Professional Documents
Culture Documents
Contract 2
Contract 2
Contract 2
Contract-2
Contract-2
Guess Paper
Indian Contract Act- 1872- II
UNIT- I
1. What is contract of Indemnity? Explain the right of indemnity
holder. Distinguish between contracts of Indemnity & Contract of
Guarantee.
2. Discuss the nature, rights and liabilities of a Surety.
3. Explain the essential feature of Guarantee. What are the liabilities
& rights of the Surety? Can the surety discharge from his liability?
What is the difference between contract of Guarantee and
Indemnity?
4. Liability of surety is co-extensive with that of Principal debtor.
UNIT-II
1. Explain the standard of care required of a bailee in respect of
goods bailed to him.
2. What can be pledged? Who can make the valid Pledge?
Differentiate between Pledge & Lien.
3. What is bailment? What are the essentials of bailment? What are
the duties & rights of Finder of lost goods as a bailee?
4. What is Pledge? Distinguish between Pledge and Bailment.
UNIT – III
1. What is Agency? What are the various modes of creating Agency
relationship? Also describe the different kinds of Agent.
2. What are the circumstances in which agency is terminated?
3. Discuss fully the extent of Principals liabilities to third parties for
the act of Agent.
4. Define the term sub-Agent. How for is principal bound by the acts
of sub-agent? Distinguish between sub-agent and substituted Agent.
UNIT- IV
1. Sharing of profits in business is not conclusive evidence of the
existence of Partnership. Discuss with the help of relevant case law.
2. How the firm is registered? What is the effect of Registration &
Non registration of firm?
3. Right against Creditor to take back the securities deposited by the Principal
debtor:- After making the dues the surety has all the rights which are available to
the creditor against the principal debtor under section 141 of the act. He is entitled
to the benefit of every security which the creditor has against the principal debtor.
4. Surety has no right to goods in hypothecation:- In case there is hypothecation of
the goods the goods remain in the possession of the borrower the surety cannot
invoke the provision of section 141 in such case. Refer a case of Bank of India v/s
Yogeshwar Kant Wahhera, 1987.
CONCLUSION:- Keeping in view the above facts it is revealed that the surety’s
nature, liabilities and rights are of such types once he stands surety for any debt he
will remain bound till the amount is repaid by the principal debtor. Although the
surety has some rights such as right of subrogation, indemnity and to taking back
the securities but even though there are more complications in this regard. So one
should stand surety for a person who have some qualities of good pay master.
“It says that the liability of the surety is co-extensive with that of the
principal debtor unless it otherwise provided by the Contract.”
A case of law in this regard is of Andhra Bank Soryapeet v/s Anantnath Goel-
1991: It was held by the court that where there were joint promisors and
consideration was paid by only one of them the other piomisors were equally liable
to pay amount. The liability of son was co-extensive with his father who was
principal debtor in view of section 127 and 128 of the Indian contract Act.
The gist of some the leading cases in which the liability of the surety is co-
extensive are given below to strengthening the answer of the question:-
Kellappan Nambiar v/s Kanhi Raman-1957: In this case that if the principal
debtor happens to be a minor and the agreement made by him is void, the surety
too cannot be made liable in respect of the same because the liability of the surety
is co-extensive with that of principal debtor. It has been held that the guarantee of
the loan or an overdraft to an infant is void because the loan to the infant itself is
void.
That in case of State Bank of India v/s V.N. Anantha Krishnam-2005: that in
view of the provision of section 128 of Act the Presiding officer was not correct in
giving directions to the Bank to proceed against the property because cash credit
facility and the liability of surety was co-extensive with that of principal debtor.
In a case of Bank of Bihar Ltd. v/s Dr.Damodar Prasad -1969: The Supreme
Court held that the liability of the surety is immediate and cannot be defended until
the creditor has exhausted all his remedies against the principal debtor.
A case of Industrial Financial Corporation of India v/s Kannur Spining &
Weaving Mills Ltd.-2002: It was held that the liability of surety does not cease
merely because of discharge of the principal debtor from liability.
In a case of Harigobind Aggarwal v/s State Bank Of India-1956: It was held
that the principal debtor liability is reduced e.g. after the creditor has recovered a
part of the sum due from him out of his property the liability of the surety is also
reduced accordingly.
CONCLUSION:- On deeply going into depth of provisions laid down in the Act it
is revealed that surety liability is co-extensive with that of principal debtor means
that his liability is exactly the same as that of the principal debtor. Suppose if the
default having made by the principal debtor the creditor can recover the same from
the surety all what he could have recovered from the principal debtor.
I will”, this type of a collateral undertaking o be liable for the default of another is
called a contract of guarantee.
ESSENTIALS: - The following are the essential elements of Guarantee:-
1. Existence of Creditor, Surety, and Principal debtor: - The economic function of
a guarantee is to enable a credit-less person to get a loan or employment or
something else. Thus there must exist a principal debtor for a recoverable debt for
which the surety is liable in case of the default of the principal debtor. In the case
of Swan v/s Bank of Scotland -1836, It was held that a contract of guarantee is a
triplicate agreement between the creditor, the principal debtor and the surety.
