JAMIA MILLIA ISLAMIA

FACULTY OF LAW

NAME- SHANTANU AGNIHOTRI

COURSE- B.A. LLB (HONS.)

SEMESTER II (REGULAR)
SUBJECT- CONTRACTS II
STUDENT ID- 201903738
ROLL NO- 57
SUBMITTED TO- Prof. EQBAL HUSSAIN

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UNIT 1

Q. No.1 Define the term ‘Guarantee’. What are its special features. Refer to case laws.

Introduction

According to Section 126 of Indian Contract Act, 1872, a contract of guarantee is defined as: “A
‘contract of guarantee’ is a contract to perform the promise, or discharge the liability, of a
third person just in case of his default.” The one that gives the guarantee is termed the “surety”,
the person in respect of whose default the guarantee is given is termed “principal debtor” and
therefore the person to whom the guarantee is given is called the “creditor”. A guarantee could
also be either oral or written. 
For example, A takes a loan from a bank. A promises to the bank to repay the loan. B also makes
a promise to the bank saying that if A doesn't repay the loan “then I will pay”. in this case, A is
the principal debtor, who undertakes to repay the loan, B is the surety, whose liability is
secondary because he promises to perform the same duty just in case there's fail the a part of A.
The bank in whose favour the promise has been made is the creditor.
It is a provision to answer for the payment of some debt, or the performance of some duty within
the case of failure of some person who, in the first instance, is liable for such payment or
performance.

Bouvier’s Law Dictionary gives the meaning of guarantee as a promise to answer for the debt,
default, or miscarriage of another person.

Guarantee is an undertaking to be collaterally answerable for the debt, default or miscarriage of

another. In a banking context it's an undertaking given by the guarantor to the banker accepting
responsibility for the debt of the principal debtor, the customer, should he or she default. The
guarantor may or might not be a customer.

Guarantee is classified among two types:

On Money
1. Nature of Payment
●Specific/Simple Guarantee

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Guarantee is for a single transaction. It ends when debt is discharged or promise is performed.
●Continuing Guarantee
Guarantee is for a series of transactions. Liability extends till the revocation of guarantee.
2. Effective time of Payment
●Retrospective Guarantee
Guarantee is for an existing debt or obligation.
●Prospective Guarantee
Guarantee is for a future debt or obligation.
On Person
●Fidelity Guarantee
Guarantee is on the good conduct or honesty of an individual employed in a particular
organizations.

RIGHTS OF THE SURETY

AGAINST THE PRINCIPAL DEBTOR:

Right of subrogation: The surety steps into the shoes of the creditor when he has paid all
that he's liable for, or performed all he's liable for.

Right to Indemnity: In every contract of guarantee there's an implied promise by the principal

debtor to indemnify the surety. The right enables the surety to recover from the principal debtor
whatever sum he has rightfully paid under the guarantee.

AGAINST THE CREDITOR:

Right to securities:

The surety steps into the shoes of the creditor and gets the right to have the securities, if any,
which the creditor has against the principal debtor, irrespective of the fact whether the surety
knows of the existence of such security or not.

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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.

State of M P V Kaluram (1967)

State sold lot of felled timber to a person-price payable in 4 instalments-payment guaranteed by

defendant-if there was default in payment of an instalment, State would prevent further removal
of timber & sell remaining timber for realisation of price-buyer defaulted but even so State
allowed him to remove the timber-Surety was then sued for the price-held not liable-by allowing
goods to be removed by the buyer the security was lost.If the securities are burdened with further
advances it will not affect the rights of the surety

Forbes V Jackson 1882

Mortgage of leasehold premises & insurance policy for loan of £ 200-principal debtor borrows
further sums upon same security from creditor without knowledge of surety-defaults

Right of set off:

If the creditor sues the surety, the surety may have the benefit of the set off, if any, that the
principal debtor had against the creditor. He is entitled to use the defences of the debtor against
the creditor.

AGAINST CO SURETIES:

Release by the creditor of one of the co sureties does not discharge the others; neither does it free
the surety so released from his responsibility to the other sureties.

The co sureties, in the absence of a contract to the contrary, are liable, as between themselves, to
pay each an equal share of the whole debt, or that part of it which remains unpaid by the
principal debtor.

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Essentials of a Contract of Guarantee

1. Concurrence of All the Parties

All the three parties namely, the principal debtor, the creditor and the surety must agree to make
such a contract.

A contract of guarantee should be entered into freely and voluntarily by the guarantor. Fry J. in
Davies v London and Provincial Marine Insurance Co. said "Everything like pressure used by
the intending creditor will have a very serious effect on the validity of the contract". It is
essential that a guarantee form should be most carefully drawn so as to create an effective
security, and bankers have their own printed forms of guarantees drafted so as to meet, as far as
possible, the various requirements of a good and complete guarantee.

2. Liability
In a contract of guarantee, liability of the surety is secondary i.e., the creditor must first proceed
against the debtor and if the latter does not perform his promise, then only he can proceed against
the surety.

The word ‘liability’ in Section 126 of the Indian Contract Act, 1872, means a liability which is
enforceable at law, and if that liability does not exist, there cannot be a contract of guarantee. A
surety, therefore, is not liable on a guarantee for payment of a debt which is statute - barred.

The Supreme Court in Chattanatha Karayalar v Central Bank ofIndia Ltd7 laid down that ifa
transaction is contained in more than one document between the same parties, they must be read
and interpreted together. Although a guarantor may join the principal debtor in executing the
promissory note he will not be a co obligant where the underlying transaction and the conduct of
the parties show that he is a surety under Section 126 of the Contract Act.

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3. Existence of a Debt

A contract of guarantee pre-supposes the existence of a liability, which is enforceable at law. If

no such liability exists, there can be no contract of guarantee. Thus, where the debt, which is
sought to be guaranteed is already time barred or void, the surety is not liable.

