaning to technical terms.
XI. Assessment of Damages

There is a need to evaluate certain principles for assessing damages to which
a buyer may be entitled on being supplied defective goods. An example in
this respect is furnished by Union of India v. A.L. Rallia Ram,94 in which on
the sale of cigarettes, the stock supplied turned out to be mildewed and unfit
for consumption. The Supreme Court awarded the damages on the basis of
the difference between the contract price and the actual price realised by the
buyer on sale of this stock. In this case the respondent had purchased and
taken delivery of a certain number of packets of cigarettes from the
government of India under a contract, which provided that "all sales will be
conducted on the distinct understanding that the goods sold are on a 'said
to contain' basis. N o responsibility for quality will be accepted whatsoever
after the delivery is made at the depot". A part of the stock of cigarettes
supplied to the respondent was unfit for consumption. Out of the packets
delivered, the respondent sold some of them in the market at a price lower
than the purchase price and returned the rest under an arrangement whereby
the government was to take back the goods in their original packing. The
contract with regard to undelivered goods was cancelled. The parties
referred their disputes to arbitration and the award granted to the
respondent three sums of money under the heads:
(i) loss suffered by the respondent in respect of packets of
cigarettes not returned by him computed on the basis of
difference between the price paid and price received by him on
sale;
(ii) incidental charges on account of expenses i n c u r r e d on
advertisement, storage, agency commission etc.; and
(iii) interest on sum refunded to respondent in respect of returned
packets.
Considering the matter, the Supreme Court held that since a part of
stock of cigarettes supplied to the respondent was mildewed and unfit for
consumption, the respondent was entitled to claim compensation for breach
of warranty, the measure of damages being the difference between the price
94. AIR 1963 SC 1685.

paid and the price realised on sale. The amount awarded under the second
head as incidental charges could not be sustained because on taking delivery
of the goods, the respondent became the owner of the goods by the express
intendment of the contract. The expenditure incurred for advertisement,
storage, agency commission and other overhead expenses, was therefore in
respect of his own goods and he could not claim these expenses as part of
compensation payable for breach of warranty in respect of goods retained
by him.
The award of interest under the third head as interest on sum refunded
could not be sustained as the contract did not provide for payment of
interest in respect of amounts paid by the respondent if the contract fell
through. Comparing the arbitration award with the decision of the Supreme
Court, in the given circumstances, the former is consumer-centric.
Lastly, it may be noted that there is an urgent need to amend the above
discussed provisions of the Act on the pattern of trends in England and
make them more suited to be advancement of consumer interest.
R.D. Saxena v. Balram Prasad Sharma
(2000) 7 SCC 264
[Papers of Clients – not goods]
K.T. THOMAS, J. - The issue is this: has the advocate a lien for his fees on the litigation papers
entrusted to him by his client?
The appellant has been practising as an advocate mostly in the courts at Bhopal, after
enrolling himself as a legal practitioner with the State Bar Council of Madhya Pradesh.
According to him, he was appointed as legal advisor to Madhya Pradesh State Cooperative Bank
Ltd. (! the Bank" ) in 1990 and the Bank continued to retain him in that capacity during the
succeeding years. He was also engaged by the said Bank to conduct cases in which the Bank was
a party. However, the said retainership did not last long. On 17-7-1993 the Bank terminated the
retainership of the appellant and requested him to return all the case files relating to the Bank.
Instead of returning the files the appellant forwarded a consolidated bill to the Bank showing an
amount of Rs 97,100 as the balance payable by the Bank towards the legal remuneration to which
he is entitled. He informed the Bank that the files would be returned only after settling his dues.
7. We would first examine whether an advocate has lien on the files entrusted to him by the
client. Learned counsel for the appellant endeavoured to base his contention on Section 171 of the
Indian Contract Act which reads thus:
! 171. Bankers, factors, wharfingers, attorneys of a High Court and policy-brokers may,
in the absence of a contract to the contrary, retain as a security for a general balance of
account, any goods bailed to them; but no other persons have a right to retain, as a
security for such balance, goods bailed to them, unless there is an express contract to that
effect."
8. Files containing copies of the records (perhaps some original documents also) cannot be
equated with the ! goods" referred to in the section. The advocate keeping the files cannot amount
to ! goods bailed" . The word ! bailment" is defined in Section 148 of the Contract Act as the
delivery of goods by one person to another for some purpose, upon a contract that they shall be
returned or otherwise disposed of according to the directions of the person delivering them, when
the purpose is accomplished. In the case of litigation papers in the hands of the advocate there is
neither delivery of goods nor any contract that they shall be returned or otherwise disposed of.
That apart, the word ! goods" mentioned in Section 171 is to be understood in the sense in which
that word is defined in the Sale of Goods Act. It must be remembered that Chapter VII of the
98 R.D. Saxena v. Balram Prasad Sharma
Contract Act, comprising Sections 76 to 123, had been wholly replaced by the Sale of Goods Act,
1930. The word ! goods" is defined in Section 2(7) of the Sale of Goods Act.
9. Thus understood ! goods" to fall within the purview of Section 171 of the Contract Act
should have marketability and the person to whom they are bailed should be in a position to
dispose of them in consideration of money. In other words the goods referred to in Section 171 of
the Contract Act are saleable goods. There is no scope for converting the case files into money,
nor can they be sold to any third party. Hence, the reliance placed on Section 171 of the Contract
Act has no merit.
10. In England the solicitor had a right to retain any deed, paper or chattel which had come
into his possession during the course of his employment. It was the position in common law and
it was later recognized as the solicitor#s right under the Solicitors Act, 1860. In Halsbury¶s Laws
of England, it is stated thus (vide para 226 in Vol. 44):
! 226. Solicitor’s rights. - At common law a solicitor has two rights which are termed
liens. The first is a right to retain property already in his possession until he is paid costs
due to him in his professional capacity, and the second is a right to ask the court to direct
that personal property recovered under a judgment obtained by his exertions stand as
security for his costs of such recovery. In addition, a solicitor has by statute a right to
apply to the court for a charging order on property recovered or preserved through his
instrumentality in respect of his taxed costs of the suit, matter or proceeding prosecuted
or defended by him."
12. After independence the position would have continued until the enactment of the
Advocates Act, 1961 which has repealed a host of enactments including the Indian Bar Council
Act. When the new Bar Council of India came into existence it framed rules called the Bar
Council of India Rules as empowered by the Advocates Act. Such Rules contain provisions
specifically prohibiting an advocate from adjusting the fees payable to him by a client against his
own personal liability to the client. As a rule an advocate shall not do anything whereby he abuses
or takes advantage of the confidence reposed in him by his client (vide Rule 24). In this context a
reference can be made to Rules 28 and 29 which are extracted below:
! 28. After the termination of the proceeding, the advocate shall be at liberty to
appropriate towards the settled fee due to him, any sum remaining unexpended out of the
amount paid or sent to him for expenses, or any amount that has come into his hands in
that proceeding.
29. Where the fee has been left unsettled, the advocate shall be entitled to deduct, out
of any moneys of the client remaining in his hands, at the termination of the proceeding
for which he had been engaged, the fee payable under the rules of the court in force for
the time being, or by then settled and the balance, if any, shall be refunded to the client."
R.D. Saxena v. Balram Prasad Sharma 99
13. Thus, even after providing a right for an advocate to deduct the fees out of any money of
the client remaining in his hand at the termination of the proceeding for which the advocate was
engaged, it is important to notice that no lien is provided on the litigation files kept with him. In
the conditions prevailing in India with lots of illiterate people among the litigant public it may not
be advisable also to permit the counsel to retain the case bundle for the fees claimed by him. Any
such lien if permitted would become susceptible to great abuses and exploitation.
14. There is yet another reason which dissuades us from giving approval to any such lien. We
are sure that nobody would dispute the proposition that the cause in a court/tribunal is far more
important for all concerned than the right of the legal practitioner for his remuneration in respect
of the services rendered for espousing the cause on behalf of the litigant. If a need arises for the
litigant to change his counsel pendente lite, that which is more important should have its even
course flow unimpeded. Retention of records for the unpaid remuneration of the advocate would
impede such course and the cause pending judicial disposal would be badly impaired. If a medical
practitioner is allowed a legal right to withhold the papers relating to the treatment of his patient
which he thus far administered to him for securing the unpaid bill, that would lead to dangerous
consequences for the uncured patient who is wanting to change his doctor. Perhaps the said
illustration may be an overstatement as a necessary corollary for approving the lien claimed by
the legal practitioner. Yet the illustration is not too far-fetched. No professional can be given the
right to withhold the returnable records relating to the work done by him with his client#s matter
on the strength of any claim for unpaid remuneration. The alternative is that the professional
concerned can resort to other legal remedies for such unpaid remuneration.
15. A litigant must have the freedom to change his advocate when he feels that the advocate
engaged by him is not capable of espousing his cause efficiently or that his conduct is prejudicial
to the interest involved in the lis, or for any other reason. For whatever reason, if a client does not
want to continue the engagement of a particular advocate it would be a professional requirement
consistent with the dignity of the profession that he should return the brief to the client. It is time
to hold that such obligation is not only a legal duty but a moral imperative.
16. In civil cases, the appointment of an advocate by a party would be deemed to be in force
until it is determined with the leave of the court [vide Order 3 Rule 4(1) of the Code of Civil
Procedure]. In criminal cases, every person accused of an offence has the right to consult and be
defended by a legal practitioner of his choice which is now made a fundamental right under
Article 22(1) of the Constitution. The said right is absolute in itself and it does not depend on
other laws. In this context reference can be made to the decision of this Court in State of M.P. v.
Shobharam [AIR 1966 SC 1910]. The words ! of his choice" in Article 22(1) indicate that the
right of the accused to change an advocate whom he once engaged in the same case, cannot be
whittled down by that advocate by withholding the case bundle on the premise that he has to get
the fees for the services already rendered to the client.
17. If a party terminates the engagement of an advocate before the culmination of the
proceedings that party must have the entire file with him to engage another advocate. But if the
advocate who is changed midway adopts the stand that he would not return the file until the fees
claimed by him are paid, the situation perhaps may turn to dangerous proportions. There may be
cases when a party has no resources to pay the huge amount claimed by the advocate as his
remuneration. A party in a litigation may have a version that he has already paid the legitimate
fee to the advocate. At any rate if the litigation is pending the party has the right to get the papers
from the advocate whom he has changed so that the new counsel can be briefed by him
effectively. In either case it is impermissible for the erstwhile counsel to retain the case bundle on
the premise that fees were yet to be paid.
18. Even if there is no lien on the litigation papers of his client an advocate is not without
remedies to realise the fee which he is legitimately entitled to. But if he has a duty to return the
files to his client on being discharged the litigant too has a right to have the files returned to him,
more so when the remaining part of the lis has to be fought in the court. This right of the litigant
is to be read as the corresponding counterpart of the professional duty of the advocate.
25. We, therefore, alter the punishment to one of reprimanding the appellant. However, we
make it clear that if any advocate commits this type of professional misconduct in future he
would be liable to such quantum of punishment as the Bar Council will determine and the lesser
punishment imposed now need not be counted as a precedent.
SETHI, J. - 31. In England also, a belief existed from the earliest times that the lawyer#s fees is
not a compensation to him for discharge of legal obligations but a gratuity or an honorarium
which the client bestowed on him in token of his gratitude. The lawyers were considered as
officers of the court, the tradition being that the law was an honorary occupation and not a means
of livelihood. Early advocates were generally persons in holy orders who rendered their services
to the weak and afflicted without charge and as an act of pity.
32. Under common law, the rights of a solicitor are called as liens, which are of two types
namely:
(1) a ! retaining lien" , i.e., a right to retain property already in his possession until he
has been paid costs due to him in his professional character; and
(2) a ! lien on property recovered or preserved" , i.e., a right to ask the court to direct
that personal property recovered under a judgment obtained by his exertions stand as
security for his costs of such recovery.
33. According to Cordery on Solicitors, 7th Edn., the retaining lien is founded on the general
law of lien which springs from possession and is governed by the same rules as other cases of
possessory lien. Evershed, M.R. in Barratt v. Gough-Thomas [(1950) 2 All ER 1048], observed:
! It is a right at common law depending, it has been said, on implied agreement. It has
not the character of an encumbrance or equitable charge. It is merely passive and
possessory, that is to say, the solicitor has no right of actively enforcing his demand. It
confers on him merely the right to withhold possession of the documents or other
personal property of his client or former client.... It is wholly derived from, and, therefore
coextensive with, the right of the client to the documents or other property:"
34. According to Cordery the property upon which lien can be claimed is in the form of
deeds, papers or other personal property which comes into a solicitor#s possession in the course of
his professional employment with the sanction of the client and/or client#s property, such as bill
of exchange, application of shares, share certificates, a debenture trust deed, a policy of
assurance, letters of administration or money. After referring to various authorities of English
courts, the law relating to lien and its retention has been summarised in Halsbury¶s Laws of
England, Vol. 44 (1), 1995 Edn., as under:
! Property affected by retaining lien.- The general rule is that the retaining lien extends
to any deed, paper or personal chattel which has come into the solicitor#s possession in
the course of his employment and in his capacity as solicitor with the client#s sanction
and which is the client#s property. The following may thus be subject to a retaining lien:
(1) a bill of exchange; (2) a cheque; (3) a policy of assurance; (4) a share certificate; (5)
an application for shares; (6) a debenture trust deed; (7) letters patent; (8) letters of
administration; (9) money, including money in a client account, although only the
amount due to the solicitor, and maintenance received by a solicitor if not subject to an
order as to its application or bound to be applied, in effect, as trust money; or (10)
documents in a drawer of which the solicitor is given the key.
The lien does not extend to (a) a client#s original will; or (b) a deed in favour of the
solicitor but reserving a life interest and power of revocation to the client; or (c) original
court records; or (d) documents which did not come into the solicitor#s hands in his
capacity as solicitor for the person against whom the lien is claimed or his successor, but
as mortgagee, steward of a manor or trustee. Moreover, where documents are delivered
to a solicitor for a particular purpose under a special agreement which does not make
express provision for a lien in favour of the solicitor, as perhaps the raising of money, or
money is paid to the solicitor for a particular purpose so that he becomes a trustee of the
money, no lien arises over those documents or that money unless subsequently left in the
solicitor#s possession for general purposes. Otherwise the lien extends to the property
whatever the occasion of delivery, except that where a solicitor acts for both mortgagor
and mortgagee and the mortgage is redeemed the solicitor cannot set up a lien on the
deeds against the mortgagor."
It is further stated that such a lien extends only to the solicitor#s taxable costs, charges and
expenses incurred on the instructions of the client against whom the lien is claimed and for which
the client is personally liable including the costs of recovering the remuneration by action or upon
a taxation.
35. It follows, therefore, that even under the common law no lien can be claimed with respect
to the case file and such documents which are necessary for the further progress of the lis filed in
the court. Even in England the right of retention has been much diluted by various exceptions
created by decisions, chiefly by the courts of equity on the basis of what may be just and
equitable as between the parties with conflicting interests.
39. Reference to ! goods" in Section 171 of the Contract Act cannot, by any imagination, be
stretched to mean the case papers, entitling their retention by the lawyer as his lien for the
purposes of realising his fee. Besides the meaning attached to the ! goods" under Section 2(7) of
the Sale of Goods Act, under the general law the ! goods" have been defined in Bailey¶s Large
Dictionary of 1732 as ! merchandise" and by Johnson, who followed as the next lexicographer, it
is defined to be moveables in a house; personal or immovable estates; wares, freight,
merchandise. Webster defines the word ! goods" thus:
! Goods, noun, plural; (1) moveables; household furniture; (2) Personal or moveable
estate, as horses, cattle, utensils, etc. (3) wares; merchandise; commodities bought and
sold by merchants and traders."
40. This Court in Union of India v. Delhi Cloth and General Mills Co. Ltd. [AIR 1963 SC
791], held that to become ! goods" an article must be something which can ordinarily come to the
markets to be bought and sold. In CCE v. Eastend Paper Industries Ltd.[(1989) 4 SCC 244] it
was stated that goods are understood to mean as identifiable articles known in the markets as
goods and marketed and marketable in the market as such. Where the Act does not define
! goods" , the legislature should be presumed to have used that word in its ordinary dictionary
meaning i.e. to become goods it must be something which can ordinarily come to the market to be
bought and sold and is known to the market as such.
41. Thus, looking from any angle, it cannot be said that the case papers entrusted by the client
to his counsel are the goods in his hand upon which he can claim a retaining lien till his fee or
other charges incurred are not paid. In ‘G’, a Senior Advocate of the Supreme Court, Re [AIR
1954 SC 557], this Court observed that it was highly reprehensible for an advocate to stipulate for
or receive a remuneration proportioned to the result of litigation or a claim whether in the form of
a share in the subject-matter, a percentage or otherwise. An advocate is expected, at all times, to
conduct himself in a manner befitting his status as an officer and a gentleman by upholding the
high and honourable profession to whose privilege he has been admitted after his enrolment. If an
advocate departs from the high standards which the profession has set for itself and conducts
himself in a manner which is not fair, reasonable and according to law, he is liable to disciplinary
action. In M, an Advocate, Re [AIR 1957 SC 149], this Court observed:
! As has been laid down by this Court In the matter of ‘G’, a Senior Advocate of the
Supreme Court the Court, in dealing with cases of professional misconduct is $not
concerned with ordinary legal rights, but with the special and rigid rules of professional
conduct expected of and applied to a specially privileged class of persons who, because
of their privileged status, are subject to certain disabilities which do not attach to other
men and which do not attach even to them in a non-professional character... he (a legal
practitioner) is bound to conduct himself in a manner befitting the high and honourable
profession to whose privileges he has so long been admitted; and if he departs from the
high standards which that profession has set for itself and demands of him in professional
matters, he is liable to disciplinary action#. It appears to us that the fact of there being no
specific rules governing the particular situation, which we are dealing with, on the facts
found by us, is not any reason for accepting a less rigid standard. If any, the absence of
rules increases the responsibility of the members of the profession attached to this Court
as to how they should conduct themselves in such situations, having regard to the very
high privilege that an advocate of this Court now enjoys as one entitled, under the law, to
practise in all the courts in India."
42. In our country, admittedly, a social duty is cast upon the legal profession to show the
people beckon (sic beacon) light by their conduct and actions. The poor, uneducated and
exploited mass of the people need a helping hand from the legal profession, admittedly,
acknowledged as a most respectable profession. No effort should be made or allowed to be made
by which a litigant could be deprived of his rights, statutory as well as constitutional, by an
advocate only on account of the exalted position conferred upon him under the judicial system
prevalent in the country. It is true that an advocate is competent to settle the terms of his
engagement and his fee by private agreement with his client but it is equally true that if such fee
is not paid he has no right to retain the case papers and other documents belonging to his client.
Like any other citizen, an advocate has a right to recover the fee or other amounts payable to him
by the litigant by way of legal proceedings but subject to such restrictions as may be imposed by
law or the rules made in that behalf. It is high time for the legal profession to join heads and
evolve a code for themselves in addition to the mandate of the Advocates Act, Rules made
thereunder and the Rules made by various High Courts and this Court, for strengthening the belief
of the common man in the institution of the judiciary in general and in their profession in
particular. Creation of such a faith and confidence would not only strengthen the rule of law but
also result in reaching excellence in the profession.
*****
Commissioner of Sales Tax, M.P. v. M.P. Electricity Board, Jabalpur
(1969) 1 SCC 200
A.N. GROVER, J. - 5. Arguments which have been addressed by both sides have centred on
question Nos. 1 and 3 which are as follows:
! (1) On the facts and circumstances of the case whether or not the Madhya Pradesh
Electricity Board is a dealer within the meaning of Section 2 (c) of the C. P. and Berar Sales
Tax Act, and Section 2 (d) of the Madhya Pradesh General Sales Tax Act, 1958, in respect of
its activity of generation, distribution, sale and supply of electrical energy?
(3) On the facts and circumstances of the case, whether or not steam is saleable goods
and if they are saleable goods is the turnover representing the supply thereof liable to be
assessed to sales tax in the hands of the assessee?"
The definition of a ! dealer" is given in the two Acts substantially is that any person who
carried on the business of buying, selling, supplying or distributing the goods is a ! dealer" and
! goods" are defined by Section 2(d) by Act XXI of 1947, as meaning all kinds of movable
property other than actionable claims....and includes all material articles and commodities
whether or not to be used in the construction, fitting out, improvement or repair of immovable
property. The definition contained in Section 2(g) of Act II of 1959, is almost in similar terms
except that certain additions are there with which we are not concerned. Reference may be made,
at this stage, to the definition of ! movable property" which has not been defined in the two Acts
given in Section 2(24) of the Madhya Pradesh General Clauses Act. It has been defined to mean
! property of every description, except immovable property" . Section 2(18) of that Act says that
! immovable property" includes land, benefits to arise out of land and things attached to the earth,
or permanently fastened to anything attached to the earth" .
6. The High Court went into a discussion from the point of view of mechanics relating to
transmission of electric energy. It was of the view that electricity could not be regarded as an
article or matter which could be possessed or moved or delivered.
7. Mr I. N. Shroff has relied on certain decisions in which the same point was involved as in
the present case, namely, whether electricity is ! goods" for the purpose of imposition of sales tax.
In Kumbakonam Electric Supply Corporation Ltd. v. Joint Commercial Tax Officer, Esplanade
Division, Madras [14 STC 600], the Madras High Court was called upon to decide whether
electricity is ! goods" for the purposes of the Madras General Sales Tax Act, 1959, and the
Central Sales Tax Act, 1956. After referring to the definition of ! goods" as given in the Sale of
Goods Act, 1930, it was observed that under that definition goods must be property and it must be
movable. According to the learned Madras Judge any kind of property which is movable would
fall within the definition of ! goods" , provided it was transmissible or transferable from hand to
hand or capable of delivery which need not necessarily be in a tangible or a physical sense.
Commissioner of Sales Tax, M.P. v. M.P. Electricity Board, Jabalpu 105
Reference was also made to the definition given in the General Clauses Act which was quite wide
and it was held that if electricity was property and it was movable it would be ! goods" . The
learned Judge found little difference between electricity and gas or water which would be
property and could be subjected to a particular process, bottled up and sold for consumption. It
was observed that electricity was capable of sale as property as it was sold, purchased and
consumed every where. A ! dealer" was defined by the Central Sales Tax Act practically in the
same way as in the Madras General Sales Tax Act and it meant a person who carried on business
of buying and selling goods. In the opinion of the learned Judge the concept of dealer, goods and
sale comprehended all kinds of movable property. He further relied on certain decisions which
have been cited before and which will be presently noticed. A similar view was expressed by Tek
Chand, J. of the Punjab and Haryana High Court in Malerkolta Power Supply Company v. The
Excise and Taxation Officer, Sangrur [22 STC 325]. It was held that electric energy fell within
the definition of ! goods" in both the Punjab Sales Tax Act, 1948, and the Central Sales Tax Act,
1956. According to the learned Judge electric energy has the commonly accepted attributes of
movable property. It can be stored and transmitted. It is also capable of theft. It may not be
tangible in the sense that it cannot be touched without considerable danger of destruction or
injury but it was perceptible both as an illuminant and a fuel and also in other energy giving
forms Electric energy may not be property in the sense of the term ! movable property" as used in
the Punjab and Central General Clauses Acts in contra-distinction to ! immovable property" but it
must fall within the ambit of ! goods" even if in a sense it was intangible or invisible" . As pointed
out in the Madras case the statement contained in 18 Am. Jur. 407 [18 AJ 407 (2 Electy)]
recognises that electricity is property capable of sale and it may be the subject of larceny. In
Naini Tal Hotel v. Municipal Board [AIR 1946 All 502], it was held that for the purpose of
Article 52 of the Indian Limitation Act, electricity was property and goods. In Erie County
Natural Gas and Fuel Co. Ltd. v. Carroll [(1911) AC 105], a question arose as to the measure of
damages for a breach of contract to supply gas. Lord Atkinson delivering the judgment of the
Privy Council applied the same rule which is applicable where the contract is one for sale of
goods. In other words gas was treated to be ! goods.
8. The High Court, in the present case, appears to have relied on Rash Behari v. Emperor
[AIR 1936 Cal 753], in which approval was accorded to the statement in Pollock and Mulla#s
Commentary on Sale Goods Act, 1913 that it was doubtful whether that Act was applicable to
such ! goods" as gas, water and electricity. The context in which this matter is discussed in the
Calcutta case is altogether different and distinguishable and what was being decided there was the
scope and ambit of Section 39 of the Electricity Act, 1910. As regards the entries in List II of the
Seventh Schedule to the Constitution, the relevant ones may be produced:
! 53. Taxes on the consumption of sale of electricity.
54. Taxes on the sale or purchase of goods other than newspapers, subject to the provisions
of Entry 92-A of List I."
106 Commissioner of Sales Tax, M.P. v. M.P. Electricity Board, Jabalpur
9. The reasoning which prevailed with the High Court was that a well-defined distinction
existed between the sale or purchase of ! goods" and consumption or sale of electricity otherwise
there was no necessity of having Entry No. 53 but under Entry 53 taxes can be levied not only on
sale of electricity but also on its consumption which could not probably have been done under
Entry 54. It is difficult to derive much assistance from the aforesaid entries. What has essentially
to be seen is whether electric energy is ! goods" within the meaning of the relevant provisions of
the two Acts. The definition in terms is very wide according to which ! goods" means all kinds of
movable property. Then certain items are specifically excluded or included and electric energy or
electricity is not one of them. The term ! movable property" when considered with reference to
! goods" as defined for the purposes of sales tax cannot be taken in a narrow sense and merely
because electric energy is not tangible or cannot be moved or touched like, for instance, a piece of
wood or a book it cannot cease to be movable property when it has all the attributes of such
property. It is needless to repeat that it is capable of abstraction, consumption and use which, if
done dishonestly, would attract punishment under Section 39 of the Indian Electricity Act, 1910.
It can be transmitted, transferred, delivered, stored, possessed etc., in the same way as any other
movable property. Even in Benjamin on Sale, 8th Ed. reference has been made at p. 171 to
County of Durham Electrical, etc. Co. v. Inland Revenue [(1909) 2 KB 604], in which electric
energy was assumed to be ! goods" . If there can be sale and purchase of electric energy like any
other movable object, we see no difficulty in holding that electric energy was intended to be
covered by the definition of ! goods" in the two Acts. If that had not been the case there was no
necessity of specifically exempting sale of electric energy from the payment of sales tax by
making a provision for it in the schedules to the two Acts. It cannot be denied that the Electricity
Board carried on principally the business of selling, supplying or distributing electric energy. It
would therefore clearly fall within the meaning of the expression ! dealer" in the two Acts.
10. As regards steam there has been a good deal of argument on the question whether it is
liable to be assessed to sales tax in the hands of the Electricity Board. According to Mr Shroff, the
Electricity Board carried on the business of selling steam to the Nepa Mills and that this has
lasted for a number of years. It has been submitted that simply because the Electricity Board does
not have any profit motive in supplying steam, it cannot escape payment of sales tax because the
steam is nevertheless being sold as ! goods" . The High Court was of the view that the water which
the Nepa Mills supplied free to the Electricity Board became the property of the Board and in
return for this free supply the Board agreed to give steam to Nepa Mills at a rate based solely on
the coal consumed in producing steam. The mills had also agreed to reimburse the Electricity
Board for the loss sustained on account of the mills not taking the ! full demand of steam" .
According to the High Court there was no contract for the sale of steam as such and it was only
for the labour and cost involved in its supply to the mills. The High Court relied on the findings
of the Tribunal on this point and held that the turnover in respect of steam was not taxable. The
tribunal in its order, dated June 16, 1966, referred to certain conditions of working arrangement
which was reduced to writing but which had not been properly executed as a contract which
showed that the mills was supplying water free and the Electricity Board was making a prorata
charge of conversion of water into steam. It seems to us that the High Court was right in coming
to the conclusion, on the finding of the tribunal, that the real arrangement was for supplying
steam on actual cost basis and in that sense it was more akin to a labour contract than to sale.
12. On the findings of the tribunal and the High Court, we are of the opinion that the
arrangement relating to supply of steam in return for the water supplied by the mills on payment
of actual cost was not one of sale but was more in the nature of a works contract. In the result, the
answer of the High Court to the first question is discharged and it is held that the Electricity
Board is a ! dealer" within the meaning of the relevant provisions of the two Act#s in respect of its
activities of generation, distribution, sale and supply of electric energy. The appeals are allowed
to the extent indicated above.
*****
µSALE¶ AND µAGREEMENT TO SELL¶
State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd.

1959 SCR 379
VENKATARAMA AIYAR, J. - This appeal arises out of proceedings for assessment of sales
tax payable by the respondents for the year 1949-1950, and it raises a question of considerable
importance on the construction of Entry 48 in List II of Schedule VII to the Government of India
Act, 1935, ! Taxes on the sale of goods" .
2. The respondents are a private limited company registered under the provisions of the
Indian Companies Act, doing business in the construction of buildings, roads and other works and
in the sale of sanitary wares and other sundry goods. Before the Sales Tax Authorities, the
disputes ranged over a number of items, but we are concerned in this appeal with only two of
them. One is with reference to a sum of Rs 29,51,528-7-4 representing the value of the materials
used by the respondents in the execution of their works contracts, calculated in accordance with
the statutory provisions applicable thereto, and the other relates to a sum of Rs 1,98,929-0-3 being
the price of foodgrains supplied by the respondents to their workmen.
3. It will be convenient at this stage to refer to the provisions of the Madras General Sales
Tax Act, (Mad. 9 of 1939), insofar as they are relevant for the purpose of the present appeal.
Section 2(h) of the Act, as it stood when it was enacted, defined ! sale" as meaning ! every transfer
of the property in goods by one person to another in the course of trade or business for cash or for
deferred payment or other valuable consideration" . In 1947, the legislature of Madras enacted the
Madras General Sales Tax (Amendment) Act 25 of 1947 introducing several new provisions in
the Act, and it is necessary to refer to them so far as they are relevant for the purpose of the
present appeal. Section 2(c) of the Act had defined ! goods" as meaning ! all kinds of movable
property other than actionable claims, stocks and shares and securities and as including all
materials, commodities and articles" , and it was amended so as to include materials ! used in the
construction, fitting out, improvement or repair of immoveable property or in the fitting out,
improvement or repair of movable property" . The definition of ! sale" in Section 2(h) was
enlarged so as to include ! a transfer of property in goods involved in the execution of a works
contract" . In the definition of ! turnover" in Section 2(i), the following Explanation (1)(i) was
added:
! Subject to such conditions and restrictions, if any, as may be prescribed in this behalf -
the amount for which goods are sold shall, in relation to a works contract, be deemed
to be the amount payable to the dealer for carrying out such contract, less such portion as
may be prescribed of such amount, representing the usual proportion of the cost of labour
to the cost of materials used in carrying out such contract."
A new provision was inserted in Section 2(i) defining ! works contract" as meaning ! any
agreement for carrying out for cash or for deferred payment or other valuable consideration, the
construction, fitting out, improvement or repair of any building, road, bridge or other immoveable
property or the fitting out, improvement or repair of any movable property" . Pursuant to the
Explanation to Section 2(l)(i), a new rule, Rule 4(3), was enacted that ! the amount for which
goods are sold by a dealer shall, in relation to a works contract, be deemed to be the amount
payable to the dealer for carrying out such contract less a sum not exceeding such percentage of
the amount payable as may be fixed by the Board of Revenue, from time to time for different
areas, representing the usual proportion in such areas of the cost of labour to the cost of materials
used in carrying out such contract, subject to the following maximum percentages% ." , and then
follows a scale varying with the nature of the contracts.
4. It is on the authority of these provisions that the appellant seeks to include in the turnover
of the respondents the sum of Rs 29,51,528-7-4 being the value of the materials used in the
construction works as determined under Rule 4(3). The respondents contest this claim on the
ground that the power of the Madras Legislature to impose a tax on sales under Entry 48 in List II
in Schedule VII of the Government of India Act, does not extend to imposing a tax on the value
of materials used in works, as there is no transaction of sale in respect of those goods, and that the
provisions introduced by the Madras General Sales Tax (Amendment) Act, 1947 authorising the
imposition of such tax are ultra vires. As regards the sum of Rs 1,98,929-0-3, the contention of
the respondents was that they were not doing business in the sale of foodgrains, that they had
supplied them to the workmen when they were engaged in construction works in out of the way
places, adjusting the price therefor in the wages due to them and that the amounts so adjusted
were not liable to be included in the turnover. The Sales Tax Appellate Tribunal rejected both
these contentions, and held that the amounts in question were liable to be included in the taxable
turnover of the respondents.
7. The sole question for determination in this appeal is whether the provisions of the Madras
General Sales Tax Act are ultra vires, insofar as they seek to impose a tax on the supply of
materials in execution of works contract treating it as a sale of goods by the contractor, and the
answer to it must depend on the meaning to be given to the words ! sale of goods" in Entry 48 in
List II of Schedule VII to the Government of India Act, 1935. Now, it is to be noted that while
Section 311(2) of the Act defines ! goods" as including ! all materials, commodities and articles" ,
it contains no definition of the expression ! sale of goods" . It was suggested that the word
! materials" in the definition of ! goods" is sufficient to take in materials used in a works contract.
That is so; but the question still remains whether there is a sale of those materials within the
meaning of that word in Entry 48. On that, there has been sharp conflict of opinion among the
several High Courts. In Pandit Banarsi Das v. State of Madhya Pradesh [(1955) 6 STC 93], a
Bench of the Nagpur High Court held, differing from the view taken by the Madras High Court in
the judgment now under appeal, that the provisions of the Act imposing a tax on the value of the
materials used in a construction on the footing of a sale thereof were valid, but that they were bad
insofar as they enacted an artificial rule for determination of that value by deducting out of the
total receipts a fixed percentage on account of labour charges, inasmuch as the tax might,
according to that computation, conceivably fall on a portion of the labour charges and that would
be ultra vires Entry 48. The entire controversy hinges on the meaning of the words ! sale of
goods" in Entry 48, and the point which we have now to decide is as to the correct interpretation
to be put on them.
8. The contention of the appellant and of the States which have intervened is that the
provisions of a Constitution which confer legislative powers should receive a liberal construction,
and that, accordingly, the expression ! sale of goods" in Entry 48 should be interpreted not in the
narrow and technical sense in which it is used in the Indian Sale of Goods Act, 1930, but in a
broad sense.
12. The contention of the appellant is well-founded that as the words ! sale of goods" in Entry
48 occur in a Constitution Act and confer legislative powers on the State Legislature in respect of
a topic relating to taxation, they must be interpreted not in a restricted but broad sense. And that
opens up questions as to what that sense is, whether popular or legal, and what its connotation is
either in the one sense or the other. Learned counsel appearing for the States and for the assessees
have relied in support of their respective contentions on the meaning given to the word ! sale" in
authoritative text-books, and they will now be referred to. According to Blackstone, ! sale or
exchange is a transmutation of property from one man to another, in consideration of some price
or recompense in value" . This passage has, however, to be read distributively and so read, sale
would mean transfer of property for price. That is also the definition of ! sale" in Benjamin on
Sale, 1950 Edn., p. 2. In Halsbury¶s Laws of England, Second Edn., Vol. 29, p. 5, para 1,we
have the following:
! Sale is the transfer of the ownership of a thing from one person to another for a
money price. Where the consideration for the transfer consists of other goods, or some
other valuable consideration, not being money, the transaction is called exchange or
barter; but in certain circumstances, it may be treated as one of sale.
The law relating to contracts of exchange or barter is undeveloped, but the courts
seem inclined to follow the maxim of civil law, permutatio vicina est emptioni, and to
deal with such contracts as analogous to contracts of sale. It is clear, however, that
statutes relating to sale would have no application to transactions by way of barter."
In Chalmer¶s Sale of Goods Act, 12th Edn., it is stated at p. 3 that ! the essence of sale is the
transfer of the property in a thing from one person to another for a price" , and at p. 6 it is pointed
out that ! where the consideration for the transfer % consists of the delivery of goods, the contract
is not a contract of sale but is a contract of exchange or barter" . In Corpus Juris, Vol. 55, p. 36,
the law is thus stated:
! Sale" in legal nomenclature, is a term of precise legal import, both at law and in equity,
and has a well defined ! legal signification, and has been said to mean, at all times, a
contract between parties to give and pass rights of property for money, which the buyer
pays or promises to pay to the seller for the thing bought or sold."
It is added that the word ! sale" as used by the authorities ! is not a word of fixed and invariable
meaning, but may be given a narrow or broad meaning, according to the context" .
13. It will be seen from the foregoing that there is practical unanimity of opinion as to the
import of the word ! sale" in its legal sense, there being only some difference of opinion in
America as to whether price should be in money or in money#s worth, and the dictionary meaning
is also to the same effect. Now, it is argued by Mr Sikri, the learned Advocate-General of Punjab,
that the word ! sale" is, in its popular sense, of wider import than in its legal sense, and that is the
meaning which should be given to that word in Entry 48, and he relies in support of this position
on the observations in Nevile Reid and Company Ltd. v. Commissioners of Inland Revenue
[(1922) 12 Tax Cas 545]. There, an agreement was entered into on April 12, 1918, for the sale of
the trading stock in a brewery business and the transaction was actually completed on June 24,
1918. In between the two dates, the Finance Act, 1918, had imposed excess profits tax, and the
question was whether the agreement dated April 12, 1918, amounted to a sale in which case the
transaction would fall outside the operation of the Act. The Commissioners had held that as title
to the goods passed only on June 24, 1918, the agreement dated April 12, 1918, was only an
agreement to sell and not the sale which must be held to have taken place on June 24, 1918, and
was therefore liable to be taxed. Sankey, J., agreed with this decision, but rested it on the ground
that as the agreement left some matters still to be determined and was, in certain respects,
modified later, it could not be held to be a sale for the purpose of the Act. In the course of the
judgment, he observed that ! sale" in the Finance Act should not be construed in the light of the
provisions of the Sale of Goods Act, but must be understood in a commercial or business sense.
14. Now, in its popular sense, a sale is said to take place when the bargain is settled between
the parties, though property in the goods may not pass at that stage, as where the contract relates
to future or unascertained goods, and it is that sense that the learned Judge would appear to have
had in his mind when he spoke of a commercial or business sense. But apart from the fact that
these observations were obiter, this Court has consistently held that though the word ! sale" in its
popular sense is not restricted to passing of title, and has a wider connotation as meaning the
transaction of sale, and that in that sense an agreement to sell would, as one of the essential
ingredients of sale, furnish sufficient nexus for a State to impose a tax, such levy could,
nevertheless, be made only when the transaction is one of sale, and it would be a sale only when
it has resulted in the passing of property in the goods to the purchaser. It has also been held in
STO v. Messrs Budh Prakash Jai Prakash [(1955) 1 SCR 243], that the sale contemplated by
Entry 48 of the Government of India Act was a transaction in which title to the goods passes and
a mere executory agreement was not a sale within that entry. We must accordingly hold that the
expression ! sale of goods" in Entry 48 cannot be construed in its popular sense, and that it must
be interpreted in its legal sense. What its connotation in that sense is, must now be ascertained.
For a correct determination thereof, it is necessary to digress somewhat into the evolution of the
law relating to sale of goods.
15. The concept of sale, as it now obtains in our jurisprudence, has its roots in the Roman
law. Under that law, sale, emptio venditio, is an agreement by which one person agrees to transfer
to another the exclusive possession (vacuam possessionem tradere) of something (merx) for
consideration. In the earlier stages of its development, the law was unsettled whether the
consideration for sale should be money or anything valuable. By a rescript of the Emperors
Diocletian and Maximian of the year 294 A.D., it was finally decided that it should be money,
and this law is embodied in the Institutes of Justinian, vide Title 23. Emptio venditio is, it may be
noted, what is known in Roman law as a consensual contract. That is to say, the contract is
complete when the parties agree to it, even without delivery as in contracts re or the observance
of any formalities as in contracts verbis and litteris. The common law of England relating to sales
developed very much on the lines of the Roman law in insisting on agreement between parties
and price as essential elements of a contract of sale of goods. In his work on Sale, Benjamin
observes:
! Hence it follows that, to constitute a valid sale, there must be a concurrence of the
following elements viz. (1) Parties competent to contract; (2) mutual assent; (3) a thing,
the absolute or general property in which is transferred from the seller to the buyer; and
(4) a price in money paid or promised."
16. Coming to the Indian law on the subject, Section 77 of the Contract Act defined ! sale" as
! the exchange of property for a price involving the transfer of ownership of the thing sold from
the seller to the buyer" . It was suggested that under this section it was sufficient to constitute a
sale that there was a transfer of ownership in the thing for a price and that a bargain between the
parties was not an essential element. But the scheme of the Contract Act is that it enacts in
Sections 1 to 75 provisions applicable in general to all contracts, and then deals separately with
particular kinds of contract such as sale, guarantee, bailment, agency and partnership, and the
scheme necessarily posits that all these transactions are based on agreements. We then come to
the Indian Sale of Goods Act, 1930 (3 of 1930), which repealed Chapter 7 of the Contracts Act
relating to sale of goods, and Section 4 thereof is practically in the same terms as Section 1 of the
English Act. Thus, according to the law both of England and of India, in order to constitute a sale
it is necessary that there should be an agreement between the parties for the purpose of
transferring title to goods which of course presupposes capacity to contract, that it must be
supported by money consideration, and that as a result of the transaction property must actually
pass in the goods. Unless all these elements are present, there can be no sale. Thus, if merely title
to the goods passes but not as a result of any contract between the parties, express or implied,
there is no sale. So also if the consideration for the transfer was not money but other valuable
consideration, it may then be exchange or barter but not a sale. And if under the contract of sale,
title to the goods has not passed, then there is an agreement to sell and not a completed sale.
17. Now, it is the contention of the respondents that as the expression ! sale of goods" was at
the time when the Government of India Act was enacted, a term of well-recognised legal import
in the general law relating to sale of goods and in the legislative practice relating to that topic
both in England and in India, it must be interpreted in Entry 48 as having the same meaning as in
the Sale of Goods Act, 1930, and a number of authorities were relied on in support of this
contention.
21. On the basis of the authorities, the respondents contend that the true interpretation to be
put on the expression ! sale of goods" in Entry 48 is what it means in the Indian Sale of Goods
Act, 1930, and what it has always meant in the general law relating to sale of goods. It is
contended by the appellant - and quite rightly - that in interpreting the words of a Constitution the
legislative practice relative thereto is not conclusive. But it is certainly valuable and might prove
determinative unless there are good reasons for disregarding it, and in STO v. Budh Prakash Jai
Prakash, it was relied on for ascertaining the meaning and true scope of the very words which are
now under consideration. There, in deciding that an agreement to sell is not a sale within Entry
48, this Court referred to the provisions of the English Sale of Goods Act, 1893, the Indian
Contract Act, 1872, and the Indian Sale of Goods Act, 1930, for construing the word ! sale" in
that Entry and observed:
! Thus, there having existed at the time of the enactment of the Government of India Act,
1935, a well-defined and well-established distinction between a sale and an agreement to
sell, it would be proper to interpret the expression ! sale of goods" in entry 48 in the sense
in which it was used in legislation both in England and India and to hold that it authorises
the imposition of a tax only when there is a completed sale involving transfer of title."
This decision, though not decisive of the present controversy, goes far to support the contention
of the respondents that the words ! sale of goods" in Entry 48 must be interpreted in the sense
which they bear in the Indian Sale of Goods Act, 1930.
22. The appellant and the intervening States resist this conclusion on the following grounds:
(1) The provisions of the Government of India Act, read as a whole, show that the
words ! sale of goods" in Entry 48 are not to be interpreted in the sense which they have
in the Sale of Goods Act, 1930;
(2) The legislative practice relating to the topic of sales tax does not support the
narrow construction sought to be put on the language of Entry 48;
(3) The expression ! sale of goods" has in law a wider meaning than what it bears in
the Sale of Goods Act, 1930, and that is the meaning which must be put on it in Entry 48;
and
(4) The language of Entry 48 should be construed liberally so as to take in new

concepts of sales tax.
(1) As regards the first contention, the argument is that in the Government of India Act, 1935,
there are other provisions which give a clear indication that the expression ! sale of goods" in
Entry 48 is not to be interpreted in the sense which it bears in the Sale of Goods Act, 1930. That
is an argument open to the appellant, because rules of interpretation are only aids for ascertaining
the true legislative intent and must yield to the context, where the contrary clearly appears. Now,
what are the indications contra? Section 311(2) of the Government of India Act defines
! agricultural income" as meaning ! agricultural income as defined for the purposes of the
enactments relating to Indian income tax" . It is said that if the words ! sale of goods" in Entry 48
were meant to have the same meaning as those words in the Sale of Goods Act, that would have
been expressly mentioned as in the case of definition of agricultural income, and that therefore
that is not the meaning which should be put on them in that Entry.
In our opinion, that is not the inference to be drawn from the absence of words linking up the
meaning of the word ! sale" with what it might bear in the Sale of Goods Act. We think that the
true legislative intent is that the expression ! sale of goods" in Entry 48 should bear the precise
and definite meaning it has in law, and that that meaning should not be left to fluctuate with the
definition of ! sale" in laws relating to sale of goods which might be in force for the time being. It
was then said that in some of the Entries, for example, Entries 31 and 49, List II, the word ! sale"
was used in a wider sense than in the Sale of Goods Act, 1930. Entry 31 is ! intoxicating liquors
and narcotic drugs, that is to say, the production, manufacture, possession, transport, purchase
and sale of intoxicating liquors, opium and other narcotic drugs% ." The argument is that ! sale"
in the Entry must be interpreted as including barter, as the policy of the law cannot be to prohibit
transfers of liquor only when there is money consideration therefor. But this argument proceeds
on a misapprehension of the principles on which the Entries are drafted. The scheme of the
drafting is that there is in the beginning of the Entry words of general import, and they are
followed by words having reference to particular aspects thereof. The operation of the general
words, however, is not cut down by reason of the fact that there are sub-heads dealing with
specific aspects. In Manikkasundara v. R.S. Nayudu [(1946) FCR 67, 84], occur the following
observations:
! The subsequent words and phrases are not intended to limit the ambit of the opening
general term or phrase but rather to illustrate the scope and objects of the legislation
envisaged as comprised in the opening term or phrase."
A law therefore prohibiting any dealing in intoxicating liquor, whether by way of sale or barter or
gift, will be intra vires the powers conferred by the opening words without resort to the words
! sale and purchase" . Entry 49 in List II is ! Cesses on the entry of goods into a local area for
consumption, use or sale therein" . It is argued that the word ! sale" here cannot be limited to
transfers for money or for even consideration. The answer to this is that the words ! for
consumption, use or sale therein" are a composite expression meaning octroi duties, and have a
precise legal connotation, and the use of the word ! sale therein" can throw no light on the
meaning of that word in Entry 48. We are of opinion that the provisions in the Government of
India Act, 1935 relied on for the appellant are too inconclusive to support the inference that
! sale" in Entry 48 was intended to be used in a sense different from that in the Sale of Goods Act.
(2) It is next urged that for determining the true meaning of the expression ! Taxes on the sale
of goods" in Entry 48 it would not be very material to refer to the legislative practice relating to
the law in respect of sale of goods. It is argued that ! sale of goods" and ! taxes on sale of goods"
are distinct matters, each having its own incidents, that the scope and object of legislation in
respect of the two topics are different, that while the purpose of a law relating to sale of goods is
to define the rights of parties to a contract, that of a law relating to tax on sale of goods is to bring
money into the coffers of the State, and that, accordingly, legislative practice with reference to
either topic cannot be of much assistance with reference to the other. Now, it is true that the
object and scope of the two laws are different, and if there was any difference in the legislative
practice with reference to these two topics, we should, in deciding the question that is now before
us, refer more appropriately to that relating to sales tax legislation rather than that relating to sale
of goods. But there was, at the time when the Government of India Act was enacted, no law
relating to sales tax either in England or in India. The first Sales Tax law to be enacted in India is
the Madras General Sales Tax Act, 1939, and that was in exercise of the power conferred by
Entry 48. In England, a purchase tax was introduced for the first time only by the Finance Act 2
of 1940. The position, therefore, is that Entry 48 introduces topic of legislation with respect to
which there was no legislative practice.
(3) It is next contended by Mr Sikri that though the word ! sale" has a definite sense in the
Sale of Goods Act, 1930, it has a wider sense in law other than that relating to sale of goods, and
that, on the principle that words conferring legislative powers should be construed in their
broadest amplitude, it would be proper to attribute that sense to it in Entry 48. It is argued that in
its wider sense the expression ! sale of goods" means all transactions resulting in the transfer of
title to goods from one person to another, that a bargain between the parties was not an essential
element thereof, and that even involuntary sales would fall within its connotation. He went on to
state that such sale took place when the value of the goods is paid to the owner.
The Land Acquisition Act, 1894 refers to the compulsory taking over of immovable property
as acquisition. In List II of the Government of India Act, this topic is described in Entry 9 as
! compulsory acquisition of land." In the Constitution, Entry 42 in List III is ! acquisition and
requisition of property" . The ratio on which the opinion of Lord Morton is based has no place in
the construction of Entry 48, and the law as laid down by the majority is in consonance with the
view taken by this Court that bargain is an essential element in a transaction of sale.
Another contention presented from the same point of view but more limited in its sweep is
that urged by the learned Solicitor-General, the Advocate-General of Madras and the other
counsel appearing for the States, that even in the view that an agreement between the parties was
necessary to constitute a sale, that agreement need not relate to the goods as such, and that it
would be sufficient if there is an agreement between the parties and in the carrying out of that
agreement there is transfer of title in movables belonging to one person to another for
consideration. It is argued that Entry 48 only requires that there should be a sale, and that means
transfer of title in the goods, and that to attract the operation of that Entry it is not necessary that
there should also be an agreement to sell those goods. To hold that there should be an agreement
to sell the goods as such is, it is contended, to add to the Entry, words which are not there.
We are unable to agree with this contention. If the words ! sale of goods" have to be
interpreted in their legal sense, that sense can only be what it has in the law relating to sale of
goods. The ratio of the rule of interpretation that words of legal import occurring in a statute
should be construed in their legal sense is that those words have, in law, acquired a definite and
precise sense, and that, accordingly, the legislature must be taken to have intended that they
should be understood in that sense. In interpreting an expression used in a legal sense, therefore,
we have only to ascertain the precise connotation which it possesses in law. It has been already
stated that, both under the common law and the statute law relating to sale of goods in England
and in India, to constitute a transaction of sale there should be an agreement, express or implied,
relating to goods to be completed by passing of title in those goods. It is of the essence of this
concept that both the agreement and the sale should relate to the same subject-matter. Where the
goods delivered under the contract are not the goods contracted for, the purchaser has got a right
to reject them, or to accept them and claim damages for breach of warranty. Under the law,
therefore, there cannot be an agreement relating to one kind of property and a sale as regards
another. We are accordingly of opinion that on the true interpretation of the expression ! sale of
goods" there must be an agreement between the parties for the sale of the very goods in which
eventually property passes. In a building contract, the agreement between the parties is that the
contractor should construct a building according to the specifications contained in the agreement,
and in consideration therefor receive payment as provided therein, and as will presently be shown
there is in such an agreement neither a contract to sell the materials used in the construction, nor
does property pass therein as movables. It is therefore impossible to maintain that there is implicit
in a building contract a sale of materials as understood in law.
(4) It was finally contended that the words of a Constitution conferring legislative power
should be construed in such manner as to make it flexible and elastic so as to enable that power to
be exercised in respect of matters which might be unknown at the time it was enacted but might
come into existence with the march of time and progress in science, and that on this principle the
expression ! sale of goods" in Entry 48 should include not only what was understood as sales at
the time of the Government of India Act, 1935 but also whatever might be regarded as sale in the
times to come.
24. The principle of the decisions is that when, after the enactment of a legislation, new facts
and situations arise which could not have been in its contemplation, the statutory provisions could
properly be applied to them if the words thereof are in a broad sense capable of containing them.
The question then would be not what the framers understood by those words, but whether those
words are broad enough to include the new facts. Clearly, this principle has no application to the
present case. Sales tax was not a subject which came into vogue after the Government of India
Act, 1935. It was known to the framers of that statute and they made express provision for it
under Entry 48. Then it becomes merely a question of interpreting the words, and on the
principle, already stated, that words having known legal import should be construed in the sense
which they had at the time of the enactment, the expression ! sale of goods" must be construed in
the sense which it has in the Sale of Goods Act.
The argument is that the definition of ! sale" given in the Madras General Sales Tax Act is in
conflict with that given in the Sale of Goods Act, 1930, that the sale of goods is a matter falling
within Entry 10 of the Concurrent List, and that, in consequence, as the Madras General Sales
Tax (Amendment) Act, 1947 under which the impugned provisions had been enacted, had not
been reserved for the assent of the Governor-General as provided in Section 107 (2), its
provisions are bad to the extent that they are repugnant to the definition of ! sale" in the Sale of
Goods Act, 1930. The short answer to this contention is that the Madras General Sales Tax Act is
a law relating not to sale of goods but to tax on sale of goods, and that it is not one of the matters
enumerated in the Concurrent List or over which the Dominion legislature is competent to enact a
law, but is a matter within the exclusive competence of the Province under Entry 48 in List II.
The only question that can arise with reference to such a law is whether it is within the purview of
that Entry. If it is, no question of repugnancy under Section 107 can arise.
26. It now remains to deal with the contention pressed on us by the States that even if the
supply of materials under a building contract cannot be regarded as a sale under the Sale of
Goods Act, that contract is nevertheless a composite agreement under which the contractor
undertakes to supply materials, contribute labour and produce the construction, and that it is open
to the State in execution of its tax laws to split up that agreement into its constituent parts, single
out that which relates to the supply of materials and to impose a tax thereon treating it as a sale. It
is said that this is a power ancillary to the exercise of the substantive power to tax sales. The
respondents contend that even if the agreement between the parties could be split up in the
manner suggested for the appellant, the resultant will not be a sale in the sense of the Sale of
Goods Act, as there is in a works contract neither an agreement to sell materials as such, nor does
property in them pass as movables.
32. The contention that a building contract contains within it all the elements constituting a
sale of the materials was sought to be established by reference to the form of the action, when the
claim is in quantum meruit. It was argued that if a contractor is prevented by the other party to the
contract from completing the construction he has, as observed by Lord Blackburn in Appleby v.
Myres claim against that party, that the form of action in such a case is for work done and
materials supplied, as appears from Bullen and Leake¶s Precedents of Pleadings, 10th Edn., at
pp. 285-86, and that that showed that the concept of sale of goods was latent in a building
contract. The answer to this contention is that a claim for quantum meruit is a claim for damages
for breach of contract, and that the value of the materials is a factor relevant only as furnishing a
basis for assessing the amount of compensation. That is to say, the claim is not for price of goods
sold and delivered but for damages. That is also the position under Section 65 of the Indian
Contract Act.
33. Another difficulty in the way of accepting the contention of the appellant as to splitting up
a building contract is that the property in materials used therein does not pass to the other party to
the contract as movable property. It would so pass if that was the agreement between the parties.
But if there was no such agreement and the contract was only to construct a building, then the
materials used therein would become the property of the other party to the contract only on the
theory of accretion. When the work to be executed is, as in the present case, a house, the
construction imbedded on the land becomes an accretion to it on the principle quicquid plantatur
solo, solo cedit, and it vests in the other party not as a result of the contract but as the owner of
the land. It is argued that the maxim, what is annexed to the soil goes with the soil, has not been
accepted as a correct statement of the law of this country.
The decisions are concerned with rights of persons who, not being trespassers, bona fide put
up constructions on lands belonging to others, and as to such persons the authorities lay down that
the maxim recognised in English law, quicquid plantatur solo, solo cedit has no application, and
that they have the right to remove the superstructures, and that the owner of the land should pay
compensation if he elects to retain them. That exception does not apply to buildings which are
constructed in execution of a works contract, and the law with reference to them is that the title to
the same passes to the owner of the land as an accretion thereto. Accordingly, there can be no
question of title to the materials passing as movables in favour of the other party to the contract. It
may be, as was suggested by Mr Sastri for the respondents, that when the thing to be produced
under the contract is movable property, then any material incorporated into it might pass as a
movable, and in such a case the conclusion that no taxable sale will result from the disintegration
of the contract can be rested only on the ground that there was no agreement to sell the materials
as such. But we are concerned here with a building contract, and in the case of such a contract,
the theory that it can be broken up into its component parts and as regards one of them it can be
said that there is a sale must fail both on the grounds that there is no agreement to sell materials as
such, and that property in them does not pass as movables.
34. To sum up, the expression ! sale of goods" in Entry 48 is a nomen juris, its essential
ingredients being an agreement to sell movables for a price and property passing therein pursuant
to that agreement. In a building contract which is, as in the present case, one, entire and
indivisible - and that is its norm, there is no sale of goods, and it is not within the competence of
the Provincial Legislature under Entry 48 to impose a tax on the supply of the materials used in
such a contract treating it as a sale.
35. This conclusion entails that none of the legislatures constituted under the Government of
India Act, 1935 was competent in the exercise of the power conferred by Section 100 to make
laws with respect to the matters enumerated in the lists, to impose a tax on construction contracts
and that before such a law could be enacted it would have been necessary to have had recourse to
the residual powers of the Governor-General under Section 104 of the Act. And it must be
conceded that a construction which leads to such a result must, if that is possible, be avoided. It is
also a fact that acting on the view that Entry 48 authorises it, the States have enacted laws
imposing a tax on the supply of materials in works contracts, and have been realising it, and their
validity has been affirmed by several High Courts. All these laws were in the statute book when
the Constitution came into force, and it is to be regretted that there is nothing in it which offers a
solution to the present question. We have, no doubt, Article 248 and Entry 97 in List I conferring
residual power of legislation on Parliament, but clearly it could not have been intended that the
Centre should have the power to tax with respect to works constructed in the States. In view of
the fact that the State Legislatures had given to the expression ! sale of goods" in Entry 48 a wider
meaning than what it has in the Sale of Goods Act, that States with sovereign powers have in
recent times been enacting laws imposing tax on the use of materials in the construction of
buildings, and that such a power should more properly be lodged with the States rather than the
Centre, the Constitution might have given an inclusive definition of ! sale" in Entry 54 so as to
cover the extended sense. But our duty is to interpret the law as we find it, and having anxiously
considered the question, we are of opinion that there is no sale as such of materials used in a
building contract, and that the Provincial Legislatures had no competence to impose a tax thereon
under Entry 48.
36. To avoid misconception, it must be stated that the above conclusion has reference to
works contracts, which are entire and indivisible, as the contracts of the respondents have been
held by the learned Judges of the Court below to be. The several forms which such kinds of
contracts can assume are set out in Hudson on Building Contracts, at p. 165. It is possible that
the parties might enter into distinct and separate contracts, one for the transfer of materials for
money consideration, and the other for payment of remuneration for services and for work done.
In such a case, there are really two agreements, though there is a single instrument embodying
them, and the power of the State to separate the agreement to sell, from the agreement to do work
and render service and to impose a tax thereon cannot be questioned, and will stand untouched by
the present judgment. In the result, the appeal fails.
*****
STATUTORY TRANSACTIONS
Vishnu Agencies (P) Ltd. v. Commercial Tax Officer
(1978) 1 SCC 520 : AIR 1978 SC 449
Y.V. CHANDRACHUD. J. - These appeals have been placed for hearing before a seven-Judge
Bench in order to set at rest to the extent foreseeable, the controversy whether what is
conveniently, though somewhat loosely, called a $compulsory sale# is exigible to sales tax. When
essential goods are in short supply, various types of orders are issued under the Essential
Commodities Act, 1955 with a view to making the goods available to the consumer at a fair price.
Such orders sometimes provide that a person in need of an essential commodity like cement,
cotton, coal or iron and steel must apply to the prescribed authority for a permit for obtaining the
commodity. Those wanting to engage in the business of supplying the commodity are also
required to possess a dealer#s licence. The permit-holder can obtain the supply of goods, to the
extent of the quantity specified in the permit, from the named dealer only and at a controlled
price. The dealer who is asked to supply the stated quantity to the particular permit holder has no
option but to supply the stated quantity of goods at the controlled price. The question for our
consideration, not easy to decide, is whether such a transaction amounts to a sale in the language
of the law.
2. We will refer to the facts of civil appeal 724 of 1976, in which a company called M/s
Vishnu Agencies (Pvt.) Ltd. is the appellant. It carries on business as an agent and distributor of
cement in the State of West Bengal and is a registered dealer under the Bengal Finance (Sales
Tax) Act, 1941, referred to hereinafter as the Bengal Sales Tax Act. Cement being a controlled
commodity, its distribution is regulated by the West Bengal Cement Control Act, 26 of 1948,
referred to hereinafter as the Cement Control Act, and by the orders made under Section 3(2) of
that Act. Section 3(1) of the Cement Control Act provides, inter alia, for regulation of production,
supply and distribution of cement for ensuring equitable supply and distribution thereof at a fair
price. By the Cement Control Order, 1948 framed under the Cement Control Act, no sale or
purchase of cement can be made, except in accordance with the conditions contained in the
written order issued by the Director of Consumer Goods, West Bengal or the Regional Honorary
Adviser to the Government of India at Calcutta or by officers authorised by them, at prices not
exceeding the notified price.
3. The appellant is a licensed stockist of cement and is permitted to stock cement in its
godown, to be supplied to persons in whose favour allotment orders are issued, at the price
stipulated and in accordance with the conditions of permit issued by the authorities concerned.
The authorities designated under the Cement Control Order issue permits under which a specified
quantity of cement is allotted to a named permit-holder, to be delivered by a named dealer at the
price mentioned in the permit. A permit is generally valid for 15 days and as soon as the price of
Vishnu Agencies (P) Ltd. v. Commercial Tax Officer 121
cement allotted in favour of an allottee is deposited with the dealer, he is bound to deliver to the
former the specified quantity of cement at the specified price.
5. The appellant supplied cement to various allottees from time to time in pursuance of the
allotment orders issued by appropriate authorities and in accordance with the terms of the licence
obtained by it for dealing in cement. The appellant was assessed to sales tax by the first
respondent, the Commercial Tax Officer, Sealdah Charge, in respect of these transactions. It paid
the tax but discovered on perusal of the decision of this Court in New India Sugar Mills Ltd. v.
Commr of Sales Tax [AIR 1963 SC 1207], that the transactions were not exigible to sales tax.
Pleading that the payment was made under a mistake of law, it filed appeals against the orders of
assessment passed by Respondent 1. It contended in appeals before the Assistant Commissioner
of Commercial Taxes that by virtue of the provisions of the Cement Control Act and the Cement
Control Order, no volition or bargaining power was left to it and since there was no element of
mutual consent or agreement between it and the allottees, the transactions were not sales within
the meaning of the Sales Tax Act. The appellant further contended that if the transactions were
treated as sales, the definition of ! sale" in the Sales Tax Act was ultra vires the legislative
competency of the Provincial Legislature under the Government of India Act, 1935 and of the
State Legislature under the Constitution. The appellate authority rejected the first contention and
upheld the assessments. It did not, as it could not, go into the second contention regarding
legislative competence. The appellant adopted the statutory remedies open to it but since the
arrears of tax were mounting up and had already exceeded a sum of rupees eight lacs, it filed a
writ petition in the Calcutta High Court praying that the various assessment orders referred to in
the edition be quashed and a writ of prohibition be issued directing the sales tax authorities to
refrain from making any further assessments for the purpose of sales tax on the transactions
between the appellant and the allottees.
8. Since the crux of the appellant#s contention is that the measures adopted to control the
supply of cement leave no consensual option to the parties to bargain, it is necessary first to
notice the relevant provisions of law bearing on the matter. The West Bengal Cement Control
Act, 26 of 1948, was enacted in order to ! confer powers to control the production, supply and
distribution of, and trade and commerce in, cement in West Bengal" . Section 3(1) of the Act
empowers the Provincial Government to provide, by order in the Official Gazette, for regulating
the supply and distribution of cement and trade and commerce therein. Section 3(2) provides by
clauses (b) to (e) that an order made under sub-section (1) may provide for regulating or
controlling the prices at which cement may be purchased or sold and for prescribing the
conditions of sale thereof; regulating by licenses, permits or otherwise, the storage, transport,
movement, possession, distribution, disposal, acquisition, use or consumption of cement;
prohibiting the withholding from sale of cement ordinarily kept for sale; and for requiring any
person holding stock of cement to sell the whole or specified part of the stock at such prices and
to such persons or classes of persons or in such circumstances, as may be specified in the order. If
any person contravenes an order made under Section 3, he is punishable under Section 6 with
122 Vishnu Agencies (P) Ltd. v. Commercial Tax Officer
imprisonment for a term which may extend to three years or with fine or with both, and if the
order so provides, any Court, trying such contravention, may direct that any property in respect of
which the Court is satisfied that the order has been contravened shall be forfeited to the
Government.
9. In exercise of the powers conferred by Section 3(1) read with clauses (b) to (a) of Section
3(2) of the Act an older which may conveniently be called the Cement Control Order was
promulgated by the Governor on August 18, 1948. The relevant clauses of that order contain the
following provisions: By paragraph 1, no person shall after the commencement of the order sell
or store for sale any cement unless he holds a licence and except in accordance with the
conditions specified in such licence obtained from the Director of Consumer Goods, West
Bengal, or any officer authorised by him in writing in this behalf. By paragraph 2, no person shall
dispose of or agree to dispose of any cement except in accordance with the conditions contained
in a written order of the Director of Consumer Goods, West Bengal or the authorities specified in
the paragraph. By paragraph 3, no person shall acquire or agree to acquire any cement from any
person except in accordance with the conditions contained in a written order of the Director of
Consumer Goods, West Bengal, or the authorities specified in the paragraph. By paragraph 4, no
person shall sell cement at a ! higher than notified price" . By paragraph 8, no person or stockist
who has any stock of cement in his possession and to whom a written order has been issued under
paragraph 2 shall ^refuse to sell the same, ! at a price not exceeding the notified price" , and the
seller shall deliver the cement to the buyer ! within a reasonable time after the payment of price"
By paragraph 8A, every stockist or every person employed by him shall, if so requested by the
person acquiring cement from him under a written order issued under paragraph 3, weigh the
cement in his presence or in the presence of his authorised representative at the time of delivery.
11. As regards the batch of appeals from Andhra Pradesh, the levy of tax was challenged by
three sets of persons, the procuring agents, the rice-millers and the retailers with the difference
that the procuring agents were assessed to purchase tax, while the others to sales tax under the
Andhra Pradesh General Sales Tax Act, 1957. By virtue of the provisions of the Andhra Pradesh
Paddy Procurement (Levy) Orders, the paddy-growers can sell their paddy to licensed procuring
agents appointed by the State Government only and at the prices fixed by the Government. The
agriculturist has the choice to. select his own procuring agent but he cannot sell paddy to a private
purchaser. The procuring agents in their turn have to supply paddy to the rice-millers at controlled
prices. The millers, after converging paddy into rice, have to declare their stocks to the Civil
Supplies Department. Pursuant to the orders issued by the Department, the rice-millers have to
supply a requisite quantity of rice to the wholesale or retail dealers at prices fixed by the
Department. Orders for such supply by the millers are passed by the authorities under the A. P.
Procurement (Levy) and Restriction on Sale Order, 1957. Under this order, every miller carrying
on rice-milling operations is required to sell to the agent or officer duly authorised by the
Government the minimum quantities fixed by the Government at the notified price; and no miller
or other person who gets his paddy milled in any rice-mill can move or otherwise dispose of the
rice recovered by milling at such rice-mill except in accordance with the directions of the
Collector. A breach of these provisions is liable to be punished under Section 7 of the Essential
Commodities Act, 1955 and the goods are liable to be forfeited under Section 6A of that Act. The
A. P. sales tax authorities levied purchase tax on the purchase of paddy by the procuring agents
from the agriculturists and they levied sales tax on the transactions relating to the supply of rice
by the millers to the wholesale and retail dealers and on the sales made by the retailers to their
customers. The case as regards the sales tax imposed on the transactions between the retail
dealers and the consumers stood on an altogether different footing, but the writ petitions filed by
the procuring agents and rice-millers raised questions similar to those involved in the writ petition
filed in the Calcutta High Court.
13. We may now notice the provisions of the Sales Tax Acts. Section 2(8) of the Bengal
Finance (Sales Tax) Act, 6 of 1941, defines a ! sale" to mean ! any transfer of property in goods
for cash or deferred payment or other valuable consideration, including a transfer of property in
goods involved in the execution of a contract, but does not include a mortgage, hypothecation,
charge or pledge" . Section 2(1) provides that the word ! turnover" used in relation to any period
means ! the aggregate of the sale-prices or parts of sale-prices receivable, or if a dealer so elects,
actually received by the dealer ...." . By clause (h) of Section 2, ! sale-price" is defined to mean the
amount payable to a dealer as valuable consideration for ! the sale of any goods" By Section 4(1),
every dealer whose gross turnover during the year immediately preceding the commencement of
the Act exceeded-the taxable quantum is liable to pay tax under the Act on all ! sales" effected
after the date notified by the State Government.
14. Section 2(n) of the Andhra Pradesh Central Sales Tax Act, 1957 defines a ! sale" as
! every transfer of the property in goods by one person to another in the course of trade or
commerce, for cash, or for deferred payment or for any other valuable consideration ...." Section
5 of that Act is the charging section.
15. According to these definitions of $sale# in the West Bengal and Andhra Pradesh Sales Tax
Acts, transactions between the appellants on one hand and the allottees or nominees on the other
are patently sales because indisputably, in one case the property in cement and in the other,
property in paddy and rice was transferred for cash consideration by the appellants; and in so far
as the West Bengal case is concerned, property in the goods did not pass to the transferees by way
of mortgage, hypothecation, charge or pledge. But that is over-simplification. To counteract what
appears on the surface plain enough, learned Counsel for the appellants have advanced a twofold
contention. They contend, in the first place, that the word $sale# in the Sales Tax Acts passed by
the Provincial or State Legislatures must receive the same meaning as in the Sale of Goods Act,
1930; or else, the definition of $sale# in these Sales Tax Acts will be beyond the legislative
competence of the Provincial and State Legislatures. Secondly, the appellants contend that since
under the Sale of Goods Act, there can be no sale without a contract of sale and since the parties
in these matters had no volition of their own but were compelled by law to supply and receive the
goods at prices fixed under the Control Orders by the prescribed authorities, the transactions
between them are not sales properly so called and therefore are not exigible to sales tax.
16. For examining the validity of the first contention, it is necessary to turn to the appropriate
entries in the legislative lists of the Constitution Acts, for the contention is founded on the
premise that the word $sale# which occurs in those entries must receive the same meaning as in
the Sale of Goods Act, 1930 since the expression ! sale of goods" was, at the time when the
Government of India Act was enacted, a term of well-recognised legal import in the general law
relating to sale of goods and in the legislative practice relating to that topic both in England and in
Indian Entry 48 in the Provincial List, List II of Schedule VII to the Government of India Act,
1935 relates to: ! Taxes on the sale of goods" . Entry 54 of List II, of the Seventh Schedule to the
Constitution reads to say: ! Taxes on the sale or purchase of goods other than newspapers, subject
to the provisions of Entry 92A of List I" . We are not concerned with Entry 92A of the Union List
but we may refer to it in order to complete the picture. It refers to: ! Taxes on the sale or purchase
of goods other than newspapers, where such sale or purchase takes place in the course of inter-
State trade or commerce" .
17. The contention of the appellants that the expression ! sale of goods" in Entry 48 in the
Provincial List of the Act of 1935 and in Entry 54 in the State List of the Constitution must
receive the same meaning as in the Sale of Goods Act is repelled on behalf of the State
Governments with the argument that constitutional provisions which confer legislative powers
must receive a broad and liberal construction and therefore the expression ! sale of goods" in
Entry 48 and its successor, Entry 54, should not be construed in the narrow sense in which that
expression is used in the Sale of Goods Act, 1930 but in a broad sense. The principle that in
interpreting a constituent or organic statute, that construction most beneficial to the widest
possible amplitude of its powers must be adopted has been examined over the years by various
Courts, including this Court, and is too firmly established to merit reconsideration. The decisions
have taken the view that a Constitution must not be construed in a narrow and pedantic sense, that
a broad and liberal spirit should inspire those whose duty it is to interpret it, that a Constitution of
a Government is a living and organic thing which of all instruments has the greatest claim to be
construed ut res magis valeat quam pereat, that the Legislature in selecting subjects of taxation is
entitled to take things as it finds them in rerum natura and that it is not proper that a court should
deny to such a Legislature the right of solving taxation problems unfettered by a priori legal
categories which often derive from the exercise of legislative power in the same constitutional
unit.
24. In order, therefore, to determine whether there was any agreement or consensuality
between the parties, we must have regard to their conduct at or about the time when the goods
changed hands. In the first place, it is not obligatory on a trader to deal in cement nor on any one
to acquire it. The primary fact, therefore, is that the decision of the trader to deal in an essential
commodity is volitional. Such volition carries with it the willingness to trade in the commodity
strictly on the terms of Control Orders. The consumer too, who is under no legal compulsion to
acquire or possess cement, decides as a matter of his volition to obtain it on the terms of the
permit or the order of allotment issued in his favour. That brings the two parties together, one of
whom is willing to supply the essential commodity and the other to receive it. When the allottee
presents his permit to the dealer, he signifies his willingness to obtain the commodity from the
dealer on the terms stated in the permit. His conduct reflects his consent. And when, upon the
presentation of the permit, the dealer acts upon it, he impliedly agrees to supply the commodity to
the allottee on the terms by which he has voluntarily bound himself to trade in the commodity.
His conduct too reflects his consent. Thus, though both parties are bound to comply with the legal
requirements governing the transaction, they agree as between themselves to enter into the
transaction on statutory terms, one agreeing to supply the commodity to the other on those terms
and the other agreeing to accept it from him on the very terms It is therefore not correct to say
that the transactions between the appellant and the allottees are not consensual. They, with their
free consent, agreed to enter into the transactions.
25. We are also of the opinion that though the terms of the transaction are mostly
predetermined by law, it cannot be said that there is no area at all in which there is no scope for
the parties to bargain. The West Bengal Cement Control Act, 1948 empowers the Government by
Section 3 to regulate or control the prices at which cement may be purchased or sold. The Cement
Control Order, 1948 provides by paragraph 4 that no person shall sell cement at a ! higher than
notified price" , leaving it open to the parties to charge and pay a price which is less than the
notified price, the notified price being the maximum price which may lawfully be charged.
Paragraph 8 of the Order points in the same direction by providing that no dealer who has a stock
of cement in his possession shall refuse to sell the same ! at a price not exceeding the notified
price" , leaving it open to him to charge a lesser price, which the allottee would be only too
agreeable to pay. Paragraph 8 further provides that the dealer shall deliver the cement ! within a
reasonable time" after the payment of price. Evidently, within the bounds of reasonableness, it
would be open to the parties to fix the time of delivery. Paragraph 8A which confers on the
allottee the right to ask for weighment of goods also shows that he may reject the goods on the
ground that they are short in weight just as indeed, he would have the undoubted right to reject
them on the ground that they are not of the requisite quality. The circumstance that in these areas,
though minimal, the parties to the transactions have the freedom to bargain militates against the
view that the transactions are not consensual.
40. The resume of cases may yet bear highlighting the true principle underlying the decisions
of this Court which have taken the view that a transaction which is effected in compliance with
the obligatory terms of a statute may nevertheless be a sale in the eye of a law. The Indian
Contract Act which was passed in 1872 contained provisions in its seventh chapter comprising
Sections 76 to 123 relating to sale of goods which were repealed on the enactment of a
comprehensive law of sale of goods in 1930. The Contract Act drew inspiration from the English
law of contract which is almost entirely the creation of English courts and whose growth is
marked by features which are peculiar to the social and economic history of England.
Historically, the English law of contract is largely founded upon the action on the case for
assumpsit, where the essence of the matter was the undertaking. The necessity for acceptance of
the undertaking or the promise led the earlier writers on legal theories to lay particular emphasis
on the consensual nature of contractual obligations.
43. It all began with the reliance in Gannon Dunkerley on the statement in the Eighth Edition
(1950) of Benjamin on Sale that to constitute a valid sale there must be a concurrence of four
elements, one of which is ! mutual assent" . That statement is a reproduction of what the
celebrated author had said in the second and last edition prepared by himself in 1873. The
majority judgment in New India Sugar Mills also derives sustenance from the same passage in
Benjamin¶s eighth edition. But as observed by Hidayatullah J. in his dissenting judgment in that
case, consent may be express or implied and offer and acceptance need not be in an elementary
form (page 510). It is interesting that the General Editor of the 1974 edition of Benjamin¶s Sale
of Goods says in the preface that the editors decided to produce an entirely new work partly
because commercial institutions, modes of transport and of payment, forms of contract, types of
goods, market areas and marketing methods, and the extent of legislative and governmental
regulation and intervention, had changed considerably since 1868, when the first edition of the
book was published. The formulations in Benjamins second edition relating to the conditions of a
valid $sale# of goods, which are reproduced in the eighth edition, evidently require modification
in the light of regulatory measures of social control. Hidayatullah, J., in his minority judgment
referred to above struck the new path; and Bachawat J. who spoke for the Court in Andhra
Sugars went a step ahead by declaring that ! the contract is a contract of sale and purchase of
cane, though the buyer is obliged to give his assent under compulsion of a statute" (page 716).
The concept of freedom of contract, as observed by Hegde, J. in Indian Steel and Wire
Productions, has undergone a great deal of change even in those countries where it was
considered as one of the basic economic requirements of a democratic life (page 490). Thus, in
Ridge Nominees Ltd, the Court of Appeal, while rejecting .the argument that there was no sale
because the essential element of mutual assent was lacking, held that the dissent of the
shareholder was overridden by an assent which the statute imposed on him, fictional though it
may be, that a sale may not always require the consensual element mentioned in Benjamin on
Sale, and that there may in truth be a compulsory sale of property with which the owner is
compelled to part for a price against his will. Decisions in cases of $compulsory acquisition#,
where such acquisition is patent as in Kirkness or is inferred as in Chhitter Mal fall in a separate
and distinct class. The observations of Lord Reid in Kirkness that $sale# is a nomen juris - the
name of a particular consensual contract -have therefore to be understood in the context in which
they were made, namely, that compulsory acquisition cannot amount to sale. In Gannon
Dunkerley, Venkatarama Aiyar, J. was influenced largely by these observations and by the
definition of $sale# in Benjamin’s eighth edition. Gannon Dunkerley involved an altogether
different point and is not an authority for the proposition that there cannot at all be a contract of
sale if the parties to a transaction are obliged to comply with the terms of a statute. Since we are
putting in a nutshell what we have discussed earlier, we would like to reiterate in the interest of
uniformity and certainty of law that, with great deference the majority decision in New India
Sugar Mills is not good law. The true legal position is as is stated in the minority judgment in
that case and in Indian Steel and Wire Products, Andhra Sugars. Salar Jung Sugar Mills and
Oil and Natural Gas Commission. To the extent to which Cement Distributors Pvt. Ltd. is
inconsistent with these judgments, it is also, with respect, not good law.
44. The conclusion which therefore emerges is that the transactions between the appellant,
M/s Vishnu Agencies (Pvt.) Ltd., and the allottees are sales within the meaning of Section 2(g) of
the Bengal Finance (Sales Tax) Act, 1941. For the same reasons, transactions between the
growers and procuring agents as also those between the rice-millers on one hand and the whole-
sellers or retailers on the other are sales within the meaning of Section 2(n) of the Andhra Pradesh
General Sales Tax Act, 1957. The turnover is accordingly exigible to sales tax or purchase tax as
the case may be. The appeals are accordingly dismissed.
*****
Coffee Board, Karnataka v. Commissioner of Commercial Taxes
AIR 1988 SC 1487
SABYASACHI MUKHARJI, J. - These appeals by certificates are from the judgment and order
of the High Court of Karnataka dated August 16, 1985. By the impugned judgment and order the
writ petitions filed by the Coffee Board and others were dismissed. In order to appreciate the
questions involved in the decision, it may be noted that the appellant herein & Coffee Board
contended that the compulsory delivery of coffee under the Coffee Act, 1942 extinguishing all
marketing rights of the growers was $compulsory acquisition# and not sale or purchase to attract
levy of purchase tax: it was further contended that the appellant was only a $trustee# or $agent# of
growers not exigible to purchase tax and that all export sales were $in the course of export#
immune to tax under Article 286 of the Constitution.
3. The power conferred on the Board under Section 25(2) of the Coffee Act, to which we will
make reference later, to reject coffee offered for delivery or even the right of a buyer analogous to
Section 37 of the Sale of Goods Act showed that there was an element of consensuality in the
compulsory sales regulated by the Act. The amount paid by the Board to the grower under the Act
was the value or price of coffee in conformity with the detailed accounting done thereto under the
Act. It was further held by the High Court that the amount paid to the grower was neither
compensation nor dividend. The payment of price to the grower was an important element to
determine the consensuality test to find out whether there was sale under Section 4(1) of the Sale
of Goods Act. The Act also ensures periodical payments of price to the growers. The Rules
provide for advancing loans to growers. Therefore, according to the Division Bench of the
Karnataka High Court without any shadow of doubt these elements indicated that in the
compulsory sale of coffee, there was an element of consensuality. When once the Board was held
to be a $dealer# it also followed from the same that there was sale by the grower, purchase by the
Board and then a sale by the Board. The purchases and the exports if any made by the Board
thereafter on any principle would not be $local sales# within the State of Karnataka. Explanation
3(2)(ii) to Section 2(1) of the Karnataka Sales Tax Act had hardly any relevance to hold that the
later export sales were $local sales# to avoid liability under Section 6 of the Karnataka Sales Tax
Act. The direct export sales made by the appellant for the period in challenge were not $in the
course of export# and they did not qualify for exemption from purchase tax under Section 6 of the
Karnataka Sales Tax Act. The levy of sales tax on coffee, it was held by the High Court fell,
under entry 43 of the Second Schedule of the Act and it was governed by Section 5(3)(a) of the
Act and not by Section 5(1) of the Act. It was further held that under Section 5 of the Central
Sales Tax Act, 1956 purchases and exports made by the Coffee Board are $for export# and not $in
the course of export# and thus did not qualify for exemption under Article 286 of the Constitution
of India. It was observed by the High Court that the Board did not purchase or take delivery of
any specific coffee or goods of any grower and exported the same under prior contracts of sale.
The Board did not purchase any specific coffee of any specific grower for purposes of direct
Coffee Board, Karnataka v. Commissioner of Commercial Taxes 129
exports at all. The purchases made and exports made would be $for export# only and not $in the
course of export# to earn exemption under Article 286 of the Constitution of India. It was further
held that Sections 11 and 12 of the Act which regulate the levy and payment of customs and
excise duties when closely examined really established according to the High Court that what was
grown by the growers and delivered to the Board was not at all compulsory acquisition but was
sale. If it was compulsory acquisition and there was payment of compensation, then these
provisions would not have found their places in the Coffee Act at all, according to the High
Court. Levy of customs and excise duties on compensation was something unheard of, an
incongruity and an anachronism in compulsory acquisition, according to the High Court.
11. The question involved in these appeals and the writ petitions is the exigibility of tax on
sale if there be any, by the growers of the coffee to the Board. Basically, it must depend upon
what is sale in the general context as also in the context of the relevant provisions of the Act
namely, the Karnataka Sales Tax Act, 1957, as amended from time to time, ($the Karnataka Act#)
and the Central Sales Tax Act, 1956, ($the Central Act#). We must, however, examine these in the
context of general law, namely, the Sale of Goods Act, 1930 and the concept of sale in general.
12. The essential object of the contract of sale is the exchange of property for a money price.
There must be a transfer of property, or an agreement to transfer it, from one party, the seller, to
the other, the buyer, in consideration of a money payment or a promise thereof by the buyer. Lord
Denning, M.R., in C.E.B. Draper & Sons Ltd. v. Edward Turner & Sons Ltd. [(1964) 3 All ER
148], observed as follows:
$$I know that often times a contract for sale is spoken of as a sale. But the word $sale#
properly connotes the transfer of the absolute or general property in a thing for a price in
money [see Benjamin on Sale, 2nd edn. (1873), p. 1, quoted in Kirkness v. John Hudson
& Co., 1955 AC 696, 708, 719]. In this Act of 1926 I think that $sale# is used in its
proper sense to denote the transfer of property in the goods. The sale takes place at the
time when the property passes from the seller to the buyer and it takes place at the place
where the goods are at that time.##
Lord Denning was speaking for the English Act of 1926 for the Sale of Goods Act.
13. In the Sale of Goods Act, 1930, ($Sale of Goods Act#) contract of sale of goods is defined
under Section 4(1) as a contract whereby the seller transfers or agrees to transfer the property in
goods to the buyer for a price. It also stipulates by sub-section (4) of Section 4 that an agreement
to sell becomes a sale when the time elapses or the conditions are fulfilled subject to which the
property in the goods is to be transferred.
14. Benjamin¶s Sale of Goods (2nd Edn.) states that leaving aside the battle of forms, sale is
a transfer of property in the goods by one, the seller, to the other, the buyer.
15. Under the Karnataka Sales Tax Act, sale is defined under Section 2(t) as:
130 Coffee Board, Karnataka v. Commissioner of Commercial Taxes
! $Sale# with all its grammatical variations and cognate expressions means every transfer
of the property in goods by one person to another in the course of trade or business for
cash or for deferred payment or other valuable consideration, but does not include a
mortgage, hypothecation, charge or pledge.##
16. The Central Act defines ! sale" as under in Section 2(g):
! $Sale#, with its grammatical variations and cognate expressions, means any transfer of
property in goods by one person to another for cash or for deferred payment or for any
other valuable consideration, and includes a transfer of goods on the hire-purchase or
other system of payment by instalments, but does not include a mortgage or
hypothecation of or a charge or pledge on goods.##
17. Coffee Board is a $dealer# duly registered as such under the Sales Tax Acts of all the
States in which it holds auctions/maintains depots/runs coffee houses. The Board is also
registered as a $dealer# under the Central Sales Tax Act. The Board collects and remits sales tax
on all the coffee sold by it for domestic consumption to the State in which the sale takes place.
Coffee is sold through auctions held in the States of Karnataka, Tamil Nadu and Andhra Pradesh,
and also through the Board#s own depots located in nine States. Sale is also effected by way of
allotments to cooperative societies. The Board directly exports coffee and also sells coffee to
registered exporters through separate export auctions. It may be mentioned that over 50 per cent
of the coffee is produced in Karnataka and most of the Robusta variety of coffee is produced in
Kerala. All the coffee produced in these States cannot be sold within the State where the coffee is
produced. Coffee meant for export has also to be stored at convenient places. The Board,
therefore, transfers coffee from one State to another. Sales tax is not payable or paid on the
transfer of such coffee. In order to appreciate the actual controversy and the point at issue in the
instant case, it is vital to appreciate the real nature of the transaction.
18. In 1966 this Court in the case of State of Kerala v. Bhavani Tea Produce Co. [AIR 1966
SC 677], which arose under the Madras Plantations Agricultural Income Tax Act, 1955, held that
when growers delivered coffee under Section 25 of the Act to the Board all their rights therein
were extinguished and the coffee vested exclusively in the Board. This Court observed that when
growers delivered coffee to the Board, though the grower ! does not actually sell" the coffee to the
Board, there was a $sale# by operation of law. This was in connection with Section 25 of the Act.
The court, however, did not hold that there was a taxable $sale# by the grower to the Board in the
year in question. The sale, according to this Court in that case took place in earlier years in which
the Agricultural Income Tax Act did not operate. All the States in which coffee is grown and all
the persons concerned with the coffee industry, it is asserted on behalf of the Additional Solicitor
General, understood this decision as laying down that the $sale by operation of law# mentioned
therein only meant the $compulsory acquisition# of the coffee by the Coffee Board.
19. We are, however, bound by the clear ratio of this decision. The Court considered this
question: ! was there a sale to the Coffee Board?" at page 99 of the Report and after discussing
clearly said the answer must be in the affirmative. It was rightly argued, in our opinion, by Dr
Chitale on behalf of the respondents that the question whether there was sale or not or whether
the Coffee Board was a trustee or an agent could not have been determined by this Court, as it
was done in this case unless the question was specifically raised and determined. We cannot also
by-pass this decision by the argument of the learned Additional Solicitor General that Section 10
of the Act had not been considered or how it was understood by some. This decision in our
opinion concludes all the issues in the instant appeal.
20. In 1970 purchase tax was introduced. The Karnataka Sales Tax Act was amended by
Karnataka Act 9 of 1970 and Section 6 was substituted. The new Section 6 provided for the levy
of purchase tax on every dealer who in the course of his business purchased any taxable goods in
circumstances in which no tax under Section 5 was leviable and, inter alia, despatched these to a
place outside the State, at the same rate at which tax would have been leviable on the sale price of
such goods under Section 5 of the Karnataka Act. The delivery of coffee by the coffee growers to
the Coffee Board not being treated a purchase by the Board, the State did not demand any tax
from the Board in respect of such deliveries. Demands were raised for the first time in 1983.
Assessments for the years up to 1975 were completed without any demand for purchase tax being
raised.
21. This Court on or about April 15, 1980 in the case of Consolidated Coffee Ltd. v. Coffee
Board, Bangalore [AIR 1980 SC 1468], held that sale of coffee at export auctions were sales
which preceded the actual export and thus exempt from sales tax under Section 5(3) of the
Central Sales Tax Act. The court also directed the State Governments to refund the amounts
collected as sales tax on such sales and set a time limit for effecting such refunds. The Karnataka
Government, as a consequence, became liable to refund to the Coffee Board about Rs 7 crores
which amount in turn was to be refunded by the Board to the exporters. In 1981 the
Commissioner of Sales Tax, Karnataka informed the Board by a letter that the mandatory
delivery of coffee to the Board by the grower would be regarded as $sale# and that the Board
should pay purchase tax as the coffee growers, being agriculturists are not $dealers#. It is the case
of the Coffee Board that no such claim had been made at any time in the past in any of the States
in India. The Commissioner issued a show cause notice proposing to reopen the assessment for
the year 1974-75. In June 1982 pre-assessment notice was sent by the authorities proposing to
assess the Board to purchase tax for the assessment year 1975-76 and a sum of Rs 3.5 crores was
demanded as purchase tax on the coffee transferred from Karnataka to outside the State either as
stock transfers or as exports directly to buyers abroad.
22. In August 1982 the Coffee Board along with two coffee growers filed writ petitions
being Writ Petition Nos. 15536 to 15540 of 1982 in the High Court of Karnataka praying for a
declaration that the mandatory delivery of coffee under Section 25(1) of the Act was not sale and
that Section 2(t) of the Karnataka Sales Tax Act required to be struck down if the same
encompassed compulsory acquisition also. The show cause notice and the pre-assessment notice
were also challenged and prayers were made for quashing the same. The High Court granted
interim stay. In the meantime on or about February 3, 1983 Constitution (Forty-Sixth