2. Distinct Promise of Surety: - There must be distinct promise by the surety to be
answerable for the liability of the Principal debtor.
3. Liability must be legally enforceable: - Only if the liability of the principal
debtor is legally enforceable, the surety can be made liable. For example a surety
cannot be made liable for a debt barred by Statute of Limitation.
4. Consideration: - As with any valid contract the contract of guarantee also must
have a consideration. The consideration in such contract is nothing but anything
done or the promise to do something for the benefit of the principal debtor. The
section 127 of the Act clarify as under :-
“Anything done or any promise made for the benefit of principal debtor is
sufficient consideration to the surety for giving the guarantee.”
Illustrations: - 1. A agrees to sell to B certain goods if C guarantees for payment of
the price of the goods. C promises to guarantee the payment in consideration of
A’s promise to deliver goods to B. This is sufficient consideration for C’s promise.
2. A sells and delivers goods to B. C afterwards requests A to forbear to sue B for
an year and promise if A does so he will guarantee the payment if B not pay. A
forbears to sue B for one year. This is sufficient consideration for C’s guarantee.
5. It should be without misrepresentation or concealment: - Section 142 of the
Act specifies that a guarantee obtained by misrepresenting facts that are material to
the agreement is invalid, and section 143 specifies that a guarantee obtained by
concealing a material fact is invalid as well.
Illustration :- 1. A appoints B for collecting bills to account for some of the bills.
A asks B to get a guarantor for further employment. C guarantees B’s conduct but
C is not made aware of B previous mis-accounting by A. B afterwards defaults. C
cannot be held liable.
Illustration: 2- A promise to sell Iron to B if C guarantees payment. C guarantees
payment however, C is not made aware of the fact that A and B had contracted that
B will pay Rs.5/- higher that the market price. B defaults. C cannot be held liable
A case of London General Omnibus V/s Holloway- 1912: A person was invited
guarantee an employee, who was previously dismissed for dishonesty by some
employer. This fact was not told to the surety. Later on the employee embezzled
funds but the surety was not held liable.
CONCLUSION
It is noted from the above mentioned facts that the contract of guarantee is a
triplicate agreement between Creditor, Surety and the Principal debtor. A person
who stands for surety known as guarantor for a third person (principal debtor) who
in case of his default to fulfil his promise or to discharge the liabilities. The surety
or guarantor has to make a distinct promise for payment of the liabilities of the
Principal debtor which must be legally enforced.
UNIT-II
6 EXPLAIN THE STANDARD OF CARE REQUIRED OF A BAILEE IN
RESPECT OF GOODS BAILED TO HIM.
INTROUCTION: - The standard of care is required is that of a reasonable man.
The amount of care to be taken should be such as a man of ordinary prudence
would under similar circumstances take of his own goods of the same bulk quantity
and value as the goods bailed.
DEFINITION OF STANDARD OF CARE:- While going through the contents
of the provisions laid down in Section 151 of the Contract Act it is noticed that “in
all cases of bailment the bailee is bound to take as much as care of the goods bailed
to him as a man of ordinary prudence would under similar circumstances take of
his own goods of the same bulk and quality and value and value as the goods
bailed.”
On perusal of the definition it is revealed uniform duty of maintaining
the standard of care in respect of the goods bailed to him. However the following
steps may also be taken to maintain the standard of care:-
1. The Bialee should act as a prudent man: When the goods are bailed to him then he
should take such standard way of care as a man of ordinary prudence would like to
take of his own goods. If the bailee has not acted like an ordinary prudent man he
cannot be excused. A case of Union Bank of India v/s Udho Ram & sons-1963:
It was held railway did not take proper care and failed to keep an eye on wagons
which resulted theft.
2. In Calcutta Credit Corportation Ltd. v/s Prince Peter of Greece-1964: A car
was received for repairs by a garage which was damaged by fire. The car was
parked in a garage which was a partitioned by wooden walls, it also stored the
paint and thinners. When the fire open the car where it was kept could not opened
for fifteen minutes when the fire was notice. It was held that the bailee had not
taken a standard of care and he is liable.
3. Barbant & Comp. v/s King, 1895: The House of Lords held that the only cases
where the bailee would be immune are laid down expressly in section 152 of the
authority from the owner for pledging the goods, but having possession with the
owner’s consent can make a pledge and confer rights on the pledgee. These are as
under:-
1. Pledge by Mercantile Agent: Section 178 of the Act a mercantile Agent having
the possession of the goods with the consent of the owner but having no authority
to pledge them can make a pledge provided the pledgee or pawnee is acting in
good faith. He must pledge the goods while acting in the ordinary course of his
business of a mercantile agent.
2. PLEDGE BY PERSON IN POSSESSION UNDER A VOIDABLE
CONTRACT: The Act recognises another exception to the rule that either the
owner or his duly authorised agent can pledge the goods. According to this a
person who has obtained the possession of the goods under a voidable contract.
