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Paper 1.5: BUSINESS LAWS

Unit – 1

Indian Contract Act 1872: Contract – Meaning – Essential elements –

Nature of contract – Performance of contract – Discharge of contract - Remedies

for breach of contract – Quasi contracts.

Unit – 2

Special Contracts: Contract of Indemnity and Guarantee – Bailment and

Pledge – Law of Agency.

Unit – 3

Sale of Goods Act, 1930: Contract of sale – Essentials – Duties of

buyers and sellers – Conditions and warranties – Transfer of property –

Performance of the contract of sale – Rights of an unpaid seller.

Consumer Protection Act, 1986: Key definitions – Consumer

Protection Councils – Redressal Forum – Remedies.

Unit – 4

Negotiable Instruments Act, 1881: Negotiable instruments – Parties to

a negotiable instrument – Material alteration.

Indian Partnership Act, 1932: Meaning and test of partnership –

Registration of firms – Relations of partners – Rights and duties – Dissolution

of partnership.

Unit – 5

Law of Insurance: Contract of Insurance – Fundamental of principles –

Life Insurance, Fire Insurance and Marine Insurance.

Unit - 6

Companies Act, 1956: Definition of a company – Characteristics –

Kinds – Incorporation of a company – Memorandum and articles of association

– Prospectus – Directors – Appointment – Powers and duties – Company

Meetings – Resolutions and Minutes.

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References:

1. Kapoor, N.D., Elements of Mercantile Law, Sultan Chand & Sons, New

Delhi.

2. Shukla, M.C., Mercantile Law, S.Chand & Co., New Delhi

3. D.F. Mulla, The Indian Contract Act.

4. S.M. Shah, Lectures on Company Law.

5. Relevant Bare Acts

Course Material prepared by -

Dr. S. Sudalaimuthu,

Professor of Corporate Secretaryship

Alagappa University, Karaikudi.

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LESSON TITLE

Indian Contract Act, 1872

1. Meaning and Types of Contracts

2. Offer and Acceptance

3. Consideration and Capacity

4. Free Consent

5. Legality of Object and Contingent Contracts

6. Performance of Contract and Remedies for Breach of

Contract

7. Quasi Contracts

Special Contracts

8. Contract of Indemnity and Guarantee

9. Contract of Bailment

10. Contract of Agency

11. Sale of Goods Act

12. Consumer Protection Act

13. Negotiable Instruments Act

14. Indian Partnership Act

15. Law of Insurance

16. Companies Act, 1956

17. Company Management

18. Company Meetings

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LESSON - 1

INDIAN CONTRACT ACT, 1872

MEANING AND TYPES OF CONTRACTS

The law relating to the contracts is contained in the Indian Contract Act,

1872. It is that branch of law which lays down the essentials of a valid contract,

the different modes of discharging the contract and the remedies available to the

aggrieved party in the case of breach of contract. It is the most important branch

of business law. It is, of particular importance to people engaged in trade,

commerce and industry as bulk of their business transactions are based on

contracts.

A contract is an agreement made between two or more parties which the

law will enforce. Sec. 2 (h) of the Indian Contract Act defines it as “An

agreement enforceable by law”. Sec. 10 lays down that “All agreements are

contracts if they are made by the free consent of parties competent to contract,

for a lawful consideration and with a lawful object and are not hereby expressly

declared to be void”.

CLASSIFICATION OF CONTRACTS

Contracts may be classified according to their validity, formation or

performance.

I CLASSIFICATION ACCORDING TO VALIDITY

A contract is based on an agreement. An agreement becomes a contract

when all the essential elements referred to above are present. In such a case, the

contract is a valid contract. If one or more of these elements are missing, the

contract is either voidable, void, illegal or unenforceable.

Voidable Contract

Voidable contract is an agreement that is binding and enforceable, but

because of the lack of one or more of the essentials of a valid contract, it may be

repudiated by the aggrieved party at his option.

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Example: A promises to sell his house to B for Rs.2 lakhs. A obtained

B’s consent by exercising fraud on the latter. The contract is voidable at the

option of B.

Void Contract

A contract which is not enforceable by law is a void contract. It confers

no right on any person and creates no obligations.

Example: A promises for no consideration, to give to B Rs.1000. This

contract is void.

Illegal Contracts

An illegal contract is one which are opposed to statutory law or public

morals. It is criminal in nature. The effect of an illegal contract is that, it not

only makes the transaction between the immediate parties void, but also render

the collateral transactions void.

Example: A borrows Rs.1000 from B for manufacturing bombs. As

manufacturing bombs is illegal, the contract is void.

Unenforceable Contract

An unenforceable contract is one which cannot be enforced in a Court of

law because of some technical defect.

Example:

(i) A debt barred by limitation is unenforceable.

(ii) A document for want of prescribed value of the stamp is

unenforceable.

II CLASSIFICATION ACCORDING TO FORMATION

Contracts may be classified according to the mode of their formation as

follows:

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Express Contract

If the terms of a contract are expressly agreed upon, whether by words

spoken or written at the time of the formation of the contract, the contract is said

to be an express contract.

Implied Contract

An implied contract is one which is inferred from the acts or conduct of

the parties or course of dealings between them. It is not the result of any

express promise or promises by the parties but of their particular act.

Example: A, enters into a hotel and takes lunch. It is an implied contract

that he has to pay the cost of lunch after taking it.

III CLASSIFICATION ACCORDING TO PERFORMANCE

These may be classified as – Executed contracts or Executory contracts,

Unilateral contracts or Bilateral contracts.

Executed Contracts

An executed contract is one in which both the parties have performed

their respective obligations.

Example: A agrees to sell a book to B for Rs.200. When A delivers the

book and B pays the price, the contract is said to be executed.

Executory Contracts

An executory contract is one in which both the parties have yet to perform

their obligations. Thus in the above example, the contract is executory if A has

not delivered the book and B has not paid the price.

Another classification of contracts according to performance is as follows:

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Unilateral or One-sided Contract

A unilateral or one-sided contract is one in which only one party has to

fulfil his obligation at the time of the formation of the contract, the other party

having fulfilled his obligation at the time of the contract or before the contract

comes into existence.

Example: A permits a railway porter to carry his luggage and place it in

the compartment. The contract comes into existence as soon as the luggage is

placed in the compartment. Now only A has to fulfill his obligation of paying the

charges to the porter.

Bilateral Contract

A bilateral contract is one in which the obligations on the part of both the

parties to the contract are outstanding at the time of the formation of the

contract. In this sense, bilateral contracts are similar to executory contracts.

Example: A promises to issue a book to B on payment of Rs.100 by A.

Both A and B have not performed their duties.

ESSENTIALS OF A VALID CONTRACT

A valid contract must have the following essentials:

1. Two parties: There must be two parties for a valid contract.

2. Offer and acceptance: There must be an offer and acceptance. One party

making the offer and the other party accepting it.

3. Consensus-ad-idem or Identity of Minds: The parties to the contract must

have agreed about the subject matter of the contract at the same time and in

the same sense.

Illustration: A has two houses, one at Karaikudi and another at Madurai.

He has offered to sell one to B. B accepts thinking to purchase the house at

Karaikudi, while A, when he offers, has in his mind to dispose of house at

Madurai. There is no Consensus-ad-idem.

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4. Consideration: It means “something in return”. Every contract must be

supported by consideration.

Illustration: A offers to sell his watch for Rs.800 to B and B accepts the

offer. Thus, Rs.800 is the consideration for the watch and vice-versa.

5. Capacity: The parties to the contract must be competent to contract. For

example, a contract by a minor is void, since he is not competent to contract.

6. Free Consent: The consent of the parties must be free from any flaw. It

must not be caused by a mistake or coercion or undue influence.

7. Lawful Consideration: The consideration to a contract must be lawful.

Illustration: A promises to pay Rs.500/- to B, in consideration of B

murdering C. The consideration is illegal.

8. Lawful object: The object of the contract must be lawful.

Illustration: A promises to pay Rs.500/- for letting B’s house for running

a brothel. The object is illegal. Hence, the contract is void.

Thus, “the essence of a legal contract is that there shall be an agreement

between two persons, that one of them shall do something either for the benefit

of the other or for his own detriment and that these persons intend that the

agreement shall be enforceable at law”.

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LESSON - 2

OFFER AND ACCEPTANCE

OFFER

One of the early steps in the formation of contract lies in arriving at an

agreement between the contracting parties by means of offer and acceptance.

One party makes a definite proposal to the other, and that other accepts it in its

entirety.

An offer is also called a proposal. Sec.2 (a) of the Indian Contract Act

defines a proposal as, “When one person signifies to another his willingness to

do or to abstain from doing anything, with a view to obtaining the assent of that

other to such act or abstinence, he is said to make a proposal”. The person

making the proposal is called the “proposer”, or “offeror” and the person to

whom the proposal is made is called the “offeree”.

LEGAL RULES RELATING TO OFFER

1. It must contain definite, unambiguous and certain and not loose and vague

terms.

Montreal Gas Co Vs Vasey: It was held in this case, that a clause to

favourably consider the application for renewal, is ambiguous and not

binding the company.

Taylor Vs Portington: The terms to put the house into thorough repairs

and decorate drawing rooms according to present style, were held uncertain.

2. It must intend to give rise to legal relationship. A social invitation, even if it

is accepted does not create legal relationship, because it is not so intended.

Balfour Vs Balfour: A husband promised to pay Rs.1000/- per month to

his wife, staying away from him. Held that the promise was never intended

to be enforced in law.

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3. It must be distinguished from a quotation or an invitation to offer.

MacPherson Vs. Appanna: P offered to buy D’s property for Rs.6000. D

replied, “Won’t accept less than Rs.10,000”. P agreed to pay Rs.10,000.

But D sold it to another person. It was held that mere statement of price by D

contained no implied contract to sell it at that price.

4. An offer may be made to an individual or addressed to the world at large.

An offer is called a specific offer when it is made to a particular person.

Carlill Vs Carbolic Smoke Ball Co: The company has offered by

advertisement, a reward of £ 100 to anybody contracting influenza after using

their smoke ball according to their direction. Mrs. Carlill used it as directed

but still had an attack of influenza. Hence, she sued for the award of £ 100.

It was held that she was entitled to the award since an offer made at large,

can ripen itself into a contract with anybody who performs the terms of the

offer.

5. Offer must be made with a view to obtaining the assent.

The offer to do or not to do something must be made with a view to

obtaining the assent of the other party addressed and not merely with a view

to disclosing the intention of making an offer.

6. An offer must be communicated to the offeree.

Lalman Shukla Vs Gowri Dutt: A’s nephew was missing. B, who was an

employee of A, volunteered his services to search for the boy. Meanwhile,

A had announced a reward to anybody who could trace the boy. B found the

boy and brought him back to home and sued for the reward. It was held that

he was not entitled to the reward as he was ignorant of the offer.

Section 4 lays down that the communication of an offer is complete only

when it reaches the offeree. So, an offer binds the offeror only when the

offeree has the knowledge of the offer.

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ACCEPTANCE

Section 2 (b) of the Indian Contract Act defines acceptance as, “When

the person to whom the proposal is made signifies his assent thereto, the

proposal is said to be accepted. A proposal, when accepted becomes a promise”.

An offer, when accepted, becomes a contract.

Acceptance may be express or implied. It is express when it is

communicated by words spoken or written or by doing some required act. It is

implied when it is to be gathered from the surrounding circumstances or the

conduct of the parties.

Essentials of Valid Acceptance

1. Acceptance must be absolute and unconditional and should correspond with

the terms of the offeror. Otherwise, it amount to counter offer which may be

accepted or rejected by the offeror.

For example, A offers to sell his car for Rs.l lakh. B asks for Rs. 70,000.

It is not an acceptance, but a counter offer only.

2. An offer can be accepted only by the persons to whom the offer is made.

Boulton Vs Jones: A sold his business to B. This sale is not known to

A’s customers. So, Jones, who is a usual customer of the vendor, places an

order for goods with the vendor ‘A’ by name. B, the new owner, receives the

order and supplies the goods without disclosing the fact of sale of business

to him. It was held that the price could not be recovered as the contract was

not entered into with him.

3. Acceptance must be communicated in usual and reasonable manner. It may

be made by express words, spoken or written or by conduct of the parties, i.e.

by doing an act which amounts to acceptance according to the terms of the

offer or by the offeree accepting the benefit offered by the offeror.

Any method can be prescribed for the communication of acceptance. It

must be according to the mode prescribed or usual and reasonable mode.

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Silence can never be prescribed as a method of communication. Hence,

mere mental assent without expressing it and communicating it by means of

word or an act, is not sufficient.

Example: A wrote to B, “I offer you my car for Rs.10,000. If I don’t hear

from you in seven days, I shall assume that you accept”. B did not reply at

all. There is no contract.

Brogden Vs Metropolitan Railway Co: The Manager of a railway

company simply wrote on the proposal “approved” and kept it in a drawer.

By oversight, it was not communicated. It was held that the acceptance was

not communicated and hence there was no contract.

4. Acceptance must be made within a reasonable time. If any time limit is

specified, the acceptance must be given within that time. If no time limit is

specified, it must be given within a reasonable time.

Example: On June 8 M offered to take shares in R company. He

received a letter of acceptance on November 23. He refused to take the

shares. Held, M was entitled to refuse as his offer had lapsed as the

reasonable period during which it could be accepted had elapsed.

5. Acceptance should be made before the offer lapses or is revoked or is

rejected.

6. Acceptance cannot precede an offer. If the acceptance precedes an offer, it is

not a valid acceptance and does not result in a contract.

Example: In a company, shares were allotted to a person who had not

applied for them. Subsequently when he applied for shares, he was unaware

of the previous allotment. The allotment of shares previous to the application

is invalid.

7. Communication of acceptance may be waived by the offeror.

This rule is established in the case of Carlill Vs Carbolic Smoke Ball

Company where the advertisement never wanted the communication, apart

from fulfilling the conditions of offer.

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Acceptance, once made, Concludes the Contract

The rule is that when once an offer is accepted, it concludes the contract.

So, an acceptance is irrevocable. When a lighted match is applied to gun powder

it produces something which cannot be recalled. Sir William Anson compares

here the “gun powder” to “an offer” and “the lighted match” to “acceptance” and

says that either the gun powder may be allowed to become damp or it may be

removed before the lighted match is applied. So also an offer may be allowed to

lapse for lack of acceptance or may be revoked before acceptance is given. But

when once acceptance is given, it ripens into contract, just as when a lighted

match is applied to gun powder it produces an explosion. Thus he emphasises

two things: (i) There cannot be an acceptance after revocation of the offer and

(ii) When once there is an acceptance, there can be no revocation.

COMMUNICATION OF OFFER, ACCEPTANCE AND REVOCATION

An offer, its acceptance and their revocation to be complete must be

communicated.

1. The communication of an offer is complete when it comes to the knowledge

of the person to whom it is made.

Example: A proposes, by a letter, to sell a house to B at a certain price.

The letter is posted on 10th

July. It reaches B on 15th

July. The

communication of the offer is complete when B receives the letter on 15th

July.

2. The communication of acceptance is complete –

• as against the proposer when it is put into a course of transmission to

him, so as to be out of the power of the acceptor;

• as against the acceptor when it comes to the knowledge of the

proposer.

Example: B accepts A’s proposal, in the above case, by a letter sent

by post on 16th

July. The letter reaches A on 18th

instant. The

communication of the acceptance is complete, as against A, when the

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letter is posted, i.e. on 16th

. As against B, when the letter is received by

A, i.e. on 18th

.

3. The communication revocation is complete –

� as against the person who makes it, when it is put into a course of

transmission to the person to whom it is made, so as to be out of the

power of the person who makes it;

� as against the person to whom it is made, when it comes to his

knowledge.

Time for revocation of Offer and Acceptance

An offer may be revoked at any time before the communication of its

acceptance is complete as against the offeror, but not afterwards.