Swan V Bank of Scotland (1836) Payment of overdraft by bank's customer was guaranteed

-those days overdrafts were contrary to statute-penalty was imposed upon parties to such drafts
& the overdraft was void-customer having defaulted, surety was sued-he was held not liable as
no debt was due.

4. Consideration
There must be consideration between the creditor and the surety so as to make the contract
enforceable. The consideration must also be lawful.  In a contract of guarantee, the consideration
received by the principal debtor is taken to be the sufficient consideration for the surety.

Thus, any benefit received by the debtor is adequate consideration to bind the surety. But past
consideration is no consideration for a contract of guarantee. There must be a fresh consideration
moving from the creditor.

In State Bank of India v Premco Saw Mill(1983), the State Bank gave notice to the debtor-
defendant and also threatened legal action against her, but her husband agreed to become surety
and undertook to pay the liability and also executed a promissory note in favor of the State Bank
and the Bank refrained from threatened action. It was held that such patience and acceptance on
the bank’s part constituted good consideration for the surety.

5. Writing not Necessary

A contract of guarantee may either be oral or written. It may be express or implied from the
conduct of parties.

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In P.J. Rajappan v Associated Industries(1983) the guarantor, having not signed the contract of
guarantee, wanted to wriggle out of the situation. He said that he did not stand as a surety for the
performance of the contract. Evidence showed the involvement of the guarantor in the deal and
had promised to sign the contract later. The Kerala High Court held that a contract of guarantee
is a tripartite agreement, involving the principal debtor, surety and the creditor. In a case where
there is evidence of the involvement of the guarantor, the mere failure on his part in not signing
the agreement is not sufficient to demolish otherwise acceptable evidence of his involvement in
the transaction leading to the conclusion that he guaranteed the due performance of the contract
by the principal debtor. When a court has to decide whether a person has actually guaranteed the
due performance of the contract by the principal debtor all the circumstances concerning the
transactions will have to be necessarily considered.

In Punjab National Bank Limited vs Bikram Cotton Mills & Anrit was held that though, the
bond, it is true, did not expressly recite that the Company was the principal debtor; it is also true
and the Company did not execute the bond. But a contract of guarantee may be wholly written,
may be wholly oral, or may be partly written and partly oral.

6. Essentials of a Valid Contract

It must have all the essentials of a valid contract such as offer and acceptance, intention to create
a legal relationship, capacity to contract, genuine and free consent, lawful object, lawful
consideration, certainty and possibility of performance and legal formalities.

7. No Concealment of Facts
The creditor should disclose to the surety the facts that are likely to affect the surety’s liability.
The guarantee obtained by the concealment of such facts is invalid. Thus, the guarantee is
invalid if the creditor obtains it by the concealment of material facts.

8. No Misrepresentation
The guarantee should not be obtained by misrepresenting the facts to the surety. Though the
contract of guarantee is not a contract of uberrimae fidei i.e., of absolute good faith, and thus,
does not require complete disclosure of all the material facts by the principal debtor or creditor to

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the surety before he enters into a contract. But the facts, that are likely to affect the extent of
surety’s responsibility, must be truly represented.

In the case of Stone v. Compton, it was held that, “if with the knowledge and assent of the
creditor, any material part of the transaction between the creditor and his debtor is
misrepresented to the surety, the misrepresentation being such that but for the same having taken
place, either the suretyship would not have been entered into at all, or being entered into, the
extent of the surety’s liability might be thereby increased, the security so given is void on the
ground   of fraud.”

On the other hand, in a latter case, London General Omnibus Co. Ltd. V. Holloway, it was
clearly decided that, “Innocent misrepresentation is sufficient, and, although the doctrine by
which uberrima fides is required in insurance cases is not applicable to the same extent in
suretyship cases, still the surety is entitled to relief on the ground of non-disclosure of matters
which ought to have been communicated to him, whether the non-communication was or was not
innocent.”

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UNIT 2

Q.No.2. Define Contract of Agency. Discuss the various modes of creation of agency.

Introduction

Agency is a special type of contract. The concept of agency was developed as one cannot
possibly do every transaction himself. Hence, he should have opportunity or facility to transact
business through others like an agent.

According to Sec 182 defines an ‘Agent’ as “a person employed to do any act for another or to
represent another in dealings with third person”. The person for whom such act is done or who is
represented is called the principal. The relationship between the agent and the principal is called
“agency”.

The same observation was made by the Supreme Court in  Syed Abdul Khader v Rami Reddy
where it said that “the expression agency is used to connote the relation which exists where one
person has an authority or capacity to create legal relations between a person occupying the
position of principal and a third party”. An agent is simply an extended hand of the principal and
cannot claim independent rights

Principles of contract of agency- (a) Expecting matters of a personal nature, what a person can
do himself, he can also do it through agent. (b) A person acting through an agent is acting
himself, i.e. act of agent is act of principal. Since agency is a contract, all usual requirements of a
valid contract are applicable to agency contract also except to the extent excluded in the Act.
One important distinction is that as per Sec. 185, no consideration is necessary to create an
agency.

Who may employee an agent(Sec 183)- Any person who is of the age of majority according to
the law to which he is subject, and who is of sound mind, may employee an agent (Sec. 183).
Thus any person competent to contract can appoint an agent.

Who may be an agent(Sec. 184)- As between the principal and third person any person can
become an agent, but no person who is not of the age of majority and of sound mind can become

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an agent, so as to be responsible to his principal. The significance is that a principal can appoint a
minor or person of unsound mind as agent. In such case, the principal is responsible to third
parties.

Different Kinds of Agents

Depending upon the kind of authority given to the agent to act on behalf of the principal, the
agents are of various kinds.