Voidable contract is a valid contract until it has been rescinded and
becomes void after the same has been rescinded. If the pawnor has obtained the
possession of the goods under a voidable contract but the contract has not yet been
rescinded, the pledgee is capable of having a good title to such goods. Thus if a
person has obtained the possession of goods by fraud, misrepresentation, coercion
or undue influence, he could make a valid pledge of the goods if the same is done
before the contract has been rescinded. A case of Phillips v/s Brooks Ltd., 1919: It
was in this case that pledge was valid.
3. Pledge by a person with a limited interest: - This Provision have been given in
the section 179 of the act that a person having limited interest in the goods may
make a valid pledge. For example : A pledges the goods to B for Rs.5000/- and B
makes a sub pledge of those goods for Rs.8000/- A gets a right to take back those
goods only by paying Rs.5000/-as held in case of Belgawn Poiner Urban Co-op
Credit Bank v/s Satyaparmoda-1962.
Pledge Lien
In a pledge pawne acquires a special interest in the Right to lien gives only a right to detain the
property pledged. subject matter of the lien until payment. Lien is
not transferable to a third person.
Pledge is deliver of goods to the creditor as security Lien is a right of a creditor to retain the goods
for the debt. until his debt is paid or satisfied
held liable to pay the cost of Rs. 3,72,400/- along-with simple interest @12% from
the date of institution of the suit.
ii) Ultzen v/s Ni coles, 1894:- It was held that the defendant was the bailee of the
coat as his servant had assumed the possession of the same and he was therefore
liable for its loss which was occurred due to his negligence.
(b) IF THE OWNER MAINTAINS CONTROL OVER THE GOODS
THERE IS NO BAILMENT: When the person keeps his goods in the premises
of others but himself continues to have the control over them, this is not sufficient
delivery for being considered to be bailment. Kaliaporumal Pillai v/s
Visalakshmi, 1938 : It was held that there was no bailment as she had not handed
over the possession of the jewels to the goldsmith, and therefore the goldsmith
could not be made liable for the loss. Punjab National Bank v/s Sohan Lal, 1962,
It was held that the locker could be operated even without the key with the
consumer. The consumer’s control over the valuable things in the locker had gone
and the same with the bank, therefore the bank was liable being bailee and thus
Bank is liable for the loss of the belonging of the consumer in the locker.
(c) THERE CAN BE BAILMENT WITHOUT CONTRACT:- In some cases
there can be a bailment when the person obtains the possession without a contract
of the bailment as it was done in the case of :Ram Gulam v/s Govt. Of Uttar
Pradesh- 1950, The court expressed that the property of plaintiff was stolen and
the same was recovered by the Police, Police kept the same in the Malkhana.
Property was again stolen from the Maalkhana and could not be traced out. Here
the point of bailment raised since no contract of bailment was made for which
conviction is announced but the law itself recognises the finder of the goods as
bailee under section 71 of contract Act, hence it was held that bailment can be even
there when there is no contract of bailment. L.M. Co-operative Bank v/s
Prabhudass HathiBhai-1966:- It was held that the government stood in the
position of a Bailee to take due care of the goods. Govt., duty to prove that they
had taken proper care as was possible for them and the damage was due to reasons
beyond their control.
RETURN OF GOODS AFTER THE PURPOSE IS ACHIEVED: OR
THEIR DISPOSAL ACCORDING TO THE BAILOR DIRECTIONS:- The
delivery of the goods in a bailment is only for some purpose i.e. for safe custody,
for carriage, for repair etc., when the purpose is accomplished the goods are to be
returned or otherwise disposed of according to the directions of the person
delivering them. According to Section 148, the goods shall be when purpose is
achieved returned to the bailor or disposed of as per his directions i.e. when the
cloth is given for being stitched in to suit or gold for being converted into
ornaments or wheat for being converted into flour there is a bailment in each case.
When the money is deposited into a Bank, when the agent receives some payment
on behalf of Principal, he is not the bailee thereof because he is only bound to pay
an equivalent of it to the principal rather than the same currency as done in the case
of: - Secretary of State for India Council v/s Sheo Singh-1880: Some notes
were given to Treasury for being cancelled, there is no bailment as the same notes
are not to be returned. Constructive bailment does not confer any right to a
stranger. Bailment regarding hiring of a locker will not create relationship of Land
lord and the tannent, as the Bank can always open the locker with a Master Key.
The hirer of the locker is not in a position to open the locker without the assistance
of the Bank. The Hirer has to operate the locker only within the Bank’s time but
the bank has no such limitation
CONCLUSION:- Keeping in view the above stated facts and the gist of the
decisions of the Courts it is noticed that the goods are to be returned to their
original owner after the purpose is accomplished or they are to be disposed of as
per the directions of the Bailor in same condition as these were bailed.
sustain by reason that the bailor was not entitled to make the bailment or to receive
back the goods or to give directions in respect of them.”