An acceptance may be revoked at any time before the communication of

the acceptance is complete as against the acceptor, but not afterwards.

Revocation of Offer

According to Sec.6, an offer is revoked –

1) By communication of notice of revocation by the offeror at any time

before its acceptance is complete as against him.

2) By lapse of time if it is not accepted within the prescribed time. If

however, no time is prescribed, it lapses by the expiry of a reasonable

time.

3) By death or insanity of the offeror provided the offeree comes to know

ofit before acceptance.

Rejection of Offer

An offer is rejected (i) when the offeree communicates his rejection, or

(ii) when the offeree makes a counter offer, or (iii) when the offeree accepts it

subject to some conditions.

lesson - 3

CONSIDERATION AND CAPACITY

Consideration is one of the essential elements of a contract. Consideration is known as quid pro quo, i.e.

something in return for something. When a party to an agreement promises to do something, he must get

“something” in return. This “something” is defined as consideration.

Section 2 (d) of the Indian Contract Act defines consideration thus: “When at the desire of the

promisor, the promisee or any other person has done or abstained from doing, or does or abstains from

doing, or promises to do or abstain from doing something, such act or abstinence or promise is called a

consideration for the promise”.

legal rules as to consideration

1. Consideration at the Desire of the Promisor

Consideration must proceed at the request or desire of the promisor. Hence, acts done voluntarily

or at the request of third parties do not constitute a valid consideration.

Durga Prasad Vs Baldev: A built a market at the request of the Collector of the place. B

promised to pay A, commission on the articles sold in the market. It was held that B’s promise to pay

commission did not constitute a valid consideration because A did not build the market at the request of

B.

1. The Promisee or any other Person

Consideration may move from the promisee or any third party. Hence, a stranger to consideration can

sue on the contract.

2. It may be an act, abstinence or forbearance or a return promise

i) An act, i.e. doing of something. In this sense consideration is in an affirmative form.

ii) An abstinence or forbearance, i.e. abstaining or refraining from doing something. In this sense

consideration is in a negative form.

Example: A promises B not to file a suit against him if he pays him Rs.10,000. The abstinence of A is

the consideration for B’s payment.

iii) A return promise.

Example: A agrees to sell his horse to B for Rs.30,000. Here B’s promise to pay the sum of Rs.30,000 is

the consideration for A’s promise to sell the horse, and A’s promise to sell the horse is the consideration

for B’s promise to pay the sum of Rs.30,000.

4. Consideration may be past, present or future

The words used in Sec.2(d) are: “…. has done or abstained from doing (past), or does or abstains

from doing (present), or promises to do or to abstain from doing (future) something …..” This means

consideration may be past, present or future.

a) Consideration may be past: When consideration by a party for a present promise was given in the

past.

Example: A renders some service to B at latter’s desire. After a month B promises to compensate A for

the services rendered to him. It is past consideration.

b) Consideration may be present: When consideration is given simultaneously with promise, it is said to

be present consideration.

Example: A receives Rs.500 in return for which he delivers a watch to B. The money A receives is the

present consideration for which he delivers the watch.

c) Consideration may be future: When consideration from one party to the other is to pass subsequently

to the making of the contract, it is future consideration.

Example: A promises to deliver certain goods to B after a week and B promises to pay the price after a

fortnight. Consideration in this case is future.

5. Something in return for Something

There must be “something in return”. This “something in return” need not necessarily be equal in value

to “something given”. Consideration need not be adequate. But it must be real and lawful.

Example: A agrees to sell a cow worth Rs.1200 for Rs.10. He has given his consent freely. The

agreement is a contract though consideration is inadequate.

6. Consideration must be real and not illusory

Although consideration need not be adequate, it must be real, competent and of some value in the

eyes of the law.

Example: A promise to create treasure by magic or to join two straight lines together cannot be

regarded as valid consideration.

7. Consideration must be something which the promisor is not already

bound to do

A promise to do what one is already bound to do, either by general law or under an existing

contract, is not a consideration.

8. Consideration should not be illegal, immoral or opposed to public policy

Example: A married woman was given money to enable her to obtain divorce from her husband

and then to marry the lender. Held, the agreement was immoral and the lender could not recover the

money.

stranger to contract

It is a general rule of law that only parties to a contract may sue and be sued on that contract.

This rule is known as the doctrine of privity of contract. In other words, a stranger cannot sue.

Example: A receives Rs.50 from B and promises B to deliver a book to C. C cannot sue on this

contract as he has neither supplied the consideration nor is he a party to the contract. So a stranger to

contract cannot sue, as there is no privity of contract between him and the promisor.

However, following are the exceptions:

(1) A Trust: A person, called beneficiary in whose favour a trust or other interest in some specific

immovable property has been created can enforce it even though he is not a party to the contract.

(2) Marriage Settlement, Partition or other Family arrangements: When an arrangement is made in

connection with marriage, partition or other family arrangements and a provision is made for the

benefit of a person, he may sue although he is not a party to the agreement.

(3) Acknowledgement or Estoppel: Where the promisor by his conduct, acknowledges or otherwise

constitutes himself as an agent of a third party, a binding obligation is thereby incurred by him

towards the third party.

(4) Contracts entered into through an Agent: The principal can enforce the contracts entered into by

his agent provided the agent acts within the scope of his authority and in the name of the principal.

(5) Assignment of a Contract: The assignee of rights and benefits under a contract not involving

personal skill can enforce the contract subject to the equities between the original parties.

(6) Charge on Immovable Property: When a charge on some specific immovable property is created for

the benefit of a third party such third party can sue.

a contract without consideration is void

The general rule is that an agreement made without consideration is void. Secs. 25 to 185 dealt

with the exceptions to this rules.

(1) An agreement expressed in writing and registered and made on account of natural love and affection

between parties standing in near relation to each other is enforceable even if it is without

consideration.

(2) A promise to compensate a person who has already voluntarily done something for the promisor, is

enforceable even though without consideration.

Example: A finds B’s purse and gives it to him. B promises to give A Rs.50. This is a contract.

(3) A promise to discharge a time-barred debt.

Example: D owes C Rs.1,000 but the debt is barred by the Limitation Act. D signs a written promise to

pay C Rs.500 on account of the debt. This is a contract.

(4) The rule “No consideration, no contract” does not apply to completed gifts.

(5) Consideration is not necessary to create an agency.

capacity to contract

The parties who enter into a contract must have the capacity to do so. ‘Capacity’ means the

competence of the parties to understand the nature of the contract and the rights and liabilities arising out

of those contract.

According to Sec. 11, every person is competent to contract who

(a) is of the age of majority according to the law, to which he is subject,

(b) is of sound mind, and

(c) is not disqualified from contracting by any law to which he is subject.

Thus the following persons are incompetent to contract:

(i) Minors

(ii) Persons of unsound mind, and

(iii) Persons disqualified by any law to which they are subject

incapacity to contract

Incapacity may arise out of (a) Status and (b) Mental deficiency.

(A) Incapacity Arising out of Status

Alien Enemies: An alien is a person who belongs to a foreign state. He may be an alien friend

or an alien enemy.

Contracts with an alien friend are valid. Contracts made with an alien enemy before the war may

either be suspended or discharged.

During the continuance of the war, an alien enemy can neither contract with an Indian subject nor

can he sue in an Indian Court.

Foreign Sovereigns, their diplomatic staff and accredited representatives of foreign States:

They have some special privileges and generally cannot be sued unless they of their own submit to the

jurisdiction of our law Courts. They can enter into contracts and enforce those contracts in our Courts.

But an Indian citizen has to obtain a prior sanction of the Central Government in order to sue them in our

Courts.

Convict: A convict when undergoing imprisonment is incapable of entering into a contract.

Insolvent: The insolvent cannot enter into contract and bind his property as his property shall be

vested with the official receiver when he is adjudged as insolvent.

(B) Incapacity Arising from Mental Deficiency

A person is said to be mentally deficient when (a) he does not attain majority, e.g. a minor, or

(b) he is of unsound mind.

1. When he is a Minor

A minor is a person who has not completed 18 years of age. He attains majority on completion of

18 years. A minor cannot enter into a valid contract.

2. When he is of Unsound Mind

Section 12 lays down that “A person is said to be of sound mind for the purpose of making a

contract if, at the time when he makes it, he is capable of understanding it and of forming a rational

judgement as to its effect upon his interests. A person who is usually of unsound mind, but occasionally

of sound mind, may make a contract when he is of sound mind.

Illustration: A patient in a lunatic asylum, who is at intervals, of sound mind, may contract during those

intervals.

law relating to contracts entered into by minors

According to Sec.3 of the Indian Majority Act, 1875, a minor is a person who has not completed

eighteen years of age. He attains majority on completion of 21 years when his property ismanaged by

court of wards or a guardian.

1) A contract by a minor is void and inoperative ab initio (from the beginning).

Mohoribibi Vs Dharmodas Ghosh: A minor had executed a mortgage for Rs.20,000. The money-lender

had paid Rs.8000 on the security of the mortgage. The minor sued for setting aside the mortgage. It was

held that a contract by a minor was void and that the amount advanced by the lender could not be

recovered under Sections 64 and 65 of the Indian Contract Act.

2) Minor’s agreement cannot be ratified by him on attaining the age of majority.

Arumugam Vs Duraisinga: A minor, having given a promissory note during his minority, has executed

another note on attaining majority in settlement of the first note. It was held that the second note executed

by the minor is void.

3) He can be a promisee or a beneficiary. Incapacity of a minor to enter into a contract does not debar

him from becoming a beneficiary. Such contracts may be enforced at his option, but not at the

option of the other party.

Example: M aged 17, agreed to purchase a second-hand scooter for Rs.5,000 from S. He paid Rs.200 as

advance and agreed to pay the balance the next day. S told him that he had changed his mind and offered

to return the advance. S cannot avoid the contract.

4) If the minor has received any benefit under a void agreement, he cannot be asked to compensate or

pay for it.

Example: M, a minor, obtains a loan by mortgaging his property. He is not liable to refund the loan. Not

only this, even his mortgaged property cannot be made liable to pay the debt.

5) Minor can always plead minority. Even if he has, by misrepresenting his age, induced the other

party to contract with him, he cannot be sued either in contract or in tort for fraud.

The Court may, where a loan or some property is obtained by the minor by some fraudulent

representation and the agreement is set aside, direct him, on equitable consideration, to restore the money

or property to the other party. Whereas the law gives protection to the minors, it does not give them

liberty “to cheat men”.

6) There can be no specific performance of the agreements entered into by him as they are void ab

initio.

7) Minor cannot enter into a contract of partnership. But he may be admitted to the benefits of

partnership with the consent of other partners.

8) Minor cannot be adjudged as insolvent, because he is incapable of contracting debts.

9) Minor can be an agent, since an agent is merely a link between the principal and the third party.

10) A contract by a guardian on behalf of the minor is enforceable by or against the minor, provided the

guardian is competent to contract and the contract is beneficial to the minor. But he cannot

purchase immovable property without obtaining the consent of the court.

11) A minor is liable for ‘necessaries’ supplied to him.

Minor’s Liability for Necessaries

The property of the minor is liable for the ‘necessaries’ supplied to him, provided the goods are suitable

to the condition of his life and status. Even here, he is not personally liable; but his estate only is liable.

The term ‘necessaries’ is not defined in the Indian Contract Act. The English Sale of Goods Act, 1893,

defines it in Sec.2 as “goods suitable to the condition in life of such infant or other person, and to his

actual requirement at the time of sale and delivery”.

Ryder Vs Wombell: A, a minor has property worth £ 20000 and has annual income of £ 500. He

purchased a golden goblet to be presented to a friend and cuff-links for personal use. It was held that

these articles were not necessaries and hence his estate was not liable.

Robert Vs Gray: A promised to pay certain amount to Roberts, a noted billiards player and to learn

playing matches with him so that he might become a professional player. It was held that the contract

was beneficial to the minor and hence minor’s property was liable.

Loans incurred to obtain necessaries. A loan taken by a minor to obtain necessaries also binds

him and is recoverable by the lender as if he himself had supplied the necessaries. But the minor is not

personally liable. It is only his estate which is liable for such loans.

persons of unsound mind

One of the essential conditions of competency of parties to a contract is that they should be of

sound mind. Sec.12 lays down that “A person is said to be of sound mind for the purpose of making a

contract if, at the time when he makes it, he is capable of understanding it and of forming a rational

judgement as to its effect upon his interests.

A person who is usually of unsound mind, but occasionally of sound mind, may make a contract

when he is of sound mind.

A person who is usually of sound mind, but occasionally of unsound mind, may not make a

contract when he is unsound mind.”

Soundness of mind of a person depends on:

(i) his capacity to understand the contents of the business concerned, and

(ii) his ability to form a rational judgement as to its effect upon his interests.

If a person is incapable of both, he suffers from unsoundness of mind. Whether a party to a contract is of

sound mind or not is a question of fact to be decided by the Court.

Contracts of Persons on Unsound Mind

Lunatics: A lunatic is a person who is mentally deranged due to some mental strain or other

personal experience. He suffers from intermittent intervals of sanity and insanity. He can enter into

contract during the period when he is sane and the contract is valid. The contract entered during the

period of insanity is not valid.

Idiots: An idiot is a person who has only physical maturity but not mental maturity. For

instance, an individual of age 25 can have the brain growth of only 10 years old. Hence he cannot

understand the nature of the transactions. Idiocy is permanent. An agreement with an idiot is void.

Drunkard: A drunkard person suffers from temporary incapacity to contract, i.e. at the time when

he is incapable of forming a rational judgement. He can enter into a valid contract when he is normal,

and the contract entered during the period of intoxication is not valid.

lesson - 4

FREE CONSENT

Consent: It means an act of assenting to an offer. According to Sec.13 “Two or more persons

are said to consent when they agree upon the same thing in the same sense”.

Free Consent: Consent is said to be free when it is not caused by –

(1) Coercion as defined in Sec. 15, or

(2) Undue influence as defined in Sec. 16, or

(3) Fraud as defined in Sec. 17, or

(4) Misrepresentation as defined in Sec. 18, or

(5) Mistake, subject to the provisions of Secs.20, 21 and 22 (Sec.14).

When there is no consent, there is no contract.

Example: A is forced to sign a promissory note at the point of pistol. A knows what he is signing but his

consent is not free. The contract in this case is voidable at his option.

flaw in consent

Coercion Undue influence Misrepresentation Mistake

(Sec. 15) (Sec. 16)

Fraudulent or Innocent or

Willful (Sec. 17) unintentional

(Sec. 18)

Mistake of law Mistake of fact

(Sec. 21) (Sec. 20)

coercion

Coercion is the committing, or threatening to commit, any act forbidden by the Indian Penal

Code, 1860 or the unlawful detaining, or threatening to detain, any property, to the prejudice of any

person whatever, with the intention of causing any person to enter into an agreement. When a person is

compelled to enter into a contract by the use of force by the other party or under a threat, “coercion” is

said to be employed.

The threat amounting to coercion need not necessarily proceed from a party to the contract. It

may proceed even from a stranger to the contract.

Example: A threatens to kill B if he does not lend Rs.1000 to C. B agrees to lend the amount to

C. The agreement is entered into under coercion.

Consent is said to be caused when it is obtained by:

1) Committing or threatening to commit any act forbidden by the Indian Penal Code.

Ranganayakamma Vs Alwar Chetti: A young girl of 13 years was forced to adopt a boy to her husband

who had just died by the relativesof the husband who prevented the removal of his body for cremation

until she consented. Held, the consent was not free but was induced by coercion.

2) Unlawful detaining or threatening to detain any property

Muthiah Vs Muthu Karuppan: An agent refused to hand over the account books of a business to the new

agent unless the principal released him from all liabilities. The principal had to give a release deed as

demanded. Held, the release deed was given under coercion and was voidable at the option of the

principal.

effect of coercion

When consent to an agreement is caused by coercion, the contract is voidable at the option of the

party whose consent was so caused (Sec.19).