1) Auctioneers
An auctioneer is an agent whose business is to sell goods or other property by auction, i.e. by
open scale. The authority vested in him is to sell the goods only, and not to give warranties on
behalf of the seller, unless expressly authorized therein behalf. He's a mercantile agent within the
meaning of Section 2(9) of the Sales of goods Act.

2) Factors
A factor is a mercantile agent who is entrusted with the possession of the goods for the aim of
sale. He has the ability to sell goods on credit and also to receive the worth from the buyer.
According to Section 171, a factor has right of general lien over the goods belonging to his
principal, which are in his possession, for the general balance of account.

3) Brokers
A broker is an agent who has an authority to negotiate the sale or purchase of goods on behalf of
his principal, with a 3rd person. Unlike the factor, he himself has no possession of goods, he
merely makes the two parties to enter into a contract.

4) Del Credere Agents

In general, agent isn't answerable to his principle for the failure of the person to perform the
contract. A del credere agent constitutes an exception to this rule. he's a mercantile agent, who,
on payment of some extra commission, called del credere commission, guarantees the
performance of the contract by the third person. The liability of the del credere agent is like that
of surety and is secondary and the same arises if the third person fails to pay to the
principal what is due under the contract.

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Authority of an Agent: Authority of an agent are often both express or implied.

Express authority: As per Section 187, the authority is claimed to be express when it's given by

words spoken or written.

Implied authority: As per Section 187, authority is claimed to be implied when it's to be

inferred from the facts and circumstances of the case. In carrying out the work of the Principal,
the agent can take any legal proceeding. That is, the agent can do any lawful thing necessary to
carry out the work of the Principal.

RIGHTS OF AGENT

1. Right of retainer(Sec. 219 and 220)– An agent has the right to retain any remuneration or
expenses incurred by him while conducting the Principal’s business.

2. Right to remuneration(Sec. 217)– An agent, when he has wholly administered the business

of the agency has the right to be remunerated of any expenses suffered by him while conducting
the business.

3. Right of Lien on Principal’s property(Sec 221)- The agent has the right to hold (keep with
himself) any movable or immovable property of the Principal until his due remuneration is paid
to him by the Principal.

4. Right to be indemnified against consequences of lawful acts. (Sec.222)-An agent has

also the right to be indemnified against the consequences of all lawful acts done by him in
exercise of the authority conferred upon him.

5. Right to Compensation(Sec. 225)- The Agent has the right to be compensated for any injury
or loss suffered by him due to the shortage of skill and competency of the Principal.

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6. Right to be indemnified against consequences of acts done in good faith (Sec. 223)-An
agent incorporates a right to be indemnified against the consequences of an act done in good
faith though it seems to be injurious to the rights of third persons.

7. Right of stoppage of goods in transit-An agent incorporates a right to prevent the goods in

transit to the principal (just like an unpaid seller), if (i)He has bought goods either along with
his own money or by incurring a personal liability for the price and (ii) The principal has become
insolvent.

DUTIES OF AGENT

1. Duty to follow principal's directions or customs (Sec. 211):

The first duty of every agent is to act within the scope of the authority conferred upon him and
perform the agency work according to the directions given by the principal.

In Lilley vs. Doubleday, where the principal instructed the agent to warehouse the goods at a
particular place and the agent warehoused them at a different warehouse which was equally safe,
and the goods were destroyed by fire without negligence, it was held that the agent was liable for
the loss because any departure from the instructions makes the agent absolutely, liable

In Pannatal Jankidas vs. Mohanlal it was held that if an agent being instructed to insure goods
neglects to do so. He is liable to compensate the principal in the event of their being lost .

 In Bostock v Jardine, it was clearly laid down that any disobedience of or departure from the
instructions is enough to make the agent absolutely liable for the loss.

2. Duty to carry out the work with reasonable skill and diligence (Sec. 212):

The agent must conduct the business of the agency with as much skill as is generally possessed
by persons engaged in similar business, unless the principal has notice of his want of skill.

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3. Duty to render accounts (Sec. 213).

It is the duty of an agent to keep proper accounts of his principal's money or property and render
them to him on demand, or periodically if so provided in the agreement.

The Supreme Court in Narandas Morardas Gajiwala v S.P.A.M Papammal, that the provisions
of the Contract Act are not exhaustive in such regard and it is an equitable remedy available with
an agent to sue the principal under certain circumstances.
In a Madras High Court Case, a mill which was being run by an agent was taken over by the
owners and it was claimed by the agent that he lost the accounts in the process of take-over and
thus claimed accounts from the principal. However, since he was not able to prove that he had
actually lost the accounts, the court did not grant him any relief.

4. Duty to communicate (Sec. 214):

It is the duty of an agent, in cases of difficulty, to use all reasonable diligence in communicating
with his principal, and in seeking to obtain his instructions, before taking any steps in facing the
difficulty or emergency.

5. Duty not to deal on his own account (Sec. 215 and 216):

An agent must not deal on his own account in the business of agency; i.e., he must not himself
buy from or sell to his principal goods he is asked to sell or buy on behalf of his principal;
without obtaining the consent of his principal after disclosing all material facts to him.

6. Duty not to make profit out of his agency except his remuneration (Sec. 217 and 218):

An agent stands in a fiduciary relation to his principal and therefore he must not make any profit
out of his agency. He must pay to his principal all moneys, including illegal gratification, if any
received by him on principal's account.

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7. Duty on termination of agency by principal's death or insanity (Sec. 209):

When an agency is terminated by the principal dying or becoming of unsound mind, the agent
must take, on behalf of the representatives of his late principal, all reasonable steps for the
protection and preservation of the interests entrusted to him. .

8. Duty not to delegate authority (Sec. 190):

An agent must not further delegate his authority to another person, but perform the work of
agency himself. But there are exceptions in the following cases when the agent can delegate: 1.
Nature of work 2. Principal consent 3. Nature of work 4. Trade customs

It was laid down in John McCain and Co. v. Pow that unless so authorized by the principal,an
estate agent has no right to appoint a sub-agent and delegate to him his powers which require
special skill and care.