From the definition it is noticed that when the Bailor sometime not entitled
to make the bailment or to receive back the goods which may results a loss to the
bailee, then the bailee is entitled to recover the loss from the Bailor.
3. RIGHT OF LIEN ON THE GOODS BAILED:- According to section 170-
171 of the Act the bailee can retain the lien on the goods of the Bailor and can
refuse to deliver them back to Bailor until his due remuneration for services he
renders or any amount due is paid by the Bailor.
4. Compensation for the loss caused by non-disclosure of faults in goods
Bailed:- The goods so bailed contain a fault which is known to the bailor but he
does not convey it to the bailee and as a result thereof bailee sustains some injury.
The bailee can ask for the compensation.
5. Loss caused by the defects of thing bailed:- When the things bailed for hire or on
rent the bailee can ask for compensations for the loss or injury caused by both
latent or patent defects of the thing bailed irrespective of awareness of bailor about
those defects as provided in sec.150 of the Act.
6. Right to sue: The bailee has the right to sue the wrong-doer who wrongfully
deprives the bailee of the use or possession of the goods bailed or does them any
injury on the basis of instructions in Sec.180 of the Act.
DUTIES OF THE BAILEE:- A bailee has to observe the following duties:-
1. Duty to take reasonable care of the goods bailed: under section 151-152 of the
act bailee is bound to take reasonable care of goods bailed to him as man of
ordinary prudent under similar circumstances as he is taking care of his own goods.
2. Duties not make unauthorised use of the goods bailed: Section 153-154 of the
act bailee is not authorised to make unauthorised use of the goods bailed to him.
3. Duty not to mix bailor’s goods with his own goods: Act says through its
section155 and 157 that bailee may not mix the bailed goods with his own goods
which will create a problem at the time of return of the goods to bailor.
4. Duty to return the goods on fulfilment of the purpose: Section 159-161and
165-167 provides that when the purpose is accomplished the bailee has to return
the goods to bailor or to disposed of as per his directions.
5. Duty to deliver to the bailor increase or profit on the goods bailed:- Under
secion 163 of the Act it is the duty of the bailee to pay to bailor the profits earned
through the goods bailed or any increase thereby.
CONCLUSION:- If the bailee performed his duties with entire of his dedications,
honesty and in good-faith and also to enjoy his rights on the basis of the provisions
laid down in the Contact Act then there will be no creation of any problem and the
agreement will also be fulfilled.
UNIT- III
11. Explain various ways in which an agency relationship is created. Also
describe about the different kinds of Agent?
INTRODUCTION:- An agent is a person employed to do any act for another or to
represent another in dealing with third parties. The person for whom such act is
done or who is so represented is called the principal. Where one person mere gives
advice to another in matter of business agency does not arise because of such
advice only does not create an Agency. Sayed Abdul Khader v/s Rami
Reddy,1979.
The following are the various ways in which a relationship of agency is created:-
WHO MAY EMPLOY AGENT:- No person can employ an agent if he does not
possess capacity to contract. So a minor or person of unsound mind cannot become
the principal under section 183 of the Indian Contract Act.
WHO MAY BE AN AGENT:- According to section 184 of the Act any person can
be appointed as an agent but a person who is not of age of majority and of sound
mind cannot be made personally liable for the act done on behalf of the principal.
Minor can create contractual relation but a minor agent cannot be made personally
liable to the principal for the misconduct like an adult agent.
CONSIDERATION: No consideration is required for the creation of an Agency
under section 185 of the Act. A case of Digvijay Cement Co.Ltd. v/s State
Trading Corpn., 2006.
KINDS OF AGENT:- On the basis of provisions available in the Contract Act the
following are kinds of Agent in the business of Agency:-
1. Del-Credere Agent:- Such type of Agent who for extra remuneration undertakes
the liability of guarantee the due performance of the contract by the other party. He
is also responsible for the solvency and performance of their contracts by the other
parties.
2. COMMISSION AGENT:- A commission agent is person who purchases and sells
goods in the market on behalf of his employer on the best possible terms and who
gets commission for his labor.
3. FACTOR:- He is such type of agent who is given the possession of the goods for
the purpose of selling them. He is entitled to sell the goods in his own name. A
factor has a right to retain the goods for a general balance of accounts.
4. BROKER:- He is also to be known in the name of Mercantile Agent employed for
the purpose of sale and sale of goods. The main duty of a broker is to establish
privity between two parties for a transaction and he gets commission for his labour.
He is not entrusted with the possession of the goods. He merely brings two parties
together and if the deal is materialized he becomes entitled to the commission.
5. CO-AGENT:- Where several persons are expressly authorized with no stipulation
that anyone or more of them shall be authorized to act in name of the whole body.
They have a joint authority and they are called co-Agents.
6. Sub-Agent:- The sub-agents are usually appointed by the original Agent in the
business of Agency. He works under the control of original Agent.
7. PACCA- AARTIA:- He is also known by this name only and he works in the
open market to sell the goods on commission basis. He only sells the goods.