Amendment) Act, 1983 came into force and the definition of ! Tax on sale or purchase of goods"
was added by insertion of clause (29-A) in Article 366. This definition is prospective in
operation. Subsequent to February 3, 1983, the Karnataka Sales Tax Act was amended by Act 10
of 1983, Act 23 of 1983 and Act 8 of 1984. The definition of $sale# in Section 2(t), however, was
not amended. That definition was amended with effect from August 1, 1985 by the Karnataka Act
27 of 1985. After hearing the State Government, the High Court made absolute the stay of further
proceedings pursuant to the show cause notice of the Commissioner proposing to reopen the
assessment for the year 1974-75. The court modified the stay order regarding the pre-assessment
notice and permitted the completion of assessment reserving liberty to the Coffee Board to move
the High Court after the assessment was completed. On May 31, 1983 assessment order was
made for the year 1975-76. On or about June 17, 1983 demand for Rs3.5 crores as arrears of tax
for the assessment year 1975-76 was issued to the Coffee Board. On July 2, 1983, the High Court
stayed the assessment demand for purchase tax for the assessment year 1975-76. On or about
June 18, 1983 the assessment order was issued for the year 1976-77. The Board was assessed on a
taxable turnover of Rs 92.99 crores and Rs 10.18 crores was assessed as tax. Of this sum, Rs 8.06
crores is the demand on account of purchase tax. Thereafter notice demanding payment of Rs
8.06 crores as arrears of tax for the assessment year 1976-77 was issued. The Coffee Board filed a
writ petition in August 1983 being Writ Petition No. 13981 of 1983 challenging the assessment
and the demand for the purchase tax for the assessment year 1976-77. Rule was issued and the
assessment as also demand for purchase tax was stayed. In the meantime, notice of demand for Rs
8.08 crores as arrears of tax for the assessment year 1977-78 was issued. In September 1983 Writ
Petition No. 17071 of 1983 was filed by the Coffee Board for the assessment year 1977-78. Rule
was issued. Assessment and demand for purchase tax was stayed. Similarly, Writ Petition No.
17072 of 1983 was filed by the Coffee Board regarding assessment year 1978-79. Rule was
issued. Assessment and demand for purchase tax was stayed. In the meantime in October 1983,
there was another Writ Petition No. 19285 of 1983 filed challenging the demand for the purchase
tax for the year 1979-80. Rule was issued. Assessment and demand was stayed. Writ Petition No.
19118 of 1983 was filed challenging the demand of purchase tax for the year 1980-81. Rule was
issued. Assessment and demand for purchase tax was stayed.
23. All these writ petitions in January 1984 were referred to the Division Bench for hearing
and disposal. It may be mentioned here that in or about May 1984 the Coffee Board started for
the first time to collect contingency deposits to cover purchase tax liability, if any, for the period
February 3, 1983 onwards subsequent to the Forty-Sixth Amendment to a limited extent. This
was by a circular. It is stated that the Board withheld about Rs 6.8 crores from the pool payment
to growers for the season 1982-83 for meeting in part the liability, if any, for the purchase tax for
the period subsequent to February 3, 1983. The court however, in 1985 directed the appellant-
Coffee Board to remit to the State Government Rs 6.8 crores. The High Court also directed the
Board to remit to the State Government Rs 1.5 crores collected by the Board as contingency
deposits between May and December 1984. The State Government undertook to return these
monies with interest, in the event of the writ petitions being allowed. By the judgment delivered
on August 16, 1985, the High Court dismissed the writ petitions by a common judgment and
various sums of money for the various years became payable as purchase tax. The said judgment
is reported in Indian Law Reports, Karnataka, Vol. 36 at page 1365. These appeals challenge the
said decision.
24. In view of the decision of the High Court several questions were canvassed in these
appeals. The questions were: (i) Was there transfer of coffee to the Board from the coffee growers
or acquisition? (ii) Was there any element of sale involved? (iii) Was the Coffee Board trustee or
agent for the coffee growers for sale to the export market, and (iv) if it is sale, is it in the course of
export of the goods to the territory outside India? The first and the basic question that requires to
be considered in these appeals is whether the acquisition of coffee by the Board is compulsory
acquisition or is it purchase or sale? As mentioned all the questions were answered by this Court
in Bhavani Tea Produce Co. case against the appellant. We were, however, invited to compare
the transaction in question with transactions in Peanut Board v. Rockhampton Harbour Board
[(1932-33) 48 CLR 266]. Was there any mutuality? In this connection it is necessary to analyse
and compare the decision of this Court in Vishnu Agencies (Pvt.) Ltd. v. CTO and to what extent
the principles enunciated in the said decision affect the position. In order to address ourselves to
the problem posed before this Court, we must bear in mind the history and the provisions of the
Coffee Market Expansion Act, 1942, under which the Board was constituted, which we have
already noted.
25. The control of marketing of farm produce for the economic benefit of the producers and
to bring about collective marketing of the produce is a recognised feature of governments of
several countries, particularly. United States of America, Britain and Australia. The object was to
prevent unhealthy competition between the producers, to secure the best price for the produce in
the local market, to conserve for local consumption as much produce as was needed and to make
available the surplus for export outside the States and also to foreign markets. The method usually
adopted to achieve the object is to establish a marketing board with power to control the price, to
obtain possession of the produce and to pool it with a view to collective marketing. The
legislation in this behalf is compendiously described as ! pooling legislation" and is based on the
fundamental idea that the collectivist economy is superior to individualistic economy. There are
therefore, different marketing boards for different kinds of produce, such as sugar, dairy produce,
wheat, lime fruit, apples, pears and so on. The Indian Coffee Market Expansion Act was
modelled somewhat on the lines which obtained in other countries and was intended to control
the development of the coffee industry and to regulate the export and sale of coffee. If, however,
the transaction amounts to sale or purchase under the relevant Act then that is the end of the
matter.
26. All parties drew our attention to the decision in the case of Vishnu Agencies Pvt. Ltd.
[AIR 1978 SC 449]. There the court was concerned with the Cement Control Order and the
transactions taking place under the provisions of that control order. The Cement Control Order
was promulgated under the West Bengal Cement Control Act, 1948 which prohibited storage for
sale and sale by a seller and purchase by a consumer of cement except in accordance with the
conditions specified in licence issued by a designated officer. It also provided that no person
should sell cement at a higher price than the notified price and no person to whom a written order
had been issued shall refuse to sell cement ! at a price not exceeding the notified price" . Any
contravention of the order became punishable with imprisonment or fine or both. Under the A. P.
Procurement (Levy and Restriction on Sale) Order, 1967, (CA Nos. 2488 to 2497 of 1972) every
miller carrying on rice milling operation was required to sell to the agent or an officer duly
authorised by the government, minimum quantities of rice fixed by the government at the notified
price, and no miller or other person who gets his paddy milled in any rice mill can move or
otherwise dispose of the rice recovered by milling at such rice mill except in accordance with the
directions of the Collector. Breach of these provisions became punishable. It was held dismissing
the appeals that sale of cement in the former case by the allottees to the permit-holders and the
transactions between the growers and procuring agents as well as those between the rice millers
on the one hand and the wholesalers or retailers on the other, in the latter case, were sales exigible
to sales tax in the respective States. It was observed by Beg, C.J. that the transactions in those
cases were sales and were exigible to tax on the ratio of Indian Steel and Wire Products Ltd.
[AIR 1968 SC 478], Andhra Sugars Ltd. [AIR 1968 SC 599] and Karam Chand Thapar [AIR
1969 SC 343]. In cases like New India Sugar Mills [AIR 1963 SC 1207], the substance of the
concept of a sale itself disappeared because the transaction was nothing more than the execution
of an order. The Chief Justice emphasised that deprivation of property for a compensation called
price did not amount to a sale when all that was done was to carry out an order so that the
transaction was substantially a compulsory acquisition. On the other hand, a merely regulatory
law, even if it circumscribed the area of free choice, did not take away the basic character or core
of sale from the transaction. Such a law which governs a class obliges a seller to deal only with
parties holding licences who may buy particular or allotted quantities of goods at specified prices,
but an essential element of choice was still left to, the parties between whom agreements took
place. The agreement, despite considerable compulsive elements regulating or restricting the area
of his choice, might still retain the basic character of a transaction of sale. In the former type of
cases, the binding character of the transaction arose from the order directed to particular parties
asking them to deliver specified goods and not from a general order or law applicable to a class.
In the latter type of cases, the legal tie which binds the parties to perform their obligations
remains contractual. The regulatory law merely adds other obligations, such as the one to enter
into such a tie between the parties. Although the regulatory law might specify the terms, such as
price, the regulation is subsidiary to the essential character of the transaction which is consensual
and contractual.
The parties to the contract must agree upon the same thing in the same sense. Agreement on
mutuality of consideration, ordinarily arising from an offer and acceptance, imports to it
enforceability in courts of law. Mere regulation or restriction of the field of choice does not take
away the contractual or essentially consensual binding core or character of the transaction.
Analysing the Act, it was observed that according to the definition of ! sale" in the two Acts the
transactions between the appellants in that case and the allottees or nominees, as the case may be,
were patently sales because in one case the property in the cement and in the other property in the
paddy and rice was transferred for cash consideration by the appellants. When the essential goods
are in short supply, various types of orders are issued under the Essential Commodities Act, 1955
with a view to making the goods available to the consumer at a fair price. Such orders sometimes
provide that a person in need of an essential commodity like cement, cotton, coal or iron and steel
must apply to the prescribed authority for a permit for obtaining the commodity. Those wanting
to engage in the business of supplying the commodity are also required to possess a dealer#s
licence. The permit-holder can obtain the supply of goods, to the extent of the quantity specified
in the permit and from the named dealer only and at a controlled price. The dealer who is asked to
supply the stated quantity to the particular permit-holder has no option but to supply the stated
quantity of goods at the controlled price. Then the decisions in State of Madras v. Gannon
Dunkerley & Co. Ltd. [AIR 1958 SC 560] and New India Sugar Mills v. CST, were discussed
and the correctness of the view taken in the former case was doubted and the majority opinion in
the latter case was overruled.
27. It was submitted by the learned Additional Solicitor General that these cases, namely,
Bhavani Tea Estate and Vishnu Agencies’ would have no application within the set up of the
Coffee Act because the provisions of the statute expressly provide that there could be no sale or
contract of sale, yet the High Court had for purposes of sales tax assumed (notwithstanding the
statutory prohibition) that the transaction contemplated by the statute in the present case, the
mandatory delivery, would be a sale. It was submitted that where a statute prohibited a registered
owner from selling or contracting to sell coffee from any registered estate, there could be no
implication of any purchase on the part of the Coffee Board of the coffee delivered pursuant to
the mandatory provisions of Section 25(1) of the Act. It was urged that Section 17 of the Coffee
Act read with Sections 25 and 47 enacts what since 1944 is a total prohibition against the sale of
coffee by growers and corresponding purchase of coffee from growers. In view of Section 17 read
with Section 25, purchase by the Coffee Board of coffee delivered under Section 25(1) was also
impliedly prohibited. It is in view of this express prohibition of sale and corresponding implied
prohibition of purchase that the Act provided the only method of disposal of coffee, viz., by the
delivery of all coffee to the Coffee Board with no rights attached on such delivery, save and
except the statutory right under Section 34. It was also argued that the legislature has made a
conscious difference between acquisition of coffee by compulsory delivery by the growers under
Section 25(1) of the Act and purchase of coffee by the Board under Section 26(2) and, as such,
compulsory delivery of coffee under Section 25(1) cannot constitute a sale transaction as known
to law between the growers and the Coffee Board. We are, however, unable to accept the
submissions of the learned Additional Solicitor General. All the four essential elements of sale -
(1) parties competent to contract, (2) mutual consent - though minimal, by growing coffee under
the conditions imposed by the Act, (3) transfer of property in the goods and (4) payment of price
though deferred, - are present in the transaction in question. As regards the provisions under
Section 26(2) empowering the Coffee Board to purchase additional coffee not delivered for
inclusion in the surplus pool, it is only a supplementary provision enabling the Coffee Board to
have a second avenue of purchase, the first avenue being the right to purchase coffee under the
compulsory delivery system formulated under Section 25(1) of the Act. The scheme of the Act is
to provide for a single channel for sale of coffee grown in the registered estates. Hence, the Act
directs the entire coffee produced except the quantity allotted for internal sale quota, if any, to be
sold to the Coffee Board through the modality of compulsory delivery and imposes a
corresponding obligation on the Coffee Board to compulsorily purchase the coffee delivered to
the pool, except:
(1) where the coffee delivered is found to be unfit for human consumption: and
(2) where the coffee estate is situated in a far off and remote place or the coffee grown
in an estate is so negligible as to make the sale or coffee through compulsory delivery
an arduous task and an uneconomical provision.
28. Since all persons including the Coffee Board are prohibited from purchasing/selling
coffee in law, there could be no sale or purchase to attract the imposition of sales/purchase tax it
was urged. Even if there was compulsion there would be a sale as was the position in Vishnu
Agencies" . This Court therein approved the minority opinion of Hidayatullah, J. in New India
Sugar Mills v. CST. In the nature of the transactions contemplated under the Act mutual assent
either express or implied is not totally absent in this case in the transactions under the Act. Coffee
growers have a volition or option, though minimal or nominal to enter into the coffee growing
trade. Coffee growing was not compulsory. If anyone decides to grow coffee or continue to grow
coffee, he must transact in terms of the regulation imposed for the benefit of the coffee growing
industry. Section 25 of the Act provides the Board with the right to reject coffee if it is not up to
the standard. Value to be paid as contemplated by the Act is the price of the coffee. Fixation of
price is regulation but is a matter of dealing between the parties. There is no time fixed for
delivery of coffee either to the Board or the curer. These indicate consensuality which is not
totally absent in the transaction.
29. It was urged that regard having been to the sovereign nature of the power exercised by the
Coffee Board and the scheme of the Coffee Act, the ratio of Vishnu Agencies will not apply to
the acquisition of coffee under Section 25(1) by the Coffee Act. It is in this connection
appropriate to refer to the question of compulsory acquisition and this naturally leads to the
problem of exercising eminent domain by the State. It is trite knowledge that eminent domain is
an essential attribute of sovereignty of every state and authorities are universal in support of the
definition of eminent domain as the power of the sovereign to take property for public use
without the owner#s consent upon making just compensation. Nichols on Eminent Domain (1950
edn.) a classic authority on the subject, defines $eminent domain# as $the power of the sovereign
to take property for public use without the owner#s consent#; see para 1.11 page 2 of Vol. 1 which
elaborates the same in these words:
$$This definition expresses the meaning of the power in its irreducible terms: (a)
Power to take, (b) Without the owner#s consent, (c) For the public use.
All else that may be found in the numerous definitions which have received judicial
recognition is merely by way of limitation or qualification of the power. As a matter of pure logic
it might be argued that inclusion of the term $for the public use# is also by way of limitation. In
this connection, however, it should be pointed out that from the very beginning of the exercise of
the power the concept of the $public use# has been so inextricably related to a proper exercise of
the power that such element must be considered as essential in any statement of its meaning. The
$public use# element is set forth in some definitions as the $general welfare#, the $welfare of the
public#, the $public good#, the $public benefit# or $public utility or necessity#.
It must be admitted, despite the logical accuracy of the foregoing definition and despite the
fact that the payment of compensation is not an essential element of the meaning of eminent
domain, that it is an essential element of the valid exercise of such power. Courts have defined
eminent domain so as to include this universal limitation as an essential constituent of its
meaning. It is much too late in the historical development of this principle to find fault with such
judicial utterances. The relationship between the individual#s right to compensation and the
sovereign#s power to condemn is discussed in Thayer#s Cases on Constitutional Law. $But while
obligation (to make compensation) is thus well established and clear let it be particularly noticed
upon what ground it stands, viz. upon the natural rights of the individual. On the other hand, the
right of the State to take springs from a different source, viz. a necessity of government. These
two, therefore, have not the same origin; they do not come, for instance, from any implied
contract between the State and the individual, that the former shall have the property, if it will
make compensation; the right is no mere right of pre-emption, and it has no condition of
compensation annexed to it, either precedent or subsequent. But, there is a right to take, and
attach to it as an incident, an obligation to make compensation; this latter, morally speaking,
follows the other, indeed like a shadow, but it is yet distinct from it, and flows from another
source.
30. It is concluded thus:
Accordingly, it is now generally considered that the power of eminent domain is not
a property right, or an exercise by the state of an ultimate ownership in the soil, but that it
is based upon the sovereignty of the state. As the sovereign power of the State is broad
enough to cover the enactment of any law affecting persons or property within its
jurisdiction which is not prohibited by some clause of the Constitution of the United
States, and as the taking of property within the jurisdiction of a state for the public use
upon payment of compensation is not prohibited by the Constitution of the United States,
it necessarily follows that it is within the sovereign power of a state, and it needs no
additional justification.
31. Cooley in his treatise on the Constitutional Limitations Chapter XV expressed the same
view at page 524 of the book in these words:
$$More accurately, it is the rightful authority which must rest in every sovereignty to
control and regulate those rights of a public nature which pertain to its citizens in
common and to appropriate and control individual property for the public benefit, as the
public safety, convenience or necessity may demand.##
33. This Court in the State of Karnataka v. Ranganatha Ready [AIR 1978 SC 215], held that
the power of acquisition could be exercised both in respect of immovable and movable properties.
34. While conceding the power of acquisition of coffee in exercise of eminent domain, the
scheme contemplated under the Act was not an exercise of eminent domain power. The Act was
to regulate the development of coffee industry in the country. The object was not to acquire
coffee grown and vest the same in the Board. The Board is only an instrument to implement the
Act.
39. We accept the submission of the learned Additional Solicitor General that it is not
necessary that every member of the public should benefit from property that is compulsorily
acquired. But in essence the scheme envisaged is sale - and not compulsory acquisition.
40. It has also to be borne in mind that the terms $sale# and $purchase# have been used in
some of the provisions and that is indicative that no compulsory acquisition was intended.
41. Section 34 of the Act reads as follows:
$$34.(1) The Board shall at such times as it thinks fit make to registered owners who
have delivered coffee for inclusion in the surplus pool such payments out of the pool
fund as it may think proper.
(2) The sum of all payments made under sub-section (1) to any one registered owner
shall bear to the sum of the payments made to all registered owners the same proportion
as the value of the coffee delivered by him out of the year#s crop to the surplus pool
bears to the value of all coffee delivered to the surplus pool out of that year#s crop.
42. The High Court has referred to the provisions of Section 34(2) of the Act and observed
that the said provisions ensure periodical payments of price to the growers. The rules provide for
advancing loans to the growers. Without a shadow of doubt these elements indicate, according to
the High Court, that in the compulsory sale of coffee, there was an element of consensuality. We
are in agreement that there is consensuality in the scheme of the section. The High Court has
referred to Section 25(2) of the Coffee Act and observed that the power conferred by Section
25(2) of the Coffee Act must be read subject to the very requirement of that and all other
provisions of the Act. When a grower sells coffee that has become totally unfit for human
consumption for one or the other valid reason, such a grower cannot compel the Board to
purchase such coffee on the ground that it was coffee and thus endanger public safety and also
pay its value or price. In the very nature of things, these things cannot be foreseen or enumerated
exhaustively. The High Court was of the view that if a grower delivered coffee to the Board, the
Coffee Act extinguished his title and absolutely vested the same in the Board, however,
preserving his right for payment of its value or its price in accordance with the provisions of that
Act. According to the High Court the amount paid by the Board to the grower under the Act is the
value or price of coffee in conformity with the detailed accounting done thereto under the Coffee
Act. The High Court was right. The High Court went on to observe that the amount paid to the
grower was neither compensation nor dividend. The payment of price to the grower is an
important element to determine the consensuality in the sale and the sale itself is under Section
4(1) of the Sale of Goods Act. Therefore, the High Court was of the view that neither Section
25(2) read with Section 17 nor the provisions for payment of compensation indicate that coffee
becomes the property of the Coffee Board not by consent but by the operation of law.
43. The levy of duties of excise and customs under Sections 11 and 12 of the Coffee Act are
inconsistent with the concept of compulsory acquisition. Section 13(4) of the Coffee Act clearly
fixes the liability for payment of duty of excise on the registered owner of the estate producing
coffee. The Board is required to deduct the amount of duty payable by such owner from the
payment to the grower under Section 34 of the Act. The duty payable by the grower is a first
charge on such Pool payment becoming due to the grower from the Board. Section 11 of the Act
provides for levy of duty of customs on coffee exported out of India. This duty is payable to the
customs authorities at the time of actual export. The levy and collection of this duty is not
unrelated to the delivery of the coffee by the growers to the Board or the pool payments made by
the Board to the growers. The duty of excise as also the duty of customs are duties levied by
Parliament in exercise of its powers of taxation. It is not a levy imposed by the Board. It is a fact
that the revenue realised from the levy of these duties form part of the Consolidated Fund of India
and can be utilised for any purpose. It may be utilised for the purpose of the Coffee Act only if
Parliament by appropriation made by law in this regard so provides. The true principle or basis in
Vishnu Agencies case applies to this case. Offer and acceptance need not always be in an
elementary form, nor does the law or contract or of sale of goods require that consent to a
contract must be express. Offer and acceptance can be spelt out from the conduct of the parties
which cover not only their acts but omissions as well. The limitations imposed by the Control
Order on the normal right of the dealers and consumers to supply and obtain goods, the
obligations imposed on the parties and the penalties prescribed by the order do not militate
against the position that eventually, the parties must be deemed to have completed the transaction
under an agreement by which one party binds itself to supply the stated quantity of goods to the
other at a price not higher than the notified price and the other party consents to accept the goods
on the terms and conditions mentioned in the permit or the order of allotment issued in its favour
by the concerned authority.
44. A contract whether express or implied between the parties for the transfer of the property
in the goods for a price paid or promised is an essential requirement for a $sale#. In the absence of
a contract whether express or implied, it is true, there cannot be any sale in the eyes of law.
However, as we see the position and the scheme of the Act, in the instant case, there was contract
as contemplated between the growers and the Coffee Board. This Court applied in Vishnu
Agencies case the consensual test laid down in the earlier decision of this Court in the State of
Madras v. Gannon Dunkerley in this regard. In law there cannot be a sale whether or not
compulsory, in the absence of a contract express or implied. The position of the Coffee Board so
far as sale is concerned is explained by the Madras High Court very lucidly in Indian Coffee
Board, Batlagundu v. State of Madras, where the High Court expressed the view that the Indian
Coffee Board which derived its existence from the Coffee Market Expansion Act is a dealer
within the meaning of Section 2 (b) of the Madras General Sales Tax Act, 1939, and is therefore,
liable to sales tax on its turnover. The High Court held that the Board was not a constituted
representative of the producer and it did not hold the goods on behalf of the producer. After the
goods enter the pool after delivery, they become the absolute property of the Board and the
producer, a registered owner, has no right or claim to the goods except to a share in the sale
proceeds after the goods are sold in accordance with the provisions of the Act.
45. It was said by the learned Additional Solicitor General that the cultivation of coffee in
India was over a century old and numerous plantations existed long prior to the enactment of the
Coffee Act. There was no act of volition on the part of the growers in taking to coffee cultivation
and subjecting themselves to the provisions of the Act by taking up such cultivation. The
cultivation of coffee can be carried on only in certain types of soil and in high elevations. The
land suited for coffee cultivation cannot be used for growing other crops on a similar scale.
Coffee is a perennial crop. The growers have no choice in growing coffee one year and then
changing to a different crop in the following year. Coffee plants have a life ranging from 30 to 70
years, the average life of the plant being 40 years. Coffee estates require constant attention and
expenses have to be incurred for manuring, cultural operations, application of pesticides, etc. at
regular intervals. Removal of old and diseased plants and replanting them with superior disease-
resistant varieties is also necessary and is done each year. The coffee grower has thus no choice at
all in continuing to be a coffee cultivator, it was argued. The cultivation of coffee is not in any
way comparable to the cultivation of sugarcane, the cultivation of which can be discontinued at
will. Such practical difficulties, however, do not in essence make any difference.
47. The coffee growers being agriculturists are not dealers and therefore are not liable to pay
any sales tax or purchase tax, it was submitted. The demand for purchase tax is in effect a demand
on the growers who were exempt from such levy, as the monies required for paying the tax if the
same is lawful has necessarily to come out of the monies otherwise payable to the growers. The
object of the pool marketing system is not to deprive the growers of a fair compensation for their
produce by making them suffer a tax which they would not otherwise be required to suffer. An
analysis of the different provisions of the Coffee Act makes it clear that there was no sale to
attract exigibility to duty, it was submitted. We are unable to accept these submissions. Section 6
of the Karnataka Sales Tax Act, 1957 meets the situation created by such circumstances. This was
examined by this Court in State of Tamil Nadu v. M.K. Kandaswami [AIR 1975 SC 1871],
which examined Section 7-A of Tamil Nadu General Sales Tax Act, 1959 - which was in pari
materia with Section 6 of the Karnataka Sales Tax Act. In that view of the matter Section 6 of the
Karnataka Act would be attracted.
48. The alternative submission of the appellant was that the Coffee Board was a trustee or
agent of the growers#. We are unable to accent this submission either. There is no trust created in
the scheme of the Act in the Coffee Board: it is a statutory obligation imposed on the Coffee
Board and does not make it a trustee in any event. It is also not possible to accept the submission
that the Central Sales Tax Act will not be applicable to any sale by the Coffee Board because it
was an export sale by the Coffee Board.
50. In the aforesaid view of the matter, we are of the opinion that the imposition of tax in the
manner done by the sales tax authorities which has been upheld by the High Court is correct and
the High Court was right. The appeals fail and are dismissed.
* * * * *
CONTRACT FOR WORKS/LABOUR
Commr. of Commercial Taxes v. Hindustan Aeronautics Ltd.
(1972) 1 SCC 395 : AIR 1972 SC 744
S. M. SIKRI, C. J. - In this appeal by certificate granted by the High Court of Mysore the only
question involved is whether the delivery by the respondent -Hindustan Aeronautics Ltd. (the
assessee) to the Railway Board of railway coaches model 407,408 and 411 is liable to sales-tax
under the Central Sales Tax Act.
2. The Commercial Tax Officer, by assessment order, dated March 28, 1964, in respect of the
assessment year 1958-59, included the turnover in respect of the supply of these coaches. The
Sales Tax Officer rejected the contention of the assessee that there was no sale involved in the
execution of the works-contract.
3. In appeal, the Deputy Commissioner of Commercial Taxes confirmed the order. In revision
the Commissioner of Commercial Taxes also came to the same conclusion. He, therefore,
confirmed the appellate order of the Deputy Commissioner.
4. The assessee then took an appeal to the High Court of Mysore under Section 24(1) of the
Mysore Sales Tax Act, read with Section 9(3) of the Central Sales Tax Act. The High Court was
not satisfied with the material on record and directed that a report be sent on three points, viz:
! (i) Whether and if so to what extent the assessee has drawn advance payment
from the Railway Board in respect of the material utilised for completing the contracts in
question;
(ii) Whether any material, in respect of which no advance have been drawn, has
been utilised by the assessee for completing the contracts; and
(iii) Whether the assessee has used for completing the contracts any material not
specifically procured for the purposes of completing the contracts."
5. The Commercial Tax Officer submitted his report, and certain extracts may be reproduced
below:
! My findings revealed that as and when they purchased materials, they sent to the
Railway Board ! an invoice" accompanied by a list of the details regarding the materials
purchased. 90 per cent. of the value of these materials was then paid to the company after
inspection of the materials by the Board#s representative.
Invoice No. 31009 of October 15, 1956, is obtained as a sample. This invoice shows
that materials for the value of Rs 2,60,374-12-0 were purchased by the company for 407
model coaches. The details of the materials are given in list attached to the invoice. The
invoice and the list were sent to the Board with a covering letter, dated October 15, 1956,
asking payment of Rs 2,34,517-4-0 being 90 per cent of the invoice amount. The amount
of this invoice is included in the Board#s remittance note No. 1290 of October 30, 1956,
and a cheque was issued to the company for the total of several such invoices. The
amount of the cheque received on October 30, 1956, was Rs 22,90,719-0-0."
He concluded:
! (1) It is not possible to specify the exact amount received from the Board as
advance payments. It is said that the construction was spread out more than one year and
a running account was maintained showing the debits and credits for this coaches.
(2) It is said that no materials, for which advance was not drawn, was utilised for
building the coaches.
(3) It is not possible to find out whether any materials not specifically procured for
the construction of coaches were used. But it is said that there is no possibility of any
other materials being used for this construction. The constructions are said to be done at
particular shed which is separately located. No other work is undertaken in this section.
All the materials procured for construction of coaches are said to be kept separately in
this section alone. Materials not connected with this work are not mixed up with the
materials in this section. Separate stock registers are maintained for this section. Receipts
and issues of materials for the constructions of coaches are being accounted for in this
register under code numbers."
6. The High Court allowed the appeal and set aside the order including the turnover relating
to the construction of railway coaches, models 407, 408 and 411. Facts found by the High Court
and as they appear to us are as follows.
7. On February 3, 1955, the Ministry of Railways wrote to the Hindustan Aircraft Ltd.
regarding the coaching programme 1955-56.
8. After discussions and settlement of terms between officers of the Government of India and
of the assessee, the Railway Board placed orders with the assessee. The terms agreed between the
parties are found stated in a litter of the Government of India, Ministry of Railways (Railway
Board) No. 57/142/RE(163), dated May 4, 1957. This relates to the first of the models 407.
9. There is an indemnity bond in respect of this contract.
12. On these facts we have to decide whether there has been any sale of the coaches within
the meaning of the Central Sales Tax Act. We were referred to a number of cases of this Court
and the High Courts, but it seems to us that the answer must depend upon the terms of the
contract. The answer to the question whether it is a works contract or it is a contract of sale
depends, upon the construction of the terms of the contract in the light of the surrounding
circumstances. In this case the salient features of the contract are as follows:
(1) The Railway books capacity of the assessee for the purpose of construction of
railway coaches.
(2) Advance on account is made to the extent of 90% of the value of the material on
the production of a certificate by the inspecting authority.
(3) The material used for the construction of coaches before its use is the property of
the Railway. This is quite clear from para 1 of the Idemnity Bond set out above. No other
meaning can be given to the words in the bond to the effect that ! the Hindustan Aircraft
Ltd. hereby undertake to hold at their works at Bangalore for and on behalf of the
President of the Union of India and as his property in trust for him the Stores and articles
in respect of which advances are made to them" .
It seems to us clear that the property in the materials which are used for the
construction of the coaches becomes the property of the President before it is used.
(4) It seems that there is no possibility of any other material being used for the
construction as is borne out from the report written by the Commercial Tax Officer.
(5) As far as the coaches of models 407 and 408 are concerned, the wheelsets and
underframes are supplied free of cost.
(6) In the order the words used are ! manufacture and supply of the following
coaches" .
(7)The material and wage escalator and adjustments which are mentioned in the
contract are natural factors.
13. On these facts it seems to us that it is a pure works contract. We are unable to agree that
when all the material used in the construction of a coach belongs to the Railways there can be any
sale of the coach itself. The difference between the price of a coach and the cost of material can
only be the cost of services rendered by the assessee. If it is necessary to refer to a case which is
close to the facts of this case, then this case is more in line with the decision of this Court in State
of Gujarat v. Kailash Engineering Co. [19 STC 13] than any other case.
14. The only difference as far as coach model No. 411 is concerned is that in that case the
wheelsets and underframes are not supplied free of cost but otherwise there is no essential
difference in the terMs This does not make any difference to the result.
15. In the result the appeal fails and is dismissed with costs.
*****
Sentinel Rolling Shutters and Engg. Co. (P) Ltd. v. CST
(1978) 4 SCC 260 : AIR 1978 SC 545
P.N. BHAGWATI, J. - This appeal by special leave raises the vexed question whether a
particular contract is a contract of sale or a contract of work and labour. This has always been a
difficult question, because most of the cases which come before the Court are border line cases
and the decisions given by courts are by no means uniform. But so far as the present case is
concerned, it does not present any serious difficulty and is comparatively free from complexity or
doubt, for there is a decision of this Court which is directly applicable and is determinative of the
controversy between the parties.
2. The assessee who is the appellant before us is a private limited company carrying on
business as engineers, contractors, manufacturers and fabricators and in the course of its business,
it entered into a contract dated June 28, 1972 with M/s C.M. Shah & Co. (P) Ltd. (hereinafter
referred to as the Company) for fabrication, supply, erection and installation of Sentinels Pull and
Push Type and Reduction Gear Type Rolling Shutters in shed Nos. 3 and 4 of the Sidheswar
Sahakari Sakar Karkhana belonging to the company. The detailed specifications of the rolling
shutters were given in the contract and the price was stipulated to be Rs 7 per sq. ft. and rt. for
Pull and Push Type Rolling Shutters and Rs 9 per sq. rt. and ft. for the Reduction Gear Type
Rolling Shutters, the price in both cases being inclusive of ! erection at site" . The contract was
expressed to be subject to the terms and conditions set out in a printed form and there were also
certain special terms and conditions which were specifically written out in the contract. Since
considerable reliance was placed on behalf of the Revenue on some of the printed terms and
conditions of the contract, we shall set them out in extenso:
2. Once the delivery of the goods is effected, rejection claims cannot be entertained.
4. All erection work shall be carried out at-customer#s own risk and no claim for
incidental structural breakages, damages to the property of the customers or others shall
be entertained. All masonry works required before and or after erection shall be carried
out by customers at own cost.
10. All payment shall be on overall measurements only. Customer desiring to check
the correctness of the overall measurements shall notify their intention in advance and
shall get the measurements checked before installation. No dispute on this ground shall
be entertained once the erection is completed.
12. Terms of Business: 50 per cent advance with the order and the balance against
delivery of the goods ex-work prior to erection, or against through Banks.
The special terms and conditions provided that the actual transportation charges would be in
addition to the price stipulated in the contract and the delivery would be 6/8 weeks ex-works from
146 Sentinel Rolling Shutters and Engg. Co. (P) Ltd. v. CST
the date of receipt of the final confirmation of the order. The terms of payment also formed part
of the special terms and conditions and they provided ! 25 per cent advance, 65 per cent against
delivery and remaining 10 per cent after completion of erection and handing over of shutters to
the satisfaction" of the Company. The assessee carried out its part of the contract and
manufactured the two types of rolling shutters according to the specifications provided in the
contract and erected and installed them in sheds Nos. 3 and 4 of the Sidheswar Sahakari Sakar
Karkhana. It does not appear from the record as to when the bill relating to the contract was
submitted by the assessee to the Company, but it was dated August 19, 1972 and presumably it
was sent by the assessee after the fabrication of the two types of rolling shutters was completed,
but before they were erected and installed at the premises of the Company. Since the assessee
entertained doubt as to whether the contract was a contract for sale or a contract for work and
labour, the assessee made an application dated September 16, 1972 to the Commissioner of Sales
Tax for determining this question, for on the answer to it, depended the taxability of the amount
to be received by the assessee against fulfilment of the contract. The Deputy Commissioner of
Sales Tax, who heard the application, took the view that the contract was a contract for sale of the
two types of rolling shutters and the work of erection and installation was merely incidental to the
sale and the assessee was, therefore, liable to pay sales tax on 95 per cent of the amount
receivable by it under the contract. Since that represented the sale price of the rolling shutters, the
remaining 5 per cent being attributable to the work and labour involved in erection and
installation. The assessee, being aggrieved by the order passed by the Deputy Commissioner of
Sales Tax preferred an appeal to the Sales Tax Tribunal, but the Sales Tax Tribunal also took the
same view and held that the transaction of supply of the two types of rolling shutters embodied in
the contract amounted to a sale but so far as the price was concerned, the Sales Tax Tribunal
observed that since 90 per cent of the amount under the contract was payable at the stage of
delivery, that should be taken to be the sale price and the balance of 10 per cent should be held to
be ! the charges for the work" . The contract was thus held by the Sales Tax Tribunal to be a
composite contract consisting of two parts, one for sale of the two types of rolling shutters and the
other for execution of the work of erection and installation. This led to an application for a
reference by the assessee and on the application, the following question of law was referred for
the opinion of the High Court:
Whether having regard to the facts and circumstances of the case the Tribunal was
justified in law in coming to the conclusion that the contract in question essentially
consisted of two contracts, one for supply of materials for money consideration and the
other for service and labour done?
The High Court made a detailed and exhaustive review of the decided cases and held, agreeing
with the Sales Tax Tribunal, that the contract between the assessee and the Company ! was a
divisible contract which essentially consisted of two contracts, one for the supply of shutters of
the aforesaid two types for money and the other for service and labour" , and accordingly
Sentinel Rolling Shutters and Engg. Co. (P) Ltd. v. CST 147
answered the question in favour of the Revenue and against the assessee. The assessee thereupon
brought the present appeal with special leave obtained from this Court.
3. Now the question whether a particular contract is a contract for sale or for work and labour
is always a difficult question and it is not surprising to find the taxing authorities divided on it.
The difficulty, however, lies not in the formulation of the tests for determining when a contract
can be said to be a contract for sale or a contract for work and labour, but in the application of the
tests to the facts of the case before the Court. The distinction between a contract for sale and a
contract for work and labour has been pointed out by this Court in a number of decisions and
some tests have also been indicated by this Court, but it is necessary to point out that these tests
are not exhaustive and do not lay down any rigid or inflexible rule applicable alike to all
transactions. They do not give any magic formula by the application of which we can say in every
case whether a contract is a contract for sale or a contract for work and labour. They merely focus
on one or the other aspect of the transaction and afford some guidance in determining the
question, but basically and primarily, whether a particular contract is one for sale of goods or for
work and labour depends upon the main object of the parties gathered from the terms of the
contract, the circumstances of the transaction and the custom of the trade.
4. It may be pointed out that a contract where not only work is to be done but the execution of
such work requires goods to be used may take one of three forms The contract may be for work to
be done for remuneration and for supply of materials used in the execution of the work for a
price; it may be a contract for work in which the use of materials is accessory or incidental to the
execution of the work; or it may be a contract for supply of goods where some work is required to
be done as incidental to the sale. Where a contract is of the first type, it is a composite contract
consisting essentially of two contracts, one for the sale of goods and the other for work and
labour. The second type of contract is clearly a contract for work and labour not involving sale of
goods, while the third type is a contract for sale where the goods sold as chattels and some work
is undoubtedly done, but it is done only as incidental to the sale. No difficulty arises where a
contract is of the first type because it is divisible and the contract for sale can be separated from
the contract for work and labour and the amount payable under the composite contract can be
apportioned between the two. The real difficulty arises where the contract is of the second or third
type, because in such a case it is always a difficult and intriguing problem to decide in which
category the contract falls. The dividing line between the two types of contracts is somewhat hazy
and ! thin partitions do their bounds divide" . But even so the distinction is there and it is very
much real and the Court has to perform at times the ingenious exercise of distinguishing one from
the other.
5. The distinction between a contract for sale and a contract for work and labour has been
pointed out in Halsbury¶s Laws of England, Third Edition, Volume 34, Article 3.The primary
test is whether the contract is one whose main object is transfer of property in a chattel as a
chattel to the buyer, though some work may be required to be done under the contract as
ancillary or incidental to the sale or it is carrying out of work by bestowal of labour and service
and materials are used in execution of such work. A clear case of the former category would be a
contract for supply of airconditioner where the contract may provide that the supplier will fix up
the airconditioner in the premises. Ordinarily a separate charge is provided in such contract for
the work of fixing up but in a given case it may be included in the total price. Such a contract
would plainly be a contract for sale because the work of fixing up the airconditioner would be
incidental to the sale. Then take a contract for constructing a building where considerable
quantity of materials is required to be used in the execution of the work. This would clearly be a
contract for work and labour and fall within the latter category. But, as we pointed out earlier,
there may be and indeed as the decided cases show, there are a large number of cases which are
on the border line and it is here that difficulty is often experienced in the application of this
primary test. To resolve this difficulty, the courts have evolved some subsidiary tests. One such
test is that formulated by this Court in Commissioner of M.P. v. Purshottam Premji [(1970) 2
SCC 287], where it has been said:
The primary difference between a contract for work or service and a contract for sale of
goods is that in the former there is in the person performing work or rendering service no
property in the thing produced as a whole % . In the case of a contract for sale, the thing
produced as a whole has individual existence as the sole property of the party who
produced it, at some time before delivery, and the property therein passes only under the
contract relating thereto to the other party for price.
This was the test applied by this Court in the State of Rajasthan v. Man Industrial
Corporation [(1969) 1 SCC 567], for holding that a contract for providing and fixing four
different types of windows of certain sizes according to ! specifications, designs, drawings and
instructions" set out in the contract was a contract for work and labour and not a contract for sale.
6. Now, it is clear that the contract is for fabrication, supply, erection and installation of two
types of rolling shutters and not only are the rolling shutters to be manufactured according to the
specifications, designs, drawings and instructions provided in the contract, but they are also to be
erected and installed at the premises of the Company. The price stipulated in the contract is
inclusive of erection and installation charges and the contract does not recognise any dichotomy
between fabrication and supply of the rolling shutters and their erection and installation so far as
the price is concerned. The erection and installation of the rolling shutters is as much an essential
part of the contract as the fabrication and supply and it is only on the erection and installation of
the rolling shutters that the contract would be fully executed. It is necessary, in order to
understand the true nature of the contract, to know what is a rolling shutter and how it is erected
and installed in the premises. It is clear from the statement Ex. C to the petition for special leave,
which statement was submitted before the Sales Tax Tribunal and the correctness of which was at
no time disputed before us, that a rolling shutter consists of five component parts, namely, two
brackets welded with $U# type clamps, one pipe shafting with high tension springs, shutter screen
made out of 20G/18G/thickness of metal as required by the customer, side guides or guide
channels welded with iron clamps to the bottom with provision of locking arrangements with
welded handles and top cover. These component parts fabricated by the manufacturer and taken
to the site and fixed on the premises and then comes into existence a Rolling Shutter as an
identifiable commercial article. The method of fixing the component parts in position in the
premises so as to bring into existence the commercial article known as a rolling shutter is fully
described in the statement Ext. C. First of all, certain masonry work is required to be done by the
customer and that has to be carried out by the customer at his own cost. Then the brackets are
fixed on either side on the top portion of the opening by grouting holes on the masonry walls and
inserting the bolts. Thereafter the holes are filled with cement and the pipe shafting with high
tension springs is inserted into the $IT clamps of the brackets. Then the iron curtain of the rolling
shutter is hosted over the high tension springs and tightened by means of nut bolts and guide
channels are then fixed by grouting masonry walls where side guide clamps are to be fixed. After
fixing the clamps to the grouted portion of the wall, the same is plastered and then the iron curtain
of the shutter is lowered through the guide channels to operate the shutter manually up and down.
The rolling shutter is then $born# and it becomes a permanent fixture to the premises.The Indian
Standards Specification Book for Metal Rolling Shutters and Rolling Grills also gives a similar
procedure for fixing the component parts of the Rolling Shutter on the premises. It clearly shows
that a rolling shutter consists of curtain, lock plates, guide channels, bracket plates, rollers, hood
covers, gears, worms, fixing bolts, safety devices, anchoring rods, central hasp and staple. Each
guide channel has to be provided with a minimum of three fixing cleats or supports for
attachment to the walls or column by means of bolts or screws. The guide channels are further
attached to the jambs, plumbed either in the overlapping fashion, projecting fashion or embedded
in grooves, depending on the method of fixing. All these operations take place at the site after
despatch of the component parts of the rolling shutter. Hood cover is fixed in a neat manner and
supported at the top at suitable intervals. This also has to be done at the site. Item 11.1 of the
specification shows that the rolling shutter curtain and bottom lock plate are interlocked together
and rolled in one piece, but the other parts like guide channels, bracket plates, rollers, etc., are
despatched separately. Item 12.1 shows that ! all the rolling shutters are erected by the
manufacturer or his authorised representative in a sound manner, so as to afford trouble-free and
easy operation, long life and neat appearance" . It will, thus, be seen that the component parts do
not constitute a rolling shutter until they are fixed and erected on the premises. It is only when the
component parts are fixed on the premises and fitted into one another that they constitute a rolling
shutter as a commercial article and till then they are merely component parts and cannot be said
to constitute a rolling shutter. The erection and installation of the rolling shutter cannot, therefore,
be said to be incidental to its manufacture and supply. It is a fundamental and integral part of the
contract because without it the rolling shutter does not come into being. The manufacturer would
undoubtedly be the owner of the component parts when he fabricates them, but at no stage does
he become the owner of the rolling shutter as a unit so as to transfer the property in it to the
customer. The rolling shutter comes into existence as a unit when the component parts are fixed
in position on the premises and it becomes the property of the customer as soon as it comes into
being. There is no transfer of property in the rolling shutter by the manufacturer to the customer
as a chattel. It is essentially a transaction for fabricating component parts and fixing them on the
premises so as to constitute a rolling shutter. The contract is thus clearly and indisputably a
contract for work and labour and not a contract for sale.
7. The Revenue leaned heavily on the provision in the contract that the delivery of the goods
shall be ex-works and once the delivery of the goods is effected, no claim for rejection shall be
entertained and relying on this provision, the Revenue contended that under the contract the
rolling shutters were to be delivered by the assessee to the company ex-works, that is, at the
works of the assessee and the property in the rolling shutters passed to the company as soon as
they were delivered and hence it was a contract for sale. We do not think this contention of the
Revenue has any force and it must be rejected. It is clear from the above discussion that a rolling
shutter as a complete unit is not fabricated by the manufacturer in his factory but he manufactures
only the component parts and it is only when the component parts are fitted into position and
fixed on the premises that a rolling shutter comes into being as a commercial article and,
therefore, when the contract provides that the delivery of the goods-shall be ex-works, what is
obviously meant is that the component parts shall be delivered to the company at the works of the
assessee and once they are delivered, they shall not be liable to be rejected by the company.But
that does not mean that as soon as the component parts are delivered to the company, the contract
is fully executed. The component parts do not constitute a rolling shutter and it is the obligation
of the assessee under the contract to fix the component parts in position on the premises and erect
and install a rolling shutter. The execution of the contract is not completed until the assessee
carries out this obligation imposed upon it under the contract and a rolling shutter is erected and
installed at the premises. It is true that clause (12) of the printed terms and conditions provides
that 50 per cent of the amount under the contract shall be paid as advance and the balance against
delivery of the goods ex-works but this clause is clearly overridden by the special term
specifically written out in the contract that 25 per cent of the amount shall be paid by way of
advance, 65 per cent against delivery and the remaining 10 per cent after completion of erection
and handing over of the rolling shutters to the satisfaction of the company. This provision
undoubtedly stipulates that 90 per cent of the amount due under the contract would be paid before
erection and installation of the rolling shutters has commenced, but that would not make it a
contract for sale of rolling shutters. The true nature of the contract cannot depend on the mode of
payment of the amount provided in the contract. The parties may provide by mutual agreement
that the amount stipulated in the contract may be paid at different stages of the execution of the
contract, but that cannot make the contract one for sale of goods if it is otherwise a contract for
work and labour. It may be noted that the contract in State of Madras v. Richardson of Cruddas
Ltd [(1968) 21 STC 245 (SC)] contained a provision that the full amount due under the contract
shall be paid in advance even before the execution of the work has started and yet the Madras
High Court held, and that view affirmed by this Court, that the contract was a works contract. The
payment of the amount due under the contract may be spread over the entire period of the
execution of the contract with a view either to put the manufacturer or contractor in possession of
funds for the execution of the contract or to secure him against any risk of non-payment by the
customer. That cannot have any bearing on the determination of the question whether the contract
is one for sale or for work and labour.
8. Here the last portion of the special terms in regard to payment of the amount due under the
contract also makes it clear that it is only when the component parts are fitted into position in the
premises that a rolling shutter would be complete and this rolling shutter has to be to the
satisfaction of the company and it is then to be handed over by the assessee to the company and
then, and then alone, would the remaining 10 per cent be payable by the company to the assessee.
It is, therefore, clear that the contract is one single and indivisible contract and the erection and
installation of the rolling shutter is as much a fundamental part of the contract as the fabrication
and supply. We must, in the circumstances, hold, driven by the compulsion of this logic, that the
contract was a contract for work and labour and not a contract for sale. This view which we are
taking is completely supported by the decision of this Court in Vanguard Rolling Shutters of
Steel Works v. Commissioner of Sales Tax, U.P. [(1977) 2 SCC 250] to which one of us
(Bhagwati, J.) was a party.
9. We accordingly allow the appeal, set aside the judgment of the High Court and hold that the
contract in the present case was a contract for work and labour and not a contract for sale.
Northern India Caterers (India) Ltd. v. Lt. Governor of Delhi
(1978) 4 SCC 36 & (1980) 2 SCR 650
R.S. PATHAK J, - This and the connected appeal are directed against the judgment of the High
Court of Delhi disposing of a reference made to it under Section 21(3) of the Bengal Finance
(Sales Tax) Act, 1941 as extended to the Union territory of Delhi on the following question:
Whether the service of meals to casual visitors in the Restaurant is taxable as a sale&
(i) when the charges are lump sum per meal or
(ii) when they are calculated per dish? The High Court has answered the question
in the affirmative.
2. The appellant runs a hotel in which lodging and meals are provided on ! inclusive terms" to
residents. Meals are served to non-residents also in the restaurant located in the hotel. In the
assessment proceedings for the assessment years 1957-58 and 1958-59 under the Bengal Finance
(Sales Tax) Act, 1941, the appellant contended that the service of meals to residents and non-
residents could not be regarded as a sale and therefore sales tax could not be levied in respect
thereof. The contention was rejected by the Sales Tax authorities, who treated a portion of the
receipts from the residents and non-residents as representing the price of the foodstuff#s served.
At the instance of the appellant, the High Court called for a statement of the case on two
questions. One was whether the supply of meals to residents, who paid a single all-inclusive
charge for all services in the hotel, including board was exigible to sales tax. The second was the
question set forth above. The High Court answered the first question in favour of the appellant
and the second against it. And now these appeals by special leave.
3. Tax is payable by a dealer under Section 4 of the Bengal Finance (Sales Tax) Act, 1941 on
sales effected by him, and the expression ! sale" has been defined by Section 2(g) of the Act to
mean ! any transfer of property in goods for cash or deferred payment or other valuable
consideration including a transfer of property in goods involved in the execution of a contract
% ." The question is whether in the case of non-residents the service of meals by the appellant in
the restaurant constitutes a sale of foodstuff#s.
4. This is a case where the origin and historical development of an institution has profoundly
influenced the nature and incidents it possesses in law. In the case of an hotelier this Court
proceeded on the footing that his position in law was assimilable to that of an innkeeper. At
common law an innkeeper was a person who received travellers and provided lodging and
necessaries for them and their attendants and employed servants for this purpose and for the
protection of travellers lodging in his inn and of their goods [Halsbury#s Laws of England, 3rd
Edn., Vol. 21, p. 442, para 932]. It was hospitality that he offered, and the many facilities that
constituted the components of that hospitality determined the legal character of the transactions
Northern India Caterers (India) Ltd. v. Lt. Governor of Delhi 153
flowing from them. Long ago, in Crisp v. Pratt [(1939) 79 ER 1072], it was pointed out that
innkeepers do not get their living by buying and selling, and that although they buy provision;, to
be spent in their house, they do not sell them but what they do is to ! utter" them. ! Their gain" , it
was added ! is not only by uttering of their commodities, but for the attendance of their servants,
and for the furniture of their house, rooms, and lodgings, for their guests % ." In Newton v. Tries
[91 ER 100], Holt, C.J. defined the true status of an innkeeper by reference to the services
afforded by him, that he was an ! hospitator" , and was ! not paid upon the account of the intrinsic
value of his provisions, but for other reasons: the recompence he receives, is for care and pains,
and for protection and security % but the end of an innkeeper in his buying, is not to sell, but
only a part of the accommodation he is bound to prepare for his guests."
5. Having proper regard to those particular considerations, it is not surprising that the
principle was extended in England to the service of food at eating places or restaurants. The
keeper of an eating house, or victualler, was regarded fundamentally as providing sustenance to
those who ordered food to eat in the premises. Like the hotelier, a restaurateur provides many
services in addition to the supply of food. He provides furniture and furnishings, linen, crockery
and cutlery, and in the eating places of today he may add music and a specially provided area for
floor dancing and in some cases a floor show. The view taken by the English law found
acceptance on American soil, and after some desultory dissent initially in certain states it very
soon became firmly established as the general view of the law. The first addition of American
Jurisprudence, Vol. 46, p. 207, para 13, sets forth the statement of the law in that regard, but we
may go to the case itself, Electa B. Merrill v. James W. Hodson [1915-B LRA 481], from which
the statement has been derived. Holding that the supply of food or drink to customers did not
partake of the character of a sale of goods the Court commented:
The essence of it is not an agreement for the transfer of the general property of the
food or drink placed at the command of the customer for the satisfaction of his desires, or
actually appropriated by him in the process of appeasing his appetite or thirst. The
customer does not become the owner of the food set before him, or of that portion which
is carved for his use, or of that which finds a place upon his plate, or in side dishes set
about it. No designated portion becomes his. He is privileged to eat, and that is all. The
uneaten food is not his. He cannot do what he pleases with it. That which is set before
him or placed at his command is provided to enable him to satisfy his immediate wants,
and for no other purpose. He may satisfy those wants; but there he must stop. He may not
turn over unconsumed portions to others at his pleasure, or carry away such portions. The
true essence of the transaction is service in the satisfaction of a human need or desire,&
ministry to a bodily want. A necessary incident of this service or ministry is the
consumption of the food required. This consumption involves destruction, and nothing
remains of what is consumed to which the right of property can be said to attach. Before
consumption title does not pass; after consumption there remains nothing to become the
subject of title. What the customer pays for is a right to satisfy his appetite by the process
154 Northern India Caterers (India) Ltd. v. Lt. Governor of Delhi
of destruction. What he thus pays for includes more than the price of the food as such. It
includes all that enters into the conception of service, and with it no small factor of direct
personal service. It does not contemplate the transfer of the general property in the food
applied as a factor in the service rendered.
The position was radically altered in the United States by the enactment of the Uniform
Commercial Code, which provides in effect that the serving for value of food or drink to be
consumed either on the premises or elsewhere constitutes a sale.
6. It has already been noticed that in regard to hotels this Court has in M/s. Associated Hotels
of India Ltd. adopted the concept of the English law that there is no sale when food and drink are
supplied to guests residing in the hotel. The Court pointed out that the supply of meals was
essentially in the nature of a service provided to them and could not be identified as a transaction
of sale. The Court declined to accept the proposition that the Revenue was entitled to split up the
transaction into two parts, one of service and the oilier of sale of foodstuff#s. If that be true in
respect of hotels, a similar approach seems to be called for on principle in the case of restaurants.
No reason has been shown to us for preferring any other. The classical legal view being that a
number of services are concomitantly provided by way of hospitality, the supply of meals must be
regarded as ministering to a bodily want or to the satisfaction of a human need. What has been
said in Elects B. Merrill appears to be as much applicable to restaurants in India as it does
elsewhere. It has not been proved that any different view should be taken, either at common law,
in usage or under statute.
7. It was urged for the respondent that in Associated Hotels of India Ltd., this Court drew a
distinction between the case of meals supplied to a resident in a hotel and those served to a
customer in a restaurant. We are unable to find any proposition of law laid down by the court
there which could lead to that inference.
8. In the result, we hold that the service of meals to visitors in the restaurant of the appellant
is not taxable under the Bengal Finance (Sales Tax) Act, 1941, as extended to the Union territory
of Delhi, and this is so whether a charge is imposed for the meal as a whole or according to the
dishes separately ordered.
*****
State of Karnataka v. Udipikrishna Bhavan
(1981) 3 SCC 76
GUPTA, J. - These two appeals arise out of two revision petitions dismissed by the Karnataka
High Court which were preferred by the State of Karnataka under Section 8(4) of the Karnataka
Appellate Tribunal (Amendment) Act, 1976 read with Section 23 of the Karnataka Sales Tax Act,
1957. The revision petitions were directed against a common order of the Karnataka Appellate
Tribunal by which the Tribunal allowed two appeals preferred by the assessee relating to the
assessment for the years ended March 31, 1976 and March 31, 1977 respectively. Following the
decision of this Court in Northern India Caterers (India) Ltd. v. Lt. Governor of Delhi [(1979) 1
SCR 557], the Tribunal had held that the supply of refreshments to the visitors of the two hotels
owned by the respondent before us was ! part of a social service and not a sale" . The High Court
taking the same view dismissed the revision petitions. The finding of the Appellate Tribunal, as
summarised by the High Court, on which its decision rests is: ! The assessee runs a hotel wherein
food and drinks are served to the visitors." We do not think that this finding only is sufficient to
justify the conclusion reached by the Tribunal and the High Court. It appears that the attention of
the High Court was drawn to the judgment of this Court disposing of a review petition in the
Northern India Caterers case (1980) 2 SCR 650. The following extract from that judgment to
which the High Court itself has referred is relevant:
Indeed, we have no hesitation in saying that where food is supplied in an eating-house or
restaurant, and it is established upon the facts that the substance of the transaction,
evidenced by its dominant object, is a sale of food and the rendering of services is merely
incidental, the transaction would undoubtedly be exigible to sales tax. In every case it
would be for the taxing authority to ascertain the facts when making an assessment under
the relevant sales tax law and to determine upon those facts whether a sale of the food
supplied is intended...
Clearly therefore the only finding recorded in this case that the assessee runs a hotel wherein food
and drinks are served to the visitors is not sufficient.
2. We set aside the impugned order and send the case back to the Sales Tax Officer
concerned for a fresh assessment according to law following the guidelines appearing in the
judgment of this Court disposing of the review petition in the Northern India Caterers case.
*****
M/s. Larsen & Toubro Limited V. State of Karnataka
(2014) 1 SCC 708
2. Does the two-Judge Bench decision of this Court in Raheja Development[1] lay down
the correct legal position? It is to consider this question that in Larsen and Toubro[2] a two-Judge
Bench of this Court has referred the matter for consideration by the larger Bench. In the referral
order dated 19.8.2008, the two-Judge Bench after noticing the relevant provisions of the
Karnataka Sales Tax Act, 1957 and the distinction between a contract of sale and a works
contract made the reference to the larger Bench by observing as follows :
! We have prima facie some difficulty in accepting the proposition laid down in Para 20
quoted above. Firstly, in our view, prima facie, M/s Larsen & Toubro - petitioner herein, being a
developer had undertaken the contract to develop the property of Dinesh Ranka. Secondly, the
Show Cause Notice proceeds only on the basis that Tripartite Agreement is the works contract.
Thirdly, in the Show Cause Notice there is no allegation made by the Department that there is
monetary consideration involved in the first contract which is the Development Agreement.
Be that as it may, apart from the disputes in hand, the point which we have to examine is
whether the ratio of the judgment of the Division Bench in the case of Raheja Development
Corporation (supra) as enunciated in Para 20, is correct. If the Development Agreement is not a
works contract could the Department rely upon the second contract, which is the Tripartite
Agreement and interpret it to be a works contract, as defined under the 1957 Act. The Department
has relied upon only the judgment of this Court in Raheja Development Corporation(supra) case
because para 20 does assist the Department. However, we are of the view that if the ratio of
Raheja Development case is to be accepted then there would be no difference between works
contract and a contract for sale of chattel as a chattel. Lastly, could it be said that petitioner -
Company was the contractor for prospective flat purchaser. Under the definition of the term
"works contract" as quoted above the contractor must have undertaken the work of construction
for and on behalf of the contractor (sic.) for cash, deferred or any other valuable consideration.
According to the Department, Development Agreement is not works contract but the Tripartite
Agreement is works contract which, prima facie, appears to be fallacious. There is no allegation
that the Tripartite Agreement is sham or bogus.
For the aforestated reasons, we direct the Office to place this matter before the Hon'ble
Chief Justice for appropriate directions in this regard, as we are of the view that the judgment of
Division Bench in the case of Raheja Development (supra) needs re-consideration by the larger
Bench."
3. Of the 26 appeals under consideration before us, 14 are from Karnataka and 12 from
Maharashtra. Insofar as Karnataka appeals are concerned, it is appropriate that we take the facts
from the leading case being Larsen and Toubro.The ECC division of Larsen and Toubro (for
M/s. Larsen & Toubro Limited V. State of Karnataka 157
short, ! L&T" ) is engaged in property development along with the owners of vacant sites. On
19.10.1995, L&T entered into a development agreement with Dinesh Ranka, owner of the land
bearing survey numbers 90/1, 91, 92 (Part), 94, 95 and 96/1 (Part) together measuring 34 acres
all situated at Kothanur Village, Begur Hobli, Bangalore South Taluk, Bangalore, for
construction of a multi-storeyed apartment complex. The owner was to contribute his land
and L&T was to construct the apartment complex. After development, 25% of the total space
was to belong to the owner and 75% to L&T. A power of attorney was executed by the
owner of the land in favour of L&T to enable it to negotiate and book orders from
the prospective purchasers for allotment of built up area. Accordingly, L&T entered into
agreements of sale with intended purchasers. The agreements provided that on
completion of the construction, the apartments would be handed over to the
purchasers who will get an undivided interest in the land also. Sale deeds, thus, were
executed in favour of the intended purchasers by L&T and the owner.
4. On 12.07.2005, the business premises of L&T were inspected by the Deputy
Commissioner of Commercial Taxes (Intelligence-1) South Zone, Koramangala, Bangalore
(hereinafter referred to as the $Deputy Commissioner#) and a detailed statement of the
Finance Manager was recorded.
5. On 21.12.2005, the Deputy Commissioner called upon L&T to furnish the details of
development project. L&T furnished details on 24.07.2005 and 26.09.2005.
6. On 04.10.2005, the Deputy Commissioner served a show cause notice on L&T
stating that it was liable to tax as per the decision of this Court in Raheja Development1.
L&T responded to the show cause notice and submitted preliminary objections on
10.10.2005. By a further communication dated 10.11.2005, L&T objected to the assessment
of tax for development of projects by it. The L&T inter alia submitted that the
development agreement was not a works contract per se on account of the reasons: (a) the
agreement was to develop and market flats to customers; (b) the intent and purpose of the
agreement was to develop property by the petitioners on the one hand and the land owner
on the other; (c) the construction and development of the said land involved no
monetary consideration; and (d) the only consideration was that upon the completion of the
entire project, L&T would be entitled to 75 per cent of the same.
7. Again on 04.01.2006, the business premises of L&T were inspected and certain
documents like agreement copies and other documents relating to the transactions of the
sale of flats were seized for the purposes of further investigation and verification.
8. On 02.02.2006, the Deputy Commissioner served upon L&T a further notice proposing
to tax the sale of materials used in the construction of flats on the ground that it was
entitled to 75 per cent of the share of the projects. L&T filed detailed objections to this notice as
well.
158 M/s. Larsen & Toubro Limited V. State of Karnataka
9. On 03.07.2006, the Deputy Commissioner issued provisional assessment orders under

Section 28(6) of the Karnataka Sales Tax Act, 1957 (for short, $KST Act#) for the years
2000-01 to 2004-05. Along with the provisional orders, the Deputy Commissioner also
issued demand notices raising a total demand of Rs. 3,99,28,636/-.
10. Initially, L&T preferred a writ petition before this Court challenging the above
demands but that writ petition was withdrawn and a writ petition under Article 226 of the
Constitution of India was filed before the Karnataka High Court.
11. The Single Judge of the Karnataka High Court noted that the controversy raised by the
L&T was covered by the decision of this Court in Raheja Development and, accordingly,
dismissed the writ petition on 10.07.2007 by observing as follows:
! From the aforesaid observations of the Apex Court it is very much clear that as the petitioner
No. 1 had entered into an agreement to carry out construction activity on behalf of
someone else for cash or for deferred payment or for any other valuable construction, it
would be carrying out works contract and therefore would become liable to pay turnover tax
on the transfer involved in such work contracts. It is also not in dispute in this matter that the
agreement of sale is entered into between the first petitioner and the buyers of the flat even
prior to completion of the construction of the building. Under such circumstances, as
has been held by the Apex Court in the RAHEJA DEVELOPMENT
CORPORATION#s Case, the petitioners are liable to pay the turnover tax on the transfer of
goods involved in such $works contract#. In view of the dictum laid down by the recent
judgment cited supra, this Court does not find any merit in this writ petition."
12. L&T preferred an intra-court appeal. The Division Bench of that Court concurred
with the Single Judge and dismissed the writ appeal by expressing its opinion as follows:
! In our view, so far as the definition of $work contract# in almost similar situation as in the
present case has been well considered by the Hon#ble Supreme Court in the case of K.
RAHEJA DEVELOPMENT CORPORATION(supra).The question as to whether that
judgment as per Article 141 of the Constitution of India is the law of the land binding on all
the Courts in the Country. Prima facie, we find that the facts and circumstances in that case
are almost similar to the present case and as such, the ratio laid down in the
RAHEJA#s Case and relied upon by the learned Single Judge is, in our view, just and
proper. So far as the other pronouncements are concerned, if the appellant feels that it is
necessary to get the pronouncement in RAHEJA#s Case reviewed, it is open for him to
approach the Apex Court and this Court cannot substitute its own findings on the questions since
the same has already been decided by the Apex Court in RAHEJA#s case."
17.Mr. Rohinton F. Nariman, learned senior counsel for L&T led the arguments on behalf of
the appellants. His submission is that Raheja Development does not lay down correct law. He
submits that insertion of clause 29-A (b) in Article 366 following the 61 st Law Commission
Report is intended to separate the goods component from the labour and services component
of a composite works contract. The amendment does not in any manner undo Gannon
Dunkerley-I3 insofar as that decision defines what a works contract is. In this regard, learned
senior counsel extensively referred to the decisions of this Court in Builders’ Association4 and
Bharat Sanchar5. It is argued by him that in Raheja Development1 it was
incorrectly assumed that the definition of works contract was wide although the definition of
works contract in KST Act and Madras General Sales Tax Act which was under consideration in
Gannon Dunkerley-I3 was identical.
18. Alternatively, it is argued by Mr. Rohinton F. Nariman that if it is accepted that the
definition of $works contract# in KST Act is wide which takes within its fold the contracts
that are not commonly understood as works contract then this would be outside Entry 54
List II of the Seventh Schedule of the Constitution for the reason that ! works contract"
as understood in Gannon Dunkerley-I3 has not in any manner been upset by the constitutional
amendment and would have to mean ! works contract" as commonly understood.
19. Criticizing the conclusions drawn in paragraph 20 of the judgment in Raheja
Development1, it is argued by Mr. Rohinton F. Nariman that these conclusions are incorrect
for, (a) the well known tests to determine as to whether a particular contract is a
! works contract" or ! contract of sale" have not been adverted to; (b) the contract is not read as
a whole. Its substance and the main object has not been looked at and one phrase is torn out of
context without adverting to any other part of the contract and based on this reasoning the
contract is said to be a works contract; (c) though it is noticed that construction/development
is to be on payment of a price in various installments but does not draw any
conclusion from it; (d) it is noticed that developer has a lien on the property but incorrectly states
that the lien is because they are not owners. The lien is obviously so that if monies are not
recovered from the prospective flat purchasers, the lien can be exercised, showing thereby that
the contract is a contract of an agreement to sell immovable property; (e) after noticing that
developer can terminate the agreement if any one installment is not paid and can forfeit
10% of the amount that has been paid and can ultimately resell the flat, it is held that the
presence of such a clause does not mean that the agreement ceases to be a ! works
contract" without appreciating that such a clause would have no place in a works contract
and can only be consistent with the contract for the sale of immovable property inasmuch
as termination can take place if the entire consideration for the immovable property is not
paid; (f) it is stated that if there is termination but there is no re-sale, there would be no
works contract only to that extent which is again wholly incorrect because post termination
what happens to a particular flat is of no relevance inasmuch as the prospective flat
purchaser goes out of the picture; and (g) the distinction between a flat being constructed
and a flat under construction is a distinction without a difference for the reason that the
judgment notices that if the agreement is entered into after the flat is already constructed,
there would be no $sale# and no $works contract#. This is obviously for the reason that the flat
has already been developed by the developer using his material and his plan and is sold as such to
a purchaser.
21. Based on the various clauses of the tripartite agreement, it is argued that the main object
of the agreement read as a whole and the substance of the agreement is to sell and
convey fraction of the land together with a fully constructed flat only when all installments
have been fully paid. The work undertaken is for the joint development of the project as a
whole, i.e., work is undertaken by the developer for himself and for the owner. The
construction is not carried out for and on behalf of the purchaser, but it is carried out
entirely by the owner/developer in order to exploit or get the best price for the land and the
structure built thereon from various flat purchasers. The flat is to be sold as a flat and not an
aggregate of its component parts. No work is carried out for the purchaser who gets title to the
property only after all work is complete. Learned senior counsel argued that the ultimate test
would be: if a suit for specific performance is filed by the flat purchaser against the
owner/developer, such suit would invariably be for the conveyance of title and not for the
construction of a building. Conversely a suit by an owner/developer against the flat
purchaser would be for payment of consideration of a flat/fractional interest in the land. Such
suit would never be for payment of work done at the behest of the flat purchaser and
payment of consideration therefor. It is, thus, submitted that the judgment in Raheja
Development1 does not lay down good law and deserves to be overruled.
39. In the counter arguments advanced on behalf of the two States ' Karnataka and
Maharashtra - Raheja Development1 has been stoutly defended. Mr. K.N. Bhat, learned
senior counsel for Karnataka submits that view taken in Raheja Development1 is correct and
needs no reconsideration ' both on merits as well as on the basis of binding
precedents on the principles governing reconsideration of an earlier decision. He
submits that Article 366(29-A) uses the phraseology employed in Entry 54 of List II
that reads, ! taxes on sale or purchase of goods % ." For the purpose of Entry 54 List II,
! taxes on the sale or purchase of goods" includes ! tax on the transfer of property in
goods (whether as goods or in some other form) involved in the execution of works
contract" . Transfer of property in goods is the essence of definition of $sale# in Section 4 of
the Sale of Goods Act. Article 366(29-A)(b) can be rephrased as ! a tax on the sale of goods
involved in the execution of a works contract" and in any case by the deeming fiction
incorporated in the above provision, it shall be deemed to be a sale of those goods by the
person making the transfer and a purchase by a person to whom such transfer is made. The
taxable event is the deemed sale of goods involved in the execution of works contract. Article
366 (29-A) has been inserted to remedy the situation arising from the decision in the Gannon
Dunkerley-I where attempt to levy sales tax on the sale of goods involved in the
execution of works contract was held to be unconstitutional. This was on the basis that a
works contract could not be dissected into contract for ! works and services" and contract
for ! sale of goods" . Mr. K.N. Bhat submits, relying upon para 41 in Builders’
Association , that definition of $works contract# KST Act does not go beyond what is
contemplated in the Constitution.
52. Prior to Forty-sixth Amendment in the Constitution, levy of sales tax on the sale of
goods involved in the execution of the works contract was held to be unconstitutional in
Gannon Dunkerley-I3. That was a case where the assessee (Gannon Dunkerley) was carrying on
business as engineers and contractors. Its business consisted mainly of execution of contracts for
construction of buildings, bridges, dams, roads and structural contracts of all kinds. During
the assessment year under consideration, the return filed by the assessee showed as many as
47 contracts most of which were building contracts which were executed by it. From the total
of the amount which the assessee received in respect of sanitary contracts and other
contracts 20 per cent and 30 per cent respectively were deducted for labour and the
balance was taken as the turnover of the assessee for the assessment year in question. Sales
tax was levied on the said balance treating it as taxable turnover under the Madras General
Sales Tax Act, 1939. Assessee questioned the levy of sales tax on the ground that there
was no sale of goods as understood in India and, therefore, no sales tax could be levied
on any portion of the amount which was received by the assessee from the persons for whose
benefit it had constructed buildings. The Madras High Court concluded that the
transactions in question were not contracts for sale of goods as defined under the provisions
of the Sale of Goods Act, 1930 which was in force on the date on which the Constitution
came into force and, therefore, the assessee was not liable to pay sales tax on the amounts
received by it from the persons for whom it had constructed buildings during the year of
assessment. It is from this judgment that the matter reached this Court. The Constitution
Bench of this Court held that in a building contract where the agreement between the
parties was that the contractor should construct the building according to the
specifications contained in the agreement and in consideration received payment as
provided therein, there was neither a contract to sell the materials used in the construction nor
the property passed therein as movables. It was held that in a building contract which was one
(entire and indivisible) there was no sale of goods and it was not within the competence of the
Provincial State Legislature to impose tax on the supply of the materials used in such a contract
treating it as a sale. The Constitution Bench said, ! % % ..when the work to be executed
is, as in the present case, a house, the construction imbedded on the land becomes an accretion
to it on the principle quicquid plantatur solo, solo cedit, and it vests in the other party not as a
result of the contract but as the owner of the land. Vide Hudson on Building Contracts, 7th Edn.,
p. 386% % % " It was further stated, ! % ..that exception does not apply to buildings which
are constructed in execution of a works contract, and the law with reference to them is that the
title to the same passes to the owner of the land as an accretion thereto. Accordingly, there can
be no question of title to the materials passing as movables in favour of the other party to the
contract% % ."
53. In Gannon Dunkerley-I3, this Court held that in a building contract which was one,
entirely indivisible, there was no sale of goods and it was not within the competence of the
provincial State legislature to impose tax on the supply of materials used in such a contract
treating it as a sale. The above statement was founded on the premise that the works contract
was a composite contract which is inseparable and indivisible. Entry 48 of List II of
Schedule Seven of the Government of India Act, 1935 was under consideration before this
Court in Gannon Dunkerley-I3. It is observed that the expression ! sale of goods" in that
entry has the same meaning as the said expression had in the Sale of Goods Act, 1930. In
other words, the essential ingredients of sale of goods are (i) an agreement to sell
movables for a price and (ii) property passing therein pursuant to that agreement.
54. The problems connected with powers of States to levy tax, inter alia, on goods
involved in execution of works contract following Gannon Dunkerley-I3 was elaborately
examined by the Law Commission of India. In its 61st Report, Chapter 1A, the Law
Commission specifically examined the taxability of works contract. The Law Commission
noted the essential nature and features of the building contracts and the difference between
contract of works and contract for sale. It examined the question whether the power to tax
indivisible contracts of works should be conferred on the States. The Law Commission
suggested three alternatives (a) amendment in the State List, Entry 54, or (b) adding a fresh
entry in the State List, or (c) insertion in Article 366 a wide definition of ! sale" so as to
include works contract. It preferred the last one, as, in its opinion, this would avoid
multiple amendments.
55. Having regard to the above recommendation of the Law Commission, the
Constitution Bill No.52 of 1981 was introduced in the Parliament.
56. The Parliament then enacted the Constitution (Forty-sixth Amendment) Act, 1982
which received the assent of the President on 02.02.1983. Accordingly, clause 29-A was
inserted in Article 366 of the Constitution which is set out as below.
(ii) the transfer of property in goods involved in the execution of a works contract;
(iii) delivery of goods on hire-purchase or any system of payment by instalments;
(iv) transfer of the right to use any goods for any purpose for cash, deferred payment or
other valuable consideration;
(v) the supply of goods by an unincorporated association or body of persons to a member
thereof for cash, deferred payment or other valuable consideration;
(vi) the supply, by way of or as part of any service, of food or any drink for cash, deferred
payment or other valuable consideration.
12. Clause (3) of article 286 is proposed to be amended to enable Parliament to specify, by
law, restrictions and conditions in regard to the system of levy, rates and other incidents of the
tax on the transfer of goods involved in the execution of a works contract, on the delivery
of goods on hire-purchase or any system of payment by instalments and on the right to use
any goods.
13. The proposed amendments would help in the augmentation of the State revenues to a
considerable extent. Clause 6 of the Bill seeks to validate laws levying tax on the supply of
food or drink for consideration and also the collection or recoveries made by way
of tax under any such law. However, no sales tax will be payable on food or drink
supplied by a hotelier to a person lodged in the hotel during the period from the date of the
judgment in the Associated Hotels of India case and the commencement of the present
Amendment Act if the conditions mentioned in sub-clause (2) of clause 6 of the Bill are
satisfied. In the case of food or drink supplied by restaurants this relief will be available only
in respect of the period after the date of judgment in the Northern India Caterers (India)
Limited case and the commencement of the present Amendment Act."
(29-A) ! tax on the sale or purchase of goods" includes&
(a) a tax on the transfer, otherwise than in pursuance of a contract, of property in any goods
for cash, deferred payment or other valuable consideration;
(b) a tax on the transfer of property in goods (whether as goods or in some other form) involved
in the execution of a works contract;
(c) a tax on the delivery of goods on hire-purchase or any system of payment by instalments;
(d) a tax on the transfer of the right to use any goods for any purpose (whether or not for a
specified period) for cash, deferred payment or other valuable consideration;
(e) a tax on the supply of goods by any unincorporated association or body of persons to a
member thereof for cash, deferred payment or other valuable consideration;
(f) a tax on the supply, by way of or as part of any service or in any other manner whatsoever,
of goods, being food or any $other article for human consumption or any drink (whether or not
intoxicating), where such supply or service, is for cash, deferred payment or other valuable
consideration,
and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods
by the person making the transfer, delivery or supply and a purchase of those goods by the
person to whom such transfer, delivery or supply is made;#.
57. Following the above amendment in the Constitution, the sales tax legislations in various
States were amended and provisions were made for imposition of sales tax in relation to works
contract. The constitutional validity of the Forty-sixth Amendment by which the
legislatures of the States were empowered to levy sales tax on certain transactions described in
clauses (a) to (f) of clause 29-A of Article 366 of the Constitution as well as the amendments
made in the State legislations were challenged in Builders’ AssociationThe Constitution
Bench of this Court upheld the constitutionality of the Forty-sixth Amendment. The Court
observed that the object of the new definition introduced in clause 29-A of Article 366 of the
Constitution was to enlarge the scope of the expression ! tax of sale or purchase of goods"
wherever it occurs in the Constitution so that it may include within its scope any transfer,
delivery or supply of goods that may take place under any of the transactions referred to in
sub-clauses (a) to (f). The Constitution Bench explained that clause 29-A refers to a tax on the
transfer of property in goods (whether as goods or in some other form) involved in the
execution of a works contract. The emphasis is on the transfer of property in goods '
whether as goods or in some other form. A transfer of property in goods under sub-clause
(b) of clause 29-A is deemed to be a sale of the goods involved in the execution of a
works contract by the person making the transfer and a purchase of those goods by a person to
whom such transfer was made.
58. Article 286 puts certain restrictions upon the power of the State to enact laws
concerning imposition of sales tax. It lays down that no law of a State shall impose or authorise
the imposition of a tax on the sale or purchase of goods where such sale or purchase takes place
(a) outside the State, or (b) in the course of import of the goods into, or export of the goods
out of the territory of India. Sub-clause (2) of Article 286 enables the Parliament to enact
law formulating principles for determining when a sale or purchase of goods takes place in
any of the ways mentioned in clause (1). As regards inter-state trade and commerce, clause
(3) puts two restrictions. It provides that any law of a State shall, insofar as it imposes, or
authorises the imposition of (a) a tax on the sale or purchase of goods declared by Parliament
by law to be of special importance in inter-state trade or commerce; (b) a tax on the sale or
purchase of goods, being a tax of the nature referred to in sub-clause (b), sub-clause (c) and
sub-clause
(d) of clause 29-A of Article 366, be subject to such restrictions and conditions in
regard to the system of levy, rates and other incidents of tax as the Parliament may by law
specify. Clause (3) was substituted by Constitution Forty-sixth Amendment Act, 1982 with
effect from 02.02.1983.
59. Clause 29-A was inserted in Article 366 by the Forty-sixth Amendment with effect
from 02.02.1983. Entry 54 of List II (State List) -enables the State to make laws relating to
taxes on the sale or purchase of goods other than the newspapers, subject to the provisions of
Entry 92-A of List I. Entry 63 of List II enables the States to provide rates of stamp duty in
respect of documents other than those specified in provisions of List I with regard to the rates
of stamp duty. Entry 92-A of List I deals with taxes on the sale or purchase of goods other
than newspapers where such sale or purchase takes place in the course of inter-state trade
or commerce. Entry 6 of List III deals with the subjects, ! transfer of property other than the
agricultural land; registration of deeds and documents" .
60. It is important to ascertain the meaning of sub-clause (b) of clause 29-A of Article 366
of the Constitution. As the very title of Article 366 shows, it is the definition clause. It
starts by saying that in the Constitution unless the context otherwise requires the
expressions defined in that article shall have the meanings respectively assigned to them in the
article. The definition of expression ! tax on sale or purchase of the goods" is contained in
clause (29-A). If the first part of clause 29-A is read with sub-clause (b) along with latter
part of this clause, it reads like this: tax on the sale or purchaser of the goods" includes a
tax on the transfer of property in goods (whether as goods or in some other form) involved in
the execution of a works contract and such transfer, delivery or supply of any goods shall be
deemed to be a sale of those goods by the person making the transfer, delivery or supply and
a purchase of those goods by the person to whom such transfer, delivery or supply is made.
The definition of ! goods" in clause 12 is inclusive. It includes all materials, commodities and
articles. The expression, $goods# has a broader meaning than merchandise. Chattels
or movables are goods within the meaning of clause 12. Sub-clause (b) refers to
transfer of property in goods (whether as goods or in some other form) involved in
the execution of a works contract. The expression ! in some other form" in the bracket is of
utmost significance as by this expression the ordinary understanding of the term $goods# has
been enlarged by bringing within its fold goods in a form other than goods. Goods in
some other form would thus mean goods which have ceased to be chattels or
movables or merchandise and become attached or embedded to earth. In other words, goods
which have by incorporation become part of immovable property are deemed as goods. The
definition of $tax on the sale or purchase of goods# includes a tax on the transfer or property in
the goods as goods or which have lost its form as goods and have acquired some other form
involved in the execution of a works contract.
61. Viewed thus, a transfer of property in goods under clause 29-A(b) of Article 366 is
deemed to be a sale of the goods involved in the execution of a works contract by the person
making the transfer and the purchase of those goods by the person to whom such transfer is
made.
62. The States have now been conferred with the power to tax indivisible contracts of
works. This has been done by enlarging the scope of ! tax on sale or purchase of
goods" wherever it occurs in the Constitution. Accordingly, the expression ! tax on the
sale or purchase of goods" in Entry 54 of List II of Seventh Schedule when read with
the definition clause 29-A, includes a tax on the transfer of property in goods whether as
goods or in the form other than goods involved in the execution of works contract. The taxable
event is deemed sale.
63. Gannon Dunkerley-I and few other decisions following Gannon Dunkerley-I wherein
the expression ! sale" was given restricted meaning by adopting the definition of the word
! sale" contained in the Sale of Goods Act has been undone by the Forty-sixth
Constitutional Amendment so as to include works contract. The meaning of sub-clause (b) of
clause 29-A of Article 366 of the Constitution also stands settled by the Constitution Bench of
this Court in Builders’ Association4. As a result of clause 29-A of Article 366, tax on the
sale or purchase of goods may include a tax on the transfer in goods as goods or in a form
other than goods involved in the execution of the works contract. It is open to the States to
divide the works contract into two separate contracts by legal fiction: (i) contract for sale of
goods involved in the works contract and (ii) for supply of labour and service. By the Forty-
sixth Amendment, States have been empowered to bifurcate the contract and to levy sales
tax on the value of the material in the execution of the works contract.
64. Whether contract involved a dominant intention to transfer the property in goods, in our
view, is not at all material. It is not necessary to ascertain what is the dominant intention
of the contract. Even if the dominant intention of the contract is not to transfer the
property in goods and rather it is the rendering of service or the ultimate transaction is
transfer of immovable property, then also it is open to the States to levy sales tax on the
materials used in such contract if it otherwise has elements of works contract. The view
taken by a two-Judge Bench of this Court in Rainbow Colour Lab16 that the division of the
contract after Forty- sixth Amendment can be made only if the works contract involved
a dominant intention to transfer the property in goods and not in contracts where the transfer
of property takes place as an incident of contract of service is no longer good law,
Rainbow Colour Lab has been expressly overruled by a three-Judge Bench in Associated
Cement.
65. Although, in Bharat Sanchar, the Court was concerned with sub-clause (d) of clause 29-
A of Article 366 but while dealing with the question as to whether the nature of
transaction by which mobile phone connections are enjoyed is a sale or service or both,
the three-Judge Bench did consider the scope of definition in clause 29-A of Article 366.
With reference to sub-clause (b) it said: ! % % . sub-clause (b) covers cases relating to works
contract. This was the particular fact situation which the Court was faced with in Gannon
Dunkerley-I and which the Court had held was not a sale. The effect in law of a transfer of
property in goods involved in the execution of the works contract was by this amendment
deemed to be a sale. To that extent the decision in Gannon Dunkerley-I was directly
overcome" . It then went on to say that all the sub-clauses of Article 366(29-A) serve to bring
transactions where essential ingredients of a $sale# as defined in the Sale of Goods Act, 1930
are absent, within the ambit of purchase or sale for the purposes of levy of sales tax.
66. It then clarified that Gannon Dunkerley-I survived the Forty- sixth Constitutional
Amendment in two respects. First, with regard to the definition of ! sale" for the purposes of
the Constitution in general and for the purposes of Entry 54 of List II in particular except to the
extent that the clauses in Article 366(29-A) operate and second, the dominant nature test would
be confined to a composite transaction not covered by Article 366 (29-A). In other words, in
Bharat Sanchar5, this Court reiterated what was stated by this Court in Associated Cement15
that dominant nature test has no application to a composite transaction covered by the clauses of
Article 366(29-A). Leaving no ambiguity, it said that after the Forty-sixth
Amendment, the sale element of those contracts which are covered by six sub-clauses of
clause 29-A of Article 366 are separable and may be subjected to sales tax by the States
under Entry 54 of List II and there is no question of the dominant nature test applying.
67. In view of the statement of law in Associated Cement and Bharat Sanchar, the argument
advanced on behalf of the appellants that dominant nature test must be applied to find
out the true nature of transaction as to whether there is a contract for sale of goods or
the contract of service in a composite transaction covered by the clauses of Article 366 (29-
A) has no merit and the same is rejected.
68. In Gannon Dunkerley-II11, this Court, inter alia, established the five following propositions
: (i) as a result of Forty-sixth Amendment the contract which was single and indivisible has
been altered by a legal fiction into a contract which is divisible into one for sale of goods and the
other for supply of labour and service and as a result of such contract which was single and
indivisible has been brought on par with a contract containing two separate agreements; (ii) if
the legal fiction introduced by Article 366 (29-A)(b) is carried to its logical end, it follows
that even in a single and indivisible works contract there is a deemed sale of the goods
which are involved in the execution of a works contract. Such a deemed sale has all the
incidents of the sale of goods involved in the execution of a works contract where the
contract is divisible into one for sale of goods and the other for supply of labour and
services; (iii) in view of sub-clause (b) of clause 29-A of Article 366, the State legislatures
are competent to impose tax on the transfer of property in goods involved in the execution of
works contract. Under Article 286(3)(b), Parliament has been empowered to make a law
specifying restrictions and conditions in regard to the system of levy, rates or incidents of such
tax. This does not mean that the legislative power of the State cannot be exercised till the
enactment of the law under Article 286(3)(b) by the Parliament. It only means that in the
event of law having been made by Parliament under Article 286(3)(b), the exercise of the
legislative power of the State under Entry 54 in List II to impose tax of the nature referred to
in sub-clauses (b), (c) and (d) of clause (29-A) of Article 366 would be subject to restrictions
and conditions in regard to the system of levy, rates and other incidents of tax contained in the
said law; (iv) while enacting law imposing a tax on sale or purchase of goods under Entry 54
of the State List read with Article 366 (29-A)(b), it is permissible for the State legislature to
make a law imposing tax on such a deemed sale which constitutes a sale in the course
of the inter-state trade or commerce under Section 3 of the Central Sales Tax Act or outside
under Section 4 of the Central Sales Tax Act or sale in the course of import or export under
Section 5 of the Central Sales Tax Act; and (v) measure for the levy of tax contemplated by
Article 366 (29-A)(b) is the value of the goods involved in the execution of a works
contract. Though the tax is imposed on the transfer of property in goods involved in the
execution of a works contract, the measure for levy of such imposition is the value of the goods
involved in the execution of a works contract. Since, the taxable event is the transfer of
property in goods involved in the execution of a works contract and the said transfer of
property in such goods takes place when the goods are incorporated in the works, the value
of the goods which can constitute the measure for the levy of the tax has to be the value of the
goods at the time of incorporation of the goods in works and not the cost of acquisition of the
goods by the contractor.
69. In Gannon Dunkerley-II, sub-section (3) of Section 5 of the Rajasthan Sales Tax Act and
Rule 29(2)(1) of the Rajasthan Sales Tax Rules were declared as unconstitutional and
void. It was so declared because the Court found that Section 5(3) transgressed the limits
of the legislative power conferred on the State legislature under Entry 54 of the State List.
However, insofar as legal position after Forty-sixth Amendment is concerned, Gannon
Dunkerley-II11 holds unambiguously that the States have now legislative power to impose tax
on transfer of property in goods as goods or in some other form in the execution of works
contract.
70. The Forty-sixth Amendment leaves no manner of doubt that the States have power to
bifurcate the contract and levy sales tax on the value of the material involved in the execution
of the works contract. The States are now empowered to levy sales tax on the material used in
such contract. In other words, clause 29-A of Article 366 empowers the States to levy tax on the
deemed sale.
71. Now, if by legal fiction provided in clause (29-A)(b) of Article 366, the works contract
becomes separable and divisible, one for the materials and the other for services and for
the work done, whatever has been said by this Court in Gannon Dunkerley-I with regard to the
definition of works contract in Section 2(i) of the Madras General Sales Tax Act pales
into insignificance insofar as ambit and scope of the term ! works contract" within the
meaning of Article 366(29-A) is concerned. To say that insertion of clause (29-A) in
Article 366 has not undone Gannon Dunkerley-I in any manner, in our view, is
not correct. The narrow meaning given to the term ! works contract" in Gannon Dunkerley-I
now no longer survives.
72. There is no doubt that to attract Article 366(29-A)(b) there has to be a works contract but
then what is its meaning. The term ! works contract" needs to be understood in a manner that
the Parliament had in its view at the time of Forty-sixth Amendment and which is more
appropriate to Article 366(29-A)(b).
76. In our opinion, the term $works contract# in Article 366(29-A)(b) is amply wide and cannot
be confined to a particular understanding of the term or to a particular form. The term
encompasses a wide range and many varieties of contract. The Parliament had such wide
meaning of ! works contract" in its view at the time of Forty-sixth Amendment. The
object of insertion of clause 29-A in Article 366 was to enlarge the scope of the expression ! tax
of sale or purchase of goods" and overcome Gannon Dunkerley-I. Seen thus, even if in a
contract, besides the obligations of supply of goods and materials and performance of labour
and services, some additional obligations are imposed, such contract does not cease to be
works contract. The additional obligations in the contract would not alter the nature of contract
so long as the contract provides for a contract for works and satisfies the primary
description of works contract. Once the characteristics or elements of works contract are
satisfied in a contract then irrespective of additional obligations, such contract would be
covered by the term $works contract#. Nothing in Article 366(29-A)(b) limits the term ! works
contract" to contract for labour and service only.
The Parliament had all genre of works contract in view when clause 29-A was inserted in
Article 366.
77. The difference between a contract for work (or service) and a contract for sale (of goods)
has come up for consideration before this Court on more than one occasion. Before we
consider some of the decisions of this Court in this regard, it is of interest to refer to
two old decisions of English courts. In Lee, it was laid down that if a contract would
result in the transaction of property in goods from one party to another then it must be a
contract of sale.
78. However, the statement of law in Lee did not find favour in Robinson where it was held
that if the substance of the contract required skill and labour for the production of the articles
then it would not make any difference that there would pass some materials in addition to the
skill.
79. In Chandra Bhan Gosain this Court exposited that for finding out whether a contract is one
of work done and materials found or one for sale of goods depends on its essence. If not of its
essence that a chattel should be produced and transferred as a chattel, then it may be a contract
for work done and materials found and not a contract for sale of goods.
80. In Purshottam Premji, the difference between a contract for work and a contract for sale
was explained like this: The primary difference between a contract for work or service and a
contract for sale of goods is that in the former there is in the person performing work or
rendering service no property in the thing produced as a whole notwithstanding that a part or
even the whole of the materials used by him may have been its property. In a case of
contract for sale, the thing produced as a whole has individual existence as the sole property
of the party who produced it at some time before delivery and the property therein passes
only under the contract relating thereto to other party for price. Mere transfer of property in
goods used in the performance of the contract is not sufficient; to constitute a sale
there must be an agreement express or implied relating to the sale of goods and completion of
the agreement by passing of title in the very goods contracted to be sold. Ultimately the
true effect of an accretion made pursuant to a contract has to be judged, not by an artificial
rule that the accretion may be presumed to have become by virtue of affixing to a
chattel of part of that chattel but from the intention of the parties to the contract.
81. The factors highlighted in Purshottam Premji which distinguish a contract for work
from a contract for sale are relevant but not exhaustive. It is not correct to say that these factors
should be considered as the only factors to differentiate a works contract and a contract for sale.
In our view, there are not and there cannot be absolute tests to distinguish a sale and works
contract.
82. This Court in Associated Hotels, stated that the determination as
to whether the contract involved in a transaction constitutes a contract of sale or a
contract of work or service depends in each case upon its facts and circumstances. Mere
passing of property in article or commodity during the course of the performance of
the transaction does not render it a transaction of sale. For even in a contract purely of work or
service, it is possible that articles may have to be used by the person executing the work and
property in such cases articles or materials where passed to the other party. That would
not necessarily convert the contract into one of sale of those materials. It is stated in
Associated Hotels that in every case the Court will have to find out what is the primary object of
the transaction and the intention of the parties while entering upon it. It has been clarified that
in some cases it may be that even while entering into a contract of work or even service,
parties might enter into separate agreements, one of work and service and the other of sale and
purchase of materials to be used in the course of executing the work or performing the service.
But, then in such cases the transaction will not be one and indivisible but will fall into the
two separate agreements one of work or service and the other of sale.
85. In Hindustan Aeronautics26, the Court noted the difference between contract for
service and contract for sale of goods in these words:
! 13. It is well settled that the difference between contract of service and contract for sale of
goods, is, that in the former, there is in the person performing work or rendering service no
property in the things produced as a whole notwithstanding that a part or even the whole of
materials used by him had been his property. In the case of a contract for sale, the thing
produced as a whole has individual existence as the sole property of the party who
produced it sometime before delivery and the property therein passed only under the contract
relating thereto to the other party for price. It is necessary, whether in essence there was any
agreement to work for a stipulated consideration% % % % "
86. The Court went on to say further in Hindustan Aeronautics as follows;
! 18. It cannot be said as a general proposition that in every case of works contract, there is
necessarily implied the sale of the component parts which go to make up the repair. That
question would naturally depend upon the facts and circumstances of each case. Mere
passing of property in an article or commodity during the course of performance of the
therefore, in every case for the courts to find out transaction in question does not render the
transaction to be transaction of sale. Even in a contract purely of works or service, it is
possible that articles may have to be used by the person executing the work, and property in
such articles or materials may pass to the other party. That would not necessarily convert
the contract into one of sale of those materials% % "
7. In Kone Elevators27, the Court again highlighted the tests to distinguish a works contract
and a contract for sale of goods. The Court said;
! 5. It can be treated as well settled that there is no standard formula by which one can
distinguish a ! contract for sale" from a ! works contract" . The question is largely one of fact
depending upon the terms of the contract including the nature of the obligations to be
discharged thereunder and the surrounding circumstances. If the intention is to transfer for a
price a chattel in which the transferee had no previous property, then the contract is a contract
for sale. Ultimately, the true effect of an accretion made pursuant to a contract has to be
judged not by artificial rules but from the intention of the parties to the contract. In a ! contract
of sale" , the main object is the transfer of property and delivery of possession of the property,
whereas the main object in a ! contract for work" is not the transfer of the property but it is
one for work and labour. Another test often to be applied is: when and how the property of
the dealer in such a transaction passes to the customer: is it by transfer at the time of delivery of
the finished article as a chattel or by accession during the procession of work on fusion
to the movable property of the customer? If it is the former, it is a ! sale" ; if it is the latter, it is a
! works contract" . Therefore, in judging whether the contract is for a ! sale" or for ! work
and labour" , the essence of the contract or the reality of the transaction as a whole has to be
taken into consideration. The predominant object of the contract, the circumstances of the
case and the custom of the trade provide a guide in deciding whether transaction is a
! sale" or a ! works contract" . Essentially, the question is of interpretation of the ! contract" . It is
settled law that the substance and not the form of the contract is material in determining
the nature of transaction. No definite rule can be formulated to determine the question as
to whether a particular given contract is a contract for sale of goods or is a works contract.
Ultimately, the terms of a given contract would be determinative of the nature of the
transaction, whether it is a ! sale" or a ! works contract" . Therefore, this question has to
be ascertained on facts of each case, on proper construction of terms and conditions of the
contract between the parties."
92. It seems to us (and that is the view taken in some of the decisions) that a contract
may involve both a contract of work and labour and a contract of sale of goods. In our
opinion, the distinction between contract for sale of goods and contract for work (or
service) has almost diminished in the matters of composite contract involving both (a contract
of work/labour and a contract for sale for the purposes of Article 366 (29-A)(b). Now
by legal fiction under Article 366(29-A)(b), it is permissible to make such contract divisible
by separating the transfer of property in goods as goods or in some other form from the
contract of work and
labour. A transfer of property in goods under clause 29(A)(b) of Article 366 is deemed to be a
sale of goods involved in the execution of a works contract by the person making the
transfer and the purchase of those goods by the person to whom such transfer is made. For
this reason, the traditional decisions which hold that the substance of the contract must be seen
have lost their significance. What was viewed traditionally has to be now understood in light of
the philosophy of Article 366(29-A).
93. The question is: Whether taxing sale of goods in an agreement for sale of
flat which is to be constructed by the developer/promoter is permissible under
the Constitution? When the agreement between the promoter/developer and the flat
purchaser is to construct a flat and eventually sell the flat with the fraction of land, it is
obvious that such transaction involves the activity of construction inasmuch as it is only when
the flat is constructed then it can be conveyed. We, therefore, think that there is no reason
why such activity of construction is not covered by the term ! works contract" . After all,
the term ! works contract" is nothing but a contract in which one of the parties is obliged to
undertake or to execute works. Such activity of construction has all the characteristics or
elements of works contract. The ultimate transaction between the parties may be sale of
flat but it cannot be said that the characteristics of works contract are not involved in that
transaction. When the transaction involves the activity of construction, the factors such as, the
flat purchaser has no control over the type and standard of the material to be used in the
construction of building or he does not get any right to monitor or supervise the
construction activity or he has no say in the designing or lay-out of the building, in
our view, are not of much significance and in any case these factors do not detract the
contract being works contract insofar as construction part is concerned.
94. For sustaining the levy of tax on the goods deemed to have been sold in execution of a
works contract, in our opinion, three conditions must be fulfilled: (i) there must be a works
contract, (ii) the goods should have been involved in the execution of a works contract,
and (iii) the property in those goods must be transferred to a third party either as goods or in
some other form. In a building contract or any contract to do construction, the above
three things are fully met. In a contract to build a flat there will necessarily be a sale of
goods element. Works contracts also include building contracts and therefore
without any fear of contradiction it can be stated that building contracts are species of
the works contract.
95. Ordinarily in the case of a works contract the property in the goods used in the
construction of the building passes to the owner of the land on which the building is
constructed when the goods and materials used are incorporated in the building. But there
may be contract to the contrary or a statute may provide otherwise. Therefore, it cannot be
said to be an absolute proposition in law that the ownership of the goods must pass by way
of accretion or exertion to the owner of the immovable property to which they are affixed
or upon which the building is built.
96. Value addition as a concept after Forty-sixth Amendment to the Constitution has been
accepted by this Court in P.N.C. Construction While dealing with this concept, the Court
said that value addition was important concept which had arisen after the Forty-sixth
Amendment by insertion of sub-clause (b) of clause (29-A) in Article 366. It has now
become possible for the States to levy sales tax on the value of the goods involved in a works
contract in the same way in which the sales tax was leviable on the price of the goods in a
building contract. On account of the Forty-sixth Amendment in the Constitution the State
Governments are empowered to levy sales tax on the contract value which earlier was not
possible
97. Where a contract comprises of both a works contract and a transfer of immovable
property, such contract does not denude it of its character as works contract. Article
366(29-A)(b) does contemplate a situation where the goods may not be transferred in the
form of goods but may be transferred in some other form which may even be in the form of
immovable property.
100. We have no doubt that the State legislatures lack legislative power to levy tax on the
transfer of immovable property under Entry 54 of List II of the Seventh Schedule. However,
the States do have competence to levy sales tax on the sale of goods in an agreement of sale of
flat which also has a component of a deemed sale of goods. Aspects theory though does not
allow the State legislature to entrench upon the Union List and tax services by including the
cost of such service in the value of goods but that does not detract the State to tax the sale of
goods element involved in the execution of works contract in a composite contract like
contract for construction of building and sale of a flat therein. In para 88 of Bharat
Sanchar5, the Court stated: ! the aspects theory does not however allow the State to entrench
upon the Union List and tax services by including the cost of such service in the value of the
goods. Even in those composite contracts which are by legal fiction deemed to be divisible
under Article 366(29-A), the value of the goods involved in the execution of the whole
transaction cannot be assessed to sales tax" . Having said that, the Court also stated that the
States were not competent to include the cost of service in the value of the goods sold (i.e.
the sim card) nor the Parliament could include the value of the sim card in the cost of
services. But the statement in para 92(C) of the Report is clear that it is upto the States to tax
the sale of goods element in a composite contract of sale and service. Bharat Sanchar5 thus
supports the view that taxation of different aspects of the same transaction as separate taxable
events is permissible.
101. In light of the above discussion, we may summarise the legal position, as follows:
(i) For sustaining the levy of tax on the goods deemed to have been sold in execution of a
works contract, three conditions must be fulfilled: (one) there must be a works contract, (two)
the goods should have been involved in the execution of a works contract and (three) the
property in those goods must be transferred to a third party either as goods or in some other
form.
(ii) For the purposes of Article 366(29-A)(b), in a building contract or any contract to do
construction, if the developer has received or is entitled to receive valuable consideration,
the above three things are fully met. It is so because in the performance of a contract for
construction of building, the goods (chattels) like cement, concrete, steel, bricks etc. are
intended to be incorporated in the structure and even though they lost their identity as goods but
this factor does not prevent them from being goods.
(iii) Where a contract comprises of both a works contract and a transfer of immovable
property, such contract does not denude it of its character as works contract. The term
! works contract" in Article 366 (29-A)(b) takes within its fold all genre of works contract and is
not restricted to one specie of contract to provide for labour and services alone. Nothing in
Article 366(29-A)(b) limits the term ! works contract" .
(iv) Building contracts are species of the works contract.
(v) A contract may involve both a contract of work and labour and a contract for sale. In such
composite contract, the distinction between contract for sale of goods and contract for
work (or service) is virtually diminished.
(vi) The dominant nature test has no application and the traditional decisions which have held
that the substance of the contract must be seen have lost their significance where
transactions are of the nature contemplated in Article 366(29-A). Even if the dominant
intention of the contract is not to transfer the property in goods and rather it is rendering of
service or the ultimate transaction is transfer of immovable property, then also it is open to the
States to levy sales tax on the materials used in such contract if such contract otherwise has
elements of works contract. The enforceability test is also not determinative.
(vii) A transfer of property in goods under clause 29-A(b) of Article 366 is deemed to be a
sale of the goods involved in the execution of a works contract by the person making the
transfer and the purchase of those goods by the person to whom such transfer is made.
(viii) Even in a single and indivisible works contract, by virtue of the legal fiction introduced
by Article 366(29-A)(b), there is a deemed sale of goods which are involved in the execution
of the works contract. Such a deemed sale has all the incidents of the sale of goods
involved in the execution of a works contract where the contract is divisible into one for the
sale of goods and the other for supply of labour and services. In other words, the single and
indivisible contract, now by Forty-sixth Amendment has been brought on par with a
contract containing two separate agreements and States have now power to levy sales tax
on the value of the material in the execution of works contract.
(ix) The expression ! tax on the sale or purchase of goods" in Entry 54 in List II of Seventh
Schedule when read with the definition clause 29-A of Article 366 includes a tax on the
transfer of property in goods whether as goods or in the form other than goods involved in
the execution of works contract.
(x) Article 366(29-A)(b) serves to bring transactions where essential ingredients of
$sale# defined in the Sale of Goods Act, 1930 are absent within the ambit of sale or
purchase for the purposes of levy of sales tax. In other words, transfer of movable property
in a works contract is deemed to be sale even though it may not be sale within the meaning of
the Sale of Goods Act.
(xi) Taxing the sale of goods element in a works contract under Article 366(29-A)(b) read
with Entry 54 List II is permissible even after incorporation of goods provided tax is
directed to the value of goods and does not purport to tax the transfer of immovable property.
The value of the goods which can constitute the measure for the levy of the tax has to be the
value of the goods at the time of incorporation of the goods in works even though property
passes as between the developer and the flat purchaser after incorporation of goods.
102. The crucial question would now remain: whether the view taken in Raheja
Development1 with reference to definition of ! works contract" in KST Act is legally
unjustified? The following definition of ! works contract" was under consideration before
this Court in Raheja Development ! works contract" includes any agreement for carrying
out for cash, deferred payment or other valuable consideration, the building, construction,
manufacture, processing, fabrication, erection, installation, fitting out, improvement,
modification, repair or commissioning of any moveable or immovable property" .
103. The Court also noticed the definition of ! dealer" and ! taxable turn over " .
104. The broad facts in Raheja Development were these:

Raheja Development carried on the business of real estate development and allied
contracts;
Raheja Development entered into development agreements with the owners of land;
Raheja Development entered into agreements of sale with intended purchasers. The
agreements provided that on completion of the construction, the residential apartments or the
commercial complexes would be handed over to the purchasers who would get an undivided
interest in the land also;
The owners of the land would then transfer the ownership directly to the society formed
under the Karnataka Ownership Flat (Regulation of the Promotion of Construction, Sale,
Management and Transfer) Act, 1972 (for short, $KOFA#).
105. In light of the above facts and the definition of ! works contract" , the question
before this Court was whether Raheja Development were liable to pay turnover tax on the
value of goods involved in the execution of the works contract.
106. Section 5-B of the KST Act provides for levy of tax on transfer of property in goods
(whether as goods or in some other form) involved in the execution of works contract.
107. On consideration of the arguments that were put forth by the parties, the Court in Raheja
Development1 held as under:
(i) The definition of the term ! works contract" in the Act is an inclusive definition.
(ii) It is a wide definition which includes ! any agreement" for carrying out building or
construction activity for cash, deferred payment or other valuable consideration.
(iii) The definition of works contract does not make a distinction based on who carries on
the construction activity. Even an owner of the property may be said to be carrying on a works
contract if he enters into an agreement to construct for cash, deferred payment or other
valuable consideration.
(iv) The developers had undertaken to build for the prospective purchaser.
(v) Such construction/development was to be on payment of a price in various installments
set out in the agreement.
(vi) The developers were not the owners. They claimed lien on the property. They had right to
terminate the agreement and dispose of the unit if a breach was committed by the purchaser.
A clause like this does not mean that the agreement ceases to be ! works contract" . So long
as there is no termination, the construction is for and on behalf of the purchaser and it
remains a ! works contract" .
(vii) If there is a termination and a particular unit is not resold but retained by the developer,
there would be no works contract to that extent.
(viii) If the agreement is entered into after the flat or unit is already constructed then there
would be no works contract. But, so long as the agreement is entered into before the
construction is complete it would be works contract.
108. The correctness of the view taken in Raheja Development has been doubted in the
referral order principally for the reasons: (a) the developer had undertaken the contract to
develop the property of the owner. It is not alleged by the department that there is
monetary consideration involved in the development agreement. If the development agreement
is not a works contract, could the department rely upon the second contract which is the
tripartite agreement and interpret it to be a works contract; (b)if the ratio in Raheja
Development is to be accepted then there would be no difference between works contract and
a contract for sale of chattel as a chattel and (c) from the definition of works contract, the
contractor must have undertaken the work of construction for and on behalf of the flat
purchaser for cash, deferred or any other valuable consideration but could it be said that
developer was contractor for the prospective flat purchaser.
109. In Raheja Development1, the Court on consideration of the clauses (q) and (r) of the
recitals and clauses (1), 5(c) and (vii) of the agreement between the flat purchaser,
developer and owner of the land observed that the agreement had an element for carrying out
building and construction activity for cash, deferred payment or other valuable
consideration. The developer had undertaken to build for the prospective purchaser. Having
regard to the various clauses of the recitals and also the clauses of the agreement, the Court was
of the view that such agreement was a typical agreement and so long as there was no
termination of the contract, the construction is for and on behalf of the purchaser and it
remains a ! works contract" .
114. In Article 366(29-A)(b), the term $works contract# covers all genre of works contract
and it is not limited to one specie of the contract. In Raheja Development1, the definition of
! works contract" in KST Act was under consideration. That definition of ! works contract"
is inclusive and refers to building contracts and diverse construction activities for monetary
consideration viz; for cash, deferred payment or other valuable consideration as
works contract. Having regard to the factual position, interalia, Raheja Development1 entered
into development agreements with the owners of the land and it also entered into agreements for
sale with the flat purchasers, the consideration being payment in installments and also the
clauses of the agreement the Court held that developer had undertaken to build for the flat
purchaser and so long as there was no termination of the contract, the construction is for and
on behalf of the purchaser and it remains a ! works contract" . The legal position
summarized by us and the foregoing discussion would justify the view taken by the two Judge
Bench in Raheja Development1.
115. It may, however, be clarified that activity of construction undertaken by the

developer would be works contract only from the stage the developer enters into a contract
with the flat purchaser. The value addition made to the goods transferred after the agreement
is entered into with the flat purchaser can only be made chargeable to tax by the State
Government.
116. The reasons stated in the referral order for reconsideration of Raheja Development1 do not
make out any good ground for taking a view different from what has been taken by this Court
in Raheja Development. We are in agreement with the submission of Mr. K.N. Bhat that
since Raheja Development in May, 2005 almost all States have modified their laws in line
with Raheja Development and there is no justification for change in the position settled
after the decision of this Court in Raheja Development.
18. We are clearly of the view that Raheja Development1 lays down the correct legal
position and we approve the same. 120. Clause (24) of Section 2 defines sale to mean a
sale of goods made within the State for cash or deferred payment or other valuable
consideration but does not include a mortgage, hypothecation, charge of pledge; and the
words ! sell" , ! buy" and ! purchase" , with all their grammatical variations and cognate
expressions. An explanation is appended to this clause. Clause (b) of the explanation to
Section 2(24) defines what would be a sale for the purpose of the clause and brought in its
ambit the transactions mentioned therein. Explanation (b)(ii) was amended with effect
from 20.06.2006 by inserting the following words after the words ! works contract" : ! including,
an agreement for carrying out for cash, deferred payment or other valuable consideration,
the building, construction, manufacture, processing, fabrication, erection, installation, fitting
out, improvement, modification, repair or commissioning of any movable or immovable
property" .
121. There is no doubt in our mind that the amendment in explanation b(ii) to
Section 2(24) was brought because of the judgment of this Court in Raheja Development.
We have already held that Raheja Development lays down the correct legal position.
125. Once we have held that Raheja Development lays down the correct law, in our opinion,
nothing turns on the circular dated 07.02.2007 and the notification dated 09.07.2010. The
circular is a trade circular which is clarificatory in nature only. The notification enables the
registered dealer to opt for a composition scheme. The High Court has dealt with the circular
and notification. We do not find any error in the view of the High Court in this regard.
M/S. Kone Elevator India Pvt. Ltd v. State of Tamil Nadu. & Ors.
(2014) 7 SCC 1
Dipak Misra, J. [for R.M. Lodha, C.J., A.K. Patnaik, Sudhansu Mukhopadhaya, JJ. and
himself] Leave granted in all the special leave petitions.
2. By an order dated 13.2.2008 in Kone Elevator India Private Limited v. State of Tamil Nadu
and others[(2010) 14 SCC 788], a three-Judge Bench of this Court, while dealing with the
writ petition preferred by Kone Elevator India Pvt. Ltd. along with Special Leave Petitions,
noted that the question raised for consideration in the said cases is whether manufacture,
supply and installation of lifts is to be treated as ! sale" or ! works contract" , and a three-Judge
Bench, in State of A.P. v. Kone Elevators (India) Ltd.[ (2005) 3 SCC 389], had not noticed
the decisions rendered by this Court in State of Rajasthan v. Man Industrial Corporation Ltd.[
(1969) 1 SCC 567], State of Rajasthan and others v. Nenu Ram[(1970) 26 STC 268 (SC)]
and Vanguard Rolling Shutters and Steel Works v. Commissioner of Sales Tax[(1977) 2 SCC
250] and perceiving the manifest discord, thought it appropriate that the controversy should
be resolved by the larger Bench. Thereafter, keeping in view the commonality of the
controversy in Civil Appeal No. 6285 of 2010 and other Special Leave Petitions, they were
tagged with the originally referred matters. Thus, the matters are before us.
3. The seminal controversy which has emerged in this batch of matters is whether a contract
for manufacture, supply and installation of lifts in a building is a ! contract for sale of goods"
or a ! works contract" . Needless to say, in case of the former, the entire sale consideration
would be taxable under the sales tax or value added tax enactments of the State legislatures,
whereas in the latter case, the consideration payable or paid for the labour and service element
would have to be excluded from the total consideration received and sales tax or value added
tax would be charged on the balance amount.
4. Keeping in mind the said spinal issue, we think it apposite to briefly refer to the facts as
adumbrated in the writ petition preferred by Kone Elevator India Pvt. Ltd. The petitioner is
engaged in the manufacture, supply and installation of lifts involving civil construction. For
the Assessment Year 1995-96, the Sales Tax Appellate Tribunal, Andhra Pradesh,
considering the case of the petitioner, opined that the nature of work is a ! works contract" , for
the erection and commissioning of lift cannot be treated as ! sale" . On a revision being filed,
the High Court of Andhra Pradesh affirmed the view of the tribunal and dismissed the Tax
Case (Revision) filed by the Revenue. Grieved by the decision of the High Court, the State of
Andhra Pradesh preferred special leave petition wherein leave was granted and the matter was
registered as Civil Appeal No. 6585 of 1999 and by judgment dated 17.2.2005 in Kone
Elevators (supra), the view of the High Court was overturned. After the pronouncement in the
said case, the State Government called upon the petitioner to submit returns treating the
transaction as sale. Similarly, in some other States, proceedings were initiated proposing to
reopen the assessments that had already been closed treating the transaction as sale. The said
situation compelled the petitioner to prefer the petition under Article 32 of the Constitution.
As far as others are concerned, they have preferred the writ petitions or appeals by special
leave either challenging the show cause notices or assessment orders passed by the assessing
officers or affirmation thereof or against the interim orders passed by the High Court
180 M/S. Kone Elevator India Pvt. Ltd v. State of Tamil Nadu. & Ors.
requiring the assessee to deposit certain sum against the demanded amount. That apart, in
certain cases, appeals have been preferred assailing the original assessment orders or
affirmation thereof on the basis of the judgment in Kone Elevators (supra).
5. Mr. Harish Salve, learned senior counsel for the petitioners, has contended that prior to the
decision of this Court in Bharat Sanchar Nigam Ltd. and another v. Union of India and
others[(2006) 3 SCC 1], which has been further explained in Larsen and Toubro Limited and
another v. State of Karnataka and another[(2014) 1 SCC 708], the law as understood was (a)
where a contract was divisible by itself, then the element of sale would be taxed as an
ordinary sale of goods, irrespective of the element of service; (b) where a contract was for the
supply of goods, and for rendition of services, if the pre-dominant intention of the parties was
to supply goods, the element of service would be ignored and the entirety of the contract
consideration would be treated as the price of goods supplied and the tax imposed
accordingly; and (c) as the law did not provide for dividing, by a legal fiction, a contract of
such a nature into a contract for goods and a contract for services, the goods in which
property passed from the contractor to the owner could not be brought to tax under the law of
sales tax. It is assiduously urged by Mr. Salve that the ! predominant intention test" is no
longer relevant and after the decision in Larsen and Toubro (supra), supply and installation of
lift cannot be treated to be a contract for sale. It is argued that a lift comprises of components
or parts [goods] like lift car, motors, ropes, rails, etc. and each of them has its own identity
prior to installation and they are assembled/installed to create the working mechanism called
lift. Learned senior counsel would contend that the installation of these components/parts with
immense skill is rendition of service, for without installation in the building, there is no lift.
6. Mr. Salve, learned senior counsel, has also referred to the Bombay Lifts Act, 1939, the
Bombay Lifts Rules, 1958 and Bombay Lifts (Amendment) Rules, 2010. He has referred to
the Preamble of the Act which stipulates that an Act has been enacted to provide for the
regulation of the construction, maintenance and safe working of certain classes of lifts and all
machinery and apparatus pertaining thereto in the State of Bombay. The State Act applies to
the whole of Maharashtra. He has drawn our attention to the dictionary clause of ! lift" as has
been defined in clause 3(c) to mean a ! hoisting mechanism" equipped with a car which moves
in a substantially vertical direction, is worked by power and is designed to carry passengers or
goods or both; and ! lift installation" which includes the lift car, the lift way, the lift way
enclosure and the operating mechanism of the lift and all ropes, cables, wires and plant,
directly connected with the operation of the lift. He has also placed reliance on Section
4 which deals with permission to erect a lift,Section 5 that deals with licence to use a lift
and Section 7 which provides a lift not to be operated without a licence. Learned senior
counsel has also drawn our attention to the various rules that deal with many a technical
aspect and the terms on which lift shall work and what requirements are to be carried out by a
licencee under the Act. In essence, the submission is that the manufacture, supply and the
installation are controlled by the statutory provisions under an enactment of the legislature
and also the rules made in consonance with the Act which would reflect that immense skill is
required for such installation and the separate parts of the lift are not sold like goods, but it
only becomes operational after it is installed, adjusted, tested and commissioned in a building.
M/S. Kone Elevator India Pvt. Ltd v. State of Tamil Nadu. & Ors. 181
7. Mr. Khambatta, learned Advocate General, appearing for the State of Maharashtra,
submitted that in the case of sale and installation of a lift or elevator, the contract would
include the obligation to install the lift or to undertake any services in relation to the lift and
these elements of value need to be deducted while taxing the sale of goods involved in such a
contract. It is his submission that in a given case, there can be a contract which is exclusively
for sale of lift, i.e., for sale of goods which does not include any labour or service element at
all where the lift is bought from a manufacturer but a separate contract for installation is
entered into with an independent engineering contractor. Learned Advocate General urged
that such an installation by way of contract is permissible under the Bombay Lifts Act, 1939
read with the Bombay Lifts Rules, 1958. It is urged by him that prior to the decision in Kone
Elevators case, the State of Maharashtra had treated contracts for sale and installation of lifts
as ! works contract" as per the decision of the High Court in Otis Elevator Company (India)
Ltd. v. The State of Maharashtra[(1969) 24 STC 525 (Bom)]. He has copiously referred to the
rule position which is prevalent in the State of Maharashtra. He has brought on record a Trade
Circular dated 11.11.2013 to show that from 1.4.2006, the decision in Kone Elevators (supra)
has been followed in the State of Maharashtra and it has adjusted the position in accordance
with the said authority and the State having adjusted its position to the law rendered by the
three-Judge Bench, in case the authority in Kone Elevators (supra) is overruled, it should be
given prospective effect.
8. Mr. K.N. Bhat, learned senior counsel for the State of Karnataka, has submitted that the
contract of manufacture, supply and installation of lifts comprises a works contract, for the
expression ! works contract" is not a term of art as has been explained in
Builders# Association of India and others v. Union of India and others[(1989) 2 SCC 645] as
well as in Larsen and Toubro (supra). It is put forth by Mr. Bhat that lifts are assembled and
manufactured to suit the requirement in a particular building and are not something sold out
of shelf and, in fact, the value of goods and the cost of the components used in the
manufacturing and installation of a lift are subject to taxation while the element of labour and
service involved cannot be treated as goods. In essence, the submission of Mr. Bhat is that
taking into consideration the multifarious activities involved in the installation of the lift, it
has to be construed as a ! works contract" and the decision in Kone Elevators (supra) does not
lay down the law correctly.
9. Mr. Rakesh Dwivedi, learned senior counsel appearing for the State of Orissa, has referred
to the terms of the quotation, the confirmation letter, the letter of approval, the preparatory
erection work or civil work which are to be carried out by the customer at its own cost, the
specific mode of payment and the nature of supply and, on that basis, contended that the
contract was for sale and supply of a lift to the customer for a monetary consideration. It is
urged by him that a part of manufacture is carried out at the project site of the customer and
the skill and labour deployed in the installation or the work done is merely a component of the
manufacturing process and, as a matter of fact, the elevator is supplied to the customer only
after its erection/installation at the site. It is further contended by him that where a
manufacturer of lift first manufactures components and then completes the manufacture of the
lift at the site and retains ownership in the components as property while producing the
completed lift, it is a case of pure manufacture. It is contended by him that the phraseology
used in the contract is not decisive because it is the economic reality which is decisive, for the
installation is a part of the manufacturing process resulting in the emergence of the product of
elevator which is contracted for. Learned senior counsel would contend that it has to be
construed as an elevator bought and sold as such.
11. Mr. R. Venkataramani, learned senior counsel appearing for the States of Tamil Nadu and
Andhra Pradesh, has contended that the primary intention behind the demand of installation
of a lift is the intention to have the lift as a system and, therefore, the work of installation
merely fulfills the erection and functional part of the system. The service or work element
may be the means to render a set of goods constituting a unit to be fit for use and, in fact, the
act of installation is to bring the goods to use and hence, it is the culmination of the act of
sale. The learned senior counsel has put forth that the contract involved would come in the
category of contracts which can be described as contracts where goods, in any form
whatsoever, are intended for transfer but the completion of the transfer may involve certain
set of activities, by whatever name called, for the purposes of securing the use or consumption
of such goods in question and to that class of contracts, the principle of ! deliverable state" as
used in Section 21 of the Sale of Goods Act, 1930 would be attracted and, therefore,
such a contract would be a pure contract for sale of goods. It is emphasized by him that the
threshold question to be put in every case is whether the purchaser#s true object is to obtain an
identifiable product or goods or the intention is to utilize the services of or works from a
person for the purposes of realizing an end product which may emerge only for the reason of
the execution of the work by rendering of the services in question. Applying the said principle
to a lift, it is canvassed by him that a lift or an elevator is an identifiable good which is
transferred to the purchaser as such and solely because certain amount of labour or service is
required for the purpose of putting together all the components of the lift at the site to bring it
to its usable state, the same does not make a difference as to the nature of the contract and it
cannot be regarded as a works contract.
15. Mr. P.P. Malhotra, learned Additional Solicitor General of India appearing for Union of
India, has submitted that parts of the lift are assembled at the site in accordance with its
design and requirement of the building which may include the floor levels and the lift has to
open on different floors or otherwise depending upon the requirement. It has to synchronize
with the building and each door has to open on the level of each floor and hence, by no stretch
of imagination, it can be treated as a manufacture or mere supply but cumulatively
considered, it is a works contract and, more so, when the contract is a composite or turnkey
contract. Mr. Malhotra would further submit that it is not a mere case of sale and according to
the expanded definition of tax on sale, ! tax" is leviable only on the transfer of property in
goods, whether in goods or in some other form, involved in the execution of work and no
sales tax is leviable on the execution of works contract. Thus, the stand of the Union of India
is that supply and installation of lift is not a contract for sale but a works contract.
16. To appreciate the controversy in the backdrop of the rivalised submissions, it is necessary
to delve into the genesis of the law in respect of ! works contract" and thereafter to dwell upon
how far the principles pertaining to ! works contract" would govern the manufacture, supply
and installation of lifts. In this context, it is seemly to appreciate the legal position as to how
the impost of sales tax on ! works contract" was treated prior to the insertion of Clause (29A)
inArticle 366 of the Constitution by the Constitution (Forty-sixth Amendment) Act, 1982 with
effect from 1.3.1983 and how this court has dealt with the said facet after the constitutional
amendment that changed the concept of levy of sales tax on ! works contract" . For the
aforesaid purpose, chronological recapitulation is imperative. In State of Madras v. Gannon
Dunkerley & Co., (Madras) Ltd.[ AIR 1958 SC 560], the assessee faced a levy in respect of
goods sold in relation to works contract under the Madras General Sales Tax Act, 1939 as
amended by the Madras General Sales Tax (Amendment) Act 25 of 1947 wherein certain new
provisions were incorporated and one such provision, namely, Section 2(i) defined ! works
contract" to mean ! any agreement for carrying out for cash or for deferred payment or other
valuable consideration, the construction, fitting out, improvement or repair of any building,
road, bridge or other immoveable property or the fitting out, improvement or repair of any
movable property" . In pursuance of the said provision, the rules were amended and the
assessment was framed. When the matter travelled to the Constitution Bench of this Court, it
was contended by the assessee that nothing could be levied that was received by the assessee
from the persons for whose benefit it had constructed the buildings. On behalf of the
Revenue, it was urged that once there was an agreement between the parties and in the
carrying out of that agreement there was transfer of title in movables belonging to one person
to another for consideration, there would be a ! sale" . Repelling the said submission, it was
held that if the words "sale of goods" were to be interpreted in their legal sense, that sense
could only be what it was in the law relating to sale of goods. It was observed that the ratio of
the rule of interpretation that words of legal import occurring in a statute should be construed
in their legal sense is that those words have, in law, acquired a definite and precise sense, and
that, accordingly, the legislature must be taken to have intended that they should be
understood in that sense and in interpreting an expression used in a legal sense, the
requirement was to ascertain the precise connotation which it possesses in law because both
under the common law and the statute law relating to sale of goods in England and in India, to
constitute a transaction of sale, there should be an agreement, express or implied, relating to
goods to be completed by passing of title in those goods. The essence of the concept that both
the agreement and the sale should relate to the same subject-matter was highlighted and it was
opined that under the law, there could not be an agreement relating to one kind of property
and a sale as regards another. The Constitution Bench further held that on the true
interpretation of the expression "sale of goods", there must be an agreement between the
parties for the sale of the very goods in which eventually property passes and in a building
contract, the agreement between the parties being to the effect that the contractor should
construct a building according to the specifications contained in the agreement, and in
consideration therefor receive payment as provided therein, there was neither a contract to sell
the materials used in the construction nor did the property pass therein as movables and,
therefore, it was impossible to maintain that there was implicit in a building contract a sale of
materials as understood in law. Eventually, the Court summed up the conclusion by stating
that the expression "sale of goods" in Entry 48 is a nomen juris, its essential ingredients being
an agreement to sell movables for a price and property passing therein pursuant to that
agreement and in a building contract which was one, entire and indivisible, there was no sale
of goods, and it was not within the competence of the Provincial Legislature under Entry 48
to impose a tax on the supply of the materials used in such a contract treating it as a sale.
22. In The State of Punjab v. M/s. Associated Hotels of India Ltd.[ (1972) 1 SCC 472], the
Constitution Bench, while dealing with the construction of a contract of work and labour on
the one hand and contract for sale on the other, opined that the difficulty which the Courts
have often to meet in construing a contract of work and labour, on the one hand, and a
contract for sale, on the other, arises because the distinction between the two is very often a
fine one and it is particularly so when the contract is a composite one involving both a
contract of work and labour and a contract of sale. The Court thereafter proceeded to state
thus: -
! Nevertheless, the distinction between the two rests on a clear principle. A contract of sale is
one whose main object is the transfer of property in, and the delivery of the possession of, a
chattel as a chattel to the buyer. Where the principal object of work undertaken by the payee
of the price is not the transfer of a chattel qua chattel, the contract is one of work and labour.
The test is whether or not the work and labour bestowed and in anything that can properly
become the subject of sale; neither the ownership of materials, nor the value of the skill and
labour as compared with the value of the materials, is conclusive, although such matters may
be taken into consideration in determining, in the circumstances of a particular case, whether
the contract is in substance one for work and labour or one for the sale of a chattel[34]." Be it
stated, in the said case, the respondent-company carried business as hoteliers and, as a part of
its business, the company received guests to whom it furnished certain amenities. The Court
ruled that the transaction between a hotelier and a visitor was essentially one of contract of
service and facilities provided at reasonable price.
27. The aforesaid authorities clearly show that a works contract could not have been liable to
be taxed under the State sales tax laws and whether the contract was a works contract or a
contract for sale of goods was dependent on the dominant intention as reflected from the
terms and conditions of the contract and many other aspects. In certain cases, the court has
not treated the contract to be a works contract by repelling the plea of the assessee after taking
into consideration certain special circumstances. No straitjacket formula could have been
stated to be made applicable for the determination of the nature of the contract, for it
depended on the facts and circumstances of each case. As the works contract could not be
made amenable to sales tax as the State Legislatures did not have the legislative competence
to charge sales tax under Entry 48 List II of the Seventh Schedule of the Constitution on an
indivisible contract of sale of goods which had component of labour and service and it was
not within the domain of the assessing officer to dissect an indivisible contract to distinguish
the sale of goods constituent and the labour and service component. The aforesaid being the
legal position, the Parliament brought in the Forty-sixth Amendment by incorporating Clause
(29A) in Article 366 of the Constitution to undo the base of the Constitution Bench decision
in Gannon Dunkerley#s-I case.
28. To have a complete picture, we think it apt to reproduce the said constitutional provision:
-
! 366 (29A) ! tax on the sale or purchase of goods" includes '
a) a tax on the transfer, otherwise than in pursuance of a contract, of property in any goods for
cash, deferred payment or other valuable consideration;
b) a tax on the transfer of property, in goods (whether as goods or in some other form)
involved in the execution of a works contract;
c) a tax on the delivery of goods on hire purchase or any system of payment by instalments;
d) a tax on the transfer of the right to use any goods for any purpose (whether or not for a
specified period) for cash, deferred payment or other valuable consideration;
e) a tax on the supply of goods by any unincorporated association or body of persons to a
member thereof for cash, deferred payment or other valuable consideration;
f) a tax on the supply, by way of or as part of any service or in any other manner whatsoever,
of goods, being food or any other article for human consumption or any drink (whether or not
intoxicating), where such supply or service, is for cash, deferred payment or other valuable
consideration, and such transfer, delivery or supply of any goods shall be deemed to be a sale
of those goods by the person making the transfer, delivery or supply and a purchase or those
goods by the person to whom such transfer, delivery or supply is made;"
32. Having dealt with the aforesaid authorities, as advised at present, we shall refer to certain
authorities as to how the term ! works contract" has been understood in the contextual
perspective post the constitutional amendment. In Hindustan Shipyard Ltd. (supra), the Court
observed that the distinction between a contract of sale and a works contract is not free from
difficulty and has been the subject-matter of several judicial decisions. It is further observed
that neither any straitjacket formula can be made available nor can such quick-witted tests
devised as would be infallible, for it is all a question of determining the intention of the
parties by culling out the same on an overall reading of the several terms and conditions of a
contract. Thereafter, the two- Judge Bench set out three categories of contracts and explained
the contours, namely, (i) the contract may be for work to be done for remuneration and for
supply of materials used in the execution of the work for a price; (ii) it may be a contract for
work in which the use of the materials is accessory or incidental to the execution of the work;
and (iii) it may be a contract for supply of goods where some work is required to be done as
incidental to the sale. Thereafter, it opined that the first contract is a composite contract
consisting of two contracts, one of which is for the sale of goods and the other is for work and
labour; the second is clearly a contract for work and labour not involving sale of goods; and
the third is a contract for sale where the goods are sold as chattels and the work done is
merely incidental to the sale.
40. On the basis of the aforesaid elucidation, it has been deduced that a transfer of property in
goods under Clause (29A)(b) of Article 366 is deemed to be a sale of goods involved in the
execution of a works contract by the person making the transfer and the purchase of those
goods by the person to whom such transfer is made. One thing is significant to note that in
Larsen and Toubro (supra), it has been stated that after the constitutional amendment, the
narrow meaning given to the term ! works contract" in Gannon Dunkerley-I (supra) no longer
survives at present. It has been observed in the said case that even if in a contract, besides the
obligations of supply of goods and materials and performance of labour and services, some
additional obligations are imposed, such contract does not cease to be works contract, for the
additional obligations in the contract would not alter the nature of the contract so long as the
contract provides for a contract for works and satisfies the primary description of works
contract. It has been further held that once the characteristics or elements of works contract
are satisfied in a contract, then irrespective of additional obligations, such contract would be
covered by the term ! works contract" because nothing in Article 366(29-A)(b) limits the term
! works contract" to contract for labour and service only.
42. At this juncture, it is condign to state that four concepts have clearly emerged. They are (i)
the works contract is an indivisible contract but, by legal fiction, is divided into two parts, one
for sale of goods, and the other for supply of labour and services;
(ii) the concept of ! dominant nature test" or, for that matter, the ! degree of intention test" or
! overwhelming component test" for treating a contract as a works contract is not applicable;
(iii) the term ! works contract" as used in Clause (29A) of Article 366 of the Constitution
takes in its sweep all genre of works contract and is not to be narrowly construed to cover one
species of contract to provide for labour and service alone; and (iv) once the characteristics of
works contract are met with in a contract entered into between the parties, any additional
obligation incorporated in the contract would not change the nature of the contract.
45. In this backdrop, we shall now proceed to deal with the submissions advanced by the
learned counsel for the respondents which we have already noted. The fundamental
submission of Mr. Dwivedi is that the manufacturer of the lift retains ownership in the
components as property while producing the completed lift and, hence, it would be a case of
pure manufacture. A distinction has been sought to be made that if another agency is
appointed to install, it does not have the ownership of the components. To bolster the basic
submission, as we find, he has referred to various facets. The said proponement, as we
understand, is based on the assumption that the supplier remains the owner of the components
as per the contract; that the manufacture is a process or activity which brings in existence new
identifiable and distinct component; that installation is an integral part of the manufacturing
process and proceeds from the manufacture of the components themselves; that the concept of
permanent fixture to a building cannot be enlarged to such an extent to put it in the realm of
works contract or to take it away from the conceptual meaning of manufacture. We have
already dealt with the principles stated in Patnaik and Co. (supra), Hindustan Aeronautics Ltd.
(supra), T.V. Sundaram Iyengar (supra), Kailash Engineering Co. (supra) and the
observations made by Sikri, J., in Patnaik & Co. (supra) wherein the decision in Anglo-
Egyptian Navigation Co. v. Rennie[(1875) LR 10 CP 271] was distinguished by stating that
whenever a contract provides for the fixing of a chattel to another chattel, there is no sale of
goods. Be it noted, in Patnaik & Co. (supra), an illustration was given that when a dealer fits
tyres supplied by him to the car of the customer, it would tantamount to sale of the tyres by
the dealer to the customer. In these cases, the Court was really dealing with the terms of the
contract contextually to come to a conclusion as to whether the contract in question was a
contract for sale or a works contract. The fundamental principle that was applied is that what
was sold was a chattel as chattel or the contract was a composite one on a different
base/foundation.
46. The other decisions which have been relied upon by Mr. Dwivedi to show that installation
is a part of the manufacturing process are J. Marcel (Furriers) Ltd. (supra), Central India
Machinery Manufacturing Company Ltd. (supra), Norman Wright (Builders) Ltd. (supra),
Titan Medical Systems (supra), MIL India Ltd. (supra), Eastend Papers Industries Ltd. (supra)
and Aspinwall & Co. (supra). In J. Marcel (Furriers) Ltd. (supra), the plaintiff had kept a
stock of furs made up ready for sale and they also made up furs, coats, jackets, and boleros for
customers. An order was placed by the defendant for a mutation mink jacket. As the jacket
was not up to mark, it was rejected by the defendant. In that context, the Court observed that
though huge degree of skill and craftsmanship had gone into making up of a fur jacket as was
made for the defendant, yet it was no more than making an article for sale to the defendant on
a special order and the transaction, in fact, related to sale of a complete article and the receipt
of the price.
47. In Norman Wright (Builders) Ltd. (supra), an agreement was entered into by the appellant
for fixing of black-out curtains at some London police stations. The appellant-plaintiff
contended before the Court that the fixing of curtains was not a sale of goods but a contract
for work and labour and the supply of material in connection therewith. Repelling the said
submission, it was held that as the contract involved transferring chattels, namely, curtains to
the defendants for a price, in which they had no previous right, it was a sale of goods.
48. Narne Tulaman Manufacturers Pvt. Ltd., Hyderabad v. Collector of Central Excise,
Hyderabad[(1989) 1 SCC 172], Eastend Paper Industries Ltd. (supra), Aspinwall & Co. Ltd.
(supra), MIL India Ltd. (supra) and Sirpur Papers Mills Ltd. (supra) are the decisions under
the Central Excise Act, 1944 which are really not of relevance as they relate to the concept,
term and expression ! manufacture" as used and understood under the said Act. The concept
of ! manufacture" has limited relevance and cannot be a determining factor to decide whether
the contract is one for supply of goods or is a composite contract. In Narne Tulaman
Manufacturers Pvt. Ltd. (supra), installation of weighbridges was held to be manufacture for
the purpose of excise duty, observing that the assessee was obsessed with the idea that part of
the machinery was liable to duty but the whole of the product was not dutiable as excisable
goods. Similarly, in Aspinwall & Co. (supra), curing of coffee, it was held, amounts to
manufacture, as a new and distinct commodity of independent identity, distinct from raw
material, had come into existence. In Sirpur Paper Mills Ltd.#s case, the question arose
whether paper making machine was an immovable property as it was embedded on the earth
and, therefore, not exigible to excise duty. This Court opined that paper making machine was
exigible to excise duty as the whole machine could be dismantled and it was attached to the
earth only for operational efficiency. Though the entire machine was assembled from various
components, yet, by itself, it was a new marketable commodity that had emerged as a result of
the manufacturing activity. The aforesaid decisions cannot be taken aid of to come to a
conclusion that installation is assembling and, in the ultimate eventuate, it is a part of the
manufacturing process. We are disposed to think so as there is a fundamental fallacy in the
submission as far as installation of the lift is concerned. It is not a plant which is erected at the
site. It is not a different item like coffee which comes into the market after processing. It is
also not like a ! weighbridge" as is understood under the excise law. It has to be understood in
the conceptual context of the manufacture and installation of a lift in a building. The lift
basically comprises components like lift car, motors, ropes, rails, etc. having their own
identity even prior to installation. Without installation, the lift cannot be mechanically
functional because it is a permanent fixture of the building having been so designed. These
aspects have been elaborately discussed in Otis Elevator (supra) by the High Court of
Bombay. Therefore, the installation of a lift in a building cannot be regarded as a transfer of a
chattel or goods but a composite contract. Hence, we unhesitatingly hold that the said
decisions are not of much help to the learned senior counsel for the State of Orissa.
49. Coming to the submissions of Mr. Venkataramani, we find that the fundamental facet of
the contention is based on the principle of ! deliverable state" and the intention of the
purchaser to obtain an identifiable product or goods and the said identified product comes into
being after the components are fixed at the site to make the lift usable. As submitted, the
rendering of service is only to make the lift deliverable. The aforesaid submission, on proper
appreciation, really rests on the bedrock of incidental or ancillary service involved in the
installation of lift. We shall deal with this aspect when we address more elaborately to the
dominant nature test and the incidental service in the context of clause 29A(b) of Article
366 of the Constitution.
50. As far as the submission put forth by the learned counsel for the State of Gujarat, it is
based on the edifice that the ! dominant nature test" is still available in view of the decisions
in Bharat Sanchar (supra) and Larsen and Toubro (supra). On a careful reading of the written
note of submission of the learned counsel for the State of Gujarat, we find that the learned
counsel have not appositely understood the ratio laid down in the aforesaid authorities.
Reliance was placed on para 45 of the decision in Bharat Sanchar (supra). It is noticeable that
the Court was analyzing the principle stated in Gannon Dunkerley-I (supra) and thereafter, in
para 49, which we have reproduced hereinabove, it has been clearly held that after the Forty
Sixth Amendment of the Constitution, the works contract which is covered under Clause
(29A)(b) of Article 366 of the Constitution is separable and may be subject to sales tax by the
State under Entry 54 of List-II and there is no question of the dominant nature test being
applicable. Thus, the submission is absolutely misconceived.
51. The submission of Dr. Manish Singhvi, learned counsel for the State of Rajasthan,
primarily rests on the base that decisions which have been discussed in the referral order, do
not lay down the correct law. In our considered opinion, the judgments rendered in the said
cases rested on the nature of the contract and the tests laid down in Gannon Dunkerley-I
(supra). We see no reason to hold that the said decisions do not lay down the correct law in
the context of works contract as it was understood and treated prior to the Forty Sixth
Amendment.
52. Coming to the stand and stance of the State of Haryana, as put forth by Mr. Mishra, the
same suffers from two basic fallacies, first, the supply and installation of lift treating it as a
contract for sale on the basis of the overwhelming component test, because there is a
stipulation in the contract that the customer is obliged to undertake the work of civil
construction and the bulk of the material used in construction belongs to the manufacturer, is
not correct, as the subsequent discussion would show; and second, the notification dated 17th
May, 2010 issued by the Government of Haryana, Excise and Taxation Department, whereby
certain rules of the Haryana Value Added Tax Rules, 2003 have been amended and a table
has been annexed providing for ! Percentages for Works Contract and Job Works" under the
heading ! Labour, service and other like charges as percentage of total value of the contract"
specifying 15% for fabrication and installation of elevators (lifts) and escalators, is self-
contradictory, for once it is treated as a composite contract invoking labour and service as a
natural corollary, it would be works contract and not a contract for sale. To elaborate, the
submission that the element of labour and service can be deducted from the total contract
value without treating the composite contract as a works contract is absolutely fallacious. In
fact, it is an innovative subterfuge. We are inclined to think so as it would be frustrating the
constitutional provision and, accordingly, we unhesitatingly repel the same.
53. As far as submissions of Mr. K.N. Bhat, learned senior counsel for the State of Karnataka,
and Mr. P.P. Malhotra, learned Additional Solicitor General, are concerned, as their stand is
that the decision in Kone Elevators (supra) is not correct, we have only noted that for
completeness.
54. Having dealt with the submissions advanced by the learned counsel for various States and
the learned Additional Solicitor General for the Union of India, we shall presently proceed to
deal with the correctness of the legal position as stated in Kone Elevators case. In the said
case, a three-Judge Bench took note of the submissions on behalf of the Department that the
main object of the contract in question was to sell the lifts and the works done by the assessee
for installation was incidental to the sale of lifts. It had also taken note of the submission that
the legislature has classified the commodity ! lift" under Entry 82 of the First Schedule to the
Andhra Pradesh General Sales Tax Act, 1957 keeping in mind that the word ! installation"
was ancillary to the ! sale" of lifts. The Court, while dealing with the differentiation between
! contract for sale" and ! works contract" , opined thus: -
! 5. It can be treated as well settled that there is no standard formula by which one can
distinguish a ! contract for sale" from a ! works contract" . The question is largely one of fact
depending upon the terms of the contract including the nature of the obligations to be
discharged thereunder and the surrounding circumstances. If the intention is to transfer for a
price a chattel in which the transferee had no previous property, then the contract is a contract
for sale. Ultimately, the true effect of an accretion made pursuant to a contract has to be
judged not by artificial rules but from the intention of the parties to the contract. In a ! contract
of sale" , the main object is the transfer of property and delivery of possession of the property,
whereas the main object in a ! contract for work" is not the transfer of the property but it is
one for work and labour. Another test often to be applied is: when and how the property of the
dealer in such a transaction passes to the customer: is it by transfer at the time of delivery of
the finished article as a chattel or by accession during the procession of work on fusion to the
movable property of the customer? If it is the former, it is a ! sale" ; if it is the latter, it is a
! works contract" . Therefore, in judging whether the contract is for a ! sale" or for ! work and
labour" , the essence of the contract or the reality of the transaction as a whole has to be taken
into consideration. The predominant object of the contract, the circumstances of the case and
the custom of the trade provide a guide in deciding whether transaction is a ! sale" or a ! works
contract" . Essentially, the question is of interpretation of the ! contract" . It is settled law that
the substance and not the form of the contract is material in determining the nature of
transaction. No definite rule can be formulated to determine the question as to whether a
particular given contract is a contract for sale of goods or is a works contract. Ultimately, the
terms of a given contract would be determinative of the nature of the transaction, whether it is
a ! sale" or a ! works contract" . Therefore, this question has to be ascertained on facts of each
case, on proper construction of terms and conditions of the contract between the parties."
55. After so stating, the three-Judge Bench adverted to the definitions in the State Act,
referred to the decision in Gannon Dunkerley-I (supra), placed reliance on the decision in
Hindustan Shipyard Ltd. (supra) and, analyzing the principle stated therein, observed thus:
-
! 9. In the case of Hindustan Shipyard Ltd. v. State of A.P. this Court held that if the thing to
be delivered has any individual existence before the delivery as the sole property of the party
who is to deliver it, then it is a sale. If the bulk of material used in construction belongs to the
manufacturer who sells the end product for a price, then it is a strong pointer to the conclusion
that the contract is in substance one for the sale of goods and not one for labour. However, the
test is not decisive. It is not the bulk of the material alone but the relative importance of the
material qua the work, skill and labour of the payee which also has to be seen. If the major
component of the end product is the material consumed in producing the chattel to be
delivered and skill and labour are employed for converting the main components into the end
products, the skill and labour are only incidentally used, the delivery of the end product by the
seller to the buyer would constitute a sale. On the other hand, if the main object of the
contract is to avail the skill and labour of the seller though some material or components may
be incidentally used during the process of the end product being brought into existence by the
investment of skill and labour of the supplier, the transaction would be a contract for work
and labour."
56. Applying the above test, the learned Judges referred to the terms of the contract and took
note of the fact that the entire onus of preparation and making ready of the site for installation
of lift was on the customer. It was agreed that under no circumstances would the assessee
undertake installation of lift if the site was not kept ready by the customer inasmuch as under
clause 4(g) of the ! Customers# Contractual Obligations" , the assessee reserved the right to
charge the customer for delay in providing the required facilities. The Court observed that
these facts clearly indicated that the assessee divided the execution of the contract into two
parts, namely, ! the work" to be initially done in accordance with the specifications laid down
by the assessee and ! the supply" of lift by the assessee. ! The work" part in the contract was
assigned to the customer and ! the supply" part was assigned to the assessee and the said
! supply" part included installation of lift. Therefore, the learned Judges further observed that
the contractual obligation of the assessee was only to supply and install the lift, while the
customer#s obligation was to undertake the work connected in keeping the site ready for
installation as per the drawings. The Court took note of the contractual obligations of the
customer and the fact that the assessee undertook exclusive installation of the lifts
manufactured and brought to the site in knocked-down state to be assembled by the assessee
and ruled that it was clear that the transaction in question was a contract of ! sale" and not a
! works contract" . The Court perused the brochure of the assessee Company and noticed that
the assessee was in the business of manufacturing of various types of lifts, namely, passenger
lifts, freight elevators, transport elevators and scenic lifts and a combined study of the above
models, mentioned in the brochure, indicated that the assessee had been exhibiting various
models of lifts for sale and the said lifts were being sold in various colours with various
capacities and variable voltage. From the further analysis, it is manifest that the Court took
into account the fact that it was open for a prospective buyer to place purchase order for
supply of lifts as per his convenience and choice and ruled that the assessee, on facts, satisfied
the twin requirements to attract the charge of tax under the 1957 Act, namely, that it carried
on business of selling the lifts and elevators and it had sold the lifts and elevators during the
relevant period in the course of its business. To strengthen the conclusion, it has been held
that the major component of the end product is the material consumed in producing the lift to
be delivered and the skill and labour employed for converting the main components into the
end product are only incidentally used.
57. From the aforesaid decision, it is perceptible that the three-Judge Bench has drawn
distinction between the contract for sale and works contract and, in that context, the essence
of the contract or reality of the transaction as a whole, regard being had to the predominant
object of the contract, the circumstances of the case and the custom of the trade have been
taken into consideration. In that context, the learned Judges have opined that it is not the bulk
of the material alone but the relevant importance of the material qua the work, skill and labour
of the payee which also has to be seen and if the major component of the end product is the
material consumed in producing the chattel to be delivered and skill and labour are employed
for converting the main components into the end product, the skill and labour are only
incidentally used and the delivery of the end product by the seller to the buyer would
constitute a sale. On the aforesaid principle, the three- Judge Bench has finally ruled that a
dealer carries on business of selling lifts and elevators and the major component of the end
product is the material consumed in producing the lift to be delivered and the skill and labour
employed for converting the main components into the end product are incidentally used and,
therefore, the delivery of the end product by the assessee qua the customer has to be
constituted as a sale and not a works contract.
58. To understand the reasons ascribed in the said decision, it is requisite to appreciate the
principle relating to the overwhelming component test or major component test. We have
already referred to the decision in Bharat Sanchar (supra) wherein it has been clearly stated
that the dominant nature test has no application. The said principle has been reiterated in
Larsen and Toubro (supra) by stating thus: -
! 87. It seems to us (and that is the view taken in some of the decisions) that a contract may
involve both a contract of work and labour and a contract of sale of goods. In our opinion, the
distinction between contract for sale of goods and contract for work (or service) has almost
diminished in the matters of composite contract involving both a contract of work/labour and
a contract for sale for the purposes of Article 366(29-A)(b). Now by legal fiction
under Article 366(29-A)(b), it is permissible to make such contract divisible by separating the
transfer of property in goods as goods or in some other form from the contract of work and
labour. A transfer of property in goods under clause (29-A)(b) of Article 366 is deemed to be
a sale of goods involved in the execution of a works contract by the person making the
transfer and the [pic]purchase of those goods by the person to whom such transfer is made.
For this reason, the traditional decisions which hold that the substance of the contract must be
seen have lost their significance. What was viewed traditionally has to be now understood in
light of the philosophy ofArticle 366(29-A)." xxx xxx xxx ! 97.5. A contract may involve both
a contract of work and labour and a contract for sale. In such composite contract, the
distinction between contract for sale of goods and contract for work (or service) is virtually
diminished.
97.6. The dominant nature test has no application and the traditional decisions which have
held that the substance of the contract must be seen have lost their significance where
transactions are of the nature contemplated in Article 366(29- A). Even if the dominant
intention of the contract is not to transfer the property in goods and rather it is rendering of
service or the ultimate transaction is transfer of immovable property, then also it is open to the
States to levy sales tax on the materials used in such contract if such contract otherwise has
elements of works contract. The enforceability test is also not determinative."
59. It is also necessary to state here that in Larsen and Toubro (supra), the question arose
whether taxing of sale of goods in an agreement for sale of flat which is to be constructed by
the developer-promoter is permissible under the Constitution. The three-Judge Bench opined
that though the ultimate transaction between the parties may be sale of the flat, yet it cannot
be said that the characteristics of works contract are not involved in that transaction because
the term ! works contract" is nothing but a contract in which one of the parties is obliged to
undertake or to execute the work and such an activity of construction bears all the
characteristics and elements of works contract. In that context, in paragraph 107 of the
decision, reliance was placed on Builders# Association (supra) wherein the contention that a
flat is sold as a flat and not as an aggregate of its component parts was negated on the ground
that the properties that were transferred to the owner in the execution of the works contract
are not goods involved in the execution of the works contract, but a conglomerate, that is, the
entire building which is actually constructed.
60. The aforesaid analysis has to be understood on the anvil of Article 366 (29A) of the
Constitution. In this regard, we may fruitfully reproduce a passage from Builders# Association
case: -
! % After the 46th Amendment the works contract which was an indivisible one is by a legal
fiction altered into a contract which is divisible into one for sale of goods and the other for
supply of labour and services. After the 46th Amendment, it has become possible for the
States to levy sales tax on the value of goods involved in a works contract in the same way in
which the sales tax was leviable on the price of the goods and materials supplied in a building
contract which had been entered into in two distinct and separate parts as stated above."
61. Explaining the said passage, the Constitution Bench, in Gannon Dunkerley-II (supra), has
opined thus:-
! This would mean that as a result of the Forty-sixth Amendment, the contract which was
single and indivisible has been altered by a legal fiction into a contract which is divisible into
one for sale of goods and other for supply of labour and services and as a result such a
contract which was single and indivisible has been brought on a par with a contract containing
two separate agreements."
62. It has been further observed therein as follows: -
! 36. If the legal fiction introduced by Article 366(29-A)(b) is carried to its logical end it
follows that even in a single and indivisible works contract there is a deemed sale of the
goods which are involved in the execution of a works contract. Such a deemed sale has all the
incidents of a sale of goods involved in the execution of a works contract where the contract
is divisible into one for sale of goods and the other for supply of labour and services."
63. Considered on the touchstone of the aforesaid two Constitution Bench decisions, we are
of the convinced opinion that the principles stated in Larsen and Toubro (supra) as
reproduced by us hereinabove, do correctly enunciate the legal position. Therefore, ! the
dominant nature test" or ! overwhelming component test" or ! the degree of labour and service
test" are really not applicable. If the contract is a composite one which falls under the
definition of works contracts as engrafted under clause (29A)(b) of Article 366 of the
Constitution, the incidental part as regards labour and service pales into total insignificance
for the purpose of determining the nature of the contract.
64. Coming back to Kone Elevators (supra), it is perceivable that the three-Judge Bench has
referred to the statutory provisions of the 1957 Act and thereafter referred to the decision in
Hindustan Shipyard Ltd. (supra), and has further taken note of the customers# obligation to do
the civil construction and the time schedule for delivery and thereafter proceeded to state
about the major component facet and how the skill and labour employed for converting the
main components into the end product was only incidental and arrived at the conclusion that it
was a contract for sale. The principal logic applied, i.e., the incidental facet of labour and
service, according to us, is not correct. It may be noted here that in all the cases that have
been brought before us, there is a composite contract for the purchase and installation of the
lift. The price quoted is a composite one for both. As has been held by the High Court of
Bombay in Otis Elevator (supra), various technical aspects go into the installation of the lift.
There has to be a safety device. In certain States, it is controlled by the legislative enactment
and the rules. In certain States, it is not, but the fact remains that a lift is installed on certain
norms and parameters keeping in view numerous factors. The installation requires
considerable skill and experience. The labour and service element is obvious. What has been
taken note of in Kone Elevators (supra) is that the company had brochures for various types
of lifts and one is required to place order, regard being had to the building, and also make
certain preparatory work. But it is not in dispute that the preparatory work has to be done
taking into consideration as to how the lift is going to be attached to the building. The nature
of the contracts clearly exposit that they are contracts for supply and installation of the lift
where labour and service element is involved. Individually manufactured goods such as lift
car, motors, ropes, rails, etc. are the components of the lift which are eventually installed at
the site for the lift to operate in the building. In constitutional terms, it is transfer either in
goods or some other form. In fact, after the goods are assembled and installed with skill and
labour at the site, it becomes a permanent fixture of the building. Involvement of the skill has
been elaborately dealt with by the High Court of Bombay in Otis Elevator (supra) and the
factual position is undisputable and irrespective of whether installation is regulated by
statutory law or not, the result would be the same. We may hasten to add that this position is
stated in respect of a composite contract which requires the contractor to install a lift in a
building. It is necessary to state here that if there are two contracts, namely, purchase of the
components of the lift from a dealer, it would be a contract for sale and similarly, if separate
contract is entered into for installation, that would be a contract for labour and service. But, a
pregnant one, once there is a composite contract for supply and installation, it has to be
treated as a works contract, for it is not a sale of goods/chattel simpliciter. It is not chattel sold
as chattel or, for that matter, a chattel being attached to another chattel. Therefore, it would
not be appropriate to term it as a contract for sale on the bedrock that the components are
brought to the site, i.e., building, and prepared for delivery. The conclusion, as has been
reached in Kone Elevators (supra), is based on the bedrock of incidental service for delivery.
It would not be legally correct to make such a distinction in respect of lift, for the contract
itself profoundly speaks of obligation to supply goods and materials as well as installation of
the lift which obviously conveys performance of labour and service. Hence, the fundamental
characteristics of works contract are satisfied. Thus analysed, we conclude and hold that the
decision rendered in Kone Elevators (supra) does not correctly lay down the law and it is,
accordingly, overruled.
65. Ordinarily, after so stating, we would have directed the matter to be listed before the
appropriate Division Bench. However, it is not necessary to do so in this batch of cases
inasmuch as the writ petitions have been filed either against the show-cause notices where
cases have been reopened or against the orders of assessment framed by the assessing officers
and civil appeals filed against certain assessment orders or affirmation thereof which are
based on the decision of the three-Judge Bench in Kone Elevators case. Considering the
factual matrix, we direct that the show-cause notices, which have been issued by taking
recourse to reopening of assessment, shall stand quashed. The assessment orders which have
been framed and are under assail before this Court are set aside. It is necessary to state here
that where the assessments have been framed and have attained finality and are not pending in
appeal, they shall be treated to have been closed, and where the assessments are challenged in
appeal or revision, the same shall be decided in accordance with the decision rendered by us.
66. The writ petitions and the civil appeals are disposed of with no order as to costs.
J U D G M E N T :-Fakkir Mohamed Ibrahim Kalifulla, J.

1. I had the benefit of reading the illuminating judgment of my brother Justice Dipak Misra.
With respect, I state that I am not able to subscribe to the views and conclusions of His
Lordship. Therefore, I wish to record my reasoning and conclusions holding that the
manufacture, supply and installation of lifts are to be treated as a contract of $Sale# in the
following paragraphs.
51. Having heard the learned Counsel for the Petitioners and the Respondents and having
considered the material papers placed before us and the various decisions relied upon by the
Petitioners as well as the Respondents, at the foremost, what has to be first ascertained is
whether the contract between the Petitioner and its Purchaser would fall within the definition
of $Works Contract# in order to attract clause (b) to Sub- Article (29-A) of Article 366 of the
Constitution. In fact, if an answer to the said question can be held in the affirmative, then that
would axiomatically lead to an answer in favour of the Petitioner. Though, several decisions,
wherein various tests have been highlighted, were cited before us and also reference to
various provisions of different statutes, as well as the Finance Act provisions were brought to
our notice, in my view, before adverting to those tests and the provisions, in the first instance,
it will have to be found out as to what exactly was the nature of contract, as between the
Petitioner and its Purchasers.
. 52. At the outset, even before examining the terms of the contract, it will have to be stated
that the only business of the Petitioner is manufacture and supply of LIFTS/ELEVATORS. In
fact, neither Mr. Salve nor any other Counsel appearing for the Petitioners submitted before
us that the business of the Petitioner included any other activity along with the manufacture
and supply of LIFTS/ELEVATORS.
56. When examining the claim of the Petitioner that what was agreed by the Petitioner in the
contract with its Purchaser is nothing but a $Works Contract#, such a claim should be explicit
and must be discernable from the contract itself. When in the Contract the element of $Works
Contract# is totally absent and what was agreed between the parties was only supply of its
elevator for a fixed price, mere mentioning of the expression $Works Contract# or by making
reference to the basis for fixing the cost of labour involved in the manufacture or by simply
using the expression $Works Contract# without any scope of performing any work at the
command of the Purchaser, in my opinion, the Petitioner#s claim to hold its activity as a
$Works Contract# cannot be accepted on mere asking. In other words, the contract must
disclose in no uncertain terms that it was one for carrying out $the work# and the supply of
the materials were part of such agreement to carry out any such specified work. Here, it is the
other way around, the contract is only for supply of LIFTS/ELEVATOR and whatever
element of works which the Petitioner claims to carry out in effecting the supply is virtually
very insignificant as compared to the element of sale, which is paramount as found in the
terms of the contract. The whole of the preparatory work for the erection of the LIFT is that
of the Purchaser and the Petitioner merely goes to the Purchaser#s premises and fixes the
various parts of the LIFT in the slots created for it.
63. With this, the $Conditions of the Contract# can be referred to, which contains as many as
27 conditions. These conditions have been elaborately discussed in paragraph 18 of this
judgment, to which I once again bestow my serious consideration, in order to appreciate
whether, these conditions at least throw any light to state that the contract can be brought
within the expression $Works Contract#.
65. A reference to the various other conditions in the contract also do not suggest that the
consideration under the Contract to be borne by the Purchaser, has got anything to do with
the installation part of the LIFT. On the other hand, the terms have downright been agreed
upon between the parties only to mandate the Purchaser to pay 90% of the contracted amount
on mere signing of the contract and to pay the balance 10% within 30 days of the Petitioner#s
offer to commission the LIFT and even if the said event of commissioning of the LIFT fails
to occur due to any reason not attributable to the Petitioner or beyond its control, within 90
days of the materials made ready for dispatch at the premises of the Petitioner. In that
situation also what all the Petitioner will have to ensure is that such components of the
LIFTS are ready for dispatch. At the risk of repetition, it can be stated that if on the date of
the signing of the contract 90% payment is made and within the contract period i.e 52 weeks,
the Petitioner is able to show that the whole of the components of the LIFTS are ready for
dispatch at its premises, the Purchaser is bound to pay the balance 10% also within 90 days
from the date of such availability of materials for dispatch without any other stipulation as to
such equipments or components being delivered at the spot of the Purchaser for its
installation. If the conditions of the contract relating to payment are discernable to that effect,
it can only be stated that the contract of the Petitioner with the Purchaser is virtually for the
manufacture of the materials and for its absolute readiness to supply those materials and
nothing more. The sum and substance of the conditions of the contract de hors the other
clauses is only to that effect.
68. Having considered the above terms of the contract threadbare, I am convinced that it can
only be concluded that this contract is only one for the manufacture and supply of the
LIFT/ELEVATOR and the installation though mentioned in the contract, has very
insignificant relation to the consideration agreed upon between the parties. In any event, as I
have found that the contract of supply and installation are divisible in very many aspects, it is
difficult to hold that it is a $Works Contract#. Therefore, it will have to be held that the
manufacture, supply and erection of LIFT/ELEVATOR agreed upon by the Petitioner to any
of its customers, would only fall within the expression $Sale# and can never be called as
$Works Contract#. Once that is the conclusion that can be made based on the contractual
terms as agreed between the Petitioner and its customers, the application of Article
366(29A)(b) cannot be made and does not in any way support the contentions raised by the
Petitioner.
140. In light of the above discussions, it will have to be held that even after the 46th
Amendment, if Article 366 (29A)(b) is to be invoked, as a necessary concomitant, it must be
shown that the terms of the contract would lead to a conclusion that it is a $Works Contract#.
In other words, unless a contract is proved to be a $Works Contract# by virtue of the terms
agreed as between the parties, invocation of Article 366 (29A)(b) of the Constitution, cannot
be made. Alternatively, if the terms of the contract disclose or lead to a definite conclusion
that it is not a $Works Contract#, but one of outright sale, the same will have to be declared as
a $Sale# attracting the provisions of the relevant sales tax enactments. Therefore, based on the
conclusions arrived at and having applied the above principles to the case on hand, and
having regard to the nature of the terms of the contract displayed, it will have to be held that
the manufacture, supply and installation of LIFTS/ELEVATORS comes under the definition
of $Sale# and not $Works Contract# and the decision in Kone Elevators (India) Pvt. Ltd.
(supra) has been correctly decided. The Reference is, therefore, answered on the above terms.
ORDER
Keeping in view the conclusions of the majority, expressed in the judgment of Dipak Misra,
J., it is held that the decision rendered in State of A.P. v. Kone Elevators[(2005) 3 SCC 389]
does not correctly lay down the law and it is accordingly overruled.
2. It is directed that the show-cause notices, which have been issued by taking recourse to
reopening of assessment, shall stand quashed. The assessment orders which have been framed
and are under assail before this Court are set aside. It is necessary to state here that where the
assessments have been framed and have attained finality and are not pending in appeal, they
shall be treated to have been closed, and where the assessments are challenged in appeal or
revision, the same shall be decided in accordance with the decision rendered by us.
3. The writ petitions and the civil appeals are disposed of with no order as to costs.
State of Karnataka and Ors. v. Pro Lab and Ors.
AIR 2015 SC 1098
Constitutional validity of Entry 25 of Schedule VI to the Karnataka Sales Tax
Act, 1957 (hereinafter referred to as the 'Act') is the subject matter of the present
appeal. It is the third endeavour to resurrect this entry, when on the first two
occasions, the steps taken by the State were declared as impermissible. Even this time,
the High Court has dumped the amendment as unconstitutional. However, the reasons
advanced by the High Court in all three rounds are different. While traversing through the
historical facts leading to the issue at hand, we shall be referring to the same for clear
understanding of the controversy involved.
2.This entry was inserted in the said Act by an amendment which came into effect
from 01.07.1989, thereby providing levy of tax for processing and supply of photographs,
photo prints and photo negatives. The validity of this entry was challenged by means of a
writ petition filed in the High Court of Karnataka. The High Court in that case titled
M/s Keshoram Surindranath Photo – Bag (P) Ltd. and others v. Asstt.Commissioner of
, declared the said Entry to
Commercial Taxes (LR), City Division, Bangalore and others
be unconstitutional. State of Karnataka had challenged that judgment by filing special
leave petition in this Court. This special leave petition was dismissed vide order dated
20.04.2000, following its earlier judgment in the case of Rainbow Colour Lab and Another
v. State of Madhya Pradesh and others2. The reason for holding Entry 25 as
unconstitutional was that the contract of processing and supplying of photographs, photo
frames and photo negatives was predominantly a service contract with negligible
component of goods/material and, therefore, it was beyond the competence of State
Legislature given in Entry 25 of List II of Schedule VII of theConstitution to impose sales tax
on such a contract.
3.It so happened that within one year of the judgment in Rainbow Colour Lab's case,
three Judges Bench of this Court rendered another judgment in the case of ACC Ltd. v.
, wherein it expressed its doubts about the correctness of the law
Commissioner of Customs
laid down in Rainbow. We may point out at this stage itself that during the course of
hearing of the present appeal, there was a hot debate on the question as to whether
judgment in Rainbow Colour Lab's case was over-ruled in the case of ACC Ltd. case or
not. This aspect will be gone into by us at the appropriate stage.
4.After the judgment in ACC Ltd. case, a circular instruction was issued by the
Commissioner of Commercial Taxes to the assessing authorities to proceed with the
assessments as per Entry 25. This became the subject matter of challenge before the High
Court of Karnataka in the case of M/s Golden Colour Labs and Studio and others v. The
. The High Court allowed the writ petition vide
Commissioner of Commercial Taxes
judgment dated 30.07.2003 holding that a provision once declared unconstitutional
State of Karnataka and Ors. v. Pro Lab and Ors. 199
could not be brought to life by mere administrative instructions. However, at the same
time, the Court observed that Entry 25, Schedule VI to the Act, declared ultra vires the
Constitution in Keshoram's case, cannot be revived automatically, unless there is re-
enactment made by the State Legislature to that effect.
5.The appropriate procedure indicated in the aforesaid judgment emboldened the
State to come out with the required legislative amendment. This paved way for the
enactment of the Karnataka State Laws Act, 2004 by the State Legislature that came
into force with effect from 29.01.2004. Section 2(3) of the said amendment re-introduced
Entry 25 in identical terms, as it appeared earlier, and that too with retrospective effect
that is w.e.f. 01.07.1989, when this provision was inserted by the amendment made in the
year 1989 for the first time.
6.As was expected, this amendment was again challenged before the Karnataka High
Court by the respondent herein as well as many others. Vide impugned judgment dated
19.08.2005, the High Court has again declared the said amendment as unconstitutional. It
would be pertinent to mention that the HighCourt has not taken into consideration the
events that followed after Rainbow Colour Lab's case, namely, over-ruling of the said
judgment in ACC Ltd. Since the basis of Keshoram's case decided in the first calm by the
High Court was same as given in Rainbow Colour Lab, obviously Keshoram also no
longer remains a good law. However, the reason given by the High Court, this time, is
that the ratio laid down in Keshoram's case continues to be binding on the State of
Karnataka. As per the High Court, ! the re-enactment of the said provision is possible in the
event of a subsequent declaration made by the Hon'ble Supreme Court re-considering or
pronouncing a similar question in terms of the findings in para 23 of the Golden Colour
Lab's case. This is, thus, the chequered history of the litigation amply demonstrating as to
how the State of Karnataka is making desperate attempts to ensure that provision in the
form of Entry 25 in the said Act survives, empowering the State Government to levy sales
tax for processing and supply of photographs, photo prints and photo negatives.
8. We may also record at this point itself that legislative competence of the State to insert
the aforesaid Entry is primarily challenged on the ground that the State Government is
not empowered to levy sales tax on the processing and supplying of photographs which
is predominantly in the nature of ! service" and the element of ! goods" therein was minimal.
The respondents argue that the State Legislature does not have any power to impose
tax on ! services" inasmuch as the sales tax can be levied only on ! sale of goods" as
permitted under Article 366 (29-A) of the Constitution of India. Challenge is also laid on
the retrospective effect given to the said Entry by arguing that such a move is
violative of Article 265 of the Constitution of India as subjecting the assessees to such a
tax from retrospective effect is confiscatory in nature and, therefore, unconstitutional.
9. We have projected, in nutshell, the chequered history of the litigation by referring to
the judgments of this Court pronouncedfrom time to time which have a direct bearing on
the outcome of this appeal. Therefore, we are simply required to do a diagnostic of the sorts
in revisiting these judgments.
200 State of Karnataka and Ors. v. Pro Lab and Ors.
10. In order to ensure that we avoid unnecessary burdening of judgments with the
earlier case laws, it is safe to charter the journey by initiating discussion about the
Constitution Bench judgment in the case of Gannon Dunkerley and Co. and othersv. State
That case pertained to the execution of the Works Contracts.
of Rajasthan and others.
Question involved was as to whether there could be levy of sales tax on the sale of
goods involved in the execution of such Works Contracts. The assessee, viz. Gannon
Dunkerley, was carrying on business as Engineering Contractors and executing the
contracts pertaining to construction of building projects, dams, roads and structural
contracts of all kinds. In respect of sanitary contracts, 20 per cent was deducted for
labour and balance was taken as a
turnover of the assessee for the purposes of levying
sales tax by the assessing authority. Likewise, in respect of other contracts, 30 per cent
was deducted for labour and on balance amount, sales tax was levied treating it as
turnover of the assessee under the Madras General Sales Tax Act, 1939. The question
which arose for consideration was as to whether there was any sale of goods. The
Constitution Bench held that building contract was in the nature of Works Contract and there
was no element of sale of goods in such a contract. In its opinion, in a building contract
where the agreement between the parties was that the contractor should construct the building
according to the specifications contained in the agreement and in consideration received
payment as provided therein, there was neither a contract to sell the materials used in the
construction nor the property passed therein as movables. It was held that in a
building contract, which was one entire and indivisible, there was no sale of goods and it
was not within the competence of the Provincial State Legislature to impose tax on the
supply of the materials used in such a contract treating it as a sale. The Court, thus,
proceeded on the basis that a building contract was indivisible and composite wherein
there was no sale of goods and, therefore, the State Legislature was not competent to
impose sales tax on the supply of material used in such a contract treating it as asale.
Since, Entry 48 of the List II of Schedule VII in the Government of India Act, 1935 was
under consideration that empowers State Government to levy tax ! sale of goods" , the
Court held that the expression ! sale of goods" in the said Entry is to be given the same
meaning as given under the Sale of Goods Act, 1930. That would mean that it would be sale
of goods only if the two essential ingredients, namely: (i) an agreement to sell movables
for a price, and (ii) property passing therein persuant to that agreement, are satisfied.
11. After the aforesaid Constitution Bench judgment, the Parliament amended the
th Amendment) Act, 1982 which received
Constitution of India by the Constitution (46
the assent of the President of India on 02.02.1983. By this amendment, clause (29-A)
was inserted in Article 366 of the Constitution, which reads as under:
! [(29A) ! tax on the sale or purchase of goods" includes -
• a tax on the transfer, otherwise than in pursuance of a contract, of property in any
goods for cash, deferred payment or other valuable consideration;
• a tax on the transfer of property in goods (whether as goods or in some other

form) involved in the execution of a works contract;
• a tax on the delivery of goods on hire-
• purchase or any system of payment by instalments;
• a tax on the transfer of the right to use any goods for any purpose (whether or
not for a specified period) for cash, deferred payment or other valuable
consideration;
• a tax on the supply of goods by any unincorporated association or body of
persons to a member thereof for cash, deferred payment or other valuable
consideration;
• a tax on the supply, by way of or as part of any service or in any other manner
whatsoever, of goods, being food or any other article for human consumption or
any drink (whether or not intoxicating), where such supply or service, is for
cash, deferred payment or other valuable consideration; and such transfer, delivery
or supply of any goods shall be deemed to be a sale of those goods by the
person making the transfer, delivery or supply and a purchase of those goods by
the person to whom such transfer, delivery or supply is made;]"
12.The challenge laid to the aforesaid amendment was repelled by this Court in the
6. In
case of Builders Association of India and others v. Union of India and others
this judgment, the Constitution Bench specifically noted that the purport and object of the
aforesaid amendment was to enlarge the scope of the expression ! tax of sale for
purchase of goods" wherever it occurs in the Constitution so that it may include within
its ambit any transfer, delivery or supply of goods that may take place under any of the
transactions referred to in sub-clauses (a) to (f). To put it tersely, with the aforesaid
amendment, the States are empowered to make the Works Contract divisible and tax ! sale of
goods" component. It clearly follows therefrom that the restricted meaning which was
assigned to the expression ! sale of goods" in Gannon Dunkerley's case is undone by the
aforesaid amendment. The interpretation which is to be assigned to clause 29-A of Article
366 is stated with remarkable clarity in M/s Larsen Toubro and another v. State of
Karnataka and another7, by a three Judge Bench in the following words:
! 60. It is important to ascertain The meaning of Sub-clause (b) of Clause 29A of
Article 366 of the Constitution. As the very title of Article 366 shows, it is the definition
clause. It starts by saying that in the Constitution unless the context otherwise requires the
expressions defined in that article shall have the meanings respectively assigned to them
in the article. The definition of expression "tax on sale or purchase of the goods" is contained
in Clause (29A). If the first part of Clause 29A is read with Sub-clause
(b) along with latter part of this clause, it reads like this: tax on the sale or
purchaser of the goods" includes a tax on the transfer of property in goods (whether as
goods or in some other form) involved in the execution of a works contract and such
transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the
person making the transfer, delivery or supply and a purchase of those goods by the person
to whom such transfer, delivery or supply is made. The definition of "goods" in Clause 12 is
inclusive. It includes all materials, commodities and articles. The expression, 'goods'
has a broader meaning than merchandise. Chattels or movables are goods within the
meaning of Clause 12. Sub-clause (b) refers to transfer of property in goods (whether as
goods or in some other form) involved in the execution of a works contract. The
expression "in some other form" in the bracket is of utmost significance as by this
expression the ordinary understanding of the term 'goods' has been enlarged by bringing
within its fold goods in a form other than goods. Goods in some other form would
thus mean goods which have ceased to be chattels or movables or merchandise and
become attached or embedded to earth. In other words, goods which have by incorporation
become part of immovable property are deemed as goods. The definition of 'tax on the sale
or purchase of goods' includes a tax on the transfer or property in the goods as goods or
which have lost its form as goods and have acquired some other form involved in the
execution of a works contract.
61.Viewed thus, a transfer of property in goods under Clause 29A(b) of Article 366 is
deemed to be a sale of the goods involved in the execution of a works contract by the
person making the transfer and the purchase of those goods by the person to whom such
transfer is made.
62.The States have now been conferred with the power to tax indivisible contracts of
works. This has been done by enlarging the scope of "tax on sale or purchase of goods"
wherever it occurs in the Constitution. Accordingly, the expression "tax on the sale or
purchase of goods" in Entry 54 of List II of Seventh Schedule when read with the
definition Clause 29A, includes a tax on the transfer of property in goods whether as
goods or in the form other than goods involved in the execution of works contract. The
taxable event is deemed sale.
63.Gannon Dunkerley-I (supra) and few other decisions following Gannon Dunkerley-I
(supra) wherein the expression "sale" was given restricted meaning by adopting the
definition of the word "sale" contained in the Sale of Goods Act has been undone by the
Forty-sixth Constitutional Amendment so as to include works contract. The meaning of
Sub-clause (b) of Clause 29A of Article 366 of the Constitution also stands settled by the
Constitution Bench of this Court in Builders' Association (supra). As a result of Clause
29A of Article 366, tax on the sale or purchase of goods may include a tax on the transfer
in goods as goods or in a form other than goods involved in the execution of the
works contract. It is open to the States to divide the works contract into two separate
contracts by legal fiction: (i) contract for sale of goods involved in the works contract and
(ii) for supply of labour and service. By the Forty-sixth Amendment, States have been
empowered to bifurcate the contract and to levy sales tax on the value of the material in
the execution of the works contract."
13. Notwithstanding some clear and pertinent observations made in by the Constitution
Bench in Builders Association's case, while upholding the Constitutional validity of
46th Amendment, there was some ambiguity in the judicial thought on one particular
aspect which was also one of the basis of judgment in Gannon Dunkerley's case. In
Gannon Dunkerley's case, the Constitution Bench had laid down ! dominant intention test"
to find out as to whether a particular contract involved transfer of property in goods. The
Court was of the opinion that if the dominant intention of a contract was not to transfer the
property in goods, but it was Works Contract, or for that matter, a contract in the
nature
of rendering of services, even if a part of it related to the transfer of goods, that would be
immaterial and no sales tax on the said part could be levied, going by the principle of
dominant intention behind such a contract, which was in the nature of Works
Contract in the contract relating to construction of buildings.
14.As pointed out above, in Gannon Drunkerley's case, the Court also held that such
a contract was indivisible. No doubt, insofar as indivisibility facet of the contract is
th Constitutional Amendment. However, in
concerned, the same was done away by 46
subsequent cases, the Court grappled with the issue as to whether the principle of
dominant intention still prevailed. This very aspect came up for discussion before two
Judge Bench of this Court in Rainbow Colour Lab's case. The Court held the view that
the division of contract after 46th Amendment can be made only if the Works Contract
involved a dominant intention to transfer the property in goods and not in contracts
where the transfer in property takes place as an incident of contract of service. This
aspect is highlighted by the said Bench in the following manner:
! 10. Since this was a judgment rendered prior to the coming into force of the 46th
Constitutional Amendment, we will have to consider whether the said Amendment has
brought about any change so as to doubt the legal position enunciated in the above case.
It is true that by the 46th Constitutional Amendment by incorporating Clause 29A(b) in
Article 366, the definition of the words "sale" and "works contract" have been enlarged.
The State of Madhya Pradesh has also brought about a consequent change in the
definition of the word 'sale' in Section of its Sales Tax Act but it is to be noticed that in the
said State Act the expression 'works contract' has not been specifically defined.
11. Prior to the Amendment of Article 366, in view of the judgment of this Court
In State of Madras v Gannon Dunkerley and Co., the State could not levy sales-tax on
sale of goods involved in a work's contract because the contract was indivisible. All that
has happened In law after the 46th Amendment and the judgment of this Court in Builders
case (supra) is that it is now open to the States to divide the works contract into two
separate contracts by a legal fiction (i) contract for sale of goods involved in the said
works contract and (it) for supply of labour and service. This division of contract under
the amended law can be made only if the works contract involved a dominant intention to
transfer the property in goods and not in contracts where the transfer in property
takes place as an incident of contract of service. The Amendment, referred to above, has
not empowered the State to indulge in microscopic division of contracts involving the
value of materials used incidentally in such contracts. What is pertinent to ascertain in this
connection is what was the dominant intention of the contract. Every contract, be it a
service contract or otherwise, may involve the use of some material or the other in
execution of the said contract. State is not empowered by the amended law to impose
sales-tax on such incidental materials used in such contracts. This is clear from the
judgment of this Court in Hindustan Aeronautics Ltd. v. State of Karnataka [1984]2SCR248,
where it was held thus: Mere passing of property in an article or commodity during the
course of performance of the transaction in question does not render the transaction to be
transaction of sale. Even in a contract purely of work or service, it is possible that articles
may have to be used by the person executing the work, and property in such articles or
materials may pass to the other party. That would not necessarily convert the contract
into one of sale of those materials. In every case, the Court would have to find out
what was the primary object of the transaction and the intention of the parties while entering
into it...."
15. While considering the validity of Entry 25 in Schedule VI of the Act and holding
it to be unconstitutional, as beyond the powers of the State Legislature, the High Court of
Karnataka in Keshoram's case examined in detail the business which was carried out by
the petitioner in the said case and the process that was involved in processing and supplying
of photographs, photoframes or photonegatives. By that time, 46th Constitutional
Amendment had already been effected which was also taken note of by the High Court.
However, the High Court took the view that the main object of the work undertaken
by the petitioner in that case was not the transfer of a chattle as a chattle and, in fact, it
was a contract of work and labour and there was no sale of goods involved.
16. It is manifest from the above that the rationale behind the judgment was to look into
the main object of the work undertaken by the assessee and concluding that since it was
essentially a
Works Contract and transfer of photopaper upon which the positive prints were taken
were simply incidental and ancilliary to the main transactions, that was in the nature of
service contract, and, therefore, Entry 25 was beyond the scope of Article 366 of the
Constitution of India. Apparently, the High Court applied dominant intention test while
holding Entry 25 as unconstitutional. By the time, Special Leave Petition against this
judgment came up for consideration before this Court on 20.04.2000, the judgment in
the case of Rainbow Colour Lab's case had just been rendered observing that
dominant intention test was still valid notwithstanding insertion of clause 29-A in Article
th Amendment. Following this judgment, SLP was dismissed.
366 of the Constitution by 46
17.Within one year of the said judgment, this very issue again cropped up for
discussion and decision before a three Judge Bench in ACC Ltd. case. The issue arose
under the Customs Act, 1962 viz. whether the drawings, designs etc. relating to machinery
or industrial technology were goods which were leviable to duty of customs on their
transaction value at the time of their report. However, since the issue related to meaning that
has to be given to the expression ! goods" , the case law on this aspect including Gannon
Dunkerley & Kame's case were specifically taken note of and discussed. The Court also
noticed the effect of 46th Amendment and in the process commented upon the
judgment in the Rainbow Colour Lab's case. The Court specifically remarked that Gannon
Dunkerley & Kame's judgments were of pre 46th Amendment era which had no
relevance after the said Constitutional amendment. It can be discerned from the
following discussion contained therein:
! 21. All the aforesaid decisions related to the period prior to the Forty-sixth
Amendment of the Constitution when Article 366(29A) was inserted. At that time in the
case of a works contract it was held that the same could not be split and State
Legislature had no legislative right to seek to levy sales tax on a transaction which was not a
sale simpliciter of goods. Rainbow Colour Lab & Anr. Vs. State of M.P. and Others,
(2000) 2 SCC 385 was, however, a case relating to the definition of the word "sale" in
the M.P. General Sales Tax Act, 1958 after its amendment consequent to the insertion of
Article 366(29A). The question there was whether the job rendered by a photographer in
taking photographs, developing and printing films would amount to works contract for the
purpose of levy of sales tax. This Court held that the work done by the photographer was
only a service contract and there was no element of sale involved. After referring to
earlier decisions of this Court, it was observed at page 391 as follows:
"15. Thus, it is clear that unless there is sale and purchase of goods, either in fact or
deemed, and which sale is primarily intended and not incidental to the contract, the
State cannot impose sales tax on a works contract simpliciter in the guise of the expanded
definition found in Article 366(29A)(b) read with Section 2(n) of the State Act. On facts
as we have noticed that the work done by the photographer which as held by this Court in
Kame case is only in the nature of a service contract not involving any sale of goods, we
are of the opinion that the stand taken by the respondent State cannot be sustained."
22.Even though in our opinion the decisions relating to levy of sales tax would have,
for reasons to which we shall presently mention, no application to the case of levy of
customs duty, the decision in Rainbow Colour Lab case (supra) requires consideration. As a
result of the Forty-sixth Amendment, sub-article 29A of Article 366 was inserted as a result
whereof tax on the sale or purchase of goods was to include a tax on the transfer of
property in goods (whether as goods or in some other form) involved in the execution
of a works contract. Taking note of this amendment this Court in Rainbow Colour Lab at page
388-389 observed as follows:
"11. Prior to the amendment of Article 366, in view of the judgment of this Court in
State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd. the States could not levy sales
tax on sale of goods involved in a works contract because the contract was indivisible. All
that has happened in law after the 46th Amendment and the judgment of this Court in
'Builders' case is that it is now open to the States to divide the works contract into
two separate contracts by a legal fiction: (i) contract for sale of goods involved in the
said works contract, and (ii) for supply of labour and service. This division of contract
under the amended law can be made only if the works contract involved a dominant
intention to transfer the property in goods and not in contracts where the transfer in
property takes place as an incident of contract of service. The amendment, referred
to above, has not empowered the State to indulge in a microscopic division of contracts
involving the value of materials used incidentally in such contracts. What is pertinent to
ascertain in this connection is what was the dominant intention of the contract. Every
contract, be it a service contract or otherwise, may involve the use of some material or the
other in execution of the said contract. The State is not empowered by the amended law to
impose sales tax on such incidental materials used in such contracts.."
23.In arriving at the aforesaid conclusion the Court referred to the decision of this
Court in Hindustan Aeronautics Ltd. vs. State of Karnataka (1984) a SCC 706 and
Everest Copier (supra). But both these cases related to pre-Forty-sixth Amendment era
where in a works contract the State had no jurisdiction to bifurcate the contract and
impose sales tax on the transfer of property in goods involved in the execution of a works
contract. The Forty-sixth Amendment was made precisely with a view to empower the
State to bifurcate the contract and to levy sales tax on the value of the material involved
in the execution of the works contract, notwithstanding that the value may represent a
small percentage of the amount paid for the execution of the works contract. Even if the
dominant intention of the contract is the rendering of a service, which will amount to a
works contract, after the Forty-sixth Amendment the State would now be empowered to levy
sales tax on the material used in such contract. The conclusion arrived at in Rainbow
Colour Lab case, in our opinion, runs counter to the express provision contained in
Article 366 (29A) as also of the Constitution Bench decision of this Court in Builders'
Association of India and Others vs. Union of India and Others (1989) 2 SCC 645."
[emphasis supplied]
18.It is amply clear from the above and hardly needs clarification Bench judgment
in Rainbow Colour Lab's case did not lay down the correct law as it referred to pre
46th Amendment judgments in arriving at its conclusions which had lost their validity. The
Court also specifically commented that after 46th Amendment, State is empowered to levy
sales tax on the material used even in those contracts where ! the dominant intention of
the contract is the rendering of a service, which will amount to a Works Contract" .
19.In view of the above, the argument of the respondent assessees that ACC Ltd. case
did not over-rule Rainbow Colour Lab's case is, therefore, clearly misconceived. In fact, we
are not saying so for the first time as a three member Bench of this Court in M/s Larsen
and Toubro has already stated that ACC Ltd. had expressly over-ruled Rainbow Colour
th
Lab while holding that dominant intention test was no longer good test after 46
Constitutional Amendment. We may point out that learned counsel for the respondent
assessees took courage to advance such an argument emboldened by certain observations
made by two member Bench in the case of C.K. Jidheesh v. Union of India8, wherein
the Court has remarked that the observations in ACC Ltd. were merely obiter. In
Jidheesh, however, the Court did not notice that this very argument had been rejected earlier
9.
in Bharat Sanchar Nigam Ltd. v. Union of India
20. In M/s Larsen and Toubro, the Court, after extensive and elaborate discussion,
once again specifically negated the argument predicated on dominant intention test having
regard to the statement of law delineated in ACC Ltd. and Bharat Sanchar
Nigam Ltd. cases.
The reading of following passages from the said judgment is indicative of providing
complete answer to the arguments of the respondent assessees herein:
! 64. Whether contract involved a dominant intention to transfer the property in goods,
in our view, is not at all material. It is not necessary to ascertain what is the dominant
intention of the contract. Even if the dominant intention of the contract is not to transfer
the property in goods and rather it is the rendering of service or the ultimate transaction
is transfer of immovable property, then also it is open to the States to levy sales tax
on the materials used in such contract if it otherwise has elements of works contract.
The view taken by a two-Judge Bench of this Court in Rainbow Colour Lab (supra) that the
division of the contract after Forty-sixth Amendment can be made only if the works
contract involved a dominant intention to transfer the property in goods and not in
contracts where the transfer of property takes place as an incident of contract of service
is no longer good law, Rainbow Colour Lab (supra) has been expressly overruled by a
three-Judge Bench in Associated Cement.
65.Although, in Bharat Sanchar, the Court was concerned with Sub-clause (d) of Clause
29A of Article 366 but while dealing with the question as to whether the nature of
transaction by which mobile phone connections are enjoyed is a sale or service or both, the
three-Judge Bench did consider the scope of definition in Clause 29A of Article366.
With reference to Sub-clause (b) it said: "Sub-clause (b) covers cases relating to works
contract. This was the particular fact situation which the Court was faced with in Gannon
Dunkerley-I and which the Court had held was not a sale. The effect in law of a transfer
of property in goods involved in the execution of the works contract was by this amendment
deemed to be a sale. To that extentthe decision in Gannon Dunkerley-I was directly
overcome". It then went on to say that all the Sub-clauses of Article 366 (29A) serve to
bring transactions where essential ingredients of a 'sale' as defined in the Sale of Goods Act,
1930 are absent, within the ambit of purchase or sale for the purposes of levy of sales tax.
66.It then clarified that Gannon Dunkerley-I survived the Forty-sixth Constitutional
Amendment in two respects. First, with regard to the definition of "sale" for the purposes of
the Constitution in general and for the purposes of Entry 54 of List II in particular
except to the extent that the clauses in Article 366(29A) operate and second, the
dominant nature test would be confined to a composite transaction not covered by Article
366(29A). In other words, in Bharat Sanchar, this Court reiterated what was stated by
this Court in Associated Cement that dominant nature test has no application to a
composite transaction covered by the clauses of Article 366(29A). Leaving no ambiguity, it
said that after the Forty-sixth Amendment, the sale element of those contracts which are
covered by six Sub-clauses of Clause 29A of Article 366 are separable and may be
subjected to sales tax by the States under Entry 54 of List II and there is no question of the
dominant nature test applying.
67.In view of the statement of law in Associated Cement and Bharat Sanchar, the
argument advanced on behalf of the Appellants that dominant nature test must be applied
to find out the true nature of transaction as to whether there is a contract for sale of goods or
the contract of service in a composite transaction covered by the clauses of Article
366(29A) has no merit and the same is rejected.
68.In Gannon Dunkerley-II, this Court, inter alia, established the five following
propositions:
(i)as a result of Forty-sixth Amendment the contract which was single and indivisible
has been altered by a legal fiction into a contract which is divisible into one for sale of
goods and the other for supply of labour and service and as a result of such contract
which was single and indivisible has been brought on par with a contract containing two
separate agreements;
(ii)if the legal fiction introduced by Article 366(29A)(b) is carried to its logical end,
it follows that even in a single and indivisible works contract there is a deemed sale of
the goods which are involved in the execution of a works contract. Such a deemed sale has
all the incidents of the sale of goods involved in the execution of a works contract where
the contract is divisible into one for sale of goods and the other for supply of labour and
services;
(iii)in view of Sub-clause (b) of Clause 29A of Article 366, the State legislatures are
competent to impose tax on the transfer of property in goods involved in the execution of
works contract. Under Article 286(3)(b), Parliament has been empowered to make a law
specifying restrictions and conditions in regard to the system of levy, rates or incidents of
such tax. This does not mean that the legislative power of the State cannot be exercised till
the enactment of the law under Article 286(3)(b) by the Parliament. It only means that in
the event of law having been made by Parliament under Article 286(3)(b), the exercise of
the legislative power of the State under Entry 54 in List II to impose tax of the nature
referred to in Sub- clauses (b), (c) and (d) of Clause (29A) of Article 366 would be
subject to restrictions and conditions in regard to the system of levy, rates and other
incidents of tax contained in the said law; (iv) while enacting law imposing a tax on sale
or purchase of goods under Entry 54 of the
State List read with Article 366(29A)(b), it is permissible for the State legislature to
make a law imposing tax on such a deemed sale which constitutes a sale in the course of
the inter- state trade or commerce under Section 3 of the Central Sales Tax Act or outside
under Section 4 of the Central Sales Tax Act or sale in the course of import or export
under Section 5 of the Central Sales Tax Act; and (v) measure for the levy of tax
contemplated by Article 366(29A)(b) is the value of the goods involved in the execution
of a works contract. Though the tax is imposed on the transfer of property in goods
involved in the execution of a works contract, the measure for levy of such imposition is
the value of the goods involved in the execution of a works contract. Since, the taxable
event is the transfer of property in goods involved in the execution of a works contract and
the said transfer of property in such goods takes place when the goods are incorporated
in the works, the value of the goods which can constitute the measure for the levy of the tax
has to be the value of the goods at the time of incorporation of the goods in works and not
the cost of acquisition of the goods by the contractor.
69.In Gannon Dunkerley-II, Sub-section (3) of Section 5 of the Rajasthan Sales Tax
Act and Rule 29(2)(1) of the Rajasthan Sales Tax Rules were declared as unconstitutional
and void. It was so declared because the Court found that Section 5(3) transgressed the
limits of the legislative power conferred on the State legislature under Entry 54 of the
State List. However, insofar as legal position after Forty- sixth Amendment is concerned,
Gannon Dunkerley-II holds unambiguously that the States have now legislative power to
impose tax on transfer of property in goods as goods or in some other form in the
execution of works contract.
70.The Forty-sixth Amendment leaves no manner of doubt that the States have power
to bifurcate the contract and levy sales tax on the value of the material involved in the
execution of the works contract. The States are now empowered to levy sales tax on the
material used in such contract. In other words, Clause 29A of Article 366 empowers the
States to levy tax on the deemed sale."
21. To sum up, it follows from the reading of the aforesaid judgment that after insertion
of clause 29-A in Article 366, the Works Contract which was indivisible one by legal
fiction, altered into a contract, is permitted to be bifurcated into two: one for ! sale of
goods" and other for ! services" , thereby making goods component of the contract
exigible to sales tax. Further, while going into this exercise of divisibility, dominant
intention behind such a contract, namely, whether it was for sale of goods or for services,
is rendered otiose or immaterial. It follows, as a sequitur, that by virtue of clause 29-A of
Article 366, the State Legislature is now empowered to segregate the goods part of the
Works Contract and impose sales tax thereupon. It may be noted that Entry 54, List II
of the Constitution of India empowers the State Legislature to enact a law taxing sale of
goods. Sales tax, being a subject-matter into the State List, the StateLegislature
has the competency to legislate over the subject.
22.Keeping in mind the aforesaid principle of law, the obvious conclusion would be
that Entry 25 of Schedule VI to the Act which makes that part of processing and
supplying of photographs, photo prints and photo negatives, which have ! goods"
component exigible to sales tax is constitutionally valid.
23.For being classified as Works Contract the transaction under consideration has
to be a composite transaction involving both goods and services. If a transaction
involves only service i.e. work and labour then the same cannot be treated as Works
Contract. It was contended that processing of photography was a contract for service
simplicitor with no elements of goods at all and, therefore, Entry 25 could not be saved
by taking shelter under clause 29-A of Article 366 of the Constitution. For this
proposition, umbrage under the judgment in B.C. Kame's case was sought to be taken
wherein this Court held that the work involving taking a photograph, developing the
negative or doing other photographic work could not be treated as contract for sale of
goods. Our attention was drawn to that portion of the judgment where the Court held that
such a contract is for use of skill and labour by the photographer to bring about desired
results inasmuch as a good photograph reveals not only the asthetic sense and
artistic faculty of the photographer, it also reflects his skill and labour. Such an
argument also has to be rejected for more than one reasons. In the first instance, it needs to
be pointed out that the judgment in Kame's case was rendered before the 46th Constitutional
Amendment. Keeping this in mind, the second aspect which needs to be noted is that the
dispute therein was whether there is a contract of sale of goods or a contract for
service. This matter was examined in the light of law prevaling at that time, as declared in
Dunkerley's case as per
which dominant intention of the contract was to be seen and
further that such a contract was treated as not divisible. It is for this reason in BSNL and
M/s Larsen and Toubro cases, this Court specifically pointed out that Kame's case would
not provide an answer to the issue at hand. On the contrary, legal position stands settled
by the Constitution Bench of this Court in Kone Elevator India Pvt. Ltd. v. State of
10. Following observations in that case are apt for this purpose:
Tamil Nadu and Ors.
! On the basis of the aforesaid elucidation, it has been deduced that a transfer of property
in goods under Clause (29A)(b) of Article 366 is deemed to be a sale of goods involved in
the execution of a Works Contract by the person making the transfer and the purchase of
those goods by the person to whom such transfer is made. One thing is significant to
note that in Larsen and Toubro (supra), it has been stated that after the constitutional
amendment, the narrow meaning given to the term ! works contract" in Gannon
Dunkerley-I (supra) no longer survives at present. It has been observed in the said case
that even if in a contract, besides the obligations of supply of goods and materials and
performance of labour and services, some additional obligations are imposed, such contract
does not cease to be works contract, for the additional obligations in the contract would
not alter the nature of the contract so long as the contract provides for a contract for
works and satisfies the primary description of works contract. It has been further held
that once the characteristics or elements of works contract are satisfied in a contract, then
irrespective of additional obligations, such contract would be covered by the term ! works
contract" because nothing in Article 366(29A)(b) limits the term works contract" to
contract for labour and service only."
24. Another attack on the insertion of Entry 25 pertained to retrospectivity given to
this provision. It was sought to be argued that amendment to the Act was made by
Karnataka State Laws Act, 2004 which came into force w.e.f. 29.01.2004 and insertion of
Entry 25 with retrospective effect i.e. w.e.f. 01.07.1989 was not permissible. To put it
otherwise, the argument was that even if Entry 25 is held to be valid, it should be made
prospective i.e.,w.e.f. 29.01.2004.
25. We are afraid, even this argument does not cut any ice. The first thing in this regard
which is to be kept in mind is that Entry 25 was inserted for the first time by
th Constitutional
amendment of the Act w.e.f. 01.07.1989. This amendment was post 46
Amendment. However, the High Court of Karnataka declared thesaid Entry to be
unconstitutional and the SLP was also dismissed. Undoubtedly, it was because of the
judgment in Rainbow Colour Lab, which judgment was declared as not a good law in
ACC Ltd. (which position is repeated in BSNL as well as M/s Larsen and Toubro cases). Thus,
the very basis on which Entry 25 of Schedule VI was declared as unconstitutional, has
been found to be erroneous. In such circumstances, the legislature will be justified in
enacting the law from the date when such a law was passed originally and that date is
01.07.1989 in the instant case. We have to keep in mind the fact that on the basis of this
amendment, there have been assessments made by the assessing authorities. This was
admitted by the learned counsel for the respondents at bar at the time of the arguments.
27. We would also like to refer to the case of Hiralal Ratanlal v. State of U.P.15,
wherein it was observed ! the source of the legislative power to levy sales or purchase tax on
goods is Entry 54 of the List II of the Constitution. It is well settled that subject to
Constitutional restrictions a power to legislate includes a power to legislate prospectively as
well as retrospectively. In this regard legislative power to impose tax also includes
within itself the power to tax retrospectively."
28. We would like to point out at this stage that the High Court in the impugned
judgment has not dealt with the mater in its correct perspective. The reason given by
the High Court in invalidating Entry 25 is that this provision was already held
unconstitutional by the said High Court in Keshoram's case against which the SLP was
also dismissed and in view of that decision, it was not permissible for the legislature to re-
enact the said Entry by applying a different legal principle. According to us, this was
clearly an erroneous approach to deal with the issue and the judgment of the High
Court is clearly unsustainable. The High Court did not even deal with various facets of
the issue in their correct perspective, in the light of subsequent judgments of this Court
with specific rulings that Rainbow Colour Lab is no longer a good law.
29.The impugned judgment of the High Court is accordingly set aside, the present
appeal is allowed and as a result thereof, the writ petitions filed by the respondents in the
High Court are dismissed holding that Entry 25 of Schedule VI of the Act is
constitutionally valid. There shall, however, be no order as to costs.
*****
Sundaram Finance Ltd. v. State of Kerala
(1966) 2 SCR 828, 841 : AIR 1966 SC 1178
J.C. SHAH, J. - On September 29, 1958 the Sales Tax Officer, 1st Circle, Ernakulam, issued
a notice calling upon the appellants to file returns of their turnover from sales in the course of
business and to secure registration as dealers under the Travancore-Cochin General Sales Tax
Act 11 of 1125 M.E. and to furnish details of the transactions of sale with parties in the State
of Kerala in the years 1955-56, 1956-57 and 1957-58. A similar notice was issued by the
Sales Tax Officer on March 3, 1962 in respect of the transactions within the State for the
years 1958-59 and 1959-60. The appellants contended that they were not liable to be assessed
under the Act. They contended that they were mere financiers and that they did not enter into
any transactions of sale of goods with parties within the State of Kerala and that they were not
! dealers" within the meaning of the Act. The Sales Tax Officer by orders dated March 25,
1962 and July 6, 1962 held that the transactions between the appellants and certain parties
within the State of Kerala were sales within the meaning of the Act and the appellants were
dealers liable to be assessed under the Act. The Sales Tax Officer accordingly reiterated his
demand upon the appellants to file returns of their turnover in respect of sales for the five
years in question along with details of all transactions in the State and ! to produce evidence to
prove the correctness and completeness of their returns" .
14. The appellants then moved the High Court of Kerala under Article 226 of the
Constitution for writs of certiorari quashing the proceedings of the Sales Tax Officer and for
writs of prohibition restraining that Officer from taking further proceedings against the
appellants under his orders dated March 25, 1962 and July, 6, 1962. The High Court of Kerala
rejected these petitions upholding the view of the Sales Tax Officer that on the transactions
between the appellants and their customers sales tax was payable under the Travancore-
Cochin General Sales Tax Act. With certificate granted by the High Court under Article
133(1)(a) of the Constitution, these appeals are preferred.
15. The appellants are a company incorporated under the Indian Companies Act, 1913,
and have their registered office in Madras. The Company carries on business of financing
purchases of motor vehicles on the security of those vehicles. The manner in which these
transactions were effected is briefly this. A customer desirous of purchasing a motor-vehicle,
but unable to pay the price to the dealer, agrees to purchase the vehicle, and makes part
payment of the price to the dealer. He then approaches the appellants and requests that a loan
be advanced to him. On the appellants# agreeing to grant a loan, the customer executes nine
documents - (1) an application requesting the appellants to grant a loan of a stated amount on
the security of the motor-vehicle; (2) a ! sale letter" reciting that the customer had on the date
of the application for loan sold to the appellants the motor vehicle: (3) a bill which recites that
for the amount mentioned in the ! sale letter" and received in full, the customer has sold to the
appellants the vehicle belonging to the customer: (4) a receipt for the amount on the security
of the motor-vehicle: (2) a ! sale letter" reciting appellants: (5) an agreement called the hire-
purchase agreement under which the appellants agree to let out to the customer and the
customer agrees to take on hire the motor-vehicle for a specified term subject to
determination in conditions mentioned therein: (6) a promissory-note agreeing to pay the
224 Sundaram Finance Ltd. v. State of Kerala
difference between the price of the vehicle and the amount paid by the customer to the dealer,
and interest therein at the stipulated rate: (7) a letter from the customer requesting the
appellants to pay to the dealer the amount agreed to be advanced to him: (8) a letter addressed
to the appellants agreeing and undertaking to keep the vehicle, on the security of which the
loan was granted, insured against ! comprehensive risks" : and (9) a letter addressed to the
Motor Vehicles Authorities intimating that the motor-vehicle ! is the subject of hire-purchase
agreement between" the customer ! as owner" and the appellants, and requesting the
Authorities to ! make a note of the hire-purchase agreement" in the registration certificate
standing in the name of the customer. The scheme for financing the purchase of the vehicle is
therefore that the customer purchases the vehicle from the dealer directly and gets it
registered in his name. At his request the appellants agree to advance the balance of the price
remaining to be paid, and pay it to the dealer on the customer#s executing a promissory-note
for repayment of the amount, a hire-purchase agreement and other related documents. On
repayment of the amount stipulated to be paid, the vehicle becomes the sole and absolute
property of the customer.
16. The relevant terms of the hire-purchase agreement may now be set out. In the
preamble of the agreement, it is recited that the agreement is between the appellants to be
described as ! the owners" the customer to be described as ! the Hirer" and ! the Guarantor" ,
who guarantees due performance and observance by the customer of all the clauses and
covenants of the agreement and agrees to pay on demand any monies due or which may
become payable to the owners under the agreement either by way of hire expenses or
damages, repairs, replacements or other supplies. By the first clause it is recited that the
owners (the appellants) will let and the hirer (the customer) will take on hire the motor
vehicle for a specified number of calendar months subject to determination as mentioned in
the agreement. Clause 2 sets out the conditions of hiring. Thereby the customer agrees to pay
rent to the appellants punctually; to take proper care of the vehicle and keep it in good
condition and to keep it insured for its full value; to pay all rents, rates, taxes payable by him
in respect of the premises where the vehicle shall for the time being be garaged and all licence
fees, insurance premium and other duties payable in respect of the said vehicle; to keep the
vehicle in his sole custody and possession; and to permit the appellants to inspect the vehicle
at all reasonable times during the hiring; not to cause, permit, allow or suffer any person to
acquire any lien on the vehicle; not to cause, permit or allow or suffer the vehicle to become
liable to distress, execution or any other process levied or issued against the customer; and not
to assign, sell, pledge, charge, underlet, lend or otherwise part with the possession, custody or
beneficial interest in the vehicle of the customer therein under the agreement without the
consent of the owners. By clause 3 all monies payable to the customer by any insurer for loss
or damage to the motor-vehicle are assigned to the owners. Clause 4 sets out the conditions in
which the agreement is to stand determined without any notice to the customer.
17. Those conditions are:
(a) failure to pay any of the hiring instalments within the stipulated time;
(b) customer becoming insolvent or compounding with his creditors;
Sundaram Finance Ltd. v. State of Kerala 225
(c) customer pledging or selling or attempting to pledge or sell or otherwise

alienate or transfer the vehicle;
(d) customer suffering any act or thing whereby or in consequence of which the
vehicle may be distrained, seized or taken in execution under legal process;
(e) customer breaking or failing to perform or observe any conditions.
On the determination of the agreement all the instalments previously paid by the customer
stand forfeited to the owners who shall thereupon be entitled to seize the vehicle and to sue
for all the instalments due and for damages for breach of the agreement. Under clause 5 the
customer has the option at any time to determine the agreement by delivering up the vehicle
at his own cost to the owners, and by clause 6 on the customer paying the entire amounts due
under the second schedule, the vehicle becomes the sole and absolute property of the
customer. By clause 7 it is provided that if the appellants seize the vehicle and take possession
of it under clause 4, or if the customer returns it under clause 5, the customer shall remain
liable to the appellants for arrears of the amount of hire upto the date of such seizure or return.
Under clause 8 it is agreed that the customer shall maintain registration of the vehicle in his
own name, provided that the customer shall transfer the registration in the name of the
appellants whenever required to do so by them, and especially when the customer commits a
breach of any of the conditions of the agreement.
18. According to the Sales Tax Authorities, between the date on which the customer
agreed to purchase a vehicle and the date on which he became full owner of the vehicle
without any encumbrance, three sale transactions were interposed: a sale by the dealer to the
customer; a sale by the customer to the appellants under the ! sale letter" referred to earlier;
and a sale by virtue of clause 6 of the hire-purchase agreement. It is common ground that the
first transaction is taxable under the appropriate Sales Tax Act. On behalf of the State of
Kerala it is conceded that the second transaction is not taxable, but it is so because the
customer is ordinarily not a dealer within the meaning of the Act, but they contend that
inasmuch as under that transaction the appellants become transferees of the rights of the
customer in the vehicle under the sale letter, when by the operation of clause 6 of the hire-
purchase agreement the rights of the appellants are extinguished, there results a sale in favour
of the customer which is taxable under the Act. We are in this case concerned with the
exigibility to tax of what the State of Kerala contends is a sale resulting from the payment of
all the instalments under the hire-purchase agreement.
19. The appellants submit that execution of a ! sale letter" by the customer acknowledging
sale of the vehicle to them does not create in them any right of ownership, the ! sale letter"
being merely one of a set of documents under which arrangement for granting a loan and for
ensuring repayment of the money advanced by the appellants is made. The appellants say that
they do not become owners of the vehicle under the ! sale letter" , that the true effect of the
transaction on the execution of the nine documents is to hypothecate the vehicle in favour of
the appellants, that the vehicle continues to remain in the ownership of the customer, and that
under clause 6 of the hire-purchase agreement there is extinction of encumbrance and not a
transfer of title which may be called a sale taxable under the Travancore-Cochin General
Sales Tax Act.
20. The Travancore-Cochin General Sales Tax Act 11 of 1125 M.E. was brought into
force in May 1950. The State authorities had, it is conceded, no power to enact a statute for
levying tax on a transaction which does not conform to the definition of $sale# within the
meaning of the Indian Sale of Goods Act: State of Madras v. Gannon Dunkerley & Co.
(Madras) Ltd. The Travancore-Cochin General Sales Tax Act by Section 2(j) define ! sale" as
follows:
! $sale# with all its grammatical variations and cognate expressions means every
transfer of the property in goods by one person to another in the course of trade or
business for cash or for deferred payment or other valuable consideration and
includes also a transfer of property in goods involved in the execution of a works
contract, but does not include a mortgage, hypothecation, charge or pledge;
Explanation (1).- A transfer of goods on the hire-purchase or other instalment