A threat to commit suicide – Does it amount to coercion?

In Chikham Amiraju Vs. Seshamma, it was held that threat to commit suicide amounts to

coercion. In this case, a person held out a threat of committing suicide to his wife and son if they did not

execute a release in favour of his brother in respect of certain properties. The wife and son executed the

release deed under the threat. It was held, that “the threat of suicide amounted to coercion within Sec.15

and the release deed was, therefore, voidable”.

Duress: Coercion in India is called Duress in England. Duress means committing or threatening to

commit bodily violence or imprisonment with a view to obtain the consent of the other party to the

contract.

undue influence

Sometimes a party is compelled to enter into an agreement against his will as a result of unfair

persuasion by the other party. This happens when a special kind of relationship exists between the parties

such that one party is in a dominant position to exercise undue influence over the other.

Sec. 16(1) defines “undue influence” as follows:

“A contract is said to be induced by ‘undue influence’ where the relations subsisting between the parties

are such that one of the parties is in a position to dominate the will of the other and uses that position to

obtain an unfair advantage over the other”.

The following relationships usually raise a presumption of undue influence, viz.,

(i) teacher and student,

(ii) guardian and ward,

(iii) trustee and beneficiary,

(iv) religious adviser and disciple,

(v) doctor and patient,

(vi) solicitor and client.

The presumption of undue influence applies whenever the relationship between the parties is such that

one of them is, by reason of confidence reposed on him by the other, able to take unfair advantage over

the other.

A person is deemed to be in a position to dominate the will of another where:

� he holds a real or apparent authority over the other, e.g. the relationship between teacher and the

student.

� he stands in a fiduciary relation (relation of trust and confidence) to the other. It is supposed to exist,

for example, between solicitor and client, trustee and beneficiary.

� he makes a contract with a person whose mental capacity is temporarily or permanently affected by

reason of age, illness or mental or bodily distress. Such a relation exists, for example, between a

medical attendant and his patient.

Example: A spiritual guru induced his devotee to gift to him the whole of his property in return of a

promise of salvation of the devotee. Held, the consent of the devotee was given under undue influence.

(Mannu Singh Vs. Umadat Pandey).

effect of undue influence

When consent to an agreement is obtained by undue influence, the contract is voidable at the

option of the party whose consent was so obtained.

Example: A money lender advances Rs.1000 to B, and agriculturist and by undue influence

induces B to execute a bond for Rs.2000 with interest at 6 per cent per month. The Court may set the

bond aside, ordering B to repay Rs.1000 with such interest as may seem to it reasonable.

difference between coercion and undue influence

S.No. Coercion Undue Influence

1. The consent is obtained under the threat of

an offence.

The consent is obtained by a person who

is in a position to dominate the will of

another.

2. Coercion is mainly of a physical

character. It involves mostly use of

physical or violent force.

Undue influence involves use of moral

force or mental pressure to obtain the

consent.

3. There must be intention of causing

physical harm to any person to enter into

an agreement.

Here the influencing party uses its

position to obtain an unfair advantage

over the other party.

4. It involves a criminal act. It involves unlawful act.

misrepresentation and fraud

A statement of fact which one party makes in the course of negotiations with a view to inducting

the other party to enter into a contract is known as representation.

misrepresentation

A representation, when wrongly made is a misrepresentation.

A misrepresentation may be (i) innocent misrepresentation (ii) willful misrepresentation or fraud.

Innocent misrepresentation is a false statement which the person making it honestly believes to be

true or which he does not know to be false. It also includes non-disclosure of a material fact or facts

without any intent to deceive the other party.

Sec. 18 defines “misrepresentation”. According to it, there is misrepresentation:

(1) When a person positively asserts that a fact is true when his information does not warrant it to be so,

though he believes is to be true.

(2) When there is any breach of duty by a person which brings an advantage to the person committing

it by misleading another to his prejudice.

(3) When a party causes, however innocently, the other party to the agreement to make a mistake as to

the substance of the thing which is the subject of the agreement.

Example: A told his wife within the hearing of their daughter that the bridegroom proposed for her was a

young man. The bridegroom, however, was over sixty years. The daughter gave her consent to marry

him believing the statement by her father. Held, the consent was vitiated by misrepresentation and fraud.

Consequences of Misrepresentation

The aggrieved party, in case of misrepresentation by the other party, can –

1) avoid or rescind the contract; or

2) accept the contract but insist that he shall be placed in the position in which he would have been if

the representation made had been true.

fraud

Fraud exists when it is shown that a false representation has been made (a) knowingly, or (b)

without belief in its truth, or (c) recklessly, not caring whether it is true or false, and the maker intended

the other party to act upon it, or,

There is a concealment of a material fact or that there is a partial statement of a fact in such a manner that

the withholding of what is not stated makes that which is stated false.

The intention of the party making fraudulent misrepresentation must be to deceive the other party

to the contract or to induce him to enter into a contract.

According to Sec.17, “fraud” means and includes any of the following acts committed by a party

to a contract, or with his connivance, or by his agent with intent to deceive or to induce a person to enter

into a contract:

1. The suggestion that a fact is true when it is not true and the person making the suggestion does not

believe it to be true;

2. The active concealment of a fact by a person having knowledge or belief of the fact;

3. A promise made without any intention of performing it;

4. Any other act or omission as the law specifically declares to be fraudulent.

essential elements of fraud

1. There must be a representation or assertion and it must be false.

Peek Vs Gurney: The prospectus of a company did not refer to the existence of a document disclosing

liabilities. Held, non-disclosure amounted to fraud and anyone who purchased shares on the faith of this

prospectus could avoid the contract.

2. The representation must relate to a material fact and not to an opinion.

Example: A sells some spoons to B and makes the following statements:

• The spoons are as good as that of X. This is a statement of opinion.

• The spoons have as much silver in them as that of X. This is a statement of fact.

3. The representation must have been made before the conclusion of the contract with the intention of

inducing the other party to act upon it.

4. The person making it must have made it knowing it to be false or recklessly or carelessly without

regarding whether it is true or false.

Reese Rive Co. Vs Smith: The prospectus issued by the company has induced the plaintiff to take shares.

Subsequently the shareholder found the property of the company worthless contrary to the statements in

the prospectus. It was held that there was fraud.

5. The other party must have relied upon the representation and must have been deceived.

6. The other party, acting on the representation or assertion, must have subsequently suffered some loss.

consequences of fraud

A contract induced by fraud is voidable at the option of the party defrauded. Until it is avoided, it

is valid. The party defrauded has, however, the following remedies:

1. He can rescind the contract.

2. He can insist on the performance of the contract on the condition that he shall be put in the position in

which he would have been if the representation made had been true.

3. He can sue for damages.

mistake of law

Mistake of law may be — (1) mistake of law of the country, or (2) mistake of law of a foreign

country.

1. Mistake of law of the country: Ignorantia juris non excusat, i.e. ignorance of law is no excuse, is a

well settled rule of law. A party cannot be allowed to get any relief on the ground that it had done a

particular act in ignorance of law. A mistake of law is, therefore, no excuse, and the contract cannot

be avoided.

Example: A and B enter into a contract on the erroneous belief that a particular debt is barred by the

Indian Law of Limitation. This contract may be voidable.

2. Mistake of law of a foreign country: Such a mistake is treated as mistake of fact and the agreement

in such a case is void. (Sec. 21).

mistake of fact

Mistake of fact may be — (1) a bilateral mistake, or (2) a unilateral mistake.

1. Bilateral Mistake

Where both the parties to an agreement are under a mistake as to a matter of fact essential to the

agreement, there is a bilateral mistake. In such a case, the agreement is void (Sec. 20). The following

two conditions have to be fulfilled for the application of Sec. 20:

(i) The mistake must be mutual, i.e. both the parties should misunderstand each other and should be at

cross-purposes.

Example: A agreed to purchase B’s motor-car which was lying in B’s garage. Unknown to either party,

the car and garage were completely destroyed by fire a day earlier. The agreement is void.

(ii) The mistake must relate to a matter of fact essential to the agreement. As to what facts are essential

in an agreement will depend upon the nature of the promise in each case.

Example: A man and a woman entered into a separation agreement under which the man agreed to pay a

weekly allowance to the woman, mistakenly believing themselves lawfully married. Held, the agreement

was void as there was mutual mistake on a point of fact which was material to the existence of the

agreement.

The various cases which fall under bilateral mistake are as follows:

Mistake as to the Subject-Matter:

Where both the parties to an agreement are working under a mistake relating to the subject-

matter, the agreement is void. Mistake as to the subject-matter covers the following cases:

(1) Mistake as to the existence of the subject-matter: If both the parties believe the subject-matter of

the contract to be in existence, which in fact at the time of the contract is non-existent, the contract

is void.

Example: A agrees to buy from B a certain goat. It turns out that the goat was dead at the time of the

bargain, though neither party was aware of the fact. The agreement is void.

(2) Mistake as to the identity of the subject-matter: It usually arises where one party intends to deal in

one thing and the other intends to deal in another.

Example: W agreed to buy from R a cargo of cotton “to arrive ex-peerless from Bombay”. There were

two ships of that name sailing from Bombay, one sailing in October and the other in December. W meant

the former ship R meant the latter. Held, there was a mutual or a bilateral mistake and there was no

contract/

(3) Mistake as to the quality of the subject-matter: If the subject matter is something essentially

different from what the parties thought it to be the agreement is void.

Example: A sells to B a piece of silk. B thinks that it is foreign silk. A knows that B thinks so but knows

that it is Indian silk only.

(4) Mistake as to the quantity of the subject-matter: If both the parties are working under a mistake as

to the quantity of the subject-matter, the agreement is void.

Example: A silver bar was sold under a mistake as to its weight. There was a difference in value

between the weight of the bar as it was and as it was supposed to be. Held, the agreement was void.

(5) Mistake as to the title to the subject-matter: If the seller is selling a thing which he is not entitled

to sell and both the parties are acting under a mistake, the agreement is void.

Example: A person took a lease of a fishery which, unknown to either party, already belonged to him.

Held, the lease was void.

(6) Mistake as to the price of the subject-matter: If there is a mutual mistake as to the price of the

subject-matter, the agreement is void.

Example: C wrote to D offering to sell certain property for Rs.15,000. He had earlier declined an offer

from D to buy the same property for Rs.20,000. D who knew that his offer of Rs.15,000 was a mistake

for Rs.25,000, immediately accepted the offer. Held, D knew perfectly well that the offer was made by

mistake and hence the contract could not be enforced.

Mistake as to the Possibility of Performing the Contract

Consent is nullified if both the parties believe that an agreement is capable of being performed

when in fact this is not the case. The agreement, in such a case, is void on the ground of impossibility.

Impossibility may be —

(i) Physical Impossibility.

Example: A contract for the hire of a room for witnessing the coronation procession of Edward VII was

held to be void because, unknown to the parties, the procession had already been cancelled.

(ii) Legal Impossibility: A contract is void if it provides that something shall be done which cannot, as a

matter of law, be done.

2. Unilateral Mistake

When in a contract only one of the parties is mistaken regarding the subject-matter or in

expressing or understanding the terms or the legal effect of the agreement, the mistake is a unilateral

mistake. According to Sec. 22, a contract is not voidable merely because it was caused by one of the

parties to it being under a mistake as to a matter of fact. A unilateral mistake is not allowed as a defence

in avoiding a contract unless the mistake is brought about by the other party’s fraud or misrepresentation.

Example: A offers to sell his house to B for an intended sum of Rs.44,000. By mistake he

makes an offer in writing of Rs.40,000. He cannot plead mistake as a defence.

LESSON - 5

LEGALITY OF OBJECT

A contract must have a lawful object. The word ‘object’ means purpose or design. In some cases,

consideration for an agreement may be lawful but the purpose for which the agreement is entered into

may be unlawful. In such cases the agreement is void. As such, both the object and the consideration of

an agreement must be lawful, otherwise the agreement is void.

Sec. 23. The consideration or object of an agreement is unlawful —

1. If the object is forbidden by law.

Example: A promises to obtain for B an employment in the public service and B promises to pay

Rs.1,00,000 to A. The agreement is void, as the consideration is unlawful.

2. If the object is permitted, it would defeat the provisions of any law.

Example: N agreed to enter a company’s service in consideration of a weekly wage of Rs.75 and a weekly

expense allowance of Rs.25. Both the parties knew that the expense allowance was a device to evade

tax. Held, the agreement was unlawful.

3. If the object is fraudulent. An agreement which is made for a fraudulent purpose is void. Thus an

agreement in fraud of creditors with a view to defeating their rights is void.

4. If it involves or implies injury to the person or property of the another. ‘Injury’ means ‘wrong’,

‘harm’ of ‘damage’.

5. If the consideration or the object is immoral.

Example: A agrees to let her daughter to B for concubinage (state of living together as man and wife

without being married). The agreement is unlawful, being immoral.

6. Where the object is opposed to public policy.

unlawful and illegal agreements

An unlawful agreement is one which, like a void agreement, is not enforceable by law. An

illegal agreement, is not only void as between the immediate parties but also makes the collateral

transactions void.

Example: L lends Rs.50,000 to B to help him to purchase some prohibited goods from T, an alien

enemy. If B enters into an agreement with T, the agreement will be illegal and the agreement between B

and L shall also become illegal, because it is collateral to the main transaction. L cannot, therefore,

recover the amount.

Every illegal agreement is unlawful, but every unlawful agreement is not necessarily illegal.

Illegal acts are those which involve the commission of a crime or contain an element of obvious

moral turpitude and forbidden by law. On the other hand, unlawful acts are those which are less rigorous

in effect and involve a “non-criminal breach of law”. These acts do not affect public morals, nor do they

result in the commission of a crime. These are simply disapproved by law on some ground of public

policy.

Effects of Illegality

The general rule of law is that no action is allowed on an illegal agreement and the law will not

help both the parties to the agreement.

agreements opposed to public policy

An agreement is said to be opposed to public policy when it is harmful to the public welfare.

Some of the agreements which are opposed to public policy and are unlawful are as follows:

1. Agreements of trading with enemy. An agreement made with an alien enemy in time of war is illegal

on the ground of public policy.

2. Agreement to commit a crime. Where the consideration in an agreement is to commit a crime, the

agreement is opposed to public policy. The Court will not enforce such an agreement.

3. Agreements which interfere with administration of justice. An agreement, the object of which is to

interfere with the administration of justice is unlawful, being opposed to public policy. It may take

any of the following forms:

(a) Interference with the course of justice. An agreement which obstructs the ordinary process of justice

is unlawful.

(b) Stifling prosecution. It is in public interest that if a person has committed a crime, he must be

prosecuted and punished.

(c) Maintenance and champerty. ‘Maintenance’ is an agreement to give assistance, financial or

otherwise, to another to enable him to bring or defend legal proceedings when the person giving

assistance has got no legal interest of his own in the subject-matter.

4. Agreements in restraint of legal proceedings. Sec. 28 which deals with these agreements:

(a) Agreements restricting enforcement of rights. An agreement which wholly or partially prohibits any

party from enforcing his rights under or in respect of any contract is void to that extent.

(b) Agreements curtailing period of limitation. Agreements which curtail the period of limitation

prescribed by the Law of Limitation are void because their object is to defeat the provisions of law.

5. Trafficking in public offices and titles. Agreements for the sale or transfer of public offices and titles

or for the procurement of a public recognition like Padma Vibhushan or Param Veer Chakra for

monetary consideration are unlawful, being opposed to public policy.

Example: R paid a sum of Rs.2,50,000 to A who agreed to obtain a seat for R’s son in a Medical College.

On A’s failure to get the seat, R filed a suit for the refund of Rs.2,00,000. Held, the agreement was

against public policy.

6. Agreements tending to create interest opposed to duty. If a person enters into an agreement whereby

he is bound to do something which is against his public or professional duty, the agreement is void

on the ground of public property.