MODES OF CREATION OF AGENCY

A person who has capacity to contract can enter into contract either by himself or though some
other person. If he adopts the first method there is no question of agency. If he adopts the second
method, then there is agency. The person who represents another in his dealing with third parties
is called agent and that person who is so represented by agent is called principal.

The following are different modes of creation of agency.

1. Agency by Express agreement.

2. Agency by Operation of law.
3. Agency by Ratification.
4. Agency by Implied authority.

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

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

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

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

Essentials of valid ratification:

i) The act should be done on behalf of another person. (Section 196)

ii) The principal should be in existence, and competent to contract when the act is done.

iii) Ratification may be express or implied. (Section 197)

iv) Ratification should be with full knowledge of the facts. (Section 198)

v) Ratification should be of the whole transaction. (Section 199)

vi) Ratifies acts should not be injurious to third person. (Section 200)

vii) Ratification should be made within a reasonable time.

5) Agency in Husband – Wife relationship

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

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

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

For example: A and B are brothers, A has got settled in foreign country without any request from
A, B has handed over A`s agricultural land on these basis to a farmer and B is collecting and
remitting the amount of rent to A. Here automatically A becomes principal and B becomes his
agent.

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

1. Agency by Necessity
In a situation of necessity, one person can act on behalf of another to save the person from any
loss or damage, without expressly being appointed as an agent. This creates an agency out of
necessity.

2. Agency by Estoppel
An agency can also be created by estoppel. In a situation where one person behaves in such a
manner in front of a third person, as to make someone believe he is an authorized agent on behalf
of someone, an agency by estoppel is created.

3. Agency by Holding out.

When an act of a person, who acted as another person’s agent (on his behalf) without his
knowledge is later ratified by that person, this creates an agency by ratification between the two.

CONCLUSION

Contracts establishing a relationship of the agency are very common in business law. These can
be express or implied. An agency is created when a person delegates his authority to another
person, that is, appoints them to do some specific job or a number of them in specified areas of
work. Establishment of a Principal-Agent relationship confers rights and duties upon both the
parties. There are various examples of such a relationship: Insurance agency, advertising agency,
travel agency, factors, brokers, etc

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UNIT – III

Q.No.3 Write short notes on the following

i) Essential features of contract of sale

ii) Sale distinguished from agreement to sale

ANSWER-3

(i) Essential Features of Contract of Sale:

The contract of sale is governed by Sale of Goods Act, 1930 which was laid down to define and
amend the law relating to the sale of goods or movables. The Act came into force on 1st day of
July, 1930. Section 2 of the Sale of Goods Act, 1930 defines the terms which have been
frequently used in the Act, which are as follows.

Buyer and seller – ‘Buyer’ means a person who buys or agrees to buy goods; ‘seller’ means a
person who sells or agrees to sell goods. ‘Goods’ means every kind of movable property other
than actionable claims and money, and includes stock and shares, growing crops, grass, and
things attached to or forming part of the land, which are agreed to be severed before sale or
under the contract of sale. Existing goods are such goods as are in existence at the time of the
contract of sale, i.e. those owned or possessed by the seller. Future goods means goods to be
manufactured or produced or acquired by the seller after making the contract of sale.

ESSENTIAL ELEMENTS OF A CONTRACT OF SALE

The following six features are essential elements of any contract of sale of goods.

1. Goods

2. Price

3. Two parties

4. Transfer of ownership

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5. All Essentials of a Valid Contract of Sale

6. Includes both a ‘sale‘ and ‘an agreement to sell‘

1. Two Parties: A contract of sale of goods is bilateral in nature wherein property in the goods
has to pass from one party to another. One cannot buy one’s own goods.

For example, A is the owner of a grocery shop. If he supplies the goods (from the stock meant
for sale) to his family, it does not amount to a sale and there is no contract of sale. This is so
because the seller and buyer must be two different parties, as one person cannot be both a seller
as well as a buyer. However, there shall be a contract of sale between part owners. Suppose A
and B jointly own a television set, A may transfer his ownership in the television set to B,
thereby making B the sole owner of the goods. In the same way, a partner may buy goods from
the firm in which he is a partner, and vice-versa.

However, there is an exception against the general rule that no person can buy his own goods.
Where a pawnee sells the goods pledged with him/her on non-payment of his/her money, the
pawnor may buy them in execution of a decree.

2. Goods: The subject matter of a contract of sale must be goods. Every kind of movable
property except actionable claims and money is regarded as ‘goods’. Contracts relating to
services are not considered as contract of sale. Immovable property is governed by a separate
statute, ‘Transfer of Property Act’.

3. Transfer of ownership: Transfer of property in goods is also integral to a contract of sale.

The term ‘property in goods’ means the ownership of the goods. In every contract of sale, there
should be an agreement between the buyer and the seller for transfer of ownership. Here property
means the general property in goods, and not merely a special property.

Thus, it is the general property, which is transferred under a contract of sale as distinguished
from special property, which is transferred in case of pledge of goods, i.e., possession of goods is
transferred to the pledgee or pawnee while the ownership rights remain with the pledger. Thus,
in a contract of sale there must be an absolute transfer of the ownership. It must be noted that the
physical delivery of goods is not essential for transferring the ownership.

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4. Price: The buyer must pay some price for goods. The term ‘price’ is ‘the money consideration
for a sale of goods’. Accordingly, consideration in a contract of sale has necessarily to be in
money. Where goods are offered as consideration for goods, it will not amount to sale, but it will
be called barter or exchange, which was prevalent in ancient times.

Similarly, if a person offers the goods to somebody else without consideration, it amounts to a
gift or charity and not sale. In explicit terms, goods must be sold for a definite amount of money,
called the price. However, the consideration can be partly in money and partly in valued up
goods. Furthermore, payment is not necessary at the time of making the contract of sale.