system of payment shall, notwithstanding the fact that the seller retains the title in the
goods as security for payment of the price, be deemed to be a sale."
It is in the light of this definition that the liability to tax of the transactions resulting from
clause 6 of the agreement falls to be determined. If, by the operation of clause 6, title to the
vehicle is, under an existing contract to sell, transferred to the customer for a price, the
transaction is a sale, and is taxable.
21. The appellants are financiers and their business is to advance loans on favourable
terms on the security of vehicles. This is effected by obtaining a promissory-note for
repayment of the amount advanced, and a hire-purchase agreement which provides a
mechanism for recovery of the amount. It is true that a ! sale letter" is obtained from the
customer, but the consideration for the sale letter is only the balance remaining payable to the
dealer, after giving credit against the price of the vehicle the amount paid by the customer.
The application for a loan, and the letter addressed to the appellants undertaking to insure the
vehicle expressly mention that a loan is asked for and granted on the security of the motor-
vehicle under the hire-purchase agreement. It is the customer who insures the vehicle, and in
the books of the Motor Vehicle Authorities he remains, with the consent of the appellants,
owner of the vehicle. Undue importance to the acknowledgment of sale in the ! sale letter"
and the recital of sale in the bill and in the receipt cannot therefore be attached. These
documents - ! sale letter" , bill and receipt - must be read with the application for granting a
loan on the security of the vehicles, the letter in which the customer requests the appellants to
pay the balance of the price remaining to be paid by him to the dealer, the promissory-note
executed by him for that amount, the undertaking to insure the vehicle, and intimation to the
Motor Vehicles Authorities to make note of the hire-purchase agreement.
22. The hire-purchase agreement executed by the customer undoubtedly contains several
onerous covenants. The customer has to pay all rents, rates, taxes and other outgoings
regularly, to take proper care of the vehicle, to get it insured, to keep it fully repaired, and not
to assign, sell, pledge, charge, underlet, lend or otherwise to create any lien thereon. The hire-
purchase agreement is liable to be determined if any of the eventualities mentioned in clause 4
of the agreement happens and the appellants have the right to seize the vehicle. These
covenants are only material in considering the true intention of the parties entering into the
hire-purchase agreement: it is irrelevant that in a given case these covenants may not be
enforced by a Court in a dispute arising between the appellants and the customer, or relief
may be granted on the ground that they contain penal clauses. In considering the true
intention of the parties, the terms of clause 6 of the hire-purchase agreement are important: it
is stipulated thereby that ! Upon the Hirer (customer) paying the entire amount due under
Second Schedule herein, the said vehicle shall become the sole and absolute property of the
Hirer" . The intention clearly disclosed thereby is that on payment of the amount due at any
time after the hire-purchase agreement, the vehicle would be free from encumbrance. It is also
to be noted that the agreement does not contemplate exercise of an option on payment of a
nominal sum of money as is to be found in other hire-purchase agreements. Execution of the
promissory-note, the hire-purchase agreement and the other documents, in our judgment,
indicate that it was the intention of the parties not to transfer any interest in the vehicle by the
customer to the appellants: it was intended to give security by hypothecating the vehicle in
favour of the appellants and for ensuring repayment of the loan advanced that the customer
submitted to the various onerous conditions of the hire-purchase agreement.
23. A hire-purchase agreement is normally one under which an owner hires goods to
another party called the hirer and further agrees that the hirer shall have an option to purchase
the chattel when he has paid a certain sum, or when the hirer-rental payments have reached
the hire purchase price stipulated in the agreement. But there are variations when a financier
is interposed between the owner of the goods and the customer. The agreement, ignoring
variations of detail, broadly takes one or the other of two forms: (1) when the owner is
unwilling to look to the purchaser of goods to recover the balance of the price, and the
financier who pays the balance undertakes the recovery. In this form, goods are purchased by
the financier from the dealer, and the financier obtains a hire-purchase agreement from the
customer under which the latter becomes the owner of the goods on payment of all the
instalments of the stipulated hire and exercising his option to purchase the goods on payment
of a nominal price. The decision of this Court in K.L. Johar & Company v. Deputy
Commercial Tax Officer [AIR 1965 SC 1082] dealt with a transaction of this character. (2) In
the other form of transactions, goods are purchased by the customer, who in consideration of
executing a hire-purchase agreement and allied documents remains in possession of the
goods, subject to liability to pay the amount paid by the financier on his behalf to the owner
or dealer, and the financier obtains a hire-purchase agreement which gives him a license to
seize the goods in the event of failure by the customer to abide by the conditions of the hire-
purchase agreement.
24. The true effect of a transaction may be determined from the terms of the agreement
considered in the light of the surrounding circumstances. In each case, the Court has, unless
prohibited by statute, power to go behind the documents and to determine the nature of the
transaction, whatever may be the form of the documents. An owner of goods who purports
absolutely to convey or acknowledges to have conveyed goods and subsequently purports to
hire them under a hire-purchase agreement is not estopped from proving that the real bargain
was a loan on the security of the goods. If there is a bona fide and completed sale of goods,
evidenced by documents, anterior to and independent of a subsequent and distinct hiring to
the vendor, the transaction may not be regarded as a loan transaction, even though the reason
for which it was entered into was to raise money. If the real transaction is a loan of money
secured by a right of seizure of the goods, the property ostansibly passes under the documents
embodying the transaction, but subject to the terms of the hiring agreement, which become
part of the buyer#s title, and confer a licence to seize. When a person desiring to purchase
goods and not having sufficient money on hand borrows the amount needed from a third
person and pays it over to the vendor, the transaction between the customer and the lender
will unquestionably be a loan transaction. The real character of the transaction would not be
altered if the lender himself is the owner of the goods and the owner accepts the promise of
the purchaser to pay the price or the balance remaining due against delivery of goods. But a
hire-purchase agreement is a more complex transaction. The owner under the hire-purchase
agreement enters into a transaction of hiring out goods on the terms and conditions set out in
the agreement, and the option to purchase exercisable by the customer on payment of all the
instalments of hire arises when the instalments are paid and not before. In such a hire-
purchase agreement there is no agreement to buy goods; the hirer being under no legal
obligation to buy has an option either to return the goods or to become its owner by payment
in full of the stipulated hire and the price for exercising the option. This class of hire-purchase
agreements must be distinguished from transactions in which the customer is the owner of the
goods and with a view to finance his purchase he enters into an arrangement which is in the
form of a hire-purchase agreement with the financier, but in substance evidences a loan
transaction, subject to a hiring agreement under which the lender is given the license to seize
the goods.
25. A few illustrative cases decided by the Courts in England, which do not import
complications arising from the Bills of Sale Act, 1878, and the Hire Purchase Act, 1938, may
be briefly noticed. In Re Watson Ex parte Official Receiver in Bankruptcy [(1890) 25 QBE
27], it was held that in adjudging the true nature of a transaction purporting to be a sale of
personal chattels, followed by a hiring and purchase agreements, whereby the vendor agreed
to hire the chattels from the purchaser and to pay quarterly sums for such hire until a certain
amount was paid, when the chattels were to become again the property of the vendor, and
power was given to the purchaser to take possession of the chattels on default of payment, the
form of the transaction cannot be given undue importance. The Court held that no sale or
hiring of the chattel was intended, the object in truth being to create a security for a loan of
money to the supposed vendor from the supposed purchaser. The transaction was therefore
one of loan. Lord Esher, M.R., observed at p. 37:
! (W)hen the transaction is in truth merely a loan transaction, and the lender is to be
repaid his loan and to have a security upon the goods, it will be unavailing to cloak
the reality of the transaction by a sham purchase and hiring. It will be a question of
fact in each case whether there is a real purchase and sale complete before the hiring
agreement. If there be such a purchase and sale in fact and afterwards the goods are
hired, the case is not within the Bills of Sale Act.
The document itself must be looked at as part of the evidence; but it is only part,
and the Court must look at the other facts, and ascertain the actual truth of the case."
27. In Polsky v. S. And A. Services [(1951) 1 All ELR 185], the plaintiff purchased a
motor-car and gave a cheque for the price. Being unable to make arrangement for the cheque,
he entered into a transaction with the defendants who carried on the business of financing the
purchase of motor-cars. Though the plaintiff had purchased the motor-car, and merely sought
a loan, the transaction between him and the defendants was carried out by means of
documents used by the defendants when financing purchase of motor-cars, and they purported
to buy the motor-car from the plaintiff and to let it out to him under a hire-purchase
agreement. The plaintiff then brought an action for a declaration claiming that hire-purchase
agreement was void under the Bills of Sale Act, 1882. Lord Goddard, C.J., in upholding the
claim of the plaintiff observed at p. 188:
! A considerable number of cases were cited ... on the point which may, I think,
be conveniently divided into two lines of authority. There is on the one hand, the
class of cases, of which Yorkshire Railway Wagon Co. v. Maclure - (1882) Chapter
D. 309 - and British Railway Traffic & Electric Co. v. Kahn - (1921) W.N. 52 - are
good examples, where the transaction in question has been held to be a genuine sale
followed by a hire-purchase agreement, and, therefore, unaffected by the Bills of Sale
Acts, and, on the other hand, there is the class, which includes Re Watson, Ex P.
Official Receiver in Bankruptcy - (1890) 25 Q.B.D. 27 - and Madell v. Thomas &
Co. - (1891) 1 Q.B. 230 - where the court has held, on facts not very dissimilar from
those in the present case, that the real transaction was one of loan, and, therefore, it
was avoided by reason of the Acts. There is no doubt, I think, as to the deciding
principle. The Court has to determine whether the transaction in question is a genuine
sale by the original owner of the chattel to the person who is finding the money and a
genuine re-letting by the latter to the original owner on hire-purchase terms, or
whether the transaction, though taking that form, is nothing more than a loan of
money on the security of the goods.... The Court is not to look merely at the
documents. It must discover what the real transaction was.
! ... the court is to look through or behind the documents, and to get at the reality;
and, if in reality the documents are only given as a security for money, then they are
bills of sale."
28. In the light of these principles the true nature of the transactions of the appellants may
now be stated. The appellants are carrying on the business of financiers: they are not dealing
in motor-vehicles. The motor-vehicle purchased by the customer is registered in the name of
the customer and remains at all material times so registered in his name. In the letter taken
from the customer under which the latter agrees to keep the vehicle insured, it is expressly
recited that the vehicle has been given as security for the loan advanced by the appellants. As
a security for repayment of the loan, the customer executes a promissory-note for the amount
paid by the appellants to the dealer of the vehicle. The so-called ! sale letter" is a formal
document which is not made effective by registering the vehicle in the name of the appellants
and even the insurance of the vehicle has to be effected as if the customer is the owner. Their
right to seize the vehicle is merely a licence to ensure compliance with the terms of the hire-
purchase agreement. The customer remains qua the world at large the owner and remains in
possession, and on condition of performing the covenants has a right to continue to remain in
possession. The right of the appellants may be extinguished by payment of the amount due to
them under the terms of the hire-purchase agreement even before the dates fixed for payment.
The agreement undoubtedly contains several onerous covenants, but they are all intended to
secure to the appellants recovery of the amount advanced. We are accordingly of the view
that the intention of the appellants in obtaining the hire-purchase and the allied agreements
was to secure the return of loans advanced to their customers, and no real sale of the vehicle
was intended by the customer to the appellants. The transactions were merely financing
transactions. The appeals will therefore be allowed.
******
British Paints (India) Ltd. v. Union of India
AIR 1971 CAL. 393
The Union of India invited tenders for the supply of paints of the description compound
recolouring Olive Green Scamic 314 for faded tents to Specification Ind/32/7037. The
plaintiff offered a tender. The laboratory did not consider the sample to be up to the mark, but
the higher authorities of the Defence Department accepted this tender, and placed an order
with the plaintiff for supply of 500 Cwt. of this article and the price was fixed at Rs. 256/-
F.O.R. Calcutta per Cwt. According to the contract the goods were to be inspected by the
Inspector at Calcutta, and if he was satisfied that these were up to the mark, then the same
could be dispatched by the plaintiff on receipt of the inspection notes. The original date of
delivery was fixed on 15th of October, 1952, but the plaintiff stated that it might not be in a
position to do so as it had to indent some of the ingredients from U.K., and on their successive
applications for extension of time, time for supply was finally extended up to the 30th of
April 1953. 9 Cwt. of this article was inspected on the 16th October 1952 and accepted and
dispatched on the 5th December 1952. The second lot consisting of 59½ Cwt. was inspected
on the 16th March 1953, and was rejected on the 22nd April 1953, and again offered after
some reconditioning on the 30th April 1953, and rejected on the 19th May 1953. The third lot
of 150 Cwt. was inspected on the 30th March 1953 and accepted and dispatched on the 17th
April 1953. The fourth lot consisting of 188 Cwt. was inspected on the 13th April 1953, and
was rejected on the 7th May 1953. The last lot consisting of 93½ Cwt. together with 59½
Cwt. constituting the second lot, were inspected on the 30th April 1953, and rejected on the
19th May 1953. Therefore, the defendant had accepted 159 Cwt., and the balance of 341 Cwt.
constitutes the disputed item. The defendant terminated this contract on the ground that the
delivery was not made by the 30th April by its letter dated the 1st of May 1953. Before the
receipt of this letter, Mr. Bogh the Technical Director of the plaintiff company went over to
Kanpur to find out how the test was carried on there and he was given every opportunity to
see that on the 1st of May 1953. On his coming back, the letter of cancellation of the contract
was gone into, and the plaintiff requested the Kanpur authorities where the tests were to be
done, to enable its chemist Mr. Ghosh to come and see for himself why the goods were
rejected. Mr. Ghosh came there in the third week of May 1953, and with the help of Drs.
Ranganathan and Balakrishnan he saw how the test was carried on. The reconditioned sample
which he had brought was tested by the authorities at Kanpur, at the request of the plaintiff by
its letter the 22nd May 1953, and on the 30th May the Kanpur authorities wrote to the
Inspector in Calcutta, with copy to the plaintiff, that his reconditioned sample was ! found to
conform to the quoted particulars in all respects and is therefore acceptable." There was
further correspondence between the plaintiff and the defendant re: the acceptance of the goods
but the defendant by its letter dated the 30th September 1953 intimated that its decision as
conveyed by its letter dated the 1st of May 1953 was final and cannot be altered and further
that the stores offered by the plaintiff ! were not in accordance with the terms of the Contract
for quality." Thereafter the plaintiff served the usual notices on the defendant and the matter
had also been referred to arbitration. The Arbitrators however found that under the terms of
the contract, the Inspector#s decision was to be final and binding on the parties, and, as such,
held that they had no jurisdiction to enter into this question of the rejection of the supplies on
232 British Paints (India) Ltd. v. Union of India
the ground that this did not conform to the required specification. The main ground of the
plaintiff is that the test made by the Kanpur authorities was not in accordance with the
agreement inasmuch as they ! were carrying out the test by comparing the supplied material
with a tinted slip prepared some months ago with the paint from the said sample No. 30/100"
and not in the same manner and at the same time as provided for in the Agreement. It was
further alleged that the Inspector carried out the inspection capriciously and not in accordance
with the said specification. The plaintiff further alleged that the materials were specially
manufactured for the purpose of this tender and could not be resold in the market and claimed
a sum of Rupees 88,496/- as damages inclusive of storing charges on the basis of the price at
which the plaintiff agreed to supply together with a sum of Rs. 5,228/- by way of interest.
The total claim was thus laid at Rs. 93,724/-. The Union of India contested the suit alleging
that time was of the essence of the contract and further that the tests at Kanpur were carried
on in accordance with the rules, and that the Inspector#s reports were not at all arbitrary, and
that the supplies were not accepted as the same were not of the requisite quality. The learned
Subordinate Judge at Alipore held in favour of the defendant on all the points involved and
dismissed the suit. Hence this appeal.
S.K. CHAKRAVARTI, J. ± 2. Now under the terms of the Agreement ! the Inspector#s
decision as regards rejections aforesaid shall be final and binding on the parties." In this case,
as we have already pointed out, the Inspector#s reports are to the effect that the articles are not
according to the specification and the shade is lighter than the sample of 30/100" and ! did not
match also the standard olive green scamic 314." Prima facie, therefore, the plaintiff will be
bound by it and its claim to damages cannot be entertained. Mr. Rabindra Mohan Mukherjee
learned Advocate appearing on behalf of the appellant submits that the Inspector did not
apply his mind to the point and merely dittoed what was written by the authorities at Kanpur
and, as such his Reports are perverse and arbitrary and cannot bind the parties. In the next
place, it has also been urged that the tests which had been urged that the tests which had been
made at Kanpur were not in accordance with the Contract, in view of the facts that the tests
were not carried on with reference to the accepted sample 30/100 at the time of examination
of the contents of the further supplies, but with tints made at a distant time. It has also been
urged that the sample 30/100 had already been destroyed.
3. Now, if the contentions or either of them are accepted, then it must be held that the
Inspector#s reports would be arbitrary, and it would be open to the plaintiff to challenge the
order of rejection prima facie passed on that basis, and the order of rejection would not stand.
4. The Inspector in question, Colonel Pillay has been examined in this case and his
evidence would disclose that he did apply his mind. He waited for 3 to 4 days to make up his
mind after obtaining the reports from Kanpur and appears to have taken other factors also into
consideration. There is no reason to disbelieve his testimony in this respect. There were not
proper facilities for testing in Calcutta, and the procedure appears to be to send the same to
Kanpur for testing, and on getting their reports, the Inspector in Calcutta was to decide
whether the goods were to be accepted or not. Moreover, the tests at Kanpur were carried on
by experts namely, Dr. Ranganathan and Dr. Balakrishnan and if the Inspector acted on the
basis of such reports, it cannot be said that he did not apply his mind thereto. In the
circumstances, we must overrule the contention of Mr. Mukherjee in this respect.
British Paints (India) Ltd. v. Union of India 233
5. As regards the tests at Kanpur it would appear from the evidence of Dr. Ranganathan
and Dr. Balakrishnan and specially of the latter that every time a sample of the supply came,
they carried on the tests with reference to the sample 30/100 and that they did so even in the
case of these three rejected supplies. They have emphatically denied that the sample 30/100
had been destroyed. Mr. Bogh who called on them on the 1st of May 1953 did not at all ask
them as to whether that sample 30/100 had been destroyed or not. He only wanted to see how
the test was done and it was not necessary therefore, to bring out the sample 30/100 which
was kept in safe custody, so to say to show the method of testing. Mr. Bogh in his cross-
examination had stated that that sample had been destroyed. As a matter of fact no such
complaint in writing was made to the authorities concerned. Mr. I.B. Ghosh the Chief
Chemist of the plaintiff firm of course states that he was told that the sample had been
destroyed. This fact has been denied by Drs. Ranganathan and Balakrishnan, and the learned
Judge appears to have preferred the testimony of the latter gentleman, to that of Mr. Ghosh.
We see no reasons to differ from him in the assessment of his evidence. They are responsible
Officers and under the rules so long as the Contract is alive they are bound to keep it and it is
only when much later they came to know that the Contract had been cancelled they destroyed
the sample. As a matter of fact, when Mr. Ghosh called on the Kanpur authorities in May
1953 he took with himself a reconditioned sample. It would appear from the evidence that
some amount of black carbon was put in to make the colour a bit darker and thereafter that
passed the test. When the second batch of 59½ Cwt. had been rejected, the plaintiff wrote to
the authorities concerned that they would supply these things after reconditioning. This fact
would also disclose that the supplies which had been made and rejected did not conform to
the required specification. It would further appear from the evidence of Mr. Bogh and Mr.
Ghosh that they did not carry on the tests in their own laboratories with any cotton Dosuti. As
a matter of fact, Mr. Bogh was not aware what cotton Dosuti was, and he asked for a sample
of that from the Kanpur authorities. Therefore, the fact that according to the plaintiff#s own
technical men, these three supplies in question were up to the specification, cannot override
the opinion of the Kanpur authorities. Under the terms of the Contract, the test is to be made
by applying the sample ! to a piece of cotton dosootie or sheeting used in the manufacture of
tents." That was not done at all by the plaintiff. Mr. Mukherjee has also made grievance of
the fact that the Kanpur authorities had carried on the test with a piece of scoured cotton
dosootie and not an unscoured one. The evidence of Dr. Balakrishnan would show that they
always carry on the test on scoured cotton dosootie and it is cotton dosootie which is mostly
used in the manufacturing of tents. Scoured cotton dosootie is also cotton dosootie, and in the
circumstances it cannot be said that the test carried on by the Kanpur authorities on scoured
cotton dosootie would be inconsistent with the terms of the contract.
6. Mr. Mukherjee has laid stress on the fact that the plaintiff had also got the rejected
supplies tested by an expert Mr. Monk and his report and evidence would disclose that the
rejected articles were of the same quality as the tender sample 30/100, a duplicate of which
had been kept in the plaintiff firm. Mr. Monk carried on his test in the absence of the
defendant. He did so also more than three years after the articles had been made and his own
evidence would disclose that the articles were not exactly of the same quality as before
something having already evaporated. He also did not apply the same to any scoured cotton
dosootie or any sheeting used in the manufacture of tents. What is worse, he took samples
from each of the rejected barrels and made a hotchpot of the same, and then made the
comparison. The plaintiff had already written to the defendant to offer the 59½ Cwt. after
reconditioning and it is quite likely that it was so done. Therefore, we cannot accept the
evidence of Mr. Monk in this respect. What is more, as we have already pointed out, the
Kanpur authorities had made the tests in accordance with the rules, and found the quality not
up to the mark, and the Inspector#s report is based on that and the Inspector also applied his
mind to it, and the Inspector#s report in this connection is final and conclusive, and cannot be
overruled by Mr. Monk#s opinion.
7. It has further been urged by Mr. Mukherjee that the delivery has been made in time and
that the defendant had voluntarily or involuntarily waived the quality and therefore was not
competent to reject the supplies. It would appear that Mr. Ghosh went to Kanpur with the
reconditioned sample and the Kanpur authorities found it acceptable. Mr. Mukherjee,
therefore, submits that the defendant was not therefore right in cancelling the Contract and in
refusing to give them any further time to recondition the rejected goods in accordance with
the approved sample. Now, the Contract was cancelled on the 1st of May 1953 and the
Contract had been made with the Director-General of Supply. The Kanpur authorities cannot
extend the time of delivery, and therefore, this point also fails. At no stage was there any
waiver of the quality.
8. In this connection Mr. P.K. Sengupta learned Government Advocate points out that the
plaintiff did not give sufficient time for inspection even. It would appear from Section 17(2)
of the Indian Sale of Goods Act that if the purchase was being made on the basis of a sample,
some reasonable time must be given to the purchaser to find out if the goods offered were in
accordance with the sample. It would further appear from the evidence that after the goods
were manufactured, the plaintiff was to send an intimation to the Inspector in Calcutta and he
would take samples and then send the same to Kanpur and there it must be tested and the test
alone would take at least three days. All these were within the knowledge of the plaintiff.
The plaintiff, however, offered the reconditioned second supply and the 4th and 5th
instalments on the 30th April by its letter dated the 29th and the delivery date being the 30th
April there was not sufficient time to inspect.
9. Mr. Mukherjee has very strenuously contended that time was not of the essence of the
contract and that the respondent was not entitled therefore to cancel the Contract on the 1st of
May on the alleged default to make delivery of the goods by the 30th April. It would appear
from the Contract itself that time was specifically made of the essence of the Contract. Mr.
Mukherjee submits that inasmuch as the time had been extended from time to time, it would
appear therefrom that the Union of India did not consider the fixed time to be a condition it
was a warranty and nothing more and the action of the Union of India in cancelling the
Contract unilaterally was an anticipatory breach, and would entitle the plaintiff to damages.
In Gomathi Nayagam v. Palaniswami [AIR 1967 SC 868], it has been laid down that
! Intention to make time of the essence of the contract may be evidenced by either express
stipulations or by circumstances which are sufficiently strong to displace the ordinary
presumption that in a contract of sale of land stipulations as to the time are not of the
essence." In this particular case, as we have already pointed out, there was an express
stipulation that time would be of the essence of the Contract. It is no doubt a fact that the
British Paints (India) Ltd. v. Union of India 235
original time for delivery in the Contract namely 15th of October 1952 was extended from
time to time or the application express or implied of the plaintiff up to the 30th of April 1953.
In its telegram as also letter dated the 2/3rd March 1953 the defendant made it quite clear that
there would be no further extension of time. In Md. Habidullah v. Bird and Co. [AIR 1922
PC 178], it has been held by the Privy Council that when after the seller of goods has failed to
deliver them at the agreed time the buyer has agreed to an extension of time for delivery, the
effect of Section 55 of the Indian Contract Act is that the buyer is entitled to damages
computed in the ordinary way, if the seller fails to delivery within the extended time. Mr.
Mukherjee, with his usual fairness, has placed before us the aforesaid two decisions and has
also relied on Burn & Co. v. Morvi State [AIR 1925 PC 188] and more particularly on
Hindusthan Construction Co. v. State of Bihar [AIR 1963 Pat 254]. In Burn & Co. case, the
Privy Council, on an interpretation of the terms of the Contract came to the conclusion that
the intention of the parties when the Contract was made, was that time should be of the
essence of the Contract. In the Hindustan Construction Co., the court, on an analysis of the
terms and specially in view of the facts, that there was a provision for daily damages after the
default is made, and the State of Bihar which had the option of determining the Contract did
not avail itself of the option, held that time was not of the essence of the Contract. The facts
in that case are entirely different from the facts, of the present case wherein the plaintiff had
asked for extension of time again and again and the defendant had reluctantly to agree thereto.
Even, in this decision it has also been laid down that an intention to make time of the essence
of the Contract must be expressed in explicit and unmistakable language in the agreement
itself and if by any means such an intention is not explicit, it may be inferred from the
antecedent conduct of the parties and surrounding circumstances but not from the subsequent
conduct of the parties after the Contract was made. We are therefore, of opinion that in this
particular case time was of the essence of the Contract and this time would also include the
extended time as agreed upon by both the parties. This term in the agreement was a condition
precedent and not a mere warranty.
10. Mr. Mukherjee has also relied on Section 23 of the Sale of Goods Act and submits
that as in the month of May the Kanpur authorities found the reconditioned sample to be
acceptable, Section 23 would apply. In this case the Contract was cancelled originally by
letter dated the 1st of May 1953 as the goods were not delivered by the 30th of September
1953. In that letter it has been stated that the stores offered by the plaintiff were not in
accordance with the terms of the Contract for quality and were therefore, rejected. At one
stage of the arguments, it was urged on behalf of the appellant that as the Inspector#s reports
regarding the goods were not available on the 1st May 1953, the authorities had no materials
before it under which it would cancel the Contract. In Nune Siwayya v. Maddu [(1935) 62
IA 89, 98 (PC)], it has been held by the Privy Council that in a suit for damages for breach by
repudiation of the Contract for the sale of goods, the defendant can rely upon any grounds for
repudiation which existed when he repudiated; he is not confined to the ground which he then
stated. After the Inspector#s reports were made available and showed that the goods were not
in accordance with the tender, it was up to the Union of India to take up that ground as well.
Mr. Sengupta in this connection has already drawn our attention to Ext. 3-C the condition of
Contract. Now the term ! delivery" as defined therein means ! Delivery by the dates specified
in the acceptance of tender of stores which are found acceptable by the Inspector and not the
submission of stores which are not to the required standard or which are not delivered by due
dates." In this particular case, the goods were not properly delivered by the 30th of April
1953. The goods were not up to the standard, and there was no sufficient time given to Union
of India for inspecting the same, as we have already pointed out.
11. Mr. Mukherjee has also submitted that as the defendant also claimed liquidated
damages, the defendant was not entitled to cancel the Contract. We are not in a position to
accept this contention. In Ext. 3-C it has been specifically laid down that if any stores are
rejected, the Secretary shall be at liberty to (a) to allow the Contractor to resubmit the stores
within a time specified by himself, (b) buy the quantity of the stores rejected by others of a
similar nature elsewhere at the risk and cost of the contract etc. or (c) terminate the contract
and recover from the contractor the loss the purchaser thereby incurs. Therefore, it was
within the rights of the defendant to terminate the contract. The defendant has not made any
attempt to recover the loss if any, he has suffered for the default of the plaintiff. By Ext. 20
the defendant while cancelling the Contract for the supply of the further materials had merely
asked the plaintiff to note that right to recover liquidated damages for delayed supply was
reserved. There was no claim actually made for liquidated damages. In the subsequent letter
(Ext. 51) no such claim was even referred to. In the circumstances, this objection must be
overruled.
12. The result, therefore, is that we find that in this case time was of the essence of the
contract and that the time was extended up to the 30th of April 1953 by the mutual consent of
the parties and that the goods had not been offered or delivered in time, and were also not of
the requisite quality. The defendant, therefore, was within its rights to repudiate the contract
for the supply of the remaining portion of the goods, and this appeal therefore, must fail.
13. At the same time we must note that we do not find that there has been any deliberate
negligence on the part of the plaintiff. They had difficulties of their own, inasmuch as they
had to import some of the ingredients, and the defendant itself was also responsible for some
delay, inasmuch as, in the month of January it suddenly directed the defendant to supply the
goods in galvanized sheets. If the plaintiff#s men had gone over to Kanpur by the 30th April
on getting the rejection slip of the second lot, then further troubles might have been avoided.
Unfortunately however, its representatives went to Kanpur after the cancellation of the
Contract, and it is quite clear from the evidence, that the goods were required very urgently
for Military purposes and it was not possible for the defendant to wait any further, We,
therefore, dismiss this appeal, but direct that each party will bear its own costs.
*****
DOCTRINE OF CAVEAT EMPTOR
Jones v. Just
(1868) 3 Q.B. 197
MELLOR, J. ± In this case, it appeared that the plaintiffs, through Messrs. Beneke & Co.,
their brokers, entered into a contract with the defendant for the purchase of a quantity of
Manilla hemp, to arrive% . The shipping documents were duly delivered to the plaintiffs, and
the price was paid. All the vessels named in the contract arrived in due course, with the
respective numbers of bales of hemp having marks corresponding to those specified in the
contract on board; and the bales were delivered to the plaintiffs. On examination of the bales
it was found that the whole of those marked J.H.V. were in such a state as to afford strong
evidence that they had at some time, probably from a shipwreck when on the voyage from
Manilla to Singapore, been wetted through with salt water had afterwards been unpacked and
dried, and then repacked in the bales which were afterwards shipped at Singapore.
Manilla hemp is divided into several qualities. The hemp in the bales in question, if in
good condition, would have been what is called ! fair current Manilla hemp" , which is not the
lowest quality; but in all the bales the hemp was damaged to some extent, though not so far as
to make it lose the character of hemp. After some correspondence between the parties, the
hemp was sold by auction by the plaintiffs# orders as ! Manilla hemp, with all faults" , and at
the auction it realised about 75 per cent of the price which similar hemp would have fetched if
undamaged. The price of hemp had risen considerably since the contract, so that the proceeds
of the sale were very nearly equal to the invoice price. There was no attempt to shew that the
defendant knew of the state in which the hemp had been shipped at Singapore.
At the close of the plaintiffs# case, Mr. Brett, for the defendant, contended that, in point of
law, under this written contract, there was no further condition or warranty than that the bales
on their arrival should answer the description of bales of Manilla hemp, which they did, as
was proved by the fact that the hemp, though sold with a stigma upon it, fetched a price only
25 per cent, below that of sound hemp; and that as to quality or condition there was no
warranty; that consequently the maxim caveat emptor applied.
The learned judge expressed an opinion adverse to this view. He said: ! I think that the
question is for the jury, whether what was supplied under this contract was, when shipped at
Singapore, such as to answer the description of reasonably merchantable Manilla hemp, that
being the warranty which, I think, the law implies in a contract to supply, as this is: though it
would be different in a sale of specific things which the purchaser might examine, or of things
sold by sample. And I think the question whether it is fairly and reasonably merchantable, is
a question of more or less, which must be left to the jury as reasonable men to determine."
The judge then reserved leave to move to enter the verdict for the defendant, if there was no
evidence to go to the jury of a breach of warranty.
Upon this intimation of opinion, the counsel addressed the jury, and the case was left to
them substantially to the effect above stated; and the jury were further told that if they found
238 Jones v. Just
for the plaintiffs, the damages should be measured by the rate which the hemp was worth
when it arrived compared with the rate which the same hemp would have realised, had it been
shipped in the state in which it ought to have been shipped: thus, in effect, giving the
plaintiffs the benefit of the rise in the market.
Mr. Brett, in the ensuing Term, obtained a rule to enter the verdict for the defendant,
pursuant to the leave reserved; or for a new trial, on the ground of misdirection as to the
measure of damages, which he contended ought at most to have been the difference between
the value of the article actually delivered, viz., fair average Manilla hemp in a damaged state,
and the value of sound Manilla hemp of the lowest quality which might have been supplied at
Singapore under this contract. The other objections to the direction were substantially only
varied modes of putting the point reserved.
We thought that if the contract had the effect which the direction stated it to have, the true
measure of the damages was given, as it put the plaintiffs in the position in which they would
have been if the contract had been fulfilled; but we took time to consider the question as to
what the contract really was, which is no doubt one of importance and difficulty.
After careful consideration, we are of opinion that Blackburn, J.#s direction was
substantially correct. On the argument before us, it was contended that the contract was
performed on the part of the defendant by the shipping at Singapore of an article which
answered the description of ! Manilla hemp" , although at that time it was so damaged as to
have become unmerchantable. It was said that there being no fraud on the part of the vendor,
and both parties being equally ignorant of the past history and actual condition of the article
contracted for, and neither of them having had the opportunity of inspecting it, it was the duty
of the vendees to have stipulated for a merchantable article, if that was what they intended to
contract for. In other words, it was said that the maxim, caveat emptor, applied in such a
case, in the same way as on a sale of a specific article by a person not being the manufacturer
or producer, even though the defect was latent and not discoverable upon examination.
We are of opinion that there is a great distinction between the present case and the sale of
goods in esse, which the buyer may inspect, and in which a latent defect may exist, although
not discoverable on inspection.
The cases which bear upon the subject do not appear to be in conflict, when the
circumstances of each are considered. They may, we think, be classified as follows:
First, where goods are in esse, and may be inspected by the buyer, and there is no fraud
on the part of the seller, the maxim caveat emptor applies, even though the defect which
exists in them is latent, and not discoverable on examination, at least where the seller is
neither the grower nor the manufacturer: Parkinson v. Lee [2 East, 314]. The buyer in such a
case has the opportunity of exercising his judgment upon the matter; and if the result of the
inspection be unsatisfactory, or if he distrusts his own judgment he may if he chooses require
a waranty. In such a case, it is not an implied term of the contract of sale that the goods are of
any particular quality or are merchantable. So in the case of the sale in a market of meat,
which the buyer had inspected, but which was in fact diseased, and unfit for food, although
that fact was not apparent on examination, and the seller was not aware of it, it was held that
Jones v. Just 239
there was no implied warranty that it was fit for food, and that the maxim caveat emptor
applied: Emmerton v. Mathews [31 L.J. (Ex.) 139].
Secondly, where there is a sale of a definite existing chattel specifically described, the
actual condition of which is capable of being ascertained by either party, there is no implied
warranty: Barr v. Gibson [3 M. & W. 390].
Thirdly, where a known described and defined article is ordered of a manufacturer,
although it is stated to be required by the purchaser for a particular purpose, still if the known,
described, and defined thing be actually supplied, there is no warranty that it shall answer the
particular purpose intended by the buyer: Chanter v. Hopkins [4 M. & W. 399].
Fourthly, where a manufacturer or a dealer contracts to supply an article which he
manufactures or produces, or in which he deals, to be applied to a particular purpose, so that
the buyer necessarily trusts to the judgment or skill of the manufacturer or dealer, there is in
that case an implied term or warranty that it shall be reasonably fit for the purpose to which it
is to be applied: Brown v. Edgington [2 Man. & G. 279]. In such a case the buyer trusts to
the manufacturer or dealer, and relies upon his judgment and not upon his own.
Fifthly, where a manufacturer undertakes to supply goods, manufactured by himself, or in
which he deals, but which the vendee has not had the opportunity of inspecting, it is an
implied term in the contract that he shall supply a merchantable article: Laing v. Fidgeon [4
Camp. 169]. And this doctrine has been held to apply to the sale by the builder of an existing
barge, which was afloat but not completely rigged and furnished; there, inasmuch as the buyer
had only seen it when built, and not during the course of the building, he was considered as
having relied on the judgment and skill of the builder that the barge was reasonably fit for
use: Shepherd v. Pybus [3 Man. & G. 868].
If, therefore, it must be taken as established that, on the sale of goods by a manufacturer
or dealer to be applied to a particular purpose, it is a term in the contract that they shall
reasonably answer that purpose, and that on the sale of an article by a manufacturer to a
vendee who has not had the opportunity of inspecting it during the manufacture, that it shall
be reasonably fit for use, or shall be merchantable, as the case may be, it is difficult to
understand why a similar term is not to be implied on a sale by a merchant to a merchant or
dealer who has had no opportunity of inspection. Accordingly in the case Bigge v. Parkinson
[31 L.J. (Ex. 301)] upon a contract to supply provisions and stores to a ship guaranteed to
pass the survey of the East India Company#s officers, it was held by the Court of Exchequer
Chamber that there was an implied term in the contract, that the stores should be reasonably
fit for the purpose for which they were to be supplied, notwithstanding that the vendor had
specially contracted that they should pass the survey of the East India Company#s officers.
We are aware of no case in which the maxim, caveat emptor, has been applied where
there has been no opportunity of inspection, or where that opportunity had not been waived.
The case of Gardiner v. Gray [4 Camp. 144, 145], appears strongly in point to the present.
The contract was for the sale of twelve bales of waste silk imported from the continent, and
before it was landed samples were shewn to plaintiff#s agent, and the bargain was then made,
but without reference to the sample. It was purchased in London, and sent to Manchester, and
on its arrival there was found to be of a quality not saleable under the denomination of ! waste
240 Jones v. Just
silk" . Lord Ellenborough expressed his opinion that ! the purchaser under such circumstances
had a right to expect a saleable article answering the description in the contract. Without any
particular warranty, this is an implied term in every such contract. Where there is no
opportunity to inspect the commodity the maxim, caveat emptor, does not apply."
In general, on the sale of goods by a particular description, whether the vendee is able to
inspect them or not, it is an implied term of the contract that they shall reasonably answer
such description, and if they do not, it is unnecessary to put any other question to the jury;
thus, in Wieler v. Schilizzi [25 L.J. (C.P.) 89], and in Josling v. Kingsford [32 L.J. (C.P.) 94],
the substantial question put to the jury was, did the goods delivered reasonably answer the
description in the contract? And the answer of the jury being that they did not, that answer
sufficed to determine each case. In one of those cases there was no opportunity to inspect, in
the other there was. So in the case of Nichol v. Godts [10 Ex. 191], where the contract was for
the sale of ! foreign refined rape oil, warranted only equal to sample" , it was held in an action
for not accepting the article tendered, that it was necessary for the vendor to establish that it
was not only equal to the sample as to quality, but that it was in fact such an article as
answered, the description of foreign refined rape oil. In Wieler v. Schilizzi, in which there
was no opportunity to inspect, and no express stipulation as to quality, it would have been
necessary, had the finding of the jury affirmed that the article delivered did in fact answer the
description of ! Calcutta linseed" , to determine whether the judge ought not to have put the
further question, was it reasonably merchantable? It certainly was not determined that such a
question would have been wrong, though perhaps the words ! tale quale" in that contract
might have the effect of excluding any such warranty; and Willes, J., in his judgment [17 C.B.
at p. 624], said that the purchaser in that case ! had a right to expect, not a perfect article, but
an article which would be saleable in the market as Calcutta linseed."
It appears to us that, in every contract to supply goods of a specified description which
the buyer has no opportunity to inspect, the goods must not only in fact answer the specific
description, but must also be saleable or merchantable under that description. In the words of
Lord Ellenborough in Gardiner v. Gray [4 Camp. 145], ! without any particular warranty this
is an implied term in every such contract." In the present case the question appears to be, was
the article as delivered at Singapore merchantable or saleable in the market under the
description of ! Manilla hemp?" Blackburn, J., appears to have divided that question into two,
viz.: Was the article, in fact, Manilla hemp? Secondly, was it merchantable? The precise
mode of submitting the question is not material, provided the substantial direction was
correct, as we think it was.
The counsel for the defendant relied upon a case of Turner v. Mucklow [8 Jur. (N.S.)
870], tried before Mellor, J., in the year 1862, at Liverpool. In that case the plaintiffs were
calico printers, and had contracted to sell to the defendant, who was a drysalter and dye
extract manufacturer, a boat-load of ! spent madder." The defendant, not finding the spent
madder supplied suitable for his purpose, repudiated the contract, and refused to pay for it. It
appeared that the plaintiffs, in their trade as calico printers, used large quantities of madder
roots, having extracted from which the finer colouring matter by chemical processes they
placed the refuse or spent madder in a large heap in their yard. They occasionally used
portions of it, and by the application of other chemical processes extracted from it a colouring
Jones v. Just 241
matter called garancine, but they did not manufacture spent madder for sale. On a previous
occasion they had sold to the defendants, who was a manufacturer of garancine, a small
quantity of spent madder from their accumulation; and on the occasion in question the
defendant, by letter, bargained with the plaintiffs for a quantity of their spent madder, which
he did not inspect before delivery, and upon a portion of it being used by the defendant for the
purpose of manufacturing garancine, it turned out that the garancine produced by it was of
very inferior quality and unmarketable. The jury were directed that if the article supplied
fairly and reasonably answered the description of ! spent madder" , there was no implied
warranty that it was of any particular quality or fitness for any particular use, and upon that
direction the jury found a verdict for the plaintiffs; and upon the argument on a rule which
was obtained for a new trial, on the ground of misdirection, the Court of Exchequer held the
direction to be right; Martin B., declaring his opinion to be ! that no direction was ever more
correct."
In that case it is to be observed that the defendant had the opportunity, if he had chosen to
avail himself of it, to inspect the heap of spent madder; he knew that it was the refuse madder
after it had gone through the plaintiffs# processes, and that it was not manufactured for sale.
These circumstances entirely distinguish that case from the present.
The counsel for the defendant also relied upon the statute 19 & 20 Vict. c. 60, s. 50 [19 &
20 Vict. c. 60, s. 5]: ! Where goods shall after the passing of this act be sold, the seller, if at
the time of the sale he was without knowledge that the same were defective or of bad quality,
shall not be held to have warranted their quality or sufficiency, but the goods with all faults
shall be at the risk of the purchaser, unless the seller shall have given an express warranty of
the quality or sufficiency of such goods, or unless the goods have been expressly sold for a
specified and particular purpose, in which case the seller shall be considered without such
warranty to warrant that the same are fit for such purpose." [This statute applies only to
Scotland], as a sort of implied legislative declaration of the law of England upon that subject
in favour of his argument; but, upon examining the section referred to, it does not appear to
bear out that view, for all that it declares is, that a seller of goods, without knowledge that
they are defective or of bad quality, shall not be held to have warranted their quality or
sufficiency.
It has already appeared that there is not in general, on the sale of goods in England to be
supplied, an implied warranty that they shall be of any particular quality or sufficiency for
any particular purpose, but merely that they shall be merchantable goods of the description
bargained for. The present case depends on the distinction between a sale of particular articles
and a contract to supply articles of a particular kind.
The authority of Chancellor Kent [Kent¶s Commentaries, vol. II; p. 479 of the 6th ed.,
the last by the author himself. 11th ed., pp. 633-635] was also appealed to; but as the
American cases which he cites are generally adverse to his opinion, it can at most be said that
the opinion of an eminent writer is opposed to the authority of the cases which he cites.
It appears to us, in the result of this case, that the maxim of caveat emptor cannot apply,
and that it must be assumed that the buyer and seller both contemplated a dealing in an article
which was merchantable. The buyer bought for the purpose of sale, and the seller could not
242 Jones v. Just
on any other supposition than that the article was merchantable have found a customer for his
goods, and the buyer must be taken to have trusted to the judgment, knowledge, and
information of the seller, as it is clear that he could exercise no judgment of his own; and this
appears to us to be at the root of the doctrine of implied warranty, and that in this view it
makes no difference, whether the sale is of goods specially appropriated to a particular
contract, or to goods purchased as answering a particular description.
It was contended further by the defendant#s counsel that the shippers at Singapore were
the persons who selected the goods in question, and that the defendant, who merely sold them
to arrive, was as little aware of their true condition when shipped as the plaintiffs; but it is
clear that the defendant, if not directly connected with the shippers as his correspondents,
must at least have purchased from them, and had recourse against them for not supplying an
article reasonably merchantable.
The remarks of Cockburn, C.J., on the argument in Bigge v. Parkinson [H. 7 & N. at p.
959], though not in terms repeated by him in delivering the judgment of the Court of
Exchequer Chamber, are really involved in it, and are very closely in point here.
We are therefore of opinion that Blackburn, J.#s direction was right, and that this rule
must be discharged.
*****
Richard Thorold Grant v. Australian Knitting Mills, Ltd.
AIR 1936 PC 34
[Section 16 - Reliance by buyer on seller’s skill]
The appellant was a fully qualified medical man practising at Adelaide in South Australia.
He brought his action against the respondent, claiming damages on the ground that he had
contracted dermatitis by reason of the improper condition of underwear purchased by him
from the respondents, John Martin & Co., Ltd., and manufactured by the respondents, the
Australian Knitting Mills, Limited; the case was tried by Sir George Murray, Chief Justice of
South Australia, who after a trial lasting for 20 days gave judgment against both respondents
for the appellant for £2,450 and costs. On appeal the High Court of Australia set aside that
judgment by a majority. Evatt, J., dissented, and agreed with the Chief Justice. Of the
majority, the reasoning of Dixon, J., with whom McTiernan, J., concurred, was in effect that
the evidence was not sufficient to make it safe to find for the appellant. Starke, J., who
accepted substantially all the detailed findings of the Chief Justice, differed from him on his
general conclusions of liability based on these findings. The appellant#s claim was that the
disease was caused by the presence in the cuffs or ankle ends of the underpants which he
purchased and wore, of an irritating chemical, viz., free sulphite, the presence of which was
due to negligence in manufacture, and also involved on the part of the respondents, John
Martin & Co., Ltd., a breach of the relevant implied conditions under the Sale of Goods Act.
The underwear, consisting of two pairs of underpants and two singlets, was bought by the
appellant at the shop of the respondents, John Martin & Co., Ltd., who dealt in such goods
and who will be hereafter referred to as the retailers, on 3rd June 1931; the retailers had in
ordinary course at some previous date purchased them with other stock from the respondents,
the Australian Knitting Mills, Ltd., who will be referred to as the manufacturers; the garments
were of that class of the manufacturers# make known as Golden Fleece. The appellant put on
one suit on the morning of Sunday, 28th June 1931; by the evening of that day he felt itching
on the ankles but no objective symptoms appeared until the next day, when a redness
appeared on each ankle in front over an area of about 2½ inches by 1½ inches. The appellant
treated himself with calomine lotion, but the irritation was such that he scratched the places
till he bled. On Sunday, the 5th July, he changed his underwear and put on the other set
which he had purchased from the retailers; the first set was washed and when the appellant
changed his garments again on the following Sunday he put on the washed set and sent the
others to the wash; he changed again on 12th July. Though his skin trouble was getting worse
he did not attribute it to the underwear, but on the 13th July he consulted a dermatologist, Dr.
Upton, who advised him to discard the underwear, which he did, returning the garments to the
retailers with the intimation that they had given him dermatitis; by that time one set had been
washed twice and the other set once. The appellant#s condition got worse and worse; he was
confined to bed from 21st July for 17 weeks; the rash became generalised and very acute. In
November, he became convalescent and went to New Zealand to recuperate. He returned in
the following February and felt sufficiently recovered to resume his practice, but soon had a
relapse and by March his condition was so serious that he went in April into hospital where he
remained until July. Meantime in April 1932, he commenced this action, which was tried in
and after November of that year. Dr. Upton was his medical attendant throughout and
244 Richard Thorold Grant v. Australian Knitting Mills, Ltd.
explained in detail at the trial the course of the illness and the treatment he adopted. Dr. de
Crespigny also attended the appellant from and after 22nd July 1931, and gave evidence at the
trial. The illness was most severe, involving acute suffering and at times Dr. Upton feared
that his patient might die.
LORD WRIGHT, J. ± It is impossible here to examine in detail the minute and conflicting
evidence of fact and of expert opinion given at the trial: all that evidence was meticulously
discussed at the hearing of the appeal before the Board. It is only possible to state briefly the
conclusions at which their Lordships after careful consideration have arrived. In the first
place, their Lordships are of opinion that the disease was of external origin. Much of the
medical evidence was directed to supporting or refuting the contention strenuously advanced
on behalf of the respondents that the dermatitis was initially produced and was of the type
described as herpetiformis, which is generally regarded as of internal origin. That contention
may now be taken to have failed: it has been rejected by the Chief Justice at the trial and in
the High Court, by Starke and Evatt, JJ., and, in effect also, by Dixon and McTiernan, JJ. The
evidence as to the symptoms and course of the disease given by the two doctors who attended
the appellant is decisive: dermatitis herpetiformis is an uncommon disease, of a type generally
not so severe as that suffered by the appellant, and presenting in general certain characteristic
features, in particular, bullae or blisters and symmetrical grouping of the inflammatory
features, which were never present in the appellant. Dr. Wigley, a very eminent
dermatologist, who examined the appellant, and as an expert gave evidence in support of the
doctors who actually attended him, expressed his opinion that all dermatitis had no external
origin, but whether he was right in this or not, he was confident that in the appellant#s case the
origin of the disease was external and on all the evidence their Lordships accept this view.
But then it was said that the disease may have been contracted by the appellant from some
external irritant the presence of which argued no imperfection in the garments but which only
did harm because of the appellant#s peculiar susceptibility. Thus the disease might have been
initiated by the mechanical irritation of the wool itself or if it was due to some chemical
ingredient in the garments, that might have been something in itself harmless, either because
of its character or because of the actual quantity in which it was present, so that the mischief
was attributable to the appellant#s own physical defect and not to any defect in the garments;
the respondents, it was said, could not be held responsible for anything in the garments which
would not be harmful in normal use. Two issues were thus involved: one, was the appellant#s
skin normal, and the other, was there in the garments or any part of them a detrimental
quantity of any mischievous chemical? The Chief Justice held that the appellant#s skin was
normal. He had habitually up to the material time worn woolen undergarments without
inconvenience; that he was not sensitive to the mechanical effects of wool seemed to be
proved by an experiment of his doctors who placed a piece of scoured wool on a clear area on
his skin and found that after a sufficient interval no trace of irritation being produced. It was
said that he had suffered from tuberculosis some years before and that the disease had merely
been arrested, not eliminated, and it was then said that tuberculosis made the patient more
susceptible to skin disease, because it weakens the resistance of the skin and lowers the
patient#s vitality. But this contention did not appear to be established. It was admitted that
the appellant#s skin had by reason of his illness become what is denominated ! allergic," that
Richard Thorold Grant v. Australian Knitting Mills, Ltd. 245
is, unduly sensitised to the particular irritant from which he had suffered; but that could throw
no light on the original skin condition. A point was made that a skin ordinarily normal might
transiently and unexpectedly show a peculiar sensitivity, but that remained a mere possibility
which was not developed and may be ignored. In the result there does not seem any reason to
differ from the Chief Justice#s finding that the appellant#s skin was normal.
What then caused this terrible outbreak of dermatitis? The place and time of the original
infection would seem to point to the cause being something in the garments, and in particular
to something in the ankle ends of the underpants, because the inflammation began at the front
of the shins where the skin is drawn tight over the bone, and where the cuff of the pants
presses tightly under the socks against the skin, and began about nine or ten hours after the
pants were first put on: the subsequent virulence and extension of the disease may be
explained by the toxins produced by the inflammation getting into the blood stream. But the
coincidence, it was pointed out, was not sufficient proof in itself that the pants were the cause.
The appellant then relied on the fact that it was admitted in the respondents# Answers to
Interrogatories that the garments when delivered to the retailer by the manufacturers
contained sulphur dioxide, and on the fact that the presence of sulphur dioxide indicated the
presence of free sulphites in the garment. If there were in a garment worn continuously all
day next the skin free sulphites in sufficient quantities, a powerful irritant would be set in
operation. Sweat is being slowly and continuously secreted by the skin, and combines with
the free sulphites to form successively sulphur dioxide, sulphurous acid and sulphuric acid:
sulphuric acid is an irritant which would produce dermatitis in a normal skin if applied in
garments under the conditions existing when the appellant wore the underpants. It is a fair
deduction from the Answers and form the evidence that free sulphites were present in
quantities not to be described as small, but that still left the question whether they were
present in quantities sufficient to account for the disease. It is impossible now and was
impossible at any time after the garments were washed to prove what quantities were present
when the garments were sold. That can only be inferred from various considerations. The
garments were in July 1931 handed back to the retailers and by them sent back to the
manufacturers. In November 1931 Mr. Anderson, of Victoria an analytical chemist, on the
instructions of the manufacturers analysed one half of one of the pants to ascertain what
quantity of water soluble salts they contained and found certain quantities of sulphates but
sulphates would not irritate the skin. In the following May, Mr. Anderson made a further
analysis of the other three garments and of the remaining half of the pair of pants: he was
testing for sulphites, which he expressed in terms of sulphur dioxide percentage by weight. In
one singlet he found a nil return, in the other 0.0070; in the pants he found 0.0082 in one and
0.0201 in the other. There was some debate whether these figures were of free sulphites, or
of sulphites adherent to the wool molecule, and not soluble by sweat. Their Lordships, after
careful consideration and for a variety of reasons do not differ from the conclusion of the
Chief Justice that these results proved the presence of free sulphite. But the results were not
such as to show quantities likely to cause irritation. On the other hand, a very eminent
scientist, Professor Hicks, called by the appellant, gave his opinion that the garments before
washing must have had sulphites in considerably greater quantity: and these tests of Mr.
Anderson were of each garment as a whole, whereas it was clear that the relevant parts in
each pair of pants were the ankle ends since the disease was initiated at that point in each leg.
It is clear that no further light could be thrown by fresh analysis of the actual garments.
Evidence was given on behalf of the manufacturers as to the processes used in the
manufacture of these garments. The webs of wool were put through six different processes: of
these the second, third and fourth, were the most significant for this case. The second was for
shrinking and involved treatment of the web with a solution of calcium hypochloride and
hydrochloric acid. The third process was to remove these chemicals by a solution of
bisulphite of soda, and the fourth process was to neutralise the bisulphite by means of
bicarbonate of soda; the fifth process was for washing and the sixth was a drying and
finishing process. If the fourth process did not neutralise the added bisulphite, free sulphites
would remain, which the subsequent washing might not entirely remove. The manufacturers#
evidence was that the process was properly applied to the wool from which these garments
were made and if properly applied was bound to be effective. The foreman scourer Smith
was not called at the trial, where his absence was made matter of comment, but Ashworth,
one of the scourers, gave evidence and among other things said that they had to be very
careful that there was no excess of one chemical or the other. If there were an excess of some
sort or the other, it would be bound to be somebody#s fault. The washing off was to clear out
as much of the traces of the previous process as possible. But something might go wrong,
someone might be negligent and as a result some bisulphite of soda which had been
introduced might not have been got rid of. The cuffs of the pants were ribbed and were made
of a different web separately treated. The appellant#s advisers had at the trial no independent
information as to the actual process adopted in respect of these garments or even when they
were made and, by petition, they asked for leave to adduce further evidence which would go
to show, as they suggested, that the process deposed to was not adopted by the manufacturers
until after 3rd June 1931. Their Lordships however feel themselves in a position to dispose of
the appeal on the evidence as it stands taking due account of the fact that the manufacturers#
secretary was called and deposed that in the previous six years the manufacturers had treated
by a similar process 4,737,600 of these garments, which they had sold to drapers throughout
Australia and he had no recollection of any complaints, which if made would in ordinary
course have come under his notice. Dr. Hargreaves, an analytical chemist, on the instructions
of the manufacturers analysed specimen garments, subjecting them to tests which would
extract any sulphur adherent to the wool as well as free sulphites, if any were present, and
found only negligible quantities. Against this evidence was that of Professor Hicks who
agitated in unheated water for two minutes a singlet of the manufacturers# Golden Fleece
make, purchased in November 1932, and found that the aqueous extract contained a
percentage by weight of sulphite of 0.11 which in his opinion was free in the fabric and
readily soluble in cold water. The significance of this experiment seems to be that however
well designed the manufacturers# proved systems may be to eliminate deleterious substances
it may not invariably work according to plan. Some employee may blunder.
Mr. Greene for the respondents quite rightly emphasised how crucial it would have been
for the appellant#s case to prove by positive evidence that in fact the garments which the
appellant wore, contained an excess of free sulphites. He contended that the appellant#s case
involved arguing in a circle; his argument, he said, was that the garments must have caused
the dermatitis because they contained excess sulphites, and must have caused the disease: but
nought, he said, added to nought still is no more than nought. This, however, does not do
justice either to the process of reasoning by way of probable inference which has to do so
much in human affairs or to the nature of circumstantial evidence in law Courts.
Mathematical, or strict logical demonstration is generally impossible: juries are in practice
told that they must act on such reasonable balance of probabilities as would suffice to
determine a reasonable man to take a decision in the grave affairs of life. Pieces of evidence,
each by itself insufficient, may together constitute a significant whole, and justify by their
combined effect a conclusion. Dixon, J., in the judgment in which he dissented from that of
the Chief Justice, does not seem to suggest that there was no evidence for a decision in the
appellant#s favour but merely that it was not safe so to decide. But the coincidences of time
and place and the absence of any other explanation than the presence of free sulphite in the
garments, point strongly in favour of the appellant#s case: it is admitted as has been said
above that some sulphites were present in the garments, and there is nothing to exclude the
possibility of a quantity sufficient to do the harm. On the whole there does not seem adequate
reason to upset the judgment on the facts of the Chief Justice. No doubt, this case depends in
the last resort (be& inference to be drawn from retailers evidence, though on much of the
circumstances and evidence the trial judge had) by the advantage of seeing and hearing the
witnesses. The plaintiff must prove his case but there is an onus on a defendant who, on
appeal, contends that a judgment should be upset: he has to show that it is wrong. Their
Lordships are not satisfied in this case that the Chief Justice was wrong.
That conclusion means that the disease contracted and the damage suffered by the
appellant were caused by the defective condition of the garments which the retailers sold to
him and which the manufacturers made and put forth for retail and indiscriminate sale. The
Chief Justice gave judgment against both respondents, against the retailers on the contract of
sale and against the manufacturers in tort, on the basis of the decision in the House of Lords
in 1932 AC 562(1). The liability of each respondent depends on a different cause of action,
though it is for the same damage. It is not claimed that the appellant should recover his
damage twice over; no objection is raised on the part of the respondents to the form of the
judgment which was against both respondents for a single amount. So far as concerns the
retailers, Mr. Greene contends that if it were held that the garments contained improper
chemicals and caused the disease, the retailers were liable for breach of implied warranty, or
rather condition under S. 14. South Australia Sale of Goods Act, 1895, which is identical
with S. 14, English Sale of Goods Act, 1893. The section is in the following terms:
! 14. Subject to the provisions of this Act, and of any Statute in that behalf, there
is no implied warranty or condition as to the quality or fitness for any particular
purpose of goods supplied under a contract of sale, except as follows:
I. Where the buyer, expressly or by implication, makes known to the seller the
particular purpose for which the goods are required, so as to show that the buyer
relies on the seller#s skill or judgment, and the goods are of a description which it is
in the course of the seller#s business to supply (whether he be the manufacturer or
not), there is an implied condition that the goods shall be reasonably fit for such
purpose: provided that in the case of a contract for the sale of a specified article under
its patent or other trade name, there is no implied condition as to its fitness for any
particular purpose:
II. Where the goods are bought by description who deals in gods of that
description (whether he be manufacturer or not), there is implied condition that the
goods shall be of merchantable quality; provided that if the buyer has examined the
goods, there shall be no implied condition as regards defects which such examination
ought to have revealed;
III. An implied warranty or condition as to quality or fitness for a particular

purpose may be annexed by the usage of trade;
IV. An express warranty or condition does not negative a warranty or condition

implied by this Act unless inconsistent therewith."
He limited his admission to liability under exception (ii), but their Lordships are of
opinion that liability is made out under both exception (i) and exception (ii) to S. 14, and feel
that they should so state out of deference to the views expressed in the Court below. S. 14
begins by a general enunciation of the old rule of caveat emptor and proceeds to state by way
of exception the two implied conditions by which it has been said the old rule has been
changed to rule of caveat vendor; the change has been rendered necessary by the conditions of
modern commerce and trade. There are numerous cases on the section, but as these were cited
below it is not necessary to detail them again. The first exception, if its terms are satisfied,
entitles the buyer to the benefit of an implied condition that the goods are reasonably fit for
the purpose for which the goods are supplied but only if that purpose is made known to the
seller ! so as to show that the buyer relies on the seller#s skill or judgment." It is clear that the
reliance must be brought home to the mind of the seller, expressly or by implication. The
reliance will seldom be express; it will usually arise by implication from the circumstances;
thus to take a case like that in question of a purpose from a retailer the reliance will be in
general inferred from the fact that a buyer goes to the shop in the confidence that the
tradesman has selected his stock with skill and judgment; the retailer need know nothing
about the process of manufacture; it is immaterial whether he be manufacturer or not; the
main inducement to deal with a good retail shop is the expectation that the tradesman will
have brought the right goods of a good make; the goods sold must be, as they were in case
goods of a description which it is in the course of the seller#s business to supply; there is no
need to specify in terms the particular purpose for which the buyer requires the goods; which
is nonetheless the particular purpose within the meaning of the section because it is the only
purpose for which anyone would ordinarily want the goods. In this case the garments were
naturally intended and only intended to be worn next the skin. The proviso does not apply to
a case like the sale of Golden Fleece make such as is here in question, because Golden Fleece
is rather a patent or trade name within the meaning of the proviso to Excep. (i). With great
deference to Dixon, J. their Lordships think that the requirements of Excep. (i) were complied
with. The conversation at the shop in which the appellant discussed questions of price and of
the different makes did not affect the fact that he was substantially relying on the retailers to
supply him with a correct article.
The second exception in a case like this in truth overlaps in its application the first
exception; whatever else merchantable may mean it does mean that the article sold, if only
meant for one particular use in ordinary course, is fit for that use; merchantable does not mean
that the thing is saleable in the market simply because it looks all right. It is not merchantable
in that event if it has defects unfitting it for its only proper use but not apparent on ordinary
examination: that is clear from the proviso, which shows that the implied condition only
applies to defects not reasonably discoverable to the buyer on such examination as he made or
could make. The appellant was satisfied by the appearance of the underpants; he could not
detect and had no reason to suspect the hidden presence of the sulphites; the garments were
saleable in the sense that the appellant or anyone similarly situated and who did not know of
their defect, would readily buy them but they were not merchantable in the statutory sense
because their defect rendered them unfit to be worn next the skin. The proviso to Excep. (ii)
does not apply where, as in this case, no examination that the buyer could or would normally
have made would have revealed the defect. In effect the implied condition of being fit for the
particular purpose for which they are required and implied condition of being merchantable
produce in cases of this type the same result. It may also be pointed out that there is a sale by
description even though the buyer is buying something displayed before him on the counter: a
thing is sold by description, though it is specific, so long as it is sold not merely as the
specific thing but as a thing corresponding to a description, e.g., woolen under garments, a hot
water bottle, a second-hand reaping machine, to select a few obvious illustrations.
The retailers accordingly in their Lordships# judgment are liable in contract: so far as they
are concerned, no question of negligence is relevant to the liability in contract. But when the
position of the manufacturers is considered, different questions arise: there is no privity of
contract between the appellant and the manufacturers: between them the liability, if any, must
be in tort, and the gist of the cause of action is negligence. The facts set out in the foregoing
show in their Lordships# judgment negligence in manufacture. According to the evidence, the
method of manufacture was correct; the danger of excess sulphites being left was recognised
and was guarded against: the process was intended to be fool proof. If excess sulphites were
let in the garment, that could only be because someone was at fault. The appellant is not
required to lay his finger on the exact person in all the chain who was responsible or to
specify what he did wrong. Negligence is found as a matter of inference from the existence
of the defects taken in connexion with all the known circumstances: even if the manufacturers
could by apt evidence have rebutted that inference they have not done so.
On this basis, the damage suffered by the appellant was caused in fact (because the
interposition of the retailers may for this purpose in the circumstances of the case be
disregarded) by the negligent or improper way in which the manufacturers made the
garments. But this mere sequence of cause and effect is not enough in law to constitute a
cause of action in negligence, which is a complex concept, involving a duty as between the
parties to take care, as well as a breach of that duty and resulting damage. It might be said
that here was no relationship between the parties at all: the manufacturers, it might be said,
parted once and for all with the garments when they sold them to the retailers and were
therefore not concerned with their future history, except in so far as under their contract with
the retailers they might come under some liability: at no time, it might be said, had they any
knowledge of the existence of the appellant: the only peg on which it might be sought to
support a relationship of duty was the fact that the appellant had actually worn the garments,
but he had done so because he had acquired them by a purchase from the retailers, who were
at that time the owners of the goods, by a sale which had vested the property in the retailers
and divested both property and control from the manufacturers. It was said there could be no
legal relationships in the matter save those under the two contracts, between the respective
parties of those contracts, the one between the manufacturers and the retailers and the other
between the retailers and the appellant. These contractual relationships (it might be said)
covered the whole field and excluded any question of tort liability: there was no duty other
than the contractual duties. This argument was based on the contention that the present case
fell outside the decision of the House of Lords in 1932 AC 562 (1). Their Lordships, like the
Judges in the Courts in Australia, will follow that decision, and the only question here can be
what that authority decides and whether this case comes within its principles. In 1932 AC
562 (1) the defendants were manufacturers of ginger beer which they bottled: the pursuer had
been given one of their bottles by a friend who had purchased it from a retailer who in turn
had purchased from the defenders. There was no relationship between pursuer and defenders
except that arising from the fact that she consumed the ginger beer they had made and bottled.
The bottle was opaque so that it was impossible to see that it contained the decomposed
remains of a snail: it was sealed and stoppered so that it could not be tampered with until it
was opened in order to be drunk. The House of Lords held these facts established in law a
duty to take care as between the defenders and the pursuer. Their Lordships think that the
principle of the decision is summed up in the words of Lord Atkin at p. 599:
A manufacturer of products, which he sells in such a form as to show that he
intends them to reach the ultimate consumer in the form in which they left him with
no reasonable possibility of intermediate examination, and with the knowledge that
the absence of reasonable care in the preparation or putting up of the products will
result in an injury to the consumer#s life or property, owes a duty to the consumer to
take that reasonable care.
This statement is in accord with the opinions expressed by Lord Thankerton and Lord
Macmillan, who in principle agreed with Lord Atkin. In order to ascertain whether the
principle applies to the present case, it is necessary to define what the decision involves and
consider the points of distinction relied upon before their Lordships. It is clear that the
decision treats negligence, where there is a duty to take care, as a specific tort in itself, and
not simply as an element in some more complex relationship or in some specialised breach of
duty, and still less as having any dependence on contract. All that is necessary as a step to
establish the tort of actionable negligence is to define the precise relationship from which the
duty to take care is to be deduced. It is however essential in English law that the duty should
be established: the mere fact that a man is injured by another#s act gives in itself no cause of
action: if the act is deliberate, the party injured will have no claim in law even though the
injury is intentional, so long as the other party is merely exercising a legal right: if the act
involves lack of due care, again no case of actionable negligence will arise unless the duty to
be careful exists. In 1932 AC 562, the duty was deduced simply from the facts relied on, viz.,
that the inured party was one of a class for whose use, in the contemplation and intention of
the makers, the article was issued to the world, and the article was used by that party in the
state in which it was prepared and issued without it being changed in any way and without
there being any warning of, or means of detecting, the hidden danger: there was, it is true, no
personal intercourse between the maker and the user; but though the duty is personal, because
it is interpartes, it needs no interchange of words, spoken or written, or signs of offer or
assent; it is thus different in character from any contractual relationship; no question of
consideration between the parties is relevant: for these reasons the use of the word ! privity" in
this connexion is apt to mislead because of the suggestion of some overt relationship like that
in contract, and the word ! proximity" is open to the same objection; if the term proximity is
to be applied at all, it can only be in the sense that the want of care and the injury are in
essence directly and intimately connected; though there may be intervening transactions of
sale and purchase and intervening handling between these two events, the events are
themselves unaffected by what happened between them; proximity can only properly be used
to exclude any element of remoteness, or of some interfering complication between the want
of care and the injury, and like ! privity" may mislead by introducing alien ideas. Equally also
may the word ! control" embarrass, though it is conveniently used in the opinions in 1932 AC
562(1) to emphasise the essential factor that the consumer must use the article exactly as it
left the maker, that is in all material features, and use it as it was intended to be used.
In that sense the maker may be said to control the thing until it is used. But that again is
an artificial use, because, in the natural sense of the word, the makers parted with all control
when they sold the article and divested themselves of possession and property. An argument
used in the present case based on the word ! control" will be noticed later. It is obvious that
the principles thus laid down involve a duty based on the simple facts detailed above, a duty
quite unaffected by any contracts dealing with the thing, for instance, of sale by maker to
retailer, and again by retailer to consumer or to the consumer#s friend. It may be said that the
duty is difficult to define, because when the act of negligence in manufacture occurs there
was no specific person towards whom the duty could be said to exist: the thing might never be
used: it might be destroyed by accident or it might be scrapped, or in many ways fail to come
into use in the normal way: in other words the duty cannot at the time of manufacture be other
than potential or contingent and only can become vested by the fact of actual use by a
particular person.
One further point may be noted. The principle of (1932) AC 562 can only be applied
where the defect is hidden and unknown to the consumer, otherwise the directness of cause
and effect is absent: the man who consumes or uses a thing which he knows to be noxious
cannot complain in respect of whatever mischief follows because it follows from his own
conscious volition in choosing to incur the risk or certainty of mischance. If the foregoing are
the essential features of (1932) AC 562, they are also to be found, in their Lordships#
judgment, in the present case. The presence of the deleterious chemical in the pants, due to
negligence in manufacture, was a hidden and latent defect, just as much as were the remains
of the snail in the opaque bottle; it could not be detected by any examination that could
reasonably be made. Nothing happened between the making of the garments and their being
worn to change their condition. The garments were made by the manufacturers for the
purpose of being worn exactly as they were worn in fact by the appellant: it was not
contemplated that they should be first washed. It is immaterial that the appellant has a claim
in contract against the retailers, because that is a quite independent cause of action, based on
different considerations, even though the damage may be the same. Equally irrelevant is any
question of liability between the retailers and the manufacturers on the contract of sale
between them. The tort liability is independent of any question of contract.
It was argued, but not perhaps very strongly, that (1932) AC 562 was a case of food or
drink to be consumed internally, whereas the pants here were to be worn externally. No
distinction, however can be logically drawn for this purpose between a noxious think taken
internally and a noxious thing applied externally: the garments were made to be worn next the
skin: indeed Lord Atkin specifically puts as examples of what is covered by the principle he is
enunciating things operating externally, such as ! an ointment, a soap, a cleaning fluid or
cleaning powder." Mr. Greene, however sought to distinguish (1932) AC 562 from the
present on the ground that in the former the makers of the ginger beer had retained ! control"
over it in the sense that they had placed it in stoppered and sealed bottles, so that it would not
be tampered with until it was opened to be drunk, whereas the garments in question were
merely put into paper packets, each containing six sets, which in ordinary course would be
taken down by the shopkeeper and opened and the contents handled and disposed of
separately so that they would be exposed to the air. He contended that though there was no
reason to think that the garments when sold to the appellant were in any other condition, least
of all as regards sulphur contents, that when sold to the retailers by the manufacturers, still the
mere possibility and not the fact of their condition having been changed was sufficient to
distinguish (1932) AC 562: there was no ! control" because nothing was done by the
manufacturers to exclude the possibility of any tampering while the goods were on their way
to the user. Their Lordships do not accept that contention. The decision in (1932) AC 562
did not depend on the bottle being stoppered and sealed: the essential point in this regard was
that the article should reach the consumer or user subject to the same defect as it had when it
left the manufacturer. That this was true of the garment is in their Lordships# opinion beyond
question. At most there might in other cases be a greater difficulty of proof of the fact.
Mr. Greene further contended on behalf of the manufacturers that if the decision in (1932)
AC 562 were extended even a hairsbreadth, no line could be drawn and a manufacturer#s
liability would be extended indefinitely. He put as an illustration the case of a foundry which
had cast a rudder to befitted on a liner: he assumed that it was fitted and the steamer sailed the
seas for some years: but the rudder had a latent defect due to faulty and negligent casting and
one day it broke, with the result that the vessel was wrecked, with great loss of life and
damage to property. He argued that if (1932) AC 562 were extended beyond its precise facts,
the maker of the rudder would be held liable for damages of an indefinite amount, after an
indefinite time and to claimants indeterminate until the event. But it is clear that such a state
of things would involve many considerations far removed from the simple facts of this case.
So many contingencies must have intervened between the lack of care on the part of the
makers and the casualty that it may be that the law would apply, as it does in proper cases, not
always according to strict logic, the rule that cause and effect must not be too remote: in any
case the element of directness would obviously be lacking. Lord Atkin deals with that sort of
question in (1932) AC 562, 591, where he quotes the common sense opinion of Mathew, LJ:
It is impossible to accept such a wide proposition, and, indeed, it is difficult to see
how, if it were the law, trade could be carried on.
In their Lordships# opinion it is enough for them to decide this case on its actual facts.
No doubt many difficult problems will arise before the precise limits of the principle are
defined: many qualifying conditions and many complications of fact may in the future come
before the Courts for decision. It is enough now to say that their Lordships hold the present
case to come within the principle of (1932) AC 562 and they think that the judgment of the
Chief Justice was right and should be restored as against both respondents and that the appeal
should be allowed with costs here and in the Courts below, and that the appellant#s petition
for leave to adduce further evidence should be dismissed without costs. They will humbly so
advise His Majesty.
*****
EFFECTS OF THE CONTRACT
Passing of Property
CIT v. Mysore Chromite Ltd.
(1955) 1 SCR 849 : AIR 1955 SC 98
S.R. DAS, J. - This is an appeal from the judgment pronounced by the High Court of
Judicature at Madras on 29th March, 1951 on a consolidated reference by the Income Tax
Appellate Tribunal under Section 66(1) of the Income Tax Act whereby the High Court
answered in the affirmative both the referred questions which were expressed in the following
terms:
! (1) Whether on the facts and in the circumstances of the case the profits derived
by the assessee company from sales made to European and American buyers arose
outside British India?
(2) Whether on the facts and in the circumstances of the case the profits derived
by the assessee company from sales made to European and American buyers were
received outside British India?"
3. The assessee company is a private limited company registered in the Mysore State
under the Mysore Company Regulations and has its registered office at Sinduvalli in Mysore
State. The management and control of the assessee company was vested in Messrs Oakley
Bowden & Co. (Madras) Ltd., another private limited company incorporated under the Indian
Companies Act, having its registered office at No. 15, Armenian Street, Madras. The assessee
company owns chromite mines in Mysore State. Chrome ores are extracted from the mines
and converted into a merchantable product and then sold to buyers mostly outside India. A
very small proportion of the total sales is effected in India and for the purposes of this case
may be left out of consideration. The sales are mostly to buyers in America and Europe. The
sales to the purchasers in Europe are put through in London by Bowden Oakley & Co. Ltd.,
London, which is the agent of the assessee company in Europe holding a power of attorney
from the assessee company. The contracts for sale to European purchasers are signed by
Bowden Oakley & Co. Ltd., in London. The sales to purchasers in America are effected
through Messrs W.R. Grace & Co., who buy for undisclosed principals. The contracts for sale
to American purchasers are signed by W.R. Grace & Co., presumably in America and by
Oakley Bowden & Co. (Madras) Ltd., in Madras. Specimen forms of contracts with European
purchasers and those with American purchasers are set out in the order of the Tribunal dated
22nd January, 1948 out of which the present reference arises. Under both forms of contracts
the price was F.O.B. Madras or Marmagoa. A very small quantity of goods was sold F.O.B.
Marmagoa and the same need not be considered here. Provision was made for weighment,
sampling and assay of goods at destination.
CIT v. Mysore Chromite Ltd. 255
4. The course of dealing as found by the Appellate Tribunal was as follows: Before the
goods were actually shipped, the buyers used to open a confirmed irrevocable Bankers# credit
with some first class bank in London. Being informed of the opening of such credit the
Eastern Bank Ltd., London sent intimation to the Eastern Bank Ltd., Madras, and the latter in
its turn used to pass on the intimation by letter addressed to the assessee company. A
specimen of such letter is also set out in the order of the Appellate Tribunal. In such
communication the Eastern Bank Ltd., Madras, informed the assessee company that ! in
accordance with advices received by letter from our London Office, a confirmed and
irrevocable credit has been opened in your favour by Messrs Morgan Grenfell & Co., Ltd.,
London, for account of Messrs W.R. Grace & Co., New York, for a sum not exceeding £
7300 (seven thousand three hundred pounds sterling) in all, available by delivery to us on or
before 15th January, 1940 of the following documents.% " Towards the end of the letter the
Eastern Bank Ltd., Madras used to write that they were ! prepared in our options as customary
to negotiate drafts drawn in terms of the arrangement provided that the documents as
abovementioned appear to us to be in order" . The letter concluded with a warning that the
advice was ! given for your guidance and without involving any responsibility on the part of
this Bank" . On receipt of such intimation the assessee company placed the contracted goods
on board the steamer at Madras and obtained A bill of lading in its own name. As already
mentioned, the shipments were made principally at Madras Port. Thereafter the assessee
company used to make out a provisional invoice on the basis of the bill of lading weight and
contract price for 48 per cent Cr. 203 and used to draw a bill of exchange on the buyers#
Bank, where the letter of credit had been opened, for 90 per cent of the amount of the
provisional invoice payable at sight in the case of European contracts and 80 per cent of the
amount of the provisional invoice at 90 days# sight in the case of American contracts and in
either case the bills of exchange used to be drawn in favour of the Eastern Bank Ltd., London.
The bill of exchange together with the relative bill of lading endorsed in blank by the assessee
company and the provisional invoice was then negotiated with the Eastern Bank Ltd., Madras,
the bankers of the assessee company, who used to credit the assessee company with the
amount of the bill of exchange. The Eastern Bank Ltd., Madras, then forwarded the
documents to the Eastern Bank Ltd., London, who used to present the bill of exchange to the
buyers# Bank in London and upon the bill of exchange being accepted the Eastern Bank Ltd.,
London, used to deliver the bill of lading and the invoice to the buyers# Bank. The buyers#
Bank in due course used to pay the amount of the bill of exchange to the Eastern Bank Ltd.,
London. Thereafter, on arrival of the goods and after weighment and assay, the sale price was
ascertained and the balance of price, after deducting the payments made against the bill of
exchange, used to be paid to the Eastern Bank Ltd., London, which was the assessee
company#s agent and banker in London.
7. Learned Solicitor-General appearing in support of this appeal contends that having
regard to the terms of the contracts the sales must be regarded as having taken place in British
India. The facts strongly relied on by him are (i) that the price and delivery of goods were on
F.O.B. terms, (ii) that in the European contracts the insurance, if any, was to be the concern of
the buyers and (iii) that payment of the 80 per cent or 90 per cent as the case may be was
made in Madras by the Eastern Bank Ltd., Madras, to the assessee company on the delivery of
the documents. All these facts taken together indicate, according to his submission, that the
256 CIT v. Mysore Chromite Ltd.
property in the goods passed at Madras and the sales accordingly were completed in British
India. We are unable to accept this line of reasoning. According to Section 4 of the Indian
Sale of Goods Act a contract of sale of goods is a contract whereby the seller transfers or
agrees to transfer the property in goods to the buyer for a price and where under a contract of
sale the property in the goods is transferred from the seller to the buyer, the contract is called
a sale, but where the transfer of property in the goods is to take place at a future time or
subject to some condition thereafter to be fulfilled, the contract is called an agreement to sell.
By sub-section (4) of that section an agreement to sell becomes a sale when the time elapses
or the conditions are fulfilled subject to which the property in the goods is to be transferred.
Section 18 of the Act clearly indicates that in the case of sale of unascertained goods no
property in the goods is transferred to the buyer unless and until the goods, are ascertained. In
the present case, the contracts were always for sale of unascertained goods. Skipping over
Sections 19 to 22 which deal with contract of sale of specific goods we come to Section 23
which lays down that where there is a contract for the sale of unascertained or future goods by
description and goods of that description and in a deliverable state are unconditionally
appropriated to the contract, either by the seller with the assent of the buyer or by the buyer
with the assent of the seller, the property in the goods thereupon passes to the buyer. It is
suggested that as soon as the assessee company placed the goods on board the steamer named
by the buyer at the Madras Port the goods became ascertained and the property in the goods
passed immediately to the buyer. This argument, however, overlooks the important word
! unconditionally" used in the section. The requirement of the section is not only that there
shall be appropriation of the goods to the contract but that such appropriation must be made
unconditionally. This is further elaborated by Section 25 which provides that where there is a
contract for the sale of specific goods or where goods are subsequently appropriated to the
contract, the seller may, by the terms of the contract or appropriation reserve the right of
disposal of the goods until certain conditions are fulfilled. In such a case, notwithstanding the
delivery of the goods to the buyer, or to a carrier or other bailee for the purpose of
transmission to the buyer, the property in the goods does not pass to the buyer until the
conditions imposed by the seller are fulfilled. The question in this case, therefore, is: was
there an unconditional appropriation of the goods by merely placing them on the ship? It is
true that the price and delivery was F.O.B., Madras but the contracts themselves clearly
required the buyers to open a confirmed irrevocable Bankers# credit for the requisite
percentage of the invoice value to be available against documents. This clearly indicated that
the buyers would not be entitled to the documents that is, the bill of lading and the provisional
invoice, until payment of the requisite percentage was made upon the bill of exchange.
The bill of lading is the document of title to the goods and by this term the assessee
company clearly reserved the right of disposal of the goods until the bill of exchange was
paid. Placing of the goods on board the steamer named by the buyer under a F.O.B. contract
clearly discharges the contractual liability of the seller as seller and the delivery to the buyer
is complete and the goods may thenceforward be also at the risk of the buyer against which he
may cover himself by taking out an insurance. Prima facie such delivery of the goods to the
buyer and the passing of the risk in respect of the goods from the seller to the buyer are strong
indications as to the passing also of the property in the goods to the buyer but they are not
decisive and may be negatived, for under Section 25 the seller may yet reserve to himself the
CIT v. Mysore Chromite Ltd. 257
right of disposal of the goods until the fulfilment of certain conditions and thereby prevent the
passing of property in the goods from him to the buyer. The facts found in this case are that
the assessee company shipped the goods under bill of lading issued in its own name. Under
the contract it was not obliged to part with the bill of lading which is the document of title to
the goods until the bill of exchange drawn by it on the buyers# Bank where the irrevocable
letter of credit was opened was honoured. It is urged that under the provision in the contract
for weighment and assay, which was ultimately to fix the price unless the buyer rightly
rejected the goods as not being in terms of the contract, the passing of property in the goods
could not take place until the buyer accepted the goods and the price was fully ascertained
after weighment and assay. It is submitted that being the position, the property in the goods
passed and the sales were concluded outside British India, for the weighment, sampling, assay
and the final fixation of the price could only take place under all these contracts outside
British India. It is not necessary for us to express any opinion on this extreme contention.
Suffice it to say, for the purposes of this case, that in any event upon the terms of the contracts
in question and the course of dealings between the parties the property in the goods could not
have passed to the buyer earlier than the date when the bill of exchange was accepted by the
buyers# Bank in London and the documents were delivered by the assessee company#s agent,
the Eastern Bank Ltd., London, to the buyers Bank. This admittedly, and as found by the
Appellate Tribunal, always took place in London. It must, therefore, follow that at the earliest
the property in the goods passed in London where the bill of lading was handed over to the
buyers# Bank against the acceptance of the relative bill of exchange. In the premises, the
Appellate Tribunal as well as the High Court were quite correct in holding that the sales took
place outside British India and, ex hypothesi, the profits derived from such sales arose outside
British India.
8. As to the second question, the learned Solicitor-General contends that irrespective of
the place where the sale may have taken place the profits derived from such sales were
received in Madras. It is recalled that after shipment the assessee company, through its
managing agent in Madras, prepared provisional invoices and drew bills of exchange for 80
per cent or 90 per cent, as the case may be, of the amount of such invoices and handed over
the same to the Eastern Bank Ltd., Madras, and received the amount of the bill of exchange
from them in Madras. He contends that the receipt of this payment by the assessee company
was really the receipt of the price of the goods and amounted to receipt of profits in Madras.
He draws our attention to the terms of payment in the European contract and to the letter of
intimation of the opening of the credit sent by the Eastern Bank Ltd. Madras, to the assessee
company which have been quoted in part in the earlier part of this judgment. He relies on the
words ! through the Eastern Bank Ltd" , appearing in the contract and the words ! available by
delivery to us" appearing in the letter. We do not think that those words support the
contention of the learned Solicitor-General. The words ! through the Eastern Bank Ltd.,"
appear to us to go with the preceding words ! to be advised to sellers" which are put within
brackets which seem to have been wrongly closed after the word ! sellers" instead of after the
words ! the Eastern Bank Ltd." Ordinarily, the buyer opens a letter of credit with his Bank in
favour of the seller and the words ! through the Eastern Bank Ltd." would be meaningless
unless it was intended to mean that the irrevocable credit which was in favour of the assessee
company was to be operated upon by the latter through the Eastern Bank Ltd. If that were the
258 CIT v. Mysore Chromite Ltd.
true meaning, then that certainly does not make the Eastern Bank Ltd. the agent of the buyers.
The words ! available by delivery to us" occurring in the letter of the Eastern Bank Ltd.,
Madras, do not appear to us to indicate that this was any part of the terms of the letter of
credit. This was an intimation in accordance with the advice received by the Eastern Bank
Ltd., Madras, from the Eastern Bank Ltd., London, that the assessee company might avail
itself of the letter of credit by delivery of the documents to the Eastern Bank Ltd., Madras.
This is made further clear by the latter part of the letter where the Eastern Bank Ltd., Madras,
expressed their willingness at their option to negotiate the drafts drawn in terms of the
arrangement provided that the documents were in order. The concluding sentence of that
letter whereby the Eastern Bank Ltd., Madras, disown any responsibility in respect of the
advice clearly militates against the suggestion of the learned Solicitor-General. It is, in these
circumstances, impossible to accede to the argument that the payment of 80 per cent or 90 per
cent, as the case may be, of the amount of the provisional invoice by the Eastern Bank Ltd.,
Madras, was a payment on account of the price. Normally, price is paid by or on behalf of the
buyer. In this case the fact found is that the Eastern Bank Ltd., Madras, and the Eastern Bank
Ltd. London, were agents of the assessee company. Neither of them had any relation with the
buyers. Therefore, a payment by them cannot be regarded as a payment of the price. The true
position is very clearly put by Lord Sumner in The Prinz Adalbert [LR (1917) AC 586, 589]:
! When a shipper takes his draft, not as yet accepted, but accompanied by a bill of
lading indorsed in this way, and discounts it with a banker, he makes himself liable
on the instrument as drawer, and further makes the goods, which the bill of lading
represents, security for its payment. If, in turn, the discounting banker surrenders the
bill of lading to the acceptor against his acceptance, the inference is that he is
satisfied to part with his security in consideration of getting this further party#s
liability on the bill, and that in so doing he acts with the permission and by the
mandate of the shipper and drawer."
This payment by the Eastern Bank Ltd., Madras, therefore, is nothing but an advance made by
them to their own customer on the security of the goods covered by the bill of lading
reinforced by the benefit of the liability taken up by the assessee company as drawer of the
bill which in its turn is backed by the confirmed and irrevocable credit of the buyers# London
Bank. If this payment was on account of the price, why should the assessee company, as the
seller, undertake any liability to the Eastern Bank Ltd., as the drawer of the bill of exchange?
The truth of the matter is that the price was paid on behalf of the buyers by their respective
London Banks in London to the Eastern Bank Ltd., London which was the agent of the
assessee company. The first receipt of the price, therefore, as pointed out by the High Court,
was by the Eastern Bank Ltd., London, on behalf of the sellers. There is no dispute that the
balance of the price ascertained after weighment and assay and deducting the amount paid on
the bill of exchange was similarly received in London by the Eastern Bank Ltd., London, on
behalf of the assessee company. The subsequent adjustment made in the books of the Eastern
Bank Ltd., London did not operate as a receipt of profits in British India. In our opinion the
High Court correctly answered the second question also in favour of the assessee company.
9. For reasons stated above, this appeal must stand dismissed.
Mysore Sugar Co. Ltd., Bangalore v. Manohar Metal Industries,
Chikpet, Bangalore
AIR 1982 Kant. 283
[Section 54 - Right of an un-paid seller]
The Mysore Sugar Company, the plaintiff in the suit, advertised for sale of certain items like
copper ingots, copper scraps as well as brass tubes available with the company at Mandya by
its notification dated 27th July, 1966. The defendant offered to purchase the same by his letter
dated 30-6-1966. The plaintiff accepted the offer of the defendant to purchase the various
items and, thereafter, the defendant lifted certain items on part-payment and when it came to
lifting of copper ingots, he sought for time to pay the balance and to remove the same
separating it from other things with which it was mixed up. The defendant had to lift 2,000
K.Gs. of copper scrap and 2,000 K.Gs. of copper ingots valued at Rs. 48,503-96. He wrote to
the plaintiff on 28-4-1966 raising objections regarding percentage of copper contents in the
articles. The plaintiff intimated to the defendant on 12-9-1966 stating that no certificate for
purity of the metal would be given and the material was sold on ! as is and where is"
condition. In spite of repeated reminders and demands, the defendant did not take delivery of
the remaining goods and remit the value. The letter dated 22-11-1966 to the defendant also
did not meet with favourable response. Therefore, the plaintiff resold copper tubes and copper
ingots through an advertisement dated 30th December, 1966 to M/s. Karnataka Hardware,
Avenue Road, Bangalore. By the said resale, the plaintiff incurred loss of Rs. 8,643-96. The
plaintiff got issued a legal notice to the defendant to make good the loss. The defendant did
not. Hence, the plaintiff instituted the suit for recovery of Rs. 8,643-96 less Rs. 500/- being
the initial deposit by the defendant. The plaintiff claimed, in all, Rs. 8,143-96 ps. from the
defendant along with costs and interest.
The defendant contended that the suit was not tenable. According to him, what was
offered was copper scraps and copper ingots in the advertisement and what was found at the
spot was alloy and not pure copper. Therefore, he contended that the plaintiff committed
breach of contract. He further contended that the plaintiff did not have right to re-sell and that
compensation, if any, could only be recovered under the general principles contained in S. 73
of the Indian Contract Act, 1872 (hereinafter referred to as the #Act$). According to him,
Section 54 of the Sale of Goods Act, 1930 was not applicable. The defendant, according to
him, was not liable to pay any damages. On the other hand, he claimed compensation of Rs.
1,000/-.
G.N. SABHAHIT, J. ± 8. The points, therefore, that arise for my consideration in this appeal
are:
(1) Whether the Courts below were justified in holding that the defendant committed
breach of contract?
(2) Whether the learned Civil Judge was justified in dismissing the suit for damages?
9. It is true that in the advertisement given by the plaintiff, it is specifically mentioned
that what was offered for sale was copper scraps and copper ingots. It is further true that
there was no clause in the tender stating that the goods were sold on ! as is and where is"
condition. It is also on record that the parties were not allowed to inspect the goods before
Mysore Sugar Co. Ltd., Bangalore v. Manohar Metal Industries, Chikpet, Bangalore 279
offering their tender. The fact, however, remains that after the tender of the defendant was
accepted he had occasion to inspect the goods and he lifted part of the goods and when he
came to lifting of copper scraps and copper ingots, instead of raising any protest, he prayed
for extension of time to make payment and to lift the goods. That would clearly show that the
defendant knew that what was offered was the material on ! as is and where is" condition.
Hence, the Courts below have rightly rejected the contention of the defendant that he was not
offered copper scraps and copper ingots of cent per cent purity and as such the plaintiff
committed the breach of contract. I have no reason to differ.
10. It is no doubt true that it is the plaintiff who has come to the Court claiming damages.
The first question that would arise for my consideration is whether, under Section 54(2) of
the Sale of Goods Act, the goods had already passed on to the ownership of the buyer.
11. Thus we have to find out whether the seller exercised his right of lien or stoppage in
transit on the facts of this case. (The court re-produced sections 19 and 20 of the Act.)
12-A. Thus by reading Ss. 19 and 20 of the said Act, it becomes obvious that in this case
an offer was made by advertising to sell all the articles in question. Thereafter, a tender was
given by the defendant and his tender was accepted. Therefore, there is an unconditional
contract of sale and there were, no doubt, stipulations for payment of price and delivery of
goods subsequently. In such a case, the property in the goods passes on to the buyer and
hence Section 54 of the Act comes into play. It is on record that the plaintiff issued a notice
to the defendant as per Ex. D-10 on 22-11-1966 making his intention clear that the buyer must
lift the goods on payment as otherwise he will have to resell the goods and the defendant shall
be liable for any loss caused. That satisfied the condition mentioned in Section 54(2) of the
Act. Thereafter, however, it was made clear by a notice to the defendant that if he did not lift
the goods within three days, his contract would be treated as cancelled. That is by Ex. D-8
dated 12-9-1966. Therefore, since the goods were not lifted by the defendant, the contract
came to an end on or about 15-9-1966. Within a reasonable time thereafter the company
should have resold the goods by advertising it. But the evidence on record shows that the
advertisement was inserted only on 30-12-1966, i.e., after nearly three months.
13. The learned Advocate appearing for the respondent-defendant urged before me that
this was not re-sale within a reasonable time as contemplated under S. 54(2) of the Act. It is
all the more so, according to him, because P.W. 2, the person who purchased the goods in the
re-sale has clearly stated in his evidence that the prices were more three months prior to his
giving the tender for resale, and, thereafter, the prices came down. Therefore it is clear from
the evidence on record that the prices were falling from August 1966 and the plaintiff-
company delayed for three months therefrom to give the advertisement, knowing fully well
that the prices were falling; for P.W. 2 has stated that the prices were a little low at the time
when he gave his tender and that the prices were a little more earlier. P.W. 2 is witness
examined by the plaintiff. Making allowance for his interestedness, it is obvious that the
prices were more in about September 1966 when the breach of contract occurred.
14. It is needless for me to point out that a duty lay on the plaintiff to mitigate the
damages. Even in view of S. 54(2), it was the duty of the plaintiff to see that re-sale was
effected within a reasonable time especially so, when the prices were falling for the relevant
material. Three months delay, therefore, on the facts of this case, is certainly inordinate and
280 Mysore Sugar Co. Ltd., Bangalore v. Manohar Metal Industries, Chikpet, Bangalore
re-sale has not taken place within a reasonable time as contemplated in Section 54(2). It is
relevant to mention in this context that what was the ruling price in about September 1966 is
not brought on record by the plaintiff though P.W. 2, as stated above, admitted that the prices
were more at that time. The difference claimed as damages on the facts of this case, is also
not much. That being so, the learned Civil Judge having regard to the probabilities has
observed that if the goods were re-sold in September 1966 within a reasonable time, the
plaintiff would not have incurred any loss whatsoever. At any rate, since the burden of
proving the damages was on the plaintiff and he has not placed any evidence on record in that
behalf, the learned Civil Judge has rightly proceeded to disallow the suit for damages.
16. As explained above, there has been unreasonable delay in re-selling, on the facts of
the present case, when the market price was falling. Hence, the value realised on re-sale does
not afford a good ground to fix the damages. There is no evidence on record placed by the
plaintiff to show the ruling price of the commodity at the time when there was breach of
contract. The plaintiff has come to Court. The burden is on him to prove the alleged damages
and since he has not placed any material evidence to show that he has suffered damages, he
has to fail and the learned Civil Judge has rightly held so. I have no reason to differ.
17. The learned counsel appearing for the respondent-defendant submitted that S. 54(2) of
the Sale of Goods Act should be read with Section 73 of the Act. It may be stated in this
context that Section 73 contains the general principle with regard to fixing up of damages,
whereas Section 54 speaks of specific case of moveable property sold. Section 54 is more
specific whereas Section 73 is general in nature. Therefore, Section 54 prevails over Section
73 though both the sections are based on the same general principle.
18. In the result, therefore, I am constrained to hold that the appeal is devoid of merits and
is liable to be dismissed and I dismiss the same.
*****
Gopalakrishna Pillai v. K.M. Mani
(1984) 2 SCC 83 : AIR 1984 SC 216
[Unpaid seller – section 54(4)]
D.P. MADON, J. -The question which falls for determination in this appeal by special leave
from the judgment and order of the Kerala High Court is whether the amount claimed by the
appellant in a suit filed by him against the respondent was a ! debt" within the meaning of that
expression as defined in clause (3) of Section 2 of the Kerala Debt Relief Act, 1977, (! the
Act" ) and was, therefore, deemed to be discharged.
2. The appellant$s case as founded in the plaint was that the respondent sold a cow and a
calf to him for a sum of Rs 1600 and that the cow did not yield the quantity of milk which the
respondent had stated it would yield and was suffering from an incurable disease which was
concealed from the appellant by the respondent. For this reason, the appellant asked the
respondent to buy back the said cow and the calf for the same price which had been paid by
the appellant to the respondent and thereupon the respondent agreed to buy back the said cow
and calf for a sum of Rs 1600. In pursuance of this agreement, the said cow and calf were
returned by the appellant to the respondent. By his letter dated October 27, 1976, the
respondent acknowledged that he had received back the said cow and calf and assured the
appellant that he would pay the price as early as possible. In spite of repeated demands made
by the appellant, including by his advocate$s letter dated September 17, 1977, the respondent
failed and neglected to pay to the appellant the said sum of Rs 1600 or any part thereof
though he went on promising to do so by his letters dated November 25, 1976, December, 30,
1976, and May 19, 1977. The appellant thereupon filed the suit out of which the present
appeal arises, being Original Suit No. 242 of 1977, in the Court of the Munsiff, Taliparamba.
In the plaint it was stated that though there was no agreement to pay any interest, the
appellant was entitled to interest by way of damages, and interest at the rate of 6 per cent per
annum was claimed on the said sum of Rs 1600 from October 27, 1976. The appellant
expressly averred in the plaint that the amount claimed by him was excluded from the
definition of ! debt" in the said Act.
3. By his written statement the respondent contended that he had only sold a pregnant
cow to the appellant for a sum of Rs 1500 and not Rs 1600 and that the cow did not suffer
from any disease but by reason of the negligent manner in which the appellant handled the
cow, it gave premature birth to a calf and that the appellant brought back the cow and the calf
and left them in front of his house. The respondent further denied his liability to pay any
amount to the appellant and alleged that he had ! agreed to pay Rs 1500 to the plaintiff
(appellant) by his letters for nothing" . He further alleged that he had paid a sum of Rs 750 to
the appellant. He also contended that he was a ! debtor" and the amount claimed from him in
the said suit was a ! debt" within the meaning of those expressions in the said Act and that he
was entitled to the benefit of the said Act and the suit was, therefore, not maintainable.
4. In order to understand the controversy between the parties it will be convenient to refer
now to the relevant statutory provisions. The Kerala Debtors Temporary (Relief) Act, 1975,
provided for a moratorium on the recovery of debts due from certain categories of persons,
such as, indigent agriculturists, landless labourers, artisans and kudikidappukars, for a period
of one year from October 14, 1975, or for such longer period as might be specified by the
282 Gopalakrishna Pillai v. K.M. Mani
Government by notification in the Gazette. The period of operation of the said temporary
legislation was extended until January 14, 1977, by S.R.O. No. 1031/76 dated October 7,
1976, published in the Kerala Government Gazette No. 559 dated October 8, 1976. This said
temporary legislation had been enacted pending the passing of a legislation to give permanent
relief to certain classes of debtors. Such permanent piece of legislation had, therefore, to come
into force before the expiry of the extended period of the said Kerala Debtors Temporary
(Relief) Act, 1975. As the Legislative Assembly was not in session, the Kerala Debt Relief
Ordinance, 1977 (Ordinance No. 1 of 1977), was promulgated by the Governor on January
13, 1977. As a bill to replace the said ordinance could not be introduced and passed in time, in
order to keep alive the provisions of the said ordinance another ordinance containing identical
provisions, namely, the Kerala Debt Relief Ordinance, 1977 (Ordinance No. 9 of 1977) was
promulgated by the Governor on May 6, 1977. The said Act, namely, the Kerala Debt Relief
Act, 1977, repealed and replaced the said ordinance. The said Act came into force with
retrospective effect from January 13, 1977, namely, the date on which the first Kerala Debt
Relief Ordinance, 1977, was promulgated.
5. Clause (3) of Section 2 of the said Act defines the expression ! debt" . The material
provisions of the said definition are:
! (3) ! debt" means any liability in cash or kind, whether secured or unsecured, due
from or incurred by a debtor on or before the date of commencement of this Act,
whether payable under a contract, or under a decree or order of any court, or
otherwise, and subsisting on that date, but does not include -
(f) any debt which represents the price of goods purchased;% ."
6. Clause (4) of the said Act defines the expression ! debtor" as meaning ! any person
whose annual income does not exceed three thousand rupees from whom any debt is due" .
There are two exceptions to this definition. We are concerned only with the first of these
exceptions. Under it any person from whom debt or debts exceeding three thousand rupees
(excluding interest) is or are due is excluded from the definition of the expression ! debtor" .
Section 3 of the said Act, omitting the proviso with which we are not concerned, provides as
follows:
3. Discharge of debt .- Notwithstanding anything contained in any other law for
the time being in force, or in any contract or other instrument having force by virtue
of any such law, or in any decree or order of court, with effect on and from the
commencement of this Act&
(a) every debt and the interest thereon payable by a debtor to a creditor shall be
deemed to be wholly discharged;
(b) no civil court shall entertain any suit or other proceeding against a debtor
for the recovery of any debt or part of a debt or any interest thereon;
(c) all suits and other proceedings (including appeals, revision petitions,
applications for review, proceedings for attachment and execution proceedings)
pending at such commencement against any debtor for the recovery of any debt
shall abate.
Gopalakrishna Pillai v. K.M. Mani 283
7. Thus, if the respondent$s annual income as also his total debts, excluding interest, did
not exceed Rs 3000, he would be a debtor for the purposes of the said Act. In such
eventuality, the amount due by him to the appellant together with interest, if any, thereon
would. be deemed to be wholly discharged on the date of the commencement of the said Act,
namely, January 13, 1977, and the Court would have no jurisdiction to entertain the
appellant$s suit inasmuch as the transaction in respect of which the claim was made in the suit
took place prior to that date, unless the claim made in the suit was a debt which represented
the price of goods purchased by the respondent.
11. Whether the amount due by way of refund of price would be a debt representing the
price of goods sold is not a question with which we are concerned for the appellant had
expressly pleaded in his plaint that the respondent had agreed to buy back the said cow and
calf and had agreed to pay to him a sum of Rs 1600 as price and that he had failed to pay the
said amount or any part thereof. The respondent in his written statement had denied this
contract of sale. As set out earlier, at the trial of the suit the respondent abandoned this
defence and the appellant restricted his claim to Rs 1500. As a result of this, the agreed and
undisputed position was that there was an agreement between the appellant and the
respondent under which the appellant had agreed to sell to the respondent the said cow and
calf purchased by him from the respondent for a sum of Rs 1500 and had delivered the said
cow and calf to the respondent in performance of his part of the contract. The High Court
overlooked the fact that at the trial, the respondent had given up his contention with respect to
the transaction in question resting content with contesting the suit only on the grounds of part
payment and discharge of the debt by reason of clause (3) of Section 2 read with Section 3 of
the said Act, and that those were the only issues on which the parties went to trial. It is also
pertinent to note that it was not the case of the appellant that it was a condition of the contract
that the cow would yield a particular quantity of milk and that such condition not having been
fulfilled, he was entitled to reject the goods, namely, the cow and the calf, and get a refund of
the price. Even if such a statement on the part of the respondent were to be treated as a
warranty, a breach of warranty does not entitle a buyer to reject the goods and his only
remedies would be those provided in Section 59 of the Sale of Goods Act, 1930, namely, to
set up against the seller the breach of warranty in diminution or extinction of the price or to
sue the seller for damages for breach of warranty. The case of the appellant was also not
founded upon any breach of warranty. His case as expressly pleaded in the plaint was that he
took back the cow and the calf to the respondent and that the respondent agreed to buy them
back for the same price. This was, therefore, a case of a resale by the buyer to the seller, the
sale price being the very same amount which the buyer had paid to the seller. Clause (10) of
Section 2 of the Sale of Goods Act defines #price$ as meaning ! the money consideration for a
sale of goods" . A resale of goods is also a sale of goods and the money consideration for such
resale is the price payable in respect of such resale. When a person purchases goods, he may
sell them in his turn. Such second sale is generally referred to as a resale. A resale may be to a
third person or to the original seller. In either case, the money consideration for such second
sale would be the price of goods resold. It is, therefore, difficult to understand how the High
Court could have come to the conclusion that such money consideration would be equivalent
to the price of goods purchased but would not represent the price of goods purchased. The
High Court was clearly wrong in the view which it took. The amount due from the respondent
284 Gopalakrishna Pillai v. K.M. Mani
to the appellant was a debt which represented the price of goods purchased by the respondent
from the appellant and was by reason of exception (f) to clause (3) of the said Section 2 of the
said Act clearly excluded from the definition of ! debt" .
12. It was also submitted before us on behalf of the respondent that there being admittedly
no agreement as to any payment of interest, the trial court was not justified in awarding
interest to the appellant. The amount of interest claimed by the appellant in his plaint was not
based on an agreement but was claimed by way of damages. Section 61 of the Sale of Goods
Act provides for interest by way of damages and special damages. The relevant provisions of
sub-section (2) of that section are as follows:
(2) In the absence of a contract to the contrary, the court may award interest at such rate
as it thinks fit on the amount of the price -
(a) to the seller in a suit by him for the amount of the price - from the date of the
tender of goods or from the date on which the price was payable;
13. According to the averments in the plaint it was by his letter dated October 26, 1976,
that the respondent had agreed to pay the amount of the price. The appellant had accordingly
made a claim for interest from the said date. Under the provisions of Section 61(2) of the Sale
of Goods Act, the appellant was clearly entitled to such interest by way of damages.
14. In the result, this appeal must succeed and is allowed and the judgment and order of
the Kerala High Court are set aside except as regards the order for costs and the Civil
Revision Petition No. 1990 of 1979 (c) filed by the respondent in the said High Court is
dismissed and the judgement and decree of the District Court of Tellicherry in Appeal Suit
No. 356 of 1978 and, except with respect to the order of costs, the decree of the Court of the
Munsiff of Taliparamba in Original Suit No. 242 of 1977 are restored.
*****
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HARDSHIP & SUBSTITUTED
PERFORMANCE AS DEFENCES AGAINST
SPECIFIC PERFORMANCE: CRITIQUE
OF THE RECENT DEVELOPMENTS
-Badrinath Srinivasan
Abstract For a long time, contract law in India has been

regarded as being plagued with inefficient contract enforce-
ment mechanisms. The consequence has been that projects
remained incomplete for several years, thereby increasing
project completion costs and fostering litigation. All these
factors have resulted in a weak regime on contract enforce-
ment. To address these deficiencies, the Government consti-
tuted an expert committee and based on the recommendations
of the said committee, introduced amendments to the Specific
Relief Act, 1963 which are now in force. The amended pro-
visions enable the promisee obtain specific performance irre-
spective of legitimate situations where it is not possible for
the promisor to perform or where substitutes are reasonably
available. This paper argues that such a legal position will
lead to unjust results for the promisors/contractors and that
judicial interpretation should take into account their legiti-
mate interests.
I. INTRODUCTION
Edward Fry in his epochal work on Specific Performance prophesied:
"It may be suggested that [] a perfect system of jurisprudence ought to

enforce the actual performance of contracts of every kind and class, except
only when there are circumstances which render such enforcement unnec-
essary or inexpedient, and that it ought to be assumed that every contract is
LL.M., FI.I., M.C.I.Arb. The author is currently working as Senior Executive (Law) in a
public sector undertaking and writes on arbitration and contract law in various fora, including
at the Practical Academic Blog (www.practicalacademic.blogspot.in). Views stated herein are
personal. Email: lawbadri@gmail.com.
54 NATIONAL LAW SCHOOL OF INDIA REVIEW 31 NLSI REV. (2019)
specifically enforceable until the contrary be shown. But so broad a proposition

has never, it is believed, been asserted by any of the judges of the court of
chancery, or their successors in the high court of justice, though, if prophecy
were the function of a law writer, it might be suggested that they will more
and more approximate to such a rule".
His prophesy has come true in India. The Specific Relief (Amendment) Act,
2018 ('2018 Act' or 'Act'), which has been brought into force from October
1, 2018,2 makes contracts specifically enforceable, excepting extraordinary
circumstances. 3
The 2018 Act makes far-reaching changes in the law on contract reme-
dies. It provides a basket of remedies to a promisee whose contract has been
breached. Before the enactment of the 2018 Act, specific performance was
ordered by the court only as an exceptional remedy in respect of specific cat-
egories of agreements,' and against specific parties.5 Specific performance,
whose origins could be traced to equity in English law,6 was granted only at
the discretion of the court.' The 2018 Act does away with all these and mod-
ifies the law substantially so much that the Specific Relief Act, 1963 ('Act' or
'1963 Act') as amended hardly resembles English law.
WILLIAM DONALDSON RAWLINS & EDWARD FRY, A TREATISE ON THE SPECIFIC PERFORMANCE OF
CONTRACTS 21 (5th ed. 1911).
2 Ministry of Law & Justice, Notification No. S.O. 4888(E) dated Sep. 19, 2018, http://egazette.
nic.in/WriteReadData/2018/189830.pdf (last visited Nov. 8, 2018).
3 The Specific Relief Act, § 14 (1963), as amended reads: "The following contracts cannot be
specifically enforced, namely:
(a) where a party to the contract has obtained substituted performance of contract in accord-
ance with the provisions of S. 20;
(b) a contract, the performance of which involves the performance of a continuous duty which
the court cannot supervise;
(c) a contract which is so dependent on the personal qualifications of the parties that the
court cannot enforce specific performance of its material terms; and
(d) a contract which is in its nature determinable."
4 The Specific Relief Act, § 14(1) (1963), as originally enacted read: "(1) The following con-
tracts cannot be specifically enforced, namely:
(a) a contractfor the non-performance of which compensation is an adequate relief
(b) a contract which runs into such minute or numerous details or which is so dependent on
the personal qualifications or volition of the parties, or otherwise from its nature is such,
that the court cannot enforce specific performance of its material terms;
(c) a contract which is in its nature determinable; and
(d) a contract the performance of which involves the performance of a continuous duty which
the court cannot supervise."
The Specific Relief Act, § 16 (1963), as originally enacted in its relevant portions read:
"Specific performance of a contract cannot be enforced in favour ofa person- (a) who would
not be entitled to recover compensationfor its breach."
6 NILIMA BHADBHADE, POLLOCK AND MULLA, THE SPECIFIC RELIEF ACT 1963 4 (1 4th ed., 2015).
The Specific Relief Act § 20(1) (1963), as originally enacted, began with the phrase: "The
jurisdiction to decree specific performance is discretionary"
VOL. 31 HARDSHIP & SUBSTITUTED PERFORMAINCE
For a long time, contract law in India has been regarded as being plagued
with inefficient contract enforcement mechanisms. The consequence has been
that projects remained incomplete for several years, thereby increasing project
completion costs and fostering litigation. All these factors have resulted in a
weak regime on contract enforcement.'
Although the amendments in the 2018 Act seek to address these problems,
they completely ignore legitimate situations where it is not possible for the
promisor to perform. Virtually all nuanced systems of contract law take into
account such situations and strike a balance between varied interests of the
parties by allowing substituted performance or restricting the promisee's range
of remedies to damages or substituted performance. 0 Unfortunately, the 2018
Act does not take this path, thereby creating a regime akin to strict liability of
the promisor to complete the contract. This paper argues that such a legal posi-
tion will lead to unjust results for the promisors/contractors and that judicial
interpretation should take into account their legitimate interests.
The paper proceeds as follows: Part II, titled "The Specific Relief
(Amendment) Act, 2018" briefly discusses how the 2018 Act came to be
enacted. The legislative history of the 2018 Actis important because it gives
an idea as to the manner in which the law was enacted and as to whether con-
cerns such as the one that this paper raises were discussed in the Parliament.
Part II of the paper also discusses the provisions relating to substituted per-
formance and specific performance in the 1963 Act as amended by the 2018
Act. Part III titled "Specific Performance When Substituted Performance
is Available" critically evaluates the new Section 14(a) which allows specific
performance even if substituted performance is reasonably available to the
promisee but is not opted for. Part IV concludes by suggesting that specific
performance should not be allowed in a situation where the promisor is unable
to perform due to legitimate reasons and substituted performance is reasonably
possible."
See, for instance, INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT/WORLD BANK,
DOING BUSINESS 2015: GOING BEYOND EFFICIENCY 192 (1 2 th ed., 2014), https://goo.gl/yZuXuu
(last visited Nov. 8, 2018) (where India stood at an abysmal 186th place among 189 countries
with respect to contract enforcement); Ramanuj Mukherjee, How Does India Plan on Solving
its Crippling Contract Enforcement Problem?, THE WIRE, Mar. 22, 2018, at https://thewire.in/
business/how-does-india-plan-on-solving-its-crippling-contract-enforcement-problem; Pradeep
S. Mehta, When Nothing is Resolved in Court, THE BUSINESS LINE, Jul. 9, 2015, at https://goo.
gl/VRdrfX.
9 As in 2016, contract enforcement in India was expensive (about 39.6% of the claim amount)
and time consuming (it took about 1420 days, or about 3.8 years) for obtaining a decision
from the trial court for enforcing a contract. See, INTERNATIONAL BANK FOR RECONSTRUCTION
AND DEVELOPMENT/THE WORLD BANK, DOING BUSINESS 2016: MEASURING REGULATORY QUALITY
AND EFFICIENCY 208 (1 3th ed., 2016), https://goo.gl/N7FpVM ("Doing Business 2016") (last vis-
ited Nov. 7, 2018).
1o See, Part III of the paper, titled "Specific Performance when Substituted Performance is
Available".
The legal position discussed in this paper is as on Mar. 31, 2019.
II. THE SPECIFIC RELIEF (AMENDMENT) ACT, 2018
A few years back, India was pegged as one of the worst performing coun-
tries in the way in which it facilitated businesses: it stood at the 13 0 th rank
in the World Bank's Ease of Doing Business report published in 2016.12 The
report measures ease of doing business on the basis of quantitative indicators
concerning eleven areas affecting businesses, one of which is contract enforce-
ment.1 3 The ability of the legal system to efficiently enforce contracts has a sig-
nificant impact on the economic development and sustained growth." Although
its ranking on the overall parameters in the ease of doing business was 130
in 2016, India's ranking on contract enforcement 5 was even worse: it stood
at the 17 8th position among 189 countries, lower than several underdeveloped
countries.16
Given India's bleak performance in contract enforcement, the Government

constituted a committee of experts 7 ('Expert Committee') to recommend
reforms to the 1963 Act with a view to improve contract enforcement and to
increase India's rankings in the Ease of Doing Business reports. The Expert
Committee submitted its report in May 2016 suggesting a slew of amendments
to the Specific Relief Act. 9
In its report, the Expert Committee recommended introducing a provi-

sion on substituted performance in the 1963 Act. Substituted Performance or
risk and cost contracting enables the promisee to complete the complete the
12 Doing Business 2016: MeasuringRegulatory Quality and Efficiency, p. 5.