CONCLUSION:- As regards to determine whether relationship is that of Agent
and Principal or that of Master and servant. Agent has to remain faithful to his
principal and has work in good faith in the business of Agency. There must be
relation in between principal and the agent. Merely giving advice to another person
in the matter of business does not arise any business of agency. The main object of
the agency business that the agent makes the principal answerable to third person.
otherwise he will be liable to make the loss good for any damage. Sec. 207 further
mentions that like revocation the renunciation may also be express or implied in
the conduct of agent.
3. By the business of the agency being completed:- In term of contract where the
period of completion of the business is made the agency automatically stands
terminated.
4. By either the principal being adjudicated an insolvent: Section 201 of the Act
clearly indicates that, the agency which may be validy created stands revoked in
the event of different situations including the death or insanity of the principal or
the agent or by insolvency of the principal.
5. Principal should give reasonable notice of revocation:- Provisions says that a
reasonable notice of the revocation when he have the justification to revoke the
authority under sec.206.
6. By either the principal or Agent dying or becoming unsound mind:
Section 201 also describes that, when principal dying or becoming of unsound
mind agent is bound o take on behalf of the representatives of his late principal all
reasonable steps for the protection of interests of agency.
7. By the happening of any event rendering the agency unlawful: - Whenever
there is declaration of war the principal and agent may become alien enemies also
comes in the way of termination of the agency.
8. If a limited period is given:- If the agency is for a fixed term, although with the
possibility of fresh appointment after the expiry of the term it automatically
terminates on expiry of the said term such agency cannot be said to be irrevocable
as in the case of P. sukhdev v/s Commissioner of Endowments-1997. Under
sec.205.
9. MANNER AND CIRCUMSTANCES OF REVOCATION:- The principal may
have where the agent has himself an interest in the property which forms the
subject matter of the agency, revoke the authority given to his agent at any time
before the authority has been exercised so as to bind the principal under section
203 of the Act.
The Principal cannot revoke the authority given to his agent after the agent has
partly exercised his authority so far as regards such acts and obligations as arise
from acts already done in the Agency as laid down in the section 204 of the Act.
The reasonable notice of revocation is essential. Revocation may be express or
implied in the Contract of the business under section 206 of the act.
The revocation and renunciation may be expressed or may be implied in the
conduct of the principal or agent respectively under section 207 of the act.
ILLUSTRATION: - A empowers B to let A’s house. Subsequently A lets it
himself. This implied revocation of B’s authority.
13. Discuss fully the extent of Principals liabilities to third parties for the Act
of the Agent.
INTRODUCTION:- Agent is a person employed to do any act for another or to
represent another in dealing with third persons. There one of the most essential
characteristics of Agency is that the agent makes the principal answerable to third
persons. Principal is held bound by the obligations incurred on his behalf by his
agent. Section 226 to 228 of the Act deals with the law regarding the obligations
of principal for the contract of his Agent.
We will find from the following provisions and illustrations that how the
Principal’s liabilities and is bound answerable to the third parties for the acts done
by his agent:-
1. Principal’s obligation for acts of Agents:- Section 226 of the Indian Contract
Act provides that contract entered into through an Agent and obligations arising
from acts done by an Agent and will have the same legal consequences as if the
contract has been entered into and the acts done by the principal in person. This
section is based on the principle act as in Maxim which means that the act of an
Agent is the act of the principal.
ILLUSTRATION:- A being B’s Agent with the authority to receive money on his
behalf receives from C a sum of money due to B. C is discharged of his obligation
to pay the sum in question to B.
2. When an agent does more than he is authorized to do and when the part of what he
does, which is within his authority, can be separated from the part which is beyond
his authority the principal is liable only for so much part of what he does as is
within Agent’s authority as provided in Section 227 of the Act.
ILLUSTRATION:- A being the owner of a ship and cargo authorizes B to procure
an insurance for Rs.4000/- on the ship. B procures a policy for Rs.4000/- on the
ship and another for the like sum on the cargo. A is bound to pay the premium for
the policy on the ship but not the premium for the policy on the cargo.
3. An agent does more than he is authorized to do and what he does beyond the scope
of his authority is not separable from what is within it the principal is not liable for
the transaction as provided in the section 228 of the Act.
ILLUSTRATION:- Where A authorizes B to buy 5000 sheep for him and B buys
5000 sheep and 200 lambs for a sum rupees 6000/- . A may repudiate the whole
transaction.
4. OSTENSIBLE AUTHORITY:- Section 237 of the Contract Act embodies the
principle of ostensible authority. The section lays down When an agent has
without authority done acts or incurred obligations to third persons on behalf of his
principal, the principal is bound by such acts or obligations if he has by the words
or conduct induced such third persons to believe that such acts and obligations
were within the scope of the Agent’s authority.”
ILLUSTRATION:- A being B’s agent for the sale of goods induces C to buy them
by misrepresentation which he was not authorized by B to make. The contract is
voidable as between B and C, at the opinion of C. Undersection 238 of the Act
misrepresentation or fraud committed by an Agent may be classified into two
categories:-
i) Under his actual or ostensible authority.
ii) Which is not covered within his authority, the principal is liable for the acts which
fall under actual or ostensible authority.