5. All essentials of a Valid contract: A contract of sale is a special type of contract, therefore, to
be valid, it must have all the essential elements of a valid contract, viz., free consent,
consideration, competency of contracting parties, lawful object, legal formalities to be
completed, etc. A contract of sale will be invalid if important elements are missing. For instance,
if A agreed to sell his car to B because B forced him to do so by means of undue influence, this
contract of sale is not valid since there is no free consent on the part of the transferor.

6. Includes both a ‘Sale’ and ‘An Agreement to Sell’: The ‘contract of sale’ is a generic term
and includes both sale and an agreement to sell. The sale is an executed or absolute contract
whereas ‘an agreement to sell’ is an executory contract and implies a conditional sale.

A contract of sale can be made merely by an offer, to buy or sell goods for a price, followed by
acceptance of such an offer. Interestingly, neither the payment of price nor the delivery of goods
is essential at the time of making the contract of sale unless otherwise agreed.

Subject to the provisions of the law for time being in force, a contract of sale may be made either
orally or in writing, or partly orally and partly in writing, or may even be implied from the
conduct of the parties.

(ii) Sale distinguished from agreement to sale:

A contract is a formal or verbal agreement that is enforceable by law. Every contract must have
an agreement but every agreement is not a contract. The section 4(1) of the Sale of Goods Act,
1930 states that – ‘A contract of sale of goods is a contract whereby the seller either transfers or
agrees to transfer the property in goods to the buyer for a decided price.’

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In Section 4(4) of the Act, it is maintained that for an agreement of sale to become a sale, the
time has to elapse or the conditions have to be fulfilled subject to which the property in the goods
is to be is to be transferred. The point that is to be understood from the above discussion is that a
contract for the sale of goods can either be a sale or an agreement of sale. Let us see both the
cases in the light of the Act.

Sale

Here the property in goods is transferred at once to the buyer from the seller. The Section 4(3) of
the Act says that “where under a contract of sale the property in the goods is transferred from the
seller to the buyer, the contract is then known as a sale.” A sale is carried out on deliverable
goods. Goods are said to be in a deliverable state when they are in such a condition that the buyer
would, under the contract, be bound to take delivery of them [Section 2(3)]. The transfer of
goods may be affected directly, after the fulfillment of a contingency or to a party authorized by
the seller.

Agreement to Sale

In a sale the property in the goods is transferred from the seller to the buyer. However, in an
agreement to sell, the ownership of the property in goods is not transferred immediately. The
objective of the agreement is to transfer the goods at a future date, once some contingent clauses
in the agreement or certain conditions are satisfied.

The Act in Section 4(3), defines what an agreement to sell is. The section 4(3) of the sale of
Goods Act defines it as, “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, the contract is called an
agreement to sell.”

Thus we see that a contract for the sale of goods may be either sale or agreement to sell. This
depends on the condition whether it postulates an immediate transfer of property from the seller
to the buyer or whether it postulates the transfer to take place at some future date.

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The following are the major differences between sale and agreement to sell:

1. When the vendor sells goods to the customer for a price, and the transfer of goods from the
vendor to the customer takes place at the same time, then it is known as Sale. When the seller
agrees to sell the goods to the buyer at a future specified date or after the necessary conditions
are fulfilled then it is known as Agreement to sell.

2. The nature of sale is absolute while an agreement to sell is conditional.

3. A contract of sale is an example of Executed Contract whereas the Agreement to Sell is an

example of Executory Contract.

4. Risk and rewards are transferred with the transfer of goods to the buyer in Sale. On the other
hand, risk and rewards are not transferred as the goods are still in possession of the seller.

5. If the goods are lost or damaged subsequently, then in the case of sale it is the liability of the
buyer, but if we talk about an agreement to sell, it is the liability of the seller.

6. Tax is imposed at the time of sale, not at the time of agreement to sell.

7. In the case of a sale, the right to sell the goods is in the hands of the buyer. Conversely, in
agreement to sell, the seller has the right to sell the goods.

Case Law

Rowland v. Divall [1923]

Facts: Rowland bought a motor-car from Divall and used it for four months. Divall had no title
to the car, and consequently Rowland had to surrender it to the true owner. Rowland sued to
recover the total purchase price he had paid to Divall.

Held: It was held that there is a breach of implied condition as to title by the seller and therefore
the buyer is entitled to recover the purchase price in full, notwithstanding that he used the car for
four months.

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UNIT 4

Q.No.4 Who is an ‘Unpaid Seller’? Explain. Also discuss the unpaid seller’s right to lien.

According to section 2(1) of Sale of Goods Act, 1930, Seller is a person who sells the goods or
agrees to sell the goods. Unpaid implies payment is not made or without payment.

Definition of an unpaid seller has been given under section 45 of Sale of Goods Act. It says that
an unpaid seller is a person who has not been paid yet either by cash or other negotiable
instruments. In the case of negotiable instruments, the mere fact that it has been tendered by the
buyer doesn’t mean that seller is not anymore an unpaid seller. He becomes an unpaid seller
when even after tendering it, it is rejected by the bank or as the case may be. Section also
provides that any person who is in the position of a seller e.g. his agent is also considered seller
for the purposes of the act.

Although ownership of the goods is passed to the buyer after the sale of goods but an unpaid
seller has certain rights.

An unpaid seller has two-fold rights which are as follows:

1. Rights of unpaid seller against the goods.

2. Rights of unpaid seller against the buyer personally.

Rights of an unpaid seller against the goods

These rights of the unpaid seller are known as ‘rights in rem’. If the property in the goods has
already been passed on to the buyer, the unpaid seller has the following rights against the goods:

a) Right of lien on the goods for the price while he is in possession of them;

b) Right of stoppage of goods in transit after he has parted with the possession of them and the
buyer has become insolvent;

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c) Right of re-sale. Even if the property in the goods has not passed to the buyer, the unpaid
seller has right of withholding delivery of the goods and this right would be similar to and co-
extensive with the right of lien or stoppage in transit where the property has passed to the buyer.