13 Doing Business 2016: MeasuringRegulatory Quality and Efficiency, p. vi.
14 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT/THE WORLD BANK, DOING BUSINESS
2019: TRAINING FOR REFORM 53 (1 6th ed. 2018), https://goo.gl/Htffct (last visited Nov. 7, 2018).
15 The methodology of assessment of contract enforcement is available at International Bank for
Reconstruction and Development/ The World Bank, Enforcing Contracts Methodology (2018),
http://www.doingbusiness.org/en/methodology/enforcing-contracts (last visited Nov. 2, 2018).
16 Countries which are classified as the least developed countries were placed at rankings higher
than India in respect of contract enforcement (rankings are indicated in bracket): Cambodia
(174), Ethiopia (84), Lesotho (85), Madagascar (153), Rwanda (127), Tanzania (64), and
Zambia (134). See 2016 Report, pp. 183-246.
1 The Expert Committee consisted of: (1) Mr Anand Desai, Managing Partner, DSK Legal,
New Delhi -Chairperson; (2) Mr Amit Kapur, Senior Partner, J. Sagar Associates, New
Delhi - Member; (3) Mr Akshay Chudasama, Managing Partner - West, Shardul Amarchand
Mangaldas & Co., New Delhi - Member; (4) Dr Arghya Sengupta, Vidhi Centre for Legal
Policy, New Delhi - Member; (5) Dr Nilima Bhadbhade, Associate Professor, ILS Law
College, Pune - Member; and (6) Dr Mukulita Vijayawargiya, Additional Secretary,
Legislative Department, Ministry of Law and Justice - Member Secretary.
* The Law Commission of India had suggested reforms to the said Act previously in the Law
Commission's 147th Report. See, Commission of India, One Hundred and Forty-Seventh
Report on the Specific Relief Act, 1963 (1993), http://lawcommissionofindia.nic.in/101-169/
Reportl47.pdf (last visited Sep. 13, 2018).
19 Government of India: Ministry of Law & Justice, Report of the Expert Committee on Specific
ReliefAct, 1963 (May 26, 2016), https://goo.gl/KhufAM (last visited Aug. 25, 2018) ("Expert
Committee Report").
VOL. 31 HARDSHIP & SUBSTITUTED PERFORMANCE 57
contractual obligations left unfulfilled by the promisor and entitles the prom-
isee to claim the increase in cost of such completion from the promisor.
Previously, the legal framework of such risk and cost contracting was not clear,
leading to inconsistent approaches by courts in deciding such cases. Further,
absence of risk and cost contracting or substituted performance as a statutory
right meant that the promisee could invoke it only as a matter of contract.
Recognising this, the Expert Committee recommended that substituted perfor-
mance should be recognised as a statutory right and advised introduction of
Section 20A for the purpose.
The Committee also suggested a comprehensive revision of Section

14, which dealt with the grounds for refusing specific performance. The
Committee suggested that specific performance should be refused where the
party seeking specific performance could "reasonably obtain substituted perfor-
mance from another source on comparable terms, including price and time". 20
In this regard, the Committee observed that law should encourage the victim to
obtain substituted performance. 2 1
Another ground for refusal of specific performance recommended by the

Committee was hardship, 2 2 though hardship was pegged at a relatively higher
threshold 23 and had to be determined with reference to the circumstances exist-
ing at the time of entering into the contract. 24
The recommendations of the Expert Committee were far-reaching but

attempted to strike a balance between the need for enhancing the efficacy of
2 § 14(1)(b) as recommended by the Expert Committee.

The Committee observed: "The law should also encourage him to do so because this course
of action will achieve for the promisee the completion of his task, leaving him free to claim
compensation ifhis loss is substantial enough to warrantfiling litigation." Expert Committee
Report, p. 54.
2 § 14(1)(g) as recommended by the Expert Committee stated: "(1) The Court may refuse to
grant specific performance or injunction in the following cases, and in no others . . (g) Where
the performance of the contract would involve some hardship on the defendant which was
not foreseeable at the time of entering into the contract, whereas its non-performance would
involve no such hardship on the plaintiff"
23 Expln. (i) to § 14 excluded the following from the purview of hardship: "It is hereby clarified
that - (i) mere inadequacy of consideration, or any rise or fall in prices or market value or
any change in circumstances after entering into the contract unless otherwise agreed in the
contract, or the mere fact that the contract is onerous to the defendant orimprovident in its
nature, shall not be deemed to constitute an unfair advantagewithin the meaning of clause (f)
or hardship within the meaning of clause (g)."
24 Expln. (ii) to § 14(1) proposed by the Expert Committee stated: "(ii) The question whether
the performance of a contract would involve hardship on the defendant within the meaning of
clause (g) shall, except in cases where the hardship has resultedfrom any act of the plaintiff
subsequent to the contract, be determined with reference to the circumstances existing at the
time of entering into the contract."
contract enforcement mechanisms and protecting the legitimate interests of the

parties.2 5
Subsequently, on December 21, 2017, a bill titled the Specific Relief

(Amendment) Bill, 2017 ('Bill' or '2018 Bill') was introduced in the Lok Sabha.
The Statement of Objects and Reasons to the 2018 Bill stated, among other
things, that the 1963 Act conferred wide discretionary powers on courts to
decree specific performance due to which awarding damages was the general
rule and granting specific performance was the exception, that by enacting the
2018 Bill it was proposed to do away with the discretion so as to make specific
performance as the default/general remedy and that the alternative remedy of
performance through third party would be the exception. The relevant portions
of the Statement of Objects and Reasons for the 2018 Bill are extracted below:
"[The 1963 Act] also confers wide discretionary powers

upon the courts to decree specific performance and to refuse
injunction, etc. As a result of wide discretionary powers, the
courts in majority of cases award damages as a general rule
and grant specific performance as an exception... In view of
the above, it is proposed to do away with the wider discretion
of courts to grant specific performance and to make specific
performance of contract a general rule than exception subject
to certain limited grounds. Further, it is proposed to provide
for substituted performance of contracts, where a contract
is broken, the party who suffers would be entitled to get the
contract performed by a third party or by his own agency and
to recover expenses and costs, including compensation from
the party who failed to perform his part of contract. This
would be an alternative remedy at the option of the party who
suffers the broken contract." 2 6
The Bill was taken up in the Lok Sabha for discussion on March 15,
2018. 27Despite the substantial changes that the Bill sought to achieve, there was
hardly any discussion in the Lok Sabha on it, except for certain amendments
suggested by Mr N.K. Premachandran from Kollam. The amendments sug-
gested by Mr N.K. Premachandran were negatived and the Bill was passed on
the same date, that is, March 15, 2018, with a few minor changes. 28
25 The Expert Committee report on the amendments was not released in the public domain but
was disclosed pursuant to an application under the Right to Information Act, 2005 filed by the
author.
26 Specific Relief (Amendment) Bill, 2017.
27 See, The Lok Sabha Debates, Mar. 15, 2018, http://164.100.47.194/Loksabha/Debates/Resultl6.
aspx?dbsl=13405 (last visited Nov. 1, 2018).
2 Id., Minor changes included amending the year of the Bill from 2017 to 2018.
Thereafter, the Bill came up for discussion in the Rajya Sabha on July 23,
2018.29 The discussions on the Bill could not have been substantial consider-
ing that the Chairman indicated during the discussions that the total time
allocated for discussion of the Bill was one hour.30 While some concerns relat-
ing to constituting separate courts and the absence of the power of the State
Governments to notify infrastructure projects under Section 20A were raised,
there was hardly any detailed discussion on the implications of the various pro-
visions in the Bill. On the same day, the Rajya Sabha passed the Bill. The 2018
Bill was assented to on August 1, 2018 and was brought into force on October
1, 2018.31
Section 10 of the 2018 Act substitutes the existing Section 2032 with a
new Section 20 containing four sub-sections. The new Section 20 is titled
'Substituted performance of contract'. Section 20(1) states that where the
contract is broken due to non-performance of promise by any party, the vic-
tim of the breach shall have the option of substituted performance through a
29 The verbatim (uncorrected) debates in the Rajya Sabha on the Specific Relief (Amendment)
Bill, 2018 are at http://164.100.47.5/newdebate/246/23072018/Fullday.pdf (last visited Nov. 1,
2018).
30 Id. at 56.
31 Ministry of Law & Justice, Notification No. S.O. 4888(E) dated Sep. 19, 2018, http://egazette.
nic.in/WriteReadData/2018/189830.pdf (last visited Nov. 8, 2018).
32 The Specific Relief Act § 20 (1963), as enacted prior to the 2018 amendments, read: "(1) The
jurisdiction to decree specific performance is discretionary, and the court is not bound to
grant such relief merely because it is lawful to do so; but the discretion of the court is not
arbitrary but sound and reasonable, guided by judicial principles and capable of correction
by a court of appeal.
(2) The following are cases in which the court may properly exercise discretion not to decree
specific performance:
(a) where the terms of the contract or the conduct of the parties at the time of entering into
the contract or the other circumstances under which the contract was entered into are
such that the contract, though not voidable, gives the plaintiff an unfair advantage over
the defendant; or
(b) where the performance of the contract would involve some hardship on the defendant
which he did notforesee, whereas its non-performance would involve no such hardship on
the plaintiff or
(c) where the defendant entered into the contract under circumstances which though not ren-
dering the contract voidable, makes it inequitable to enforce specific performance.
Explanation 1: Mere inadequacy of consideration, or the mere fact that the contract is
onerous to the defendant or improvident in its nature, shall not be deemed to constitute an
unfair advantage within the meaning of clause (a) or hardship within the meaning of clause
(b).
Explanation 2: The question whether the performance of a contract would involve hard-
ship on the defendant within the meaning of clause (b) shall, except in cases where the hard-
ship has resultedfrom any act of the plaintiff subsequent to the contract, be determined with
reference to the circumstances existing at the time of the contract.
(3) The court may properly exercise discretion to decree specific performance in any case
where the plaintiff has done substantial acts or suffered losses in consequence of a con-
tract capable ofspecific performance.
(4) The court shall not refuse to any party specific performance of a contract merely on the
ground that the contract is not enforceable at the instance of the party."
third party or by the victim's own agency. It further states that the victim can
recover the expenses and other costs actually incurred, spent or suffered by
him, from the party committing such breach.
Section 20(2) proscribes substituted performance without complying with

the below conditions:
* The victim has to give a written notice of a minimum of thirty days

to the perpetrator of breach.
* The notice should call upon the perpetrator to perform the contract
within time specified in the notice, which shall not be less than
thirty days.
* The perpetrator should have refused or failed to perform the con-

tract within such time.
On satisfaction of the above conditions, the victim can get the contract per-
formed through a third party or by his own agency. The proviso to Section
20(2) clarifies that unless the contract is performed through a third party or
by his own agency, the victim will not be entitled to recover the expenses and
costs mentioned in Section 20(1). Section 20(3) talks about events happening
after the completion of the work by the third party or by the victim. It states
that once this happens, the victim cannot claim specific performance. Section
20(4) states that the right of substituted performance will not prevent the vic-
tim from claiming compensation from the perpetrator for loss caused due to
the breach.
Section 14 enumerates contracts that cannot be specifically enforced.

Section 14(a) states that where the promisee has obtained substituted per-
formance of the contract as per Section 20, the contract is not specifically
enforceable. Section 16(a) provides that specific performance cannot be
enforced in favour of a person who has obtained substituted performance of
contract.
As regards sale of goods, Section 58 of the Sale of Goods Act, 1930, per-
mits the court to decree, on application, specific performance in suit for
breach of contract to deliver specific or ascertained goods. This is made sub-
ject to Chapter II of the Specific Relief Act, 1877, which has been replaced by
the 1963 Act. Chapter II of the 1963 Act contains provisions relating to when
specific performance would be available and would not be available. After
the 2018 Act, the new Section 20 (substituted performance of contract), con-
tained in Chapter II, would also apply to sale of goods. Consequently, Section
58 of the Sale of Goods Act, 1930 would be subject to the amended Sections
10, 14(a), 16(a), and 20 of the 1963 Act. The implication of this is that in the
VOL. 31 HARDSHIP & SUBSTITUTED PERFORMAINCE 61
case of sale of goods, the remedy of specific performance would be available,

except in circumstances provided under Section 14 and 16 of the 1963 Act, as
amended.
Thus, specific performance is not available to a promisee 33 or to a contract

where the contract is completed through substituted performance under Section
20.34 The expression "has obtained substituted performance of contract" in
Section 14(a) conveys the meaning that specific performance is not allowed
only when the promisee has actually opted for substituted performance and has
completed the contract through it.
III. SPECIFIC PERFORMANCE WHEN

SUBSTITUTED PERFORMANCE IS AVAILABLE
A. Damages versus Specific Performance: Contextualising the Issue
Prior to addressing the issue of specific performance when substituted per-

formance is available, it would do well to deal, albeit in brief, with the theoret-
ical foundations of the issue of damages versus specific performance.
Specific performance is not available when damage is an adequate remedy.

Common law systems regard damages as the default remedy and specific per-
formance as the exception, available only in certain recognised cases or when
damages will not adequately compensate the victim of the breach. 35 Several
justifications have been given for prioritising damages over specific perfor-
mance. 36 Law's intervention in private law is restricted to the minimum pos-
sible extent and at the same time, it works towards protecting the interests of
the victim of breach. 37 An award of specific performance forcing the breaching
party to perform is against the voluntary nature of a contract, when the victim
can be afforded an adequate remedy. 38 This is especially true in personal con-
tracts. At the same time, it is argued, with some justification, that damages is
often under-compensatory, that the victim of breach would be in the best posi-
tion to judge whether damages or specific performance would be the appropri-
ate remedy, and that the victim would have better information as compared to
the courts on the issue of adequacy of damages. 39 There are points and coun-
33 § 16(a), as amended.
34 § 14(a), as amended.
35 JONATHAN MORGAN, GREAT DEBATES IN CONTRACT LAW 307 (2nd ed., 2015).
36 See, EWAN McKENDRIK, CONTRACT LAW: TEXT, CASES, AND MATERIALS 946 (5 th ed., 2012), for a
summary of the justifications prioritising damages over specific performance.
37 Stephen A. Smith, Performance, Punishment and the Nature of Contractual Obligation, 60
MODERN L. REV. 360, 363 (1997).
38 EWAN McKENDRIK, CONTRACT LAW: TEXT, CASES, AND MATERIALS 946 (5 th ed. 2012).
39 Alan Schwartz, The Case for Specific Performance, 89 YALE L. J. 271, 275-277 (1979).
ter-points, including arguments based on the efficient breach theory"o and juris-
dictions often vacillate between these two approaches without taking extreme
positions.'
India has since long adopted the common law position. The Specific Relief
Act, 1963, prior to the 2018 amendments, reflected the general preference to
damages as against specific relief.42 Section 14 of the Specific Relief Act stated
that specific relief would not be available when compensation is an adequate
relief for non-performance. Further, Section 10 of the said Act provided that
specific performance of a contract may be enforced where there existed no
standard of ascertaining actual damages caused by non-performance of the
promise or where monetary compensation would not afford adequate relief for
non-performance.4 3
A detailed analysis of the legal position in India on the grounds where spe-
cific performance could be granted prior to the 2018 amendments is not dealt
with here. 4 However, Indian courts seem to have been leaning in favour of the
appropriateness test rather than the adequacy test: thus, specific performance
would be ordered where it is appropriate to do so. 5
40 See, Gregory Klass, Efficient Breach, in PHILOSOPHICAL FOUNDATIONS OF CONTRACT LAW 362-387
(Gregory Klass et al. eds., 2014) (for a detailed discussion on the theory and its relation to
specific performance). See also, JONATHAN MORGAN, GREAT DEBATES IN CONTRACT LAW 305-347
(2nd ed. 2015).
41 For a discussion on the debate, see, MINDY CHEN-WISHART, CONTRACT LAW 550- 552 (4th ed.
2012).
42 This was the case with the earlier law, The Specific Relief Act 1877.
43 The Specific Relief Act § 10 (1963) as enacted prior to the 2018 amendments read: "Cases
in which specific performance of contract enforceable: Except as otherwise provided in this
Chapter, the specific performance of any contract may, in the discretion of the court, be
enforced--
(a) when there exists no standardfor ascertaining actual damage caused by the non-perfor-
mance of the act agreed to be done; or
(b) when the act agreed to be done in such that compensation in money for its non-perfor-
mance would not afford adequate relief
Explanation-Unlessand until the contrary is proved, the court shallpresume-
(i) that the breach of a contract to transfer immovable property cannot be adequately
relieved by compensation in money; and
(ii) that the breach of a contract to transfer movable property can be so relieved except in the
following cases:
(a) where the property is not an ordinary article of commerce, or is of special value or inter-
est to the plaintiff or consists of goods which are not easily obtainable in the market; and
(b) where the property is held by the defendant as the agent or trustee of the plaintiff'
44 For a detailed treatment of the subject, see, V. Niranjan, Specific and Agreed Remedies for
Breach of Contract in Indian Law: A Code of English Law?, in STUDIES IN THE CONTRACT LAWS
OF ASIA I: REMEDIES FOR BREACH OF CONTRACT (Mindy Chen-Wishart et al. eds., 2016).
45 Id.
B. Substituted Performance, Hardship, and Specific Performance
The availability of substitutes for fulfilling a contractual obligation further

justifies the principle that specific performance should not be granted when the
victim has other means to be put in a position as if the contract is performed.
The 1963 Act as originally enacted contemplated hardship as a ground

against specific performance. Under Section 20(2)(b), specific performance
could not be decreed "where the performance of the contract would involve
some hardship on the defendant which he did not foresee, whereas its non-per-
formance would involve no such hardship on the plaintiff.. "46
At times, courts while decreeing specific performance, have modified the

consideration taking into account the hardship that the defendant would suffer
if specific performance is ordered in terms of the agreement. For instance, in
K. Prakash v. B.R. Sampath Kumar,"7 the Supreme Court held that although
rise in price of the property could not be treated as a ground for refusing
specific performance, courts could balance equities by ordering specific per-
formance at a higher consideration. In this case, taking into account that then
prevailing price was at least five times of the agreed price, the court ordered
specific performance but substantially increased the consideration."
Substituted performance primarily offers the following benefits to the prom-

isee. It puts the promisee in a position as if the contract is performed. This
is the objective of awarding damages under contract law. The second bene-
fit is that it provides a concrete method to compute losses suffered owing to
non-performance or failure by the promisor to perform the contract. 9 Instead
of proving the market price as on the date of breach, damages is computed
as the difference between the expenditure that the promisee has reasonably
incurred in actually completing the contract through substituted performance
and that would have been incurred in completing the contract through the
promisor. Recognising substituted performance as a substantive statutory right
is a reform in the right direction.
As regards providing the option to avail the remedy of specific perfor-

mance, there is nothing wrong per se in amending the law, given the prevailing
Indian scenario. The efficiency and effectiveness of satisfaction of expecta-
tion interests of the promisee through damages holds true in a scenario where
46 See, for instance, Nirmala Anand v. Advent Corpn. (P) Ltd., (2002) 8 SCC 146, ¶ 6; Patel
Harji Shamji v. Dharmshi Meghji Shivla, (2019) 60 (1) GLR 67.
(2015) 1 SCC 597.
48 Id. at ¶ 22-23. See also, Damacherla Anjaneyulu v. Damcherla Venkata Seshaiah, 1987 Supp
SCC 75, where a similar approach was undertaken by the Supreme Court.
49 THE AMERICAN LAW INSTITUTE, RESTATEMENT OF THE LAW SECOND: CONTRACTS 2D: OFFICIAL TEXT
& COMMENTS (1979), Formatted for Electronic Media (William H. Widen), Comment to §360,
p. 539.
substantial costs and time are not incurred in enforcing contracts. This, as data
go to show, is not the case in India."o Therefore, the efficient breach theory"
or the argument that it would be bad faith for a promisee to insist on specific
performance since it would give him the benefit that he did not pay for52 would
not apply in India.
The problem, however, is in allowing specific performance even where

substituted performance is a possible and reasonable remedy but the prom-
isee does not avail of it for reasons extraneous to protection of his expecta-
tion interests. The amended Section 14 of the 1963 Act provides that a contract
cannot be specifically enforced where a party to the contract has obtained sub-
stituted performance of the contract as per the new Section 20.
In this connection, the discussions regarding substituted performance in the

Rajya Sabha make an interesting read.5 3 The intent behind enactment of the
provision on substituted performance and contract enforcement is reflected in
the observations of the Law Minister during the debates:
"What is important is, what kind of India do we want to cre-

ate? It is very good for good contractors who perform their
obligations in time, and it should be very strong for bad con-
tractors who don't perform and run away for the money. That
is what the essence of Section 20 is. Therefore, when the mat-
ter came to me, I said, 'No', we must give a proper provision
for notice. If you are not performing, give a notice of one
month. If you perform, okay. If you don't, try to perform and
run away, then, I will get the work done by other agency and
take the money from you. What is wrong with this? We are
trying to make India's execution of contract more sober and
more responsible"."
Although the Law Minister stated that if the contractor is not able to per-
form, the promisee could go for substituted performance, the text of Section
14(a) goes much beyond and allows the promisee to force the promisor to per-
form the contract, irrespective of any irreparable injury that could be caused to
the promisor, and irrespective of a reasonably available substitute.
5o See, for instance, Doing Business 2016: MeasuringRegulatory Quality and Efficiency, p. 208.
See, for instance, Klass, supra note 40, at 362.
52 See, for instance, Daniel Markovits, Good Faith as Contract's Core Value, in PHILOSOPHICAL
FOUNDATIONS OF CONTRACT LAW 281 (Gregory Klass et al. eds., 2014).
53 The verbatim (uncorrected) debates in the Rajya Sabha on The Specific Relief (Amendment)
Bill, 2018 are at http://164.100.47.5/newdebate/246/23072018/Fullday.pdf (last visited Nov. 1,
2018), at 73.
54 Id.
A promisor may breach a contract for several reasons. Some of these rea-
sons might go to the root of the promisor's existence as a commercial entity.
For instance, a construction contractor might be suffering from serious cash
flow issues which could prevent him from completing a contract. The law as it
stood prior to the 2018 Act allowed the promisor to terminate the contract with
the construction contractor, get the work completed at the construction contrac-
tor's cost, and make the construction contractor liable for increased expenses
or damages. This enabled all the parties get what they wanted: the promisee
could complete the project and recover increased expenses, the original con-
struction contractor had to merely bear the increased expenses, and the new
construction contractor could get the price for the work he completed.55
The 2018 Act does away with the general rule in contract law that damages
will be the default remedy and specific performance will be the exception. It
alters the legal position which has been in vogue in the common law world
for a long time. 56 Although several jurisdictions have specific performance as
a default remedy,.5 damages is the normal remedy in common law jurisdic-
tions. The present amendments do not merely prioritise specific performance
over damages; they go a step further than the recommendations of the Expert
Committee by holding that specific performance would be available if substi-
tuted performance is possible but was not opted by the promisee. The possibil-
ity of availability of specific performance in this context which could result in
serious injustice to the promisor has already been noted above.
Consider the below hypothetical scenario:
In a village, Ramu, a mango retailer, promises to deliver 100 kg of man-

goes to Gowri for Rs. 1000 (Rs. 10/kg) on a particular date. Ramu thinks he
will invest Rs. 800 that he has with him for buying mangoes from the whole-
sale market, sell it to Gowri, and get Rs. 200 as profit (at Rs. 2/kg). On the
date when he is supposed to go to the wholesale market, his child falls sick
and is admitted in the hospital. Ramu expects that he will have to spend about
Rs. 700 for the hospital. So he tells Gowri that he will not be able to perform
the contract. Gowri is furious at Ramu and threatens to teach him a lesson.
Gowri enquires with another retailer Shyamu who agrees to sell the mangoes
at Rs. 1100 (at Rs. 11/kg). Still angry at Ramu, she complains to the village
Panchayat. The elders of the Panchayat summon both Ramu and Gowri and a
sitting is held on a sunny Sunday. Ramu, whose daughter's surgery is sched-
uled held the next day attends the sitting.
After hearing both the parties, the Panchayat says that even the Parliament
of India has amended the Specific Relief Act, 1963, to give the option to the
5 In practice, however, several projects remained incomplete for various reasons.
56 See, for instance, Harnett v. Yielding, (1805) 2 Sch & Lef 549.
5 Expert Committee Report, p. 49.
victim of breach to decide on whether the victim wants specific performance

or damages. So the elders ask Gowri what she wants. Gowri says she wants
specific performance. Ramu implores with Gowri to forgive him and his cries
that unless he pays up Rs. 700 to the hospital, his daughter will not be oper-
ated on and might die fails to move Gowri. Suddenly, Priya jumps up and says
she'll provide a solution. She says if Gowri buys Shyamu's mangoes at Rs. 11/
kg and if Ramu pays to Gowri that Rs. 1/kg extra that Gowri has to shell out
to Shyamu, Gowri will get the mangoes, Shyamu will make a profit (at Rs. 3/
kg) and Ramu will have to shell out Rs. 1/kg (Rs. 100), which he will be able
to do even after paying up for his daughter's surgery. Priya says if the solu-
tion she proposed is adopted, Shyamu, Gowri and Ramu will all get what they
want. What should the Panchayat do?"
Notice how unjust it is for the breaching party (Ramu, in the above exam-
ple) to be asked to perform the contract. 9 As opposed to the Committee's rec-
ommendations, the Act goes a long way in providing an unfettered option to
the victim (Gowri) to compel the breaching party to perform, irrespective of
whether substituted performance was possible for the victim. It is in such cases
that substituted performance can play a significant role in ensuring protection
of interests of all the parties.
The 2018 Act does not distinguish between commercial and non-commercial
situations in its applicability. If the above parties are substituted for a whole-
saler and a retailer in a commercial context, the injustice caused would not be
much different. Consider the situation where the wholesaler is unable to sup-
ply the goods contracted for owing to a bad business decision in another con-
text, but the retailer-buyer has alternatives available. Would it not be unjust for
the wholesaler-seller to be ordered to perform a transaction which would ruin
him financially when the retailer-buyer will have alternatives? Therefore, hard-
ship in case of commercial contexts should also be a good ground for ordering
damages instead of specific performance, provided the buyer has substitutes
available.
None of the prominent international instruments on contract law contain a

provision similar to the amended Section 14(a). For instance, Article 7.2.2 of
the UNIDROIT Principles of International Commercial Contracts ('UNIDROIT
PICC') contains grounds on which specific performance could be refused.
Grounds (b) and (c) provide:
* This illustration is based on the following posts of the author: Badrinath Srinivasan, Ghost
Provisions: Who Will Exorcise Them Out?, LAW AND OTHER THINGS (Sep. 4, 2018), https://
goo.gl/MvoHin; Badrinath Srinivasan, Why Should Specific Performance not be the Default
Remedy: Critique of the Recently ProposedAmendments, PRACTICAL ACADEMIC BLOG (May 3,
2018), https://goo.gl/WljunT.
5 Although the above hypothetical scenario is fact-specific, situations where promisors are una-
ble to perform the contract due to serious cash flow problems or other serious reasons are not
uncommon.
"Where a party who owes an obligation other than one to pay

money does not perform, the other party may require perfor-
mance, unless
(b) performance or, where relevant, enforcement is unreasonably bur-

densome or expensive;
(c) the party entitled to performance may reasonably obtain perfor-

mance from another source;"60
These clauses show that specific performance is not available when the
promisee can go for substituted performance or replacement transaction or
where specific performance would be unreasonably burdensome or expensive
to the promisor. Article 7.2.2(c) requires that in order to refuse specific perfor-
mance replacement transaction or substituted performance should not only be
possible, it should be reasonably available as a remedy to the promisee. 6 1
Similarly, Article 9:102 of the Principles of European Contract Law

('PECL') entitles the aggrieved promisee to specific performance except where
the performance would cause the promisor unreasonable effort or expense, 62 or
where the promisee may reasonably obtain performance from another source. 63
Article 2-716 of the Uniform Commercial Code in the USA also provides
for specific performance in the context of sale of goods, "if after reasonable
effort he is unable to effect cover for such goods or the circumstances reasona-
bly indicate that such effort will be unavailing." Traditionally, under American
law, specific performance is not available when goods contracted could be
obtained from the open market. 6 4 American courts have regarded the replace
60 UNIDROIT PICC art. 7.4.5 provides for substituted performance or replacement transaction:
"Where the aggrieved party has terminated the contract and has made a replacement trans-
action within a reasonable time and in a reasonable manner it may recover the difference
between the contract price and the price of the replacement transaction as well as damages
for any further harm."
61 INTERNATIONAL INSTITUTE FOR THE UNIFICATION OF PRIVATE LAW, UNIDROIT PRINCIPLES OF
INTERNATIONAL COMMERCIAL CONTRACTS 245-246 (2016).
62 PECL art. 9:102(2)(b) provides: "Specific performance cannot, however, be obtained where:...
(b) performance would cause the obligor unreasonable effort or expense..."
63 PECL art. 9:102(2)(d) states: "Specific performance cannot, however, be obtained where:... (d)
the aggrievedparty may reasonably obtain performancefrom another source."
64 See, for instance, Hogan v. Norfleet, 113 So 2d 437, 439 (Fla Dist Ct App 1959); Heidner v.
Hewitt Chevrolet Co., 166 Kan 11 : 199 P 2d 481, 483 (1948); Poltorak v. Jackson Chevrolet
Co., 322 Mass 699 : 79 NE 2d 285 (1948); Jaup v. Olmstead, 334 Mich 614 : 55 NW 2d 119,
120 (1952); Likens v. Sourk, 263 SW 2d 462, 465 (Mo App 1953); Boeving v. Vandover, 240
Mo App 117 : 218 SW 2d 175, 177-178 (1949); Paullus v. Yarbrough, 219 Or 611 : 347 P 2d
620, 635 (1959); Cochrane v. Szpakowski, 355 Pa 357 : 49 A 2d 692, 694 (1946); Thompson
v. Virginia, 197 Va 208 : 89 SE 2d 64, 67 (1955), cited in Kaiser Trading Co. v. Associated
Metals & Minerals Corpn., 321 F Supp 923 (ND Cal 1970).
ability or the right to cover as central in determining the availability of spe-

cific relief" although it appears that the law tilts in favour of enforcing the
promise.66
Likewise, the Restatement of the Law (Second) Contracts provides that, "[s]
pecific performance or an injunction will not be ordered if damages would be
adequate to protect the expectation interest of the injured party" 67 and that "[i]
n determining whether the remedy in damages would be adequate... (b) the
difficulty of procuring a suitable substitute performance by means of money
awarded as damages" is an important circumstance. 68
In English law, one of the landmark cases on the point is that of Coop.
Insurance Society Ltd. v. Argyll Stores (Holdings) Ltd.69 Here, Argyll Stores
entered into a lease agreement with the landlord, Co-operative Insurance
Society Ltd. ('CIS'), for running a supermarket in a shopping centre. Argyll
Stores was losing money and therefore decided to close up shop in that loca-
tion. This was in breach of the lease agreement with CIS. CIS initiated legal
action. The trial court awarded damages but refused an order of specific per-
formance. On appeal, the Court of Appeal ordered specific performance by
Argyll Stores to continue to keep open the supermarket. Although Argyll
Stores ultimately assigned the lease and the proceedings between the parties
were only with regard to determination of costs, the House of Lords (now the
UK Supreme Court) deemed it fit to address the issue. The House of Lords
had to decide whether an order of specific performance would lie against the
defendant for continuing of business, even when it is running under loss. The
court noted that implementation of such an order would require constant court
supervision. The court held that ordering a party to perform the contract would
mean forcing the party to run the business with the threat of action pursuant to
contempt of court although there were no economic reasons to run the business
and that such a constant supervision would also entail expensive litigation.
On the question as to whether specific performance could be ordered to

continue the business even if defendant would suffer loss, the court noted that
such an order would amount to allowing the plaintiff to enrich the plaintiff at
the defendant's expense. According to the court, even if the defendant, by his
own conduct, put himself in an unfortunate position, contract law does not or
should not aim at punishing the defendant; rather it should seek means to put
the plaintiff in the position as if the contract is performed. The court observed:
65 See, for instance, Magellan International Corpn. v. Salzgitter Handel GmbH, 76 F Supp 2d
919 (ND Ill 1999).
66 Michael A. Schmitt & Michael Pasterczyk, Specific Performance under the Uniform
Commercial Code - Will Liberalism Prevail?, 26 DEPAUL L. REV. 54, 71-72 (1976).
67 § 359.
68 § 360.
69 1998 AC 1: (1997) 2 WLR 898 : (1997) 2 All ER 297 : 1997 UKHL 17.
"It is true that the defendant has, by his own breach of con-
tract, put himself in such an unfortunate position. But the
purpose of the law of contract is not to punish wrongdoing
but to satisfy the expectations of the party entitled to per-
formance. A remedy which enables him to secure, in money
terms, more than the performance due to him is unjust. From
a wider perspective, it cannot be in the public interest for
the courts to require someone to carry on business at a loss
if there is any plausible alternative by which the other party
can be given compensation. It is not only a waste of resources
but yokes the parties together in a continuing hostile relation-
ship. The order for specific performance prolongs the battle...
An award of damages, on the other hand, brings the litiga-
tion to an end. The defendant pays damages, the forensic link
between them is severed, they go their separate ways and the
wounds of conflict can heal".70
Although the view of the court as regards damages may not altogether apply
in the Indian context, where it takes several years for courts to decide commer-
cial cases and to recover damages even if awarded, the observations regarding
exploring plausible alternatives by which the plaintiff can be put in a position
as if contract is performed are valid.7
English courts have refused to order specific performance on the ground

of hardship even in cases such as those related to land where specific perfor-
mance is the default remedy. One such case is that of Patel v. Ali,7 where a
decree of specific performance was refused since it would have resulted in
great hardship and injustice.
The position in Singapore also appears to be similar. Courts have recog-

nised that specific performance would not be ordered where it would result in
considerable hardship to the promisor or a third party.7 3
In civil law countries, which are traditionally regarded as granting specific

performance freely, there appears to be a trend towards convergence with com-
mon law remedies." Countries such as Denmark, Germany, and France do not
readilyorder specific performance when substituted performance is possible.
70 Id.
1 EDWIN PEEL, TREITEL, THE LAW OF CONTRACT 21-030 (1 4 th ed. 2015).
7 1984 Ch 283 : (1984) 2 WLR 960 : (1984) 1 All ER 978.
73 ANDREW B.L. PHANG & GOH YIHAN, CONTRACT LAW IN SINGAPORE 724 (2012); EC Investment
Holding Pte. Ltd. v. Ridout Residence Pte. Ltd., (2012) 1 SLR 32, ¶ 110.
7 Henrik Lando & Caspar Rose, The Myth of Specific Performance in Civil Law Countries 2
(2003), <https://ssrn.com/abstract=462700> (last visited Mar. 31, 2019); KONRAD ZWEIGERT
&
HEIN KoTz, AN INTRODUCTION TO COMPARATIVE LAW (1998).

7 Lando, supra note 74, at 7, 11.
Empirically, it appears that parties prefer damages to specific performance.76

At the same time, civil law countries seem to lean in favour of substituted per-
formance even in construction contracts.77 In respect of delivery of existing
goods, civil law countries seem to readily order specific performance as com-
pared to common law countries.78
All the same, Civil law countries seem to recognise hardship as a defence
against specific performance, in cases where performance would require an
effort from the debtor that is grossly disproportionate to the creditor's right to
receive performance.79
IV. CONCLUSION
In a situation where the promisor avoids the contract on the ground of hard-
ship or other such reasons, forcing the promisor to perform the contract only
adds fuel to conflict. Law should ensure that conflict is either resolved, or at
the least, avoided. When specific performance is sought in such situations, the
conflict is neither avoided nor resolved but the promisor and the victim are put
in a conflict zone, which deepens the conflict. 0
That Indian law does a miserable job of protecting the expectation interest
of the victim is no excuse for putting the parties in the hostile zone by order-
ing specific performance even when the defendant would be put to serious
hardship in performing the contract and the plaintiff can reasonably obtain
substituted performance.8
The purpose of contract law is not to punish the promisor who breached the
contract but to ensure that the promisee is put in a position as if the contract is
performed. An order granting specific performance where the promisor is legit-
imately unable to perform and where substitutes are available, would amount
to punishing the promisor and may be a legal means of extorting performance
from the promisee.
The new Section 14(a) should have been worded such that specific perfor-
mance would not be available where a party to the contract can reasonably
7 Id. at 13. See also, Zweigert and Kolt, supra note 74, at 472-473 (summarising the German
law regarding grant of specific performance and procedure for enforcement of such remedies).
I Zweigert and Kolt, supra note 74, at 484.
7 Id. at 476-479 (discusses the French concept of penal damages or astreinte where penalty is
imposed till the contract is performed). Also see, Marco Torsello, Remedies for Breach of
Contract, in JAN M. SMITS, ELGAR ENCYCLOPEDIA OF COMPARATIVE LAW 618 (2006).
79 Torsello, supra note 78, at 617.
"0 Coop. Insurance Society Ltd. v. Argyll Stores (Holdings) Ltd., 1998 AC 1: (1997) 2 WLR 898
: (1997) All ER 297 : 1997 UKHL 17.
* The standard for determining hardship or availability of substitutes is not dealt with in this
paper. The argument is that law should at least provide some scope for the operation of hard-
ship and reasonable availability of substitute as exceptions to specific performance.
obtain substituted performance. But it is too late for that as the law has been
enacted and is now in force. The Government can move an amendment to iron
out the problematic areas in the 2018 Act. Given the injustice that is likely to
be caused to promisors with legitimate excuses owing to Section 14(a), there
are chances that courts would liberalise the threshold of impossibility in
Section 56 of the Indian Contract Act, 1872. This may not be wholly desirable
as it would become a means for non-performance of contracts.
Alternatively, courts could construe the amended Sections 14(a) and 16(a)
to provide that specific performance likely to cause irreparable injury to the
promisor will not be available where a reasonable substitute to complete the
contract is available to the promisee. This would entail construing "has
obtained" as "can obtain or has obtained". However, this would amount to
doing violence to the statute, but surely the law cannot be construed to reach
unjust results unless the statutory intent in doing so is clear and manifest. The
amendments in the 2018 Act, after all, do not do away with equitable princi-
ples altogether: Equity and justice still permeate specific relief law.
LEG IS/RJ20 18/50064
Govemrnent of India
Ministry of Law & Justice
Legislative Department
Shastri Bhavan
New Delhi 26 April, 2018.
..
To,
Shri S.Badrina~h
'
Sub:- Information sought under the RTI Act, 2005.
Sir
With reference to your online RTI application dated 24.3.2018 and your letter dated
20.4.20 J 8, a copy of Expert Committee Report on the Specific Relief Act, 1963 is enclosed.
You.rs..taithfully,
,(";1-
1":.....
~-!r,l'f.~
(S .K.Chitkara)/
Deputy Secretary &CPIC)
Phone 23388007
EMail: cpio-rti-Iegis@nic.in
Note.- Shri Udaya Kumara, Joint Secretary& Legislative Counsel, Legislative Department
Ministry of Law and Justice, Room No.436 'A; Wing, 4th Floor, Shastri Bhawan, New Delhi-
110001 is the First Appellate Authority for filing the first appeal, if any, within 30 days.(phonc
23389163, EMail: aa-rti-Iegis@nic.in )
.r :':
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GOVERNMENT OF INDIA
MINISTRY OF LAW AND JUSTICE
(LEGISLATIVE DEPARTMENT)
REPORT OF THE EXPERT COMMITTEE ON

SPECIFIC RELIEF ACT, 1963 '
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MAY, 2016
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Expert Committee's Report on Specific-Relief Act, 1963
New Delhi
26th May, 2016
Respected Sir,
I, on behalf of the Expert Committee, would like to thank the Hon'ble Minister for appointing
us as members of the Committee to recommend amendments to the Specific Relief Act, 1963.
In the course of our study we took into account the present construct of the Act, the various
challenges faced by the citizens of India in availing the benefits of the Act, and the parallel
legislations available in other jurisdictions. In view this we have recommended certain dramatic
'"
changes to the existing Act.
We have recommended that specific performance should be made the rule, and damages be the
alternate remedy.
We took into account judgements of Hon'ble Supreme Court of India and various High Courts
and also relevant Reports and concluded that we must consider the adverse impact of
Government contracts which are subjected to delays, resulting in enormous cost increase and
inconvenience to the citizens of India, who are the intended beneficiaries. We have, therefore,
recommended extensive changes to the Specific Relief Act, 1963 in respect of such contracts.
We have also recommended provisions for rights of third parties, right of cover, guidelines for
reducing discretion granted to Courts and tribunals while deciding cases involving specific
performance of contracts, and encouraging taking assistance of experts, should be introduced.
We hope that the recommendations, when accepted and acted upon, will also enhance business in
"" India, and fulfil the vision of the Government.
Sincerely,
".-./
4··~a-~~ _
AnaadDesal
Chairperson
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Encl: Expert Committee's Report

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Shri n.v. Sadananda Gowda

Minister of Law and Justice
Government of India
New Delhi 110001.
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CONTENTS
CHAPTERS TITLE OF CHAPTERS PAGES
Chapter I Introduction 3-9
Chapter II Public Utility Contracts 10-46
Chapter III Analysis of Provisions of the Specific Relief Act, 47-59

1963 : Specific Performance, Injunctions,
Rescission and Possession
.
e .
Chapter IV Discretion of Courts in the Grant of Specific 60-63

- Performance
and Injunction
Chapter V Role of Experts 64-70
Ch.apter VI Rights of Third Parties 71-79
Chapter VII Unfair Terms in Contracts 80-91
Chapter VIII Recommendations for Amendment with brief 92-107

explanations
2
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CHAPTER I
Introduction
A strong contract enforcement system is essential for the smooth flow of trade and commerce,
and for developing confidence of investors. Globally the approach to contract law remedies are
either: (i) compelling performance, by holding parties to their contract through grant of specific
performance and injunctive reliefs, or (ii) compensating for loss and damages caused by breach
of contract, with specific performance being in the nature of exception rather than the rule. The
latter approach has been preferred in India under the Specific Relief Act, 1963.
1. The Specific Relief Act, 1963
.~. 1.1 The Specific Relief Act, 1963 contains a total of 42 sections divided among 8 Chapters. It
contains provisions for recovering possession of property, specific performance of
contracts, rectification of instruments, rescission of contracts, cancellation of instruments,
declaratory decrees, and preventive relief (injunctions).
1.2 In the aforesaid background in order to make the law related to specific relief more
effective and business friendly for ease of doing business, an expert committee was
constituted to review the provisions of the Specific Relief Act, 1963.
2. Constitution of Expert Committee
2.1 The Expert Committee was constituted by the Government of Inqia, Ministry of Law and
Justice, Legislative Department (Legislative III Section) [F.No. 11(2)/2015-Leg.III] vide
Office Order dated 28th January 2016 for the purposes of making sugg~stions for
-..•./ amending the Specific Relief Act, 1963 (hereinafter referred to as the Act).
The Expert Committee comprises the following persons:
(1) Mr. Anand Desai, Managing Partner, DSKLegal, New Delhi - Chairperson;
(2) Mr. Amit Kapur, Senior Partner, J. Sagar Associates, New Delhi - Member;
(3) Mr. Akshay Chudasama, Managing Partner - West, Shardul Amarchand
Mangaldas & Co., New Delhi - Member;
(4) Dr. Arghya Sengupta, Vidhi Centre for Legal Policy, New Delhi - Member;
./
(5) Dr. Nilima Bhadbhade, Associate Professor, ILS Law College, Pune- Member; and
(6) Dr. Mukulita Vijayawargiya, Additional Secretary, Legislative Department, Ministry
./
of Law and Justice - Member Secretary.
2.2 The terms of reference as provided in the Office Order are as under:
3
·~
(a) to review the Specific Relief Act, 1963 from the point of view of enforceability of
contracts and other relief provided thereunder, in the context of tremendous
developments which have taken place since 1963 and the present changed
scenario involving contract based infrastructure developments, public private
partnerships and other public projects, involving huge investments;
(b) to study the remedies of specific relief provided under the Specific Relief Act, 1963
and suggest changes required in the present scheme of the Act so that specific
performance is granted as a general rule and grant of compensation or damages
for non-performance remains as an exception;
(c) to examine and suggest amendments in the Act to ensure that discretionary relief
is done away with;
(d) to examine amendments required to be made to the Act for ensuring ease of doing
business in India;
(e) any other suggestions for amendments in the Specific Relief Act, 1963.
2.3 The mandate given to the Expert Committee included:

(a) the Committee shall hold its meetings in New Delhi;
(b) the Committee may consult any person having knowledge and experience in the
.subject.matter; ;
(c) the Committee shall regulate its own procedure for conducting its meetings;
(d) The Committee shall finalise its report within 3 (three) months and submit its report
to the Secretary, Legislative Department, Ministry of Law and Justice.
A copy of the said Office Order is at Annexure "A".
The time for submitting the report was extended up to 26th May 2016.
3. Meetings of the Committee
3.1 The Committee decided to have a preliminary discussion vide a conference call on 27th
February 2016. The history of the legislation was noted, particularly the 9th Report of the
Law Commission. The Committee also noted the 97th Report of the Law Commission of
rd
1984, the 103 Report of the Law Commission of 1984, the 147th Report of the Law
Commissionof 1993, and the 199th Report of the Law Commissionof 2006.
3.2 The Committee in its First Meeting vide conference call on 27th February 2016 decided to
examine the following in more detail:
(i) To have a carve-out for Government contracts ~ Public Private Partnership
("PPP"), utilities, infrastructure etc., as (a) these have public iniportance and
4
<,
need to be addressed urgently, (b) they may involve matters of policy, and (c)
private contract principles and dispute resolution processesare not effective.
(ii) To introduce provisions for rights of third parties (other than for Government
contracts).
(iii) To change the approach, from damages being the rule and specific performance
being the exception, to specific performance being the rule, and damages being
the alternate remedy. This would also .entall injunctive relief becoming the norm
(which should reduce the time involved in litigation, as settlement is more likely
to result· upon injunction being qranted), and would reduce the debate on
assessmentof compensation at the time of judgment or execution of decree.
(iv) To provide guidelines for reducing the discretion granted to Courts and tribunals
while granting performance and injunctive reliefs.
(v) To provide for the "right to cover" viz. permitting obtaining performance of a
contract from a third party in case of non-performance (inability or breach) by
the counterparty who fails to perform, and the right to recover the consequent
loss suffered by the performing party (difference in price etc.).
(vi) To encourage taking assistance of experts (although the. Committee also
discussedthat this is more of procedural rather than substantive law).
(vii) To consider addressing unconscionable contracts, unfair contracts, reciprocity in
contracts etc., and implied terms .
../
3.3 The Committee also discussed recommending amendments to other statutes such as the
Contract Act, and other relevant laws, such as Consumer Protection laws, in order to give
more complete effect to the amendments the Committee would be proposing to the Act.
3.4 The sections of the Act, and comments against each were then summarised by the
Chairman of the Committee as under:
Section 1 - (a) Should the words "except the State of Jammu and Kashmir" be
deleted, (b) whether to provide a carve out here or elsewhere for the first
recommendation above?
Section 2 - To be relooked at depending on the Committee's recommendations.
Sections 3 to 5 - No change required.
Section 6 - (a) Is there a need to include the right of an owner ( heir to r@(O\fQr
poJJc~~ion,In ~ase dIspossession has been from a tenant, mortgagee in
possession etc.? (b) should the time for start of the six month period be better
5
defined? (c) should situations of joint ownership or joint possession be
addressed? (d) should the scope of relief be specifically limited only to
possession?
Section 7 - No change required.
Section 8 - Whether the explanation needs to be made tighter?
Section 9 -. No change required.
Section 10 - To be comprehensively reviewed if the approach is to change as per
the third recommendation above.
Section 11 - To consider guidelines I illustrations as per the fourth
recommendation above.
Section 12 - To be reviewed taking into account the increased complexity of
several kinds of contracts, sub-contracts in certain kinds of contracts, and the
fifth recommendation above.
Section 13 - No chanqe required.
Section 14 - To be comprehensively reviewed if the approach is to change to the
third recommendation above.
Section 15 - To consider amendment as per the second recommendation above.
Section 16- To consider deletion of the words "aver and" in clause sub-clause (c).
In sections 17 to 19, no change is required.
Section 20 --: (a) To be comprehensively reviewed if the approach is to change to
the third recommendation above, and (b) to consider deletion of sub-clause (4),
which appears superfluous.
Section 21 - No change required.
Section 22 - To consider adding the words "including. a proceeding in execution"
after the word "proceeding" in the proviso (as recommended in the 1993 Law
Commission Report).
Sections 23 and 24 - No change required.
Section 25 - To consider referring to the 1996 Act.
Sections 26 and 27 - No change required.
6
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Section 28 - To consider adding the words recommended in the 1993 Law

Commission Report.
Sections 29 to 44'- No change required.
3.5 It was then agreed that-

(a) Mr. Amit Kapur would research and make recommendations for the first topic viz. to
recommend a carve-out for Government contracts - PPP,utilities, infrastructure etc.,
as (a) these have public importance and need to be addressed urgently, (b) they may
involve matters of policy, (c) private contract principles and dispute resolution
processes are not effective. He would also evaluate the efficacy of the current
provisions (including need for revision thereof) governing powers of Courts and
arbitrators to grant interim relief, and to put in place any suitable interim
arrangements to safeguard any underlying public asset or interest.
(b) Dr. Nilima Bhadbhade would research and make recommendations for the third and
fifth topics viz. (a) to change the approach from damages being the rule and specific
performance being the exception, to specific performance being the rule and damages
being the alternate remedy. This would also entail injunctive relief becoming the norm
...-
(which should reduce the time involved in litigation, as settlement is more likely to
result upon injunction being granted), and would reduce the debate on assessment of
compensation at the time of judgment or execution of decree; and (b) to provide for
the "right to cover" viz. permitting obtaining performance of a contract from a third
party incase of non-performance (inability or breach) by the counterparty who fails to
-' perform, and the right to recover the consequent loss suffered by the performing
party (difference in price etc).
(c) Dr. Arghya Sengupta would research and make recommendations for the fourth topic
viz. to provide guidelines for reducing the discretion granted to Courts and tribunals
while granting performance and injunctive reliefs.
(d) Mr. Akshay Chudasama would research and make recommendations for the second
topic viz. to introduce provisions for rights of third parties (other than for Government
contracts).
(e) Mr. Anand Desai would research and make recommendations for the sixth and
seventh topics, viz.,-
(i) to encourage taking assistance of experts (although the Committee also
discussedthis is more of procedural rather than substantive law), and
(ii) addressing unconscionable contracts, unfair contracts, reciprocity in contracts
etc., and implied terms.
7
4. Members circulated the results of their research (except Mr. Chudasama who required
some more time) and the second meeting of the Expert Committee was held on 9th April,
2016 in New Delhi.
4.1 The Committee had further deliberations, including determining the need for amending
the Act in the context of the need to encourage foreign investment in India and to make
the relevant laws business friendly. The Committee also considered the increasing
complexity of large projects, and particularly the public interest involved in contracts with
the Government and Government agencies for infrastructure development, public-private
partnerships and other public projects involving huge investments..
4.2 The Committee decided that there was a need to-

(a) classify diverse Public Utility Contracts as a distinct class recognizing the inherent
public interest/importance to be addressed in the Act;
(b) change the approach from damages.being the rule and specific performance being
the exception, to specific performance being the rule, and damages being the
alternate remedy;
(c) provide for the "right to cover" viz. permitting obtaining performance of a contract
/rom a third party in case of non-performance (inability or breach) by the
. counterparty who fails to perform, and the right to' recover the consequent loss
suffered by the performing party;
(d) formulate guidelines for reducing the discretion granted to Courts and tribunals while
. granting performance and injunctive reliefs;
(e) recommend that Courts take the assistance of experts;
(f) introduce provisions for rights of third parties (other than for Government contracts).
5. The Committee had further deliberations that were discussed on a conference call on 30th
April 2016 and it was decided as follows:
(i) Each Committee Member will fine tune their research (including relevant case laws
and laws in other jurisdictions) and recommendations, and propose consequential
draft amendments to the Act. The other Committee Members will study and comment
upon these.
(ii) Dr. Bhadbhade will circulate an updated table, which each Committee Member will
.populate, after which Dr. Bhadbhade will consolidate the contents.
(iii) All comments should be Circulated by May 10, 2016 and all Members can meet in
Delhi on May 13, 2016.
(iv) It was agreed that the Committee will incorporate in the Report matters which were
considered, but for which it was decided to not recommend amendments to the Act.
8
-;
6. The Fourth Meeting of the Expert Committee was held on 20th May, 2016 at the Office of
the Additional Secretary in New Delhi. The table prepared by Dr. Bhadbhade was
discussed amongst the Members of the Expert Committee and changes were-suggested.
It was decided that on the basis of the amendments proposed and agreed by the
Members, and on the basis of the inputsj chapters submitted by the Members, a final
draft of the report will be circulated by May 26, 2016.
6.1 Each of the aforesaid issues is discussed in Chapters II, III, IV, V, VI and VII, along with
suggestions or recommendations.
6.2 A draft of the recommended amendments to the Specific Relief Act, 1963 are in Chapter
- VIII.
**********
9
CHAPTER II
Public Utility Contracts
7. The Committee decided that there is a need to classify diverse public utility contracts as a
distinct class recognizing the inherent public interest involved and problems to be addressed in
the Act. The aim is that public works projects must progress without interruption. Thus, court's
intervention in public works should be minimal. Smooth functioning of public works projects can
be effectively managed through a monitoring system, and a regulatorymechanism.
7.1 Inherent public interest involved in Public utility contracts and

problems faced
7.1.1 Public works contracts primarily relate to creating, upgrading, operating and maintaining
essential infrastructure facilities for use/provision of service to the citizen to secure safe
and respectable living conditions (like roads, water supply, electricity, sewerage
treatment et al). Infrastructure is a necessary input to the economy, and a necessity.
Contracts related to public works are arrangements entered into by a state agency or
statutory authority as representative of a welfare state, ~withsuppliers
~. .
of such services of
a defined quality and quantity which benefit the community at large.
7.1.2 All infrastructure assets / facilities including commercial transactions related to them,
involve an element of public interest which must never be lost sight of by Courts while
considering the enforcement of such contracts and moulding of interim arranqements.'
Infrastructure inherently bring into play economic and welfare objectives relatable to such
goods and services, which inhere all aspects of such investments and supply including
pricing, conditions of supply, freedom to refuse supply, et a/like the pricing of the
facility/service must be viable (from investment and cost of finance perspective, and
affordable for the reasons of welfare and access to such essential services).
1 Some leading judgments being Asstt. Collector Central Exdse v. Dunlop India Ltd: (1985) 1 see 260 2 Paras 1,3,5,6 &7
(0. Chinnappa Reddy J.); Mahadeo Savlaram Shelke v. Pune Munidpal Corpo"!tion: (1995) 3 see
33 @ Para 14, 15 (K.
Ramaswamy J.); Ramniklal M. Bhutta v. State ofMaharashtra; (1997) 1 see
134 @ Para 10 (B.P. Jeevan Reddy J.);
Raunaq International Ltd. v. IVR Construction Ltd.: (1999) 1 see 492 @ Paras 9-10,17-19,24-25 (Sujata V. Manohar
J.); Sanjay Kumar Shukla v. Bharat Petroleum Corporation Ltd. : (2014) 3 see 493 @ paras 14-15 (Ranjan Gogoi J.);
and Rishi Kiran Logistics {P} Ltd. v. Kandla Port Trust: (2014) 13 see 233 @ Paras 16-18 & 36 (Arjan Sikri J.);
Keshavlal Khemchand & Sons {P} Ltd. v. Union of India, (2015) 4 SCC 770, at paras 2-5, 29, 39-43: [Jasti Chelameswar
J]; Daulatshinhji Savanthsinhji Solanki & Others vs. Executive Engineer, Himatnagar & Ors, 1996 see
Online Guj 120 at
paras 9,11 to 13: AIR 1997 Guj 64 [So D. Shah J); Balakrishnan Madhavan VS. Munidpal Corporation ofGr. Mumbai&
Ors., AO/66/2016 decided on 12 January 2016 at paras 9, 15 to 16: [R. D. Dhanuka J). Relevant extracts of these
judgments are placed in para 8 below.
10
7'
7.1.3 In this context, it is important to bear the following aspects in mind:-

(a) Provision of such essential services can be undertaken only by an authorised entity
(public or private) entitled to do so (the "Concess-ion")over a specified period of
time. Invariably, the Concession Agreement ("CA") is signed between two parties,
i.e., the Authority and the Private Party/ Concessionaire. Each party is assigned
certain rights and obligations in terms of the agreement - with several such
reciprocal promises being interlinked/ sequential which must be performed in a
time bound manner.
(b) The service / facility must be of an assured quality and quantity of service/goods at
regulated prices with limited / regulated freedom to contract.
(c) These contracts invariably involve Significant upfront, long term investment in
public assets with a life of 25 to 50 years, of which 70% to 80% financing comes
from banks and financial institutions. While upholding the vires of the definition of
Non-Performing Assets under Section 2(1)(0) of the SARFESIAct, the Supreme
Court noted that speedy recovery of monies due is important for the financial
health of the country and that the legislative intent was to facilitate secured
creditor to recover the amounts due to them from the borrowers by enforcing the
security interest created by the borrowers without the intervention of the civil Court
or the tribunal. The Horrble Supreme Court also held that such action must be
taken by the secured creditor only after appropriate deiiberatton that the same
does not result in disruption of industrial production, consequently resulting in
unemployment and loss of GDP etc impacting larger interests of the nanon."
Cd) No amount can fully compensate the loss of availability of continued supply of such
. service/facility since invariably it is not available from another source', in the
following respects :-
(i) Usually, such infrastructure facility/service cannot be sourced from alternate
2 Keshavlal Khemchand & Sons (P) Ltd. v. Union of India, (2015) 4 sce 770, at paras 2-5, 29, 39-43: [Jasti Chelameswar
J)
3 In Sky Petroleum Ltd v VIP Petroleum Ltd (1974] 1 All ER 954, a contract for supply of petrol was spedfically enforced
on the basis that the goods were commercially uniquel• Petroleum was not unique but it became a rare commodity
because of inadequate supply at the time. It was also held as follows:
"The test of uniqueness must be made in terms of the total situation which characterises the contract. Output and
requirement contracts involving a particular or peculiarly available source or market present today the typical
contractual specific performance Situation, as contrasted with contracts for the sale of heirlooms or priceless works of
art which were usually involved in the older cases. "
Similarly, termination notice of a power purchase agreement by Adani Power for non-fulfilment of conditions precedent
was quashed by the Gujarat Electricity Regulatory Commission to direct for speoflc performance of the PPA. This order
was challenged by Adani Power before the Appellate Tribunal for Electricity. By judgement 07.09.2011, the Tribunal
upheld the direction for spedfic performance referring to sections 10, 14 and 23 of th~ SpeCific Relief Act relying on (a)
see
1979 (4) ~['[' ~~!) ••t p<lra;, '30. 10, (0) Z004 (4) 649 at para 39, (c) 1973 (2) SCC 515 at para 14, and (d) 2004 (9)
see 204 at para 141. A briefnoteonthis judgement is placed at para 9 hereto.
11
•.
sources without disruption.

(ii) The asset/facility so established relates to and entails an important input to
economic and social/environmental well-being of the consuming public and
the economy. It is not created for self-consumption by the concessionaire/
owner.
(iii) It invariably involves grant of some "welfare state" concessions/facilities
attracting regulation to secure maximising welfare and preventing abuse like
right of way or land use permissions; use of scarce natural resources (like
spectrum, coal, water etc.); permission/license to do something which is
otherwise not permitted; inherent natural/geographical monopoly or
oligopoly, grants and soften long term finances et.al,
(iv) The economy and citizens are concerned with reliable quality of service
at affordable and reasonable prices. Invariably, the commercial terms of
supply are regulated by statute and/or statutory agencies, constraining the
freedom of the supplier to determine conditions of supply including price,
refusal to supply, or charging a premium.
(v) Besides, being a direct supplier of jobs, infrastructure has positive
externalities for other, sectors of the economy, which in turn increases
demand for labour in these sectors.
7.1.4 It is, therefore, considered imperative that certain overreaching principles must be
incorporated in the statute to guide judicial discretion qua PublicWorks Contracts, viz.:-
(a) Secure a balance between securing access to essential facilities by citizens,
affordabiJity of the services, and viability of the investment made (as recovery of
prudent cost incurred for delivering the service with reasonable return to service
the debt and equity capital invested).
(b) Ensure that the underlying "value for money" proposition of the infrastructure asset
being developed with public and private sector financing and entrepreneurship is
not lost during implementation. In this context, Courts must be cognizant of the
well-defined allocation of role, responsibility and risk in the contracts. It is
particularly noteworthy that such role and risk allocation invariably changes during
different phasesof the Project, viz.:-
(i) Development and Feasi,bility'Phaseending with flnanclal closure.
(ii) Construction phase.
(ii) . Commercial operation phase.
(iv) Closureand hand back phase.
7.1.5 The Act permits parties to buy their way out of the commitment! contractual obligation
by availing the discretionary relief available under Section 20 of the Act. This can pose
12
>
serious challenges to the underlying public interest and welfare objectives, since these
facilities are inherently "monopolies for provision of essential facilities". As such, there is
a need to curb the perverse incentive to the parties to negotiate their way out, mainly
due to the following reasons:-
(a) delay in Courts deciding the matter.
(b) failure to award actual costs and damages.
(c) ineffective enforcement of decrees.
(d) indiscriminate grant of injunctiv~ relief without linkage to cost of capital, value for
money, inflation, opportunity, cost, etc., in the terms and conditions of the
injunctive relief.
7.1.6 When the underlying asset and facility/service is an infrastructure facility with intrinsic
public interest, certain constitutional principles get intertwined while dealing with such
contracts. These are recounted below:- .
(a) Role of State as Parens Patriae in context of the Public Trust Doctrine which must
pass muster on the foundation of Articles 14 and 39 of the Constitution of India.
Each word has been held to have a strategic role and the whole Article has a
mlsslon."
(b) The State is obliged under Article 38(2) of the Constitution to strive to minimise
inequalities of income and eliminate inequalities in. status, facilities. and
opportunities amongst individuals and amongst groups of people.
(c) Principles governing judicial review of allocation of Natural Resources (SC
Constitution Bench rulingS),including Article 14 tests of reasonablenessin allocation
of the scarce natural resourcesas also grant of any largesse.
7.1.7 Infrastructure projects generally being of long tenure, it is now judiCially recognized that
it may not be possible to envisage all possible risks over such a long period of time due to
-' which certain reset clauses like force majeure and change in laws are provided to deal
4 State of Karnataka v. Ranganath Reddy [1978 (1) SCR 641); Jacob v. Kerala Water Authority [(1991) 1 SCC 28]; Madan
Mohan Pathak v. Union of India [(1978) 2 see 50)
5 In re Natural Resources Allocation: (2012) 10 see 1, paras 148-149 it was concluded that:
• Auction despite being a more preferable method of alienation/allotment of natural resources, cannot be held to be a
constitutional requirement or limitation for alienation of all natural resources. Every method other than auction
--. cannot be struck down as uftra vires the constitutional mandate.
• Alienation of natural resources is a policy dedslon, and the means adopted for the same are thus, executive
prerogatives. However, when such a policy decision is not backed by a SOCialor welfare purpose, and precious and
scarce natural resources are alienated for commercial pursuits of profit maximising private entrepreneurs, adoption
of means other than those that are competitive and maximise revenue may be arbitrary and face the wrath of
Article 14 of the Constitution.
• A judicial scrutiny of methods of disposal of natural resources would depend on the facts .of each case to assess
whether the executive action is arbitrary, unfair, unreasonable and capridous due to its antimony with Article 14 of
me Constitution.
13
"::"
;.
with the unforeseeable events." In projects which are of long tenure, the services being
delivered to the users may vary on time, cost, quantity and quality standards.
Irrespective of the obligations of a private party, the Government is the main party
accountable to the public, and subjected to criticism in case of default.
7.1.8 Understanding the significance of the issue, the Government of India (GOI) has issued
"Guidelines on Institutional Mechanism for Monitoring PPPProjects"? ("PPP Guidelines"),
which provide an institutional level framework for monitoring of PPPprojects within the
Government of India, and their reporting.
(a) The Project Authorities may create a two-tier mechanism for monitoring the
performance of PPPProjects, comprising:-
(i) PPPProjects Monitoring Unit (PPP PMU)at the Project Authority level; and
(ii) PPP Performance Review Unit (PPP PRU) at the, Ministry level; or State
Government level, as the case may be.
(b) The PPPPMU and PPPPRUshould be associated with the respective PPPprojects
as early as possible, preferably at the award stage itself.
(c)' Monitoring by the PMU should, inter alia, cover the following aspects to be
summarised in a monthly 'PPP Project Monitoring Report' which should be
submitted to the PPPPerformance Review Unit within 15 days of the close of the
relevanfmonth :-
(i) compliance of the conditions precedent and achievement of financial
closure within the period specified in the concession agreement;
(ii) adherence to the time lines and other obligations specified in the
concession agreement;
(iii) streamlining of, and adherence to, the reporting procedures between the
concessionaireand the project authority, which may also include an MIS;
(iv) assessmentof performance against laid down standards;
(v) remedial measures and action plan for curing defaults, especially when
performance standards are not fulfilled;
(vi) imposition of penalties in the event of default;
(vii) levy and collection of user charges based on approved principles;
(viii) progress of on-going disputes and arbitration proceedings, if any; and
(ix) compliance with the instructions of the project' authority or Independent
Engineer, as the case may be.
6 This concept is recognized as the "Incomplete Contract Theory" in Common UlW Jurisprudence: A recent decision of the
full bench of the Appellate Tribunal for Electricity has held that a force majeure clause can be basis for restitutive relief
to the affected party if the clause so provides. UHBVNL & Anr. v. CERC & Ors. : APTEL dated 07.04.2016 @ Paras 293
& 295. A summary of findings with link to thejudqernent is set out in para 10 hereto.
7http://planningcommission.gov.in/sectors/ppp_reportjreports-1juidelines/Guidelines%20for%20Monitorin\l%20of0f020PPP
%20Projects.pdf
14
:(
J
Cd) The PPP PRU shall review the PPP Project Monitoring Reports and oversee or
initiate action for rectifying any defaults or lapses, besides preparing quarterly
/
reports on the status of such PPP Project. These reports shall focus on any non-
'-', compliance of relevant contracts, especially in terms of the standards of
performance or loss to the public exchequer and the users, indicating steps taken
'J
or required to be taken by the Project Authority in accordance with the provisions
of the relevant contract.
-;:»:J
(e) In the BU9get 2016, the Union Government has announced initiatives including
implementing Kelkar Committee Recommendations for rejuvenating Infrastructure
Development in PPPformat through effective and speedy dispute resolution and
.~
contract enforcement.
7.1.9 In light of the inherent public interest, the Government's policy to avoid disputes/issues in
the projects is by resorting to the method of regular supervlslon of enforcement of the
project as set out in para 1.8 above. Contracts for projects which require personal
'-- performance by the promisor, or require the promisor to do continuous or multiple acts
'" under the contracts, are difficult to enforce because they would involve supervision and
....) continuous watching by an expert body, in a departure from clauses (b) and (d) of
section 14(1) of the Act.
7.1.10 The Kelkar Committee has recommended a statutorily established credible empowered .
multi-disciplinary expert' institutional mechanism to adjudicate upon / deal with the
complex issuesinvolved in the projects in a time bound manner, such as-
(a) an Infrastructure PPP Project Review Committee (IPRC) can be constituted with
one expert each from the following disciplines:-
(i) Financeand Economics.
(ii) One or more Sectoral experts - with a minimum of 15 years' experience in
the industry in question.
(iii) Law;
(b) an Infrastructure PPPAdjudication Tribunal (IPAT) chaired by a Judicial Member
(Former Judge of the Hon'ble Supreme Court of India or Hon'ble Chief Justice of a
High Court) with a Technical and Financial Member.
'-" 8. Relevant Case Law

'-'"
While considering applications seeking interlocutory reliefs and/or arrangement impacting
--' implementation of Public Works Contracts, the Court/Tribunal concerned shall give a
reasoned order rejecting due consideration of the inherent public interest in India in such
0,../'
Contracts and the UnderlY,nf in'' f'llfiij[ mIl,1~Ilk .L.

-"
J 15
;.
8.1 Assistant Collector of Central Excise, West Bengal v

Dunlop India Ltd and Orsfl
In this matter, the Respondent Company filed a writ petition before the Single Judge of the
Calcutta High Court seeking restraining orders against the Central excise authorities from
the levy and collection of excise duty on the ground that the Respondent Company was
exempt from a certain percentage of excise duty to the extent that the manufacturers had
not availed themselves of the exemption under certain other earlier notifications. However,
the Appellant was of the view that the Company was not entitled to the exemption as it
had cleared the goods earlier without paying central excise duty, but on furnishing bank
guarantees under various interim orders of Courts. The Learned Single Judge passed an
interim order in favour of the Respondent Company and allowed the exemption to the tune
of Rs two crores ninety three lacs and eighty five thousand. The Division Bench was
approached in an appeal by the Appellant, wherein the order of the Learned Single Judge
was confirmed with slight modification giving the Appellants the liberty to encash 30% of
the bank guarantee. The Hon'ble Supreme Court, while discussing the importance of the
interim orders passed by Courts, quashed the orders of the Learned Single Judge and the
Division Bench with the observation that even assuming that the Company had established
a prima facie case, they did not think that it was sufficient justification for granting interim
orders as was done by the High Court and the Interim order was vacated. The relevant
extracts of the judgment are as under:

"1.It is indeed a great pity - and, we wish we did not have to say it but we are
afraid we wiJ/ be signally failing in our duty if we do not do so - some courts, of
tate, appear to have developed an unwarranted tendency to grant interim orders -
interim orders with a great potential for public mischief - for the mere asking. We
feel greatly disturbed. We find it more distressing that suchlnterirn orders, often ex
parte and non-speaking, are made even by the High Courts while entertaining writ
petitions under Article 226 of the Constitution, and in the Calcutta High Court, on
oral application too."
"3 .... Article 226 is not meant to short-circuit or circumvent statutory procedures.
It is only where statutory remedies are entirely ill-suited to meet the demands of
extraordinary Situations, as for instance where the very vires of the statute is in
question or where private or public wrongs are so inextricably mixed up and the
prevention of public injury and the vindication of public justice require it that
recourse may be had to Article 226 of the Constitution. But then the Court must
have good and sufficient reason to bypass the alternative remedy provided by
statute. Surely matters involving the revenue, where statutory remedies are
8 (1985) 1 see 260, Paras 1, 3, 5-7, 0 Chinnappa Reddy, J
16
-.
available, are not such matters. We can also take judicial notice of the fact that the
vast majority of the petitions under Article 226 of the Constitution are filed solely
for the purpose of obtaining interim orders and thereafter prolong the proceedings
by one device or the other. The practice certainly needs to be strongly
dlscouraqed."
"5. We repeat and deprecate the practice of granting interim order which
practically give the principal relief sought in the petition for no better reason than
that a prima facie case has been made out, without being concerned about the
balance of convenience, the public interest and a host of other relevant
considerations ....
We have come across cases where the collection of public revenue has been
seriously jeopardised and budgets of Governments and Local Authorities

affirmatively prejudiced to the point of precariousness consequent upon interim
orders made by courts. In fact, instances have come to our knowledge where
Governments have been forced to explore further sources for raising revenue,
sources which they would rather well leave alone in the public interest, because of
the stays granted by courts. We have come across cases where an entire Service is
left in a stay of. flutter and unrest because of interim orders passed by courts,
leaving the work they are supposed to do in a state of suspended animation. We
have come across cases where buses and lorries are being run under orders of
court though they were either denied permits or their permits had been cancelled
or suspended by Transport Authorities. We have come across cases where liquor
shops are being run under interim orders of court. We h~ve come across cases
where the collection of monthly rentals payable by excise contractors has been
stayed with the result that at the end. of the year the contractor has paid nothing
but made his profits from the shop and walked out. We have come across cases
where dealers in food grains and essential commodities have been allowed to take
'-,
back the stocks seized from them as if to permit them to continue to indulge in the
very practices which were to be prevented by the seizure. We have come across
cases where land reform and important welfare legislations have been stayed by
courts. Incalculable harm has been done by such interim orders. All this is not to
-",
say that interim orders may never be made against public authorities. There are, of
course, cases which demand that interim orders should be made in the interests of
justice. Where gross violations of the law and injustices are perpetrated or are
about to be perpetrated, it is the bounden duty of the court to intervene and give
appropriate interim relief. In cases where denial of interim relief may lead to public
mischief, grave irreparable private injury or shake a citizen's faith in the impartiality
,./
17
;.,
of public administration, a court may well be justified in granting interim relief

against public authority. But since the law presumes that public authorities function
properly and bona fide with due regard to the public interest, a court must be
circumspect in granting interim orders of far-reaching dimensions or orders causing
administrative, burdensome inconvenience or orders preventing collection of public
revenue for no better reason than that the parties have come to the court alleging
prejudice, inconvenience or harm and that a prima facie case has been shown.
There can be and there are no hard and fast rules. But prudence, discretion and
circumspection are called for. There are several other vital considerations apart
from the existence of a prima facie case. There is the question of balance of
convenience. There is the question of irreparable injury. There is the question of
the public interest. There are many such factors worthy of consideration. We often
wonder why in the case indirect taxation where the burden has already been
passed on to the consumer, any interim relief should at all be given to the
manufacturer, dealer and the like!"
"6. There is just one more thing that we wish to say. In Siliguri Municipality v.
, Amalendu Das [(1984) 2 SCC436], the Court was put to the necessity of pointing
out the following:
We will be failing in our duty if we' do not advert to a feature which causes us
dismay and distress. On a previous occasion, a Division Bench had vacated an
interim order passed by a learned Single Judge on similar facts in. a 'similar
situation. Even so when a similar matter giving rise to the present appeal came up
again, the same learned Judge whose order had been reversed earlier, granted a
non-speaking interlocutory order of the aforesaid nature. This order was in turn
confirmed by a Division Bench without a speaking order articulating reasons for
granting a stay when the earlier Bench had vacated the stay. We mean no
disrespect to the High Court in emphasizing the necessity for self-imposed
dlsdpllne in such matters in obeisance to such weighty institutional considerations
like the need to maintain decorum and.comlty, So also we mean no disrespect to
the High Court in stressing the need for self-discipline on the part of the High Court
in passing interim orders without entering into the question of amplitude and width
of the powers of the High Court to' grant interim relief. The main purpose of
passing an interim order is to evolve a workable formula or a workable
arrangement to the extent called for by the demands of the situation keeping in
mind the presumption regarding the constitUtionality of the legislation and the
vulnerability of the challenge, only in order that no irreparable injury is occasioned.
The Court has therefore to strike a delicate balance after consldertnq the pros and
18
".
':
cons of the matter lest larger public interest is not jeopardized and institutional
embarrassment is eschewed,"
\\7, ....Even assuming that the Company-had established a prima facie case/ about
which we do not express any opinion/ we do not think that it was sufficient
justification for granting the interim orders as was done by the High Court. There
was no question of any balance of convenience being in favour of the respondent
Company. The balance of convenience was certainly in favour of the Government
of India. Governments are not run on mere bank guarantees. We notice that very
often some courts act as if furnishing a bank guarantee would meet the ends of
justice. No governmental business or for that matter no business of any kind can
be run on mere bank guarantees. Liquid cash is necessary for the running of a
Government as indeed any other enterprise. We consider that where matters of
public revenue are concerned/ it is of utmost importance to realise that interim
orders ought not to be granted merely because a prima facie case has been.
shown. More is required. The balance of convenience must be clearly in favour of
the making of an interim order and there should not be the slightest indication of a
likelihood of prejudice to the public interest. We are v"ery sorry to remark that
these considerations have not been borne in mind by the High Court and interim
-," order of this magnitude had been granted for the mere asking."
8.2 Mahadeo Savlaram Shelke and Ors v Pune Municipal

Corpn&Anr!
In the above mentioned ease/ the issue was that Poona Municipality had undertaken
widening of the road to remove traffic congestion and initiated proceedings under Section
4(1) of the Land Acquisition Act/ 1894 for acquiring two storied building belonging to N.H.
Naik at Kotwal Chowk. The appellants/ tenants who had entered into leave and licence
agreements with the Corporation were allowed to get into possession upto the period of
licence/ after which/ eviction order was passed that was upheld uptil the Hon'ble Supreme
<,
"Court. The Appellants then filed suit for perpetual injunction from dispossession and ad
interim injunction. The Civil Judge refused to grant the interim relief sought/ the Joint
Judge/ on appeal/ granted ad interim injunction pending disposal of the suit/ the Horrble
High Court set aside the interim order and confirmed the order of the Civil Judge/ thus the
-.-:1 titled appeal was filed. The Horrble Supreme Court/ while adjudicating the matter/
considered whether there was a prima faCieease/ triable issue and balance of convenience
for granting ad interim injunction pending the suit and whether an injunction could be
~~
granted in favour of the persons who remain in unlawful possession of the property. The
-"
9 (1995) 3 see 33, Para 14 & 15, K Rsrnaswamv J
19
Court held that the court would be circumspect before granting the injunction and look into
the conduct of the party, the probable injury to either party and whether the plaintiff could
be adequately compensated if injunction is refused. It was further noted that it is settled
law that no injunction could be granted against the true owner at the instance of persons
in unlawful possession.In view of the above, the Supreme Court, while upholding the order
of the High Court, directed the trial court that in the event of the suit be dismissed while
disposing of the suit, damages be assessed and a decree for recovering the same at pro
rata against the appellants be passed. Relevant extracts of the judgment being as follows:
"14. It would thus be clear that in a suit for perpetual (sic) injunction, the court
should enquire on affidavit evidence and other material placed before the court to find
strong prima facie case and balance of convenience in favour of granting injunction
otherwise irreparable damage or damage would ensue to the plaintiff. The court should
also find whether the plaintiff would adequately be compensated by damages if
injunction is not granted. It is common experience that injunction normally is asked for
arid granted to prevent the public authorities or the respondents to proceed with
execution of or implementing scheme of public utility or granted contracts for execution
thereof. Public interest is, therefore, one of the material and relevant considerations in
either exercising or refusing to grant ad interim injunction. While exercising
discretionary power, the court should also adopt the procedure of calling. upon the
plaintiff to file a bond to the satisfaction of the court that in the event of his failing in
.the suit to obtain the relief asked for in the plaint, he would adequately compensate
the defendant for the loss ensued due to the order of injunction granted in favour of
the plaintiff. Even otherwise the court while exercising its equity jurisdiction in granting
injunction has also jurisdiction and power to grant adequate compensation to mitigate
the damages caused to the defendant by grant of injunction restraining the defendant
to proceed with the execution of the work etc. The pecuniary award of damages is
consequential to the adjudication of the dispute and the result therein is incidental to
the determination of the case by the court. The pecuniary jurisdiction of the court of
first instance should not impede nor be a bar to award damages beyond its pecuniary
jurisdiction. In this behalf, the grant or refusal of damages is not founded upon the
original cause of action but the consequences of the adjudication by the conduct of the
parties, the court gets inherent jurisdiction in doing ex debito justitiae mitigating the
damage suffered by .the defendant by the act of the court in granting injunction
restraining the defendant from proceeding with the action complained of in the suit. It
is common knowledge that injunction is invariably sought for in laying the suit in a
court of lowest pecuniary jurisdiction even when the claims are much larger than the
pecuniary jurisdiction of the court of first instance, may be, for diverse reasons.
20
'.
-,
Therefore, the pecuniary jurisdiction is not and should not stand an impediment for the
court of first instance in determining damages as part of the adjudication and pass a
decree in that behalf without relegating the parties to a further suit for damages. This
procedure would act as a check on abuse of the process of the court and adequately
compensate the damages or injury suffered by the defendant by act of court at the
behest of the plaintiff".
"15. Public purpose of removing traffic congestion was sought to be served by acquiring
the building for widening the road. By orders of injunction, for 24 years the public
purpose was delayed. As a consequence execution of the project has been delayed and
the costs now stand mounted. The courts in the cases where injunctions are to be
granted should necessarilyconsider the effect on public purpose thereof and also suitably
mould the relief. In the event of the plaintiffs losing the suit ultimately, they should
necessarily bear the consequences, namely, escalation of the cost or the damages the
Corporation suffered on account of injunction issued by the courts. Appellate court had
not adverted to any of the material' aspects of the matter. Therefore, the High Court has
rightly, though for different reasons, dissolved the order of ad interim injunction. Under
these Circumstances,in the event of the suit to be dismissed while disposing of the suit
the trial court is directed to assess the damages and pass a decree for recovering t,he
..
... ~
same at pro rata against the appellants."
8.3 Ramniklal N. Shutta and Anr v. State of Maharashtra &

'v Ors..10
The issue in this matter pertains to the notification dated 29-11-1979 issued under Section
4 of the Land Acquisition Act, 1894, whereby two pieces of land were notified for
acquisition for a public purpose, to wit, for "Bombay Electric Supply and Transport
Undertaking for bus station" ["BEST'1. Settlement was arrived at between BEST and two
persons who were owners to the extent of 906 so. mtrs. of one piece of land and the said
portion of the land was given on perpetual lease to BESTfree of any charge, i.e., Re 1 per
,~
annum. The settlement was brought to the notice of the Land Acquisition Officer passed an
order on the basis of the settlement qua only one piece of land. Non-inclusion of the other
land in the award was challenged before the Hon'ble High Court that was dismissed by the
Single Judge. In appeal, the writ was restored and was again dismissed. The Supreme
... '
Court also, while noting the relevance of land acquisition proceedings, dismissed the appeal
with the following observations:
.../
"10. Before parting with this case, we think it necessary to make a few
observations relevant to land acquisition proceedings. Our country isnow launched
J 10 (1997) 1 see 134, Para 10, BP Jeevan Reddy J
21
"
upon an ambitious programme of all-round economic advancement to make our

economy competitive in the world market. We are anxious to attract foreign direct
investment to the maximum extent. We propose to compete with China
economically. We wish to attain the pace of progress achieved by some of the
Asian countries, referred to as "Asian tigers", e.g., South Korea, Taiwan and
Singapore. It is, however, recognised on all hands that the infrastructure necessary
for sustaining such a pace of progress is woefully lacking in our country. The
means of transportation, power and communications are in dire need of substantial
improvement, expansion and modernisation. These things very often call for
acquisition of land and that too without any delay. It is, however, natural that in
most of these cases, the persons affected challenge the acquisition proceedings in
courts. These challenges are generally in the shape of writ petitions filed in High
Courts. Invariably, stay of acquisition is asked for and in some cases, orders by
way of stay or injunction are also made. Whatever may have been the practices in
the past, a time has come where the courts should keep the larger public interest
in mind while exercising their power of granting stay/injunction. The power under
Article 226 is discretionary. It will be exercised only in furtherance of interests of
justice and riot merely on the making out of a legal point. And in the matter of land
acquisition for public purposes, the interests of justice and the public interest
coalesce. They are very often one and the same. Even in a civil suit, granting of
injunction or other similar orders, more particularly of an interlocutory nature, is
equally discretionary. The courts have to weigh the public interest vis-a-vis the
private interest while exercising the power under Article 226 - indeed any of their
discretionary powers. It may even be open to the High Court to direct, in case it
finds finally that the acquisition was vitiated on account of non-compliance with
some legal requirement that the persons interested shall also be entitled to a
particular amount of damages to be awarded as a lump sum or calculated at a
certain percentage of compensation payable. There are many ways of affording
appropriate relief and redressing a wrong; quashing the acquisition proceedings is
not the only mode of redress. To wit, it is ultimately a matter of balancing the
competing interests. Beyond this, it is neither possible nor advisable to say. We
hope and trust that these considerations will be duly borne in mind by the courts
while dealing with challenges to acquisition proceedings."
8.4 Raunaq International Ltd vs IVR Construction Ltd & ore"
The issue involved in this case is that the respondent challenged the decision of the
11 (1999) 1 see 492, Para 9,10, 17-19, 24-25, Sujata Manohar]
22
Maharashtra State Electricity Board whereby the Appellant's offer to the tender was
accepted. The objection raised by the Respondent being that the Appellant does not have
the required amount of experience. The High Court passed an interim order staying the
operation of the letter of intent issued to the Appellant and the said order was challenged
before the Supreme Court which has been adjudicated herein. The Supreme Court, while
noting the relevance of an interim order, especially in caseswhere a public body is involved
and whilst discussing the elements of public interest, held that the offer of the Appellant
being the lowest and the Board has accepted the offer after weighing their requirements
against the qualifications of the two competing bidders, the High Court could not have
intervened and stayed the operation of the award of contract to the Appellant. The
Supreme Court also noted that despite there being no allegations of mala fides or
allegation that the contract has been entered into for collateral purposes, the High Court
did not weight the consequences in balance before granting interim orders and while
setting aside the impugned order, directed the Respondent to pay the appellants the costs
of the appeal. The relevant paras of the judgment are extracted hereunder:
,~'
"9 .... Even when the State or a public body enters into a commercial transaction,
considerations which would prevail in its decision to award the contract to a given
party would be the same. However, because the State ~r a public body or an
agency of the State enters into such a contract, there could be, in a given case, an
element of public law or public interest involved even in such a commercial
transaction.
10. What are these elements of public interest? (1) Public money would be
expended for the purposes of the contract. (2) The goods or services which are
being commissioned could be for a public purpose, such as, construction of roads,
public buildings, power plants or other public utilities. (3) The public would be
directly interested in the timely fulfilment of the contract so that the services
become available to the public expeditiously. (4) The public would also be
interested in the quality of the work undertaken or goods supplied by the tenderer.
Poor quality of work or goods can lead to tremendous public hardship and
substantial financial outlay either in correcting mistakes or in rectifying defects or
even at times in redoing the entire work-thus involving larger outlays of public
money and delaying the availability of services, facilities or goods e.g. a delay in
commissioning a power project, as in the present case, could lead to power
shortages, retardation of industrial development, hardship to the general public
and substantial cost escalation."
".17. NormallY Defore such a project is undertaken, a detailed consideration of the
23
-
need, viability, financing and cost-effectiveness of the proposed project and offers
received takes place at various levels in the Government. If there is a good reason
why the project should not be undertaken, then the time to object is at the time
when the same is under consideration and before a final decision is taken to
undertake the project. If breach of law in the execution of the project is
apprehended, then it is at the stage when the viability of the project is being
considered that the objection before the appropriate authorities including the court
must be raised. We would expect that if such objection or material is placed before
the Government, the same would be considered before a final decision is taken. It
is common experience that considerable time is spent by the authorities concerned
before a final decision is taken regarding the execution of a public project. This is
the appropriate time when all aspects and all objections should be considered. It is
only when valid objections are not taken into account or ignored that the court
may intervene. Even so, the court should be moved at the earliest possible
opportunity. Belated petitions should not be entertained."
"18. The same conslderatlons must weigh with the court when interim orders are
passed in such petitions. The party at whose instance interim orders are obtained
has to be made accountable for the consequencesof the interim order. The interim
order could delay the project, jettison finely worked financial arrangements and
escalate costs. Hence the petitioner asking for interim' orders in appropriate cases
should be asked to provide security for any increase in cost as a result of such
delay or any damages suffered by the opposite partv in consequence of an interim
order. Otherwise public detriment may outweigh public benefit in granting such
interim orders. Stay order or injunction order, if issued, must be moulded to
provide for restitution."
"19. A somewhat different approach may be required in the cases of award of a

contract by the Government for the purchase of items for its use. Judicial review
would be permissible only on the established grounds for such review including
mala fides, arbitrariness or unreasonableness of the Wednesbury variety. Balance
of convenience would playa major role in moulding interim relief."
"24. Dealing with interim orders, this Court observed in CCEv. Dunlop India Ltd.6
,(SCR 190 at p. 196) that an interim order should not be granted without
considering the balance of convenience, the public interest involved and the
financial impact of an interim order. Similarly, in Ramniklal N. Bhutta v. State of
Maharashtra the Court said that while granting a stay, the court should arrive at a
proper balancing of competing interests and grant a stay only when there is an
24
".
overwhelming public interest in granting it, as against the public detriment which
may be caused by granting a stay. Therefore, in granting an injunction or stay
"order against the award of a contract by the Government or a government agency,
the court has to satisfy itself that the public interest in holding up the project far
outweighs the public interest in carrying it out within a reasonable time. The court
must also take into account the cost involved in staying the project and whether
the public would stand to benefit by incurring such cost".
"25. Therefore, when such a stay order is obtained at the instance of a private
party or even at the instance of a body litigating in public interest, any interim
order which stops the project from proceeding further must provide for the
reimbursement of costs to the public in case ultimately the litigation started by
such an individual or body fails. The public must be compensated both for the
../ delay in implementation of the project and the cost escalation resulting from such
delay. Unless an adequate provision is made for this in the interim order, the
interim order may prove counterproductive."
8.5 Sanjay Kumar Shukla v. Bharat Petroleum Corpn. Ltd and

Ors.!2
In this case, the appeal was filed by the Appellants against the order of. the Patna High
Court wherein the High Court had directed that Respondent No. 7 herein who was placed
at Serial No.2 of the select list/ merit panel for award with 77.75 marks of dealership of
retail outlet under Respondent 1 i.e. Mis Bharat Petroleum Corpn. ltd. be offered the said
dealership after completing the process contemplated under the selection procedure in
force in the Corporation. In view of the fact that relevant facts had been ignored in the
previous rounds of litigation and at different stages of conslderatlon, the Supreme Court
concluded that there was a deliberated and not very bona fide attempt on the part of
Respondent No.7 to deny the fruit of selection made in favour of the Appellant by the
Corporation. The Situation, therefore, has to be remedied. The appeal was allowed and the
'~
Corporation was directed that if it is of the view that the operation of the retail outlets is
still justified by the exigencies, to award the same to the Appellant by completing the
requisite formalities in accordance with the procedure laid down by the Corporation itself.
The Supreme Court reiterated the need of caution in view of the serious consequencesthat
the entertainment of a writ petition in contractual matters, unless justified by public
-.J
interest, can entail. The relevant extracts of the judgment are quoted herein below:
"14. We have felt it necessaryto reiterate the need of caution sounded by this Court
in the decisions referred to hereinabove in view of the serious consequencesthat the
12 (2014) 3 see 493, paras 14-15, RanjanGogoi)
2S
;
entertainment of a writ petition in contractual matters, unless justified by public

interest, can entail. Delay in the judicial process that seems to have become inevitable
could work in different ways. Deprivation of the benefit of a service or facility to the
public; escalating costs burdening the public exchequer and abandonment of half
completed works and projects due to the ground realities in a fast-changing
economic/market scenario are some of the pitfalls that may occur."
"15-. In the present case, fortunately, the litigation has not been very time-consuming.
Nothing has been suggested on behalf of the Corporation that the establishment of a
retail outlet at Areraj, East Champaran District in the State of Bihar is not required as
on date. It can, therefore, be safely understood that in the instant case the public of
the locality have been deprived of the benefit of the service that the outlet could have
generated-.... "
8.6 Rishi Kinm LogistiCS (P) Ltd. v. Kandla Port Trust •.J.3.
In this matter the Respondent No.2, viz., the Board of Trustees of Kandla Port Trust has
number of plots, in and around Kandla Port, which are of different sizes and it was decided
that the said plots be given on leasehold basis for a period of 30 years at the annual rent
of Re 1 per plot. The Appellant being one of the bidders in the tender for Plot No. 14, 15
and 17, was issued letter of intent on 07.01.2006, inter alia, stating that the formal letter
will be issued to the appellant after receipt of CRZ (Coastal Regulatory Zone) clearance in
general. The Gandhidham Chamber of Commerce and Industry was ultimately received on
16.08.2010, after more than 5 years from the date of tender (12.03.2005). Due to the
prolonged time-lag resulted in taking declslon by the Board in the form of Resolution No.
108 by way of which the tender process was decided to be cancelled. The said resolution
was challenged before the High Court by two of the other bidders and the said writ was
dismissed by a detailed reasoned order and the same order was passed in the petition filed
by the Appellant herein. The two bidders who had initially filed the writ petition before the
High Court filed an appeal before Supreme Court but the same petition was sought to be
withdrawn and was accordingly dismissed as withdrawn. The High Court had held that
issuing of letter of intent did not result in any concluded contract and it was merely an
expression of intention. It was held by the High Court that held that the action on the part
of the Port Trust was neither arbitrary nor mala fide and the Port Trust was within its right
to take such a decision in the year 2010 keeping in mind the larger public interest. The
Supreme Court while deciding the matter noted that the realm of the administrative law
needs to be,kept in mind and while dealing with the administrative law aspects, contractual
elements of the case need not be brought it. Relying on the scope of judicial review of
13 (2014) 13 see 233, at paras 16-18 & 36, Arjan Sikri J
26
administrative action, it was held that by way of writ petition under Article 226, only public
law remedy can be invoked and contractual dispute is outside the power of judicial review
under Article 226. While deciding the-matter from the limited angle in exercise of powers of
judicial review, it was held that no interference is required and dismissed the appeal. The
relevant extracts of the judgment are quoted below:
"16 before taking a final decision in the matter, the Port Trust sought legal
opinion specifically on the point as to whether it would be prudent to cancel 2005
tender process and start fresh process so as to fetch the realistic marked price in
accordance with present market value of the land. Based upon the expert legal
opinion l.e. there was no legal impediment in cancellation of the tender process, the
decision was taken by the Port Trust to cancel the earlier tender process and to start
fresh process."
"17. On the aforesaid facts there is hardly any scope for argument that the decision of
the Port Trust is arbitrary. It is based on valid considerations. We have to keep in

mind that while examining this aspect we are in the realm of administrative law. The
contractual aspect of the matter has to be kept aside which would be examined
separately while dealing with the issue as to whether there was a concluded contract
between the parties. This distinction is lucidly explained in Kisan Sahkari Chini Mills
Ltd. v. Vardan Unkers [(2008) 12 SCC 500}. Keeping in mind this distinction between
<:
the two, we are not required to bring in the contractual elements of the case while
dealing with the administrative law aspects."
"18. When competing claims are private interest v. public interest, then in the case of
disposal of public property the question would be whether the right of the person,
who has earned the right to the public property in a public auction, is to be preferred
over the right of the public in ensuring that valuable public assets were not disposed
of except for a fair price and in a fair and transparent manner. Whether this Court
-.' should, in judicial review, sit in judgment over the decision of a public body which is of
the view that it need not go further ahead with the tender process. It is true if such a
decision is taken without any reasons to support it or mere ipse dixit it would be
arbitrary. In this case there are reasons. The High Court analysed the reasons and has
taken the view that those reasons are valid. In our view in matters particularly to the
..-/
disposal of valuable assets by the State when the State seeksto explore the possibility
of getting higher price (sic)."
"36. We again emphasise that the issue of the argument of there being a concluded
./
l'ontl'a« jJ fai;,cd in a petition filed under Article 226 of the Constitution and not by
,/' way of suit. The issue whether there was a concluded contract and breach thereof
../
27
become secondary and is examined by us with that limited scope in mind. In such
proceedings main aspect which has to be is as to whether impugned decision of the
Port Trust was arbitrary or unreasonable. It is also important to remark that in a given
case even if it is held that there was a concluded contract, whether specific
performance can be ordered or not would be a moot question in writ proceedings. The
appellant took the calculated risk in not going to the civil court and choosing to invoke
extraordinary jurisdiction of the High Court, which is also discretionary in nature."
8.7 Keshavlal Khemchand & Sons (P) Ltd. If. Union of India!4
While upholding the vires of the definition of 'Non-Performing Assets' under section 2(1)(0)
of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security
Interest Act, 2002( SARFESIAct), Supreme Court in this case noted that speedy recovery
of monies due is important for the financial health of the country and that the legislative
intent was to facilitate secured creditor to recover the amounts due to them from the
borrowers by enforcing the security interest created by the borrowers without the
intervention of the civil court or the tribunal. Having held that, even in such cases, the
Hon'ble Supreme Court has held that such action must be taken by the secured creditor
only after appropriate deliberation that the same does not result in disruption of industrial
production and consequently resulting in unemployment and loss of GDP etc impacting
larger interests of the nation. The relevant extracts of the judgment are quoted hereunder:
"2. The Securitisation and Reconstruction of Financial Assets and Enforcement of

Security Interest Act, 2002 (hereinafter referred to as "the Act''), was made by
Parliament in the year 2002. The Statement of Objects and Reasons appended to
the Act explained the purpose behind the enactment as follows:
•... There is no legal provision for facilitating securitisation of financial assets of

banks and financial institutions. Further, unlike international banks, the banks and
financial institutions in India do not have power to take possession of securities
and sell them. Our existing legal framework relating to commercial transactions has
not kept pace with the changing commercial practices and financial sector reforms.
This has resulted in slow pace of recovery of defaulting loans and mounting levels
of non-performing assets of banks and financial lnstltutlons,
The enactment was preceded by three Committee Reports-two headed by Mr M.