7. Agreements in restraint of parental rights. A father, and in his absence the mother, is the legal

guardian of his/her minor child. This right of guardianship cannot be bartered away by any

agreement.

8. Agreements restricting personal liberty. Agreements which unduly restrict the personal freedom of

the parties to it are void as being against public policy.

9. Agreements in restraint of marriage. Every agreement in restraint of the marriage of any person,

other than a minor, is void (Sec. 26). This is because the law regards marriage and married status as

the right of every individual.

10. Marriage brokerage agreements. An agreement by which a person, for a monetary consideration,

promises in return to procure the marriage of another is void, being opposed to public policy.

11. Agreements interfering with marital duties. Any agreement which interferes with the performance of

marital duties is void, being opposed to public policy. Such agreements have been held to include

the following:

(a) A promise by a married person to marry, during the lifetime or after the death of spouse.

(b) An agreement in contemplation of divorce, e.g. an agreement to lend money to a woman in

consideration of her getting a divorce and marrying the lender.

(c) An agreement that the husband and wife will always stay at the wife’s parents’ house and that the

wife will never leave her parental house.

12. Agreements to defraud creditors or revenue authorities. An agreement the object of which is to

defraud the creditors or the revenue authorities is not enforceable, being opposed to public policy.

13. Agreements in restraint of trade. An agreement which interferes with the liberty of a person to

engage himself in any lawful trade, profession or vocation is called an ‘agreement in restraint of

trade’.

Oakes & Co. Vs Jackson: An agreement between an employee and the company whereby the employee

agrees not to work in a similar company within a distance of 800 miles from Madras after leaving the

employment, is held void.

However, following are the exemptions to the rule that “an agreement in restraint of trade is void”.

1. In the case of sale of goodwill, the seller may agree to restrain from carrying on similar business

within certain specified limited space and time which appear to be reasonable to the court.

2. An agreement between partners that none of them shall carry on any business so long as he is a

partner, is enforceable.

3. An agreement between the partners upon or in anticipation of the dissolution of the firm not to carry

on similar business within certain specified limited area and time is valid if such restrictions are

reasonable from the view of the court.

4. An agreement between a retiring partner and continuing partners whereby the retiring partner agrees

not to carry on similar business within certain specified limited area and time is valid if such limits

appear to be reasonable.

5. An agreement between traders not to sell below a particular price is valid.

6. An agreement between the members of a trade union shall not be void on the ground that it is in

restraint of trade.

7. In case of service agreements, where the employee is prevented from accepting any other engagement

during his employment, such restraint is valid.

VOID AGREEMENTS

A void agreement is one which is not enforceable by law [Sec.2 (g)]. Such an agreement does

not give rise to any legal consequences and is void ab initio.

The following agreements have been expressly declared to be void by the Contract Act:

1) Agreements by incompetent parties (Sec. 11).

2) Agreements made under a mutual mistake of fact (Sec. 20).

3) Agreements the consideration or object of which is unlawful (Sec. 23).

4) Agreements the consideration or object of which is unlawful in part (Sec.24).

5) Agreements made without consideration (Sec. 25).

6) Agreements in restraint of marriage (Sec. 26).

7) Agreements is restraint of trade (Sec. 27).

8) Agreements in restraint of legal proceedings (Sec. 28).

9) Agreements the meaning of which is uncertain (Sec. 29).

10) Agreements by way of wager (Sec. 30).

11) Agreements contingent on impossible events (Sec. 36).

12) Agreements to do impossible acts (Sec. 56).

13) In case of reciprocal promises to do things legal and also other things illegal, the second set of

reciprocal promises is a void agreement (Sec. 57).

wagering agreements or wager

A wager is an agreement between two parties by which one promises to pay money or money’s

worth on the happening of some uncertain event in consideration of the other party’s promise to pay if the

event does not happen. Thus if A and B enter into an agreement that A shall pay B Rs.100 if it rains on

Monday, and that B shall pay A the same amount if it does not rain, it is a wagering agreement.

Essentials of Wagering Agreement

(1) Promise to pay money or money’s worth. The wagering agreement must contain a promise to pay

money or money’s worth.

(2) Uncertain event. The promise must be conditional on an event happening or not happening.

(3) Each party must stand to win or lose. Upon the determination of the contemplated event, each

party should stand to win or lose.

(4) No control over the event. Neither party should have control over the happening of the event one

way or the other.

(5) No other interest in the event. Neither party should have any interest in the happening or non-

happening of the event other than the sum or stake he will win or lose.

CONTINGENT CONTRACTS

‘Contingent’ means that which is dependent on something else. A ‘Contingent Contract’ is a

contract to do or not to do something, if some event, collateral to such contract, does or does not happen

(Sec. 31). For example, goods are sent on approval, the contract is a contingent contract depending on

the act of the buyer to accept or reject the goods.

There are three essential characteristics of a contingent contract:

1. Its performance depends upon the happening or non-happening in future of some event. It is this

dependence on a future event which distinguishes a contingent contract from other contracts.

2. The event must be uncertain. If the event is bound to happen, and the contract has got to be

performed in any case it is not a contingent contract.

3. The event must be collateral, i.e. incidental to the contract.

Contracts of insurance, indemnity and guarantee are the commonest instances of a contingent contract.

rules regarding contingent contracts

1. Contingent contracts dependent on the happening of an uncertain future event cannot be enforced

until the event has happened. If the event becomes impossible, such contracts become void (Sec. 32).

Example: A contracts to pay B a sum of money when B marries C. C dies without being married to B.

The contract becomes void.

2. Where a contingent contract is to be performed if a particular event does not happen, its performance

can be enforced when the happening of that event becomes impossible (Sec. 33).

Example: A agrees to pay B a sum of money, if a certain ship does not return. The ship is sunk. The

contract can be enforced when the ship sinks.

3. If a contract is contingent upon how a person will act at an unspecified time, the event shall be

considered to become impossible when such person does anything which renders it impossible that he

should so act within any definite time, or otherwise than under further contingencies (Sec. 34).

Example: A agrees to pay B a sum of money if B marries C. C marries D. The marriage of B to C must

now be considered impossible, although it is possible that D may die and that C may afterwards marry B.

4. Contingent contracts to do or not to do anything, if a specified uncertain event happens within a fixed

time, become void if the event does not happen or its happening becomes impossible before the

expiry of that time.

Example: A promises to pay B a sum of money if a certain ship returns within a year. The contract may

be enforced if the ship returns within the year, and becomes void if the ship is burnt within the year.

5. Contingent agreements to do or not to do anything, if an impossible event happens, are void, whether

or not the fact is known to the parties (Sec. 36).

Example: A agrees to pay B Rs.1,000 if B will marry A’s daughter, C. C was dead at the time of the

agreement. The agreement is void.

LESSON - 6

PERFORMANCE OF CONTRACT

Performance of a contract takes place when the parties to the contract fulfil their obligations

arising under the contract within the time and in the manner prescribed.

offer to perform

Sometimes it so happens that the promisor offers to perform his obligation under the contract at

the proper time and place but the promisee does not accept the performance. This is known as “attempted

performance” or “tender”. Thus, a tender of performance is equivalent to actual performance.

requisites of a valid tender

1. It must be unconditional. It becomes conditional when it is not in accordance with the terms of the

contract.

2. It must be of the whole quantity contracted for or of the whole obligation. A tender of an instalment

when the contract stipulates payment in full is not a valid tender.

3. It must be by a person who is in a position, and is willing, to perform the promise.

4. It must be made at the proper time and place. A tender of goods after the business hours or of goods

or money before the due date is not a valid tender.

5. It must be made to proper person, i.e. the promisee or his duly authorised agent. It must also be in

proper form.

6. It may be made to one of the several joint promisees. In such a case it has the same effect as a tender

to all of them.

7. In case of tender of goods, it must give a reasonable opportunity to the promisee for inspection of

goods.

8. In case of tender of money, the debtor must make a valid tender in the legal tender money.

contracts which need not be performed

A contract need not be performed –

1. When its performance becomes impossible.

2. When the parties to it agree to substitute a new contract for it or to rescind or alter it.

3. When the promisee dispenseswith or remits, wholly or in part, the performance of the promise made

to him or extends the time for such performance or accepts any satisfaction for it.

4. When the person at whose option it is voidable, rescindsit.

5. When the promisee neglects or refuses to afford the promisor resonable the facilities for the

performance of his promisee.

Example: A contracts with B to repair B’s house. A neglects or refuses to point out to A the places in

which his house requires repairs. B is excused for the non-performance of the contract, if it is caused by

such neglect or refusal.

6. When it is illegal.

devolution of joint liabilities and rights

Devolution of Joint Liabilities (Sec.42 to 44)

‘Devolution’ means passing over from one person to another.

When two or more persons have made a joint promise, they are known as joint promisors. Unless

a contrary intention appears from the contract, all joint promisors must jointly fulfil the promise. If any of

them dies, his legal representatives must, jointly with the surviving promisors, fulfil the promise. If all of

them die, the legal representatives must, jointly with the surviving promisors, fulfill the promise. If all of

them die, the legal representatives of all of them must fulfill the promise jointly (Sec.42). It would be seen

that Sec.42 deals with voluntary discharge of obligations. If the parties do not discharge their obligations

of their own volition, Sec.43 comes into play. Sec.43 lays down three rules as regards performance of

joint promises:

(1) Any one of the joint promisors may be compelled to perform (Sec.43, para1). When two or more

persons make a joint promise and there is no express agreement to the contrary, the promisee may

compel any one or more of the joint promisors to perform the whole of the promise. This means the

liability of joint promisors is joint and several.

Example: A, B and C jointly promise to pay D Rs.5,000. D may compel all or any or either A or B or C

to pay him Rs.5,000.

(2) A joint promisor compelled to perform may claim contribution (Sec.43, para 2). When a joint

promisor has been compelled to perform the whole of the promise, he may compel the other joint

promisors to contribute equally with himself to the performance of the promise, unless a contrary

intention appears from the contract.

Example: A, B and C are under a joint promise to pay D Rs.600. A is compelled to pay the whole

amount to D. He may recover Rs.200 each from B and C.

(3) Sharing of loss arising from default (Sec.43 para 3). If any one of the joint promisors makes default

in the contribution, the remaining joint promisors must bear the loss arising from such default in equal

shares. The same principle applies in the case of recovery of a loan by a creditor from the heirs who

by operation of law become joint promisors after the death of the single promisor [Orissa Cement Ltd.

vs Union of India].

Example: A, B and C are under a joint promise to pay D Rs.3,000. C is unable to pay anything and A is

compelled to pay the whole sum. A is entitled to receive Rs.1,500 from B.

Release of a Joint Promisor (Sec. 44)

A release by the promisee of any of the joint promisors does not discharge the other joint

promisors from liability. The released joint promisor also continues to be liable to the other joint

promisors.

Devolution of Joint Rights (Sec. 45)

When a person (say A) has made a promise to several persons (say B, C and D), these persons are

known as joint promisees. Unless a contrary intention appears from the contract, the right to claim

performance rests with all of the joint promisees (B, C and D). When one of the joint promisees (say B)

dies, the right to claim performance rests with his (B’s) legal representatives jointly with the surviving

joint promisees (C and D). When all the joint promisees (B, C and D) die, the right to claim performance

rests with their legal representatives jointly.

Example: B and C jointly lend Rs.5000 to A who promises B and C jointly to repay them that

sum with interest on a day specified. B dies. The right to claim performance rests with B’s

representatives jointly with C during C’s life. After the death of C, the right to claim performance rests

with the representatives of B and C jointly.

The partners of a firm, the members of a joint Hindu family, cosharers, or mortgagees are all joint

promisees when a person, say a debtor, makes a promise in their favour. Unless a contrary intention

appears from the contract, a suit to enforce such promise must be instituted by all the joint promisees.

reciprocal promises

Promises which form the consideration or part of the consideration for each other are called

“reciprocal promises” [Sect. 2(f)]. Where, for example, A promises to do or not to do something in

consideration of B’s promise to do or not to do something, the promises are reciprocal.

These promises have been classified as follows:

(1) Mutual and Independent: Where each party must perform his promise independently and

irrespective of the fact whether the other party has performed, or is willing to perform, his promise

or not, the promises are mutual and independent.

Example: In a contact of sale, B agrees to pay the price of goods on 10th instant. S promises to supply

the goods on 20th instant. The promises are mutual and independent.

(2) Conditional and Dependent: Where the performance of the promise by one party depends on the

prior performance of the promise by the other party, the promises are conditional and dependent.

Example: A promises to remove certain debris lying in front of B’s house provided B supplies him with

the cart. The promises in this case, are conditional and dependent. A need not perform his promise if B

fails to provide him with the cart.

(3) Mutual and Consent: Where the promises of both the parties are to be performed simultaneously,

they are said to be mutual and concurrent. The example of such promises may be sale of goods for

cash.

Rules Regarding Performance of Reciprocal Promises

1) Simultaneous performance of reciprocal promises.

2) Order of performance of reciprocal promises.

3) Effect of one party preventing another from performing promise.

4) Effect of default as to promise to be performed first.

5) Reciprocal promise to do things legal and also other things illegal.

time as the essence of the contract

The expression “time is of the essence of the contract” means that a breach of the condition as to

the time for performance will entitle the innocent party to consider the breach as a repudiation of the

contract.

Sec.55 deals with the question of “time as the essence of the contract” and provides:

1. When time is of the essence: In a contract, in which time is of the essence of the contract, if there is

a failure on the part of the promisor to perform his obligation within the fixed time, the contract (or so

much of it as remains unperformed) becomes voidable at the option of the promisee (Sec. 55 para 1).

If, in such a case, the promisee accepts performance of the promise after the fixed time, he cannot

claim compensation for any loss occasioned by the non-performance of the promise at the agreed

time. But if at the time of accepting the delayed performance he gives notice to the promisor of his

intention to claim compensation, he can do so (Sec.55 para 3).

In commercial or mercantile contracts which provide for performance within a specified time, time is

ordinarily of the essence of the contract. This is so because businessmen want certainty.

Example: In a contract for the sale or purchase of goods the prices of which fluctuate rapidly in the

market, the time of delivery and payment are considered to be the essence of the contract.

2. When time is not of the essence: In a contract, in which time is not of the essence of the contract,

failure on the part of the promisor to perform his obligation within the fixed time does not make the

contract voidable, but the promisee is entitled to compensation for any loss sustained by him due to

such failure (Sec. 55 para 2).

Intention to make time as the essence of the contract, if expressed in writing, must be in a language

which is unambiguous. The mere fact that certain time is specified in a contract for the performance of a

promise does not necessarily make time as the essence of the contract. If the contract includes clauses

providing for extension of time in certain contingencies or for payment of fine or penalty for every day or

week the work undertaken remains unfinished on the expiry of time provided in the contract, such clauses

are construed as rendering ineffective the express provision relating to the time being the essence of the

contract.

appropriation of payments

When a debtor owes several distinct debts to a creditor and makes a payment insufficient to

satisfy the whole indebtedness, a question arises: To which debt should the payment be appropriated?

Secs. 59 to 61 lay down the following three rules in this regard:

1. Where the debtor intimates (Sec. 59). If the debtor expressly intimates at the time of actual payment

that the payment should be applied towards the discharge of a particular debt, the creditor must do so.

If there is no express intimation by the debtor, the law will look into the circumstances attending on

the payment for appropriation.

“There is an established maxim of law that, when money is paid, it is to be applied according to the

expressed will of the payer, not of the receiver”.

Example: A owes B, among other debts, the sum of Rs.567. B writes to A and demands payment of this

sum. A sends to B Rs.567. This payment is to be applied to the discharge of the debt of which B had

demanded payment.

2. Where the debtor does not intimate and the circumstances are not indicative (Sec.60). Where the

debtor does not expressly intimate or where the circumstances attending on the payment do not

indicate any intention, the creditor may apply it at his discretion to any lawful debt actually due and

payable to him from the debtor.