5. A leading case on this subject is of Lloyds v/s Grace Smith in which it was held
that a principal is liable for the fraud of his agent within the scope of his authority
whether the fraud is committed for the benefit of the Principal or for the benefit of
Agent.
CONCLUSION:- On the perusal studies of the above provisions and the
illustrations it is seen that the liabilities of the Principal towards third persons are
based on the acts done by his agents. However in some cases it is also seen and
Principal is not liable for any wrongful act or omission of his Agent while acting
without the principal authority outside the ordinary course of employment or while
not acting nor purporting to act on his principal’s behalf.
14. Define the term Sub-Agent. How for is principal bound by the acts of Sub-
Agents. Distinguish between Sub-Agent and Substituted Agent.
INTRODUCTION:- A rule which based on the principle that Agency is a contract
based on trust and mutual confidence between the parties. A principal may have the
mutual confidence in his Agent but not in the subsequent sub Agent appointed by
the Agent. There is a provision regarding ‘delegates non-protest delegare’ which
means of this maximum is that an agent to whom another has delegated his own
authority cannot delegate that authority to a third person.
PROVISIONS MADE IN THE ACT:- Under section 190 of the Contract Act
which deals with delegation of an authority by the Agent describes as under:-
“An agent cannot lawfully employ another to perform acts which he has
expressly or impliedly undertaken to perform personally unless by the ordinary
custom or trade a sub-agent may or from the nature of the agency a sub-agent must
be employed.”
However the general principle is that the agent cannot delegate his authority to a
third person but there are two exceptions to this general rule. These are:-
i) When the ordinary custom of trade permits employment of a sub-agent.
ii) When the nature of agency demands that employment of a su-agent is necessary by
the Agent.
Although there are two exceptional conditions no agent is authorized to
delegate his authority it the nature of his act is purely managerial and he is
supposed to use his personal skill in discharge of his duty or where he is personally
required to perform his duties.
SUB-AGENT:- Sub agent is a person employed by and acting under the control of
the original Agent in the business of Agency under section 191 of the Act.
LEGAL POSITION OF SUB-AGENT PROPERLY APPOINTED:- Sub Agent
may be either properly appointed or improperly appointed. If he is appointed by
the Agent with the authority of his principal he is called sub-agent properly
appointed. If he is appointed without the authority of principal he is improperly
appointed.
When the sub-agent is appointed properly with the consent of the principal, the
principal is bound by his acts and is responsible for his action as if he was an agent
appointed by the principal.
The sub-agent is not responsible for his acts to principal. He is responsible only for
such acts to the original Agent.
But if the sub-agent is guilty of fraud or willful wrong against the principal he
becomes directly responsible to the principal under section 192 of the Act.
Difference between sub-Agent & substitute Agent
SUB-AGENT SUBSTITUTED AGENT
Sub Agent is a person employed by and Substituted agent can be nominated by
acting under the control of the original the original Agent to act for the
agent in the business of agency. principal for a certain part of the
business of agency.
A sub-agent is not generally responsible A substituted agent by his mere
to the principal but he is responsible to appointment becomes immediately
the agent. responsible to his principal.
There is no privity of contract between A privity of contract is created between
sub-agent and principal. the principal and the substituted Agent.
UNIT-IV
15. Sharing of Profits in business is not conclusive evidence of the existence of
partnership.
INTRODUCTION:- The object of every partnership must be to carry on a
business for the sake of profits and share the same. Therefore clubs, societies
which do not aim at making profits are not said to be a partnership. The definition
of term ‘Profits’ in the Partnership Act is that ‘net- gains’ i.e. he excess of the
returns over outlay. At one time it was thought that a person who shared the profits
must incur the liability also as he was deemed to be a Partner as it was held in a
case of Grace v/s Smith, 1775. This principle was again confirmed in a case
of Waugh v/s Carver, 1793, it was held that the person sharing the profits does not
always incur the liability of partners unless the real relation between them is that of
partners.
ESSENTIALS:- Although sharing of profits is one of the essential elements of
every partnership but every person who shares the profits need not always be a
partner.
Example No.1: - I may pay a share of profits to the manager of my business
instead paying him fixed salary so that he may takes more interest in the progress
of the business, such person sharing the profits is simply my servant or agent but
not my partner. Example No. 2:- A share of profits may be paid by a business man
to a money-lender by way of payment towards the return of his loan and interest
thereon, such a money-lender does not thereby become a partner.
a. The principle laid down in Cox v/s Hickman-1860: this principle forms the basis
of the provisions of section 6 of the Partnership Act which gives a caution that the
presence of only some of essentials of partnership does not necessarily result in
partnership. For determining the existence of partnership there must be had to
thereal relation between the parties after taking all the relevant facts into
consideration.
b. In determining whether a group of persons is or not a firm or whether a person is or
is not a partner in a firm. To answer this query an explanation is given below:
(i) Sharing of profits or of gross returns arising from property by persons holding a
joint or common interest in that property does not of itself make such persons as
partners.