Narasimham and the third by Mr T.R. Andhyarujlna."
1i (2015) 4 SCC770, at paras 2-5, 29, 39 to 43, Jasti Chelameswar J
28
"3. Recovery of money from a debtor by resorting to the filing of a suit takes
painfully long time in this country for various reasons. Huge amounts of money are
lent by -various banks and other financial institutions. Speedy recovery of the
monies due to such institutions is an important element determining the efficiency
not only of such institutions but also becomesan important factor for the financial
health of the country."
"4. In order to facilitate banks and financial institutions (hereinafter collectively

referred to as "the creditors" for the sake of convenience) to speedily recover the
monies due to them from the borrowers, Parliament made a law called the
Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (51 of 1993)
under which banks and financial institutions could approach a tribunal constituted
under the said Act. It deals exclusively with the claims for the recovery of the
./
monies due from the borrowers to the creditors. Apart from creating such an
exclusive forum, the Act also provided for a more simpler procedure for the
adjudication of the legality of the claims brought before it by the creditor and a
. . .
procedure for speedy recovery of sums so adjudicated."
"5. After a decade of working of the tribunals constituted under Act 51 of 1993,
Parliament felt that even the machinery and procedure established under Act 51 of
1993 is not able to produce the desired result of effldently recovering monies from
the borrowers. Parliament, therefore, made the Act. The crux of the Act is that any
"security interest" created in favour of a "creditor", who by definition under the Act
becomes a "secured creditor", can be enforced without the intervention either of
the court or tribunal constituted under Act 51 of 1993 by following the procedure
prescribed under Section 13 of the Act."
"29. We have already noticed that one of the two main purposes of the Act is to
facilitate the secured creditors to recover the amounts due to them from the
borrowers by enforcing the security interest created by the borrowers without the
intervention of the civil court or the tribuna!."
"39 •..... In other words, such loans are repayable in instalments over a period of
time the terms of which are evidenced by a written agreement between the
parties. A default in the repayment (in terms of the agreed schedule) generally
provides a cause of action for the creditor to initiate legal proceedings for the
"nm~
recovery of the entire amount due and outstanding from the borrower. Normally
:~~~ term loans are also accompanied bv ",m. "cnm';lr I"lc~\ \~ ,
for
,~\IIIID~I'(.bl a recovery Is to be made normally by InStituting a suit
recovery of the amounts by enforcing the "security interest". The Recovery of
29
Debts Due to Banks and Financial Institutions Act, 1993 created an exclusive forum
for a speedy ascertainment of the amounts actually due from the defaulting
borrower and also provided for a mechanism for speedy recovery of the amounts
so ascertained from such borrowers."
"40. Sincesuch a system was also found to be inadequate for the speedy recovery
of the monies due from the borrowers to the creditors, Parliament made the Act
under which the process of ascertainment of the amounts due from a borrower by
an independent adjudicatory body is dispensed with. The secured creditor is made
the sale judge of the amount due and outstanding from a borrower subject to an
1I
appeal under Section 17 of the Act.
"41. Be that as it may, such an ascertainment of amount due and outstanding is

not the only criterion on the basis of which the secured creditor is entitled to
initiate proceedings under Section 13C4) of the Act, but the secured creditor is also
required to classify the account-of the borrower (asset of the creditor) as an NPA.II
"42. Dehors the Act, when the borrower of a term loan defaults in the repayment,
the creditor can initiate legal proceeding straightaway for recovery of the amounts
.due and outstanding from the borrower. The Act places an additional legal
obligation on the creditor to examine and decide whether the account of the
borrower has become an NPA before initiating action under the Act. 1I
"43. The question - Why did Parliament impose such an additional obligation on
the creditors while proposing to create a mechanism for the expeditious recovery
of the money due to the secured creditors? - requires examination. The answer
appears to be that under the scheme of Section 13(4) the "secured assert
(generally the assets of an industrial concern, like plant and machinery, etc.) could
be taken possessionof and could either be sold or the management could be taken
over, etc. Such an action if not taken after an appropriate deliberation in a given
case could result in the disruption of industrial production and consequently
resulting in unemployment and loss of GDP, etc. impacting larger interests of the
nation. Therefore, Parliament must have thought that the secured creditors are
required to assesswhether the default in repayment by the borrower ls due to any
factor which is a temporary phenomenon and the same could be managed by the
borrower ifsome accommodation is qlven.'
30
8.8 Daulatshinhji Savanthsinhji Solanki & Others vs.
Executive Engineer, Himatnagar & Ors!5
The Appellants in this case are aggrieved by concurrent judgments and orders of two
Courts below at interlocutory stage, wherein Courts refused to grant injunction. It is the
case of the Appellant that there was already an existing road from village Vasanato Kadora
which was situated on the western side of the parcels of land that belonged to the
Appellant and the Executive Engineer and the State of Gujarat wanted to lay another road
and that is likely to affect the Appellant and without his consent or without acquiring his
land, starting of construction cannot be done. The Hon'ble Court has noted that to achieve
the objectives underlying Article 21, the State Government has evolved or started the
project known as "Rural Road Project" and if under such project, a road is to be laid or
constructed, injunctive orders from the Courts of law should be a rarity as it frustrates the
initial step and has held that the Courts below were justified in refusing injunction. The
relevant paras are extracted below:
"9 •......... To obviate their difficulties and to achievethe objective underlying Article
21 of the Constitution of India, the State Government has evolved or started the
project known as "Rural Road Project" and if under such project, a road is to be
e.
laid or constructed, injunctive orders from the cburts of law should be a rarity as it
frustrates an initial step, though belatedly taken towards fulfilment of most
cherished right to life,"
"11 Denial of access to roads would demobilise the rural masses to their
villages and would undoubtedly deny to them equal facilities and opportunities
which are available to urban few, India lives in villages despite undesirable exodus
of rural masses to urban areas and therefore if the State Government consistent
with its constitutional obligation envisaged and implemented its "Rural Road
Project", the Courts of law cannot and should not blindly injunct the entire project."
"12. In fact it should not be issued even in cases where prima facie case is made
out as the irreparable loss which is likely to be caused to the Government and to
the rural masses is so enormous and tremendous that no degree of moulding the
relief subsequently by the Court would be a panacea for the miseries which
injunctive wound will leave. The Courts of law therefore should be slow in granting
injunction against public project which are meant for the interest of the public at .
farge as against the private proprietary interest or otherwise of few individuals. The
proprietary interest of few individuals can always be provided for by suitable order
~---- -- -----
15 AIR 1997 Guj 64, paras 9, 11 to 13, S 0 Shah J.
31
of a Court of law but the enormous rise in the price or escalating of price in
constructing the road at the end of the litigation which may last decade or two
decades, would not only frustrate the object, but would in substance compel the
rural masses to live in the situation in which they had been for decades living with
no access to the State Highways or other ways from which they can undertake to
and fro journey to their villages. It was in the aforesaid context itself that His
Lordship Justice Mr. K. Ramaswamy in the case of Mahadeo Savlaram Shelke v.
Pune Municipal Corporation, reported in (1995) 3 SCC33 : (1995 AIR sew 1439)
while considering the provisions of Order 39, Rule I of the Code of Civil Procedure
held that plaintiff seeking injunction must show a prima facie case, triable issue
and balance of convenience for granting the injunction. However, in cases of public
injunction, whereby public project is to be injuncted, special care is required to be
taken by the Courts of law. The distinction between a private law injunction and a
public law injunction is recognised in the English Law and now more particularly by
His Lordships Justice Mr. K. Ramaswamy in the case of Mahadeo Savlaram Shelke
(1995 AIR sew 1439) (supra). It is held that ordinarily Court of law should be
loath or slow to grant injunction when a public project for the beneficial interest of
the public at large is sought to be delayed or prevented by an order of injunction,
the damage from such injunction would cause to the public at large as well as to a
Government is a paramount factor to be considered and between the two
conflicting interests, interest of public at large and the interest of few individuals, it
is the interest of public at large which must prevail over the interest of few
individuals. A Court of law shall have also to keep in mind that if entire public
project is injuncted or prevented till enquiry is made into the prima facie case by
Courts of law which work at snail speed or tortoise speed, enormous loss may be
caused to the public scheme as well as to the beneficiaries. In the case before the
Apex Court, the building was acquired under Land Acquisition Act for public
purpose of widening the road to remove traffic congestion, compensation was
awarded and paid to the owner and possession was taken and handed over to the
MuniCipal Corporation. Thereafter, the appellant entered into leave and licence
agreements with the Corporation and after the expiry of the said period, obtained
order of injunction against the Corporation. Showing its displeasure against grant
of interim injunction by the appel/ate Court, the Supreme Court in the aforesaid
case observed that injunction normally is asked for but must not be for and
granted to the public authorities or the respondents from proceeding with the
execution of or implementation of any scheme of public utility or contracts granted
for execution thereof, public interest is, therefore, one of the paramount and
relevant considerations in either granting or refusing to grant ad interim injunction.
32
In the case before the Supreme Court public purpose of removing traffic
congestion was sought to be served by acquiring the building for widening the
road. By orders of injunction, for 24 years the public purpose was delayed. As a
consequence execution of the project has been delayed and the cost of
construction has mounted. The Courts in such cases where injunctions are to be
granted should necessarilyconsider the effect on public purpose thereof and must
also suitably mould the relief."
13. "In the aforesaid settled legal position, in my opinion, two Courts below were
justified in refusing injunction in favour of the petitioners plaintiffs "
8.9 Balakrishnan Madhavan

.16
vs.. Municipal Corporation of Gr.
Mumbai & Ors.. .
In the said matter, the land of the Appellant was situated on the public street and
accordingly action was taken by the Respondent to vacate the suit structure. The Hon'ble
High Court of Bombay, while taking note of the principles to be considered by the Court
while considering an application for grant of interim injunction in a public project, held that
the appeal is dismissed since implementation of a public project is more lmportent than any
private interest and the suit structure being on the public street, the Respondent is entitled
.~ to take appropriate action under section 314 of the MMCAct to remove such structure from
public streets. The relevant extracts of the judgment being as under:
"9. Learned senior counselalso invited my attention to the judgment of the Supreme
Court in case of Mahadeo Savlaram Shelke & Ors. vs. Pune Municipal Corporation &
Anr. reported in (1995) 3 SCC33 and more particularly paragraphs 14 and 15 and
would submit that if the plaintiff is s~eking an injunction which would delay the
execution of a public project, the Court shall not grant any such injunction."
"15. The Supreme Court in case of Mahadeo Savlaram Shelke (supra) has laid down
the principles to be considered by the Court while considering an application for
grant of interim injunction which if granted would delay the public project. It is held
by the Supreme Court that it is common experience that injunction normally is asked
for and granted to prevent the public authorities or the respondents to proceed with
-./ execution of or implementing scheme of public utility or granted contracts for
execution thereof. It is also held that the public interest is, therefore, one of the
material and relevant considerations in either exercising or refusing to grant ad
interim injunction. While exercising discretionary power, the Court should also adopt
the procedure of calling upon the plaintiff to file a bond to the satisfaction of the
.-'
--~
16AO/66/2016 decided on 12 January 2016 at paras 9, 15 to 16, R. D. Dhanuka J.
33
Court that in the event of his failing in the suitto obtain the relief asked for in the
plaint, he would adequately compensate the defendant for the loss ensued due to
the order of injunction granted in favour of the plaintiff. It is held that the Courts in
the cases where injunctions are to be granted should necessarily consider the effect
on the public purpose thereof and also suitably mould the relief."
"16. In my view, the public interest and implementation of a public project is more
important that any private interest of a member of public. The suit structure being
on the public street, the Municipal Corporation is entitled to take appropriate action
under section 314 of the M.M.C.Act to remove such structure from the public street
so as to remove the obstructions from the public street. In my view, no party can be
allowed to carry on any unauthorized construction on a public street and if carries
out, such structure cannot be protected by the Court which would affect the public
project or create any obstruction on the public street. In my view, the principles laid
down by the Supreme Court in case of Mahadeo Savlaram Shelke (supra) squarely
applies to the facts of this case. I am respectfully bound by the principles laid down
by the Supreme Court."
9. UHBVNL & Anr. v. CERC & Ors. [Batch of Appeals of

CGPL,Adani, GMR and Sasan Power]:17
Full Bench of the Appellate Tribunal for Electricity C'Trlbuna/') has disposed of the
Compensatory Tariff batch of 24 appeals by judgment dated 07.04.2016 categorized in
the following groups:
(a) Adanl group,
(b) CGPL group,
(c) GMR group,
(d) Sasan group.
9.1 Findings of Appellate Tribunal for Electricity Judgement

in Adani Power PPA Termination Case: .
(a) Provision of liquidated damages the PPAdoes not imply that there can be no specific
performance (para 117).
(b) Specific performance is an appropriate remedy and such a relief is fully in consistent
with the provisions of Section 63 of the Electricity Act. The contention of the
Appellant that the provision of the Act bar the remedy of specific performance in the
present case is misplaced. Section 10 of the Act provides that the contracts may be
specifically enforced in the Act agreed to be done as such the compensation in
money for non-performance would not afford adequate relief (para 118).
17 http://www.aptel.qov.infiudgementsffull%20BenchO/020Judgment 07.04.16.pdf
34
(c) According to 2nd Respondent, Gujarat Holding Company, it has to get the supply of the
electricity to be procured from the Appellant as per the PPA in their plants for future, and it
cannot procure from others by allowing Adani Power Ltd. to terminate the agreement or by
claiming compensation only. If the Agreement is allowed to be terminated, the Procurer will
have to invite fresh tenders and the whole projections of supply of electricity at reasonable
rates to the consumer will be delayed by at least 5 years and in that event, the procurer
may not get the power at the same price and the consumers will be adversely affected. It is
contended by the Respondent that Gujarat Holding Company the non-defaulting party is
keen only on specific performance of the contract rather than the liquidated damages. We
find force in this submission. Permitting the termination of contract would give unfair and
undue advantage to the Appellant as the Appellant is proposing to sell the contracted
capacity at a much higher rate to the total disadvantage and to the prejudice of Gujarat
State and for unlawful gain to the Adani Power Ltd. (para 119)
(d) The Appellant entered into the PPA with the object of performing the agreement for 25
years. Therefore, the Appellant cannot claim any prolonged, unforeseen or undeserved
hardship. If the specific performance is not granted, lt would cause great hardship to the
Gujarat Holding Company. The equitable situation for the specific performance of the PPA
in the present case is totally and completely in favour of the Gujarat Holding Company and
.~ not in favour of the Appellant (para 121) .
(e) It is a settled law that merely because contract for sale contains a clause for payment of
damages in case of breach of contract, it cannot be said that the damages alone should be
awarded and not specific performance. (para 123).

~.
(f) Further, it is also well settled Rule that when the property is of a special value or consists of
goods which are not easily available in the market, the damages would not be adequate
~~
remedy and in those cases, specific performance of the contract should be granted. In this
-..- case, there is No. doubt that the Electricity is not an ordinary Article of commerce. The
electricity has a special value and of great interest to the procurer for the welfare of the
society at large and is not easily obtainable in the market. (para 125).
'"
(g) The Gujarat Holding Company had entered into the PPA for purchase of power at the
agreed price for the eventual benefit of consumers at large l.e, the public in the State of
Gujarat particularly for 25 years in the light of the following circumstances:
(i) the Electricity is required for supply to consumers/public at large at reasonable
rates in public interest.
(ii) the agreement is for 25 years;
(iii) the electriCity project would require a gestation period of 4 to 5 years.
.' (iv) ~ftQr Gujarat Holding company had included the electricity to be procured in the
PPA in their perspective plans for future, Gujarat Holding Company cannot
35
procure power from others by allowing Adani to terminate the agreement or by
claiming compensation only or in the alternative allowing higher rates to Adani
Power.
(h) If the agreement is allowed to be terminated, the Procurer will have to invite fresh
tenders and the whole project of supply of electricity at reasonable rates to the
Consumer will be delayed by at least 5 years the procurer may not get the power at
the same price and the consumer will be adversely affected.
(i) Rise in price of electricity will have a cascading effect on the price of other commodities
which is not in the national interest.
(j) Liquidated damage is not an adequate relief and it may be pointed out that the Gujarat
Holding Company, the non-defaulting party is keen on the specific performance of the
contract rather than liquidated damages. (para 126).
(k) As mentioned above, if specific performance is not granted by ensuring the restoration
of the PPA the Procurer will have to wait for another 5-6 years to get the electricity by
furnishing fresh tenders. It will definitely cause immense loss to the public ..... A
defaulter cannot be allowed to dictate the terms as to how the matter is to be dealt
with and how it should be allowed to be released from specific performance by
payment of liquidated damages. (para 127).
(I) ;therefore, the direction issued by the State Commission to the Appellant to supply
power as per the PPA in our view is in consonance with the law laid down. That apart,
the. direction for specific performance is a consequential order in pursuance of the
. finding of the State Commission that the termination notice is illegal and PPA is to be
restored. (para 128).
9.2 Issues involved in the APTEL judgment:
The issues agreed between the parties for the Tribunal's consideration were noted in the
judgment [@ para 42 at page 82 to 88]:

(1) What is the scope and extent of Order dated 31/3/2015 passed by the Supreme
Court in Civil Appeal No.10016 of 2014 in the caseof Adani Power allowing the plea
of Force Majeure and Change in Law to be raised?
(2) Whether the CGPLis entitled to raise the plea of Force Majeure or Change in Law to
support the compensatory tariff granted by Order dated 21/2/2014 in terms of the
principles of Order XLI Rule 22 (First Part) of theCPC or otherwise, claiming parity
with Order dated 31/03/201S passed in Civil Appeal No.10016 of 2014 in the case of
Adani Power?
(3) Whether the supply of power to procurers in more than one State from the same
generating station of a generating company, ipso facto, qualifies as 'composne
Scheme' to attract the jurisdiction of the Central Commission under Section 79 of the
36
said Actr
(4) Whether in the case of Adani Power, Adani Power's generation and sale of electricity
-tn Gujarat and Haryana under the PPAs dated 02.02.2007 and 07.08.2008, there
exists a Composite Scheme for generation and sale of electricity within the scope of
Section 79(1)(b) of the said Ac~ for the Central Commission to exercisejurisdiction?
(S) Whether the Central Commission, de-hors the provisions of the PPAs, has the
regulatory powers to vary or modify the tariff or otherwise grant compensatory tariff
.
to the generating companies in the case of a tariff determined under a tariff based
-
competitive bid process as per Section 63 of the said Act?
(6) Whether the Appropriate Commission, independent of Force Majeure and Changein
'-. Law provisions of PPAs, has the power to vary or modify the tariff or otherwise grant
compensatory tariff to the generating companies in pursuance of the powers under
Sections 61, 63 and 79 of the Act and/or Clause 4.7 and 5.17 of the said Guidelines
issued by the Central Government and/or Article 17.3 of the PPA and/or under the
adjudicatory powers as per Section 79(1)(f} of the said Act?
(7) Whether, in the facts and circumstances of the case, the Central Commission having
held that Force Majeure and Change in Law provisions of the PPAs have no
application, is right in granting compensatory tariff under any other powers?
(8) Whether in the facts enactrcumstsnces of the case, the Ce(1tralCommission is right
in construing the order dated 2/4/2013 in case of Adani Power and order dated
15/4/2013 in the case of CGPL as a decision of the Commission to grant
compensatory tariff not being limited to a conciliatory process to explore an amicable
agreed solution which would exhaust if no consensusemerges?
(9) Whether, in the facts and circumstances of the case, the Central Commission is right
. in giving effect to the payment of compensatory tariff retrospectively from the
respective Scheduled COD of the generating units instead of considering the same
prospectiv,elyfrom Order dated 21/2/2014?
(10)Whether the Change in Law provided under Article 13 of the PPA or under Clause4.7
of the said Guidelinesissued by the Central Government as per Section 63 of the said
Act should be construed to include laws other than Indian Laws such as the
Indonesten Law/Regulations prescribing the benchmark price for export of coal?
(11)Whether in the facts and circumstances of the present case, the increase in price of
coal on account of change in National. Coal Distribution folicy linked to reduced
availability of domestic coal and/orpromulgation of Indonesian Regulation constitute
an event of Change in Law attracting Clause 4.7 of the said Guidelines read with
Article 13 of the PPA?
(12)Whether in the facts and circumstances of the case, the increase in price of COalon
~<Xi:7"'r1t or tne tntervemion by the Indonesian Regulations as also the non-
37
availability/short supply of domestic coal in case of Adani Power constitute a Force
Majeure event in terms of the PPA?
(13)Whether the bid for generation and sale of electricity by Adani Power to GUVNLwas
premised on the availability of coal from GMD~ and to what effect?
(14)Whether the bid for generation and sale of electricity by Adani Power to Haryana
Utilities was affected by non-availability of coal from Mahanadi Coalfields Limited and
if so to what extent?
(15)Whether the CGPLhad fuel supply agreements for procurement of coal for Mundra
Project at a price less than market price and if so to what extent?
(16)Whether, the Central Commission in computing the grant of compensatory tariff to
Adani Power and in devising the mechanism/formulae for the said purpose is correct
in considerinq deviation from other bid parameters/assumptions, namely, Exchange
Rate Variation, Station Heat Rate, Auxiliary Consumption, Gross Calorific Value of
Coal (GCV) and increases in transmission charges or losses?
(17)Whether, the Central Commission has properly taken into consideration the
mitigating factors in favour of the consumers and to the proper extent, namely,
reduction in the Return on Equity, Sharing of Mining Profits in Indonesia, sale of
quantum in excess of the target availability, residual value of the generating units at
the end of 25 years, etc.?
9.3 Re: Scope and extent of Supreme Co.urt's Order dated

31.03.2015 [@ para 43 to 50 at page 89 to 98]
(i) " Rejected Prayas' submission that Force Majeure and Change in law can be urged
only with respect to quantification of Compensatory Tariff in terms of Order dated
21.02.2014. {@ Paragraph 49 at page 97J

(ii) Supreme Court unambiguously stated that Adani Power can urge any proposition of
law (including FM & CIl) in support of CERC's Order dated 21.02.2014 with only one
restriction that it cannot urge on account of the said grounds, the contracts with the
procurers are frustrated and it must be relieved of its obligations under the said
contracts. [@ Paragraph 48 & 50 at page 96-98]
9.4 Re: CGPL's claim regarding its entitlement to raise Force

Majeure and Change in Law [@ Para 51 to 68 ""at page 99 to
122]
(i) In terms of Section 120(1) of the Electricity Act, the Tribunal is not bound by the
procedure under CPC but it has the power to regulate its own procedure. While
making its own procedure, the Tribunal is to be guided by the principles of nature
justice. Therefore, even if Order XU Rule 22 is held not applicable, the Tribunal can
hear a party on a particular issue, if it is required by the principles of natural justice.
[Para 62 to 65 at page 116-1191
38
(ii) CGPL can be permitted to assail findings on Force Majeure and Change in Law, which
are against it, while supporting CERC's as long as it is not seeking anything over and
above which has already been granted to it. In this regard, CGPL can draw support
from the Supreme Court's Order dated 31.03.2015 in C.A. No. 10016 of 2014 in Adani
Power's case. Moreover, giving opportunity to CGPL to urge 'Force Majeure' and
Change in Law, would amount to adopting a procedure which will be guided by the
principles of natural justice and in tune with Section 120(1) of the ElectriCity Act.
[Para 66 at page 119]
(iii) Pendency of appeal in the Supreme Court does not bar CGPL from raising these pleas
because there is no interim order passed by Supreme Court restraining CGPL from
urging these points before the Tribunal. In any case, Supreme Court's order will
override the order passed by the Tribunal. [Para 67 at page 121]

<::
9.S Re: Composite scheme under Section 79(1)(b) to attract
the jurisdiction of the Central Commission [Paragraphs
74 to 118 at page 128 to 213]
The Tribunal has discussed the legislative intent of the ElectriCity Act. The Electricity
Regulatory Commissions Act, 1998 was enacted to address the problems created by the
inability of the State Electricity Boards to take decisions on tariffs in a professional and
independent manner. The ERC Act created;the Central Electricity Regulatory Comniission
with an enabling provision through which State Governments could create a State
-..-'
Electricity Regulatory Commission in their respective States. The Electricity Act, 2003 was
enacted with the main intent of consolidating electricity laws for development of
electricity industry. A scrutiny of the provisions of the ElectriCity Act discloses the
intention to continue with the role asslqned to the Central Commission as a regulator of
inter-State and multi-State activities. The State Commissions were designed to control
~-"
intra-State activities. [Para 86 to 89 at page 178 to 180]
9.6 Re: Change in Law [@ Paras 164 to 190 @ pages 310 to

349]
(i) In the entire PPA, there is no mention of foreign law. If the intention of the parties
was to consider change in foreign law as Change in Law, nothing prevented the
parties from making a categorical averment to that effect in the PPA. {Para 171 at
page 333]
(ii) Rejected the submission that Clauses 4.7 and 5.17 of the Competitive Bidding
../
Guidelines were amended by the Gol to address the specific issue / concerns which
may arise in case of imported coal. There is no reference to foreign laws in the
amended GUidelines. In any case, the said Guidelines cannot be read independently.
j
They have to b~ n;;>~d ~)cng with tne PPA. [para 1B7 at page 347]
(iii) Definition of the term 'Change in Law' cannot be stretched to include change in policy.
39
[Para 188 at page 348]
(iv) 9.7 Re: Force Majeure [@ para 191 to 303 at page 350
to 468]
(i) Adani Power's submission is that availability of coal from GMDC was the basic
premise and condition of the PPA and Adani Power entered into the PPA with
GUVNLon the assurance of GMDCthat coal would be supplied by it. Since GMDC
resiled from its commitment, it resulted into force majeure event or change in law
event. The Tribunal had considered these submissions in its judgment dated
07.09.2011 in Appeal No. 184 of 2010 arising out of termination of PPA dated
02.02.2007. In the aforesaid Appeal, the Tribunal had returned the finding that
the claim was not sustainable. From the aforesaid judgment, it is evident that PPA
of Adahi Power is not solely based on domestic coal from GMDC.Adani Power was
entitled to source fuel from any source and admittedly, Adani Power sourced coal
from Indonesia to fulfill its contractual obligations. In view of the findings in
judgment dated 07.09.2011 the Tribunal has not accepted Adani Power's
submission that PPA dated 02.02.2007 was entered solely on the basis of
availability of coal from GMDCto Adani Power which has resulted in Change in law
or force majeure event. [Para 274 and 275 at page 417 to 422]
(ii) The term 'Force Majeure' is a term of wider import and the widest meaning that
can be given to 'Force Majeure' is that where reference is made to 'Force
Majeure', the intention is to save the performing party from the consequences of
anything over which he has no control. [Para 279 at page 426]
(iii) For an event to fall in the category of 'Force Majeure', it has to satisfy the
requirements and tests laid down in Article 12.3 of the PPA.Protection of Article
12.3 is available only if occurrence of such events or circumstances is not within
the control of the Affected Party and the burden to prove the presence of these
factors lies on the Affected Party. [Para 282 at page 432 and 433]
(iv) On a plain reading of Article 12.3.2 which refers to Non Natural Force Majeure
Event, it is clear that the generators' case that there was a rise in Indonesian coal
prices on account of Indonesian Regulation which is a force majeure event does
not fall in this article. A reading of Article 12.3, 12.4 and 12.7(a) establishes that
an event constitutes a force majeure event, if,-
(a) it wholly or partly prevents or unavoidably delays the performance of
obligations under the PPAor hinders or delays the performance of obligations
of the PPA;
(b) such event is not within the reasonable control of the Affected Party, directly
or indirectly;
(c) such events and circumstances could not have been avoided by the Affected
Party, even if it had taken reasonable care or complied with Prudent Utility
40
Practices;
(d) the events that materially impact the cost of fuel are expressly covered, so
long as they are a consequence of an event of Force Majeure. [Para 284 at
page 435 and 436].
9.7.1 Scope of Article 12.3 read with Articles 12.4 and 12.7 which contemplate Force
Majeure is wider than the scope of Section 56 of the Indian Contract Act. [Para 286 at
page 437]
9.7.2 The Tribunal has relied on Atop; Parshad & Sons Ltd. v. uofB and Satyabrata Ghose v.
~o
Mugneeram Bangur & Co. & Anr.19 to explain how' Section 56 of the Indian Contract
Act is to be read. Parties to a commercial contract are often faced with unexpected
events such as abnormal rise or fall in prices of fuel or raw materials or a sudden
depreciation of currency. But, if the basic agreed terms of the contract are altered or
wiped out and the parties find themselves in a situation which was never agreed upon
or when they find themselves in a fundamentally different situation, the contract
ceases to bind them as the performance of the contract becomes impossible. If due to
fundamentally changed situation which was beyond the contemplation of the parties,
.- .•..
performance of the contract becomes commercially impracticable, it can still be said
that the promisor finds it impossible to do the act which he promised to do. [Para 289
at page 445 and 446]
9.7.3 In view of Article 12.7, the question is whether the performance of the generators'
obligations was hindered due to force majeure event. The word "hindered" may in
context be construed as impaired and interfered with. The Tribunal saw no reason
why in this case, the rise in prices of coal imported from Indonesia cannot be said to
have impaired the generators in the performance of their obligations under the PPAs.
Change in fuel price is mentioned in Article 12.4 under the heading "Force Majeure
Exclusions". Change in fuel price if it is not within the reasonable control of the parties
0..- and is a consequence of Force Majeure Event, it will be covered by Force Majeure.
[Para 290 and 292 at page 446 to 449]
9.7.4 All the relevant documents and events establish that the promulgation of Indonesian
Regulation which resulted in unprecedented rise in prices of imported coal which
Wiped out the premise on which CGPL and Adani Power had offered their bids. It
hindered or impaired the performance of their obligations under the contracts. Their
case of occurrence of Force Majeure Event is therefore made out. [Para 292 at page
nIDI ill
~.
lB ~~
19 (1954) 1 SCR 310, AIR 1954 SC 44
41
~
449]
9.7.5 Force Majeure clause found in the instant PPAs has a wider scope as stated by the
Supreme Court in Dhanrajmal Gobindram v. Shamji Ka/idas & CO;20 and situations in
which Adani Power has landed itself on account of Indonesian Regulation fall within
the scope of Force Majeure Event. In fact, because PPAs are a long term contract and
it may not be possible to envisage all possible risks over such a long period of time
that Force Majeure and Change in Law are provided for in the PPAs. The intention
behind providing these clauses is to save the performing party from the consequences
of anything over which it has no control and in that light, it can be concluded in the
facts of this case that Indonesian Regulation resulted in rise in prices of imported coal
which led to Force Majeure. [Para 293 at page 450 and 451]
9.7.6 In all drcurnstances, a generator cannot be denied relief just because it quoted non-
escalable tariff in the bid or under the PPA and it depends on the facts and
circumstances of each case. Promulgation of the Indonesian Regulation was a totally
unexpected and drastic event and is also extremely harsh in nature. It can by no
stretch of imagination be said that Adani Power would have known that Indonesian
..
Government in exercise of its sovereign power would issue regulation directing that
the coai prices for import of coal by the mining companies in Indonesia should be
bench marked to the international market price. Thererore, in the peculiar facts of this
easel the fact that they had quoted non-escalable rates cannot be taken against them.
The Indonesian Regulation is an event which was not at all in contemplation of the
parties. It is an abnormal event which did affect the economics of the contract of
.Adani Power: [Para 295 at page 451 and 453]
9.7.7 Article 12.4 of the PPA contemplates that if the agreement becomes onerous because
of Force Majeure Event and because of circumstances beyond the control of the
Affected Party, it shall be covered by Force Majeure Event. [Para 295 at page 451 and
453]
9.7.8 The Tribunal has held that the increase in price of coal on account of the intervention
by the Indonesian Regulation as also the non-availability/short supply of domestic coal
in case of Adani Power constitute a Force Majeure Event in terms of the PPA. [Para
303 at page 467j
9.7.9Re: Whether. the bid for generation and sale of

electricity by Adani Power to GUVNL was premised on
the availability of coal from GMDC, and to what effect?
20 AIR 1961 sc 1285
42
[@ Para 303 @ page 467]
In view of t~e Tribunal's judgment dated 07.09.2011 in Appeal No.184 of 2010, the
Tribunal has held that the bid for generation and sale of electricity by Adani Power to
GUVNLwas not solely premised on the availability of coal from GMOC.Admittedly, Adani
Power sourced coal from Indonesia to fulfill its contractual obligations.
9.7.10 Re: Whether the bid for generation and sale of electricity by Adani Power to Haryana
Utilities was affected by non-availablYity of coal from Mahanadi Coalfields Limited and if so
to what extent? [@ Para 303 @ page 467]
It has been held that the bid for generation and sale of electricity by Adani Power to
Haryana Utilities was affected by non-availability of coal from Mahanadi Coalfields
limited. The shortfall in domestic coal was made good by Adani Power by importing
Indonesian coal.
'...-/
9.7.11 Re: Computation of compensatory tariff [@ Para 304 at page 468]
Since it has been held that the Central Commission, de-hors the provisions of the PPAs,
has no regulatory powers to vary or modify the tariff or otherwise grant compensatory
tariff to the generating companies in the case of a tariff determined under a tariff based
competitive bid process as per Section 63, it has been observed that the issues
--'
concerning computation of compensatory tariff need not be answered.
9.7.12 Re: Decisiqn on Adani Power group Appeals
(i) The Tribunal has summarized all the issues and its answers at page 469-480.
'---
(ii) Interim "Order dated 02.04.2013 passed in Petition No. 155/MP/2012 which is
." . .,)
impugned in Appeal No. 100 of 2013 has been set aside. Appeal No. 100 of 2013 has
therefore been allowed. In view of answer to Issue No.5, the final Order dated
21.02.2014 in Petition No. 155/MP/2012 granting compensatory tariff to Adani Power has
been set aside. The batch of Appeals pertaining to Adani Power have been allowed.
Petition No. 155/MP/2012 has been remanded to the Central Commission to assess the
'~
.
extent of impact of Force Majeure Event on the Adani Power's project and give them such
relief as may be available to them under the PPAsand in the light of the judgment after
hearing the parties. The entire exercise should be done as expeditiously as possible and
at any rate within a period of three months from 07.04.2016. [Paras 306 and 307 at page
480 to 482]
-j
9.8 Re: Decision on CGPL group Appeals

(j) Interim Order dated 1:J.O't.Z013 passed in Petition No. 159/MP/2012 which is
.r'
impugned in Appeal No. 151 of 2013 has been set aside. Appeal No. 151 of 2013
43
~
has therefore been allowed.
(ii) In view of answer to Issue No.5, the final Order dated 21.02.2014 in Petition No.
159/MP/2012 granting compensatory tariff to CGPL has been set aside. The batch of
Appeals pertaining to CGPL have been allowed.
(iii) Petition No. 159/MP/2012 has been remanded to the Central Commission to assess
the extent of impact of Force Majeure Event on the CGPL's project and give them
such relief as may be available to them under the PPA and in the light of the
judgment after hearing the parties. The entire exercise should be done as
expeditiously as possible and at any rate within a period of three months from
07.04.2016. [Paras 306 and 307 at page 480 to 48.2]
9.9 Re: Decision on GMR group Appeals

Since GMR-Kamalanga Energy Limited, is supplying power to procurers in more than one
State from its power plant at Kamalanga in the State of Orissa, the same, ipso facto,
qualifies as 'Composite Scheme' to attract the jurisdiction of the Central Commission
under Section 79 of the Electricity Act. In view of this, Appeal No.44 and 74 of 2014 filed
by the Odisha and Haryana Discoms respective is devoid of any merit and is dismissed.
[Paras 308 and 309 at page 482 to 484]
~..10 Re: Decision on Sasan Group Appeals [@ paragraph 310,

Page 484-485]
(i) Appeal No. 99 of 2014 and Appeal No. 104 of 2014 have been filed against Order
dated 21.02.2014 passed by CERC in Petition No. 14/MP/2013. Sasan Power Ltd
("SPL") had filed Petition No. 14/MP/2013 for, inter-alia, a declaration that the
unprecedented, unforeseen and uncontrollable depreciation in the INR vis-a-vis the
us Dollar as a force majeure event under the PPA. It was prayed before CERC to
restitute SPL to the same economic as if Force Majeure event did not take place.
(ii) By its Order dated 21/02/2014, CERC held that the depreciation in Indian Rupees is
not a force majeure event within the meaning of Article 12 of the PPA. However,
CERC, relying on Interim Order dated 15.04.2013 in Petition No. 159/MP/2012, held
that it may consider whether SPL is entitled to the relief sought in the Petition in
exercise of the CERC's regulator{ powers under Section 79 (1»(b) of the Electricity
Act. Accordingly, CERC directed SPL to file additional documents in order to examine
SPL's claim. Being aggrieved of the same, Haryana Utilities and Rajasthan Utilities
filed Appeal No. 99 of 2014 and 104 of 2014 respectively.
(iii) Admittedly, the matter relates to generation and sale of electricity from the power
plant 'of SPL for which tariff was determined in terms of Section 63 of the Electricity
Act. The issue of regulatory powers of CERC has already been decided wherein it
was held that the CERC has no regulatory powers under Section 79(1)(b) of the
44
Electricity Act to vary or modify the tariff or otherwise grant compensatory tariff to
generating companies in case of tariff determined under a tariff based competitive
bid process under Section 63 of the Electricity Act. In view of the same Appeal No.
99 and -104 were allowed and Impugned Order dated 21.02.2014 is set aside.
10. Recommendations
10.1 Given the intrinsic public interest in ensuring continued supply, reliable and affordable
infrastructure facilities/services, as also the deleterious inflationary and loss of services,
and impact of delayed decisions, it is imperative that public works must be implemented
without mothballing / stalling of the assets. For instance, a telecom operator's goals from
transformation projects may be multiple, like reduced cost of operations, increased
~- functionality, gaining competitive advantage etc., but it is necessary to understand that
'---'
many of these goals/objectives may eventually be defeated without the overlay of an eff-
ective Revenue Assurance and Fraud Management system during the transformation
phase."
10.2 Courts must explicitly consider the underlying public good and welfare considerations
involved in public infrastructure projects while granting any interim reliefs (injunctive
-,./
relief) qua construction/ operation of the infrastructure facility. Reliance in this regard
may be placed on the anxiety conveyed in the decislons set out earlier.
-./
10.3 It is proposed that provisions for Public Work Contracts be introduced in the Act
enshrining the following principles:-
(a) Courts should be conscious of the underlying public good and welfare
considerations involved in public infrastructure projects while granting injunctive
relief qua construction/ operation of the infrastructure facility. Hence courts should
refuse 'injunction that will impede or stop public works;
.--
(b) A Public Works Contract asset must always be made to sweat, i.e., operate at
<:>
maximum capacity irrespective of disputes and claims amongst the parties;

../
(c). There is a deleterious impact of adverse orders on the already serious problems of
the Indian banking system with high level of NPAs attributable to infrastructure
assets thereby -
-./
(i) shaking the confidence of investors, depositors and lenders.

-~ (ii) restricting flow of credit to key sectors.
.J
(iii) putting the viability of the overall banking system at risk22.
J
21 http://www.subex.com/pdf/lmportance_oCMigration_Assurance_for
~ccorQinQ to a i\mfl~mrn~mon, ,
_Telecom.Operators.odf
\
J\
22 il'lIdll bu .ACCDnJ.uN, (nfT\l"\fU~~UI
\'ji\IIWfffi nl,rrnim nil ~ I II \\I\lIlllll\LI\~

WU\U\ ~proXlmatelY Rs. 12 lakh crores
ll, \"m,UnWU\lIme ~~W eb,\'php?id=4985) remained stuck at different stages as of end- December 2014
owing to a variety of issues such as land acquisition, lack of dearances, unfavourable market conditions, costly
finances.
45
10.4 Should the Government establish the PPPContract monitoring mechanism (Para 1.8), for
quick, equitable, efficient and enforceable dispute resolution mechanism for PPPProjects,
the same may be utilized effectively to secure effective implementation. The benefit of .
such mechanism would be to enable effective and timely resets/ adjustments of contracts
in circumstances provided for contractually within the commercial and financial
boundaries of the project, backed by-
(a) sector specific project monitoring committees set up as a platform to periodically
revisit contractual and commercial relationships between parties;
(b) independent sector regulators, wherever existing.
*******
46
CHAPTER III
Analysis of Provisions of the Specific Relief Act, 1963 :

Specific Performance, Injunctions, Rescission and Possession
11. . Changes in some provisions of the Specific Relief Act, 1963 will improve the ease of doinq
business, and will encourage parties to perform their contracts. Primarily, the
recommendations enable any party to the contract to seek whichever remedy he
chooses. Hence specific performance or injunction will be available by choice, and will no
longer be exceptional or discretionary. Courts will be able to refuse these reliefs on
specified grounds only. Secondly, a party to a contract must have the right to complete
performance by himself or through a third party at the cost of the promisor, and to claim
the amount he spends for this purpose. Hence a new relief is recommended. Thirdly, it is
recommended that relief under section 6 of the Act should also be available to persons
from whom those in immediate possession derive their rights. Other recommendations
relate to assessment of compensation, enforcement by third parties. Amendments are
therefore recommended to sections 6 (Possession), sections 10, 14, 15, 16, 19,.20, 21,
23, 24 and 25 (Specific Performance), 26 and 28 (Rescission), and sections 37 and 41
(Injunctions) of the Act.
-' ...
11.1 Concerns and Issues
(i) Changing the approach from damages being the rule and specific performance being
the exception, to specific' performance being the rule, and damages being the
alternate remedy.
(ii) To provide for the "right to cover" viz. permitting obtaining performance of a contract
from a third party in case of non-performance (inability or breach) by the
counterparty who fails to perform, and the right to recover the consequent loss
suffered by the performing party
11.2 Remedies and contracting behaviour

.Where there is a right, there is a remedy. A person who wishes to establish his legal right
has ultimate recourse to courts for the remedy that ~i11vindicate his right. He will seek a
remedy if he files litigation. At first blush, it seems that a remedy is important only to a
person who has decided to approach a court for asserting his right. But the remedy
affects him much before he contemplates litigation. It affects the manner in which he
would transact. It affects his dealings, his decisions. Lawyers will advise him in his
dealings in such a way that he will either obtain a remedy, or will be immune from one.
Remedies for Qnfnrcinli ~nlrlrrl lOtnnmr ]ITR'I \\ I
I 'I l~lUUIIIUIIU, IIIU ~~econduct of parties in many ways. The
remedy (its availability and limitations) affects the content of primary terms of the
47
contract, the content of terms relating to breach and consequences,the performance of
these terms and parties' diligence during performance, the decision of non-performance
-
or termination, negotiation for altering or substituting terms agreed,_decisions to file and
prosecute litigation, and their conduct pending litigation. A good remedial structure and a
strong system of enforcement increases faith in contracting. They encourage parties to
perform their contracts. The proposed amendments not only provide remedies that will
enable the promisee to enforce promises made to, them, but should encourage
contracting parties to perform as agreed, or negotiate a mutually beneficial settlement,
and dissuade them from committing breach.
11.3 Reliefs of specific performance and injunction

11.3.1 Currently under Indian law, compensation is the usual, normal and natural remedy, and
is provided under section 73 of the Indian Contract Act 1872. An order of compensation
must put the promisee in a position as if his contract is perforrned.P But such an order
does not give to the promisee the benefit of the promise. An award of compensation is
circumscribed by strict tests of foreseeability (contemplation) and mitigation. A promisee
may not be able to prove a" losses he has suffered by the breach, nor wi" such amounts
claimed be awarded to him. Proving losses with certainty is .difficult. A decree for
compensation may not give to the promisee the equivalent of the promise thatls broken.
A decree of specific performance comes closest to protecting this interest: it gives the
promisee what was promised.
11.3.2 A promisee who wants to enforce performance by the promisor through arbitration or
civil courts seeks reliefs of specific performance or injunction, which are extraordinary
remedies in Indian law, the Specific Relief Act, 1:963. A plaintiff must satisfy a threshold
test, i.e. he must show that compensation is either unascertainableor is inadequate. This
is the. inadequacy test. It makes these remedies exceptional and restricts the availability
of specific relief. Also, these remedies are not available as a matter of right, but their
grant is in the discretion of the Court. The inadequacy test is the first hurdle any plaintiff
must meet. The Act prescribes this test in Section 10, which faithfully follows, with a
small change, the provisions of Section 12 of the repealed SpecificRelief Act, 1877.
11.3.3 The inadequacy test does not permit the remedy of specific performance (or injunction)
for every contract. By operation of a presumption, it is in fact, and is considered to be,
generally available for contracts to transfer immovable property. In the case of contracts
to transfer movable property, the presumption operates to cast contracts into types or
categories. Specific performance thus gets granted for certain types or classes of
23 Mur/idhar Chiranjilal v Harishchandra Dwarkadas AIR 1962 SC 366.
48
contracts. In other classes, vlz., contracts other than for transfer of property, a plaintiff
has to satisfy the inadequacy test. The origin of this test lies in the history of English law.
Equity courts could give these reliefs only in those matters where compensation was not
an adequate remedy.
1L3.4 The proposed amendments seek to remove this restriction and make specific
performance and injunction as general remedies available to a promisee who wishes to
claim them.
11.4 Uncertainty
-'
11.4.1 The operation of the inadequacy test renders uncertain whether the remedy will be
~.
available. The possibility of exercise of court's discretion under section 20 of the Act
increasesthis uncertainty. Some legal systems do not prescribe the test." Some common
law systems have relaxed the test.25 International conventions do not have this
precondltlon." Academic writing suggests that the test be removed." One view is that
the test is dead.28
c-: 11.4.2 Where the legal system prefers compensatory relief, the promisor has an incentive to
break his contract if such course of action is more .beneficial for him than performing:it.
Economic analysls" endorses such efficient breach. It has been observed: 'The duty to
keep a contract means a prediction that you must pay damages if you do not keep it-
'-.-/
and nothing else'.3DIf the legal system were to make available specific performance or
injunction as a natural remedy to the promisee, parties to the contract will consider
themselves bound to perform it. Suchprovisions will affect contractual behaviour, and will
encourage performance, 'and will discourage breach.
24 Denmark, France, Germany, Louisiana (USA), Quebec (Canada), Spain.

....-'
2S Evans Marshall & Co Ltd v Sertola SA [1973] 1 WLR 349, [1973] 1 All ER 992 [1005] (CA) (Sachs U); Restatement
(Second) of Contracts (1981), Chapter 16, Introductory Note.
26 Principles of European Contract Law; UNIDROIT Principles.

-:»
27 Nilima Bhadbhade, 'Exceptional Nature of Specific Performance', available at https:jjwww.academia.eduj3091909j
ExceptionaLNature_oCSpeclfic_Performance_in_the_IndianJaw; Nilima Bhadbhade, Specific Performance of
Contracts: The Tests of Inadequacy and Effective Enforcement (Lexis Nexis, Gurgaon 2014); Guenter Treitel, The Law
•.•..•.. of Contract (10th edn, Sweet and Maxwell 1999) 950; Alan Schwartz, 'The Case for Spedfic Performance' (1979) 89
Yale U 271; John Dawson, 'Specific Performance in France and Germany' (1959) 57 Mich LR 495; John Dawson,
.-! 'Specific Performance in France and Germany' (1959) 57 Mich LR 495; G H Treitel, 'SpeCific Performance in the Sale of
Goods' (1966) JBL 211
~,
28 Douglas Laycock, 'The Death of the Irreparable Injury Rule' (1990) 103 Harv LR 687; see para 7.
29Analysis of law Booillino mmnN!J> of eG<1nomIQ.
30 Oliver Wendell
Holmes,
'Pathof theLaw'(1997)10 Harv LR 457, 469
-"
../ 49
.:
-;
11.5 Exceptional nature of reliefs of Specific performance

. and injunction: An evaluation
11.5.1 The exceptional nature of specific relief arises from the inadequacy test. It is justified on
many grounds. A strong justification is made on the basis of economic analysts," which
recommends breach when it is efficient. When compensation is the primary remedy and
specific performance is exceptional, the promisor is able to break the contract when it is
more beneficial for him than performing it. The promisee is expected to get compensated
for his loss, and get into the same position as if the promise is performed. In this view,
specific performance is efficient only when the promisee cannot find a substitute. This
view assumes that the promisee can calculate all his losses, and that a decree for
compensation wifl not fully compensate his losses. However, there is also ample support
in terms of economic analysis for routine availability of spedrkperformance."
11.5.2 Giving primacy to specific relief is based upon the moral obligation to honour one's
promises." It is a well-accepted view that a regime that allows specific relief encourages
promisors to perform" and deters breaches. This enables parties to plan their activities
and transactions."
11.5.3 Inadlequacy, or lack of it, must be proved." It falls naturally on the plaintiff seeking
specific performance or injunction to prove that compensation will be inadequate, having
first proved the contract, its terms, and its breach. If it is a contract for transfer of
immovable property, the presumption assists him,37shifting the burden on the defendant
31 E Allan Farnsworth, 'Damages and Specific Relief (1979) 27 AJCL 247; Edward Yorio, 'In Defense of Money Damages
for Breach of Contract' (1982) 82 Colum LR 1365; Anthony Kronman, 'Specific Performance' (1978) 45 U Chi LR 351
32 Alan Schwartz, 'The Case for Specific Performance' (1979) 89 Yale LJ 271; John Dawson, 'Specific Performance in
France and Germany' (1959) 57 Mich LR 495; Melvin Eisenberg, 'Actual and Virtual Specific Performance, the Theory of
Efficient Breach, and the Indifference Principle in Contract Law' (2005) 93 Cal LR 975
33 Stephen A Smith, 'Performance, Punishment and the Nature of Contractual Obligation' [1997] Mod LR 360, 377; P S .
Atiyah, The Rise and Fall of Freedom of Contrad (Oxford 1979); Seana Valentine Shiffiin, 'The Divergence of Contract
and Promise' (2007)120 Harv LR 708, 722; Tess Wilkinson-Ryan and Jonathan Baron, 'Moral Judgment and Moral
Heuristics in Breach of Contract' (2009) 6 JELS 405.
3'1 Tess Wilkinson-Ryan and Jonathan Baron, 'Moral Judgment and Moral Heuristics in Breach of Contract' (2009) 6 JELS
405; Nayiri Boghossian, 'A Comparative Study of Specific Performance Provisions in the United Nations Convention on
Contracts for the International Sale of Goods', Pace Review of the Convention on Contracts for the International Sale of
Goods (Kluwer 1999-2000) 3, 23; Anthony Kronman, 'Specific Performance' (1978) 45 U Chi LR 351,373.
35 Basil Markensinis, Hannes Unberath and Angus Johnston, The German Law of Contract, a Comparative Treatise (2nd
edn, Hart 2006) 396.
36 Srij 8a/labh Das v Mahabir Prasad AIR 1924 All 529 ; Hari Krishna Agarwala v K C Gupta AIR 1949 All 440.
37 Explanation to s 10 of the Specific Relief Act 1963.
50
to show adequacy of cornpensatlon." If it is a contract for transfer of movable property,
the plaintiff must show circumstances that will satisfy the presumption of inadequacy, i.e.
that-the goods are unique, or have special value for him, or are not an ordinary article of
commerce, or are not"available in the market." In all other cases, he must show that
compensation would be inadequate. There are difficulties in establishing this test.
Inadequacy often gets decided as a matter of inference, and depends on the individual
perception of the judge.
11.5.4 A studlO about applying the inadequacy test (or its relative - the irreparable loss test in
-" interim matters) concludes that the- test is applied without appropriate analysis, and
judgments deciding inadequacy without giving reasons," and based on inferences rather
than facts." The study also concludes that the inadequacy test is granted in many
situations and cases for protection of monetary interests." If specific performance and
injunction are no longer exceptional, courts can deal with such cases with a consistent
approach.
11.5.5 A decree for compensation does not compensate fully.44This is because compensation is
calculated with reference to date of breach." Interest on the amount of compensation is
-.-J
rarely awarded." The decree does not take into account events after breach until
'-
execution of the decree. Specific performance can give the promisee the fullest relief
possible.
<:»
<:»
38 Metta Rama. Bhatlu v Metta Annayya Bhatlu AIR 1926 Mad 144; Hari Krishna AgalWa/a v K C Gupta AIR 1949 All 440;
-,...,' Ambalal Kesherbhai v Ranchhodbhai lerbhai AIR 1956 Born 120; Faujmal v Nathulal AIR 1965 Raj 115; M L Devender
Singh v Syed Khaja AIR 1973 SC 2457 .
.:»:
39 Explanation to s 10 of the Spedfic Relief Act 1963.
=::« '10 Nilima Bhadbhade, Specific Petforrnance of Contracts: The Tests of Inadequacy and Effective Enforcement (Lexis Nexis,
Gurgaon 2014).
-;:»:
11 State Bank of Saurashtra v PNB AIR 2001 SC 2412; Punjab Urban Planning and Dev Authority v Shiv Saraswati Iron and
-:;»
Steel Re-ro/ling Mills AIR 1998 SC 2352
12 Suresh lindal v Rizsoli Corriere Della Sera Prodzioni AIR 1991 SC 2092; Madras Railway Company v Thomas Rust (1890)
14 Mad 18; Bank of India Ltd v Jamsetji A H Chinoy AIR 1950 PC 90.
13 Fortune Films v Dev Anand AIR 1979 Bom 17; Frank Simoes Advertising (P) Ltd v Hada Leasing and Industries Ltd AIR
1988 Del 362; Prithvi Raj Singh v Dalip Kulkami AIR 1999 Raj 201; Karri Venkatareddy y Kolfu Narasayya (1908) 1 IC
'>oJ 384 (Mad).
41 Alan Schwartz, 'The case for Specific Performance' (1979) 89 Yale LJ 271, 275-77; also Thomas Uien, 'The Efficiency of
"..-'
specnc Performance: Toward a Unified Theory of Contract Remedies' (1984) 83 Mich LR 341, 363.
-;» 15The Indian Contract Act 1872, illustrations (a), (c), (d), (e), (0), and (q) to s 73.
16 Aditya Prasad v ehhote La! AIR 1924 Oudh :U!l: J}."hw-7h,J KlrCiSt'1afrai V Brffmohan Prafhadka AIR 1931 Bom 386; Sri Sri
-;»:
sn f'aranari Mahant Raja Ram Doss Bavaji v Sri Sri Sri Gajapathi Krishna Chendra Deo Garu AIR 1933 Mad 729; Syed
.:>
Shah Masood Ahmad v Bikan Mahuri AIR 1941 Pat 6; Sheikh Mehtab v Dharrnrao Bhujangrao AIR 1944 Nag 330.
-../ 51
--
11.5.6 Even if specific performance is a routine remedy, parties would seek specific relief in the
same type of cases in which it is available under the present law." This is actually also
the strongest justification of relaxing the grant of specific relief." If the promisee has the
choice of his remedy, he will choose compensation after obtaining substitutes. He will
also ask for compensation where he expects the promisor to be reluctant or hostile,
where the performance will require supervision not available from the court, or where he
cannot suspend his affairs pending orders from the court. He will choose specific
performance only if there is no substitute, either because the subject matter is not
available, or is of special value to him, and where he is willing to wait for relief till
execution of the decree. Hence there need not be any fear of increase in litigation and
administrative costs.
11.5.7 If the inadequacy test is removed, the promisee can choose his own remedy. The
promisee is the best judge of his own interest, and whether substitutes satisfy his needs.
He has more information than the courts whether compensation is adequate, what it
would cost him to get specific performance, and whether his promisor will obey the
decree." He is unlikely to sue for specific performance if he finds a substitute or where
compensation will be adequate.
11.5.8 Such a regime will change contract behaviour, encourage performance of contracts, and
will deter breach. It will ease the burden of proof that presently lies on the promisee,
who has already suffered by the breach. It will also encourage parties to think en-ante
about remedies, and make appropriate provisions in their contracts choosing remedies.
11.6 Changes suggested

It is therefore necessary to explore whether specific performance and injunction should
be available as normal, routine and usual remedies to a promisee who seeks to have
them. It is also necessary to explore in what manner can a promisee be assured of the
benefit of performance to the extent that he has been promised under his contract.
Three major changes are suggested:-

(i) Specflc performance and injunction should no longer be an exceptional remedy, but
should be availableto any promisee who seeks these reliefs, whether through courts,
17 Anthony Kronman, 'Specific Performance' (1978) 45 U Chi LR 351,369.
18 Srij Ballabh Das v Mahabir Prasad AIR. 1924 All 529 ; Alan Schwartz, 'The Case for Spedfic Performance' (1979) 89 Yale
LJ 271, 277; Steven Shavell, '5pedfic Performance Versus Damages for Breach of Contract:An Economic Analysis'
(2006) 84 Texas LR 831; Thomas Ulen, 'The Efficiency of Specific Performance: Toward a Unified Theory of Contract
Remedies' (1984) 83 Mich LR 341,365-366.
19 Alan Schwartz, 'The case for Spedflc Performance' (1979) 89 Yale LJ 271, 277; Edward YoriO, Contract Enforcement:
Specific Performance and Injunctions (Uttle Brown 1989) 55, footnote 24; Jan Hellner. 'Specific Performance in
Swedish Contract Law', Scandinavian Studies in Law, (1999) Vol 38, 13 •.
52
tribunals, or in arbitration. Interference with these remedy in exercise of discretionary
powers of the court should be minimal, and on specific grounds only.
(ii) If the promisor refuses or fails to perform his promise, the promisee should be
entitled get the performance completed through a third party, at the cost of the
promisor.
(iii) Where a promisee seeks specific performance, his interests should not be prejudiced
by passage of time during litigation. His interests should be protected by appropriate
interim orders.
11.7 Amendments proposed
The amendments proposed are broadly as given below, and are dealt with in detail later:
(i) Both remedies of specific performance and injunction when sought for breach of
contract, will no longer be exceptional remedies. Section 10 to be amended
accordingly.
..../
(ii) A court can refuse these remedies only on the stated grounds. Such grounds in the
-:» current Sections 14 and 20 are merged into one section, i.e. Section 14. It is
expressly stated that these remedies shall not be refused on any other grounds.
These remedies shall no longer be discrE;tionary.
(iii) A new relief of 'compensation pursuant to substituted performance' is created in new
section 20A.
(iv) Title of Chapter II to be changed to 'Enforcement of Contracts' to accommodate all
these remedies, and other consequential amendments.
11.8 Relief of Compensation

.-'
-; 11.8.1 The proposed amendments seek to enable calculation of compensation on dates other
than breach of contract, enabling realistic amounts of compensation to the aggrieved
"
party.
11.8.2 Under the present law, a plaintiff is required to seek, plead and prove ·his alternative claim
for compensation in his suit for specific performance." Under the existing law,
compensation in suits for specific performance are assessedwith reference to section 73
of the Indian Contract Act, and are assessed at the time of breach. Case law suggests
that a court can assess compensation with reference to a later date. 51 It is considered
necessaryto consolidate this position into legislation.
·-~~'i\~l~,\l\
51 Jai Narain Parasrampuria v Pushpa Devi Saraf(2006) 7 see 756; Prakashchandra v Mahalaxmiben AIR 2005 MP 118
53
11.8.3 Amendment proposed
(i) Amendments are proposed in section 21 as follows:
(a) Compensation can be claimed in substitution of or in addition to -all three
remedies, i.e. specific performance, injunction and compensation pursuant to
substituted performance.
(b) A Court may assesscompensation as on the date of the filing of suit.
(ii) Amendments are proposed in sections 23 and 24 as follows to include injunction and
compensation pursuant to substituted performance.
11.9 Refusal of relief
The amendment proposes grounds for refusal of reliefs of specific performance and
injunction. Most of these follow the current sections 14 and 20 of the Act. Both these
reliefs of specific performance and injunction shall no longer be discretionary. They can
be refused on any of the grounds specifically enumerated in the new sections 14, 16 and
41. These grounds relate to possibility of obtaining substitutes, effective enforcement of
decrees not being possible, interference where the terms of the contract or the relations
between parties at the time of making contract are such that these put a party to an
unfair advantage or undue hardship, hardship to third parties, and choice of remedies by
the parties in their contract. Such change will cast the burden of proving grounds of
refusal on the party against whom such relief is sought, l.e., the person who has broken
the contract. This will also require a Court to give a finding of the existence of a ground
of refusal and justification for such refusal.
11.9.1 Availability of substitutes
.The present system compels the victim of breach to justify his claim so that he can get
the benefit of his contract. The initial burden of proof lies on him to show non-existence
of substitutes. This negative burden is a difficult one to discharge. It is expected that if
the promisee has substitutes available, he will avail of that opportunity. If he suffers loss,
he will claim compensation. He will aim to complete his business. The law should also
encourage him to do so because this course of action will achieve for the promisee the
completion of his task, leaving him free to claim compensation if his loss is substantial
enough to warrant filing litigation.
11.9.2 Effective enforcement
Concernsof effectiveness and practicality of enforcement of decrees curtail availability of
54
specific performance. An effective decree cannot be made where the promise is vague.52
If it involves supervision or contains minute details,53or a continuous need of evaluation
of promisor's performance,54a Court might not decree specific performance becausethe
plaintiff will be required time and again to approach the Court to decide the quality of
performance rendered by the defendant judgment debtor. This limitation on availability of
specific relief cannot be avoided. However, it is expected that a promisee will not seek
specific performance that is difficult to enforce. Moreover, if the promisee has the right to
cover (in terms of relief compensation pursuant to substituted performance proposed in
the amendments), there will be no need to seek specific performance for enforcing
contracts involving minute details or constant supervision.
11.10 Unfair advantage and undue hardship
11.10.1 Reliefs of specific performance and injunction should balance the interests of all parties.
11.10.2 Circumstances that exist at the time of making the contract might make its enforcement
inequitable. These include the terms of the contract, the circumstances surrounding the
parties at the time of making it, or the unequal bargaining powers among the parties.
Such circumstances vitiate the contract itself if their existence shows lack of free consent
~.
(sections 15 to 20 of tHe Indian Contract Act), in which case the contract can be avoided
by the party whose consent is not free. These become relevant while granting reliefs of
.,/
specific performance and injunction .
11.10.3 These have been grounds of exercising discretion in refusing specific performance under
the current section 20. These are now included under the umbrella of grounds for refusal
of relief.
11.10.4 In the scheme that the promisee is entitled to the agreed performance, and entitled to
receive it as a relief if he seeks it, circumstancesarising after the making of the contract
should not affect refusal.
11.10.5 Where specific performance is not available as a right, but is based on the Court's finding
about inadequacy or satisfaction of other criteria for grant of equitable relief, the plaintiff
can never be sure about the remedy. Moreover, when the defendant can change the
situation and make transactions pending litigation, enforcing an order of specific
52 The Indian Contract Act, 1872, section 29; Pomeroy's Specific Petfonnance of Contracts (3rd edn 1926) para 159,
quoted in Ganesh Shet v C S G K Setty AIR 1998 SC 2216, 2219; See also John Dawson, 'Specific Performance in
France and Germany' (1959) 57 Mich LR 495, 537; Andrew Burrows, 'Specific Performance at the Crossroads' (1984) 4
LS 102, 108.
"- C~"" '-"111' lE lmllllll

S4 The Specific Relief Act, 1963 s 14(l)(b) and (d).
55
~
performance becomes more difficult. Many a defendant has pleaded rise in prices as a
defence in a suit for specific performance." Circumstances can be created in such
manner that a plaintiff's rights can be defeated by events after the suit. Where specific
performance lies in discretion of the Court, and is not available as a right, the breaching
promisor can continue to hope for forgiveness of his breach and avoid specific
performance by making offers56 and seeking compromises pending lltlqatlon." He might
also hope for a settlement in Court discounting breach." The party who has the stamina
and resources to keep Iitigatjon going can hope for such indulgence from the higher
courts. When specific performance is routine/ promisors will refrain from changing the
state of affairs pending proceedings. It is therefore essential that the rights of the
aggrieved party should remain unaffected by the progress of and time involved in
litigation.

(i) All grounds on which specific performance or injunction can be refused shall be
grouped together.
(ii) The two reliefs cannot be refused on any other grounds.
(Hi) Rise or fall in prices or market value or change in circumstances after entering into
the contract shall not be a factor for refusal of relief. ...
.
11.12 Substituted performance: Performance at the cost of

the promisor
11.12.1 If the promisee can complete performance (substitute performance) through another
person (a third party) at the expense of the promisor/ it will achieve nearly the same
55 Gaya Prasad v Surendra Bahadur Singh AIR 1987 se 925; S V R Mudaliar v Rajabu F Buhari AIR 1995 se 1607; Kanshi
Ram v Om Prakash Jaiswal AIR 1996 se 2150; K S Vidyanadam v Vairavan AIR 1997 SC 1751; Gobind Ram v Gian
Chand AIR 2000 SC 3106; V Pechimuthu v Gowrammal AIR 2001 se 2446; Nirmala Anand v Advent Corporation {P} Ltd
AIR 2002 se
3396; Lalit Kumar Jain v Jaipur Traders Corpn Pvt Ltd (2002) 5 sce
383; Faquir Chand v Sudesh Kumari
(2006) 12 see
146; P S Ranakrishna Reddy v M K Bhagyalakshmi AIR 2007 se
1256; Narinderjit Singh v North Star
Estate Promoters Limited AIR 2012 se 2035; S V Sankaralinga Nadar v P T S Ratnaswami Nadar AIR 1952 Mad 389;
Tharakam Veettil Muhammad v Abdarahiman Kutty AIR 1953 TC 429; Bibi Moliman Nissa v Tafazul Karim AIR 1959 Pat
132; Mu//a Badroddin v Master Tufail Ahmed AIR 1963 MP 31; N B Namazi v Central Chinmaya Mission Trost AIR 1988
Mad 84; P Lakshmi Ammal v S Lakshmi Ammal AIR 1991 Mad 137; K M Madhavakrishnan v S R Swami AIR 1995 Mad
318; Raghuvir Singh Bhatty v Ram Chandra Waman Subhedar AIR 2002 All 13; Lala Sumer Chand Goe/ v Rakesh Kumar
AIR 2002 All 82; Kuldip Gandotra v Shailendra Nath Endlay AIR 2007 Dell; Radha Krishna Agarwal v Krishna Lal AIR
2012 Uttkha 64.
56 Satya Jain v Anis Ahmed Rushdie AIR 2013 se 434 and later in AIR 2013 SC 3784; Vishwa Nath Sharma v Shyam
Shanker Goela (2007) 10 sec
595.
57 See also A Maria Angelena v A G Balkis Bee AIR 2002 SC 2385: Supreme Court rejected the offer distinguishing its
ealier judgment in Damacherfa Anjaneyulu v Damacheria Venkata Seshaiah AIR 1987 SC 1641 which it held was not a
precedent as it laid down no principle and was decided under Article 142 of the Constitition India.
58 See aaude-Lila Parulekar v Sakal Papers Pvt Ltd AIR 2005 SC 4074 : a decision relating to rectification of register under
section 155 of the Companies Act, involving other proceedings indudlng one of specific performance, all settled by the
Supreme Court.
56
result as actual specific performance. He can either perform it himself, or get it
performed through another source. Some systems allow the promisee to perform the
promise himself or through a third party at the expense of the promisor. 59 Indian law
does not give him the right to cover as a substantive right. The amendment proposes to
give this right and is referred to in the amendment as 'Compensation Pursuant To
Substituted performance'.
11.12.2 Under Indian law, if the promisee covers (completes performance through another
source), he can claim compensation as the difference between the cost of substitute
performance and the contract price. He can also claim compensation on 'cost of cure'
basis.6o A promisee can also receive such compensation where the contract allows him to
complete the performance from another agency, and claim the amount of such
performance from the promisor." Where the contract contains a 'risk and cost' clause,
the promisee can get the work completed through another agency, and deduct the
expense of such work from deposit, or claim it from the promlsor." In all such cases, the
plaintiff's claims are subject to the princtples of section 73 of the Indian Contract Act, i.e.
of foreseeability (contemplation) and mitigation. Hence, the promisee cannot be certain
whether he will get the whole amount he has spent. However, a plaintiff (as decree-
holder) can get an act done at expense of a defendant (as judgment debtor~ as a method
of executing a decree of specific performance, when such a decree has first been made
and has been disobeyed.63
11.12.3 If a promisee has the right to receive the amount he has spent, he will be able to obtain
cover and will prefer to do so with confidence. He will seek the amount spent by him for
obtaining substitute performance, as an effective alternative to specific performance. He
;'
will have the benefit of his contract very close to the time fixed for performance in the
contract, rather than having to wait for the decree of spedtlc performance.
"
11.12.4 If the promisor knows that the promisee can exercise such a right at the promisor's cost,
the promisor is likely to perform himself. Such provision will match the legal provision
that generally allows a promisor to delegate the task of performing the act prornlsed."
59 See The Spanish Civil Code, arts 1096 and 1098; The Ethiopian Ovil Code, art 1778; The Quebec Civil Code, art 1602;
The Quebec Civil Code, art 1602
60 See the Indian Contract Act 1872, illustrations (f), (k) and (I) to 5 73.
61 Indian Oil Corporation Ltd v SPS Engineering Ltd AIR 2011 SC 987; Maharashtra State Electricity Board v Sterilite
Industries (India) AIR 2001 SC 2933 (claim dismissed because loss on such basis not proved); Kamataka Electridty
Board vMS Angadi AIR 2008 Kant 55.
62 KrlshanLal V Food Corporation of India,(2012) 4 see 786.2012 AIR sew j,-,.1
\ l8\1, Lor
"-..~ft~G~\ 21 ole 32.
64 The Indian Contract Act, s 40.
57
Such a scheme also complements the system that recognizes the inadequacy test, and
can be provided even if the inadequacy test is retained.
11.12.5 However, the promisee might abuse his right and create a heavy burden on the promisor.
This can be prevented by requiring him to give an opportunity to the promisor, and
notice to promisor about the cost of substitute performance that the promisor would have
to bear.
11.12.6 The amendment proposed seeks to achieve the following objectives:

(i) A person who has actually spent to complete the work or contract promise can
confidently claim what he has spent.
(ii) This gives opportunity to the promisor to continue performance after receiving
notice.
(Ill) The provision of notice giving opportunity to the promisor to perform is likely to
encourage both parties to renegotiate the contract to their mutual advantage. This
prevents litigation, and completes the contract work.

....
It is proposed to add a new section 20A for this relief. The important features of
proposed amendment are as follows:-
(i) A party can perform the contract himself or through another person. He can claim
the amount he has actually suffered.
(ii) He can claim the amount notwithstanding section 73 of the Indian Contract Act. He
will have a choice.
(iii) He can claim the amount only after he has spent or suffered it.
(iv) The plaintiff will have to:
(a) issue notice to the other party calling upon him to complete performance; and
the cost or expenses for getting it done from a third party;
(b) complete the performance and incur costs and expenses;
(c) prove breach of contract;
(d) prove the cost and expenses incurred in the suit; and
(e) prove the amounts as reasonable.
. (v) The defendant's interests are protected by giving him an opportunity of performing.
(vi) If the notice is given as above, the amount claimed in the notice shall be deemed to
be reasonable, if actually spent or suffered.
(vii) One who seeks compensation pursuant to substituted performance cannot claim
specific performance or injunction.
58
(viii) Section 21 will be amended to enable the promisee to claim compensation in suits
for compensation pursuant to substituted performance also. Similar amendments
are also proposed in sections 23 and 24 of the Act.
*******
'-.,----
..-
.r
59
CHAPTER IV
Discretion of Courts in the Grant of Specific
Performance and Injunction
12. Specific Performance: A discretionary remedy

Specific performance of contract, due to its equitable roots, has been considered a
discretionary remedy in both England and India. However, the discretionary nature of the
remedy has created considerable uncertainty over when specific performance will be
granted.
12.1 The Committee is of the view that availability of the relief of specific performance should
be routine. This means courts should grant specific performance to the party who asks
for it, and can refuse the relief only in circumstances specified, and in no others. Many
grounds on which courts could exercise discretion under section 20 of the Act are
incorporated as grounds on which the relief can be refused.
12.1.1 Currently, Section 20 of the Act lays down that specific performance is a discretionary
remedy, and spedfles certain non-exhaustive situations in which specific performance is
not to be granted. While Courts have opined that discretion is not to be exercised
arbitrarily, and is to be exercised only on the basis of sound judicial principles, the scope
of the discretion is considerably wide. The basic tenets on the basisof which discretion is
to be exercised are "justice, equity, and good conscience.'165 This leads to a lack of
certainty for those asking for this remedy, and creates the need for limiting this
discretion.
12.1.2 It is proposed that the grounds on which specific performance may be withheld should be
clearly delineated in the statute, based on existing case law in India and comparative
practice. In other words, once the plaintiff successfully meets the conditions for obtaining
specific performance, the relief must be granted unless the defendant can prove that the
case falls squarely within the negative grounds or exceptions. This will have two benefits
- first, it will ensure that specific performance is not granted in cases wherein it is
impractical; second, it will make specific performance a statutory, and not an equitable
. .
remedy, based on clearly delineated grounds.
65 A.C. Arulappan v. Ahilya Naik AIR 2001 SC 2783.
60
·
i2.2 Grounds for refusing specific performance
12.2.1 Case law analysis shows that in almost all cases, the discretion is exercised to deny relief
on certain grounds.66 These grounds are broad, and place great emphasis on equitable
-, prlnclples, consistent with the grant of an extraordinary remedy. However, since the
intent is to increase grant of specific performance, it is important to restructure the
grounds on which it can be denied.
.»
12.2.2 Internationally, the grounds for denial of specific performance are extremely narrow. To
illustrate, the provisions in the Principles of European Contract Law and the UNIDROIT
Principles of International Commerdal Contracts have been reproduced below.
"Article 9:102, The Principlesof European Contract Law:
'--'"
(2) spedtlc performance cannot, however, be obtained where:
(a) performance would be unlawful or impossible; or
(b) performance would cause the obligor unreasonable effort or expense; or
"---
(c) the performance consists in the provision of services or work of a personal
character or depends upon a personal relationship, or
.: (d) the aggrieved party may reasonably obtain performance from another source."
"Article 7.2.2, UNIDROIT Prindlplesof International Commercial Contracts:
Where a party who owes an obligation other than one to pay money does not
perform, the other party may require performance, unless fact;
(a) performance is impossible in law or in
(b) performance or, where relevant, enforcement is unreasonably burdensome or
expensive;
(c) the party entitled to performance may reasonably obtain performance from
another source;
66Under the provisions of s.20, the bases for denying relief are:
1. When there is hardship
2. When there is unfair advantage to one party
3. When the contract is voidable
The legal grounds on the basis of which relief can be denied are:
1. When willingness to perform is not spedfically pleaded (5. 16)
-,'
2. When specific performance can't be granted by virtue of the exception falling in 5.14
3. When the contract is not as clear as needed .
-' The equitable prlndples on the basis of which relief can be denied are:
1. When the doctrine of clean hands is not satisfied
-'
2. When delay defeats equity
3. When third parties will be unduly prejudiced
4. When those who seek equity do not do equity
5. When grant of specific oerformilnCQ d~M I'\ot clo= the dIspute, only increases litigation (for instance, where the
relief is sought against a subsequent purchaser who also has a right of pre-emption)
6. The litiga~on is oppressive.
61
(d) performance is of an exclusively personal character; or
(e) the party entitled to performance does not require performance within a
reasonable time after it has, or ought to. have, become aware of the non-
performance"
12.2.3 In this light, the amended version of the Act should similarly limit the exercise of
discretion, and reduce the equitable grounds on the basis of which the relief can be
denied.
12.2.4 The grounds that may be considered as exceptions should be as follows:-

(i) The aggrieved party may reasonably obtain performance from another source:
When goods and services are of a standard kind; it would be less cumbersome
and economically efficient for the aggrieved party to claim performance from
another source, instead of burdening the unwilling party. to comply with the
contract."
(ii) Performance of the contract is impossible in law or in fact:
For grant of a specific performance remedy, it is imperative that the contract is
capable of being performed. This means that the contract should be not be
unlawful, and not impossible. Moreover, the terms of the contract cannot be so
. vague as to render them impossible to perform."
(iii) Performance of the contract would involve some hardship on the defendant which
he did not foresee, whereas its non-performance would involve no such hardship
on the plaintiff:
When it is unreasonably burdensome for the contract to be enforced, then the
contract need not be enforced. This is something that is out of the ordlnarv."
While this is a well- recognised principle, there is confusion over whether rise in
price would amount to hardship, which should be clarified in the Act. This
exception is currently present in Section 20.
(iv) The terms of the contract or conduct of parties at the time of entering the
contract gives the plaintiff an unfair advantage over the defendant:
The contract should not be unconscionable, so that the parties are not unduly
disadvantaged while performing the contract. This requirement arises out of
equity, but is to be applied in a restrictive manner." This exception is currently
present in Section 20.
67 See: Comment on A.7.2.2 of the Prindples of International Commerdal Contracts, UNIDROIT.
68 Ganesh Shet If. CSGK Setty AIR 1998 SC 2216.
·69 Zarina Siddiqui v. A. Ramalingam AIR 2015 SC 580.
70 Narindetjit Singh If. North Star Estate PromotersAIR 2012 SC 2035.
62
(v) The contract or its performance is dependent on the personal qualifications or
volition of the parties. Contracts which are dependent on the volition of the
parties cannot be specifically enforced, for various reasons. In many cases,
forcing the performance of the contract would offend the human dignity of the
person forced to perform the service, and may amount to forced labour."
Moreover, often the quality of the services in such contracts depend upon the
performer's state of mind and specific performance would not be a suitable
remedy in such cases." This exception is currently found in section 14.

(vi) The performance of the contract involves the performance of a continuous duty
which the Court cannot supervise. When the contract prescribes a positive duty
that must constantly be supervised by the Court, then the contract is considered
to be not eligible for specific performance." This exception is currently present in
section 14.
(vii) When third parties will be unduly prejudiced. When specific performance of a
contract would prejudice the rights of third parties, or prevent the defendant
from discharging her duties towards third parties then it may be denied, and a
more suitable remedy ought to be allowed." If specific performance is granted in

e.
such cases, the settled position of various people will be disturbed, leading to
more litigation.
'--'
*******
......,
71 People's Union for Democratic Rights v Union of India AIR 1982 SC 1473.
Robert D'Silva v Roshim Enterprises AIR 1987 Kant 57.
rh~'~~}l.mlm~~~~
72
-'
73~1J&orn ~U~)n JJruddin Maniar AIR 1970 Born 128.
../
7~ Sardar Singh v. Krishna Devi AIR 1995 SC 491.
.J 63
CHAPTER V
Role of Expert
13. The Committee is of the view that Courts should take the assistance of experts in the
matters relating to enforcement of contracts.
13.1 Laws relating to Expert Evidence in Indian law
13.1.1 Indian Evidence Act 1872 (Evidence Act)
Section 45 of the Evidence Act provides for assistance of an expert when the Court has to
form an opinion upon a point of foreign law, or of science, or art, or as to identity of
handwriting or finger impressions. The opinions upon that point of persons specially
skilled in such foreign law, science or art, or in questions as to identity of handwriting or
finger impressions are relevant facts.
13.1.2 Arbitration and Conciliation Act, 1996 (Arbitration Act)
Section 26 gives power to the tribunal to appoint an expert to report to it on specific:

..
issues to be determined by the arbitral tribunal and the tribunal may require a party to •.
give the expert any relevant information or to produce, or to provide access to, any
relevant documents, goods or other property for his inspection.
13.1.3 Civil Procedure Code, 1908 (CPC)

Order 16 Rule 14 of CPC gives the Court the power to take evidence of any person whom
the parties have not brought forward as witnesses. The power to examine, under this
rule, on the Court's own motion is discretionary. Further, a witness called by the Court
may be cross examined by a party.75 The CPC per se does not contain specific provisions
expressly empowering a Court to seek assistance of an expert.
13.1.4 Though Order 16 Rule 14 of the CPC empowers Courts to summon a witness, the words
"and not called as witness by a party to the suit' appearing in the said Rule, seems to
suggest that the witness to be called is for leading evidence on facts or to produce
documents. Further, in the past the Courts have also considered the stage at which a
Court should summon a witness and examine a witness who has not been called by
either party to the proceeding. It has been held that such an opinion could only be
formed after evidence of parties was over." It has been the consistent view of Courts
that a trial should be at arm's length and the Court should not really enter into the
75 Gopal La/l Seal 1'5. Manick La/! Seal (lB97)ILR 24 (Cal) 2BB
76 Bishwanath Rai v. Sachhidanand Singh AIR 1971 SC 1949 at 1952
64
dispute as a third party, but it is not to be understood that the Court never has the power
to summon a witness or to call for a document which would throw light upon the
matter", Relevant extracts of some of the judicial precedents in India dealing with power
of the Courts under Order 16 Rule 14 are mentioned in para 13.7.
13.1.5 From the judicial precedents, it is observed that the power under Order 16 Rule 14 is
generally exercised in respect of taking evidence pertaining to facts. This power is
exercised sparingly by Courts. Even the guidelines / observations made by Courts in the
judicial precedents regarding use of this power suggest that the Court should exercise the
power guardedly, and not as a routine.
13.1.6 In the circumstances, though one may attempt to interpret the words of Order 16 Rule
14 in a wider manner so as to cover the right to summon the expert witness, the absence
of a specific provision in the said Rule regarding expert evidence poses difficulties.
13.2 Expert Evidence provisions in some Foreign jurisdictions

13.2.1 Provisions relating to expert witnesses are found in the laws of various jurisdictions. In
fact, some of the countries such as the USA and France have specific provisions
empowering the Court to appoint experts. Expert's statement/assistance is primarily in
the nature of an opinion, and hence mayor may not be accepted by the Court. Paras
15.8 reproduces certain relevant provisions of the Federal Rules~f Evidence and Code of
Civil Procedure (France) respectively.
13.2.2 Unlike ordinary "lay" witnesses, the expert witness is called not to testify with respect to
the factual background of an action but rather to provide an opinion with respect to those
facts which will help the judge, jury or tribunal reach its conclusion. The ability of an
expert witness to provide evidence in connection with a factual situation with which they
had no connection is thus a major exception to the hearsay rule, which generally provides
"" that indirect evidence may not be led to support the truth of the matter asserted. An
expert witness, like any other witness, may testify as to the veracity of facts of which he
has first-hand experience, but this is not the main purpose of his or her testimony. An
'V
expert is there to give an opinion. And the opinion more often than not will be based on
second-hand evidence."
13.2.3 In New Zealand, expert evidence is admissible if the Court is likely to obtain substantial
help from the. opinion in understanding other evidence in' the proceeding or in
ascertaining any fact that is of consequence to the determination of the proceeding.
u n» ~~"- ., IIll1illlm~
rl~m~
78 Regina vs. Abbey (198Z) 2 SCR 24, Dickson J (Supreme Court of canada)
65
13.2.4 Accordingly, unlike in India, legislatures in some of the foreign jurisdiction specifically
empower the Courts to take assistance of experts. However, even in jurisdictions such as
USA, which have specific provisions empowering Courts to suo mota appoint expert
witnesses, the use of this power by the Courts is not rampant. In this regard, a survey
was conducted by the Federal Judicial Centre in 1993/9 when the Centre, based on
responses of district judges, found that much of the uneasiness with Court-appointed
experts arises from the difficulty in accommodating such experts in a Court system that
values, and generally anticipates, adversarial presentation of evidence.
13.2.5 Following are some of the reasons attributed by the said survey for the Court's reluctance
in seeking expert assistance:
(i) Judges view the appointment of an expert as an extraordinary activity that is
appropriate only in rare instances in which the traditional adversarial process has
failed to permit an informed assessment of the facts.
(ll) Parties rarely suggest appointing an expert and typically do not participate in the
nomination of appointed experts.
(iii) The opportunity to appoint an expert is often hindered by failure to recognize the
need for such assistance until the eve of trial.
(iv) Compensation of an expert often obstructs an appointment, especially when one
of the parties is indigent.
(v) Judges report little difficulty in identifying persons to serve as court-appointed
.experts,largely because of the judges' willingness to use personal and
professional relationships to aid the recruitment process.
(vi) Ex parte communication between judges and appointed experts occurs frequently,
usually with the consent of the parties.
(vii) The testimony or report presented by an appointed expert exerts a strong
influence on the outcome of litigation which may seem unfavourable at times.
13.3 General Observation

Some of the reasoned findings of the Federal Judicial Centre appear to be global in
nature and would be equally applicable to appointment of experts in India. However, with
the fast-changing nature of trade and ever increasing complexities in commercial
transactions largely due to rapid changes in technoloqles, the Committee feels there is a
need for Judges to be assisted by technical experts for speedy and fair determination of
issues. Though the parties themselves can produce expert witnesses, the Court at times
find itself in need of expert assistance from a completely impartial witness more
79 Joe S. Cecil & Thomas E. Wiliging, 'Court-Appointed Experts: Defining the Role of Experts Appointed under Federal Rule
Of Evidence 706', available at https://www.ncjr1;.gov/pdffilesl/Digitization/145624NORS.pdf
66
particularly in infrastructure! turnkey contracts which invariably involve complex
technical/scientific issues.
13.4 Recommendations
Courts should have the power to summon expert evtdence not only on the facts but also
on technical !scientific issues. In India, the Evidence Act and CPC do not have specific
provisions authorising Courts to summon expert evidence so as to enable the Court to
seek expert assistance at its own instance on complex technical! scientific issues
requiring specialised knowledge! expertise from the experts in various fields. Considering
the growing number of transactions involving complex or technical issues requiring
specific technical or scientific understanding Or knowledge, in addition to the authority to
take evidence on facts, for effective red ressaI of the disputes, it would be appropriate to
make provisions in the Act empowering the Courts to examine experts in the relevant
fields. This would assist the Court in appropriately determining the issues in expeditious
and efficient manner.
13.5 Case law

13.5.1 In P.S. Chetty v. K.E. Reddy80, the High ~ourt of Andhra Pradeshheld as follows:
"Order 16 Rule 14 Code of Civil Procedure provides that the court may of its own initiative
or suo motu cause any person to be examined asa witness though either of the parties
-"
did not choose to take steps for summoning such person as a witness. This power
obviously intended in the interest of justice is aimed at clarifying certain situations and
remove ambiguities and fill up lacuna and thereby further justice. The parties may
refrain from summoning a crucial witness in the event of their apprehension of full-
fledged support and in such a situation the court may summon such person to give
evidence to arrive at the correct factual picture and this witness is called a
'court witness.' Order 16 Rule 14 visualises the initiative by the court only to examine
any person and it is for the court to consider of its own accord the necessity of invoking
power under this rule without propulsion or application by the parties. The exercise of
this power is in the nature of "self-starter" without extraneouspressure or pull. "
Having said this, the High Court proceeded to observe that the Court-is not
obliged to invoke the power under "that provision at the instance of the parties.
However, a rider was added to the effect that an application filed by the parties
invoking such a provision can be treated as a device of passing on the
information, which may help the Court in formino 'n opini«l111~~\m ~~t
m
~
80 1988 (1) ALT 279
67
exercise its power under Rule 14 of Order 16 Code of Civil Procedure. The
relevant portion reads:
"It is true that the court is not obligated to invoke the power at the instance of
the parties and the parties have no right to move an application under this rule.
But however either of the parties can bring to the notice of the couit the
necessity for examining any person as court witness. On such application
the court may scan the totality of facts and circum.stances apart from the
situations projected by the parties and arrive at an independent conclusion as to
the necessity of a court witness. The parties are not totally barred from bringing
to the notice of the court by application or otherwise and the court is not bound
to take action on the averments or allegations contained in the application and it
is the sole discretion of the court. The application by the parties may be
considered as passing on the information so that the court may examine the
issue in depth on the facts and circumstances set out in the application and other
aspects."
13.5.2 In Kosuru Kalinga Maharaju vs Kosuru Kaikamma81, the Hon'ble Andhra High Court
observed in paras 5 and 6:
"A reading of the above provision would leave no doubt in the mind to say that either
party to the suit proceedings can summon person including a party to the suit who is not
called as a witness by a party to the suit, as a witness. .... Legislature has felt the need
for a direct provision enabling the court to summon a party for giving evidence as
a witness to help curbing the malpractice of a party not appearing as a witness and
forcing the other party to call him as a witness, and adjudicate the issues proper/yo What
is laid down in the above provision is that if the Court is satisfied about such a necessity
to cause any person to be examined as a witness, Court can summon such person as
a witness. The emphasis is laid on the subjective satisfaction of the Court. However, this
power is to be exercised by the Courts guardedly and not as a matter of routine. "
13.5.3 In the matter of K S Agha Mir Ahmad v. Mir Mudassir Shah82 before the Privy
Council in a suit for declaration, the Plaintiff invoked the jurisdiction of the trial court
under Order 16 Rule 14 of the Code of Civil Procedure, to summon a witness who was
omitted during the trial. That application was filed after both the parties closed their
evidence. The trial Court rejected the application with the following observation:
81 (2000) 2ALT409
82 AIR 1944 PC 100
68
"I have considered this question carefully and am of opinion that it would be seriously
detrimental to the Defendants' case to admit this witness at this stage. I do not consider
that it is the duty of the Court to remedy an omission by a party to the suit which may
be intentional or if not, must be due to neglect."
One of the grounds urged in the appeal before the Privy Council was as to the
correctness of the observation made by the trial Court, on the purport
of Order16 rule 14 Code of Civil Procedure. The Privy Council held:-
"In the circumstances the Courts below were right in not acceding to the request of
the Appellants to examine Mt. Feruq, whether their omission to examine her was
intentional or due to neglect. The power of the Court under Order 16/ Rule 14/ Code of
Civil Procedure/ to examine witnesses on its own motion is discretionary. "
13.5.4 In Varadharajan v, Saravanan83, the Madras High Court has observed following with
respect to the powers under the Order 16 Rule 14 of the Code of Civil Procedure.
"Para-7: Even in this rule/ the power of the Court to examine the witnesses on his own
motion/ is discretionary. Ordinarily it is for the party to summon the witnesses necessary
for his case and when. the party has done everything in that regard; it is the duty of
e.
the Court to entorce their attendance. Only when it appears to the Court that the
evidence of a particular witness is necessary for the proper adjudication of the sult, then
only the Court may secure suo motu the attendance of such witness. This discretionary
power under this Rule should not be used to help a party to tide over a real difficulty in
examining those witnesses. When neither side 'has summoned the material witness to
. give evidence/ the Court is justified in refusing to call him as a Court witness after closure
of evidence.
./
Para-8: In teet; Rule 14 prior to amendment by the Amendment Act 1976/ Court had
power to summon as witnesses any person other than a party to the suit who had not
been called as a witness by any party either to give evidence or to produce document.
The Rule did not confer any express power on the Court to summon a party to the suit as
a witness. But after the Amendment; 197~ the Court has been given express power to
summon a party to the suit. Even if a party voluntarily appears in the witness-box to give
evidence in his own favour and deliberately keeps himself away after examination-in-chief
and before cross examination/· the Court cannot exercise its power under the
amended Rule also."
t
83 https:/Jindiankanoon.org/doc/1539692/, KGnanaprakasam, J, Madras High Court decided on 11 October 2002
69
13.6 Position in other Countries
13.6.1 United States of America
Legislature: Federal Rules of Evidence ( extracts)
"Rule 706: Court Appointed Experts

(a) Appointment. The court may on its own motion or on the motion of any party enter
an order to show cause why expert witnesses should not be appointed, and may request
the parties to submit nominations. The court may appoint any expert witnesses agreed
upon by the parties, and may appoint expert witnesses of its own selection. An expert
witness shall not be appointed by the court unless the witness consents to act. A witness
so appointed shall be informed of the witness' duties by the court in writing, a copy of
which shall be filed with the clerk, or at a conference in which the parties shall have
opportunity to participate. A witness so eppotnted shall advise the parties of the witness'
findings, if any; the witness' deposition may be taken by any party; and the witness may
be called to testify by the court or any party. The witness shall be subject to cross-
examination by each party, including a party calling the witness.
(b) Compensation.Expert witnesses so appointed are entitled to reasonable
compensation in whatever sum the court may allow. The compensation thus fixed is
payable from funds which may be provided by law in criminal casesand civil actions and
proceedings involving just compensation under the fifth amendment In other civil actions
and proceedings the compensation shall be paid by the parties in such proportion and at
such time as the court directs, and thereafter charged in like manner as other costs.
(c) Disclosure of appointment In the ~ercise of its discretion, the court may authorize
disclosure to the jury of the fact that the court appointed the expert witness.
(d) Parties' experts of own selection. Nothing in this rule limits the parties in calling expert
witnesses of their own selection. H
13.6.2 France
Legislation: Code of Civil Procedure
Book I: Provisions applicable to all Courts (extracts)

"Article 232
The judge may commission any person of his choice to set him straight in the form of
findings, consultation or an expertise on a question of fact that requires the insight of an
expert. "
*******
70
CHAPTER VI
Rights of Third Parties
14. The Indian Law does not allow enforcement of contract by a person who is not a party to
the contract, even though contracting parties have conferred a benefit on him. This is
subject to exceptions recognized by judicial precedents. These exceptions are also stated
in Section 15 of the Specific Relief Act, 1963. The Committee is of the view that a third
party on whom parties have conferred a benefit should be able to specifically enforce
contracts, subject to rights of the contracting parties. However, such right should not be
exercisable against the Government, especially by sub-contractors.
14.1 Doctrine of Privity of Contract

(i) The law of contracts as applicable to India and embodied in the Indian Contract Act
1872, has largely adopted the principle of privity of contracts established by English
lawB4• The doctrine of privity means that a contract cannot, as a general rule, confer
rights or impose obligations arising under it on any person except the parties to it."sS
-../
(ii)The principle behind this rule is that rights cannot be conferred on a stranger to a
..
;' contract as a contract creates rights in personam.
(iii) The effect of the doctrine is that although rights and benefits are conferred upon a
third party under a contract: (i) the third party cannot sue on the contract or rely on
any defences under it; (ii) the third party cannot be subject to the burden of the
contract; and (iii) the third party is not bound by an exemption clause contained in
the contract."
14.1.1 The modern principle of privity developed in England can be said to have originated from
Tweedle v Atkinsor/'7 which based the principle on two grounds - first, the third party
' .
was not privy to the contract and secondly, the consideration did not flow from the third
party claiming under the contract.
14.1.2 It is interesting to note that while under English common law the doctrine of privity has
been linked to conslderatlon, in India under Section 2(d) of the Indian Contract Act,
....-. 84 Tweedle v Atkinson, 1861 EWHC J 57 (QB); Comyand Curtis v. Collidon 1674 (1) Freem. K.B. 284; leveit», Hawes,
1599 Cro. Eliz. 654 ER; Rippon v. Norton, 1602 Cro. Eliz. 849 ER; Hadvesv. Levit- (1632) Het. 176; Gandy v Gandy,
(1885) 30 ChD 57, 69; Dunlop Pneumatic Tyre Co Ltd. v Selfridge & Co Ltd., (1915) AC 847; Midland Silicones Ltd v
Scruttons lid. (1962) AC 446 (Lord Denning dissenting).
85 G.H. Treitel, The Law of Contract
-' ro.n
86 -4.1'.I!l ;/.t~~J JJO
J
87 1861 EWHC] 57 (QB)
71
187288 consideration can be given by a non-contracting party. Despite this, the Indian
judiciary, including the Hon'ble Supreme Court, has generally re-affirmed the applicability
of this doctrine to contractual relations in India and refused enforcement of contracts at
the instance of third parttes" other than instances of judicially established exceptions,
One of the most prominent statements of law on the effect of section 2(d) of the Indian
Contract Act, 1872 on the doctrine of privity is that of Rankin 0, in Krishna Lal Sadhu v.
Promila Bala DasPowhere the court observed:
"Clause (d) of section 2 of the Contract Act widens the definition of

'consideration' so as to enable a party to a contract to enforce the same in India
in certain casesin which the English law would regard the party as the recipient
of a purely voluntary promise and would refuse to him a right of action on the
ground of nudum pactum. Not onl;,; however, is there nothing in Section 2 to
encourage the idea that contracts csnbe enforced by a person who is not a party
to the contract, but this notion is rigidly excluded by the definition of 'promisor'
and 'promisee':"
14.1.3 In the recent past, however, a number of countries have begun recognising the rights of
third parties to enforce contracts."