3. Where the debtor does not intimate and the creditor falls to appropriate (Sec.61). Where the debtor

does not expressly intimate and where the creditor fails to make any appropriation, the payment shall

be applied in discharge of the debts in chronological order, i.e. in order of time. If the debts are of

equal standing, the payment shall be applied in discharge of each proportionately.

Rule in Clayton’s Case

This rule is applicable where the parties have a current account, i.e. a running account between

them. In such a case appropriation impliedly takes place in the order in which the receipts and payments

take place and are carried into the account. It is the first item on the debit side of the account that is

discharged or reduced by the first item on the credit side; the appropriation is made by the very act of

setting the two items against each other. In simple words, it means that, unless there is a contrary

intention, the items on the credit of an account must be appropriated against the items on the debit in

order of date.

To conclude,

1) the debtor has, at the time of payment, the right of appropriating the payment;

2) in default of debtor, the creditor has the option of election; and

3) in default of either, the law will allow appropriation of debts in order of time.

TERMINATION AND DISCHARGE OF CONTRACT

Discharge of contract means termination of the contractual relationship between the parties. A

contract is said to be discharged when it ceases to operate, i.e. when the rights and obligations created by

it come to an end.

A contract may be discharged —

1. By Performance

2. By Agreement or Consent

3. By Impossibility

4. By Lapse of Time

5. By Operation of Law

6. By Breach of Contract

1. discharge by performance

Performance means the doing of that which is required by a contract. Discharge by performance

takes place when the parties to the contract fulfil their obligations arising under the contract within the

time and in the manner prescribed.

Performance of a contract is the most usual mode of its discharge. It may be —

(1) Actual Performance: When both the parties perform their promises, the contract is discharged.

Performance should be complete, precise and according to the terms of the agreement.

(2) Attempted Performance or Tender: Tender is not actual performance, but is only an offer to

perform the obligation under the contract.

2. discharge by agreement or consent

Sec. 62 lays down that “if the parties to a contract agree to substitute a new contract for it, or to

rescind or to alter it, the original contract is discharged and need not be performed”.

The various cases of discharge of contract by mutual agreement are dealt with in Secs. 62 and 63 are

given below:

(a) Novation (Sec. 62): Novation takes place when a new contract is substituted for an existing one

between the same parties.

Example: A owes money to B under a contract. It is agreed between A, B and C that B shall henceforth

accept C as his debtor, instead of A. The old debt of A to B is at an end, and a new debt from C to B has

been contracted.

(b) Rescission (Sec. 62): Rescission of a contract takes place when all or some of the terms of the

contract are cancelled. It may occur—

(i) by mutual consent of the parties, or

(ii) where one party fails in the performance of his obligation. In such a case, the other party may rescind

the contract without prejudice to his right to claim compensation for the breach of contract.

Example: A promises to supply certain goods to B six months after date. By that time, the goods go out

of fashion. A and B may rescind the contract.

(c) Alteration (Sec. 62): Alteration of a contract may take place when one or more of the terms of the

contract is/are altered by the mutual consent of the parties to the contract. In such a case, the old

contract is discharged.

Example: A enters into a contract with B for the supply of 100 bales of cotton at his Godown No.1 by the

first of the next month. A and B may alter the terms of the contract by mutual consent.

(d) Remission (Sec. 63): Remission means acceptance of a lesser fulfilment of the promise made, i.e.

acceptance of a lesser sum than what was contracted for, in discharge of the whole of the debt.

Example: A owes B Rs.50,000. A pays to B and B accepts, in satisfaction of the whole debt, Rs.20,000

paid at the time and place at which Rs.50,000 were payable. The whole debt is discharged.

(e) Waiver: Waiver takes place when the parties to a contract agree that they shall no longer be bound by

the contract. This amounts to a mutual abandonment of rights by the parties to the contract.

(f) Merger: Merger takes place when an inferior right accruing to a party under a contract merges into a

superior right accruing to the same party under the same or some other contract.

Example: P holds a property under a lease. He later buys the property. His rights as a lessee merge

into his rights as an owner.

3. discharge by impossibility of performance

If an agreement contains an undertaking to perform an impossibility, it is void ab initio. This rule

is based on the following maxims:

1. Impossibility existing at the time of agreement. Sec. 56 lays down that “an agreement to do an

impossible act itself is void”. This is known as pre-contractual or initial impossibility.

2. Impossibility arising subsequent to the formation of contract. Impossibility which arises subsequent

to the formation of a contract (which could be performed at the time when the contract was entered

into) is called post-contractual or supervening impossibility.

Discharge by Supervening Impossibility

A contract is discharged by supervising impossibility in the following cases:

1. Destruction of subject-matter of contract: When the subject-matter of a contract, subsequent to its

formation, is destroyed without any fault of the parties to the contract, the contract is discharged.

Example: C let a music hall to T for a series of concerts on certain days. The hall was accidentally burnt

down before the date of the first concert. Held, the contract was void.

2. Non-existence or Non-occurrence of a particular state of things: Sometimes, a contract is entered

into between two parties on the basis of a continued existence or occurrence of a particular state of

things. If there is any change in the state of things which ought to have occurred does not occur, the

contract is discharged.

Example: A and B contract to marry each other. Before the time fixed for the marriage, A goes mad.

The contract becomes void.

3. Death or Incapacity for personal service: Where the performance of a contract depends on the

personal skill or qualification of a party, contract is discharged on the illness or incapacity or death of

that party. The man’s life is an implied condition of the contract.

Example: An artist undertook to perform at a concert for a certain price. Before she could do so, she

was taken seriously ill. Held, she was discharged due to illness.

4. Change of law. When, subsequent to the formation of a contract, change of law takes place, and the

performance of the contract becomes impossible, the contract is discharged.

Example: D enters into a contract with P on 1st March for the supply of certain imported goods in the

month of September of the same year. In June by an Act of Parliament, the import of such goods is

banned. The contract is discharged.

5. Outbreak of war. A contract entered into with an alien enemy during war is unlawful and therefore

impossible for performance. Contracts entered into before the outbreak of war are suspended during

the war and may be revived after the war is over.

4. discharge by lapse of time

The Limitation Act, 1963 lays down that a contract should be performed within a specific period,

called period of limitation. If it is not performed, and if no action is taken by the promisee within the

period of limitation, he is deprived of his remedy at law. For example, the price of goods sold without any

stipulation as to credit should be paid within three years of the delivery of the goods. If the price is not

paid and creditor does not file a suit against the buyer for the recovery of price within three years, the debt

becomes time-barred and hence irrecoverable.

5. discharge by operation of law

A contract may be discharged by operation of law. This includes discharge —

(a) By Death: In contracts involving personal skill or ability, the contract is terminated on death of the

promisor. In other contracts, the rights and liabilities of a deceased person pass on to the legal

representatives of the deceased person.

(b) By Merger: When an inferior right accruing to a party merges into a superior right accruing to the

same party under the same or some other contract, the inferior right accruing to the party is said to be

discharged.

(c) By Insolvency: When a person is adjudged insolvent, he is discharged from all liabilities incurred

prior to his adjudication.

(d) By Unauthorised Alteration of the terms of a Written Agreement: Where a party to a contract makes

any material alteration in the contract without the consent of the other party, the other party can avoid

the contract. A material alteration is one which changes, in a significant manner, the legal identity or

character of the contract or the rights and liabilities of the parties to the contract.

(e) By Rights and Liabilities becoming vested in the Same Person: Where the rights and liabilities under

a contract vested in the same person, for example when a bill gets into the hands of the acceptor, the

other parties are discharged.

6. discharge by breach of contract

Breach of contract means a breaking of the obligation which a contract imposes. It occurs when a

party to the contract without lawful excuse does not fulfil his contractual obligation or by his own act

makes it impossible that he should perform his obligation under it. It confers a right of action for

damages on the injured party.

REMEDIES FOR BREACH OF CONTRACT

When a contract is broken, the injured party has one or more of the following remedies:

1. Rescission of the contract

2. Suit for damages

3. Suit upon quantum meruit

4. Suit for specific performance of the contract

5. Suit for injunction.

1. rescission

When a contract is broken by one party, the other party may sue to treat the contract as rescinded

and refuse further performance. In such a case, he is absolved of all his obligations under the contract.

Example: A promises B to supply 10 bags of cement on a certain day. B agrees to pay the price

after the receipt of the goods. A does not supply the goods. B is discharged from liability to pay the

price.

The Court may grant rescission—

(a) where the contract is voidable by the plaintiff; or

(b) where the contract is unlawful for causes not apparent on its face and the defendant is more to blame

than the plaintiff.

When a party treats the contract as rescinded, he makes himself liable to restore any benefits he has

received under the contract to the party from whom such benefits were received. But if a person

rightfully rescinds a contract he is entitled to compensation for any damage which he has sustained

through non-fulfilment of the contract by the other party.

2. damages

Damages are a monetary compensation allowed to the injured party by the Court for the loss or

injury suffered by him by the breach of a contract. The object of awarding damages for the breach of a

contract is to put the injured party in the same position, so far as money can do it, as if he had not been

injured, i.e. in the position in which he would have been had there been performance and not breach. This

is called the doctrine of restitution.

The rules relating to damages may be considered as under:

1. Damages arising naturally — Ordinary damages

When a contract has been broken, the injured party can recover from the other party such

damages as naturally and directly arose in the usual course of things from the breach. This means that the

damages must be the proximate consequence of the breach of contract. These damages are known as

ordinary damages.

Example: A contracts to sell and deliver 50 quintals of Farm Wheat to B at Rs.1000 per quintal,

the price to be paid at the time of delivery. The price of wheat rises to Rs.1200 per quintal and A refuses

to sell the wheat. B can claim damages at the rate of Rs.200 per quintal.

2. Damages in contemplation of the parties — Special damages

Special damages can be claimed only under the special circumstances which would result in a

special loss in case of breach of a contract. Such damages, known as special damages, cannot be claimed

as a matter of right.

Example: A, a builder, contracts to erect a house for B by the 1st of January, in order that B may

give possession of it at that time to C to whom B has contracted to let it. A is informed of the contract

between B and C. A builds the house so badly that before the 1st January, it falls down and has to be

rebuilt by B, who, in consequence, loses the rent which he was to have received from C, and is obliged to

make compensation to C for the breach of the contract. A must make compensation to B for the cost of

rebuilding the house, for the rent lost, and for the compensation made to C.

3. Vindictive or Exemplary damages

Damages for the breach of a contract are given by way of compensation for loss suffered, and not

by way of punishment for wrong inflicted. Hence, ‘vindictive’ or ‘exemplary’ damages have no place in

the law of contract because they are punitive (involving punishment) by nature. But in case of (a) breach

of a promise to marry, and (b) dishonour of a cheque by a banker wrongfully when he possesses sufficient

funds to the credit of the customer, the Court may award exemplary damages.

4. Nominal damages

Where the injured party has not in fact suffered any loss by reason of the breach of a contract, the

damages recoverable by him are nominal. These damages merely acknowledge that the plaintiff has

proved his case and won.

Example: A firm consisting of four partners employed B for a period of two years. After six

months two partners retired, the business being carried on by the other two. B declined to be employed

under the continuing partners. Held, he was only entitled to nominal damages as he had suffered no loss.

5. Damages for loss of reputation

Damages for loss of reputation in case of breach of a contract are generally not recoverable. An

exemption to this rule exists in the case of a banker who wrongfully refuses to honour a customer’s

cheque. If the customer happens to be a tradesman, he can recover damages in respect of any loss to his

trade reputation by the breach. And the rule of law is: the smaller the amount of the cheque

dishonoured, the larger the amount of damages awarded. But if the customer is not a tradesman, he can

recover only nominal damages.

6. Damages for inconvenience and discomfort

Damages can be recovered for physical inconvenience and discomfort. The general rule in this

connection is that the measure of damages is not affected by the motive or the manner of the breach.

Example: A was wrongfully dismissed in a harsh and humiliating manner by G from his

employment. Held, (a) A could recover a sum representing his wages for the period of notice and the

commission which he would have earned during that period; but (b) he could not recover anything for

his injured feelings or for the loss sustained from the fact that his dismissal made it more difficult for him

to obtain employment.

7. Mitigation of damages

It is the duty of the injured party to take all reasonable steps to mitigate the loss caused by the

breach. He cannot claim to be compensated by the party in default for loss which he ought reasonably to

have avoided. That is he cannot claim compensation for loss which is really due not to the breach, but

due to his own neglect to mitigate the loss after the breach.

8. Difficulty of Assessment

Although damages which are incapable of assessment cannot be recovered, the fact that they are

difficult to assess with certainty or precision does not prevent the aggrieved party from recovering them.

The Court must do its best to estimate the loss and a contingency may be taken into account.

Example: H advertised a beauty competition by which readers of certain newspapers were to

select fifty ladies. He himself was to select twelve out of these fifty. The selected twelve were to be

provided theatrical engagements. C was one of the fifty and by H’s breach of contract she was not

present when the final section was made. Held, C was entitled to damages although it was difficult to

assess them.

9. Cost of Decree

The aggrieved party is entitled, in addition to damages, to get the cost of getting the decree for

damages. The cost of suit for damages is in the discretion of the Court.

10. Damages agreed upon in advance in case of breach

If a sum is specified in a contract as the amount to be paid in case of its breach, or if the contract

contains any other stipulation by way of a penalty for failure to perform the obligations, the aggrieved

party is entitled to receive from the party who has broken the contract, a reasonable compensation not

exceeding the amount so mentioned.

Example: A contracts with B to pay Rs.1000 if he fails to pay B Rs.500 on a given day. B is

entitled to recover from A such compensation not exceeding Rs.1000 as the Court considers reasonable.

Liquidated Damages and Penalty

Sometimes parties to a contract stipulate at the time of its formation that on the breach of the

contract by either of them, a certain specified sum will be payable as damages. Such a sum may amount

to either ‘liquidated damages’ or a ‘penalty’. ‘Liquidated damages’ represent a sum, fixed or ascertained

by the parties in the contract, which is a fair and genuine pre-estimate of the probable loss that might arise

as a result of the breach, if it takes place. A ‘penalty’ is a sum named in the contract at the time of its

formation, which is disproportionate to the damage likely to accrue as a result of the breach. It is fixed up

with a view to securing the performance of the contract.

Payment of Interest

The largest number of cases decided under Sec. 74 relate to stipulations in a contract providing

for payment of interest. The following rules are observed with regard to payment of interest:

1. Payment of interest in case of default.

2. Payment of interest at higher rate —

(a) from the date of the bond, and

(b) from the date of default.

3. Payment of compound interest on default —

(a) at the same rate as simple interest, and

(b) at the rate higher than simple interest.

4. Payment of interest at a lower rate, if interest paid on due date.

3. quantum meruit

The phrase ‘quantum meruit’ literally means ‘as much as earned’. A right to sue on a quantum

meruit arises where a contract, partly performed by one party, has become discharged by the breach of

the contract by the other party.

4. specific performance

In certain cases of breach of contract, damages are not an adequate remedy. The Court may, in

such cases, direct the party in breach to carry out his promise according to the terms of the contract.

Some of the cases in which specific performance of a contract may, in discretion of the Court, be

enforced are as follows:

(a) When the act agreed to be done is such that compensation in money for its non-performance is not an

adequate relief.

(b) When there exists no standard for ascertaining the actual damage caused by the non-performance of

the act agreed to be done.

(c) When it is probable that the compensation in money cannot be got for the non-performance of the act

agreed to be done.

5. injunction

Where a party is in breach of a negative term of a contract (i.e. where he is doing something

which he promised not to do), the Court may, by issuing an order, restrain him from doing what he

promised not to do. Such an order of the Court is known as ‘injunction’.

Example: W agreed to sing at L’s theatre, and during a certain period to sing nowhere else.