(ii) Receipt by a person of a share of the profits of a business or of a payment
contingent upon the earning of profits or varying with the profits earned by a
business does not of itself make him a partner with the persons carrying on the
business and in particulars the receipt of such a share by a servant or agent as
remuneration a case of McLaren v/s Verschoyle-190l, or by a widow or child of a
deceased partner.
(iii) Mollow March & Co. v/s Courts of Wards-1872: In this case a Hindu Raja
advanced a large amount to a firm. Raja was given extensive powers of control
over the business and he was to get commission on profits until the repayment of
loan with 12% interest. It was held by the Raja could not be made liable for the
debts contracted in the agreement was not to create Partnership but simply to
provide security.
(iv) In a case of Walker v/s Hi4sch-1884: A person was working as clerk. The served
a notice by the defendants terminating his services. Clerk contented that he was a
partner and claimed dissolution of firm. I was held that though he shared the profits
he was having the capacity of a servant only. He was not a partner and could not
see dissolution of the firm.
CONCLUSION:- On nut-shell it could be concluded that just sharing the profits
in the business is not conclusive existence of the partnership till it create some
relationship between the persons who have entered into Partnership.
16. How the firm is registered? What is the effect of Registration & Non-
Registration of firms?
INTRODUCTION: - In the Contract Act it is not necessary that the firm should
be registered at the time of its formation. However a firm may be got registered at
any-time after the creation of Partnership. Act does not lay down any-time limit
within which the firm should be registered provided insection 63 of Partnership
Act. The act does not impose any penalties for non registration of firms.There are
some disabilities are provided in sec.69 of the Act for unregistered firms and their
partners.
HOW THE FIRM IS REGISTERED:- The partnership agreement or any
transaction between the partners and third parties is void on the basis of non-
registration of partnership firm and the partners themselves. In addition to the
above no prudent partner or firm should hesitate to get his or its name registered at
the earliest possible opportunity. The procedure of registration is very simple as
provided in section 58 and 59 of the Act.
A registration of firm may be affected by submitting to the Registrar of Firms a
statement in the prescribed form and accompanied by the prescribed fee. The
application must bear the following information:-
The firm’s name. Place of business and the name of other places where the firm
can carry on business. Date of joining of each partner with their permanent
addresses. The duration of the firm.
When the Registrar is satisfied that the above mentioned requirements have been
complied with and then he shall record an entry of statement in the register. This
amounts to the registration of the firm.
Section 69 of the Act imposes certain claims in the Civil Courts. This section
provides pressure which is to be brought to bear on partners to have the firm and
themselves registered. The pressure consists in denying certain right of litigation to
the firm or partners not registered under this act. A cause of action arose when the
firm was unregistered but was registered at the time of filing the suit. It was held
in the case of State of U.P., v/s Hamid Khan & Bros. and othrs-1986: it was held
that section 69 to be inapplicable in this case.
EFFECTS OF NON-REGISTRATION& REGISTRATION
ON REGISTRATION OF FIRM ON NON-REGISTERED FIRM
Any partner, nominee and authorized No partner, nominee and agent can bring
agent can bring a suit to enforce a right a suit to enforce a right arising from a
arising from a contract against any past contract against any firm or any past or
or present partner and for the third present partner of the firm or third
parties too. parties.
Registered firm can claim of set-off or The disabilities as provided in sec.69 of
other proceedings to enforce a right the act i.e.to claim of set-off or other
arising from a contract u/s 69 of the Act. proceedings to enforce a right arising
from a contract.
Filing of the return every year is It is not required to file the return by the
necessary. un-registered firm.
Loonkaran v/s Ivan E. John, 1977, it was held that sec.69 is mandatory and
unregistered partnership firms cannot bring a suit to enforce a right arising out of a
contract falling within the ambit of sec.69 void.
In M/s Balaji Constructions co., Mumbai v/s Mrs. Lira Siraj Sheikh, 2006 It
was observed that the firm was not registered on the date of filing of suit and
person suing as partners were not shown in register of firm and suit by such firm
hit by section 69(2) of Partnership Act and was liable to be dismissed.
CONCLUSION :- It is very well established that the partnership agreement or
transaction between the partners and third parties is void on the ground of Non-
Registration of the firm as well as of Partners. To enforce any right arising out of a
contract the registration of both firm and partners are necessary for the benefit of
the both.
17. Distinguish between partnership business and Joint Hindu family business.
INTRODUCTION: According to Partnership Act persons who have entered into
partnership are individually called partners and coactively a firm and the name
under which their business is carried on Is called firm name. In the eyes of law a
firm is merely a collective name of individuals who have entered into a
partnership.