RIGHT OF LIEN
The right of lien is the right to retain possession of the goods until payment for the same is made.
‘Lien’ is the right to retain possession of goods and refuse to deliver them to the buyer until the
price due in respect of them is paid or tendered. Section 47 of Sale of Goods Act,1930 deals
with the right to Lien. An unpaid seller, in possession of products, is entitled to work out his lien
on the products within the following instances:

1. In which the goods were sold without any requirement as to credit score.

2. Where the goods were sold on credit however the term of credit has expired.

3. In which the buyer will become insolvent even though the period of credit began to expire.

In the case of the purchaser’s insolvency, the lien exists even though goods were offered on
credit and the duration of credit has not expired till the time. When the products are offered on
credit, the presumption is that the customer shall preserve his credit suitable.

If before payment the buyer turns insolvent, the seller is entitled to exceed his rights and hold the
products as security for the charge.

Section 47(2): The unpaid seller’s lien is a possessory lien, the lien may be exercised so long as
the seller stays in ownership of the products. He may exercise his rights of lien but he is holding
the ownership of the goods as agent for the customer.

Any property in the transfer of files, identify that the products which are not affecting these
rights, supplied goods should stay inside the real possession of the seller. In truth, when a
belonging has passed to the consumer then the most effective maintenance of products is
technically known as “lien”.

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In which the belonging goods have not exceeded the customer possession and the same remains
with the seller, then it will be very difficult to maintain that the seller has a lien towards his own
goods.

The seller’s lien when an asset has not exceeded the purchaser is called as a right of withholding
shipping. For that reason, Section 46(2) states in which the belonging goods have not handed
over to the customer, the unpaid seller has a right to withhold the transfer. 

The seller may additionally incur from storing the products inside the exercise of his lien for the
charge. This right of lien extends to the entire product on his own despite the fact that the part
price for the one’s items has already been made. In other phrases, the consumer is not entitled to
claim delivery of a part of the products.

Lien and Part Delivery- According to Section 48, if the seller has delivered a part of the goods,
he can exercise his right of lien over the remainder unless the part delivery was made under such
circumstances as to show that he had waived the right of lien. Sometimes delivery of the part
may operate as delivery of the whole and in such a case, it may be presumed that the seller has
waived his right of lien over the goods which have not yet been delivered. Whether such waiver
is there or not depends upon the question, whether the parties intended to separate the part
delivered from the remainder or not.

If, for example, out of 100 bags of wheat which were to be supplied by the seller to the buyer, 20
have already been delivered to the buyer, the seller may exercise his right of lien over the other
80 bags. If, however, the buyer gets the whole of the goods weighed but takes only a part of
them, the delivery of the part of the goods in such a case would operate as delivery of the whole
and the seller‟s right of lien over the remaining goods would come to an end.10 Similarly, if an
essential part of the machinery has been delivered by the seller to the buyer, the seller cannot
exercise his right of lien over the remaining parts.

Also, the lien can be exercised even though the seller has received a ‘decree’ for the rate of the
products as aaccording to Section 49(2).

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In the case of Eduljee v. Café John Bros. the seller sold a second hand refrigerator to a buyer
for Rs. 120 and it was further agreed that the seller will put that in order at a cost of Rs. 320. The
buyer took the delivery of the refrigerator and admitted that it was working satisfactorily.
Subsequently, two of its parts were delivered to the seller for further repairs. The seller now
refused to deliver it back claiming a lien on them until the amount originally due had been paid.
It was held that once the delivery of the refrigerator had been made to the buyer, the right of lien
had come to an end and the same could not be revived by the seller again by getting the
possession of those goods.

In Eduljee v Café John Bros., the seller sold a refrigerator to a buyer for Rs. 120 and it was
further agreed that the seller will put that in order at a cost of Rs. 320. The buyer took the
delivery of the refrigerator and admitted that it was working satisfactorily. Subsequently, two of
its parts were delivered to the seller for further repairs. The seller now refused to deliver back
those two parts to the buyer claiming a lien on them until the amount originally due had been
paid. It was held that once the delivery of the refrigerator had been made to the buyer, the right
of lien had come to an end and the same could not be revived by the seller again getting the
possession of those goods.

In M/s Jain Mills & Electrical Stores v State of Orissa, the counsel for the appellants argued
that as the appellants are shown to be unpaid seller, in exercise of their right to lien under
sections 46 and 47 of the Act, they are entitled to the return of the goods. From section 46 (1) (a)
it is seen that notwithstanding that the property in the goods has passed to the buyer, the unpaid
seller of goods has, as such, by implication of law, a lien on the goods for the price while he is in
possession of them. The plaint „A‟ Schedule goods were despatched by rail to the defendants
and the defendants received the same after 30th March, 1973. The lien ceases to subsist the
moment the seller loses possession of the goods. So, in the present case, in view of the admitted
facts that the possession of the plaint „A‟ Schedule goods was delivered to the defendant on or
about 30th March, 1973, the plea of the appellants that they are entitled to the return of goods in
exercise of their right of lien as unpaid sellers is without any basis and, therefore, merits no
consideration.

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TERMINARION OF LIEN

As already discovered, lien relies upon physical ownership of products. As soon as the
possession is misplaced, the lien is also misplaced. The unpaid dealer of goods loses his lien
thereon inside the following instances:

The unpaid seller’s right of lien may be lost in any of the following ways:

1. By payment of price: The right of lien comes to an end when the seller ceases to be an unpaid
seller, i.e., when the buyer pays or tenders the price to the seller. It has been noted under section
47 (1) that the unpaid seller is entitled to exercise his right of lien until payment or tender of the
price in respect of certain goods, the payment or tender of the price, therefore, terminates the
seller’s right to retain the goods.