Afterwards W made contract with Z to sing at another theatre and refused to perform the contract with L.

Held, W could be restrained by injunction from singing for Z.

LESSON - 7

QUASI CONTRACTS

Under certain circumstances, a person may receive a benefit to which the law regards another

person as better entitled, or for which the law considers he should pay to the other person, even though

there is no contract between the parties. Such relationships are termed quasi-contracts, because, although

there is no contract or agreement between the parties, they are put in the same position as if there were a

contract between them. These relationships are termed as ‘quasi-contracts’.

A quasi-contract rests on the ground of equity that a person shall not be allowed to enrich himself

unjustly at the expense of another. The principle of unjust enrichment requires:

� that the defendant has been ‘enriched’ by the receipt of a ‘benefit’;

� that this enrichment is at the expense of the plaintiff; and

� that the retention of the enrichment is unjust.

Law of quasi-contracts is also known as the law of restitution. Strictly speaking, a quasi-contract is not a

contract at all. A contract is not intentionally entered into. A quasi-contract, on the other hand, is created

by law.

kinds of quasi contracts

1. supply of necessaries (Sec. 68)

If a person, incapable of entering into a contract, or anyone whom he is legally bound to support,

is supplied by another with necessaries suited to his condition in life, the person who has furnished such

supplies is entitled to be reimbursed from the property of such incapable person.

Example: A supplies B, a lunatic, with necessaries suitable to his condition in life. A is entitled

to be reimbursed from B’s property.

2. payment by an interested person (Sec. 69)

A person who is interested in the payment of money which another is bound by law to pay, and

who therefore pays it, is entitled to be reimbursed by the other.

Example: P left his carriage on D’s premises. D’s landlord seized the carriage as distress for

rent. P paid the rent to obtain the release of his carriage. Held, P could recover the amount from D.

The essential requirements are as follows:

(a) The payment made should be bonafide for the protection of one’s interest.

(b) The payment should not be voluntary one.

(c) The payment must be such as the other party was bound by law to pay.

3. obligation to pay for non-gratuitous acts (Sec. 70)

When a person lawfully does anything for another person or delivers anything to him, not

intending to do so gratuitously, and such other person enjoys the benefit thereof, the latter is bound to

make compensation to the former in respect of, or to restore, the thing so done or delivered.

Example: A, a tradesman, leaves goods at B’s house by mistake. B treats the goods as his own.

He is bound to pay for them to A.

Before any right of action under Sec. 70 arises, three conditions must be satisfied:

(a) The thing must have been done lawfully.

(b) The person doing the act should not have intended to do it gratuitously.

(c) The person for whom the acts is done must have enjoyed the benefit of the act.

4. responsibility of finder of goods (Sec. 71)

A person, who finds goods belonging to another and takes them into his custody, is subject to the

same responsibility as a bailee. He is bound to take as much care of the goods as a man of ordinary

prudence would, under similar circumstances, take of his own goods of the same bulk, quality and value.

He must also take all necessary measures to trace its owner. If he does not, he will be guilty of wrongful

conversion of the property. Till the owner is found out, the property in goods will vest in the finder and

he can retain the goods as his own against the whole world (except the owner).

Example: F picks up a diamond on the floor of S’s shop. He hands it over to S to keep it till true

owner is found out. No one appears to claim it for quite some weeks in spite of the wide advertisements

in the newspapers. F claims the diamond from S who refuses to return. S is bound to return the diamond

to F who is entitled to retain the diamond against the whole world except the true owner.

The finder can sell the goods in the following cases:

� when the thing found is in danger of perishing;

� when the owner cannot, with reasonable diligence, be found out;

� when the owner is found out, but he refuses to pay the lawful charges of the finder; and

� when the lawful charges of the finder, in respect of the thing found, amount to two-thirds of the value

of the thing found. (Sec. 169).

5. mistake or coercion (Sec. 72)

A person to whom money has been paid, or anything delivered, by mistake or under coercion,

must repay or return it to the person who paid it by mistake or under coercion. The word ‘coercion’ is

used in Sec. 72 in its general sense and not as defined in Sec. 15.

Example: A and B jointly owe Rs.100 to C. A alone pays the amount to C, and B, not knowing

this fact, pays Rs.100 over again to C. C is bound to pay the amount to B.

quantum meruit

‘Quantum meruit’ literally means ‘as much as earned’ or ‘as much as is merited’. When a person has

done some work under a contract, and the other party repudiates the contract, or some event happens

which makes the further performance of the contract impossible, then the party who has performed the

work can claim remuneration for the work he has already done. Likewise, where one person has

expressly or impliedly requested another to render him a service without specifying any remuneration, but

the circumstances of the request imply that the service is to be paid for, there is implied a promise to pay

quantum meruit, i.e. so much as the party rendering the service deserves. The right to claim quantum

meruit does not arise out of contract as the right to damages does; it is a claim on the quasi-contractual

obligation which the law implies in the circumstances.

The claim for quantum meruit arises only when the original contract is discharged. If the original contract

exists, the party not in default cannot have quantum meruit remedy; he has to take resort to remedy in

damages. Further the claim for quantum meruit can be brought only by the party who is not in default.

The claim for quantum meruit arises in the following cases:

(a) When an agreement is discovered to be void (Sec. 65).

(b) When something is done without any intention to do so gratuitously (Sec.70).

(c) When there is an express or implied contract to render services but there is no agreement as to

remuneration.

(d) When the completion of the contract has been prevented by the act of the other party to the contract.

(e) When a contract is divisible.

(f) When an indivisible contract is completely performed but badly.

Review Questions

1. Define contract. What are the essentials of a valid contract?

2. What are legal rules relating to offer?

3. What are the rules relating to consideration?

4. Discuss the nature of contract entered into with minors.

5. What are the different modes of discharging the contract?

6. List out the agreements opposed to public policy.

7. What is contingent contract? What are the rules relating to contingent contracts?

8. Discuss the law relating to effect of mistake on contracts.

9. Distinguish between coercion and undue influence. What are their effects on validity of the contract?

10. What are the remedies for breach of contract?

11. What are quasi-contracts? Enumerate the instances of quasi-contracts laid down under the Act.

� � �

SPECIAL CONTRACTS

LESSON - 8

CONTRACT OF INDEMNITY AND GUARANTEE

DEFINITION

Section 124 of the Indian Contract Act defines indemnity as “a contract by which

one party promises to save the other from loss caused to him by the conduct of the

promisor himself or by the conduct of any other person”. The person who promises is

called the Indemnifier and the person to whom the promise is made is called the

Indemnified or Indemnity Holder.

Illustration: A promises not to construct buildings on a particular site so as to

prevent light and air to B’s house and in case of breach of such promise, to indemnify for

the consequent loss.

This is a contract of indemnity. A contract of insurance is also a contract of

indemnity.

RIGHTS OF AN INDEMNITY HOLDER

He is entitled to recover —

� all damages,

� all costs which he may be compelled to pay in any suit in respect of any matter

to which the promise to indemnity applies, and

� all sums which he may have paid under the terms of any compromise of any

such suit provided, such compromise was not contrary to the orders of the

promisor and was prudent or the promisor authorises him to compromise the

suit.

CONTRACT OF GUARANTEE

Section 126 of Indian Contract Act defines guarantee as “a contract to perform the

promise, or discharge the liability, of a third person in case of his default”. The person

who gives the guarantee is called the “surety”, the person in respect of whose default, the

guarantee is given is called the “principal debtor”, and the person to whom the guarantee

is given is called the “creditor”.

Illustration: A purchases goods from B on credit. C agrees to stand as a surety

which means that if A does not pay the price of the goods, he will pay. Here, A is the

principal debtor, B is the creditor and C is the surety or guarantee.

KINDS OF GUARANTEE

1. Specific Guarantee: When a guarantee extends to a single transaction or debt, it is

called a specific or simple guarantee. It comes to an end when the guaranteed debt is

duly discharged or the promise is duly performed.

2. Continuing Guarantee: When a guarantee extends to a series of transactions, it is

called a continuing guarantee (Sec.129). The liability of the surety in case of a

continuing guarantee extends to all the transactions contemplated until the revocation

of the guarantee.

Distinction between Contract of Indemnity and Contract of Guarantee

Contract of Indemnity Contract of Guarantee

1. There are two parties, namely

Indemnifier and the

Indemnified.

There are three parties, viz. the

principal debtor, the creditor and the

surety.

2. The liability of the Indemnifier

is primary.

The liability of the surety is

subsidiary.

3. The liability of the Indemnifier

is contingent.

The liability of the surety is

subsisting.

4. The Indemnifier cannot sue the

third party in his name even

after making good the loss

unless there is an assignment in

his favour from the

indemnified.

The surety can sue the principal

debtor in his own name after paying

the creditor.

RIGHTS OF SURETY

Rights against the Principal Debtor

1) After discharging the liability of the principal debtor, the surety is entitled to all

those rights which the creditor himself exercises against the principal debtor. This

right of the surety is called “subrogation”.

Illustration: The right of the creditor to receive dividends from the official

assignee when the principal debtor becomes bankrupt, can be exercised by the

surety.

2) The surety can proceed against all those securities of the principal debtor, which the

creditor himself can proceed against.

3) The surety is entitled to be indemnified for all payments rightfully made by him.

Illustrations: B is indebted to C, and A is surety for the debt. C demands

payment from A, and on his refusal sues him for the amount. A defends the suit,

having reasonable grounds for doing so but is compelled to pay the amount of the

debt with costs. He can recover from B the amount paid by him for costs, as well

as the principal debt.

Rights against the Creditor

1) The surety may require the creditor to sue the debtor. But he cannot compel the

creditor to do so.

2) In the case of fidelity contracts, he can insist upon the creditor to dispense with the

services of the principal debtor when his dishonesty is established.

3) He can claim set off or counter-claim which the principal debtor could have obtained

against the creditor.

4) On payment of the guaranteed debt, he can require the creditor to assign to him all

the securities held by the creditor in respect of the debt. If the creditor loses or parts

with such securities without the consent of the surety, the surety is discharged to the

extent of the value of the security.

Illustration: C advances to B, his tenant, Rs.2000 on the guarantee of A. C has

also a further security for the sum of Rs.2000 by mortgage of B’s furniture. C

cancels the mortgage. B becomes insolvent and C sues A on his guarantee. A is

discharged from liability to the amount of the value of the furniture.

Rights against the Co-Sureties

1) All the sureties shall bear equally, the loss caused by the insolvency of the principal

debtor. If one of them bears the entire loss in the first instance he can claim

contribution from other co-sureties.

2) Where the co-sureties agreed to become liable in different sums, they should

contribute, according to English Law, proportionately.

Illustration: A, B and C have agreed to become liable for Rs. 10,000, 20,000 and

40,000 respectively, as sureties for D’s liability. D’s indebtedness was Rs.30,000.

A, B and C would contribute in the ratio of 1 : 2 : 4. But according to Indian Law

they shall bear such loss equally but not exceeding the sums which they have agreed

to pay. So, A, B and C will have to pay Rs. 10,000 each.

DISCHARGE OF SURETY

1. The surety is discharged from liability if the contract of guarantee becomes void or

voidable, on the ground of misrepresentation or concealment by the creditor with

regard to a material circumstance, or on the ground that the guarantee was given on

condition that another person will join as a co-surety and that such other person has

not joined as such.

Illustration: A, engages B as clerk to collect money for him. B fails to account

for some of his receipts and A in consequence, calls upon him to furnish security for

his accounting. C gives his guarantee for B’s accounting. A does not acquaint C

with B’s previous conduct. B afterwards makes default. The guarantee is invalid.

2. The surety is discharged by revocation as to future transactions in case of continuing

guarantee.

3. The surety is discharged:

a) By variance of contract: Any variance in the terms of the contract between the

principal debtor and the creditor without the surety’s consent discharges the

surety.

Illustration: C, contracts to lend B Rs.5000 on the 1st of March. A

guarantees repayment. C pays Rs.5000 to B on the 1st of January. A is discharged

from his liability, as the contract has been varied in as much as C might sueB for

the money before the 1st of March.

b) By release or discharge of principal debtor: The surety is discharged by any

contract between the principal debtor and the creditor by which the principal

debtor is discharged or by any act or omission of the creditor, the legal

consequence of which is the discharge of the principal debtor.

Illustration: A, contracts with B for a fixed price to build a house for B

within a stipulated time, B supplying the necessary timber. C guarantees A’s

performance of the contract. B omits to supply the timber. C is discharged from

his suretyship.

c) By composition with debtor: The surety is discharged when the principal debtor

and creditor enter into a contract by which the creditor (1) makes composition

with or (2) promises to give time or (3) promises not to sue the principal debtor.

d) By act or omission impairing surety’s remedy: The surety is discharged, if the

creditor does any act inconsistent with the rights of the surety or omits to do any

act which his duty to surety requires him to do.

Illustration: A puts M as apprentice to B, and gives a guarantee to B for

M’s fidelity. B promises on his part that he will, at least once a month, see M

make up the cash. B omits to see this done as promised and M embezzles. A is

not liable to B on his guarantee.

e) Loss of security: The surety is discharged if the creditor loses or parts with the

securities belonging to the principal debtor, without the consent of the surety.

The surety is not discharged in the following cases:

1. A surety is not discharged when a contract to give time to the principal debtor is made

by the creditor with a third person and not with the principal debtor.

Illustration: C, the holder of an overdue bill of exchange drawn by A as surety for

B, and accepted by B, contracts with M to give time to B. A is not discharged.

2. Mere forbearance on the part of the creditor to sue the principal debtor does not

discharge the surety.

Illustration: B owes C a debt guaranteed by A. The debt becomes payable. C

does not sue B for a year after the debt has become payable. A is not discharged

from his liability.

3. Release of one co-surety does not discharge the other.

LESSON - 9

CONTRACT OF BAILMENTS

Section 148 of the Indian Contract Act defines that “a bailment is the delivery of

goods by one person to another for some purpose, upon a contract that they shall, when

the purpose is accomplished, be returned or otherwise disposed of according to the

directions of the person delivering them”. The person delivering the goods is called the

“bailor”. The person to whom they are delivered is called the “bailee”.

Essentials of Bailments

1) There must be delivery of gods. Such delivery may be actual or constructive.

2) The delivery must be made for some specific purpose.

3) The delivery must be made on condition that the goods shall be returned in

specie when the purpose is over, or disposed of according to the directions of

the bailor.

4) Only possession but not the ownership of the goods, is transferred.

Examples: Delivery of a radio for repair.

DUTIES OF A BAILEE

1. To take reasonable care of the goods bailed to him.

Section 151 lays down that in all cases of bailment, the bailee should take that

much of care which an ordinary prudent man would take of his own goods under similar

circumstances. Section 152 lays down that the bailee is not responsible, in the absence of

any special contact, for the loss, destruction or deterioration of the thing bailed, if he has

taken the amount of care described above.

Illustration: A gives gold to B, to be made into an ornament. B keeps them in a

safe where he usually keeps his own valuables. B is not liable if the goods are lost by

him.

2. Not to make unauthorised use of goods bailed.

The bailee should not make use of goods for purposes inconsistent with the terms

of the contract. If he does so, the bailor is entitled to terminate the contract and claim

damages, if any.

Illustration: A lends a horse to B for his own riding only. B allows C, to ride the

horse. C rides carefully but the horse accidentally falls and is injured. B is liable to

compensate A for the injury caused to the horse.

3. Not to mix the goods of the bailor with his own goods.

a) If a bailee mixes the goods of the bailor with his own goods with the consent of

the bailor, both the bailor and the bailee shall have proportionate interest in the

mixture.

b) If the goods are mixed by the bailee without the consent of the bailor and the

goods are separable, the bailee is bound to bear the expenses of separation and

pay damages if any.

c) If the goods are mixed by the bailee without the consent of the bailor and the

goods are inseparable, the bailee should compensate the bailor for the loss of

goods.