Further, the doctrine has been abrogated by statute
. ;.
in a number of common law countries." In fact the United Kingdom itself has limited the
application of this doctrine by passing the Contracts (Right of Third Parties) Act, 1999.
14.1.4 In the context of the Act, the doctrine of privity has been recognized and has received
legislative sanction under section 15 of the Act which provides for persons who may
obtain specific performance. Apart from clause (c) of Section 15, which recognizes the
right of a person beneficially entitled under a settlement on marriage or a compromise
88 Section 2(d): "When, at the desire of the promisor, the promisee or any other person has done or abstained from
dOing, or does or abstains from doinq, or promises to do or to abstain from dOing, something, such act or abstinence or
promise is called a consideration for the promise;"
89 Jamna Das v. Ram Autar, (1911) 39 IA 7. In M.C Chacko v State Bank of Travancore,AIR 1970 SC 504, Shah AG. 0
has endorsed the statement of Rankin 0 in Krishna Lal Sahu v. Promila Bala Dasi,AIR 1928 cal 518, and after referring
to the observations of Lord Haldane in Dunlop v. Selfridge, (1915) AC 847 has said: •
"In a later case, Jamna Das . Ram Autar, the Judidal Committee pointed out that the purchaser's contract to payoff a
mortgage could not be enforced by a mortgagee who was not a party to the contract It must be therefore taken as
well-setUed that except in the case of a benefidary under a trost or in the case of a family arrangement no right may
be enforced by a person who is not a party to the contract ..It is a seated law that a person not a party to a contract
cannot enforce the terms of the contract '
90 (1928) 55 cs ins. AIR 1928 cal 518
91 United States, Scotland, France, Germany, Italy, Austria, Spain, Portugal, Netherlands, Belgium, Luxembourg, Greece
92 Western Australia (Western Australian Property Law Act 1969), Queensland (Queensland Property Law Act 1974), New
Zealand (New Zealand Contracts (Privity) Act, 1982) and more recently by Hong Kong (Contracts (Rights of Third
Parties) Ordinance, brought into force with effect from January 1, 2016)
72
between family members to sue for specific performance, and Section 11, which
recognizes the right of a trustee to enforce specific performance of a contract in
performance of a trust, the Act does not permit any other exemption to the rule that a
third party to a contract cannot sue for specific performance.
14.1.5 A right to enforce a contract ordinarily encompasses a right to all remedies given by
Courts for breach of contract (together with all standard rules applicable to those
remedies) that would have been available to the third party had he been a party to the
contract, including damages, awards of an agreed sum, specific performance and
injunctions. However, given the narrow scope of the Act, the Committee decided to
confine the draft amendment to making available the right to seek specific performance
of a contract to certain third parties (Section 15 of the Act).
14.1.6 For the purpose of its study, the Committee inter alia referred to the UK Law
Commission's report on "Privity of Contract: Contracts for the Benefit of Third Parties"
and has largely proposed modifications to the Act in line with the relevant provisions of
the Contract (Rights of Third Parties) Act, 1999 (UK 1999 Act). Reference may also be
made to the Explanatory Notes on the UK 1999 Act as well as to Hong Kong's Contract
'-'
(Rights of Third Parties) orcmance" (Hong Kong Ordinance) and Singapore's Contract
(Rights of Third Parties) Act, 2001 (both of which hav~ been modelled on the UK 1999
Act).
--' 14.1.7 While the Committee believes it would be ideal to have an independent statute (in line
with the UK 1999 Act) recognising rights of third parties, without having to amend all
relevant statues, the Committee has limited recommendations within the mandate given
to the Committee, and hence suggested recommendations to the Act.
,--,.
15. Exceptions to Privity Rule - Statutory and Judicial
-
'-/
15.1 Although the doctrine of privity has received wide judicial sanction, there have been
some notable voices of dissent. Indian Courts have observed that the administration of
-.~'"
justice should not be hampered by Tweedle v AtkinsorfM and that in India, we are free
from these trammels and are guided in matters of procedure by the rules of justice,
equity and good conscience. In fact, Jenkins, 0 in Debnarayan Dutt v Chunilal Ghosf!5
has said:
--'
93 Gazette Number L.N. 118 of 2015, effective from January 1, 2016
94 1861 EWHC J 57 (QB}
95 (1914) ILR41 Call37; approved and followed in N. Devaraje Urs v M Ramakrishniah AIR 1952 Mys 109.
73
~'
"That Indian Contract Act is unlike the English Contract Act and the limits with
which the doctrine of privity of contract operates in English law cannot with same
vigour be applicable to Indian Contract Act".
15.2 Further, sensing that the strict applicability of the doctrine would have caused grave
injustice, Indian Courts have, following the trend in the Courts in England, subjected the
doctrine to certain well-recognized and settled exceptions in relation to beneficiaries of a
99
trust", aqencv", family arrangement and marriage settlements", tort of negligence ;
collateral contracts, creation of a charge. However these are not exhaustive and from
time to time, a number of exceptions against the doctrine of privity have evolved and
have been recognized by the Indian judiciary. In fact, "conduct, acknowledgment and
admission' has in a recent case by the Delhi High Court been recognized and introduced
as a new exception to the doctrine. 100
15.3 Similarly, a number of deviations from the doctrine have been introduced by the
legislature as statutory exceptions, some of such statutes are:
(i) The Married Women's Property Act, 1874, Section 6101;
(ii) The Motor VehiclesAct, 1988, Sections 149 - 150;
(iii) The Workmen's Compensation Act, 1923, Sections 12 and 14;
(iv) The Marine Insurance Act, 1963, Section 17;
(v) Negotiable Instruments Act, 1881, Section 8102;
(vi) Indian Contract Act, 1882, Section 231;
(vii) The Indian Bills of Lading Act, 1956, Section 1;
(viii) The Railways Act, 1989, Section 74;
(ix) Transfer of Property Act, 1882, Sections 39-40.103
96 Rana Uma Nath Baksh Singh v, Jang Bahadur, AIR 1938 PC 245, N. Devaraje Urs v M Ramakrishniah AIR 1952 Mys 109,
Babu Ram Budhu Mal v Dhan Singh_Bishan Singh AIR 1957 Punj 169.
97 Narayani Devi v Tagore Commercial Corporation AIR 1973 Cal 401, Jnan Chandra Mukherji v Manoranjan Mitra AIR
1942 Cal 251. >
98 Daroptiv. Jaspat Rai, (1905) PR 171; Rose Femandez v. Joseph Gonsalves, ILR (1924) 48 Bom 673: AIR 1925 Bom 97,
a case where a girl's father entered into an agreement for her marriage with the defendant, it was held that the girl
after attaining majority could sue the defendant for damages for breach 'of the promise of marriage and the defendant
could not take the plea that she was not a party to the agreement.
99 Donoghue v Stevenson, [1932] AC 562., where A supplies goods to B under a contract with B, A may owe a duty to C in
respect of personal injury or damage to property caused by defects in those goods as the right not to be injured or to
have one's property damaged by another's negligence exists independently of any contractual undertaking by A.
100 Utair Aviation v Jagson Airlines, Manmohan Singh J, Delhi High Court, I.A. No.8381/2009 in CS (OS) No.203/2009
decided on April 13, 2012
101 A policy of insurance effected by a married man on his life and expressly made for the benefit of his wife andlor
children shall be deemed to be a trust for their benefit.
102 The holder-of a promissory note, bill of exchange or cheque is entitled to recover the amount due thereon.
103 Covenants (whether positive or restrictive) running with the land so as to benefit (or burden) people other than the
original contracting parties.
74
15.4 The most recent legislative exception to the strict application of the rule may be found in
the Arbitration and Conciliation (Amendment) Act, 201510\ which has now by way of an
amendment to section 8 of the Arbitration Act, recognized the right of persons despite
not being parties to an arbitration agreement but merely by virtue of claiming through or
under a party to enforce an arbitration agreement thereby empowering such a third
person to cause a judicial authority to refer the dispute before it to arbitration.
16. Justification for and criticisms of the doctrine
16.1 Despite the catena of judgments that have reiterated and enforced the applicability
doctrine, critics of the doctrine have been widespread and plenty, Lord Denning being
one of the foremost. Infact in Drive Yourself Hire Co (London) Ltd v Strutf°5, Denning LJ
<::
has said:
"It is often said to be a fundamental principle of our law that only a person who
is a party to a contract can sue on it. I wish to assert, as distinctly as I can that
the common law in its original setting knew. no such principle. Indeed, it said
quite the contrary. For the 200 years before 1861 it was settled law that, if a
'./
promise in a simple contract was made expressly for the benefit of a third person
in such circumstances that it was intended to be enforceable by him, then the.
common law would enforce the promise at his instance, although he was not a
party to the contract "
-'
16.2 Courts in Australia106 and Hong Kong107 have also been found to be in disagreement with
',- " the applicability of the doctrine and have ruled in terms of the below:
"When a rule of the common law harks back no further than the middle of the
last century, when it has been the subject of constant criticism and when in its
'~. widest form, it lacks a sound foundation in jurisprudence and logic and further;
when that rule has been so affected by exceptions or qualifications, I see nothing
inimical to principled development in this Court now declaring the law to be
.otherwise in the Circumstanceof the present Case.,408
-" 101 Act No.3 of 2016. While the Act received Presidential assent on January 1, 2016, it is deemed to have come into force
on October 23, 2015.
105 [1954] 1 QB 250.

j
106 Trident Gene",' Insurance Co Ltdv. McNiece Bros Ply Ltd, (1988) 165 CLR 107
../
107 Re the Mahkut-n http,//www.lawd,Qpu:).wmracaOemil<e/basis-privity-contract-consideratlonl - _edn74 (1996) 2 HKC 1
108 Trident General Insurance Co Ltdv. McNiece Bros Pty Ltc!, (1988) 165 CLR 107
75
16.3 To understand how a strict interpretation of the doctrine could defeat the principles of
equity, it is prudent to refer to the landmark English decision of Beswick v Beswicko9 on

the question of the right of a third party to seek specitlc performance of a contract. In
this case, an uncle transferred his business to his nephew who in return promised that
after his uncle's death, he would pay £5 a week to his widow. On the death of the uncle,
his widow brought an action for specific performance of the nephew's promise. The
House of Lords applying the third party rule held that the widow could not maintain a
successful action in her personal capacity and could not sue the estate for her own
personal third party . loss but could only succeed in suing for the estate's loss (which
would only be nominal) in her capacity as administratrix. However, to remedy the
injustice caused, the House of Lords held that she could be granted specific performance
of the promise rather than damages.
16.4 While the doctrine of privity has been justified on certain grounds, some of which are
listed belowllo:
(i) It is unjust to enable a third party to sue on a contract and not be liable for it.
(ii) Enabling third parties to enforce contracts would affect or limit the rights of the
contracting parties to vary or terminate the contract.
(iii) The promisor is likely to face two actions, from the promisee and the third party.
16.5 A strict application of the doctrine has been denounced on several counts as well, more
particularly, on the following:-
(i) If the intention of the contracting parties is to provide a remedy to a third party but
due to the application of the doctrine this is denied, the intention of the parties
gets frustrated.
(ii) It causes injustice to the third party who may have relied on the contract to
regulate' his affairs upsetting the reasonable expectations of such third party to the
benefit under the contract.
(Hi) The third party who suffers a loss cannot sue while the promisee who has suffered
no loss can.
(iv) A third party who suffers loss cannot claim compensation, while the promisee not
having suffered a loss can claim nominal damages only.
(v) A promisee may not wish to or may not be able to sue.
(vi) Difficulties may be caused in commercial life, where transactions and projects
involve a network of contracts allocating risks, responsibilities and liabilities

between the parties.
109 [1968] AC 58
110 The Indian Contract Act, 1872, Pollock & Mulla, 14th edition; The law Commission Report's on "PriVity of contract:
Contracts for the benefit of Third Parties"
76
16.6 Given the uncertainty existing by the ever-evolving exceptions developed by Courts and
the volume of contradictory decisions, a need has been felt to re-look at the relevance of
the doctrine. The debates and discussions surrounding third party rights under contracts
are relevant not only in daily life commercial contracts but also in transactional contracts
where a several agreements are linked to the principal agreement and rights are sought
to be conferred upon persons who though not parties to such principal agreement, have
entered into such ancillary agreements. It can be seen that practices such as imposing
obligation on parties to contracts and conferring rights on affiliates, relatives and agents
of parties with respect to terms like restrictive covenants, non-compete and
confidentiality obligations are quite common for parties under contracts these days.
16.7 Law Commission's recommendations
16.7.1 Several attempts have been made by the Law Commission in its 9th and 147th report on
the Act, wherein it has repeatedly recommended amendments to Section 15 of the Act or
the corresponding Section 23 of the 1877 Act. The amendments proposed were as
follows:-
./
(i) Section 15 be amended by inserting a clause (i) to the following effect:
n(i) any person, where the contract by its express terms purports to confer a benefit
directly on such person. ,W
-»
(ii) Simultaneous amendments were proposed to the Indian Contract Act, 1872 for the ,
introduction of a general rule that a third party to a contract who is entitled to a
.
benefit thereunder or has an interest therein is entitled to sue upon the contract,
subject to certain Iimitations.1l2 It was recommended that once such a general
"' provision is made, it will be unnecessary to retain the provisions contained in clauses
(c) to (f) of Section 23 of the 1877 Act. The Law Commissionsuggested that clauses
(c) to Cf)be replaced by one clause:
111 Law Commission ofIndia, 147th Report, 1993, para 4.7.

112 law Commission of India, 13th Report, 1958, page 79-S0, recommended the insertion of a new section 37A to the
Indian Contract Act, lSn:
':17A. Benefits conferred on third parties.
(1) Where a contract expressly confers a benefit directly on a third party, then, unless the contract otherwise
provides, it shall be enforceable by the third party in his own name, subject to any defences that would have been
valid between the contracting paroes.
f1\ -.
impliedly by
'--<~ lilll~I a Leht directly _ a Ihilr/ paJty has been _ expressly or
the third party" the parties to the contract cannot substitute a new contract for it or rescind or alter it
so as to effect the rights of the third penv"
77
"(C) subject to the provisions of the Indian Contract Act 1872/ by a person who/
though not a party to the contract, is entitled to a benefit thereunder or has an
interest therein. ,,113
However, the recommendations made by the Law Commission is still under

examination of the Government.
16.8 Amendments Prop~sed
16.8.1 In light of the above, the Committee proposes amendments to section 15 of the Act
which are more particularly enumerated in Chapter VIII. The proposed amendments seek
to confer upon certain third parties the right to obtain specific performance of a contract
and injunction. The proposed amendments take into account the justifications as well as
the criticisms that have been levelled against the applicability of the doctrine and have
while granting such power to certain third parties, kept intact the freedom of contracting
parties to opt out of the legislation.
16.9 Relief against forcible dispossession

16.9.1 The Committee also proposes amendments to Section 6 of the Act which provides for the
..
right of persons in possession of immovable property to sue on being dispossessed
without consent and otherwise than in due course of law.
16.9.2 On the question of the right of a person in joint-possession to sue under section 6, there
have been a few contradictory positions taken by Indian Courts and the Committee
proposesto settle the controversy by clarifying that the right under section 6 extends to a
joint-possessor.
16.10 Amendment Proposed
It is recommended that a clarification to the meaning and scope of "possession" be

introduced by way of an explanation to sub-section (1) to encompass persons in "actual
physical possession", joint possession as well as persons in "legal possession" of
immovable property. This is in line with the Supreme Court's judgment in Sadashiv
Shyama Sawant v Anita Anant Sawanf14 in the context of a landlord's right under Section
6 of the Act, under which it has been held that the right to sue under section 6 is not
restricted to the tenant in actual possession of immovable property but also extends to
the landlord who has legal possessionof such property and consequently an implied right
of entry in case of dispossession of the tenant. The Hon'ble Supreme Court in that case
113 Law Commission of India, 9th Report, 1958, para 22, page 67.
114 (2010) 3 SCC385
78
held that" dispossession of a tenant by a third party is dispossession of the landlord' and
that the word dispossessed in Section 6(1) must in certain cases include the right to
possession.The Supreme Court also interpreted the words "any person claiming through
him" under sub-section 6(1) to bring within its fold the landlord. The same principles
would apply for a licensor who grants use and occupancy rights to a licensee, but not
legal possession which always remains with the licensor. The licensor would not know
about being dispossessedas the licensee is in daily use and occupation of the premises.
16.10.1 Further, it is also proposed to amend clause (a) of sub-section (2) and permit the time of
.~
six months to begin from the date of "knowledge" of dispossession which better protects
the right of a person in legal possession to sue under section 6.
*******
.•.....
79
CHAPTER VII
Amendments required to address certain contracts
17. The Committee considered whether amendment was required in the Specific Relief Act,
1963 to address unconscionable contracts, unfair contracts, reciprocity in contracts etc.
However it concluded that the current provlslons in the Act deal with these issues
adequately, and no amendment was required.
17.1 Key provisions relating to unfairl unconscionable terms

in India
.17.1.1 Indian Contract Act, 1872 (Indian Contract Act)
The provisions of the Indian Contract Act can be broadly segregated in two parts:
Voidable contract and Void agreements.
17.1.2 Voidable contract

Section 19: Voidabi/ity of agreements· with free consent - When consent to an
agreement is caused by coercion, fraud or misrepresentation, the agreement is a contract
voidable at the option of the party whose consent was so caused.
Section 19A: Power to set aside contract induced by undue influence - When
consent to an agreement is caused by undue influence, the agreement is a contract
voidable at the option of the party whose consent was so caused.
17.1.3 The terms "coercion", "fraud", "misrepresentation", and "undue influence" are defined in
sections 15, 16, 17 and 18 of the Indian Contract Act and its following provisions provide
for void agreement:-
Section Provision
23 Agreement VOid,where the object or consideration is unlawful
24 Agreements VOid,if considerations and objects unlawful in part-
25 Agreement without consideration, void, unless it is in writing and registered, or
is a promise to compensate for something done, or is a promise to pay a debt
barred by limitation law.
26 Agreement in restraint of marriage, void
27 Agreement in restraint of trade, void
28 Agreement in restraint of legal proceedings, void
29 Agreements void for uncertainty.
30 Agreement by way of wager, void
56 Agreement to do impossible act - an agreement to do an act impossible in itself
is void.
80
17.1.4 Void agreements
Therefore, in essence, the Indian Contract Act segregates unfairness or unconscionability

in two parts:
(a) Where the fault lies with entering into the agreement; and
(b) Where the fault lies with the terms of the agreement itself.
In the first case the contract is voidable at the instance of the party who was coerced,
misrepresented etc. and in the latter case the agreement itself is void ab-initio and there
is no need or question of election as to violability by any of the parties.
17.2 Specific Relief Act, 1963
Section 20 (2) provides the cases where the Court can exercise discretion not to decree
specific performance. The Court is not bound to grant relief merely because it is lawful to
do so but it is discretionary and the discretion of the Court is not arbitrary but sound and
reasonableguided by judicial principles.
17.3 Law Commission Recommendations

..
e.
17.3.1 Law Commission in its 103rd Report (1984) on "Unfair Terms of Contract, 1984"
recommended inclusion of Section 67A in the Indian Contract Act:
"Section67A:
(1) Where the court, on the terms of the contract or on the evidence adduced by the
parties, comes to the conclusion that the contract or any part of it is
unconsdonable, it may refuse to enforce the contract or the part that it holds to be
unconscionable.
.
-"
(2) Without prejudice to the generality of the provisions of this section, a contract or
part of it is deemed to be unconsdonable if it exempts any party thereto from- (a)
the liability for willful breach of the contract, or (b) the consequences of
negligence. "
17.3.2 Law Commission in its Report on "Unfair (Proceduraland Substantive) Terms in Contracts
Report, 2006/1, proposed for the Unfair (Procedural and Substantive) Terms in Contract
Bill, 2006 - The proposed Bill segregated procedural and substantial unfairness and
provides that in case of such unfairness inter alia enforcement of contract may be
refused, terms of contract can be varied to remove unfairness, declaration of contract
being void/unenforceable.
81
;;
17.3.3 Difference between procedural and substantive unfairness
In case of procedural unfairness, the party who suffers disadvantage can at his option
insist on performance and that he may be put in position in which he would have been
without the disadvantageous term. The 2006 Law Commission Report identified following
as shortcomings in the Indian Contract Act and the Act on the issue:
"It will be seen that the sections of the Indian Contract Act 1872 which deal with
procedural unfairness, while they do deal with undue influence, coercion, fraud, and
misrepresentation and those of sec 20 of the Specific Relief Act 1963, do not deal with
other circumstances under which a contract is entered into which may lead to an unfair
advantage to one party, thereby making it unfair, such as:
(a) where the terms are not negotiated or
(b) where they are contained in standard terms of contract or
(c) where the terms are in small print or are camouflaged and not transparent
and other situations.
These and other aspects, in our opinion, require to be considered in depth for the
purpose of 'procedural' fairness.
LikeWise, in the matter of 'substantive' unfairness, the sections 10, 21 to 30 of the

Contract Act deal with several types of 'void' contracts and sec 20 of the Specific Relief
Act 1963 with other situations, but not with contracts or terms which are otherwise
oppressive, harsh or cast unreasonable burden on one of the parties. Such provisions
requre to be considered and added.
Nor does see 67A as proposed in the 103rd Report of the Law Commission (1984) deal
with the other 'procedural' and 'substantive' aspects of unfairness which today have been
brought into the law in several countries. We have already segregated the 'procedural'
unfairness provisions in other countries from the 'substantive' unfairness provisions in
those countries in Chapters VIII and IX, with a view to consider which of them can be
brought into our law with such modifications as may suit our country.
It is, therefore, proposed to deal with certain new provisions regarding unfairness, both
procedural and substantive, which require. to be incorporated into the statute law, in
addition to what are contained in the Contract Act 1872 and the Specific Relief Act 1963
and such general provisions of unfairness, procedural and substantive, will be dealt with
in Chapter XI. "
82
17.4 Provisions in some foreign jurisdictions
17.4.1 United Kingdom
(A) Unfair Contract Terms Act, 1977 (UCTA)
Is an act to impose further limits on the extent to which under the law of England
and Wales and Northern Ireland civil liability for breach of contract, or for
negligence or other breach of duty, can be avoided by means of contract terms
and otherwise, and under the law of Scotland civil liability can be avoided by
means of contract terms.
Section 2. Negligence liability:

-~
(i) A person cannot by reference to any contract term or to a notice given to
persons generally or to particular persons exclude or restrict his liability for
death or personal injury resulting from negligence.
(ii) In the case of other loss or damage, a person cannot so exclude or restrict
his liability for negligence except in so far as the term or notice satisfies the
requirement of reasonableness."
,-' ..,
Section 3. Liability arising in contract:
(i) This section applies as between contracting parties where one of them
deals as consumer or on the others written standard terms of business.
(ii) As against that party, the other cannot by reference to any contract
term-
(a) when himself in breach of contract, exclude or restrict any
liability of his in respect of the breach; or
.'
(b) claim to be entitled-
1. to render a contractual performance substantially different
from that which was reasonably expected of him, or
2. in respect of the whole or any part of his contractual
obligation, to render no performance at all,
except in so far as.(in any of the cases mentioned above in this subsection)
the contrect term satisfies the requirement of reasonableness.
(6) Unfair Terms in Consumer Contracts Regulations, 1999 (UTCCR)
Regulation 7 of the UTCCRstates that a seller or supplier shall ensure that any
writbm torm of ., I;Qntract rs expressed in plain, intelligible language. Schedule 2
of the LrrCCR lays down certain criteria to determine unfair terms.
83
"
Schedule 2 of the UTCCR,J~9>genum~rates in section 1, a number of guidelines
for judging unfairness. All the clauses (a) to (q) refer to substantive unfairness.
These deal with the following:-
(a) exclusion or limiting liability of a seller or supplier in the event of death of a

consumer or personal injury to him on account of acts or omissions of the
seller or supplier,
(b) inappropriately excluding or limiting legal rights of consumer in the event of
breach,
(c) imposing conditions which depend on the sole will of the seller or supplier,
(d) retention of consumer's money without delivering goods,
(e) requiring the consumer to pay disproportionately upon the latter's breach,
(f) authorizing the seller or supplier to breach the contract unilaterally without
a corresponding right given to consumer,
(g) enabling the seller or supplier to terminate the contract according to his
discretion,
(h) automatically extending a contract of fixed duration,
(i) irrevocably binding the consumer to terms for which he had no opportunity
to become acquainted,
(j) enabling the seller or supplier to alter the terms of the contract unilaterally
without a valid reason,
(k) enabling the seller or supplier to alter unilaterally the characteristics of the
goods or service to be provided,
(I) allowing the seller or supplier to unilaterally increase the price of goods,
(m) giving a unilateral right to the seller or supplier to determine whether the
goods or services ere in conformity with the contrea;
(n) limiting the seller's or supplier's obligation in respect of commitments
undertaken by their agents,
(0) obliging the consumer to perform the obligations even if seller or supplier
does not,
(p) giving the seller or supplier the opportunity to transfer his rights or
obligations to the detriment of the consumer,
(q) excluding the rights of the consumer to take legal action.
17.4.2 United States
The general doctrine of unconscionability was developed in the USA largely through
judicial decisions. The doctrine of unconscionability has also been included in the Uniform
Civil Code, though it was applicable only to contracts relating to sales of goods. It has
been applied by analogy or as a general doctrine to other kinds of contract also.
84
(A) Uniform Commercial Code of USA
Section 2.302:
''If the court as a matter of law finds the contract or any clause of the contract to
have been unconscionable at the time it was made, the court may refuse to enforce
the contract, or it may enforce the remainder of the contract without the
unconscionable clause, or it may so limit the application of any unconscionable clause
as to avoid any unconscionable result"
(8) Restatement of Law (second edition)

<::
Section 208:
''If a contract or terms thereof is unconscionable at the time the contract is made a
court may refuse to enforce the contract, or may enforce the remainder of the
contract without the unconscionable term, or may so limit the application of any
unconscionable term as to avoid any unconscionable result. N
~
•. /
17.4.3 Australia
(A) The Australian Consumer Law

'-""
,J r. section 20:
'~ person must not, in trade or commerce, engage in conduct that is unconscionable
within the meaning of the unwritten law, from time to time. "
Note: A pecuniary penalty may be imposed for a contravention of this subsection":
Section 21 prohibits unconscionable conduct in connection with the supply or

acquisition of goods or services by or form a person (other than a listed public
company). It is not intended to be 'limited by the unwritten law relating to
unconscionable conduct' and relevant factors extend beyond 'consideration of the
' •••
_t' circumstances relating to formation of the contract' to the terms of the contract
...../
themselves (substantive -unconsdonable conduct). Section 22 sets out a range of
factors a Court may consider when determining whether conduct is unconscionable.
..,., (8) The Contract Review Act, 1980 (New South Wales)
•...
The Contract Review Act, 1980 ("CRA") protects persons from using unjust contracts
-- or provisions. Section 6(2) states that relief under the Act is not available so far as
contracts entered into in the course of or for the purpose of a trade, business or
profession carried on or proposed to be carried on by the person, other than a
farming undertaking in New South Wales.
85
;.
Section 7:
''Principal relief:
. (1) Where-the Court finds a _contract or a provision of a contract to have been
unjust in the circumstances relating to the contract at the time it was made, the
Court mey; if it considers it just to do so, and for the purpose of avoiding as far
as practicable an unjust consequence or resuk; do anyone or more of the
following:
(a) it may decide to refuse to enforce any or all of the provisions of the Contract,
(b) it may make an C?rderdeclaring the contract void, in whole or in part
(c) it may make an order varying, in whole or -ln part any provision of the
contract,
(d) it mey; in relation to a land instrument; make an order for or with respect to
requiring the execution of an instrument that:
(i) varies, or has the effect of varying, the provisions of the land instrument; or
(ii) terminates or otherwise affects, or has the effect of terminating or otherwise
affecting, the operation or effect or the land instrument.
(2) where the' Court makes an order under subsection (l)(b) 'or (c), the
declaration or variation shall have effect as from the time when the contact was
made or (as to the whole or any part or parts of the contract) from some other
time or times as specified in the order.
(3) The operation of this section is subject to the provisions of section 19'~.
Section 9: Matters to be considered by Court:
(1) In determining whether a contract or a provision of a contract is unjust in the

circumstances relating to the contract at the time it was made, the Court shall have
regard to the public interest and to all the circumstances of the case, including
such consequencesor results as those arising in the event of:
(a) compliance with any or all of the provisions of the contract, or
(b) non-compliance with, or comrsventonot; any or all of the provisions of the
contract.
(2) Without in anyway affecting the generality of subsection (1), the matters to
which the Court shall have regard shall, to the extent that they are relevant to' the
Circumstances,including the following:
(a) whether or not there was any material inequality in bargaining power
between the parties to the contract,
(b) whether or not prior to or at the time the contract was made its provisions
were the subject of negotiation,
86
(c) whether or not it was reasonably practicable for the party seeking relief under
this Act to negotiate for the alteration of or to reject any of the provisions of the
contract,
(d) whether or not any provisions of the contract impose conditions which are
unreasonably difficult to comply with or not reasonably necessary for the
protection of the legitimate interests of any party to the contract,
(e) whether or not any party to the contract (other than a corporation) was not
reasonably able to protect his or her interests/ or any person who represented
any of the parties to the contract was not reasonably able to protect thelnterests
of any party whom he or she represented, because of his or her age or the state
of his or her physical or mental capacity,
(f) the relative economic circumstances/ educational background and literacy of:
J (i) the parties to the contract (other than a corporatton). and
(ii) any person who represented any of the parties to the contract,
(g) where the contract is wholly or partly in writing/ the physical form of the
contract, and the intelligibility of the language in which it is expressed.
(h) whether or not and when independent legal or ,other expert advice was
obtained by the party seeking relief under this Act,
(i) the extent (if any) to which the provisions of the contract and their legal and
...-/
practical effect were accurately explained by any person to the party seeking
relief under this Act, and whether or not that party understood the provisions and
their effect,
(j) whether any undue influence/ unfair pressure or unfair tactics were exerted on
or used against the party seeking relief under this Act:
(i) by any other party to the contract, by any person acting or apPearing or
purporting to act for or on behalf of any other party to the contract, or
(ii) by any person to the knowledge (at the time the contract was made) of
any other party to the contract or of any person acting or appearing or
._. purporting to act for or on behalf of any other party to the contract,
(k) courses of dealing to which any of them has been a party, and
(I) the commercial or other setting/ purpose and effect of the contract.
~
(3) For the purposes of subsection (2)/ a person shall be deemed to have
.--- represented a party to a contract if the person represented the party, or assisted
-::»
the party to a significant degree/ in negotiations prior to or at the time the contract
was made.
.:» (4) In determining whether a contract or a provision of a contract is unju~ the
COurtshall not have regard to ay in{~ W~mm [lMlhces ~at were

not reasonably foreseeable at the time the contract wasmade.
.../
87
:;0
(5) In determining whether it is just to grant relief in respect of a contract or a

provision of a contract that is found to be unjust, the Court may have regard to the
conduct of the parties to the proceedings in relation to the performance of the
contract since it was made. "
17.4.4 Canada
The Ontario Business Practices Act, 1990 deems "an unconscionable consumer
representation" to be an unfair practice. Unconscionability would include-
(i) procedural matters, such as-

physical infirmity, ignorance, illiteracy, and inability to understand the language of an
agreement;
(ll) that the price grossly exceeds the price at which similar goods or services are readily
available to like consumers;

(Hi) that the proposed transaction is excessively one sided in favour of someone other
than the consumer; and

(iv) that the terms or conditions of the proposed transaction are so adverse to the
consumer as to be inequitable.
..
t.
17.4.5 New Zealand
The Sale of Goods Act, 1908
Section 53 - Specific performance

(1) In an action for breach of contract to deliver specific or ascertained goods the court
may, if it thinks fit, on the application of the plaintiff, by its judgment direct that the
contract shall be performed specifically, without giving the defendant the option of
retainin!J.the goods on payment of damages.
(2) The judgment mey be unconditional, or upon such terms and conditions as to
damages, payment of the price, and otherwise, as the court deems just; and the
application by the plaintiff may be made at any time beforejudgment"
The Contractual Remedies Act, 1979
Section 9. Power of court to grant relief

(1) When a contract is cancelled by any party, the court, in any proceedings or on
application made for the purpose, may from time to time if it is just and practicable to do
so, make an order or orders granting relief under this section.
(2) An order under this section may-
(a) vest in any party to the prOceedings, or direct any such party to transfer or
assign to any other such party or to deliver to him the possession of, the whole
88
or any part of any real or personal property that was the subject of the contract
or was the whole or part of the consideration for it:
(b) subject to section 6, direct qny party to the proceedings to pay to any other
such party such sum as the court thinksjust:
(c) direct any party to the proceedings to do or refrain from doing in relation to
any other party any act or thing as the court thinksjust
(3) Any such order, or any provision of it may be made upon and subject to such terms
and conditions as the court thinks fit not being in any case a term or condition that
would have the effect of preventing a claim for damages by any party. "
17.5 Analysis
17.5.1 Section 23 of the Indian Contract Act
(i) Section 23 of the Indian contract Act does not speak of 'unconscionability' as one of
the grounds. In each of the cases mentioned in the said section, the consideration or
object of an agreement is said to be unlawful. Every agreement of which the object
or consideration is unlawful is void.
~<
(ii) The last clause in section 23 provides that no man can lawfully do that which is
-..; opposed to public policy. It comprehends the protection and promotion of public
welfare. It is a principle of la'f' under which freedom of contract or private dealings
are restricted bythe law for the good of the community.
./
(iii) The Indian Contract Act does not define the expression'public policy' or what is meant
by being 'opposed to public policy'. From the very nature of things, the expressions
"public policy", "opposed to public policy", or "contrary to public policy" are incapable
of precise definitions.
~1
17.5.2 The unfairness of contractual terms by 'authorities' which fall within the meaning of the
word 'State' in article 12 of the Constitution of India figured in several service matters
before the Supreme Court. The irrationality or arbitrariness of clauses in such contracts
were considered in the context of article 14. The apex Court in 1986 in Central Inland
Water Transport Corporation Ltd. v. Brojo Nath Ganguly15made an attempt to broaden
the applicability of unconscionability outside the boundaries laid down by section 16 of
the Indian Contract Act. The Court read the principles of unconscionable bargain outside
the four corners of section 16 of the Indian Contract Act and held that such a contract
was void under section 23 of that Act. The Court emphasized on the requirement of
'reasonableness' in the terms of the contract by discussing three principles namely
'unconscionability', 'distributive justice and unreasonableness' and 'inequality of
bargaining power'.
1lS
1-
AIR 1986 SC 1571
89
..
17.5.3 A question also arose here as to under which head would an unconscionable bargain fall
under the Contract law? If it fell under the head of undue influence, it would be voidable,
but if it fell under the head of being opposed to public policy, it would be void. The Court
answered that such contracts would rarely be induced by undue influence, even though
at times they were between parties one of whom held a real or apparent authority over
the other. Very often in vast majority of cases such contracts were entered into by the
weaker party under pressure of circumstances, generally economlc, resulting in inequality
of bargaining power. Such contracts did not fall within the four corners of the definition
of 'undue influence' given in section 16 (1) of the Indian Contract Act, and ought not to
be held VOidable, because it would compel each person with whom the party with
superior bargaining power had contracted, to go to the Court to have the contract
adjudged voidable. This would only result in multiplicity of litigation which no Court
should encourage. Such a contract or such a clause in the contract ought, therefore to be
adjudged void as being opposed to public policy under Section 23.
However, the Court then excluded the application of the principle: (i) where the
bargaining power of the contracting parties is equal or almost equal; (ii) where both
parties are businessmenand the contract is a commercial transaction.
17.5.4 The existing provisions of the Indian Contract Act show that the legal control under the
said provisions is also not quite adequate to come to the rescue of the weaker party
against harsh contracts. The judiciary in India has, in several cases, indeed come to the
rescue of parties from the menace of unreasonableterms in standard form contracts.
17.6 Section 20 (1) of the Specific Relief Act, 1963
This section provides that the jurisdiction to decree specific performance is discretionary
and the Court is not bound to give such relief merely becauseit is lawful to do so. Such
discretion is, however, not to be exercised arbitrarily. It has to be exercised on sound and
reasonable basis.
17.7 Section 20 (2) of the Specific Relief Act, 1963
The section provides that the Court will not properly exercise its discretion to decree
specific performance or, in other words, the exercise of discretion to decree specific
performance will be improper, if such decree will confer an advantage upon the plaintiff
which would be unfair or unjust or inequitable, becauseeither -
(i) Terms of the contract are unjust or unfair or unreasonable; or
(ii) The conduct of the parties, at the time when they entered into the contract, has
been such as makes the advantage unfair; or
90
(iii) The other circumstances under which the contract was entered into render the
performance unequitable.
17.8 In sum, the unfair advantage which the decree for specific performance will confer upon
the plaintiff must be attributable to either-
(i) the improper or unjust terms of the contract; or
(ii) the improper conduct of the parties at the time when .they entered into the contract;
or
(iii) the other circumstances under which the contract was entered into.
17.9 Mere inadequacy of consideration or the mere fact that the contract is onerous to the
defendant or improvident in its nature would not be deemed to constitute an unfair
advantage or hardship within the meaning of clauses (a) and (b) of sub-section (2) of the
Specific ReliefAct, 1963.
Thus Section 20 (2) of the Specific Relief Act, 1963 provides for cases where the
Court may exercise its discretion not to decree specific performance.
~./ 17.10 Recommendations
17.10.1 The Committee considered whether to specifically cover unfair or unconscionable terms,
--- a separate legislation may be enacted on the lines of the Unfair Contract Terms Act, 1977
prevalent in the UK and Singapore.
17.10.2 However, the current provisions of the Act, viz. Section 20 (1) specifically grant vide
discretion to the Court whilst decreeing specific performance. Hence, no separate
provision dealing with performance in case of unfair or unconscionable terms is required
these current provisions are now proposed to be incorporated into section 14 as grounds
for refusal of relief.
*******
91
;
CHAPTER VIII
Recommendations for Amendment with brief explanation

18. Pursuant to the analysis of various provisions of the Specific Relief Act, 1963, and in the
light of opinions/judgments of the Supreme Court and High Court as also laws of other
Countries on the subject, the Committee recommends the following amendments to the
Specific Relief Act, 1963:-
Recommendations for Amendments in the Specific Relief Act, 1963
18.1 Section 1 - No change required.

[NOTE: The Committee considered whether in sub-section (2) the words "except the
State of Jammu and Kashmir" be deleted, but did not do so in view of Article 370 of the
Constitution of India]
18.2 In section 2
(i) Add as SUb-section(aa) "Public Works Contract" shall mean a contract entered into
by or on behalf of Central, State or local governments, or instrumentalities of any
of these, for creation, upgradation, operation or maintenance of infrastructure •
assets or services, such as roads, water supply, .electricity, sewerage treatment,
construction of public buildings, highways, bridges, ports, schools, airports, urban
development and railways, in each case being other than for self-consumption;
(ii) Add as sub-section (e) "ee) except where specifically provided, the expression
"contract" shall include "Public Works Contract";
(lll) Add as sub-section (f) "(f) the word "Court" shall include a tribunal (including
statutory and arbitral tribunals constituted under any law) having jurisdiction to
adjudicate matters involving the performance or compensation for breach of a
contract."
(iv) Renumber the current sub-section (e) as "SUb-section(g)."
[NOTE: 1. It is recommended that Public Works Contracts be deflned in the Act as a

separate category of contracts, so that Courts always consider the underlying public good
and welfare considerations involved while granting reliefs. Thisis important as when such
contracts are not performed in a timely manner there is public waste having far reaching
consequences.
2. It is clarined that this Act will also apply to arbitral and other tribunals, in order to
avoid any controversy on this count.].
92
18.3 Section 3 - No change is required.
18.4 In section 4, after the words "civil rights" the words "and rights under Public Works _
Contracts may be inserted".
[NOTE: This is to facilitate enforcement of Public Works Contracts.]
18.5 Section 5 - No change is required.
18.6 In section 6
(i) An Explanation may be added after sub-section (1) "Explanation: For the purpose of
sub-section (1), "possession" shall mean physical, legal or joint possession;"
(ii) In sub-section 2(a), the words "knowledge of" after the words "date of" may be
inserted;
(iii) Sub-section (5) may be substituted as follows:-
"(5) The suit shall be decided within a period of twenty four months from the
date of service of notice to the Defendants, which period may be extended by
~.
the Court for reasons recorded for grant of such extension. It is clarified that
mere consent of the parties shall not be adequate reason for granting an
.... extension."
.,
[NOTE: 1. This is particularly relevant in view of situations such as in Maharashtra, where
under the Maharashtra Rent Control Act, 1999, a licensee under a leave and license
agreement is by law in use and occupation, and not physical possession of premises. Yet
the licensor, who is in legal possession, is not overseeing the property on a daily basis.
Where one or more persons in joint possession are dispossessed and al/ choose not to
bring an action under this section, the right should be available to one or more of the
.-...-
persons who were in joint possession. On the latter point there are judgements. in the
'.....-'
matters of Ajiman Bibi v. Reasat Sheikh,116Ghooti v· Sitku,117Ramchandra Fate v.
.../ Shridhar,118 Ballabh Das v. Gaur Das,119but there are conflicting judgments on this issue
and to remove doubts, the explanation can be added.
2. Time to begin from the date of knowledge is again intended to protect the right of a
person in legal possession (as. against one in daily use and occupation) to sue under
.:>
section 6.
-
~./
11'AIR 1916 Cal 562
J 117AIR 1917 Nag 31
110 Itl1110:1:) "'-1 J.J.~
119 AIR 1940 All 2.61
./ 93
.-
3. Being a summary remedy, a cap on the time period within which suits shall be decided
by the Court is recommended, similar to Section 29-A of the Arbitration & Conciliation
Act 1996.}
18.7 Sections 7 and 8 - No change is required.
18.8 Retitle Chapter II as "ENFORCEMENTOF CONTRACTS"
[NOTE: This describes the purpose of this Chapter more directly, indicating that the norm
should be enforcement of a contract, as against compensation for breach being the
primary remedy, and also because it now includes the new remedy of substituted
performance.}
18.9 In section 9
(i) the current section may be as sub-section (1)
(ii) Sub-section (2) may be substituted as foltows:-
"(2) In cases involving specific performance of a Public Works Contract, the

remedies shall be confined to the applicable law governing the Public Works
Contract and the specific terms of such Public Works Contract:"
[NOTE: By restricting the defences that may be available to the person against whom
relief is claimed to the law that parties have agreed will govern the contract and the
specific terms agreed to by the parties, specific performance of contract as intended by
the parties will become the primary solution where public interest is involved, and
extraneous matters which usually delay the grant of specific performance will not be
taken into account by the Court.}
(Hi) The caption before Section 10 "CONTRACTSWHICH CAN BE SPECIFICALLY

ENFORCED"to be deleted.
[NOTE: All headings at this level in Chapter II be deleted as it is proposed that specific
performance will be available as the norm.}
18.10 Section 10
(i) Tltle of section may be retitled as "Speciflc performance and injunctions in respect of
contracts";
(ii) Section 10 may be substituted as follows:-
"(1) Notwithstanding anything contained in any other law for the time being in
force, a party to a contract, or any person so entitled under Section 15, shall
be entitled to specflc performance of a contract or injunction, unless such
94
relief can be refused under sections 14, 16 or 41: Provided that with respect
to enforcement of a Public Works Contract the Court shall, as far as
practicable, ensure continued provision of the relevant service being subject
matter of such PublicWorks Contract on such terms as it deems fit.
(2) Specific performance or injunction in respect of a contract may be enforced,
when the act agreed to be done is in the performance wholly or partly of a
trust."
[NOTE: 1. This makes it clear that the remedy shall be of specific perfonnance unless
there is a specific reason for refusal under law, which requires the defendant to justify
the refusal.
2. Discretion is maintained in caseof a Trust, incorporating the current Section 11(1).
3. Given the importance of PubliC Works Contracts, provision of the service should
continue in the public interest]
18.11 Section 11 may be deleted.
[NOTE: Sub-section (1) is incorporated in Section 10, and sub-section (2) is incorporated
in Section 14 in order to make Sections 10 and 14 exhaustive}.
18.12 Sections 12 and 13, no change is required.
18.13 The following amendments are suggested to Section 14.

(i) The caption before Section 14 "CONTRACTS WHICH CANNOT BE SPECIFICALLY
ENFORCED"may be deleted.
(ii) Marginal note of section 14 may be retitled "Power of the Court to refuse specific
-0'
performance or injunction"
-../ (iii) Sub-section (1) may be substituted as follows:-
"(1) The Court may refuse to grant specific performance or injunction in the
following cases, and in no others:
(a) Where the contract has become incapable of performance;
<::
(b) Where the party or person seeking spedflc performance can reasonably
-:»: obtain substituted performance from another source on comparable
terms, including price and time;
(c) Where the contract runs into such minute or numerous details, or its
J
performance is so dependent on the personal qualifications or volition of

~
the parties, or otherwise from its nature is such, that the Court cannot
=""~ -r~wffim~~ijill~ ~l~r~a\

(d) Where a contract is in its nature determinable;
krms;
.-' 95
~
(e) Where the performance of the act or promise involves the performance of
a continuous duty which the Court cannot supervise;
(f) Where the terms of the contract or the conduct of the parties at the time
of entering into the contract or the other circumstances under which the
contract was entered into are such that the contract, though not voidable,
gives the plaintiff an unfair advantage over the defendant;
(g) Where the performance of the contract would .involve some hardship on
the defendant which was not foreseeable at the time of entering into the
contract, whereas its non-performance would involve no such hardship on
the plaintiff;
(h) Where a contract is made by a trustee in excess of his powers or in
breach of trust; or
(i) Where the contract expressly restricts the right of the plaintiff to such
reliefs.
Explanation : It is hereby clarified that -
(i) mere inadequacy of consideration, or any rise or fall in prices or market
value or any change in circumstances after entering into the contract
unless otherwise agreed in the contract, or the mere fact that the contract
. is onerous to the defendant ori-improvident in its nature, shall not be
deemed to constitute an unfair advantage within the meaning of clause (f)
or hardship within the meaning of clause (g).
(ii) The question whether the performance of a contract would involve hardship
on the defendant within the meaning of clause (g) shall, except in cases
where the hardship has resulted from any act of the plaintiff subsequent to
the contract, be determined with reference to the circumstances existing at
the time of entering into the contract.
(2) The Court shall not grant an injunction if its grant would impede or delay
the progress or completion of any Public Works Contract,
(3) The Court shall not refuse specific performance of a contract for the
construction of any building or the execution of any other work on land if:
(i) the building or other work is described in the contract in terms
sufficiently precise to enable the Court to determine the exact nature of
the building or work;
(ii) the plaintiff has a substantial interest in the performance of the contract
and the interest is of such a nature that compensation in money for non-
performance of the contract is not an adequate relief; and
96
(Hi) the defendant has, in pursuance of the contract, obtained possessionof
the whole or any part of the land on which the building is to be
constructed or other work is to be executed.
(4) Refusal of the relief of specific performance or injunction shall not
prevent the Court from granting compensation in substitution of, or in
addition to, such relief.
(5) The Court shall not refuse to any party specific performance of a contract
merely on the ground that the contract is not enforceable at the instance
of the party.
(6) Where any proceedings are initiated for specific performance of a Public
Works Contract, the same may be transferred by the Court to the
competent statutory authority having adjudicatory powers, if any, with
suitable directions regarding the time within which such authority shall
dispose of the proceedings. Provided that if there is no such authority,
the Court may grant specific performance in respect of a Public Works
Contracts -
(a) running into minute or numerous details, or which from its nature
is such that the Court would not otherwise enforce specific
performance: or ;
....J
(b) invoking the performance of a' continuous duty, which the Court
cannot supervise,
and the Court may direct implementation and require the performance,
or supervision of performance, as the case may, to be monitored by an
appropriate specialized body having the relevant expertise, subject to
hearing such specialized body and taking into account its ability to
implement such directions and the terms and conditions on which it shall
-"-.-'
do so. Such directions may include the requirement of the relevant

~'
Government, or instrumentality of the State, to bear reasonable costs of
such specialized body.
[NOTE: 1. The grounds of refusal are stated together in one section, and it is clarified
<:'
that there shall be no other grounds for refusal of performance.
---
2. The provisions incorporate the relevant proVisions of Sections 14 and 20 of the Act;.
'--./
clauses l(a) and (b) follow the language of PECL and UNIDROlT, clause l(g)
<::
incorporates an objective test of foreseeability, clause l(h) incorporates clause 11(2) of
-/
the Act clause l(i) allows parties to restrict by contract their remedie; EypJ;m~tiQ(l 1
fu=r-- «~gmron Uld[ ~ ~~ ~OO~III~ ~~m AP malet value after making of the
J 97
contract shall not affect the relief, sub-section (6) ensures that public works shall not be
hindered, while taking into account relevant factors for implementation.
3. There should be quick, equitable, efficient and enforceable dispute resolution

mechanism for Public Works / Projects. These contracts need clearly articulated dispute
resolution structures that demonstrate commitment of all stakeholders and provide
flexibility to restructure within the commercial and financial boundaries of the project,
backed by-
(a) Sector specific monitOring and Regulatory Committees set up as a platform to

periodically revisit contractual and commercial relationships between parties. Such
committees can perfonn if called upon by the parties after a minimum period of
three to five years. Only officers who have decision-making powers may be
enrolled in these committees.
(b) For effective and speedy dispute resolution independent sector regulators are
essential.
(c) The monitoring and regulatory committee and the dispute resolution mechanism
must be independent of involvement in the public sector.
4. There should be a robust regulatory dispensation to address such

developments, to avoid risk of mothballing incomplete project{s) or complete projects
with lenders fund and then mothball it, thus adversely affecting the economy, consumers
and the investor sentiment]
18.14 After section 14, section 14A may be inserted as follows:-

"14A: Statements of opinion and expert evidence-
(1) Unless otherwise agreed by the parties, the Court may-
(a) appoint one or more experts to give an opinion on specific issues
determined by the Court;
(b) request the parties to nominate the expert/s; and
(c) require a party to give the expert relevant information or to produce, or to
provide access to, any relevant documents, goods or other property for
inspection.
(2) An expert witness shall not be appointed by the Court unless the witness
consents to act. A witness so appointed shall be informed of the witness' duties by
the Court in writing.
(3) Unless otherwise agreed by the parties, if a party so requests or if the Court
considers it necessary, the expert shall, after delivery of his written or oral
98
opinion, participate in an oral hearing where the parties have the opportunity to
put questions to him and to present expert witnesses in order to testify on the
polnts at issue.
(4) Unless otherwise agreed by the parties, the expert shall, on the request of a
party, make available to that party for examination all documents, goods or other
property in the possession of the expert which he relied upon while giving his
opinion.
(S)Expert witnesses so appolnted are entitled to reasonable compensation in
whatever sum the Court may allow. The compensation thus fixed shall be paid by
the parties in such proportion and at such time as the Court directs, and
. thereafter charged in like manner as other costs.
(6) Nothing in this section limits the parties calling expert witnesses of their own
selection. "
[NOTE: Courts should have power to summon expert evidence not only on facts, but also
for their opinions on technical/scientific issues. The Indian Evidence Act 1872, and
Code of Civil Procedure, 1908, do not have specific provisions CJuthorisingCourts to seek
'-"
expert assistance at the Court's own instance on technical/scientific issues requiring
specialized knowledge / expertise from expertsIn various fields. Considering the growing
number of transactions involving complex i tdhnical issues requiring specific technical/
scientific understanding / knowledge, in addition to. the authority to take evidence on
facts, for effective redressal of the disputes it would be appropriate to make provisions
empowering Courts to examine experts in relevant fields. Section 26 of the Arbitration &
Conciliation Act 1996, has express provisions empowering the Arbitral Tribunal to
'---
appoint experts and it is recommended that the same power be expressly conferred on
Courts.]
...•/
'- 18.16 The caption before Section 15 "PERSONS FOR OR AGAINST WHOM CONTRACTS MAY BE
SPEOFICALLY ENFORCED" to be deleted.
18.17 Section 15 may be numbered as sub-section "(1)" and after so renumbering, in sub-
"..-
section (1),-
(i) add in the beginning of the Section the words "or injunction" after the words
. ....-'
"Specific performance of a contract"
eii) after sub-section (a) following may be inserted:-
.~. "(aa) any person, where the contract expressly provides that he is entitled to
do so;
(ab) anv nsrcon ~ "L, w•• wnuuu ~U~ltSW illrnm~[~ ~~~~I
..--' 99
.-..
Provided that sub-section (ab) shall not apply if on a proper construction

of the contract it appears that the parties did not intend the contract to
be enforceable by such person;"
(iii) In sub-section (b) after the words "party thereto", the words "or third party
referred in clause (aa)" may be inserted;
(iv) At the end of the section the following proviso may be inserted:-
"Provided further that the persons mentioned in clauses (aa) and (ab) of
sub-section (1) must be expressly identified in the contract by name or as
a member of a class, or as answering a particular description, but need not
be in existence when the contract is entered into:
Provided also that the entitlement to obtain specific performance conferred
by clauses (aa) and (ab) of sub-section (1) shall be enforced in accordance
with all other terms of the contract, and shall be subject to defences
available to a party to the contract against whom specific performance or
an injunction is sought."
(v) Sub-section (2) may be substituted as follows:-
"(2) Nothing in this section confers a right of specific performance of a
contract on a person mentioned in clause (ab) of sub-section (1) in case of
a Public Works Contract".
[NOTE: The 9th Law Commission report recommended. that a general provision be
included which enables a third party to a contract who is entitled to a benefit thereunder
or has an interest therein to be entitled to sue upon the contract and ask for specific
relief. New clauses (aa) and (ab) incorporate two new categories of persons who can
obtain specific performance of a contract While the Contracts(Rights of Third Parties) Act
1999 of the United Kingdom does not include the word "dlrect": it is proposed to narrow
the scope of the section to include only direct beneficiaries under a contract and to
exclude scope of interference by distant indirect beneficiaries not contemplated by the
contracting parties. The proviso to clause (ab) keeps intact the freedom of the
contracting parties by giving t~em the right under the contract to exclude any third
parties.]
18.18 Section 16 may be numbered as sub-section "(1)" and after so renumbering, in sub-
section (1),-
(i) after the words "Specific performance" the words "or injunction in respect" may
be inserted;
(ii) SUb-section(a) may be deleted;
(iii) in sub-section (c) the words "aver and" may be deleted;
(iv) at the end of Explanation (i) following proviso may be inserted:-
100
"Provided that where a party seeks interim relief, the Court shall before granting
such relief, put such party to appropriate terms to protect the interests of the
other party, unless there are reasons stated in the order granting such relief for
not putting the party to terms";
(v) explanation (ii) may be deleted;
(vi) after sub-section (1) following sub-section may be inserted:-
"(2) Nothing in this section shall prevent the Court from granting relief by way of
compensation."
{NOTE: These are also grounds of refusal of reliefs, and may be incorporated in section
14, which will also clarify that this does not require mutuality. Sub-section (a) is deleted
since specific performance is now recommended to be the general remedy. Sub-section
(c) is brought in tune with current case-law. Clause (i) of the Explanation compels a Court
to put the party seeking reliefs to terms, or to give rei/sons for not dOing so. The intent is
to avoid frivolous litigation which obstructs performance and takes advantage of the
delays in Courts. The addition of sub-section (2) is to clarify that compensation can be
granted even if specific relif!f is refused under this Section.]
18.19 In sections 17 and 18, no change is required.
18.20 In section 19.after the words "specific performance", the words "or injunction in respect"
may be inserted.
18.21 Section 20 may be deleted.
[NOTE: All grounds for grant or refusal of specific performance are incorporated into
section 14 as proposed in this amendment Hence section 20 should be deleted]
"
18.22 A new Section 20A shall be inserted as follows:
"Section 20A. Compensation pursuant to substituted performance-

,.
(1) Notwithstanding anything contained in the Indian Contract Act, 1872, and
unless a different intention appears from the terms of the contract, when a
contract is broken, the party who suffers such breach shall be entitled, without
intervention of the Court, and at the cost and expense of the party committing
breach, to perform it himself or through any third person, and to recover from
the party committing breach the expenses and the. additional cost actually
incurred, spent or suffered:
Provided the: the party who suffe~ by the hmo", ~ij~\[\\tij~ ~~

m ~R~IJAt
~~W~~~
;.L,~\ij 100 \~~~~ ~M~l~~na~
contract, and the party in breach refuses or fails to perform the contract;
101
~~
Provided also that the party who suffers by the breach has performed it
himself or by engaging the third party within a reasonable time after giving
notice as per the above proviso,-and the amount of such expense or additional
cost is reasonable;
Explanation - Where the contract is in writing, and where the party who suffers
by the breach has stated in the notice mentioned in the proviso above the
estimate of such expense or costs, the amount of expense or costs stated in such
notice to the extent actually incurred, spent or suffered shall be presumed to be
reasonable.
(2) Nothing in sub-section (1) shall prevent the party who suffers by the
breach from claiming compensation for loss caused under Section 21 or under
the Indian Contract Act 1872.
(3) The party that has performed himself or through any third person after
giving notice as above shall not be entitled to claim specific performance or
injunction to enforce the perfonnance of that contract."
[NOTE: This enables a party to perform the contract himself or through another person in
case of breach by the other party, and to claim the amount he has actually suffered.
Such claim is independent of the provisions of section 21 and the Indian Contract Act
which requires the tests of contemplation and mitigation. The defendants' interests are
protected as he shall have an opportunity of performing, and the plaintiff can claim the
amount only if it is reasonable. This remedy is in the alternative to specific performance Cl
\.;:
or injunction.]
__ b
18.23 In section 21,-

(i) in sub-section (1) after the words "specific perfonnance", the words "or injunction
in respect" may be inserted.
(ll) In sub-section (2), for the words "decides that", the words "refuses the relief of"
may be substituted; and the words "ought not to be granted" may be deleted; also
after the word "but" the words "decides that" may be inserted.
(iii) At the end of sub-section (4), the words "and the Court may assess such
compensation as on the date the suit-was filed, unless another date is decided for
reasons recorded by the Court" may be added and following explanation may be
inserted:-
"Explanation: This sub-section does not preclude the grant of interest on the
compensation awarded, nor the quantification of compensation being done on any
date prior to judgement as long as the circumstances that are taken into account
are as on the date the suit was filed".
102
[NOTE: the language of sub-section (2) is brought in line with the change in section 14.
Ordinarily compensation is assessed with reference to the date of breach. However courts
have assessed compensation with reference to later dates/ and even as a speculative
lump sum. The addition is made to sub-section (4) to give express power to a court to
assess damages with reference to a date which gives rise to conflicting decisions on this
issue. By saying it should be assessed as on the date the suit was filed fixes the time for
the assessment being made].
18.24 In section 22 no change is required.
18.25 In sections 23,-

(i) in sub-section (1), for the words "A contract, otherwise proper to be specifically
enforced, may be so", the words "Specific performance or compensation pursuant to
substituted performance of a contract may be" may be substituted; and at the end
of sub-section (1), the words "or substituted performance" may be inserted;
(ii)In sub-section (2), after the words "specific performance", the words "or
. compensation pursuant to substituted performance" may be inserted.
-./
18.26 in Section 24, after the words "specific performance", the words "or compensation
pursuant to substituted performance" may be inserted.
18.27 The caption before Section 25 "ENFORCEMENTOF AWARDS AND DIRECllONS TO

EXECUTESEITLEMENTS"may be deleted.
18.28 In section 25, for the words "Arbitration Act, 1940", the words "Arbitration and
••.. Conciliation Act, 1996" may be substituted .
18.29 In section 26, at the end of sub-section (3), the words "or the claim of compensation
-'
pursuant to SUbstitutedperformance may be granted" may be inserted.
.-'
18.30 In section 27, no change is required.
18.31 In section 28, after sub-section (1), the following sub-section may be inserted-
"C1A)An application under sub-section (1) for the extension of the period within
which the purchase money or other sum was payable under the decree, or for
the rescission of the contract, may be made by the vendor or the lessor at any
time and may be made notwithstanding that the decree may have provided that
certain consequences should follow automatically on the default of the purchaser
or lest;QQ1:-0 ~t' !-h~ wQid Jums
wrrnln the ~~n~[[[Immll~ree or
oll.rwise allowed by tile COurt.
103
·-
[NOTE: The 14th Law Commission Report recommends that section 28 should be
amended to include sub-section (IA) to allow for self-operative decrees of courts. [See
para 8.1 of the Reportj]
18.32 In sections 29 to 36, no change is required.
18.33 In Section 37, after sub-section (1), the following sub-section may be inserted:-
"(lA) While .considerinq applications seeking interim reliefs or arrangements
impacting the implementation of a Public Works Contract, the Court shall give a
reasoned order giving due consideration to the inherent public interest in such
contract for the continued provision of the related services to citizens, and shall
provide appropriate safeguards."
[NOTE: In severaljudgments, the Hon'ble Supreme Court has stated this as an important
principle which seems to often escapejudicial attention, including in (1985) 1 see 260,
Para 3,5 & 7, (1995) 3 see 33, Para 14 & 15, (1997) 1 SeC134, Para 10, (1999) 1 SCC
492, Para 10,12,13,18,19,23,24,25,27J
18.34 In sections 38 to 40, no change is required.

..
.
18.35 In section 41,-

(i) after sub-clause (b), the following proviso may be inserted:-
"Provided that nothing in this sub-section shall prevent a Court from granting an
injunction restraining those amenable to the personal jurisdiction of the Court, from
instituting or prosecuting proceedings in foreign courts or tribunals if-
(a) disallowing the injunction will defeat the ends of justice and perpetuate
injustice; or
(b) if the proceedings proposed to be restrained are oppressive or vexatious or in
a forum non-conveniens, and on having regard to the principle of comity,
such grant of injunction is justified.";
(ii) in sub-section (e), for the words "not be specifically enforced" the words "be
refused" may be substituted;
(Hi) after sub-section (h), the following sub-sections may be inserted:-
"(ha) when the grant of injunction would impede or delay the progress or
completion of any Public Works Contract, or interfere with the continued
provision of the relevant infrastructure facilities or services being the subject
matter of such Public Works Contract;"
[NOTE: 1. Anti-suit injunctions are recognized by the Hon'ble Supreme Court in Modi
Entertainment Network & Anr vs w.S.G.Cricket Pte. Ltd 2003 AIR sew 733 and other
104
decisions. It is considered advisable to set out the parameters in respect of contractual
disputes.
2. Courts should be conscious of the underlying public good and welfare considerations
involved in public infrastructure projects while granting injunctive relief qua construction/
operation of the infrastructure facility. Such assets must always be made to sweat, ie.,
-J operate at maximum capacity irrespective of disputes and claims amongst the parties.
The adverse impact of such orders on the already serious problems of the Indian banking
system with high level of NPAsattributable to infrastructure assets]
19. General recommendations for amendments of other Statutes
19.1 In addition to the above recommendations in the Specific Relief Act, 1963, the Committee
noted that as stated by the Hon'ble Supreme Court in Hungerford Investment vs. Haridas
Mundhra {1972} 3 SCR 690, the Act is not exhaustive, containing the whole law on the
subject.
19.2 The Committee strongly recommends a review inter alia of the Indian Contract Act,
Transfer of Property Act, Sale of Goods Act and Consumer laws and consider having one
composite statute for matters relating to transactions between parties. It is for this
reason that while the Committee also considered certain other amendments which the
--' Committee considered advisable, the Committee then concluded that such provlsions
-- should find place in other such statutes.
19.3 The Committee considered recommending introduction of a new section to safeguard the
~. rights of a third party upon whom a benefit has been conferred under the Act. The
proposed insertion provided that where a third party had a right, the contracting parties
may not, by agreement, rescind or vary / alter the terms of a contract in a way which
affects the third party's right without his consent. This provision was borrowed almost in
"
its entirety from the United Kingdom's 1999 Act. At the same time, the Committee
.»
considered safeguarding the right of contracting parties by providing them an option to
(i) contract out of the provision by expressly agreeing to rescind or alter/ vary the
contract without the consent of the third party; or (ii) expressly agree that the third
party's consent is required only in specified Circumstances;or (Hi) giving the Court the
power to do away with such consent although made mandatory under the contract.
19.4 Further, as a deviation from the UK law, the Committee considered introducing a
provision from the Hong Kong Ordinance which grants the Court an absolute discretion to
p~rmit such rQcrioojA~ _J1-~r_'-(vq If {n \f'li nnm\1\l\ i~'\"~:l d .
lu U~II"UIIIl s '1U$\ gn practIcable to do so".
"oWever, ~~~ ~I[[~OO~

~ ~~L concluded that such an amendment would be
105
;;-
incomplete in the Act, and should find place in the Indian Contract Act. The draft
amendment to the Indian Contract Act 1872 considered by the Committee is as under:-
Rectification and rescission prohibited in certain cases.