CONCLUSION:- After going through the facts mentioned above it are clear that
there are lot and lot of difference in between an ordinary Partnership and Joint
Hindu family business. Ordinary partnership is a result of agreement between the
parties to join partnership to share the profits earned by the business being carried
out from partnership whereas in joint family business there is no need of an
agreement it is created by operation of law. In ordinary partnership each of the
partners has to render the account and to work as an agent. In joint business there
is no need to render account of profit and loss.
the Company’s Act can very well enter into a partnership but here is mentioned
that partnership firm is not a legal person therefore it is not competent to enter into
a partnership. Duli chand v/s CIT, 1956.
(iv) ALIEN: - A national of other country may be a friendly alien or an enemy alien. A
friendly Alien can enter into Partnership but latter Cannot except when he is under
the protection of that country.
2. TO SHARE THE PROFITS OF A BUSINESS:- This line consists the two parts:
1. To share the profit and 2. Of a business. However the explanation of these two
terms are as under :-
(i) Business:-This definition is not exhaustive. The existence of business is essential
unless there is no intention to carry on business and to share the profits, there can
be no partnership. Therefore the objects of the partnership and business must be
lawful. Case of R.R.Sharma v/s Ruben, 1946.
(ii) Sharing of Profits:- A case of Cox v/s Hickman, 1860:though sharing of the
profits of business is essential. The definition leave it opens as to how and when
these profits are to be shared. In order to continue the partnership the actual
existence of a business carried on by partners with an agreement to share profits of
such business is essential.
(iii) Sharing of losses Grace V/s Smith-1775, Mutual Agency and Acting for all and to
carry on the business are the essential terms of the partnership.
CONCLUSION:- In order to constitute partnership there must not only be sharing
of profits but there must be also the relationship and the principle of agency.
Section 4 of the act that there must be actual existence of a business carried on by
the partners with an agreement to share the profits of such business is essential.
CO-SURITIES
Sometimes there may be conditions in a contract of guarantee that there shall be
a co-surety also. Where a person gives a guarantee upon a contract that the
creditor shall not act upon it until another person has joined in it as co-surety, the
guarantee is not valid if the other person does not join. (It has also been provided in
section 144 of the act.) It means that in such a contract liability of the surety is
dependent on the condition precedent that a co-surety will join. The surety can be
made liable under such a contract only if the co-surety joins, otherwise not. On the
basis of provision under section 128.
LIABILITY OF CO-SURETY
From the above statement it has been noticed that the liability of sureties isco-
extensive with that of the principal debtor. It implies that the creditorcan proceed
against the principal debtor or the surety at his discretion unless it is otherwise
provided in the contract.
The same principle is applicable with regard to the rights and liabilities of the co-
sureties. Since the liability of the co-surety is joint and several a co-surety cannot
insist that the creditor should proceed either against the principal debtor or against
any other surety before proceeding against him.
A case in this regard is of State Bank of India v/s G.J.Herman-1998: It was held
that neither the court nor a co-surety can insist that the creditor should first
proceed against another surety before proceeding against him. Such direction
would go against the co-extensiveness.
In the case of Bank of Bihar Ltd. v/s Dr. Damodar Prasad-1969: It was held that
the liability of the surety is immediate and cannot be defended until the creditor
has exhausted all his remedies against the principal debtor.
CONCLUSION
It has already been noted that section 128 declares that the liability of the surety is
co-extensive with that of principal debtor. The word co-extensive denotes that
extent and can relate only to the quantum of the principal debt. However the
liability of the surety does not cease merely because of discharge principal debtor
from liability. Refer a case of Industrial Financial Corp. of India v/s Kannur
Spinning & Weaving Mills Ltd.-2002.
TERMINATION OF AGENCY
INTRODUCTION:- The agency which may be validly created stands terminated
in the event of different situations as the principal revoked his authority, or by the
agent renunciation of business of the agency or the death or unsound mind any of
the i.e. principal or of the agent. Even when the principal being adjudicated in
insolvent.
DEFINATION OF TERMINATION OF AGENCY
On the basis of provisions laid down in the Act under section 20, “That the agency
is terminated by the principal revoking his authority or by the Agent renouncing
the business of the agency being completed or either the principal or agent dying or
becoming of unsound mind or by the principal being adjudicated an insolvent
under the provisions of any act for the time being in force in the relief of insolvent
debtors.”
Extraaaaaaaaaaaaaaaa
Question No.6: What are the provisions regarding dissolution of partnership
firm?
INTRODUCTION:- Dissolution of partnership means coming to an end of the
relation known as Partnership between various partners. It may also can be
defined as the breaking up or extinction of the relationship which subsisted
between all the partners of the firm as held in a case of Santdas v/s sheodyal-
1971:
Here we are to note the significance of words in definition is, “between all partners
“means every one of the members of the firm cease to carry on business of
partnership. Thus where one or more members ceased to be partners in such firm
while others remain the firm is not said to be dissolved.
DEFINITION: - The term dissolution of the Partnership firm has been defined
in Section 39 of the Partnership Act which lies as, “the dissolution of partnership
between all the partners of a firm is called the, ‘dissolution of the firm’.”