Illustration: A bails a barrel of Cape flour worth Rs.45 to B. B, without A’s consent,

mixes the flour with country flour of his own, worth only Rs.25 a barrel. B must

compensate A for the loss of his flour.

4. Not to set up adverse title

The bailee should not deny the bailor’s title. He should not set up his own title or

that of a third party.

5. To return the goods bailed

The bailee should return goods bailed, to the bailor when the fixed period is over

or when the purpose is accomplished. The bailee should also deliver any increase or

profit which may have accrued from the goods bailed.

Illustration: A leaves a cow in the custody of B to be taken care of. The cow has

a calf. B is bound to deliver the calf as well as the cow to A.

DUTIES OF A BAILOR

1. To disclose the faults in the goods bailed

The bailor should disclose to the bailee, faults in the goods bailed, of which he is

aware. If he does not disclose, he will be liable for the loss resulting therefrom.

Illustration: A lends a horse which he knows to be vicious to B. He does not

disclose this fact. The horse runs away. B is thrown down and injured. A is responsible

to B for damages sustained.

2. To bear extra-ordinary expenses

While the ordinary expenses are payable by the bailee, extra-ordinary expenses

shall be borne by the bailor.

Illustration: Where a horse is lent for a journey, the bailee shall bear the expenses

of feeding the horse. But in case of the horse becoming sick, the bailor shall have to bear

the necessary expenses for its recovery.

3. Responsibility for want of title

The bailor is responsible to the bailee for any loss sustained by the latter by the

reason, that the bailor was not entitled to make the bailment or to receive back the goods

or to give directions respecting them.

RIGHTS OF BAILOR

1. He is entitled to the increase or profit from goods bailed.

2. In the case of gratuitous loan, the lender may require the goods to be returned, even

though he lent it for a fixed period for specific purpose. But if such a request causes

loss to the bailee exceeding the benefit he derives, the bailor should indemnify the

borrower.

3. The bailor is entitled to terminate the contract when the bailee does any act

inconsistent with the terms of bailment.

Illustration: A gives a horse to B for hire for his own riding. B drives the horse

in his carriage. The bailment can be terminated at the option of A.

LIEN

Lien is a right of a person, who has possession of goods of another, to retain such

possession until a debt due to him has been discharged. This right is called a

“Possessory lien”.

Lien is of two kinds: 1. Particular lien and 2. General lien.

1. A Particular Lien is one which is available only against that property in respect of

which the skill and labour are exercised or any expenses are incurred.

Illustration: A delivers a watch for repairs to B, a repairer. B has a right to retain

the watch till he is paid for the services rendered.

The bailees, repairers and unpaid vendors of goods are entitled to particular lein.

2. A General Lien is the right to retain the property of another for a general balance of

accounts. Bankers, can exercise this right for any debt due to them.

FINDER OF LOST GOODS

A person who finds an article need not take charge of it. But if he takes them into

his possession, be becomes a bailee.

Duties and Rights

1) He must take as much care of the goods as an ordinary prudent man would, under

similar circumstances, take of his own goods.

2) He cannot sue for remuneration for trouble and expense incurred by him to preserve

the goods or to find out the owner of the goods.

3) He may exercise particular lien against the goods for such remuneration.

4) If a reward has been offered for the return of the goods, he can sue for such reward.

5) If the goods are the subject of sale and if the owner is not found or when found,

refuses to pay the lawful charges, the finder may sell the goods:

� when the goods are about to perish or

� when they lose the greater part of their value or

� when lawful charges amount to two-thirds of their value.

PLEDGE

A pledge is a “bailment of goods as security for payment of a debt or performance

of a promise”. The bailor is called the “pawnor” and the bailee is called the “pawnee”.

In the case of pawn, there is no transfer of property in goods. Only possession of the

goods is transferred. Hence, it is different from mortgage. Pawn is also different from

lien, as in the case of lien, there is no power to sell the article while a pawnee can sell,

subject to some conditions.

Rights of Pawnor

Even after the expiry of a stipulated period, he may redeem the goods pledged at

any subsequent time before the actual sale of the goods pledged. But he must pay

expenses which may have arisen from his default.

Rights of Pawnee

1. He can retain the goods pledged until he recovers the debt, interest and other

expenses incidental to possession or preservation of the goods.

2. He cannot retain the goods for debts other than those for which pawn is made.

3. He is entitled to receive extra-ordinary expenses incurred for the preservation of

goods.

4. If the pawnor makes a default, the pawnee may:

� bring a suit upon the debt or promise and

� retain the goods pledged or

� sell the goods by giving a reasonable notice of sale to the pawnor.

If the proceeds of such are less than the amount due in respect of the debt or

promise, the pawnor is still liable to pay the balance. If the proceeds of the sale are

greater than the amount so due, the pawnee shall pay over the balance to the pawnor.

lesson - 10

contract of agency

Section 182 of the Indian Contract Act defines an agent as “a person employed to do any act for

another or to represent another in dealings with third persons. The person for whom such act is done, or

who is so represented, is called the “principal”.

essentials of a contract of agency

1. The principal and third parties must be competent into contracts.

2. An agent may be even a minor who can effectively bind his principal. But the principal cannot make

the minor agent liable for misconduct or negligence.

Example: P, a principal gives M, a minor, a jewel worth Rs.1000 and instructs him not to sell it on credit

or for less than Rs.500. M sells the jewel on credit for Rs.400. P cannot make him liable while he is

bound by the sale.

3. Consideration is not essential. That the principal gives his consent to be represented by the agent, is

sufficient consideration for the agent to act as such.

creation of agency

An agency may be created in the following ways:

1. By Express Authority: The authority of an agency may be expressed in words spoken or written.

For example, a contract of agency can be written by means of power of attorney.

2. By Implied Authority: The authority of an agent can be inferred from the circumstances of the case.

Illustration: A, living in Bombay, owns a shop in Madras and he occasionally visits it. B is managing

the shop and is in the habit of ordering goods from C in the name of A for the purpose of the shop and of

paying for them out of A’s funds with A’s knowledge. B has an implied authority from A to order goods

from C in the name of A for the purpose of the shop.

3. By Necessity: Sometimes, exigencies of circumstances require a man to act for another as an agent,

though not appointed as such.

Illustration: A horse was sent by rail. The owner had not taken delivery of the same at the destination.

So, the station master had to feed it. It was held that the station master had become an agent by necessity

and was therefore entitled to recover the charges incurred by him.

4. By Holding Out: Where a master usually sends his servant to pledge his credit for certain purposes,

he is bound by the acts of the servant for similar purposes though done without his consent.

5. By Estoppel: Where one man by words or conduct causes another to believe that some other person

is his agent and that another person had acted on that belief, he would be stopped from denying the

authority of that another person to act on his behalf.

Illustration: A tells B in the presence and within the hearing of P that he (A) is P’s agent and P does not

contradict this statement. B, on the faith of this statement, subsequently enters into a contract with A,

taking him to be P’s agent. P is bound by that contract.

6. By Ratification or Expost Facto Agency: Section 196 of the Indian Contract Act lays down that

“where acts are done by one person on behalf of another, but without his knowledge of authority, he

may elect to ratify or to disown such acts. If he ratifies them, the same effects will follow as if they

had been performed by his authority”. Thus, ratification relates back to the date of the original

contract and binds the principal as if he has expressly authorised it.

termination of contract of agency

A contract of agency is terminated in the following ways:

1. When the period of agency expires or

2. When the purpose of the agency is accomplished or

3. When the principal or agent dies or becomes of unsound mind.

4. When the principal becomes insolvent.

5. When the subject matter of the contract is destroyed.

6. When the object of the contract becomes unlawful.

7. When the agent renounces the authority.

8. When the principal revokes his authority.

The termination that takes effect, so far as regards the agent, the moment, it becomes known to him and

so far as regards third persons, the moment it becomes known to them. So, if an agent knowing the

termination of agency, contracts with third persons who are not aware of the termination, he becomes

liable to the principal for damages while the contract binds the principal and third persons.

An Agency cannot be terminated in the following cases:

(a) When the agency is one, coupled with interest: A, gives authority to B to sell A’s land and to pay

himself, out of the proceeds, the debts sue to him (B) from A. A cannot revoke this authority nor can

it be terminated by his insanity or death.

(b) When the agent has incurred personal liability and

(c) When the authority has been partly exercised by the agent.

rights of an agent

1. He is entitled to remuneration and other expenses properly incurred by him in the agency.

Illustration: A, employs B to recover Rs.1000 from C. Through B’s miscondut, the money is not

recovered. B is not entitled to any remuneration for his services and must make good the loss.

2. He is entitled to retain the goods, papers and other property, movable or immovable, of the principal

for his claims.

3. The agent has a right to be indemnified by the principal for all lawful acts.

Illustration: B at Singapore under instructions from A of Calcutta, contracts with C to deliver goods. A

does not send the goods to B and C sues B for breach of contract. B informs A of the suit and A

authorises him to defend the suit. B defends and is compelled to pay damages etc. A is liable to B for

such damages etc.

4. The agent is entitled to be indemnified for the injury caused to him by the principal’s neglect or want

of skill.

Illustration: A employs B as a brick-layer in building in a house and puts a scaffolding himself

unskillfully and B is in consequence, hurt. A must compensate B.

5. When an agent acts in good faith, the employer must indemnify him for the consequence of that act,

though it causes an injury to the rights of third parties.

Illustration: B, at the request of A, sells goods in the possession of A, but which A had no right to

dispose of. B does not know this and hands over the sale proceeds to A. Afterwards C the true owner

sues A and recovers the value of goods and costs. A must indemnify B for what he has paid and for B’s

own expenses.

duties of an agent

1. He should act according to the directions of the principal and in default, indemnify the principal for

the loss, if any.

2. In the absence of instructions, he must act according to the trade custom.

Illustration: A, an agent engaged in carrying on for B, a business, in which it is the custom, to invest

from time to time, at interest the monies which may be in hand, omits to make such investment. A, must

make good to B the interest usually obtained by such investment.

3. In case of difficulty, he must be diligent in communicating with the principal and obtaining his

instructions.

4. He must conduct the business of agency with as much skill as is generally possessed by persons

engaged in similar business, unless the principal has notice of want of skill.

Illustration: A, having authority to sell on credit, sells goods to B without enquiring about his solvency.

B, at the time of sale, is bankrupt. A must make good the loss.

5. He must render proper accounts on demand.

6. He must not delegate his authority without the consent of the principal..

7. He must deliver all monies including secret commission to the principal. He can deduct his

remuneration and other lawful expenses spent by him.

8. He should not set up his own title or title of third parties to the goods of the principal in his hands.

9. If, by the nature of profession, an agent is purported to have special skill, he must exercise that degree

of skill ordinarily expected from the members of that profession.

Illustration: A solicitor, who started the proceedings under a wrong section or filed a suit in a court

having no jurisdiction, is liable.

10. He should not disclose confidential information.

11. His interest should not conflict with his duty.

duties and rights of principal

Duties of the Principal

1. To indemnify the agent against the consequences of all lawful acts.

2. To indemnify the agent against the consequences of acts done in good faith.

3. To indemnify agent for injury caused by principal’s neglect.

4. To pay the agent the commission or other remuneration agreed.

Rights of Principal

1) If the principal suffers any loss due to disregard by the agent of the directions by the principal, he

can recover damages from the agent.

2) To obtain an account of secret profits and recover them and resist a claim from remuneration.

3) To resist agent’s claim for indemnity against liability incurred.

personal liability of agent

The general rule is that only the principal can enforce, and can be held liable on, a contract entered into by

the agent. An agent is however, personally liable in the following cases.

1. An agent is liable for breach of warranty of authority. He is liable to third parties when he exceeds

his ostensible authority. He becomes liable to pay damages to the principal, when he exceeds his

actual authority but acts within the ostensible authority and enters into contracts with third parties

who are not aware of the curtailment of his authority.

2. An agent cannot claim performance of a contract entered into by him apparently on behalf of the

principal but really on his own account.

3. An agent is personally liable:

� when the contract expressly provides;

� when he does not sign the negotiable instrument as agent;

� when he acts for a foreign principal;

� when he acts for an undisclosed principal;

� when the agency is coupled with interest;

� when the trade usage makes him liable; and

� when the principal cannot be sued as he is a minor or a foreign sovereign etc.

termination of agency

Sec.201describes the modes of termination of agency.

Termination of agency by act of the parties:

1. Agreement: The relation of principal and agent may be terminated at any time, at any stage by the

mutual agreement between them.

2. Revocation by the Principal: The principal may revoke the authority of the agent at any time.

3. Revocation by the Agent: An agency may also be terminated by an express renunciation by the agent

after giving a reasonable notice to the principal.

Termination by agency by operation of law :

1. Performance of the contract: Agency is terminated when the object is accomplished or when the

accomplishment of the object becomes impossible.

2. Expiry of time: When the agent is appointed for a specific period of time, the agency comes to an end

after the expiry of that time even if the work is not completed.

3. Death and Insanity: When the gent or the principal dies or becomes of unsound mind, the agency is

terminated.

4. Insolvency: The insolvency of the principal or agent puts an end to the insolvency of the agency.

5. Destruction of Subject-matter: When the subject matter of an agency is destructed, the agency comes

to an end.

6. Principal becoming an alien enemy: When the agent and principal are aliens, the contract of agency is

valid so long as the countries of the principal and the agent are at peace. If war breaks out between

the two countries, the contract of agency is terminate.

7. Dissolution of a company: When a company is dissolved, the contract of agency with or by the

company automatically comes to an end.

8. Termination of sub-agent’s authority: The termination of an agent’s authority puts an end to the sub-

agents authority.

review questions

1. Define Contract of Indemnity and Contract of Guarantee and bring out differences between them.

2. What are the rights of the Surety against (i) Principal debtor, (ii) Creditor, and (iii) Co-Sureties.

3. When the Surety is discharged from his liabilities?

4. Define bailment. What are the rights and duties of bailor and bailee?

5. What are the duties of finder of lost goods?

6. What are the different methods of creation of agency?

7. What are the rights and duties of an agent?

� � �

LESSON - 11

SALE OF GOODS ACT, 1930

Section 4 of the Sale of Goods Act defines a contract of sale as “a contract whereby the seller

transfers or agrees to transfer the property in goods to the buyer for a price”. The term “Contract of Sale”

includes an actual sale as an agreement to sell. It may be absolute or conditional.

When the property in the goods is transferred, the contract is called a sale. The contract is called

an agreement to sell, when the transfer of property is take place at a future time or subject to fulfillment of

some condition. An agreement to sell becomes a sale, when the time lapses or such condition is fulfilled.

essentials of a contract of sale

1. Two parties: There must be two distinct parties, i.e. a buyer and a seller to effect a contract of sale

and they must be competent to contract.

2. Goods: There must be some goods which are to be transferred from the seller to the buyer.

3. Price: The consideration for the contract of sale, called price, must be money.

4. Essential elements of valid contract: All the essential elements of a valid contract must be present in

the contract of sale.

Differences between a sale and an agreement to sell may be summarised as follows:

Sale Agreement to Sell

1. Ownership is transferred to the buyer. Ownership does not pass to the buyer. It

remains with the seller.

2. It is an executed contract. It is an executory contract.

3. It creates rights in rem. It creates rights in personam.

4. The seller can sue for the price though

the goods are in his possession

The seller can sue for the damages if the

buyer refuses to take delivery and pay the

price.

5. If the seller re-sells the goods, the buyer

can claim damages for conversion and

exercise right of recovery of goods from

third parties who are aware of the prior

sale.

In case of re-sale the buyer can only

claim damages.

6. If the goods are destroyed by accident,

the buyer has to bear the loss, though the

goods are in the possession of the seller.

In such cases, the seller has to bear the

loss, even if the goods are in the

possession of the buyer.

7. If the buyer becomes insolvent, the seller,

in the absence of a lien, must deliver the

goods to the official receiver and claim

only ratable dividend for the price due.