The Hon'ble Supreme Court of India has in the judgment titled as "Suchetan Exports Pvt. Ltd.
vs. Gupta Coal Ltd. and Ors." held that wherein the contract for sale provided that the seller
would retain its lien over the goods and title would pass to the buyer on payment of the full price
of the goods, then the unpaid seller of the goods is entitled to exercise lien over the goods,
notwithstanding that the possession of the goods may not be with the unpaid seller.

2. By delivery to the carrier: Since the right of lien is a right to retain the possession so long as
the seller continues in possession, the right would obviously come to an end when the seller loses
the possession. The seller loses the possession when he delivers the goods to a carrier or other
bailee for the purpose of transmission to the buyer without reserving the right of disposal of the
goods. If the seller has reserved the right of disposal, i.e., a right of not delivering the goods to
the buyer until he fulfils the required condition, generally that condition being the payment of the
price, the seller can exercise his right of lien.

3. By the buyer obtaining possession of the goods: When the buyer or his agent lawfully
obtains the possession of the goods the right of lien comes to an end. If the buyer at the time of
the contract of sale is already in possession of the goods, although as a bailee for the seller, the

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seller cannot exercise the right of lien in respect of those goods. If the buyer once obtains the
possession, the right of lien comes to an end, and such a right cannot be exercised even if the
seller again gets back the possession of those goods.

Thus, where a refrigerator after being sold was delivered to the buyer and since it was not
functioning properly, the buyer delivered two of its parts to the seller for repairs, it was held that
the seller could not exercise his lien over those parts.

4. By waiver: Unpaid seller’s right of lien is also lost by waiver thereof. According to section 46
(1) (a), an unpaid seller gets his right of lien by implication of law. Section 49 (1) (c) expressly
provides that the right of lien comes to an end by waiver thereof.

5. By Disposition of the goods by the buyer: According to section 53, the unpaid seller’s right
of lien or stoppage in transit is not affected by any sale or other disposition of the goods by the
buyer. This general rule is subject to the following two exceptions:

●When the seller himself assents to a sub-sale or other disposition of the goods by the buyer;

●When the buyer having lawfully obtained possession of document of title to the goods transfers
the same to a transferee in good faith and for consideration and he transfer is by way of, sale. In
he above stated two exceptional cases, the unpaid seller’s right of lien comes to an end.

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UNIT 5

Q.No.5 what do you mean by ‘Partnership’ as enshrined under the Indian Partnership Act,
1932. Discuss the concept of mutual agency. Refer to case laws.

Introduction

The Indian Partnership Act, 1932 governs partnership kinds of business in India. Section 4 of
this Act defines a partnership as the relationship between partners who have agreed to share the
firm’s profits carried on by all or any one of them acting for all.
Definition shows that a partnership requires partners who share their firm’s profits amongst one
another. Further, the firm’s business must be carried on either by all of them together or by one
of them acting on behalf of others. The members of such a business are individually called
partners and collectively, a firm.

The Indian Partnership Act was passed in 1932 to define and amend the law referring
to partnership. Indian Partnership Act is one of very old mercantile law. Partnership is one of the
special forms of Contract. Initially, this was a part of Indian Contract Act itself (Chapter IX –
sections 239 to 266), but later converted into separate Act in 1932.

The Indian Partnership Act is complimentary to Contract Act. Basic provisions of Contract Act
apply to contract of partnership also. Basic requirements of contract i.e. legally enforceable
agreement, mutual consent, parties competent to contract, free consent, lawful object,
consideration etc. apply to partnership contract also.

Partnership Firm isn't a legal entity – It is limited identity for purpose of tax law. Under
partnership law, a partnership firm isn't a legal entity, but only consists of individual partners for
the time being. It's not a definite legal entity apart from the partners constituting it -Malabar
Fisheries Co. v. CIT (1979)

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State of Punjab v. Jullender Vegetables Syndicate(1966)

FIRM LEGAL ENTITY FOR PURPOSE OF TAXATION - For tax law, income-tax as well as
sales tax, partnership firm is a legal entity.

Transport Agency v. Awadhesh Kumar(1998)

In this case the court held that a partnership firm can sue only if it is registered.

FEATURES OF PARTNERSHIP

A typical partnership form of business will always have the following basic features.

1. Agreement

The definition of the partnership itself makes it clear that there must exist an agreement between
partners to work together and share profits amongst them. Partners may make such an agreement
either orally or in writing. If it exists in written form, we refer to such an agreement as a partnership
deed.

Such written or oral agreement between partners must ensure that they are clear on their status as
partners of their firm. This includes details pertaining to their work as partners, the firm’s
businesses, their profit and loss sharing ratio, etc.

2. Business

The existence of a business is an essential feature of partnerships. There can be no formal

partnership under the Partnership Act if the partners carry out charitable activities. Section 2 says
that business includes any trade, profession or occupation. What is essential is that the firm must
work with the intention of earning profits.

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3. Profit sharing

A partnership does not exist unless partners share the profits of their firm. A person who works for
the partnership business without having a share in its profits may be an employee, but not a partner.
It is noteworthy to point out that the law only requires the sharing of profits amongst partners.
Consequently, all partners need not share losses as well.

4. Association of two or more persons

Partnership is an association of 2 or more persons. Again, only persons recognized by law can
enter into an agreement of partnership. Therefore, a firm, since it is not a person recognized in
the eyes of law cannot be a partner. Again, a minor cannot be a partner in a firm, but with the
consent of all the partners, may be admitted to the benefits of partnership. The partnership Act is
silent about the maximum number of partners but section 464 of the Companies Act, 2013 has
now put a limit of 50 partners in any association/partnership firm.