(1) Subject to the provisions of section 26 and 27 and the provisions of this section,
where a person has a right to obtain specific performance of a contract under
clauses (aa) or (ab) of sub-section (1) of section 15, the parties to the contract
may not, by agreement, rescind or alter the contract, in such a way as to
extinguish or alter his entitlement under that right, without his consent if-
(a) such person has communicated his assent to the contract to the person
against whom specific performance is claimed;
(b) The person against whom specific performance is claimed is aware that such
person has relied on the contract; or
(c) the person against whom specific performance is claimed can reasonably
be expected to have foreseen that such person would rely on the
contract and such person has in fact relied on it.
(2) The assent referred to in subsection (l)(a)-
(a) may be by words or conduct; and
(b) if sent to the promisor by post or other means, shall not be regarded as
communicated to the promisor until received by him.
(3) The provisions of sub-section (1) is subject to any express term of the contract
under which -
(a) the parties to the contract may by agreement rescind or alter the
contract without the consent of such person; or
(b) the consent of the third party is required in circumstances specified in
the contract instead of those set out in clauses (a) to (c) of sub-section
(1).
(4). Where the consent of such person is required under sub-sections (1) or (3), the
Court may, on the application of a party to the contract, dispense with his
consent if-
(a) the Court is satisfied that his consent cannot be obtained because his
whereabouts cannot reasonably be ascertained; or
(b) the Court is satisfied that he is mentally incapable of giving his consent;
or
(c) the other party or each party to the contract agrees to rescind or alter
the contract and the Court thinks it just and practicable to make the
order.
(5) The Court may, on the application of the parties to a contract, dispense with any
consent that may be required under clause (c) of sub-section (1) if satisfied that
106
,-,
-'
it cannot reasonably be ascertained whether or not such person has in fact relied
on the contract.
(6) If the Court dispenses with such person's consent, it may impose such conditions
as it thinks fit, including a condition requiring the payment of compensation to
such person.
Dated the 26th May, 2016
A"'~
Anand Desai
Chairperson ~
-, '~
~=-
.-.,
~ y"
'
e.71/.::::._~",,>_, _ •
~~,,-,
..Pel'"n---,,~'Kap~..
C--.,.,...·1,e-'01
b~ ,_ __ _
~~~~C/
Nilima Bhadbhade
Member
'-....-
-'
~ d CV1 c4AC>-- Dr. Mukulita Vijavawargiyc;t
Arghya Sengupta Akshay Chudasama Member-Secretary
Member Member
<:»
'-'
'-./
-./
107
---
\
4YFPMWLIH MR -RWXMXYXI W .SYVREP 1EVGL
LAW OF INJUNCTIONS
Justice R. R. K. Trivedi
Judge,
Allahabad High Court
The law of injunction in India has its origin in the Equity Jurisprudence of England
from which we have inherited the present administration of law. England too in its turn
borrowed it from the Roman Law wherein it was known as Interdict. The Roman Interdicts
were divided in three parts, prohibitory, restitutory and exhibitory. The prohibitory Interdict
corresponds to injunction. The injunction as a chancery remedy developed at the time of
Henry, the Vlth. The Chancellor set aside a certain bond by the plaintiff as one not binding
on him. The Court of Common Pleas, however, gave a decree with bond. Chancellor
thereupon devised the remedy of injunction by which he prohibited execution of the decree of
Common Law Court. This exercise of power by issuing injunction by the Chancery Court was
viewed with jealousy by the Common Law Court and it became a source of conflict between
the two jurisdictions. This conflict rose to the climax between the Lord Justice Coke and Lord
Chancellor Ellesmere in 1816. A decree was obtained from Lord Coke by practising gross
fraud. The Chancellor thereupon by an injunction perpetually enjoined the decree-holder
from proceeding to execute his judgment. The validity of this procedure of issuing injunction
was seriously questioned. The matter was referred to Bacon, the then Attorney General and
other counsel, who finally settled the question in favour of Chancellor. The jurisdiction to
issue injunctions was thus affirmed and the remedy which is termed as the strong arm of the
Courts of equity has contributed a lot to consolidate the position of the judiciary in
dispensing justice between the litigant parties.
From the aforesaid historical background it is manifest that the origin of the power to
grant injunction is from equity, hence the exercise of the discretion by the Courts is to be
governed mainly by equitable considerations. In our country in Criminal matters Sections
133, 142 and 144 of the Code of Criminal Procedure deal with grant of injunction. In Civil
matters the law relating to grant of injunction is contained in Chapter VII of Part III of the
Specific Relief Act, 1963. Sections 36 to 42 deal with the grant of injunction. It has been
termed as a prever1tive relief which is granted at the discretion of the Court by injunction
which may be temporary or perpetual. Section 37(1) of the Specific Relief Act, 1963 deals
with the temporary injunctions which are such as are to continue until a specified time, or
until further orders of the Court, and they may be granted at any stage of the suit or
proceedings and are regulated by the Code of Civil Procedure. From the aforesaid it is clear
that there can be permanent injunction which is granted as a final relief in the suit and there
can be temporary injunction which may be passed at any situation of the suit or proceedings
for preservation of the property. Both have to be discussed separately.
Permanent Injunction:
As is clear from Section 37 (2) of Specific Relief Act, 1963 (hereinafter referred to as
the Act), a perpetual injunction can only be granted by the decree made at the hearing and
upon the merit of the suit. The defendant is thereby perpetually enjoined from the assertion of
a right or from the commission of an - act which would be contrary to the right of the
plaintiff. Section 38 of the Act further provides the circumstances where the perpetual
injunction may be granted in favour of the plaintiff to prevent the breach of an obligation
1
existing in his favour, whether expressly or by implication. In contractual matters when such
obligation arises, the Court has to seek guidance by the rules and provisions contained in
Chapter II of the Act dealing with specific performance of contracts. Sub- Section (3) of
Section 38 in clauses (a), (b), (c) and (d) further illustrates the circumstances where a
perpetual injunction may be granted by the Court. The mandatory injunctions are
contemplated under Section 39 of the Act where it is necessary to prevent the breach of an
obligation and the erring party may be compelled to perform certain acts. Section 40 provides
for granting damages in lieu of or in addition to injunction. Section 41 provides
circumstances where the injunction should be refused. Section 42 provides for grant of
injunction to perform a negative agreement. It was made clear at the beginning that the Law
of Injunction is vast and expansive jurisdiction and It forcefully illustrates the power of
equity in spite of the fetters of codification to march with the times and adjust the beneficial
remedies to altered social conditions and the progressive needs of the humanity. The first
Specific Relief Act was codified in the year 1877 which was replaced by the Specific Relief
Act of 1963 (Act No.47 of 1963). In spite of the codification the law of injunction continued
to expand and it fulfilled the needs of the society in different shapes - and forms. The
codification of the law has never proved a fetter. In this context, a Civil Court should never
have any hesitation in granting injunction to new circumstances and situations. Our society is
a progressive society, our country is a developing country and with the growth of the industry
one may be called upon to administer law of injunction to various kinds of new situations
which were wholly unknown to this field earlier. The essential test should, however, remain
equity. In this context the views expressed by the Courts and Jurists may be gainfully quoted
here :
"It is the duty of a Court of Equity," said Lord Cot ten hem in Taylor v. Selmon, (and
the same is true of all Courts and institutions), "to adopt its practice and course of
proceedings, as far as possible, to the existing state of society and to apply its jurisdiction to
all those new cases which from the progress daily made in the affairs of men must continually
arise and not from too strict an adherence to forms and rules established under very different
circumstances decline to administer justice and to enforce rights for which there is no other
remedy."
Similarly, the view expressed by the great jurist Shri Banerjee in Tagore Law
Lectures as far back as in 1906 may be remembered by us as a good guide even today in this
field of law. Banerjee said: ‘Since an obligation includes every duty enforceable by law this
form of specific relief, it would appear, is applicable to all cases where one person can
enforce a duty against another, or to use the correlative term, where one person is vested with
a right which empowers him to constrain the other to adopt a particular line of conduct, or to
do or abstain from doing a particular act. This right mayor may not arise out of a contract,
and the remedy of injunction, by which preventive relief is granted by a Court, may be held
to be available throughout the whole range of the law, But the jurisdiction is carefully defined
in part Ill, Specific Relief Act, and to some extent circumscribed. It still remains, however, a
vast and expansive jurisdiction, and forcibly illustrates the power of equity, in spite of the
fetters of codification, to march with the times and adjust the beneficial remedies to altered
social conditions and the progressive needs of humanity.'
Mr. H.C. Joyce also in his Law of Injunctions has expressed identical views. He says,
‘As a remedy for preventing wrongs and preserving rights, the injunction has been regarded
as more flexible and adjustable to circumstances than any other process known to law. The
correctness of the estimate is seen in the readiness with which injunctions yield to the
convenience of the parties, the case with which damages are substituted in their place when
justice and public interest so require, the facility with which a preventive and a mandatory
2
injunction are made to co-operate so that by single exercise of equitable power an injury is
both restrained and repaired, and the facility with which injunctive relief can be applied to
new conditions and adjusted to the changing emergencies of modern enterprise. In this
connection it may be declared that as writ of injunction my be said to be a process capable of
more modification than any other in the law, it is so malleable that it may be moulded to suit
the various circumstances and occasions presented to a Court of Equity. It is an instrument in
its hands capable of various applications for the purpose of dispensing complete justice
between the parties. It may be special, preliminary, temporary or contracted, in short it is
adopted, and is used by Courts of Equity, as a process for preventing wrong between, and
preserving the rights of parties in controversy between them...so, where, too, if a party cannot
at once comply with an injunction without being put to great expense or grievous annoyance,
the Court may order that the injunction do not commence until after a certain stated period.
Injunction should not be denied on the ground of its novelty in application, if the exigencies
of the situation required it and if it does not militate against statutory provision. The Courts
should act according to justice, equity and good conscience, when there is no specific rule
applicable to the circumstance of the case."
Once the aforesaid basics of this equity jurisdiction become clear, there may not be
any difficulty in its application to various situations - One may be called upon to grant
injunction in various kinds of disputes which may be commercial non- commercial, marital,
non-marital, encroachment over civil rights etc. The list of these situations cannot be given
here. A civil dispute calling for a preventive relief may come before one in any shape and
then one may be guided by principles of equity, justice and good conscience in granting
relief. The hesitation should not be there when equitable consideration demand and justify it.
Temporary Injunction:
So far as the grant of temporary injunctions Is concerned, it used to be a small step
during the progress of the suit or proceeding towards the preservation of its subject matter
which could be property or any other right has now gained enormous importance and
sometimes it becomes even more important than the final result of the suit or proceedings
with the change of the time. The society in general and Judiciary in particular is passing
through a very trying time where the moral values are at their lowest ebb and there does not
appear any prospect of coming them up in near future. The dilemma of the Judicial Court or
Tribunal is that initially it has to treat the truth and falsehood at par and has to give the same
treatment, protection and hearing until it concludes its investigation to find out which is right
or wrong, false or true. This process takes a long time during which by some interim measure
the subject matter of the dispute between the parties has to be preserved, and it is this anxiety
for preservation of the property on the part of the Judicial Court, which is misused and
abused by the side which has come before the Court with a wrong or false case or a doubtful
case which had been filed only to take a chance. This category of the unscrupulous litigant
once succeeds in obtaining the interim injunction in their favour, they try to prolong
proceedings and cause irreparable damage and harm not only to their opposite side but also to
the reputation and faith of the public on Courts. Hence, it is high time that the Courts at all
levels should be very cautious, alert and vigilant while granting temporary injunction during
progress of the suit or proceeding-
Section 37(1) of the Specific Relief Act, 1963, deals with the temporary injunctions
which are such as are to continue until a specified time or until further orders of the Court and
they may be granted at any stage of the suit or proceedings and are regulated by the Code of
Civil Procedure-
3
Section 94 (c) and (e) of Code of Civil Procedure contain provisions under which the
Court may in order to prevent the ends of justice from being defeated, grant a temporary
injunction or make such other interlocutory order as may appear to the Court to be just and
convenient. Section 95 further provides that where in any suit a temporary injunction is
granted and it appears to the Court that there were no sufficient grounds, or the suit of the
plaintiff falls and it appears to the Court that there was no reasonable or probable ground for
instituting the same. The Court may on application of the defendant award reasonable
compensation which may be to the extent of the pecuniary Jurisdiction of the Court trying the
suit. The procedure with regard to the grant of temporary injunction and interlocutory orders
has been provided in Order 39 of C.P.C., as far as this State is concerned, drastic changes
were brought about by amending the provisions contained in Order 39 by U.P. Act No. 57 of
1976. In Sub-Rule (2) of Rule 2 of Order 39, a proviso was inserted by which power of the
Court to grant injunction was taken away in certain matters. Further a proviso was added in
Rule 3 which provided that where it is proposed to grant an injunction without giving notice
of the application to the opposite party, the Court shall record the reasons for its opinion that
the object of granting the injunction would be defeated by the delay and require the applicant
to serve the copy of the order of injunction along with copy of the application, affidavit,
plaint and other documents relied on by him. Further, he has also been required to file on the
same day on which the injunction is granted, an affidavit stating that the requirements
contained in Proviso (a) have been complied with. Rule 3(e) further contains a very important
provision which requires the Court to make an endeavour to finally dispose of the application
within 30 days from the date on which the Injunction was granted and where it is unable to do
so it shall record its reasons for such inability. Thus by introducing the aforesaid amendment
an attempt was made to minimise the hardship and harassment caused by the injunction
orders passed exparte.
Identical provisions were included in Article 226 of the Constitution by substituting
Clause (3) thereof which provides that if an interim order is passed exparte and the party
concerned makes an application to the High Court for vacation of such order, the High Court
has to dispose of the application within a period of two weeks and if the application is not so
disposed of, the interim order, on the expiry of that period shall stand vacated, There are
other local laws also, where the power of the Court or the Tribunal in granting the injunction
or stay orders has either been taken away or has been regulated by providing stringent
conditions to prevent hardship loss or harassment to the opposite party. It is not necessary to
mention a catalogue of such local laws and Central Acts as one come across such laws every
day. However, it is a different matter altogether as to how far these legislative measures have
succeeded to achieve the object to minimise the hardship to the opposite party and to prevent
the abuse of the injunction or interlocutory orders passed by the Courts during suits.
In my opinion, the aforesaid legislative efforts have not been able to achieve their
object. The effect of the amendments made in the provisions contained in Order 39 C. P. C.
may be mentioned which instead of remedying the situation has created further problems and
complicated the Issue. The first price has to be paid by the High Court itself, which has been
run over by a large number of writ petitions filed before it for those causes which were
normally being agitated by filing suits in civil court. The situation in High Courts has become
so grim and difficult that the pendency of the cases has crossed five lakhs and the time taken
in deciding the writ petitions is now more than ten to fifteen years. No body could have
contemplated this state of affairs at the time the amendments were brought about by U.P. Act
No.57 of 1976. The second price, which has been paid by the Bar. Is that the filing of the
original suit in every district has declined to such an extent that the growth and progress of
the Civil Bar has stopped. Now the position in District Courts as well as in High Court is that
4
it Is difficult to find out a good civil lawyer. The growth of civil law has also come to a
standstill which Is a matter of great concern. The loss of trust shown by the legislature in
subordinate judiciary by taking away the power of granting injunction in the matters
enumerated In the Proviso to Sub-Rule (2) of Rule 2 of Order 39 has in fact rendered a dis-
service of bigger magnitude than remedying the situation for which it was enacted. It will be
better for the State, the High Court and the Judiciary as a whole and also to the Bar, if this
proviso is deleted from Order 39, at the earliest.
Now, coming to the role of the Presiding Officer of the Court while granting order of
injunction or other interlocutory order, it should always be kept in mind that its origin is from
equitable jurisdiction and before passing the order the claim must be tested on all principles
of equity. The normal requirements that the applicant praying for the injunction should have a
good prima facie case, chance of suffering irreparable injury and balance of convenience is in
his favour and other principles connected with the matter, the Court should have extra
cautious approach in testing the prima facie case with a certain amount of extra rigour to
avoid the abuse of the process of the Court. As already mentioned earlier, we are passing
through a difficult time with the population explosion, the pressure on the property has
Increased to its maximum and it is likely to go further. In these days the grabbing of the
private and Government property has become the fashion of the day. Documents are being
manufactured and manipulated and on basis of such documents orders are obtained. The
modus oprendi in such cases is that property grabbers manufacture false documents, then file
a suit or proceeding and obtain orders. Knowing well that the suit will take its own time, they
succeed in their object. I came across a case which may be quoted here as example and which
may also be reminder to all of us that knowingly or unknowingly Injunction or interlocutory
orders may not be passed In such matters.
A writ petition was filed for quashing F.I.R. lodged against the petitioner under
Sections 420/ 467/468/471 I.P.C. The facts of the case were that the petitioner fined a suit
with the allegation that P.W.D. Rest House has been leased out in his favour by the Executive
Engineer on a rent of Rs. 500/- per month for a period of 90 years which was decreed in his
favour, as no body put In appearance for contest. Petitioner occupied the bungalow and
rennovated it by investing huge amount. However, when the authorities tried to dispossess
him he filed writ petition in the High Court and In view of the decree passed In his favour a
Division Bench of the High Court issued a mandamus in his favour directing the authorities
not to dispossess petitioner except In accordance with law from the property In dispute. The
F.I.R. was lodged thereafter by the district authorities for prosecuting the petitioner, which
was challenged In Court. One can very well imagine when this property shall be restored to
the Government. Where lay the failure, it is a matter for consideration.
Hon'ble Supreme Court in a recent case has laid down that property-grabbers, tax-
evaders, bank loan dodgers and other unscrupulous persons from all walks of life find the
court- process a convenient lever to retain the Illegal gains indefinitely. A bench comprising
Mr. Justice Kuldip Singh and Mr. Justice P .B. Sawant noted while imposing Rs. 11,000/-
costs on a litigant, Mr. Jagannath. He had played fraud to secure an order in his favour from
the High Court.
“Frauds avoid all judicial acts, acclesiastical or temporal, “the court recalled the
observation made over three centuries ago by the then chief Justice of England, Lord Edward
Coke. Any decree or judgment obtained by playing fraud on the court is “a nullity and nonest
in the eyes of law" the apex court ruled while setting asi~e the High court's verdict In favour
of Mr. Jagannath.
5
Such a decree or judgment passed either by the first court or by the highest court must
be treated as a “nullity by every court it can be challenged in any court even in collateral
proceedings," the judges added.
The judgment is a fall out of the appeal made by the heirs of one S.P., Chengelveraya
alleging that Mr. Jagannath had obtained the first decree by fraud. The High Court, however,
set aside the trial court's order against Mr. Jagannath, it had also noted that "there is no legal
duty cast upon the plaintiff to come to court with a true case and prove it by true evidence. "
Setting aside the High Court's judgment, the apex court said it had fallen into "patent
error". The High Court had gone haywire and made observation which were "wholly
perverse".
Disagreeing with the High Court's view that no legal duty had been cast upon the
plaintiff (Mr. Jagannath) to come to court with a true case and prove it by evidence, the apex
court observed that "the principle of 'finality of litigation' cannot be pressed to the extent of
such an absurdity that it becomes an engine of fraud in the hands of dishonest litigants.
The courts of law are meant for imparting justice between the parties, the judges
noted. They added that "one who comes to the court, must come with clean hands. More
often than not, process of court is being abused."
Elaborating in the light of the present case, the court said a fraud is an act of
deliberate deception with the design of securing something by taking unfair advantage of
another. It is a deception in order to gain by another's loss. It is a cheating intended to get an
advantage. Non-disclosure of the facts amounts to "playing fraud on the Court"
The judicial officers must take extra cautiousness and alertness while granting orders
of injunction. Their test to the prima facie case and other allied considerations should be
rigorous. The rule should be to grant injunction or interlocutory orders only after hearing
parties and only in very exceptional cases; the exparte orders should be passed. If it is not
done, the very existence of this entire judicial system shall be under peril.
[J.T.R.I. JOURNAL – Second Year, Issue – 4 & 5 - Year – March, 1996]
6
BASIC PRINCIPLES OF CONTRACT
DRAFTING
COURSE MATERIALS
Chris Goddard, with Amy Fellner and Rue-Ann Ormand

COURSE AIM AND GOALS
AIM
To introduce participants to the principles of contract drafting, and in

particular to the practical world of international contracts in English.
GOALS
• Provide a theoretical overview of legal and linguistic approaches

to contract drafting.
• Enable participants to implement theory in context of practical
exercises involving realistic situations, including examples of real
contracts airbrushed for confidentiality.
ASSESSMENT CRITERIA
To pass the course
• Attend 12 x 1-hour lectures/seminars

• Complete course assignments with minimum score of 60 from
wide choice of assignments.
Note:
1. Assignments that attract score are shaded grey.
2
TABLE OF CONTENTS
PART 1: GLOSSARY OF CONTRACT TERMS……………………………………Page 5
PART 2: COURSE TEXTBOOK
Chapter 1: Process of Contract Drafting; Elements of Effective Contracts………..Page 11
Section A: Fundamental Policies and Values of Contract Law

Section B: Sources of Contract Law
Section C: General Writing Principles Applicable to Contract Drafting
Section D: Using Defined Terms
Chapter 2: Contract Principles……………………………………………………….Page 22
Section A: Basic Attributes of the Contractual Relationship

Section B: Overview of Contract Standard Provisions
Section C: Promises and Conditions
Section D: Warranties
Chapter 3: Establishing Agreement, Rights and Obligations, Remedies………….Page 28
Section A: Establishing an Agreement: Offer, Acceptance and Consideration

Section B: Remedies
Chapter 4: Planning Ahead for Problems; Contract Interpretation………………Page 31
Section A: Termination Provisions

Section B: Impracticality of Performance and Frustration of Purpose
Section C: Risk Allocation in Contracts
Section D: Clauses that Address the Possibility of Future Litigation
Chapter 5: Other Important Clauses; Assembling Contracts……………………..Page 36
Section A: Understanding General Clauses

Section B: Assignments
Section C: Contract Interpretation Issues
PART 3: BASIC LANGUAGE GUIDE TO DRAFTING LEGAL DOCUMENTS IN

ENGLISH…………………………………………………………………………………Page 41
PART 4: ASSIGMNENTS……………………………………………………………….Page 53
Section A: Introduction and Self-Assessment
3
Section B: Contracts Terminology and Language Development Exercise
Section C: Redrafting Skills Exercise
Section D: Exercises: Does a Contract Exist?
Section E: Contract Structure Exercise
Section F: Exercise: Analyzing Promises and Conditions
Section G: Exercise: Drafting Termination Provisions
Section H: Exercise: Agreement to Use On-Line Banking Services
Section I: Exercise: Extract From Loan Agreement
Section J: Exercises: Reading and Understanding Contracts
Section K: Sales Representative Agreement Drafting Exercise
Section L: Drafting Exercise: Employment Agreement
Section M: Negotiating and drafting exercise: Contract for International Sale of Goods
Section N: Further exercises
PART 5: APPENDIX DOCUMENT FILE………………………..Page 90

I. Loan Agreement
II. Select CISG Provisions
III. Online Banking Agreement
IV. ABC Car Hire Terms and Conditions
V. Employment Agreement
VI. Distribution Agreement
VII. Property Lease – residential
VIII. Property Lease – commercial
IX. Incoterms 200
X. Agency contract
XI. Procurement contract
XII. Share purchase agreement
4
PART 1: GLOSSARY OF CONTRACT TERMS
Technical and Specialized Vocabulary
Here are a few terms that you might encounter in the course of the discussion, along
with some other terms that might be of use. Please remember, these are not technical
definitions. Strictly technical definitions would require us to spend more time on the
details of various legal systems than is useful for our purposes. Rather, these are
general descriptions of the sense of the various terms.
ADR – this is short for alternative dispute resolution, or ways to resolve

disputes outside of the courtroom. The term typically encompasses negotiation,
mediation and arbitration.
Assignment - the transfer of rights or duties by the assignor to the assignee.

This may occur only by agreement or by operation of law, for example, when
someone dies or when a company is bankrupt.
Battle of the Forms – a common business situation where business parties

establish their relationship by sending standardized forms to each other. Often, the
terms of the forms do not agree, and it can be difficult to tell if the parties have
concluded a contract, and if so, what the terms of that contract are.
Boilerplate – the clauses, generally appearing at the end of a contract, which

are used to settle general matters such as choice of law, notice procedures,
amendment procedures, interpretation issues, dispute resolution mechanisms and the
like. The term also has a more general definition meaning any standardized or
preprinted form for agreements. The term is also used to talking about the 'small
print'. For example, the small print after a TV commercial about a product or contest
which list all the various restrictions.
Choice of Law – often, the parties to a contract will specify which rules of
law should be used to resolve any dispute between them. Particularly in international
transactions, the choice of law can be a significant point of negotiation among
lawyers. Choice of law (what legal principles will be used to resolve the dispute)
should be distinguished from choice of forum (where the dispute should be resolved)
and choice of dispute resolution method (litigation or some form of ADR).
Common Law – this term, when contrasted with Civil Law, refers to legal
systems which have their origin in the British legal system. The legal system of the
United States is from the common law tradition. Within the U.S. legal system, the
term is used to distinguish judge-made law from statutes (made by legislatures) or
regulations (issued by the executive branch of government). It may also refer to the
5
method of analysis that a court uses to interpret a statute, regulation or other rule of
law, and may include the concept of precedent.
Condition Precedent – an event that must happen before a contract or a

contractual obligation goes into effect.
Condition Subsequent - a happening which terminates the duty of a party to

perform or do his/her part.
Consideration – a common law concept which requires (in essence) that a

promise be part of an exchange to be enforceable as a contract.
Contracts of Adhesion – standardized contracts, usually presented on a take-

it-or-leave-it basis, to parties of unequal bargaining strength.
Covenant – this term used in a contract means a promise which, if not carried
out, will carry legal consequences. Often, covenants are divided into Affirmative
Covenants (the things the promisor agrees to do) and Negative Covenants (the things
the promisor agrees not to do).
Cure Periods – often, when a Default occurs under a contract, the obligor
may have a certain period of time to cure the Default before the obligee is allowed to
exercise Remedies. Sometimes the obligee is required to give notice before the time
begins to run (in which case lawyers will speak of “Notice and Cure Periods”).
Notice and Cure Periods are sometimes more casually referred to as “grace periods.”
Default – the circumstances where an obligor under a contract is considered to

be in breach of the contract. In formal written contracts, Defaults often include
failure of a Representation or Warranty to be true when made, failure to perform any
Affirmative or Negative Covenant, insolvency or bankruptcy, as well as other
enumerated situations tailored to the specific circumstances.
Equity – this term, which is often used to mean fairness, also has a more
technical legal meaning. It used to be that the Common Law system was rather rigid,
and in order to obtain relief, a litigant had to fit into a limited class of situations.
Sometimes, this rigidity produced results that seemed very unfair. Eventually, a
second type of court was created to hear those cases -- those where there was “no
remedy at law” but “equity” demanded a remedy. In most jurisdictions, the separate
court systems, consisting of “Courts of Equity” have been abolished, but in many
areas the distinction between cases sounding in “law” and those sounding in “equity”
persist. In other contexts, “equity” refers to the amount by which a property’s value
exceeds the debt (or Liens) against it. The legal concept of equity in this sense is not
known to the civil law (Romano-Germanic ) system, and can cause problems. For
6
example, in a US or UK contract, "“equitable remedies" does not mean “fair,
reasonable, and just” but refers to remedies applied under the common law concept
of equity. In practice, this means remedies other than plain compensation – e.g., a
court order for specific performance of the contract, or an injunction.
Estoppel – an equitable concept that prevents a party from raising an

argument when the party has acted unfairly, fraudulently, or otherwise
inappropriately. (EU equivalent: “legitimate expectations”).
Events of Default – When a Default remains uncured under any applicable

Notice or Cure Period, contracts typically provide that an Event of Default has
occurred. Once an Event of Default has occurred, the obligee may generally pursue
Remedies.
Excuse - something that forgives performance and bars enforcement of the

contract. If performance of a contractual obligation is excused, this relieves the
nonperforming party of liability.
Execution - (1) signing; the parties execute the contract by signing it; (2)
performance; the parties may execute a contract by carrying out their obligations and
duties; (3) enforcement of a judgment, order or writ (execution of judgment); (4) in
criminal law, carrying out a death sentence. This word is a good example of
polysemy – words with multiple meanings – in legal language.
Force Majeure – an “act of God” which prevents one party from performing
the obligations owing under a contract. Commonly such things as war, riots,
earthquakes, floods, strikes and the like are included. The common law generally
takes a stricter approach to force majeure than civil law legal systems.
Impracticability – A legal doctrine closely related to Force Majeure. If some

unanticipated event makes performance of the contract unusually burdensome, some
legal systems will allow a party to be excused from the contract under the doctrine of
impracticability. Different legal systems have varied requirements for invoking this
doctrine.
Indemnity – an agreement in which one party agrees to reimburse another

party if it is held liable. An indemnity is in the nature of a guaranty, but typically is
used when the party offering indemnity has some interest in, involvement with, or
control over the events leading to liability. Indemnity clauses are often found in
commercial contracts, and may be coupled with “hold harmless” provisions. In a
“hold harmless” provision, the first party says that they will not hold the second
party responsible for certain actions, even if the first party might otherwise have the
right to do so under applicable law.
7
Independent Contractor – this term is usually used to contrast with “agent”
or “employee.” The basic idea is that an independent contractor is free to do only
that work that it contracts to do, in the way it contracts to do it. In contrast, an agent
or an employee is subject to the discretion or control of the party for whom they are
working. The chief importance of the concept is in the context of vicarious liability -
- a person is generally not responsible for the misdeeds of its independent contractor,
while it may be liable for the misdeeds of its agents or employees.
Intellectual Property – right given by law to a person in connection with

intellectual, industrial or artistic work. Intellectual Property includes, among other
things, patents (inventions), designs (graphics), trademarks (names or marks used to
identify goods) and copyrights (rights of authorship). Due to the information
revolution, the nature and extent of information which is protected as intellectual
property is a rapidly changing field.
Joint Venture – a very broad term used in many different contexts. In its
general sense, it means more than one person getting together for the purpose of
making a profit in a speculative enterprise. In this regard, it is very similar to a
Partnership, but it tends to be used for limited undertakings. Often, particularly in
reference to central and eastern Europe, American lawyers use the term to refer to
profitable activities done in cooperation with foreign governments or foreign
nationals.
Letter of Credit – a financing device whereby a bank, at the request of a

customer, agrees to pay a beneficiary upon satisfaction of certain conditions.
Typically, the conditions are limited to presentation of specified documents. The
bank makes the agreement as a service to its customer, and will seek reimbursement
from its customer if it is required to make payment under the terms of the Letter of
Credit. Letters of Credit are often divided into “Documentary Letters of Credit,”
which are often used as a normal means of payment in international trade, and
“Stand-By Letters of Credit” which are more in the nature of a bank guarantee.
License – this term has many meanings, depending on the context. Its
general sense is permission to use the property of the licensor. It is often used in the
context of Intellectual Property to mean the agreement by which the owner of the
Intellectual Property gives someone else permission to use it, typically for a royalty
or a fee. License agreements are often used to transfer technology from one party to
another. Absent the License, the licensee’s use of the Intellectual Property would be
against the law. The term is also used in completely different contexts. For instance,
a movie theatre ticket is often characterized legally as a “License.”
8
Lien – a creditor has a Lien on a piece of property owned by a debtor when
the creditor has a contingent claim to that property. Sometimes, the debtor
voluntarily gives the creditor a Lien as a form of security for payment; other times
the creditor receives the Lien by operation of law. Usually non-payment of the debt,
or an Event of Default under any contract creating the debt, allows the creditor to
Foreclose on the Lien.
Liquidated Damages – when parties to a contract settle in advance the

amount of damages which will be available should one party fail to perform.
Liquidated damage clauses are generally subject to close scrutiny under U.S. and
U.K. law. This is also sometimes called a Penalty clause.
Partnership (including General Partnership and Limited Partnership) – a

voluntary (unincorporated) association of two or more persons for the purpose of
making a profit. In a general partnership, all of the partners are personally liable for
the debts of the partnership, and have a management role. In a limited partnership,
general partners exist alongside limited partners. General partners are personally
liable and have a management role; limited partners are not personally liable and do
not have a management role. Partnership as a concept is not known or recognised in
all legal systems.
Recitals – in a formal written contract, the clauses that explain who the parties
are, and their purposes for entering into the contract (i.e., background). Sometimes
called “Preamble”.
Remedies – the actions that can be taken upon an Event of Default.

Sometimes an aggrieved party can take action on its own. This is often referred to as
“self-help.” Other times, the term “remedies” is used to describe the court
procedures and decisions that are available to help an aggrieved party. (See “Cure”).
Representations and Warranties – statements made by a party in a contract

which, if untrue, carry legal consequences. Sometimes representations and
warranties need not be explicitly stated by the parties, but instead are implied by law.
Rescission - cancellation of a contract by mutual agreement of the parties

prior to its performance.
Risk of Loss – who bears the risk if the goods covered by a contract are
damaged or destroyed. Risk of loss is particularly important when goods are being
transported long distances between the seller and the buyer. If the seller bears risk of
loss during carriage, and the goods are destroyed in transit, the seller has a
responsibility to provide substitute goods. If the buyer bears risk of loss, the buyer
generally must pay for the goods, even though they never arrive. Often parties cover
9
the risk of loss with insurance, so the ultimate loss may rest with an insurance
company. In practice, areas of risk are dealt with by INCOTERMS and insurance (or
re-insurance).
Secured Transaction – a voluntary transaction in which a debtor gives a

creditor a Lien on its property to secure payment or performance of an obligation.
Security – this particularly confusing term is used in at least two very

different contexts. First, it is used to refer to property that is subject to a Lien. The
property is “security” for the debt secured by the Lien. A more precise term for this
concept would be “collateral.” “Security” is also used in the context of investment
securities – such as stocks, bonds, and other evidences of ownership or indebtedness
which are regularly traded.
Severability - the characteristic of a contract that allows for removal of duties

or portions that are incorrectly or illegally drawn up. The parties may agree that
incorrect, impractical, or illegal portions be severed from the agreement and replaced
by language that best reflects the intent of the parties and comes closest to the
business objective of those severed portions. Severance allows the remainder of the
contract to be valid and enforceable.
Specific Performance – a court orders specific performance when it requires

a party to carry out its obligation, rather than merely paying damages. Specific
performance is an extraordinary remedy, that is to say not usually available, under
American or U.K. contract law. It is a good example of an equitable remedy (see
Equity ).
Tender - is a bid or formal offer. A proposal of terms is extended generally

('put out for tender' or 'competitive bidding'), inviting prospective parties to respond
by making a bid or tender. Do not confuse with legal tender, which is money.
Unconscionability – a U.S. concept which has its roots in Equity, and which
allows a court to refuse to enforce a contract or a portion of a contract which it
considers to be particularly unfair.
Void - is absolutely null, empty, having no legal force, and incapable of being
ratified. In contracts it refers to an attempt at formation of contract which is
equivalent to no contract at all.
Voidable is capable of being voided, or later annulled. If a contract is formed

but voidable, it may either be ratified (US) or confirmed (UK) by conduct or else it
may be voided by one of the parties. Once ratified, the promise is enforceable. If it
is voided, it is unenforceable.
10
PART 2: COURSE TEXTBOOK
CHAPTER 1: Process of Contract Drafting: Elements of Effective

Contracts
Section A: Fundamental Policies and Values of Contract Law
Introduction
While a course on contract drafting may seem dry and technical, there are a number
of strongly held ideological values underlying contract law and its rules are
motivated by conscious and deliberate public policy. Understanding these policy
themes can help a practitioner appreciate the goals and assumptions underlying the
legal rules involved in drafting contracts.
Freedom of Contract
The power to enter contracts and to formulate the terms of contractual relationships
can be regarded as an integral part of personal liberty. For instance, this respect for
the exercise of personal liberty is the policy reason underlying the rule in contracts
that one may not be bound to a contract absent that person’s assent. In the United
States, the power of contracting is understood to be one of the innate rights
originating in the people and guaranteed by the Constitution. Liberty of contract
also enforces individual rights to hold and deal with property. Like other liberties,
freedom of contract is limited by corresponding rights held by other persons and by
the state’s legitimate interest in appropriate regulation. Such regulation may be
directed, for example, at protecting weaker parties from the free exercise of
overwhelming contractual power by stronger dominant parties. The ideological basis
of contract freedom is reinforced by economic principles, as well. For example,
economic intercourse is most efficient when its participants desire it and are free to
bargain with each other to reach mutually desirable terms.
Morality of Promise
There is also a longstanding moral dimension of contract in law: that there is an
ethical as well as legal obligation to keep one’s promises. Thus, contracts should be
honoured not only because reliability is necessary to foster economic interaction, but
simply because it is morally wrong to break them. Although it often seems that the
role that this basic moral value plays in contract law is subtle, society and courts are
not indifferent to the ethical implications of dishonouring contracts—especially in
the case of deliberate breaches that are motivated by bad faith.
Accountability for Conduct and Reliance

Another fundamental value of contract law is that a person should be held
accountable for words or acts reasonably manifesting intent to contract, and that the
11
other party, acting reasonably, should be entitled to rely on that manifestation of
assent. An objective test of reasonableness is thus often used to evaluate a party’s
conduct. For example, a party’s intent in entering into a contract is often evaluated
in light of the person’s state of mind as made apparent to the outside world (as
opposed to the true and actual state of mind of the party at the time). The value of
protecting reasonable reliance is pervasive in contract law.
One corollary to this principle is that a person who has entered a contract has the
right to rely on the undertakings that have been given; if those undertakings are
breached, then the law must enforce them.
Another corollary to this principle is that, when parties in numerous specific

situations feel secure in relying on promises, the expectation arises in society as a
whole that contracts can be relied on and that there is legal recourse for breaches.
This concept of security of contracts is indispensable to economic interaction.
Without it, there would be little incentive to make or rely upon contracts.
Social Justice and Protection of the Underdog

Modern contract law is also sensitive to the imposition of contractual obligations
through coercion, dishonesty or lack of meaningful choice resulting from power
imbalance.
Fairness
Contract law has some express doctrines that address questions of unfairness, such as
doctrines of unconscionability and good faith.
Economic Aspects of Contract Law

Because contracts are concerned with economic exchanges, contract law must
inevitably be economic in its purpose. After all, the goals of contract law include
facilitating trade and commerce, regulating the manner in which people deal with
each other in the marketplace, and enforcing commercial obligations. In the United
States, the basic philosophy of contract law has been capitalist and geared toward the
ideal of a free market.
Section B: Sources of Contract Law
Introduction
Contemporary contract law seeks to respect free markets, regulate the freedom of
powerful contractors, safeguard the rights of weaker parties, and affect social policy
concerning matters of consumer protection, employee rights, and business ethics.
12
The English and American legal systems developed a general doctrine of contract
law through analysis of court decisions, from which they extracted a set of coherent
and well-defined rules, which were then used as a basis for constructing more
abstract principles. These general principles formed a framework for organizing and
linking the rules into a body of doctrine. Thus developed the classic theory of
contract law, which stresses facilitation of contractual relationships and favours an
objective approach. More recently, contract law incorporates a broader context that
considers not merely the applicable doctrine but also such other factors as economic,
relational and ethical perspectives. Contract law has evolved to reflect a
sophisticated mix of doctrine, policy and process.
Comparing the Civil and Common Law Approaches to Contract Law

The system known as the “Common Law’ developed in England, and became
adopted in Britain’s foreign territories. Thus, the common law of England has
remained the basic legal system in most of Britain’s ex-colonies, including the
United States. Therefore the term “common law”, used in the broadest international
sense, designates a country whose legal system is based on the common law of
England. On the other hand, continental Europe developed civil legal systems
derived from Roman law. The Civil systems have a long tradition of comprehensive
codification and tend to focus on their codes and scholarly commentary as a source
of law. In contrast, common law systems tend to emphasize more strongly the role
of the judge in development of the law.
The Meaning of “Common Law”

In addition to characterizing the English and American legal systems on an
international level, the term “common law” refers to those portions of law based
upon decisions of the courts (as distinct from those created by legislation). In
common law countries, many statutes govern aspects of contracts. These statutes
tend to codify the common law by taking rules and principles already developed by
judges and putting them into statutory form, in order to clarify the law or make it
more accessible. Such statutes may also reform, alter or modernize the common law
rules, or create new rules to deal with problems not yet addressed by the courts.
Despite considerable legislative attention to contracts, the field is still regarded as
part of common law because judge-made rules continue to predominate.
Commercial Codes
Civil law countries have long used codes in their legal systems. Although the United
States has a common law legal system, it has enacted a commercial code called the
Uniform Commercial Code (UCC) to apply to certain specific types of commercial
transactions. The UCC is not applicable to all contracts but does cover sales and
leases of goods, negotiable instruments and documents, and security interests in
personal property.
13
CISG
The United Nations Convention on Contracts for the International Sale of Goods
(CISG) applies to international sales transactions involving countries that are
signatories to the treaty. The Convention covers only issues of contract formation
and the rights and duties of the parties. It does not address matters touching on
contract validity, such as fraud, or illegality. It also excludes product liability issues.
Judicial Opinions
A fundamental principle of justice is the equal treatment of people in like situations.
As common law developed, it became established practice for court decisions to be
recorded so that they could be used as the basis for resolving later cases. Thus, a
court decision not only settled the dispute between the immediate parties, but it also
formed a rule to be followed in the next case involving similar facts. This allows for
efficiency in the administration of justice, enables people to predict case outcomes
more accurately, and serves to provide justice in the sense of equality of treatment
before the law. The principle that a judicial decision creates a rule of law, binding
upon later cases with similar facts, is known as the doctrine of precedent (in Latin,
stare decisis). This doctrine is peculiar to common law. Although civil systems
accord some weight to judicial precedent, they rely primarily on comprehensive
codes and scholarly commentary as a source of legal rules. Under the civil systems,
court decisions are typically regarded as an exercise in applying the law rather than
the process of creating law. European judges thus generally see their role as dispute
resolution rather than law-making. Hence court decisions in civil law countries tend
to be short, not very analytical, and fact-based. Court opinions in common law
countries, on the other hand, typically include substantial analysis in which the judge
justifies and articulates the rationale for the rule and its application in the case. The
statement of the court’s rule and reasoning are the portion of the case that constitutes
the precedent. Note that the Court of Justice of the European Communities is
developing its own approach, combining elements from both common law and civil
law systems. Its decisions affect laws in all Member States of the European Union.
Section C: General Writing Principles Applicable to Contract Drafting
Contract Drafting Process

Before writing, make sure you are clear about what parts the contract must include
and what situations the contract must cover. Know what the parties in fact want.
Precisely because this is an obvious point, it is often overlooked. Try outlining the
contract to make sure that all the needed pieces are included and are organized
logically.
The following guidelines may be helpful to you in beginning to draft a contract:
14
1. Reconcile yourself to writing many drafts of the contract to get it right. If you
try to get all the details right in the first draft, you are likely to miss some
important larger points.
2. Use clear, simple, businesslike language. Much progress has been made in
this area, particularly in the areas of insurance and finance. Be careful not to
slip back into overuse of “legalese”. Use only the technical terms you need
and define them if necessary.
3. Make each clause do one thing, not more. Outlines can help you here by
breaking down the whole contract into a series of small points.
4. When revising, check for ambiguities:
a. Check to make sure that you have used only one term for one item or
person. Referring to the same person, item or concept by two different
terms creates an ambiguity that invites misunderstandings later. If
needed, include a definition section to define all your key terms, so that
the reader understands any unusual terms.
b. Check also to be sure that you have not used one term for several
different items or persons. This can create unwanted ambiguities.
5. After polishing each clause in the contract, reread the document as a whole,
looking for larger contradictions between parts of the contract, rather than
wording problems within one clause. In your concern for the details, you may
have overlooked some larger ambiguities.
6. Somewhere along the way, consult others. No one person can imagine all the
pitfalls that the parties to any contract are hoping to avoid. No one person can
imagine all the ways some reader can misconstrue a point.
Importance of Multiple Drafts

Always try to write more than one draft of any given legal piece. Let the first draft
be creative, thorough and imperfect. Include everything you think necessary to the
piece and all things that you think might be useful.
Then use second, third, fourth and other drafts for rewriting, revising, and polishing.
15
Guidelines for Revising Drafts of Contracts
Revising occurs after rewriting in the writing process. Revising concentrates on
small-scale organization, sentence structure, transitions, paragraphing, grammar, and
punctuation.
There are two things to remember about revising. First, do not revise while you
write; this slows down both the writing and the revising processes. When you are
writing, concentrate solely on your ideas, no matter how unpolished your writing
may seem. Revise later. Second, when you revise, do it in stages. It is exhausting
and inefficient to try to revise on every level at once. Use your time for revising to
move from general writing problems to more specific ones.
1. ACCURACY: No amount of readability will replace accuracy, so

make sure you check first for the content of each legal point. Ask yourself the
following questions:
a. Is the content accurately stated?

b. Could any points be misunderstood because of ambiguity?
c. Are irrelevant facts or other irrelevant information excluded?
d. Are terms of art used correctly?
e. Are key terms used correctly?
f. Are paraphrases accurate?
g. Are names of parties and their status correct?
h. Are the citations accurate?
2. ORGANIZATION:
a. Are paragraphs internally logical?

b. Are there clear and precise transitions between paragraphs and
sentences?
3. READABILITY:
a. Are subjects and verbs close together?

b. Are unnecessary modifiers eliminated?
c. Are sentences not overly long?
d. Are lists clearly structured?
e. Are unnecessary prepositional phrases eliminated?
f. Is the text generally concise?
4. STYLE:
a. Is style consistent?
16
b. Is the tone and level of formality appropriate and consistent?
Try to give each of these categories your full attention for the specific amount of
time you have parcelled for the task. After you have finished revising, you can
move on to polishing the draft.
OTHER POINTS
General:
No archaic terms (e.g., hereinafter, hereby)
No legal pairs (e.g. good and sufficient)
No Latin or foreign expressions (e.g., bona fide)
Plain English, not legalese.
Precision: revising old text

Precise language provides firm standards for compliance and enforcement. It avoids
vagueness such as ‘… provide reasonable assurance that…” But what is “reasonable
assurance”? Perhaps this came from the words of a statute and the writer wants to
avoid an interpretation. On the other hand, perhaps the writer wants to keep some
interpretative freedom. This should be used as rarely as possible.
It is easy to create ambiguity or uncertainty by wrong punctuation, or wrong

positioning in the sentence of certain words. For example, “Do it early in the first
quarter” sets a shorter deadline than “Do it early, in the first quarter”. Likewise, “We
only recommend X” is far less strong than “We recommend X only”.
Example: “Bids must be submitted by May 6”. Is a bid submitted when sent (or
received) – and by whom? And does “by” mean the start of May 6 or the end.
Remember that Murphy’s Law (in Russian Zakon Podlosti) applies!
When revising old text, be careful of accidental changes.

Plain-language translations risk introducing errors, e.g., “Confirmation shall be filed
with this office” is more precise than “You must send us confirmation” (i.e., “file” is
more precise than “send”).
Plain-language revisions typically rearrange the text so that it is difficult to compare
the old with the new. Read each sentence in the new version and mark its equivalent
in the old text. Then decide what to do with old text that is unmarked. Two
possibilities are;
For small changes, use Track Changes to put a line through old words and
introduce new ones.
For large changes, set up two-column pages to display old and new text side by
side.
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Use the right verb
English has many ways to describe obligation, rights, prohibition and permission,
freedom to choose and limits on that freedom. Here are some general guidelines:
To express… Use… As in…

Obligation (an order) must, will you must do it
do it
Authorization (option) may you may do it
Prohibition (a ban) must not/may not you must not do it
Preference (a should you should do it
Recommendation)
Intention (promise will we will do it
Imposing no
requirement)
No obligation need not you need not do it
Note: use verbs early in the sentence.
Don’t use “shall”

The word “shall” has several meanings that are easily confused, even by lawyers.
Use “must” if you want to show obligation, and follow the rules set out above. Keep
“shall” for formal social occasions, e.g.:
Invitation: “Shall we dance?”
Response: “Wrong verb, baby!”
An alternative is to use the present simple tense, e.g. “The buyer agrees to…”.
Prefer the singular

Although doing this may mean using “a”, “an” and “the” more often, it can prevent
uncertainty.
State requirements positively

Rarely use single negatives. Never use double negatives. Readers change negative
statements to positive ones. This process needs extra work. It also allows
misunderstanding. Each negative adds to the risk of error.
For example, better to say “can… only if”, rather than “cannot…. unless”, e.g. also:
“must be no less than X” becomes “must be X or more”, or “must be at least X”
and, “does not exclude” becomes “includes”
Repeat key terms

In the case of a novel, it can be boring for the reader to see the same word repeated
many times. In the case of a legal document, use of the same word with the same
meaning is vital -– to avoid misunderstanding.
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At the same time, avoid the opposite problem – using one term in several ways,
especially legal terminology with more than one meaning (e.g., sanction).
Active voice
A serious problem in legal documents is overuse of passive verbs.
Documents are more readable in English if the passive is avoided.
Say again?!
You can make documents more readable in English by avoiding the passive.
OK, that’s better! Try again?
Documents in English are more readable when the drafter avoids the passive.
Also OK!
If the English-language drafter avoids the passive, then the document becomes more
readable.
OK, enough!
Passive verbs hide responsibility and make sentences longer than needed.
Possible cures
1. Put a subject (the “doer”) before the verb.
2. Cut part of the verb
3. Use another verb.
Use the Passive rarely *

Two or three time a page is enough.
Use passives when the doer of the verb is obvious, unimportant, or unknown.
Use you where possible
Often, “you” is implied (understood).
Without “you” it is almost impossible to avoid passives, especially when stating
obligations (imperatives).
The cleanest way to avoid passives is to lead with verbs as commands, e.g., provide,
avoid, include, perform.
In this way it is even possible to avoid “you must”.
Active verbs become natural for writers who ask the important question – WHO does
WHAT to WHOM? (in grammar: SUBJECT + VERB + OBJECT).
Sentences *
Keep sentences short: average 15 words. If you go over 30, you run the risk that the
reader may have a problem to follow you. As author, you are responsible for
communicating your ideas efficiently and effectively.
Note: the exception when using bullet points and lists.
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Keep subjects and verbs together: a short interruption between a subject and its verb
will not slow readers much. But a long one will interfere with the communication
process.
Keep compound verbs together: do not force readers to keep too much in their
minds.
Put verbs early: let readers know what the sentence is going to do.
Put main clauses early: first generalize, then qualify.
Rearrange long sentences: use punctuation surgically.
Parallelism *
Look for grammatical parallelism: help your reader by being consistent.
Clarify comparisons through parallelism: consistency helps comparisons stand out.
Use vertical lists to test for parallelism: again, to help the reader – but 3-7 items.
Look for parallelism in headings: good for style and presentation.
Save words with parallelisms: at sentence, paragraph and whole-text level.
Economy *
Make verbs do more work: they are the most important.
Use more Verbs: be active, give life to sentences.
Avoid the …ion of and the …ment of: this gives a shorter, livelier sentence.
Make verbs strong: strong verbs do more work than weak ones.
Prefer the present tense: what is future when you write is actual for the reader.
Reduce length of clauses and phrases: minor ideas require minimum words.
Avoid bureaucratese and legalese: use language the reader can understand.
Remove it is and there is: unless you have no choice.
Use neither too many nor too few prepositions: enough to clarify relationships.
Note: Special rule in special case: e.g., if…., then…
* Further explanation of these guidelines is included in Part 3: Basic Language

Guide to Drafting Legal Documents in English on page 41.
Section D: Using Defined Terms
Introduction
Your goal in drafting a transactional document is to make is speak unambiguously
and accurately. Future readers should know exactly what your document means—
regardless of whether those future readers are your client, you client’s successors,
some other party, or a judge. A good technique for achieving this goal is the use of
defined terms.
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When should you use defined terms?
A. As soon as you know you will refer to the same concept more than once in a
document; and
B. When it takes more than a few words to explain the concept
How do defined terms work?

A. “External” defined terms are unique to the external circumstances of this
particular transaction (names of parties, location of real property, etc.). They
tie the document to the outside world and the larger transaction. External
defined terms are especially useful when facts are subject to future
development and the exact details of the transaction are not yet known. They
should all be defined early in the document.
B. “Internal” definitions, by contrast, refer solely to concepts internal to the
particular document. They might refer to external defined terms.
How can defined terms simplify transactional documents?

A. They can assure that any particular laundry list will appear only once in a
document. This preserves simplicity, certainty, and consistency.
B. If properly structured, defined terms can allow you to make a necessary
change only once—by fine-tuning or modifying a defined term—as the terms
of the transaction are negotiated and modified over time.
C. Defined terms can help you prevent a maze of cross-references.
How should you create defined terms?

A. Take a “structured” approach, setting up definitions as “building blocks” that
work together.
B. As much as you try to broaden or clarify a defined term, it should still mean
what it intuitively seems to mean without close scrutiny of the definition.
C. Beware of setting up a “broad” defined term and then using it in a context
where you need a “narrow” defined term.
D. Avoid using words like “applicable” or “actual” or “selected” or “operative”.
They don’t help the user remember what the term is about.
E. When defining related concepts, the defined terms should interact in a way
that reflects the interaction of the underlying concepts
F. Collect your definitions in one place.
Final advice:
Don’t get carried away. Some concepts are simple enough, basic enough, and
sufficiently well understood (or vagueness may work in your favor) that you don’t
need a definition.
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Chapter 2: Contract Principles
Section A: Basic Attributes of the Contractual Relationship
Introduction
A contract may be defined as an exchange relationship created by oral or written
agreement before two or more persons, containing at least one promise and
recognized in law as enforceable. The essential elements of a contract thus include:
an oral or written agreement; the involvement of two or more persons; an exchange
relationship; at least one promise; and enforceability.
An oral or written agreement

Probably the most important attribute of contract is that it is a voluntary, consensual
relationship. A contract is created only because the parties, acting with free will and
intending to be bound, reach agreement on the essential terms of their relationship. It
is the element of agreement that distinguishes contractual obligations from many
other kinds of legal duty that arise by operation of law from some act or event,
without the need for assent.
Determining whether the parties actually agreed to a contract is not always easy.
The law generally gauges intent objectively in deciding whether a person agreed to a
contract. That is, the person’s overt acts (i.e., words and conduct) are evaluated to
decide whether they reasonably signified intent to enter the transaction.
Although oral contracts may be enforceable under some situations, in other situations
certain types of contracts must be recorded in writing and signed in order to be
enforceable. The legal doctrine known as the statute of frauds specifies the types of
contracts that must be written in order to be enforceable. The statute of frauds
developed in English common law, but similar rules have been codified in other
jurisdictions, including the United States. Statutes requiring written contracts
generally include situations involving contracts for the sale of land, contracts that
cannot be performed within a year, and contracts for the sale of goods.
Involvement of Two or More Persons

While it requires two parties to create a contract, it should be noted that a contract is
not confined to two participants. There can be as many parties to a contract as the
needs of the transaction dictate. In fact, multiparty contracts are common.
An Exchange Relationship
By entering into an agreement, parties bind themselves to each other for the common
purpose of the contract. Thus, the essence of a contract is the relationship. Some
contractual relationships last only a short time and require only a minimal
interaction. Other contractual relationships, however, can span many years and
22
require constant dealings between the parties, regulated by detailed provisions in the
agreement.
The essential purpose of the contract relationship is exchange. Simply stated, the
very essence of contract is a reciprocal relationship in which each party gives up
something to get something. Exchange continues to be the principal motivation for
contracting and the guiding rationale for the rules of contract law.
Promise
For a contract to exist, there must be promise. A promise is an undertaking to act or
refrain from acting in a specified way at some future time. This promise may be
made in express words or implied (i.e., inferred from conduct or from the
circumstances of the transaction). Bilateral contracts are formed when promises
remain outstanding on both sides at the instant of contracting. Unilateral contracts
are formed when one party has fully performed but a promise by the other party
remains to be performed at the time of contracting. Instantaneous exchanges, even
though consensual, do not constitute contracts because they do not involve promises.
Legal Recognition of Enforceability

It is a hallmark of contracting that it creates rules binding on the parties and confers
on them rights and obligations cognizable in law. The fundamental role of contract
law is to ensure that promises are upheld. Without legal enforceability of promises,
only instantaneous exchanges could ultimately occur—with devastating effects on
society. Where promises are broken, the power of legal enforcement enables the
disappointed party to sue. Once it is established that a contract was entered into and
breached, courts can enforce the contract by providing a remedy for the breach.
Such remedies can include monetary compensatory damages, specific enforcement
of the promise, and other types of damages. Legal enforceability thus serves to deter
breaches of contract because a reluctant party knows that failure to perform can
result in litigation with costly results.
Section B: Overview of Contract Standard Provisions
Introduction
The components of a contract will vary depending on the nature and complexity of
the transaction it reflects. There are, however, some terms that may be considered
standard that usually appear in documents in contracts in some form or another.
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Title
The title should reflect the subject matter of the transaction and, if appropriate, the
parties.
Preamble (Recitals)
Most transaction agreements begin with some form of a preamble that identifies the
purpose of the document and describes the transaction, the intent of the parties and
any assumed facts underlying the transaction. The preamble identifies the parties
and the date of the transaction as well as the nature of the transaction. In many
contracts, this appear as the “whereas” section, in which all of the statements begin
with that term.
Definitions
The use of defined terms can simplify a document immeasurably. While the number
and extent of the definition section depend upon the nature of the agreement,
virtually all contracts will include some defined terms.
Consideration
Although it need not be complicated, the consideration should be explicitly stated
since agreements must be supported by consideration. This may be expressed as an
exchange of dollars or of goods, or perhaps an exchange of mutual promises.
Covenants
The covenants memorialize the promises that are being made by the parties.
Examples include promises to deliver certain goods or to refrain from particular
activities.
Representations and Warranties

Representations and warranties identify the assumed facts underlying the agreement.
These sections represent the real heart of the deal and tend to be heavily negotiated.
An example would be a representation and warranty that the goods to be sold are in
working order.
Indemnification
The indemnification portion of the contract deals with the allocation of liability in
the event that all does not go as planned. Questions to be addressed in this portion of
the contract include who will be liable for what, and to what extent.
Breach and Cure

Although promises are not necessarily made to be broken, that possibility must be
considered when drafting a contract. What will constitute a breach of the agreement?
What opportunity will the parties have to “cure” the breach?
24
Termination
This section should identify under what circumstances the parties can terminate the
agreement and the procedures for termination.
Remedies
The remedies section addresses the consequences in the event of termination. This
section should specify what the parties are entitled to in the event of breach or
termination. It may identify a dollar amount, a formula, or simply a mechanism for
determining the appropriate remedy (such as arbitration).
Additional Important Contract Provisions

A number of other standard provisions are important to include in drafting contracts.
These include:
• Assignment
• Choice of Law
• Amendment and Waiver
• Arbitration
• Integration and Severability
• Notice
• Authority to Sign
Section C: Promises and Conditions
Introduction
By definition, all contracts—whether express or implied in fact—consist of at least
one promise. The parties to a bilateral contract, by definition, have also exchanged
promises of future performance. Because future performance is at issue, contracts
may also include conditions to performance of an obligation. The obligations
contained in a contract may be promises or conditions, the breach of which typically
has different consequences.
Promises
A promise may be defined as the manifestation of intention to act or refrain from
acting in a specified way, so made as to justify the one to whom the promise is
addressed in understanding that a commitment has been made. Typically, the
parties to a contract make multiple promises. From a drafting standpoint, parties
sometimes use language other than the word “promise” in expressing their
commitments to future performance. Language to establish a promise includes the
use of “shall”, “will”, “must”, “is obligated to”, “covenants” or “agrees to” (but see
above (p. 18). Failure to perform the obligation created by an enforceable promise
constitutes a breach of contract, which breach entitles the promisee to a remedy from
25
the promisor. Remedies for breach of promise can include compensatory money
damages or a discharge of the promisee’s own duties of performance (if any) under
the contract.
Conditions
Conditions refer to events, the occurrence of which either triggers or discharges the
duty of a party to a contract to perform the obligations created by the promises. It is
important to understand that such conditions refer to conditions to performance of an
obligation of a contract that has already been formed. An event that conditions
performance may be either a “condition precedent” or a “condition subsequent”. A
condition precedent is an event that must occur before performance of an obligation
becomes due. Thus, the occurrence of the condition precedent triggers the
obligation in the contract. In contract, a condition subsequent is an event whose
occurrence discharges an obligation. The use of conditions precedent is more
common in contract drafting. Typical language for the expression of conditions are
phrases such as: “if…, then…”; “provided that…”; “on condition that…”; “in the
event that…”. In addition to express conditions written into the contract, some
conditions may be implied from circumstances (such as usage of trade). The
consequence for non-occurrence of an event that is made a condition of an obligation
in a contract can be significant: the conditioned obligation of a party typically would
become discharged.
Section D: Warranties
Introduction
Most agreements will include affirmative duties owed to each party by the other
party, in specific sections setting forth each party’s respective performance
obligations. In addition, contracts generally include warranties, indemnities, and
limitations on warranties.
Warranties
Simply stated, a warranty is a promise. Warranties are, for the most part, promises
concerning the future quality or performance of goods to be sold or leased, of real
property to be sold or leased, of intellectual property to be sold or licensed, or of
services to be rendered. A breach of warranty results if the quality or performance
falls short of the promise made in the contract. In addition, commercial codes
describe the express and implied warranties that arise in certain transactions. Some
warranties are statements of facts. A breach of warranty would result if the fact
warranted is untrue. However, whether the warranty is based on promise or
statement of fact, breach of warranty has the same consequences as the breach of any
other promise.
26
Representations
Representations are statements of facts. Many types of contracts contain
“representation and warranties” sections that set forth statements and promises upon
which the respective parties rely in entering into the agreement. When thus
included in a contract, some statements of fact may be considered warranties, with
the inaccuracy of the statement having the same consequence as a breach of promise.
Other statements of facts, if untrue, may entitle the other party to seek to void the
contract on grounds of misrepresentation or to seek damages for deceit, rather than to
seek damages for breach of promises.
Indemnities
An indemnity is a promise by one party to take financial responsibility for damages
that the other party may suffer as a result of the first party’s breach of its warranties
under the agreement. Where contracts include representations and warranties, an
indemnification clause should also be included. Pursuant to such indemnities, each
party would agree to pay any damages and costs of litigation involved from a breach
of its warranties. Since both parties should be willing to bear the cost for problems
resulting from breach of their warranties (especially damages to third parties
resulting from a breach of a party’s warranties), an indemnity clause serves as a
mechanism for allocating the risk of loss from certain problems.
Limitations on Warranties
In addition to making promises (or no promises, in cases where a party disclaims all
warranties) and stating who will pay for certain costs that may arise, many contracts
address the amount and kind of damages that a party will pay. A party can seek to
limit its liability by disclaiming all warranties other than those expressly specified in
the contract. A party can also limit its liability by including clauses that provide: a
monetary cap on damages; exclusion of certain kinds of damages (such as special,
incidental, or consequential); exclusion of certain harms (such as harms resulting
from defects, for example). The legality of such limitations of liability may vary
among jurisdictions. Some jurisdictions require that any such disclaimers be
prominently displayed (such as in bold type or all capital letters).
27
Chapter 3: Establishing Agreement, Rights and Obligations, Remedies
Section A: Establishing an Agreement: Offer, Acceptance and Consideration
Introduction
Five essential elements of a valid contract include: competent parties; subject
matter; legal consideration; mutuality of agreement; and mutuality of obligation.
Competent Parties
Competency of parties includes being of adult age (18 years of age in some
jurisdictions) and being in complete control of mental faculties. This means that the
contracting party must not have a mental defect that would affect his/her ability to
understand and appreciate what he/she is doing.
Subject Matter
The contract must clearly and sufficiently set out the subject matter of the agreement.
The subject matter may not be illegal or for an illegal purpose.
Legal Consideration
Simply stated, consideration is the inducement to a contract. It is the cause, motive,
price or impelling influence, which influences a contracting party to enter into a
contract. Legal consideration is consideration recognized or permitted by the law as
valid and lawful. It is also referred to as good or sufficient consideration. The most
common form of consideration is money. However, goods or services or a
combination thereof may also constitute valid consideration.
Mutuality of Agreement
For a contract to be valid and enforceable, the parties must be in agreement as to
their respective rights and duties under the agreement. Mutuality of agreement is
also referred to as a “meeting of the minds.”
Mutuality of Obligation
The doctrine of mutuality of obligation provides that neither party to a contract is
bound unless both parties to the contract are bound. Thus, if performance of an
obligation (which is the consideration of the particular contract) is elective, rather
than mandatory, and the other party is required to perform some duty, then there
would be no mutuality of obligation and, accordingly, no valid enforceable contract.
28
Section B: Remedies
Introduction
A breach of contract terms occurs when a party fails to perform either fully or
adequately the obligations provided in the contract. In the event of breach, the non-
breaching and performing party may be provided relief for the breaching party’s
failure to perform its obligations.
Damages
Damages are generally designed to compensate the non-breaching party for the
benefit of its bargain. Damages may be compensatory, consequential, punitive or
nominal. The non-breaching party generally has an obligation to mitigate its
damages. Types of damages include:
• Direct damages: Losses incurred by the victim of a breach in acquiring the
equivalent of the performance promised under the contract, so as to substitute for
the performance that should have been rendered by the breaching party.
• Consequential damages: Losses suffered by the victim of a breach going
beyond the mere loss in value of the promised performance (direct damages), and
resulting from the impact of the breach on other transactions or endeavors
dependent on the contract.
• Punitive damages: Damages awarded, not to compensate the victim for
established loss, but to punish the breaching party and make an example of him.
Liquidated Damages
At the time of contracting, the parties may wish to avoid disputes and uncertainty
over damages if a breach should occur in the future. They may include a term in the
contract itself that seeks to fix in advance the amount of damages to be paid if a
breach occurs. Such “agreed damages” provisions are referred to as liquidated
damages clauses. Liquidated damages clauses can be enforceable if the clause was
fairly bargained, was a genuine attempt to forecast probable loss, and is not
disproportionate to the actual loss ultimately suffered. If the clause fails to meet
these standards, it is generally treated as a penalty and is unenforceable.
Specific Performance
The non-breaching party may seek a court order to force the breaching party to
perform in accordance with contract terms. This remedy is generally granted in
situations where money damages are inadequate as a remedy.
Rescission and Restitution

Another remedy involves cancelling the contract and making restitution to the
parties. Rescission is the cancellation of a contract. In its most common use,
rescission is the victim’s termination of the contractual relationship following a
material and total breach by the other party. Rescission ends the victim’s
29
performance obligations under the contract. Restitution is a judicial remedy under
which the court grants judgment for the restoration of property or its value to the
damaged party.
Reformation
Reformation is an equitable remedy that allows the parties to rewrite or reform the
contract as originally created in order to reflect what they intended.
Limitations and Waivers

The non-breaching party may waive its right to enforce a remedy. Generally,
contracts provide that waiver of one event of default does not mean waiver of any
future defaults. If permitted by law, the contracting parties can limit the type and
amount of remedies provided to the non-breaching party.
Voidable Contracts
A contract that is void is not legally enforceable and the parties thereto are not
legally obligated to each other. Generally, contracts are void because the subject
matter is not legal or one of the contracting parties does not have the competency to
contract. For example, a contract to commit a crime is void and cannot be enforced.
A contract that is voidable is otherwise a valid contract but the obligations can be
avoided for certain reasons permitted by law (such as duress or lack of capacity).
The party with the capacity to void the contract can choose to ratify the contract and
perform the obligations thereunder.
An unenforceable contract is generally a valid contract but is not enforced because of

public policy.
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Chapter 4: Planning Ahead for Problems; Interpreting Contracts
Section A: Termination Provisions
Introduction
When negotiating a contract, special attention should be given to “exit provisions”.
Well-drafted termination provisions are among the most valuable contractual
protections.
Termination for Cause provisions

Termination “for cause” refers to a material breach that is not cured within a
specified period.
Opportunity to Cure provisions

Termination sections often grant the damaged party the right to terminate the
agreement in the event of a material breach of the agreement by the other party.
With respect to curable breaches, such provisions typically provide that the damaged
party shall have the right to terminate the contract if the breach is not cured within a
specified time period.
Events Triggering Termination

Contracts also often grant the parties the right to terminate upon the occurrence of
certain specified events. These can include (but are not limited to):
• Insolvency, bankruptcy or liquidation
• Merger of the other party
• Change of control of the other party
• Changes in governmental regulations
• Failure to meet certain specified performance levels
Section B: Impracticality of Performance and Frustration of Purpose
Introduction
Mistake concerns an error of fact in existence at the time of contracting, so
fundamental to the premise of the contract that it precludes the formation of true
assent. Impracticability applies when events following contract formation are so
different from the assumptions on which the contract was based, that it would be
unfair to hold the adversely affected party to its commitments. There is an important
difference between mistake and impracticability. A mistake causes a defect in
contract formation, permitting a party to be excused from accountability for a
manifestation of assent. Impracticability, on the other hand, has nothing to do with
any problem in formation and presupposes that a binding contract was made. Rather,
31
it is concerned with whether a post-formation change of circumstances has such a
serious effect on the reasonable expectations of the parties that it should be allowed
to excuse performance. Similarly, the doctrine of frustration of purpose is also
concerned with a post-formation change of circumstances but in a slightly different
context than the doctrine of impracticality of performance.
Elements of the Excuse of Impracticality

The excuse of impracticability can be available to the party who is adversely affected
by the change in circumstances. However, all elements to this defense must be
satisfied in order for a party to be excused from performance. These elements
include:
1. After the contract was made, an event occurred, the non-occurrence of
which was a basic assumption of the contract.
2. The effect of the event is to render the party’s performance
“impracticable”, i.e., truly burdensome.
3. The party seeking relief was not at fault in causing the occurrence.
4. The party seeking relief must not have borne the risk of the event
occurring.
Understanding the Limitations on the Excuse of Impracticability

Impracticability arises from the occurrence of an event which event must be so
contrary to the assumptions of the contract that it changes the very basis of the
exchange. An event is unforeseen by the parties if they themselves did not
contemplate it as a real likelihood. Most occurrences external to the contract could
quality as events, such as: war, a natural disaster, a strike, and so on. A change in
the law or government regulation could also be an event. On the other hand, a
change in market conditions would not generally be regarded as a contingency
beyond the contemplation of the parties. A person should not be able to take
advantage of his own wrongful or negligent act, and a party who makes performance
more difficult or disables himself from performing, cannot expect to be excused from
liability. Risk allocation is often the dispositive issue in impracticability cases.
Thus, if the party adversely affected by the event has expressly or impliedly assumed
the risk of its occurrence, then the non-performance cannot be excused even when all
the other elements of an impracticability defense are satisfied. Thus, careful drafting
is required with respect to risk allocation in a contract.
Frustration of Purpose
Like impracticability, frustration of purpose is concerned with a post-formation
event, the non-occurrence of which was a basic assumption on which the contract
was made. This event must not have been caused by the fault of the party whose
purpose is frustrated; and that party must not have borne the risk of its occurrence.
The doctrine of frustration of purpose differs slightly from the doctrine of
impracticability. The essential difference lies in the effect of the event. Frustration
32
of purpose arises when the impact of the event is on the benefit reasonably expected
by a party in exchange for the performance, rather than directly affecting the
performance of the adversely affected party by making it unduly burdensome. In this
case, the event so seriously affects the value or usefulness of that benefit that it
frustrates the contract’s central purpose for that party. As to the purpose that has
been frustrated, the purpose must be so patent and obvious to either party that it can
be reasonably regarded as the shared basis of the contract.
Section C: Risk Allocation in Contracts
Introduction
Risk allocation is often the dispositive issue in mistake and impracticability cases.
The analysis of risk allocation is relatively straightforward: if the party adversely
affected by the event had expressly or impliedly assumed the risk of its occurrence,
the non-performance cannot be excused even if all other elements of a defense or
excuse are satisfied. The first place to look in determining risk allocation is the
contract itself. If the parties realized that a particular future event could affect
performance, the contract may include an express and specific term assigning risk.
Even if the parties do not have a particular contingency in mind, the contract may
have a more general provision allocating the risk of disruptions or calamities. Such
general provisions are called force majeure clauses.
Force Majeure Clauses

Force majeure is a term used to describe a “superior force” event. Force majeure
clauses have two purposes: they allocate risk and put the parties on notice of events
that may suspend or excuse service.
The essential requirement of force majeure is that the invoking party’s performance
of a contractual obligation must be prevented by a supervening event that is
unforeseen and not within the control of either party. Typical force majeure
provisions include: “acts of God”, superseding governmental authority, civil strife
and labor disputes. However, there is no uniform set of events that constitute force
majeure. Instead, force majeure remains a flexible concept that permits the parties to
formulate an agreement that corresponds to their unique course of dealings and
industry idiosyncrasies. Moreover, recent world events have increased the necessity
of including additional unthinkable events, such as terrorism and the risk of
biological and chemical warfare.
Negotiating Force Majeure Clauses

Parties negotiating a force majeure clause must scrutinize the events and allocation
of risk to assure that the clause is not one-sided or unenforceable.
33
Drafting a Force Majeure Clause
In drafting force majeure clauses, parties may rely on general clauses or specifically
enumerate which events will constitute force majeure. A prudent force majeure
clause specifically enumerates the events that will prevent performance and entitle a
party to suspend or excuse an obligation. Force majeure clauses may also include
language that is industry specific.
Invoking a Force Majeure Clause

Generally, a party may invoke a force majeure clause if an enumerated event occurs
that is out of the party’s control and prevents performance of a contractual
obligation. The burden of proof is on the party seeking to invoke the force majeure
clause. The force majeure event may either suspend or excuse a party’s
performance.
Sample Force Majeure Clause

Neither party shall be liable in damages or have the right to terminate this Agreement
for any delay or default in performing hereunder if such delay or default is caused by
conditions beyond its control including, but not limited to Acts of God, Government
restrictions, wars, insurrections ad/or any other cause beyond the reasonable control
of the party whose performance is affected.
Additional Risk Allocation Clauses

In addition to a force majeure clause, a contract may impliedly place risk on a party
by means of a provision such as a warranty, an undertaking to obtain insurance, or
some other commitment from which the assumption of risk may be inferred. It is
good planning for the parties to consider potential risks and to provide for them
clearly in the contract. This reduces the possibility of later disputes and litigation.
Section D: Clauses that Address the Possibility of Future Litigation
Introduction
Too often, a situation that might have been quickly and easily resolved by simply
referring to well-drafted contract language turns into costly and time-consuming
litigation. Whether the contract is simple or complex, clauses that address the
possibility of future litigation should never be overlooked.
Forum Selection Clause

Forum selection clauses specify the place where lawsuits will be filed in the event a
dispute arises between the parties to a contract. Specifically, the parties utilize such
clauses to expressly agree to litigate all disputes arising from the contract in a
34
specific jurisdiction and venue. Such clauses offer obvious practical value, as
selecting the forum in which a contract dispute is to be heard can help keep the
litigation in a nearby forum, reduce future costs, and eliminate the need for
challenges to jurisdiction in the event suit arises.
Choice of Law Clause

Parties may also negotiate which laws will govern their contract. Specifically,
choice of law clauses specify the legal jurisdiction under which the agreement shall
be governed and construed. While there are clear advantages to the parties for
inserting such clauses into their contract, there must also be a rational reason for the
specified choice of law. Such clauses require careful research and negotiation,
because the laws of different jurisdictions may affect the parties differently. A
choice of law clause may not completely shelter a party from having the laws of
other countries imposed upon it (for instance, by claims of third parties), but the
clause may at least define the laws that govern the immediate relationship between
the contracting parties.
Alternative Dispute Resolution Clause

Many types of agreements contain alternative dispute resolution clauses that obligate
the parties to submit their disputes to arbitration or mediation rather than litigation.
Alternative dispute resolution procedures are often cost-effective and enable
disputing parties to pursue their claims more quickly than traditional litigation.
Through the use of alternative dispute resolution clauses, the parties can agree to
such specific matters as: whether the arbitration will be binding or non-binding; how
the arbitration provision is to be triggered; where the arbitration would take place;
which rules will govern the arbitration proceedings; and the selection of the
arbitrators. Thus, properly drafted dispute resolution clauses can provide assurance
to the parties that their disputes will be resolved through the less expensive and
speedier processes of arbitration or mediation rather than by litigation. Moreover,
alternative dispute resolution clauses are of particular value in international
agreements, in light of the availability of established arbitration institutes to serve as
a forum for disputes involving contracting parties from different countries.
35
Chapter 5: Other Important Clauses; Assembling Contracts
Section A: Understanding General Clauses
Introduction
Contracts typically include a general section containing a number of business matters
relating to the agreement. These clauses are usually located at the end of the
agreement. Some general matters to be considered for inclusion in contracts are
described below.
Integration Clause (Entire Agreement Clause)

It is customary to provide that the agreement constitutes the entire agreement
between the parties. The purpose of this clause is to state for the record that there are
no representations, warranties, terms or conditions between the parties other than
those set out in the agreement. Such clauses are intended to prevent related dealings
or agreements between the parties entered into before or after the execution of the
agreement, from being used to vary or interpret its provisions.
Waiver Clause
There may be times when the parties want to waive a breach or default of a provision
of the agreement. A clause dealing with this circumstance usually provides that a
waiver of a breach or default will not constitute a waiver of a succeeding breach or
default of the same provision. Another typical waiver clause provides that any delay
or omission in exercising any right under the agreement does not constitute a waiver
of that right.
Time is of the Essence Clause

A clause can also be inserted to provide that, in relation to certain events, time is of
the essence. This means that time periods and limitations must be strictly observed
or else the contract is terminated.
Amendments Clause
Sometimes the parties want to change the agreement. A typical amendments clause
providing for this possibility would state that the agreement may be amended only in
writing and must be agreed to by an authorized representative of both parties.
Independent Parties Clause

This clause typically provides that the agreement will not create a legal relationship
between the contracting parties (such as a partnership, joint venture, franchise or any
other form of business organization or relationship). Neither party has the authority
to create obligations on behalf of the other party except as provided in the agreement.
36
Survival Clause
It is customary to specifically provide for the survival of an obligation after the
termination of the contract. For example, if the parties intend for warranties to
survive the termination of the agreement, then they would specifically so state in a
survival clause.
Severability Clause
If the contract is ever litigated, it is possible that a court could rule that only a part of
the agreement is invalid, illegal or unenforceable. To provide for this possibility, an
agreement can provide that the invalid, illegal, or unenforceable part can be severed
from the agreement and that the remainder of the agreement can continue in full
force and effect.
Remedies Clause
An agreement often provides a statement of remedies that are available in case of a
breach. However, there are also general remedies available under the law. This
legal situation is often addressed by including a provision that states that the
remedies expressly stated in the contract shall be in addition to, and not in
substitution for, those generally available under the law.
Further Assurances Clause

Including this clause obligates parties to perform further actions or execute further
documents after closing or execution, either indefinitely or for a specified period of
time.
Currency Clause
When negotiating international agreements, it is wise to insert a clause specifying the
currency in which money owing under the agreement is to be paid. This can also
come into play in the event a court awards damages under the agreement.
Consideration should also be given to specifying a conversion date in this clause.
Section B: Assignments
Introduction
It is not uncommon for a party to wish to assign certain rights to payment or
performance to a third party. Through the use of an assignment clause in a contract,
the benefit of the contract can be reassigned from the intended beneficiary to a third
party.
37
Effecting an Assignment
An assignment involves the act of transferring to another all or part of one’s
property, interest or rights. To assign a right, the assigner must show intention to
make the present transfer without any further action required (by either party). From
a drafting standpoint, it is best to use an active verb to connote immediate movement
of the right from assignor to assignee. Examples include “I hereby give, transfer,
convey”. Avoid using such terms as “will” or “promise to”, because such language
suggests that the assignment hinges on a future event. Although oral assignments
may be binding in some cases, it is generally in the parties’ interests to make the
assignment in writing and executed by both the assignor and assignee. Any written
assignment should clearly identify the parties and rights being transferred. A written
assignment should also define the consideration given by the assignee (if any) in
return for the benefit of the assignment.
Limitations on Assignments
The ability of a party to assign its interest in a contract may be limited by contract, or
in some cases by law or public policy. Parties can protect themselves from
assignments by adding a clause to the contract to either: (a) prohibit assignment of
any contract right, or (b) prohibit any such assignments by one party without the
consent of the other party to the contract.
Section C: Contract Interpretation Issues
Introduction
When the terms of an agreement are expressed clearly and comprehensively, the fact
of contract formation and the extent of each party’s commitment can be ascertained
with relative ease by the interpretation of the language in the written contract.
However, problems arise in cases where the parties fail to express their assent
adequately, leave a material aspect of their agreement vague or ambiguous, or fail to
resolve or provide for a material aspect at all. Obviously, such problems can arise
when insufficient attention to detail is given in drafting the contract; similarly, poor
drafting can result in the contract not clearly reflecting the parties’ expectations.
Indefiniteness can thus result from vagueness, ambiguity, omission or irresolution.
Problems of Vagueness and Ambiguity

Vagueness results when a term is stated so obscurely or in such general language that
one cannot reasonably determine what it means. Ambiguity results when a term is
capable of more than one meaning. Ambiguity can lie in a word itself or in the
structure of a sentence; ambiguity can also result from inept sentence construction.
Sometimes, the parties’ meaning can become clear if interpreted in context. Some
clarity may be gained by reference to the parties’ course of dealing, custom or usage
in the commercial environment in which the parties made the agreement, or by
38
standardized terms recognized by law. But contextual evidence cannot always save a
vague or ambiguous term. Thus, failure to properly communicate the parties’
intentions in the agreement can result in the contract not being sufficient to create an
enforceable relationship.
Omitted Terms
If a term is omitted, it simply is not there. The agreement would have a gap
regarding that particular aspect of the parties’ relationship.
Unresolved Terms
Unresolved terms result when the parties have raised an issue in their agreement, but
have not yet settled it, leaving it to be resolved by agreement at some later time. In
such cases, indefiniteness results from the parties’ deliberate postponement of
agreement on the particular term. Nevertheless, an “agreement to agree” is not
regarded as definite enough to create a firm and final contract.
“Gap Fillers”
A “gap filler” is a provision legally implied into a contract to supplement or clarify
its express language. In attempting to interpret indefinite contracts, gap fillers may
be used to supplement contracts (but not to override the parties’ probable intent).
Gap fillers are standard terms supplied by law. Some gap fillers supply generalized
obligations that are likely to be implied in all kinds of contracts; some gap fillers are
very specific and relate to particular types of terms in specialized contracts. An
example of a gap filler that supplies a general obligation is the obligation implied by
the law that the parties use their best efforts to effect the contract’s purpose.
Commercial codes (such as the CISG or the UCC) supply gap fillers that relate to
specific aspects of particular kinds of contracts.
Implication of Law Irrespective of Intent of the Parties

Nevertheless, some legally implied obligations are so fundamental to fair dealing or
so strongly demanded by public policy that they are mandatory and are part of the
contract regardless of the parties’ actual intent. Such terms are more a matter of
regulation than of intent. That is, the law’s true purpose in imposing standard terms
is not so much to ascertain what the parties reasonably must have intended, but to
limit contractual autonomy in the interests of public policy. For example, the
underlying policy may be to protect a weaker party from one-sided and unfair
contract terms. One of the most important and pervasive mandatory construed terms
is the general obligation of both parties to perform the contract reasonably and in
good faith. It should also be noted that there are some construed terms that are so
strongly implied as a matter of public policy that they become part of the contract
unless the express terms of the agreement clearly exclude them. In some cases, even
a clear exclusion is not sufficient unless it complies with specified rules that may
39
prescribe the use of particular language or format. Examples would include
disclaimers of warranties.
Terms Left for Future Determination

If the parties cannot agree upon a specific term and determine to leave it for future
determination, they have a number of alternatives. First, the parties can decide on a
formula or an external source or standard in order to provide for objective criteria for
future determination of the term. As a second alternative, the parties can opt to
leave the determination of the term to the discretion of one party, although such a
provision is risky to the party who defers discretion to the other. The parties can also
opt to omit the term from the contract; however, the omission of a central term may
render the contract itself unenforceable. The parties may also deliberately defer the
term by “agreeing to agree”; however, caution is necessary in such cases since the
general rule is that no contract comes into existence until all its material terms have
been settled.
40
PART 3
Basic Language Guide to Drafting Legal Documents in English
Archaic terms e.g.:

hereinafter
hereby
aforesaid
deem
Avoid these where possible!
Legal pairs and phrases, e.g.:
at or about
any and all
basic and fundamental
full and complete
true and accurate
each and every
true facts
important essentials
initial preparation(s)
future plans
period of time
accurate manner
at an early time
educational process
good and sufficient
Either replace with a single word, or choose one of the words.
Latin or foreign expressions e.g.:

bona fide
ipso facto
pacta sunt servanda
in rem
Plain English, not legalese

Not… but…
41
perform do
render make/give/give back
commence begin/start
terminate end/stop
ascertain learn/find out
deem think/consider
on the grounds that because
for the reason that because
due to the fact that because
based on the fact that because
in view of the fact that because
owing to the fact that because
during the course of during
in the event that if
for the purpose of to
the question as to whether whether
take into consideration consider
a number of some/many
annex attach
approximately about
at the present time now
commence begin
despite the fact that although
dispatch send
forward send
mutually agree agree
per annum a year
portion part
pursuant to by, under
remainder rest
retain keep
subsequent to after
42
(see also below: “Officialeglish”)
Passive to active: examples
When the employee is returned to duty, leave balances are reconstructed

and any leave forfeited is restored.
becomes:
When the company returns the employee to duty it reconstructs leave

balances and restores any forfeited leave.
and…
Written comments should be sent to Mindaugas Ensefalaitis. They must be
received on or before May 1.
becomes:
Please send written comments to Mindaugas Ensefalaitis, to reach him on or

before May 1.
and finally…
In response to comments that were received, it has been determined by the

department that proposal § 151.12 will be deleted and a new part will be
added.
becomes:
In response to comments, the department will delete proposed § 151.12 and

add a new part.
Sentences: keep them short
One 50-word sentence…
It has been determined that this is not a major amendment under EU Directive 12291
because this amendment will not result in an annual effect on the economy of 100
million or more or a significant increase in costs for consumers; industry; or
Community, Member State, or local government agencies.
… could read as three short sentences:
This is not a major amendment under EU Directive 12291. It will not result in an
annual effect on the economy of 100 million or more. Nor will it significantly
43
increase costs for consumers; industry; or Community, Member State, or local
government agencies.
Sentences: keep subjects and verbs together:

The following:
The courts generally, when a taxpayer hands over all books and records and
otherwise makes a full and complete disclosure of all of the facts to a third party to
whom the task has been given of preparing the taxpayer’s annual tax return, will not
find fraudulent intent.
looks better as…
The courts generally will not find fraudulent intent when a taxpayer hands over all
books and records and otherwise makes a full and complete disclosure of all of the
facts to a third party to whom the task has been given of preparing the taxpayer’s
annual tax return.
Note: the above sentence also has other problems.
Sentences: keep compound verbs together.
The Director may, in accordance with the procedures set forth in part 104 of
this chapter, take action against counsel for improper conduct in the course of
an investigation.
This might read:
The Director may take action against counsel for improper conduct in the
course of an investigation. Procedures are in part 104 of this chapter.
Note: the new version also deals with other problems in the first sentence.
Sentences: put verbs early
Verb late:
Photographs and other kinds of job and professional information such as

current duties, prior employment, types of degrees, and schools are optional
kinds of information for the intranet.
Verb early:
Optional kinds of information for the intranet are photographs and other kinds
of job and professional information such as current duties, prior employment,
types of degrees, and schools.
44
Note: the improved sentence could still be better…
Sentences; put main clauses early
Main clause late:
If it is found that any Member State adjustment to the Commission rule is in any
way ambiguous with respect to the stringency of applicability, the stringency of
the level of control, the stringency of the compliance and enforcement
measures, or the stringency of the compliance dates, for any affected source or
emission point, we will disapprove the Member State rule.
Main clause early:
We will disapprove the Member State rule if it is found that any Member State
adjustment to the Commission rule is in any way ambiguous with respect to the
stringency of applicability, the stringency of the level of control, the stringency
of the compliance and enforcement measures, or the stringency of the
compliance dates, for any affected source or emission point.
Note: the improved sentence could still be much better…
Sentences: rearrange long ones
Long and lifeless…
No person may directly or indirectly offer for three years after the conversion
to acquire or acquire the beneficial ownership of more than 10% of any stock
in the converted savings association without the prior written approval of the
Financial and Investment Controls Agency (FICA).
Surgically punctuated:
For three years after the conversion, a person must have the prior written
approval of the Financial and Investment Controls Agency (FICA) for the
following: a direct or indirect offer to acquire (or acquire the beneficial
ownership of) more than 10% of any stock in the converted savings
association.
Note: the change to positive language helps.
Note also: the possibility to use a list.
45
Parallelism: grammatical
All parts of a list should use the same grammatical form.
Below are four possibilities:
All actions
In phase 1, do three tasks:
Conduct paint tests.
Analyze test equipment.
Write software documentation.
All things
Phase 1 has three tasks:
Paint tests.
Test-equipment analysis.
Software documentation.
All gerunds
Conducting paint tests.
Analyzing test equipment.
Writing software documentation.
All infinitives
To conduct paint tests.
To analyze test equipment.
To write software documentation.
Parallelism: to clarify comparisons
Comparison difficult
The total value of the cash is called “cash in” when deposited into the
system. The term “cash out” refers to the total value of the cash removed
from the system.
Comparison easy
“Cash in” means the total value of the cash deposited into the system.
“Cash out” means the total value of the cash removed from the system.
Single if obscures differences
If the volume of traffic is heavy, vehicles may have to wait at the border for
three days or more. Expect a wait of up to two days if the volume of cross-
border traffic is light.
46
Two ifs clarify differences
If the volume of traffic is heavy, vehicles may have to wait at the border for
three days or more.
If the volume is slow, the wait is likely to be less than two days.
Note: Special rule in special case: e.g., if..., then…
Use vertical lists to test for parallelism
Running text hides the error
The identification code speeds up filing, retrieval, and

eventually to dispose of the documents.
Lack of –ing ending stands out
The identification code speeds up:

filing,
retrieval, and eventually
to dispose of the documents
Note: a list usually contains no more than seven elements…
Long list loses parallelism
As the Equal Opportunities Counselor, you have these duties:

1. Make whatever inquiries…
2. Seek to resolve…
* * *
9. The aggrieved person’s identity must not be revealed.
Long list holds parallelism
As the Equal Opportunities Counselor, you have these duties:

3. Make whatever inquiries…
4. Seek to resolve…
* * *
10. Do not reveal the aggrieved person’s identity.
Parallelism for style and presentation in headings
Equal weight to unequal topics

§ 1.1 How to apply to the Court.
§ 1.2 Who may apply to the Court.
§ 1.3 What an application to the Court involves.
§ 1.4 What follows filing of an application with the Court.
§ 1.5 What a final judgment of the court involves.
47
Minor topics are subordinated
§ 1.1 How to apply to the Court.
[Includes § 1.2 above]
§ 1.2 What an application to the Court involves.
[Includes § 1.4 above]
§ 1.3 What a final judgment of the court involves.
Inconsistency obscures logic

§ 1.1 How the Commission is involved in the approval process.
§ 1.2 What role the Department plays in the approval process.
§ 1.3 Other players.
Parallelism makes logic visible

§ 1.1 How the Commission is involved in the approval process.
§ 1.2 How the Department is involved in the approval process.
§ 1.3 How others are involved in the approval process.
Differences late
§ 1.1 General requirements for all containers.
§ 1.2 Specific requirements for dry bulk containers.
§ 1.3 Specific requirements for liquid bulk containers.
Differences early
§ 1.1 All containers: general requirements.
§ 1.2 Dry bulk containers: specific requirements.
§ 1.3 Liquid bulk containers: specific requirements.
Parallelisms: save words
Wordy
The use of seniority for furlough and rehiring of employees helps

employees, and advantages are also gained by employers and
communities.
Economical
The use of seniority to furlough and rehire employees helps employees,

employers, and communities.
48
Economy
Shorter is usually (but not always) better.

Ten pages may be too much; 100 pages may be not enough.
Length depends on content and audience.
Plain language saves words (but adds headings).
Plain language improves organization, wording and content.
Useful pointers include:
Economy: make verbs do more work
Verbs are action words. Verbs do things.
Economy: use more Verbs
Nouns are static

At the start of the program…
Due to changes in formats…
The test must include two things:
A demonstration of…
An analysis of…
Verbs add life

When the program starts…
Because formats changed…
The test must include two things:
Demonstrate…
Analyze…
Economy: avoid the …ion of and the …ment of
The …ion of and the …of

You are responsible for the development and implementation of the program.
Trading must stop during the preparation by the Exchange for the replacement of the electronic
price indicators.
Verbs add life

You are responsible for developing and implementing the program.
Or,
Develop and implement the program.
Trading must stop while the Exchange prepares to replace the electronic price indicators.
49
Economy: make verbs strong
Examples of weak verbs: is/are, give, have, make, take, provide.
Weak verb Weak sentence Strong sentence

be These regulations are These regulations
applicable to all apply to all
employees. employees
have The regulation will have The regulation

a significant effect on will significantly
deposits. affect deposits.
make Make use of the procedure. Use the procedure.
provide Provide motivation for Motivate industry to

industry to comply. comply
Economy: prefer the present tense

Write as if the text (e.g., contract, statute, rule) is already in effect.
That way, you avoid the extra words that go with complex tenses.
Complex verb tenses

§ 1.4 If Employee shall repeat conduct in respect of which Employer has already issued a warning,
then the next phase of the disciplinary procedure will come into effect.
Simple present tense

§ 1.4 If Employee repeats conduct covered by Employer’s previous warning, then the next phase of
the disciplinary procedure comes into effect.
Economy: reduce length of clauses and phrases
Clause
The domestic legal systems that are subordinate to EU law retain a degree of independence.
Phrase
The domestic legal systems subordinate to EU law retain a degree of independence.
Word
The EU’s domestic legal systems retain a degree of independence.
50
Economy: avoid “Officialegish” – use plain English
Officialegish phrases Plain English phrases

comply with meet, obey
for a period of for
in accordance with under
in the amount of for
in the event that if
is authorized to may
on a weekly basis weekly
prior to before
provided that if
pursuant to under
the provisions of (avoid)
the requirements of (avoid)
Officialegish words Plain English words

accorded given
approximately about
attempt try
consequence result
deem consider
expend spend
expiration end
inform tell
notify tell
obtain get
provided but, if, unless
regarding about
retain keep
said the, that, those
such the, that, those
utilize use
Economy: remove it is and there is

Why? Because they make sentences start slowly.
Slow start
It is the legal obligation of the agency to assess a late fee.
There are several proposals that would improve current procedures.
Quick start
The agency is legally obligated to assess a late fee.
Several proposals would improve current procedures.
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Economy: use neither too many nor too few prepositions
Too many prepositions
One of the requirements is…
The last paragraph in the first section of the order permits quarterly payment of royalties.
About right
One requirement is…
The last paragraph in the order’s first section allows quarterly royalty payments.
Too few prepositions
oil transportation rate variances
first year additional error correction costs
new interest calculation methods
About right
variances in rates for transporting oil
costs of correcting additional errors in the first year
methods to calculate new interest?

new methods to calculate interest?
52
PART 4: ASSIGNMENTS
Section A: Introduction and Self-Assessment
Question: What is the difference between the Godfather and a lawyer?

Answer: The Godfather makes you an offer you can’t __________.
The lawyer makes you an offer you can’t ______________.
For example:
If a normal person gives you an orange, they say:
“Hey, have an orange”.
But when a lawyer performs the transaction, they say:
“ I hereby give and transfer to you absolutely all my interest, rights, title, claim and
advantages to of and in said orange, together with all its skin, juice, pulp and pips
and all rights and advantages with full power to bite, cut and otherwise treat the same
as you may in your absolute discretion determine or transfer ownership or possession
of all or any part thereof namely with or without said skin, juice, pulp and pips as
aforesaid."
SELF-ASSESSMENT EXERCISE
What are the Characteristics of a Good Contract?
Quickly read through the following and check off items you think are important.
Use a 1-5 scale, where 1 = not important and 5 = very important indeed.
Would you add any other characteristics?
Clear
Organized
Specific and concrete
Abstract and general
Unclear
Accurate terminology
Correct grammar, punctuation, usage
Long and detailed
Easy to read
A short summary of agreed terms
Legal terminology shows that a lawyer wrote it
Complex
Favours the party whose lawyer prepared it
53
Section B: Contracts Terminology and Language Development Exercise
Read the following extract from a contract for services between two parties, Alpha
and Beta. The agreement is drafted in very formal style. For each space, decide
which answer A, B, C or D (on the answer sheet opposite) may be used. Underline
the correct answer on the answer sheet. Total possible score: 10 points.
There is an example at the beginning (*)
4.2 Secrecy
Not at any time during or after the term to (*) … to any person any
confidential information relating to the business or affairs of Beta other than to
persons who have signed a secrecy (1) … in a form approved by Beta.
4.3 Delegation
Not to delegate any duties arising under this agreement otherwise than may be
(2) … permitted under its terms.
4.4 Intellectual Property

Not to cause or permit anything which may damage or endanger the
Intellectual Property of Beta or assist or allow others to do so.
4.5 Indemnity
To indemnify and keep indemnified Beta from and against any and all loss
damage or liability (whether civil or criminal) (3) … by Beta resulting from a
breach of this agreement by Alpha including
4.5.1 any act or neglect or (4) … of Alpha’s employees or agents
4.5.2 breaches in respect of any matter arising from the supply of the Services
resulting in any successful claim by any third party
4.6 Insurance
4.6.1 To (5) … at its own cost a comprehensive policy of insurance to cover
the liability of Alpha in respect of any act or default for which it may become
liable to indemnify Beta under the terms of this agreement
4.6.2 To arrange that the minimum cover of that policy is GBP 1,000,000
4.6.3 To increase such cover by the (6) … of increase in the retail Prices Index
in the (7) … 12 months
4.7 Notice
To (8) … with the terms of any notice specifying a breach of the provisions of
this agreement and requiring the breach to be (9) … so far as it may be but
nothing in this clause is intended to require Beta to serve (10) … of any breach
before taking action in respect of it
Can you suggest ways to improve the above text?
54
ANSWER SHEET: Language Development Exercise
(*) A. give B. tell C. divulge D. inform
(1) A. undertaking B. promise C. contract D. covenant
(2) A. expressly B. particularly C. deliberately D. explicitly
(3) A. undergone B. held C. received D. suffered
(4) A. wrong B. evasion C. default D. emission
(5) A. maintain B. retain C. uphold D. preserve
(6) A. percent B. rate C. amount D. extent
(7) A. prior B. preceding C. following D. subsequent
(8) A. obey B. agree C. accept D. comply
(9) A. remedied B. repaired C. solved D. fixed
(10) A. warning B. communication C. notice D. report
NOTES: Can you suggest ways to improve the above text?
55
Section C: Redrafting Skills Exercise
Read the three extracts below. The origin of the extract is given. Redraft each extract
to make them more easily understood by the client.
Write your answers on the answer sheet on the opposite page.

Total possible score: 30 points.
1. From a lawyer’s explanation to a client of a statute dealing with tax

exemption
S223(1) provides that a gain accruing on the disposal of a dwelling house will not be
chargeable if it has been the individual’s only or main residence throughout the
period of ownership or throughout such period except fot the last 36 months. This
particular provision covers both periods of absence and periods during which the
house was used for any other purpose such as letting.
2. From a car insurance policy
Any policy-holder who is insured hereunder and who is deemed to have exacerbated
the damage to the vehicle shall have the aggregate amount paid out undet this policy
modified accordingly.
3. From the rules of membership of a tennis club
Prior to the attainment of the age of 21 years no member of this club may procure
alcohol for his own or any other member’s consumption. Any attempt to do so will
constitute a breach of club rules and the chairman will initiate the termination of that
person’s membership as a consequence.
56
ANSWER SHEET Redrafting Skills Exercise
(1)
(2)
(3)
57
Section D: Exercise I: Does a Contract Exist?
Under Spitalian law, four elements are needed to create a contract. They are:
1. intention to create a legal relationship

2. offer
3. acceptance
4. consideration
A court will apply an objective test to any dispute to look for these four things. If
they all exist then the parties have a contract. If only three exist then the dispute is
not the business of Spitalian contract law.
Let us begin by looking at the vocabulary associated with the first element, intention.
This is where the court looks at whether the parties to an agreement really intended
to be legally bound by their words. Some important words are:
1. express
2. implied
3. presume
4. amount to
5. appeal
6. enforce
Put one of the words into the sentences below. You can use each word only once.
You may have to change the tense of the verb.
A. Where an oral agreement is made between very close friends the court
might automatically ________________ that they did not intend to enter
into a legal agreement, even if nothing specific was said on the subject.
B. I have given you a letter to show the theatre box office when you collect
the tickets. It gives you my _______________ permission to use my credit
card to pay for them.
C. The manager of the company decided that if his behaviour

______________ a breach of his contract of employment they may well
sack him without notice.
58
D. I lost the case in the lower court but have been advised that I have grounds
for ___________________ .
E. Where two companies have been doing business for a long time, the court
might see an ______________________ contract in their behaviour even
though they haven’t specifically agreed anything.
F. If one party is in breach of contract the other can go to court to try to

_____________ the agreement.
Section D: In-Class Exercise II: Do They Have a Contract?
1. Misha and Masha are very good friends. Masha’s apartment needs decorating so
she calls Misha, who is unemployed at the moment, and asks him: “Will you
decorate all three rooms in my apartment for USD 200?” Misha agrees. On May 1
he spends 80 USD on materials and starts work. On 3 May Masha tells him that
she needs the work to be finished by 12 May because her parents are coming to
stay. Misha agrees to finish the work by then.
Unfortunately, Misha is a bit lazy and the work is only half done by 14 May. He
finally finishes on 20 May and asks Masha for his USD 200, plus USD 80 for the
materials. Masha can’t believe this. She insists that the USD 200 included the cost
of materials, and anyway Misha finished late. She has also lost her job in the last
few days and offers him USD 120.
Misha consults you for advice.
2. Dariusz has been meeting Reelika, a colleague from work, for just two weeks. He
is delighted when she agrees to come with him in a month’s time for a skiing
weekend in Italy, for which he pays USD 1K for both of them. Dariusz buys new
clothing for himself for the trip and arranges to have flowers and wine delivered
to their chalet as a surprise. He has paid for everything by credit card, which
amounted to USD 1500.
Two days before the holiday, Reelika calls him to say that she is ending their
relationship and can’t go with him. He insists that she is responsible for at least
half of his credit card bill, if not all of it.
Reelika consults you for advice.
59
Section E: Contract Structure In-Class Exercise
The Document File to this Compendium contains sample contracts for use in
completing course exercises. Please refer to these and analyze them to identify the
following structural elements:
1. Title
2. Caption
3. Recitals (preamble)
4. Definitions
5. Closing
Section F: In-Class Exercise: Analyzing Promises and Conditions
Directions: Identify the promises, conditions and promissory conditions in the

following contracts. Where you identify a condition, consider whether it is a
condition precedent, a condition subsequent, or express condition.
A) A lessor and lessee entered into a lease of real property for a two-year term at
a rent of $1,200 per month, payable in advance by the first day of each month.
The lease gave the lessee the right to renew the lease for a further two years,
provided that she delivered written notice of renewal to the lessor not later
than 30 days prior to the end of the second year of the lease. The rent for the
renewal period would be $1,500 per month, but if the lessee satisfactorily
repainted the premises in the first month of the renewal period, the rent would
be $ 1,400 per month.
B) An insurance policy provides that in consideration for an annual premium,

payable in advance, the insurer will reimburse the insured for any loss by fire
occurring on the insured premises, provided that the insured furnishes
satisfactory proof of loss to the insurer within 30 days of the loss.
60
C) On June 1, the owner of land granted an option to purchase the land. The
prospective buyer had until June 30 to exercise the option. On June 10, a
second buyer expressed interest in purchasing the land, and the owner entered
into a contract with him under which she agreed to sell the land for $100,000
if the grantee of the option failed to exercise it by its expiration on June 30.
D) Following discussions on the possible sale of a car, the owner of the car writes
to the prospective buyer, stating “I will sell you my car for $5,000 on
condition that you communicate your acceptance to me within five days of the
date of this letter.”
61
Section G: Exercise: Drafting Termination Provisions
You have received the following email. Write your reply on the answer sheet
opposite. Total possible score: 10 points.
To: contractscourse@rgsl.edu.lv
From: confused@needhelp.com
Subject: I need some help
Attachments: Extract from contract for services
Hello
I’ve got a draft contract for services between us and Beta – we’re going to see our
lawyer next week, but I really want to understand this part of the contract now. Can
you help me? I’ve attached the part of the contract that I’m interested in – could you
send me an email telling me what the clauses mean in plain English and in particular,
explaining the words that I’ve underlined.
Thanks for doing this for me – I owe you one!

Kolya
10. Termination for breach

The following obligations are conditions of this agreement and any breach of them shall be deemed
a fundamental breach which shall determine this agreement immediately and the rights and
liabilities of the parties shall then be determined in accordance with clause 11:
10.1 failure on the part of Beta to make punctual payment of all sums due to Alpha under
the terms of this agreement
10.2 the making by Beta of any arrangement with creditors or being a company Beta’s
liquidation (other than a voluntary liquidation by the members)
10.3 the doing or permitting of any act by which Alpha’s rights in the Intellectual
Property may be prejudiced or put in jeopardy
11. Termination consequences
In the event of this agreement being determined whether by effluxion of time Notice breach or
otherwise
11.1 Beta shall immediately pay to Alpha:
11.1.1 all arrears of any sums due under the terms of this agreement
11.1.2 all further sums which would but for the determination of this agreement
have fallen due at the end of the Term less a discount for any accelerated
payment at the rate of 5% per year
62
ANSWER SHEET
Reply
To: confused@needhelp.com
From: contractscourse@rgsl.edu.lv
Subject: I need some help
63
Section H: In-Class Exercise: Agreement to Use On-Line Banking
Services
The document you are going to read (see document file) is an agreement between a
bank and its business and principal account customers to use an on-line banking
service.
First, check the document to ensure you understand it.
Next, the following clients need your advice.
1. Hannelore Beerli has two accounts with the bank, a business account and a
principal account. On 1 July she wrote a cheque for GBP 4250 on her
business account to pay a repair bill. However, she had only GBP 3500 in the
account and had no formal arrangement with the bank to borrow more. She
tried to access her other account by computer 5 days later, only to find that
she was denied access. She says the bank is in breach of contract because she
pays monthly banking charges on her principal account and they therefore
had no right to block her access to it.
2. Nigel Lang is a night-club owner with a large amount of money in his

business account. He authorized his girlfriend, Zeinaba dos Santos, to use his
on-line account to transfer cash into her own bank account when she needed
it. On 10 July his relationship with Zeinaba ended and he called his local
bank that day to tell them that she was no longer authorized to access his
account and that he wanted to change his password. However, he was told
that she had already transferred GBP 10,000 the day before and that the
transaction was complete. The bank refuses to try and recover the money
and has told Nigel that his best course of action is to consult a lawyer.
3. Rebecca Mehew used the on-line service to transfer GBP 5,000 into her
husband’s business account to cover a cheque that he had issued that day to
buy a second hand car. Unfortunately, there was a technical problem at the
bank, so that the transfer was not made. Her husband’s bank paid the
cheque but told him he will be debited GBP 55 in administrative costs for an
unauthorized overdraft. Rebecca thinks her bank should pay the GBP 55
because it was their computers which were at fault.
4. Julio Mattias Garcia gave his daughter, Celia, permission to access his
business account on line but not his principal account. Julio has just
discovered that Celia took GBP 100 from the principal account (current
account) hoping her father would not notice it. As Julio wrote to the
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manager of his local bank months ago expressly forbidding the bank to allow
his daughter to do this, he wants the bank to refund the GBP 100.
Finally…Without referring to the contract, translate the following piece of

legalese into plain English.
The bank hereby expressly agrees that the account holder or any authorized
user will not be liable hereunder for any unauthorized instruction in so far as
such instruction was received after notification had been given to the bank by
said account holder or authorized user that the password had become known to
some third party or that the actions, negligence or other breach of security
attributable to the bank has caused said unauthorized instruction.
65
Section I: Exercise: Extract From Loan Agreement
The extract below is from a loan agreement between the bank (the Lender) and
an individual person (the Borrower).
For each space, fill in the correct formal word, referring to the plain English
definitions given below the text.
9. EVENTS OF DEFAULT
Each of the following events and circumstances shall be an Event of Default:
9.1 Failure to Pay: the Borrower (1) … to pay any sum payable under this Agreement when
(2) … and otherwise in accordance with the (3) … hereof;
9.2 Performance of Other Obligations: the Borrower fails (4) … and (5) … to perform or
(6) … with any of its obligations under this Agreement and, in the case only of a failure which in
the opinion of the Lender is capable of (7) … and which is not a failure to pay money, does not (7)
… that failure to the Lender’s satisfaction within 7 days (or such longer period as the Lender may
(8) …) after receipt of written (9) … from the Lender to do so;
9.3 Execution: a (10) … takes possession of all or any part of the business or assets of the
Borrower, or any execution or other legal process is (11) … against all or any part of the business
or assets of the Borrower and is not (12) … within 14 days,or any order is made against the
borrower and is not complied with or (12) … within 14 days (unless the order is subject to appeal
and is (13) … by the Borrower in good faith;
9.4 Inability to Pay Debts: the Borrower stops or (14) … payments to its creditors or any
class of its creditors, and is unable or under (15) … law is (16)… to be unable or admits its
inability to pay its debts as they fall due, or seeks to enter into any composition or other
arrangement with its creditors or any class of its creditors, or is declared or becomes (17) …;
9.5 Significant Change: any situation occurs which in the opinion of the Lender gives
reasonable (18) … to believe that:
9.5.1 a (19) … and (20) … change in the business or financial condition or prospects
of the Borrower has occurred; or
9.5.2 the ability of the Borrower to (21)… its obligations under this Agreement has
been or will be (19*) … and (20*) … affected.
(1) should do but doesn’t do

(2) be the proper time for something to happen
(3) requirements
(4) properly
(5) on time
(6) obey
(7) way of putting right, fixing
(8) agree to
(9) official communication
(10) someone who you owe money to
66
(11) made sure that something is obeyed
(12) released
(13) argued
(14) to stop for a period of time
(15) relevant
(16) considered
(17) unable to pay one’s debts
(18) reasons
(19) important, relevant, significant
(20) harmful
(21) carry out
(19* 20*) adverbs of 19 and 20
67
Section J: Exercises: Reading and Understanding Contracts
Before you read, you should be aware of the vocabulary used to refer to the
different parts of a contract:
PARAGRAPHS are the major sections of the contract. This contract for example
has ten paragraphs.
SUBSECTIONS are the small clauses in each paragraph marked (a), (b), and so on.
PARTS are the further divisions made under a subsction marked (i), (ii), and so on.
Now look up paragraph 3 subsection (b) part (i) in the car hire contract (see
DOCUMENT FILE)
If it begins, that he will not operate… then you are reading the contract correctly.
Now read the first three paragraphs and complete the exercise below.
Note the mistake where the drafter confused two words and used the wrong one.
A. Match the section underlined in (a)-(i) with one of the meanings 1-9.
(a) …the renter agrees to take on the rental of the vehicle described overleaf subject
to all terms and conditions…
(b) The owner warrants that the vehicle is roadworthy.
(c) …in the same condition received, ordinary wear and tear accepted.
(d) …on the due date specified overleaf.
(e) Nor move it, without prior written consent of the owner.
(f) …this agreement is entered into by the driver for and on behalf of the renter.
(g) …or with blood alcohol concentration above the limit prescribed by road traffic
legislation.
(h) …and may seize, without legal process or notice to renter…
(i) …vehicle at any time or place and renter waives all claims for damages.
1. decided by a rule
2. warning, time to prepare for something
3. dependent on
4. to voluntarily give up a right
5. to promise that something is true
6. instead of someone, as their representative
7. on the next page
8. excluding the normal amount of damage that can reasonably be expected
9. getting permission in writing before something is done.
68
B. Quickly – true or false?
(a) I am a taxi driver and my taxi is being repaired. I can use an ABC car as a taxi for
the day.
(b) My son is 21. He can use the car if he is correctly insured.
(c) I can hire the car for 14 continuous weeks so long as I pay an extra deposit.
(d) If I breach the contract in any way ABC don’t need to go to court in order to take
the car away from me.
C. Imagine that you are consulted by the following clients who come to you with
the following problems. For each question, decide:
(a) Which parts of the contract provide the answer to the problem.
(b) What advice you would give based on your understanding of the contract.
(c) The language you would use to give a client favourable or unfavourable news.
1. Fujiko Ino parked the car in a London car park and was late in returning to pick it
up due to a strike on the underground. She was 20 minutes late and incurred an
automatic fine of GBP 100. The letter concerning the fine went to the office of
ABC, who are demanding immediate payment. She feels that this is unfair as the
fine was not exactly her fault.
2. Francesco Tricomi is a driver employed by a public relations company. The

company hired a car for the day to be used for the transport of an important
visitor. Francesco crashed the car, causing damage totalling GBP 1825. He was
found to be over the legal limit for alcohol consumption. His company have fired
him and also insist that he is responsible for paying ABC.
3. Magdalena Leszinska left her hire car in a car park by the river. The parking
ticket she bought contained a disclaimer to the effect that the company would not
be responsible for loss or damage. Eight hours later she returned to find the car
full of water due to flooding. ABC are demanding the full cost of repairing the
car, plus a week’s rental costs to cover their total loss for the time the car couldn’t
be hired out due to being under repair.
4. Carlo Blandini rented a car for a few days to go and visit his mother in Baden-
Baden. While he was there, he suffered a serious asthma attack. The local doctor
gave him medication for 7 days and told him not to drive or operate machinery
while he was taking it. He telephoned ABC and asked them to send someone to
collect the car, adding that he would be willing to pay the driver’s travel
expenses. ABC refused because of the distance involved. A dispute as to whether
69
he was responsible for the extra payment and ABC ended when ABC simply
charged the full amount to his credit card. He wants a refund.
5. Elsebet Christensen is a tourist from Denmark who speaks little English. While
on holiday in London with her English husband, Elsebet hired a car to drive to
Scotland, where she stayed overnight. Elsebet was attacked in a lonely car park
by three teenage boys, who stole the car. In a state of shock, she caught a train
back to London, where her husband called the police. The call was made some 12
hours after the car had been stolen. She had paid for extra theft protection
insurance and had only expected to pay a maximum in case of theft. ABC are
demanding the full replacement cost of the car.
6. Vera Ziegler is 18 and a fairly new driver. Another more experienced driver
reversed into her hire car while she was manoevring it in a supermarket car park.
Although in no way responsible for the accident, she was so nervous that she
immediately apologized to the other driver for HER mistake, and a police officer
heard her apology. She is now blaming the other driver but ABC are insisting that
she has invalidated her CDW insurance.
D. Do you think this contract is satisfactory?
Section K: Sales Representative Agreement Drafting Exercise
Your law firm represents Martins Mebeles Company, an up and coming company
that sells and installs office furniture. Until now, Martins has always sold furniture
directly to customers solicited through direct mail. Now, however, Martins has
decided to try hiring salesmen. Martins would like to hire Kaspars Salesmanis to be
its first salesman.
Martins wants you to draft a Sales Representative Agreement between Martins

Mebeles Company and Kaspars Salesmanis.
Martins Direktors is the owner of Martins Mebeles Company. He has specified the
following list of provisions that he wants included in the Agreement. Please note
that the terms are not in any particular order, so you will need to organize them
within the contract.
1. Salesmanis will have a minimum quote of 5% above the previous year’s sales
in his territory and a goal of 15% above that amount. Salesmanis will also be
required to work full-time selling and promoting Martins’ products, fulfilling
70
the present and future needs of Martins’ customers in his territory, and
expanding Martins’ client base.
2. Salesmanis’ exclusive territory will be the Riga metropolitan area.
3. Salesmanis’ commission will be 10% of the net price of goods or installation
services. However, he will not be entitled to a commission on any freight
charges paid by the customer.
4. Martins’ wants to reserve the right to service directly its two existing major
accounts in Salesmanis’ territory: Peteris Printing Company and Anda’s
Accounting Firm. Salesmanis will not get any commissions on sales to those
two customers.
5. Salesmanis must agree not to handle the products of any of Martins’
competitors durng the term of the agreement.
6. Martins wants a covenant not to compete that would take effect on the
termination of the agreement and bar Salesmanis from working for any of
Martins’ competitors for three years after the agreement ends.
7. The agreement should have a one-year term starting January 1, 2003. It
should be automatically renewable unless either party gives notice of an
election not to renew at least 30 days prior to termination. On termination of
the agreement, Salesmanis should return all catalogs, price lists, and samples
to Martins.
8. Martins agrees to forward all customer leads in the territory to Salesmanis
However, if Direktors feels that Salesmanis is not pursuing a lead aggressively
enough, Martins can give Salesmanis three days notice, and, if Salesmanis still
doesn’t pursue it aggressively enough, Martins can then deal directly with the
customer.
9. Martins has the right to terminate the agreement immediately upon notice to
Salesmanis for any of the following reasons:
a. Salesmanis’ failure to meet his quota;
b. Theft, fraud or embezzlement by Salesmanis;
c. Salesmanis’ conviction of a crime;
d. Salesmanis’ breach of the agreement;
e. Salesmanis’ violation of any of the company’s rules or procedures
10. Martins will bill all of Salesmanis’ customers directly, and retains the right to
approve credit and set credit terms.
Martins Direktors has asked you, as Martins’ attorney, to draft a Sales Representative
Agreement that includes all these provisions.
1. Begin by organizing and preparing an outline of all the clauses to be included

in the contract.
2. You should also suggest additional provisions that you think are appropriate.
71
Section L: Drafting Exercise: Employment Agreement
Your client, Paint Products, Inc. (PPI) a corporation headquartered in Detroit,

Michigan, United States of America, manufactures and distributes several types of
paints and coatings to industrial, commercial and retail customers throughout the
United States and Europe. Altogether, PPI’s products are sold in more than 25,000
stores. The company’s most-widely distributed and successful product “Stay-Kleen
Paint” is one of the leading sellers in the world.
PPI has recently hired Dr. Karlis Kimikis, a well-known chemist, to work in the
company’s Riga laboratory to develop a paint to protect metal from rusting. At
least one other company is trying to develop a similar product. Both companies
offered Dr. Kimikis a job, but he chose to work for PPI because it offered him more
money.
PPI wants you to draft an employment agreement for Dr. Kimikis. Company
officials want you to include the following provisions in the contract:
1. Kimikis is to work at PPI’s laboratory located in the city of Riga, Latvia.

2. He is to devote his best efforts to developing the new paint that can protect
metal from rusting.
3. He should not have any other job.
4. He will be salaried the first year at 50,000 lats.
5. Should he leave the company’s employment for any reason, he should be
precluded from working for any competitor for 5 years.
6. PPI wants Dr. Kimikis to agree to assign to PPI all rights to anything that he
develops during his employment with PPI, including products other than rust-
proofing paints.
Part 1. Prepare an index of the terms of the employment agreement between

Paint Products, Inc. and Kaspars Kimikis.
Part 2. Refer to the Employment Agreement in Appendix I and complete the

following exercises.
1. The “Modification” section is missing from the attached sample contract.

Draft the missing provision.
72
2. Revise the Employment Agreement in accordance with the principles
addressed in this course.
3. As you revise the Employment Agreement, how would you answer the
following questions?:
a. What language would you use to describe the employee’s “best

efforts”? Is that phrase adequate? What does it mean?
b. How should the provision regarding competition be worded to best
express your client’s wishes?
c. How should you draft the provision regarding Kimikis’ assignment
of rights to the company?
Total possible score: 35 points
73
Section M: Drafting Exercise: International Sale of Goods
• ! " # $ $
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74
Section N: Further exercises
FURTHER EXERCISES 1
Read the text below and think of the word that best fits each space. Use only one word in each
space. There is an(*) example at the beginning. Total possible score: 10 points.
CONTRACT LAW: REMEDIES FOR BREACH OF CONTRACT
When considering damages as a remedy for breach, the purpose of damages is to …

*(compensate), to put the claimant back in the position that they would have been in if the contract
had been carried out. However, this is subject to the rules on (1)………… of damage that govern
the kind of loss for which a claimant ought to be compensated. For example, they may recover only
on damage as may fairly and reasonably be considered as (2)…………… naturally from the
breach. Any losses (3)……………… that were outside the parties’ contemplation at the time the
agreement was made will not be recoverable.
An injured party is also required to (4)…………….. or reduce their loss, which basically means
that they have to take steps to minimize the negative effects of the breach. For example, if a
supplier has failed to deliver goods, then the buyer ought to buy similar goods from another source
reasonably quickly. This is a question of causation – if losses were (5)……………… to the
claimant then they should not be recoverable from the defendant.
Sometimes the parties to a contract will attempt to see in advance the effect of possible breach and
make (6)……………. for it. A fixed sum agreed in advance as the sum payable in the event of
breach is called (7)……………….. damages. This term also refers to costs that can be quantified.
If such a sum has been agreed in advance, then this is the amount that the court will award in
accordance with the terms of the contract – provided it is a genuine pre-estimate of loss, and not a
(8)…………..
Where damages would not be an adequate remedy, then (9)…………… performance may be
granted. This is an order requiring the defendant to carry out their obligations under the contract. It
is particularly applicable to contracts concerning the sale of land where damages are not considered
an appropriate remedy. It will not be granted in a contract for personal services, or in a contract of
continuing obligation, as the court cannot (10)………… such an agreement.
Moreover, another equitable remedy exists that requires a person not to break their contract. This
order from the court may be used to prevent a threatened breach, or to enforce a negative
stipulation in a contract of personal services. This is known as an (11)………………..
75
FURTHER EXERCISES 2
Read the sentences below and think of the word or expression that best fits each space. There is an
example (*) at the beginning. Total possible score: 9 points.
Example: (*) Specific performance may be granted by the court in cases of breach of contract
where damages would be inadequate compensation. The effect of the order would be that the party
in breach must perform their obligations under the contract.
12. A possible remedy for breach of contract is (13)………………… This aims to return the
parties as far as possible to their pre-contractual position.
13. The buyer signed the contract because he believed the seller of the hotel, who said that
business was always good during the summer. Unfortunately, this statement turned out to be a
total (14)……………….. and the buyer decided to seek damages on that basis.
14. In order to create a valid contract, it is essential that all parties actually have
(15)……………….. to contract. For example, if one of them is a minor then the contract could
be ruled void.
15. In order to be valid and legally binding, an English contract must have (16)……………… This
can be money, goods, services, or a promise to do something. Without this gain by one party
and detriment to the other, there can be no contract.
16. The final version of a contract, where it is printed on special paper and is ready for the client to
sign, is known as the (17)………………
17. Where no express, written contract is made, the court may decide that an (18)………………..
contract exists. This type of contract may be seen from the behaviour of the parties.
18. A Mareva injunction is a court order that prevents a person taking their assets out of the
country until they have paid their debts. It is now known, more helpfully, as a
(19)………………. order.
19. The contract was declared (20)………………… This means that a person who did not have
capacity to sign the contract can end the contract if they choose to do so.
20. The consignment of cloth was (21)……………………. by customs officials, who refused to
release it until the correct amount of duty was paid.
76
FURTHER EXERCISES 3
Read the text below on the subject of consideration in common law contract law, and decide which
answer – A, B, C, or D - best fits each space. Choose only one word in each space. There is an
example (*) at the beginning. Total possible score: 10 points.
THE DOCTRINE OF CONSIDERATION IN COMMON LAW CONTRACT LAW
A court looks for several elements in deciding whether a legally *(A. obligatory B. compulsory C.
requisite D. binding) contract exists. As well as seeking a matching offer and (21 A. receipt B.
object C. recognition D. acceptance), the court also looks for consideration and, in certain
situations, a clear intention to create legal relations.
The idea of consideration is one of the defining features of English contract law. No matter how
much the (22 A. parts B. parties C. participants D. individuals) to an agreement may wish it to be
legally enforceable, it will only be enforceable if it contains “consideration”. Essentially,
consideration is the term used to refer to what one party to an agreement is giving, or promising, in
exchange for what is being given or promised from the other side.
It is sometimes said that consideration requires benefit and (23 A. detriment B. disadvantage C.
harm D. damage). In other words, what is (24 A. endowed B. provided C. granted D. imparted) by
way of consideration should benefit the person receiving it, whilst the giver loses something of
value. However, the courts will not enquire into the “adequacy” of consideration. By “adequacy” is
meant the question of whether what is made available by way of consideration (25 A. complies B.
relates C. corresponds D. totals) in value to what it is being given for. Therefore, if I own a car
worth USD 30K and I agree to sell it to you for USD 1, the courts will treat this as a binding
contract. Consideration need not therefore be “adequate” but must be “sufficient”. It must be
something “which is of some value in the eyes of the law”.
Consideration must also be given at the tme of the contract or at some point after the contract is
made. On the other hand, it is not generally possible to use as consideration some act that has
already taken place (26 A. prior to B. former C. aforesaid D. preceding) the contract. For example,
if I give my friend my old car as a gift because he is poor and he then offers me USD 1K six
months later, is that promise to pay enforceable? The answer is “No”. That is because “past
consideration” cannot be used to enforce a promise and I cannot (27 A. prosecute B. litify C. indict
D. sue) on his promise to pay, as the element of (28 A. receipt B. return C. mutuality D. support) is
absent.
An interesting question came before the court in the case of Collins v Godfrey. Can the
performance of an act which the promisor is already under a legal obligation to carry out ever (29
A. total B. be equal to C. make D. amount to) consideration? Or would such consideratin be
considered invalid on the (30 A. foundation B. grounds C. reason D. justification) that it was
contrary to public policy.
77
FURTHER EXERCISES 4
Read the following sentences and put a preposition into each space. Use only one word in each
space. There is an example (*) at the beginning. Total possible score: 10 points.
Example: My client cannot be held responsible for events that were not under her control.
31. Our client informed yours that all the goods would be delivered ……. lorry on 21 June 2003.
32. The haulage company denied the allegations ………….. it, stating that it had performed all the
terms of the agreement correctly and on time.
33. This Agreement will continue for five years unless terminated earlier in accordance …………..
clause 5.
34. Either party may terminate this Agreement ………… notice with immediate effect.
35. The term of this Agreement will continue unless terminated by either party ……... giving not
less than three months’ prior written notice.
36. The customer will notify the company …………. writing within five days of receipt of an
invoice if the customer considers the invoice incorrect for any reason.
37. We will claim damages for breach of contract, to include a claim for interest …………. the rate
of 6%.
38. Neither party will be liable for any delay ……….. performing or failure to perform its
obligations under this Agreement due to any cause outside its reasonable control.
39. I confirm that clause 6 gives you the right to terminate the agreement by notice …………..
immediate effect.
40. The customer agrees that, except as expressly provided in clause 8 of this Agreement, the
Company will not be …………….. any liabilility of any kind whatsoever in connection with
this Agreement.
78
FURTHER EXERCISES 5
Read the text below and use the word in bold at the end of each line to form a new word that fits
into the space in the same line. Use only one word in each space. There is an example (*) at the
beginning. Total possible score: 10 points.
It will sometimes be the case that a contract will include an (*) EXCLUDE
exclusion clause which will exempt one of the
(41)………………… from liability in the event of certain PART
types of breach. This exclusion may be total or may simply UNLIMITED
(42)…………………. the parties’ liability to a
(43)……………. sum of money. The problem is that many SPECIFICATION
exclusion clauses are not of this (44)”………………..” type, as VOLUNTEER
one party has little or no choice as to their inclusion. In such UNRELIABLE
cases, the party (45)………………… upon them can obtain
a very broad exemption in both (46)……………… and TORTIOUS
contract. When these so-called (47)…………….. or unfair EQUITY
clauses began to appear in the 19th century, the courts DEVICE
(48)…………. ways of limiting their effectiveness. More
recently, parliament has (49)……………….. to add a layer of INTERVENTION
control on top of the common law rules. However, case law APPLICATION
still (50)………………….. in all situations, whereas the statute
may be irrelevant in certain cases.
79
FURTHER EXERCISES 6
Read the text below and think of the word that best fits each space. Use only one word in each
space. There is an example (*) at the beginning. Total possible score: 10 points.
CONTRACT LAW: DURESS AND UNDUE INFLUENCE
This area of the law is concerned with situations where one of the parties to a contract has entered
into an agreement that appears to be (*) valid/enforceable/binding but is later challenged because it
is alleged that there has been unacceptabe pressure of some kind. This pressure could perhaps have
taken the form of a physical threat, economic pressure, or even psychological influence. However,
an obvious problem arises in establishing a legal action based on the last two categories – where
does behaviour which has a perfectly acceptable place in legitimate business life become so
unacceptable as to be considered against public (51)…………….. and on those (52)……………….
be judged unenforceable.
Notably, the courts automatically presume that certain relationships give rise to undue influence. In
these cases it is unnecessary for the party seeking to avoid the contract to prove their case, but
rather the (53)……………………. of proof will be shifted on to the other party, who must show
that no such influence operated. Evidence that the (54)……………………….. (we must include
this word as nothing has yet been proved) influenced party only acted after seeking independent
legal advice would probably be sufficient. Relationships falling into this (55)……………….. will
include parent/(56)………………, doctor/patient, and lawyer/client. These are relationships where
one party is extremely likely to (57)………………… upon the wishes or advice of the other,
without seeking independent legal advice.
Many cases in relation to economic duress have been concerned with industrial action, and, even
more (58)………………….., with trade unions. In the case of Universe Tankships Inc v
International Transport Workers Federation (1983), the union blacklisted a ship owned by the
claimants. The members of the union were told not to deal with th ship, and in order to continue
with normal business the owners made a payment to the union’s welfare fund. The company later
(59)………………. an action to recover this payment under the rules governing duress. The court
held that the unions’s actions had exceeded reasonable industrial action, and the payment was
(60)…………………………
80
FURTHER EXERCISES 7
Read the letter below that a lawyer wrote on behalf of a client to another lawyer. The letter is too
informal in style and vocabulary.
Rewrite the latter in a more appropriate way. Do not change the meaning or lose any of the
information it contains. Total possible score: 22 points.
! "
" #$ % ! &'()*(
, - . /# " 0.
/ "" 0 1 " 0
- . 2 " / "" 0 " 3

" " " " " 0 " " " "
" " 0 # - . " " " 4 - .
0 / "" 0 " 5 6 # "
- .
/ "" 0 "- . # " "" 0

0 / "" 0 " " 0 - . 0 20 "
. # . . .# " " 0 2. 0- .
"/ "" 0 "" 0 0 "" / "" 0
" " " " "
- . " 7 " "/ "" 0 "

. " . 0 #- . "
0 0 # / "" 0 "- . 0 " "
"
1 " " - . 2 - .
" 0 # 2 - . 2
1 "/ "" 0 0 " 0 " 0
1 2 / "" 0 " " 2
. 0 # " 2
. 0 " - . # " 0 " " # 0
8 #
81
FURTHER EXERCISES 8
Read the following extract from a business sale agreement between two companies. The agreement
is drafted in a highly formal style. For each space, decide which answer – A,B, C, or D – may best
be used. There is an (*) example at the beginning. Total possible score: 10 points.
1. Sale and purchase of the business
1.1 Subject to the provisions of this agreement the Vendor shall sell with (* A. complete B.
whole C. full D. total) title guarantee and the Purchaser relying inter alia on the Warranties
shall purchase free from all charges liens equities and (63 A. cumbrances B. incumbrances
C. burdens D. passives) with effect from the Transfer Date the Business as a (64 A.
succeeding B. effective C. continuing D. going) concern (65 A. comprising B. making C.
using D. constituting) the following Assets of the Vendor used in the (66 A. conduct B.
management C.perform D. control) of the Business:
1.1.1 the (67 A. goodness B. good reputation C. good opinion D. goodwill)
1.1.2 the Property
1.1.3 the Plant and Equipment
1.1.4 the Stocks
1.1.5 the benefit subject to the burden of the Contracts so far as the Vendor can (68 A. sell
B. transfer C. give D. assign) the same
1.1.6 the benefit subject to the burden of the Leased Plant and Equipment on the terms
contained in clause 13
1.1.7 the Industrial Property Rights
1.1.8 all lists data and particulars of suppliers clients and customers sales and stock
records price lists catalogs sales literature and (69 A. hype B. publicity C. promotion
D. exposure) material of the Business and all other documents relating to the
Business as the Purchaser may reasonably require to enable it (70 A. well B.
effectively C. efficient D. usefully) to carry on the same in succession to the Vendor
1.1.9 all rights and claims of the Vendor against third parties (including without (71 A.
limitation B. restraint C. constraint D. control) all rights in connection with such
third parties’ guarantee conditions (72 A. indemnitations B. indemnifices C.
indemnities D. indemnifies) warranties and representations) with respect to the
Business so far as the Vendor can assign the same other than as comprised in the
Excluded Assets
1.1.10 without in any way limiting the generality of the foregoing all other assets (if any)
of whatever nature employed in the Business at the Transfer Date but excluding the
Excluded Assets
82
FURTHER EXERCISES 8
Read the extract below. The origin of the extract is given. Redraft the extract in order to make it
more easily understood by the client. Total possible score: 10 points.
REDRAFTING SKILLS
From a company’s terms and conditions of sale
The Customer shall make payment in full and without any deduction or withholding whatsoever on
any account within thirty days of the expiration of the month in which the invoice is dated or some
later date following invoicing which must be expressly evidenced in writing as having been agreed
between the Company and the Customer and should the payment not be received in full when due
there shall accrue interest on the outstanding residue at the rate of 5% per annum above the base
lending rate of ABC Bank plc from time to time which shall be payable by the Customer.
83
FURTHER EXERCISES 9
Some contract terms are more important than others. The UNLAWFUL
English (*) law makes a clear distinction between
(74)…………………, or the major terms, and warranties, the CONDITIONAL
less vital terms. If a major term is broken then the INJURY
(75)…………………. party may refuse to continue with a
contract at all. However, if a warranty is (76)……………. BREACH
then they will have to go on with it but perhaps expect to DAMAGE
receive (77)……………….. depending on the
(78)………………… of the loss suffered. EXTENSION
Very often, the courts will be called upon to place a CONSTRUE
(79)……………… upon the term “condition”, and this will
often depend upon the (80)…………….. the breach has had EFFECTIVE
upon the (81)…………. , or plaintiff, as they are sometimes CLAIM
known. Even where a major term has been breached, the result TRIVIA
must not be (82)……………….. in the eyes of the court,
otherwise there will be no (83)………………….. in law. DRESS
FURTHER EXERCISES 10
84
Reply to the following email.
To: lawclinic@rgsl.edu.lv
From: confused@needhelp.com
Subject: What does this mean?
Attachments: Extract from Loan Agreement
Hi
Remember Clause I of the business sale agreement? Well, I’ve
attached another part of the same agreement. Please email
explaining what the clauses mean in plain English and in particular,
explaining the words that I’ve underlined.
Thanks for doing this – that’s at least two beers I owe you!
Tiit
Attachment
9. Contracts
9.1 The Purchaser agrees with the Vendor with effect from the Transfer Date to assume the
obligations of and become entitled to the benefits of the Vendor under the Contracts and the
Purchaser shall carry out perform and complete all the obligations and liabilities created by or
arising under the Contracts (except for any obligations or liabilities attributable to a breach on the
part of the Vendor or its employees agents or sub-contractors) and shall indemnify the Vendor and
keep it fully indemnified against all liabilities losses actions proceedings costs claims demands and
expenses brought or made against or incurred by the Vendor in respect of the non-performance or
defective or negligent performance by the Purchaser of the Contracts.
9.2 The vendor shall on Completion and with effect from the Transfer Date assign to the order of
the Purchaser or procure the assignment to the order of the Purchaser of all the Contracts which are
capable of assignment without the consent of other parties.
9.3 In so far as any of the Contracts are not assignable to the Purchaser without the agreement of or
novation by or consent to the assignment from another party this agreement shall not constitute an
assignment or attempted assignment if such assignment or attempted assignment would constitute a
breach of the same. In the event that consent or novation is required to such assignment:
9.3.1 The Vendor shall at the Purchaser’s request and cost use reasonable endeavours
with the co-operation of the Purchaser to procure such novation or assignment
as aforesaid
9.3.2 Unless and until any such Contract shall be novated or assigned as aforesaid the
Vendor shall hold the same in trust for the Purchaser and its successors in title
to the Business absolutely and the Purchaser shall (if such sub-contracting is
permissible and lawful under the Contract in question) as the Vendor’s sub-
contractor perform all the obligations of the Vendor under such Contract.
85
In order to create a legally valid, (*) binding contract, both BIND

parties must be deemed as having (85)…………………, that CAPABLE
is, they must be recognized by the law as being allowed to MINORITY
enter into enforceable contracts. Children, or (86)……………
as they are sometimes known, have a very limited ability to CONTRACT
enter into (87)……………. relations, a point of view that is
largely intended to protect them from the (88)……………….. CONSEQUENT
of their own actions.
There are one or two (89)………………… to this rule, EXCEPT
however. For example, if a contract of employment is BENEFIT
considered by the court as being (90)……………… to the
child, then there is a possibility that it will be enforced. NECESSARILY
Similarly, if (91)…………….. goods or services are the subject
of the contract, then there could be the same (92)…………. if COME
the young person decides that they do not want to keep to the
(93)……………….. they have made. The question of a UNDERTAKE
child’s (94)………………….. in tort is similarly complicated. IMMUNE
Read the extracts below. Redraft the extracts in order to make them more easily understood by the
client. Total possible score: 40 points.
86
REDRAFTING SKILLS
Original term: This Agreement and the benefits and advantages herein contained are personal to
the Member and shall not be sold, assigned or transferred by the Member.
New term: Membership is not transferable.
Original term: The agreement shall determine forthwith if a receiving order is made against Hirer
(or being a company Hirer goes into liquidation, whether voluntarily or compulsorily) or if Hirer
shall call a meeting of his creditors or any distress or execution is levied against any of his goods
New term:
Original term: Maples will indemnify the Customer in respect of any direct damage to property
caused by the negligence of Maples or the negligence or wilful default of its servants or agents.
New term:
Original term: Lessor shall not be liable for loss of or damage to any property left, stored or
transported by Hirer or any other person in or upon Vehicle either before or after the return thereof
to Lessor. Hirer hereby agrees to hold Lessor harmless from, and indemnify Lessor against all
claims based on or arising out of such loss or damage unless caused by the negligence of Lessor.
New term:
Original term: Title to property in the goods shall remain vested in the Company (notwithstanding
the delivery of the same to the Customer) until the price of the Goods comprised in the contract and
all other money due from the Customer to the Company on any other account has been paid in full.
New term:
In-Class Exercises: Analyzing and criticizing contracts
87
Apply the theory from this course in analyzing and criticizing one of the following:
Maximum possible 35 points
1. Loan Agreement (p. 89).

2. Draft online banking contract (p. 107)
3. Car rental agreement (p. 113).
4. Distribution agreement (p. 122).
5. Leases (pp 129 and 134).
6. Draft agency agreement (p. 147).
7. Draft procurement contract (p. 151).
8. Draft share purchase agreement (p. 163).
Notes
88

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Teaching Plan

Specific Contracts (Contract-II)

Utkarsh Kumar Mishra,

2. Objectives of the Course 4

8. Annexure A [Format of Project Consultation Record] 14

9. Annexure B [Format of First Page of Project 15

It is my pleasure to be once again engaging you all in an academic pursuit towards

It is also significant to understand and fathom the specific forms of contractual

Similarly, even though we have discussed in our foundational course various

I. To give an exposure to the students of various nuances of Specific Contracts.

S. No. Name of the Module Contents of the Module

4.0 Tentative Lecture/Teaching Schedule

Sr. No. Topic Number of

5.0 Reference Material

5.1.1 Legislation: Indian Contract Act, 1872. [Sections 124-181]

5.2.1 Legislations: Indian Contract Act, 1872. [182-238]; Indian Partnership

5.3.1 Legislation: Sale of Goods Act, 1930. [Section 1 to 54]

5.5.1 Books for Reference: Bhashyam and Adiga, Negotiable Instruments

6.0 List of Assignment/Project Topics

General Question for all students:

Following is the list of subject matters, roll number wise:

S. Enrollment Contract Drafting Question/Subject Matter

7.0 Instructions to Students

 Formatting/Content requirements and Other Information regarding Project

Dharmashastra National Law University,

Project Consultation Record

Subject: Contract II (Specific Contracts); Session 2020-21

Name:___________; Roll No:______________________________________

S. No Consultation Taken from the Date Signature of the

Signature of Course Teacher

Session: 2020-2021 Project Submission: Contract II

Brief Fact Situation (Not more than 100 Words)

Mr. Utkarsh Kumar Mishra, Assistant Professor of Law, DNLU, Jabalpur

READING AND REFERENCE MATERIAL

Subject: Specific Contracts (Contracts-II)

Course: B.A., LL. B (Hons.), Semester III, Session 2020-21

[This material is a compilation of some recommended Articles and Case

Material Collected and Compiled by:

{FOR EDUCATIONAL PURPOSES ONLY}

I acknowledge my sincere thanks to- Hon’ble Vice-Chancellor Sir, Prof. Balraj

Published in Articles section of www.manupatra.com

So far as it reflected the then-prevailing English law on indemnities, the Act

Published in Articles section of www.manupatra.com

I. DEFINITION OF INDEMNITY

Published in Articles section of www.manupatra.com

B. Scope of triggering events

The range of indemnities contemplated by Section 124 is much narrower than

From a theoretical perspective the choice of activating events is rather puz-

Published in Articles section of www.manupatra.com

implied promise of indemnity may well appear in an implied contract, but it is

C. Other obligations that resemble contractual indemnities but are

The examples given above are contractual in nature. Obligations to indemnify

Published in Articles section of www.manupatra.com

“A right to indemnity generally arises from contract express or

Different sources of indemnity can overlap. In English law, for example, a

Published in Articles section of www.manupatra.com

D. Actions upon request: scope and juristic basis

Published in Articles section of www.manupatra.com

Published in Articles section of www.manupatra.com

Charterparties, particularly time charterparties, comprise a third set of deci-

It is tempting to generalise the Sheffield principle to account for many other

Published in Articles section of www.manupatra.com

Published in Articles section of www.manupatra.com

Name:_; Roll No:____________________________

relationships in a contract of guarantee under Indian law, in contradistinc