KINDS OF PARTNERSHIP

With regard to the duration of the term of partnership:

Partnership at will when no fixed period is prescribed for the expiration of partnership then it is a
partnership at will. According to Section 7 two conditions need to be fulfilled:

1. No agreement about the determination of the  fixed period of partnership

2. No clause with respect to the determination of partnership.

Partnership for a fixed period 

When the partners fixed the duration of the partnership firm then after the expiration of the fixed
period the partnership comes to an end. When the partners decided to continue with the
partnership even after the expiry of the fixed period then it becomes a partnership at will.

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On the basis of the extent of the  business carried by a partnership

Particular Partnership (Section 8)

When the partnership is created for completing any project or undertaking. When such an
undertaking or project have been completed then partnership comes to an end. The partners have
a choice to continue with the firm.

General Partnership 

When the partnership is created for the purpose of carrying out the business. There is no
particular task that has to be completed. The task is general in nature.

MUTUAL AGENCY

The business is to be carried by all of them or by any one of them on behalf of all. It gives two
assumptions: Each partner is entitled to carry out the business. The mutual agency exists between
the partners. Each partner is a principal as well as an agent for the other partners, he is bound by
the acts of other partners as well as can bind others by his own act.

Mutual Agency is the Real Test- The real test of ‘partnership firm’ is ‘mutual agency’, i.e.
whether a partner can bind the firm by his act, i.e. whether he can act as agent of all other
partners.

Mutual agency is the right of all partners to represent the company’s normal business operations
and the authority to bind it to mutual contracts and agreements. In leman’s terms, it is the
authority given to a person doing business on behalf of the company, usually a business owner or
partner.

A mutual agency may be thought of as a business marriage, and makes each partner accountable
for the actions of the other, even if they do not agree with what has been done. Each partner may
act as individuals in their everyday responsibilities, but ultimately, the partners are each

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responsible for the actions taken by the other. However, the mutual agency only exists if the
partners are acting within range of normal business operations or practices.

Mutual agency only exists for partners acting within the scope of normal business operations and
dealings. For example, a retailer apparel partner with agency would not be able to contract the
other partners into a deal to purchase a piece of investment real estate because this would be
outside the normal operations of the business.

CASE LAWS

1. Commissioner of Income Tax v. MahendraSingh Mohansingh [1980]

‘’It is that this element of agency which distinguishes partnership from various other legal
relations and it's this element which brings out the fundamental principle that partners when
carrying on the business of the firm are agents as well as principals. It also indicates that if the
essential element of agency is lacking, the relation of partnership cannot be said to exist. Section
6 of the Partnership Act recites the principles for determining the existence of partnership, the
court will examine all the incidents of the relation between the parties and can have regard to the
real relation between them. The court will consider all the relevant facts separately and
together then draw a conclusion without attaching undue importance to any of the evidentiary
facts or any particular aspect of the matter. There aren't any cogent facts and no circumstances to
be gathered from the two statements of the case from which existence of mutual agency between
the three persons will be said to be inferable. Treating this as a case of some difficulty,
we don't see how we might be justified in saying that the element of agency has been
established. the true test for determining whether someone deriving income from a
business within the form of profits is or isn't a partner is to examine whether the business was
carried on by the others acting for him; whether the relation of principal and agent subsisted
between them. The question is usually one of agency and authority.”

2) Commissioner of income tax -Xvii  v. Idea Cellular Ltd.

We don't think that this so-called pricing freedom is so crucial in examining the precise nature of

the business relation between the assessed-company and its distributors. The pricing factor is

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also a matter of mutual consent between the parties. Even within the case of an agency, there will
be a clause by which an agent is authorized to sell the goods for a price less than the MRP.
Even in a case of principal-to-principal, there is also a clause that the distributor cannot sell a
product for a price less than the MRP unless a consent is given by the manufacturer. The matter
of pricing in both the cases, i.e., principal-to-principal and principal to agents can be a matter of
mutual consent between the parties and even a matter of negotiation after the execution of the
agreement. There aren't any hard and fast rules of any legal proposition as far as these matters are
concerned.

3) The Commissioner of income tax v. Ravi Constructions and Uma

The two elements necessary to constitute a genuine partnership, viz., an agreement entered into
by all persons concerned and mutual agency among them are present during this case. The
partnership deed itself describes Y. Seetayya as a partner and thus the primary requirement is
satisfied. so far as the second requirement is concerned, it's necessary to recollect that the very
existence of the firm’S business (the execution of certain subsisting contracts) owed its origin to
the presence of Sri Y. Seetayya as a partner within the firm. But for him, there was no such
business. Moreover, he had also acted and functioned as a consultant as shown in clause 7 of the
partnership deed. The deposition of Sri Y. Seetayya doesn't negative this fact. The several
clauses within the partnership deed also go to show that there was mutual agency among all the 9
partners.

4) Bangalkot Udyog Ltd. v. State of Karnataka

Considering he view in Chittar Mal’s case , the Supreme Court approved the view taken on the
primary point, i.e., that cases of compulsory acquisition in favour of the State did not constitute
“sale”;. However, on the second point, the court disagreed and held that the right position in law
is that the case of compulsory acquisition only stands apart and will not be considered sale and
that the view taken in that case to the effect that even if in respect of the place of delivery and
the place of payment of price there was scope for agreement, such transaction wouldn't amount
to sale, wasn't correct law. The view taken therefore in Vishnu Agencies’; case is that so
long mutual consent, express or implied, isn't completely excluded and is accessible even in

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respect of some of the matters concerning the transaction, transfer of title of goods from one
person to another for a price, though most of the matters are under statutory compulsion, still
amounts to a sale. In result, the law laid down in Salar Jung Mills and Oil and natural
gas Commission is approved.

5) Collector of Central Excise v. Babul Products

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 the 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 emphasizes the principle of agency which is already
incorporated in the definition of “partnership” under section 4.

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