If the buyer becomes bankrupt before

payment of price, the seller may refuse to

deliver the goods unless paid for, since

ownership rests with the seller.

8. If the seller becomes insolvent, the buyer

can recover the goods from the official

receiver since the ownership has passed

to him.

In such cases, the buyer who has paid the

price can only claim ratable dividend.

Distinction between a Sale and a Hire-Purchase Agreement

Sale Hire-Purchase Agreement

1. Ownership is transferred from the seller

to the buyer, as soon as the contract is

entered into.

Ownership is transferred from the seller

to the hire-purchaser only when a certain

agreed number of instalments is paid.

2. The position of the buyer is that of the

owner.

The position of the hire-purchaser is that

of the bailee.

3. The buyer cannot terminate the contract

and as such is bound to pay the price of

the goods.

The hire-purchaser has an option to

terminate the contract at any stage, and

cannot be forced to pay the further

instalments.

4. If the payment is made by the buyer in

instalments, the amount payable by the

buyer to the seller is reduced, for the

payment made by the buyer is towards

the price of the goods.

The instalments paid by the hire-

purchaser are regarded as hire charges

and not as payment towards the price of

the goods till option to purchase the

goods is exercised.

subject-matter of contract of sale

Goods form the subject-matter of a contract of sale. According to Sec.2(7), ‘goods’ means every

kind of movable property other than actionable claims and money; and includes stocks 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. Trade marks, copyrights, patent rights, goodwill, electricity,

water, gas are all goods.

subject-matter of contract of sale

classification of goods

The goods which form the subject of a contract of sale may be either –

1. Existing goods, or

2. Future goods, or

3. Contingent goods

1. Existing Goods

These are the goods which are owned or possessed by the seller at the time of sale. Only existing

goods can be the subject of a sale. The existing goods may be –

1) Specific goods: These are goods which are identified and agreed upon at the time of a contract of

sale is made. For example, a specified watch or scooter.

2) Ascertained goods: These are the goods which become ascertained subsequent to the formation of a

contract of sale.

3) Unascertained goods: These are the goods which are not identified and agreed upon at the time of

the contract of sale. They are defined only by description and may form part of a lot.

2. Future Goods

These arethe goods which a seller does not possess at the time of the contract but which will be

manufactured or produced or acquired by him after the making of the contract of sale.

3. Contingent Goods

These are the goods the acquisition of which by the seller depends upon a contingency which may

or may not happen.

document of title to goods

A document of title to goods is one which enables its possessor to deal with the goods described

in it as if he were the owner. It is used in the ordinary course of business as proof of the possession or

control of goods. It authorises, either by endorsement or by delivery, its possessor to transfer or receive

goods represented by it [Sec.2 (4)]. It symbolises the goods and confers a right on the purchaser to

receive the goods or to further transfer such right to another person. This may be done by mere delivery

or by proper endorsement and delivery.

Conditions to be fulfilled by a document of title of goods

• It must be used in the ordinary course of business.

• The undertaking to deliver the goods to the possessor of the document must be unconditional.

• The possessor of the document, by virtue of holding such document, must be entitled to receive the

goods unconditionally.

Some instances of documents of title of goods are given below:

� Bill of Lading: It is a document which acknowledges receipt of goods on board a ship and is signed

by the captain of the ship or his duly authorised representative.

� Dock warrant: It is a document issued by a dock owner, giving details of the goods and certifying

that the goods are held to the order of the person named in it or endorsee. It authorises the person

holding it to receive possession of the goods.

� Warehouse-keeper’s or Wharfinger’s Certificate: It is a document issued by a warehouse-keeper or

a wharfinder stating that the goods specified in the document are in his warehouse or in his wharf.

� Railway Receipt: It is a document issued by the railway acknowledging receipt of goods. It is to be

presented by the holder or consignee at the destination to take delivery of the goods.

� Delivery Order: It is a document containing an order by the owner of the goods to the holder of the

goods on his behalf, asking him to deliver them to the person named in the document.

transfer of property

The primary rules for ascertaining when the property in goods passes to the buyer are as follows:

1) Where there is a contract for the sale of unascertained goods, no property in the goods is transferred

to the buyer unless and until the goods are ascertained (Sec.18).

2) Where there is a contract for the sale of specific or ascertained goods, the property in them is

transferred to the buyer at such time as the parties to the contract intend it to be transferred. For the

purpose of ascertaining the intention of the parties, regard shall be had to the terms of the contract, the

conduct of the parties and the circumstances of the case (Sec. 19). Where the intention of the parties

cannot be ascertained, the following rules shall apply:

� Specific goods: In case of a contract for the sale of specific goods (a) in a deliverable state, if the

contract is unconditional, property passes as soon as the contract is entered into [Sec.20], (b) if the

seller has to do something to put them in a deliverable state, property passes only when such thing is

done and notice thereof is given to the buyer [Sec.21], (c) in a deliverable state if the seller has to do

something for the purpose of ascertaining the price, property will pass only when such act is done ad

notice thereof is given to the buyer [Sec.22].

� Unascertained goods: In case of unascertained or future goods sold by description, property passes

only when goods according to the description are unconditionally appropriated to the contract and the

buyer is given a notice thereof. Delivery to a carrier (the seller not reserving right of disposal,

Sec.25) amounts to an unconditional appropriation (Sec.23).

� Goods sent on approval: In case of goods delivered by a buyer on approval or ‘on sale or return’

property passes when he signifies his approval or acceptance or when he does some act adopting the

transaction. If he retains the goods without giving notice of rejection, property passes when the time

agreed for returning the goods expires or after a reasonable time has expired (Sec.24).

condition and warranty

A term or a stipulation in a contract of sale with reference to goods may be either a condition or a

warranty. A condition is a term which is essential to main purpose of the contract and hence is the

foundation of the contract. The effect of a breach of condition is that it gives the right to the aggrieved

party to treat the contract as void and also to claim damages, if any.

A warranty is a term which is collateral to the main purpose of the contract and hence only a subsidiary

promise. The breach of warranty does not give right to the aggrieved party to treat the contract as void

but entitles him to claim damages only. In the absence of contract to the contrary, time of delivery of

goods is treated as condition and for payment of price, as warranty.

In the following cases, the breach of a condition will be treated as breach of warranty only:

(i) when the buyer waives the condition; or

(ii) when the buyer treats the breach of condition as a breach warranty and does not treat the contract as

void; or

(iii) where the contract of sale is inseparable and the buyer has accepted the goods or part thereof; or

(iv) where the contract is for specific goods, the property in which has passed to the buyer.

Conditions and warranties may be express or implied. When they are definitely written in the contract,

they are called express conditions and warranties. They are called implied conditions and warranties,

when they are not written in the contract but applied to the contract either by operation of law or by trade

custom.

implied conditions

1. As to title to goods: There is an implied condition that the seller has a right to sell in case of sale and

that in the case of agreement to sell, he will have the right to sell the goods at the time when the

property is to pass.

Rowland Vs Divall: A purchased a car from B for a certain price and used it for some period.

Subsequently, it was found that the car was stolen by B and therefore, A had returned back the car to the

true owner. It was held that A could recover the full price paid to B.

2. Sale by description: The implied condition is that the goods delivered must correspond with the

description.

Example: Where a machine was described as almost new and used very little but when delivered, was

found to be an old and repaired one, it was held that the buyer was entitled to reject the machine.

3. Sale by sample: The implied condition is —

� that the goods delivered shall correspond with the sample,

� that the buyer shall have a reasonable opportunity of comparing the bulk with the sample and

� that the goods shall be free from any defect rendering them unmerchantable, which would not be

apparent on reasonable examination of the sample.

Drummond & Sons Vs Van Ingen & Co: Where worsted coating was supplied corresponding with the

sample but not suitable for stitching due to a latent defect, it was held that the buyer was entitled to reject

the goods.

4. Sale by sample as well as description: In the case of sale of goods by sample as well as description,

the goods delivered must correspond with both sample as well as description.

5. As to quality or fitness: The general rule is “Caveat Emptor”, i.e. let the buyer beware. So, the

seller need not disclose the faults in the goods he sells nor need he guarantee that the goods are fit for

the purposes of the buyer. So, the buyer takes them as they come. But in the following cases, there

is an implied condition as to quality or fitness of goods for any particular purpose.

a) Where the buyer makes known the purpose to the seller, who is ordinarily dealing with sale of goods

of that description and the buyer relies on the judgement of the seller.

b) Where the seller does not disclose the faults in his goods and such faults cannot be detected on

reasonable examination.

c) Where the seller makes a statement and the buyer relies upon it.

Baldry Vs Marshall: A, purchased a motor car from B for using it as a tourist car. B, the seller knew the

purpose. The car turned out to be unfit for the purpose. Held, A the buyer could repudiate the contract.

But there is no implied condition as to fitness or quality of goods when they are sold under the patent or

trade name.

E.W. Evans Vs Stella Benjamin: Where a refrigerator was sold, it was held that the name of the article

itself implies that it is fit for a particular purpose.

6. As to Merchantability: In case of sale of good by description, there is an implied condition that the

goods shall correspond with the description and also that they shall be of merchantable quality.

Grant Vs Australian Knitting Mills Ltd: The buyer was supplied wollen underpants by the manufacturers.

The buyer wore them for sometime and contracted a skin disease. Held, that the buyer was entitled to

damages.

Exception: If the buyer has examined the goods, there is no implied condition as to quality of goods as

regards defects which such examination must have revealed.

7. As to wholesomeness: In the case of sale of visions, there is an implied condition that they are fit for

immediate use. A, purchased a bun from B and injured his teeth by biting a stone in the bun. B was

held liable.

implied warranties

1. Warranty of Quiet Possession: There is an implied warranty that the buyer shall have and enjoy

quiet possession.

2. Warranty against Encumbrances: There is an implied warranty that the goods shall be free from

encumbrance or charge in favour of any third party not declared or known to the buyer before or at

the time of contract.

rights and duties of buyer and seller

Rights of Buyer

(i) The buyer has the right to have the delivery of goods as per the contract.

(ii) He has the right to reject the goods, if the seller sends to the buyer a different quantity of goods than

he ordered.

(iii) He has the right to repudiate the contract, if the seller violates the terms and conditions.

(iv) He has the right to examine the goods.

(v) He has the right against the seller for breach of contract. He may file a suit for damages or suit for

price or suit for specific performance or suit for breach of warranty.

Duties of the Buyer

(1) He must apply for delivery of the goods.

(2) He must accept the goods and pay the price.

(3) If the goods are delivered by instalments, he may refuse to accept such delivery.

(4) Where the seller sends to the buyer a quantity of goods less than or more than the goods ordered for,

the buyer may refuse or accept the entire goods or accept partly and reject the rest. Where he accepts,

he must pay for them.

(5) Where the seller sends goods of a different description along with the goods ordered for, he may

accept the goods ordered for and reject the rest.

Rights of the Seller

(i) In the absence of a contract to the contrary, delivery of goods and payment of price are concurrent

conditions. So, he may refuse to deliver the goods, if the buyer has not paid the price.

(ii) He is entitled to sue for the recovery of price or damages in case of default of the buyer.

(iii) The unpaid vendor has – right of lien, right of stoppage of goods in transit and right to re-sell the

goods.

Duties of the Seller

(1) He must prepare the invoice showing the cost of the goods, procure bill of lading and ship the goods

at the port of shipment within the time fixed or within a reasonable time, if no time is fixed.

(2) He must deliver the goods when applied for by the buyer. Such delivery may be actual, constructive

or symbolic delivery.

(3) The goods must be delivered at the place fixed by the contract. Where the contract does not specify

the place, goods must be delivered at the place where the goods are at the time of contract. In case of

sale of future goods, they must be delivered at the place where they are manufactured or produced.

(4) Delivery must be made during business hours.

(5) He must get the goods insured when they are delivered to a carrier or wharfinger.

(6) He has to bear the cost of delivery.

sale by non-owners

The general rule of law is that “no one can give that which one has not got”. This is expressed in

Latin maxim “nemo dat qut non habet”. So, a person who has no title to goods cannot convey property in

goods to the transferee or buyer. For example, if A steals an article and sells it to B, B does not become

the owner of the article. But to this rule the following are exceptions:

1. Sale by a person no the owner or title by Estoppel; Where the owner by his conduct, or by an act or

omission, leads the buyer to believe that the seller has the authority to sell and induces the buyer to

buy the goods, he shall be stopped from denying the fact of want of authority of the seller. The buyer

in such a case gets a better title than that of the seller.

2. Sale by Mercantile Agent: A sale by a mercantile agent is valid provided –

� he is in possession of goods or documents of title to goods with the consent of the owner;

� he sells them in the ordinary course of business;

� the buyer has acted in good faith; and

� he has no notice of seller’s defective title.

3. Sale by one of Joint-Owners: A sale by one of the several joint-owners is valid if –

• he is in sole possession of goods with the consent of the other co-owners;

• the buyer has acted in good faith; and

• he has no notice of want of right to sell.

4. Sale by a person in possession of goods under a voidable contract: A sale by a person who is in

possession of the goods under a voidable contract is valid if:

� he sells them before the contract is rescinded;

� the buyer has acted in good faith; and

� he has no notice of the seller’s defective title.

5. Sale by seller in possession of goods after sale: When a seller, after having sold the goods previously,

re-sells them to another buyer, he conveys good title to such another buyer provided:

• he is in possession of goods or documents of title of goods as seller, but not as bailee or hirer etc;

• the buyer has acted in good faith;

• has no notice of the previous sale; and

• he has actually received the possession of goods.

6. Sale by buyer in possession of goods after sale: A sale by a buyer who has bought or agreed to buy

the goods is valid if –

� he is in possession of the goods or documents of title to goods with the consent of the seller;

� the buyer has acted in good faith; and

� he has not notice of lien or any other right of the owner.

7. Sale by unpaid seller: Where an unpaid seller who has exercised his right of lien or stoppage in

transit re-sells the goods, the buyer acquires a good title to the goods as against the original buyer.

8. Sale by finder of lost goods: A finder of goods may sell under certain circumstances.

9. Sale under orders of court: A person who purchases goods under a court sale gets good title.

10. Sale by a pledge: A pledge can sell and convey good title, under certain circumstances.

rights of an unpaid seller

The seller of goods is deemed to be an “unpaid-seller” where —

a) The whole of the price has not been paid or tendered or

b) When a bill of exchange or any other negotiable instrument has been given as conditional payment

but the same has been dishonoured.

An unpaid vendor has the right of withholding the delivery of goods when the property in goods has not

passed to the buyer.

rights of an unpaid seller against the goods

He has the following rights when the property in goods has passed to the buyer:

1. Right of Lien

The unpaid vendor who is in possession of the goods, can retain such possession until the price is

paid or rendered. And if the goods are partly delivered, the an exercise this right on the remaining goods

except when such part delivery amounts to show that he has given up the right of lien. This right of lien

extends to the whole of goods in the possession of the unpaid vendor and can be exercised only for the

recovery of the price of goods but not the amounts like godown rent, incurred in storing the goods in

exercise of lien for the practice.

He can exercise the right of lien —

� where the goods have been sold without any stipulation as to credit;

� where the goods have been sold on credit, but the term of credit has expired and the price remains

unpaid;

� where the buyer becomes bankrupt.

This right of lien is lost —

� when the goods are delivered by him to a carrier, or other bailee for the purpose of transmission

without reserving the right of disposal;

� when the buyer or his agent lawfully obtains the possession of goods ;

� when the unpaid vendor has given up his right of lien.

2. Right of stoppage of goods in transit

When the seller has parted with the possession of goods, he may regain and retain such

possession by stopping the goods in transit, from being delivered to the buyer. This right is available (1)

when the goods are in transit and (2) when the buyer becomes bankrupt.

Following are the rules regarding duration of transit:

a) Goods are deemed to be in transit so long as the buyer or his agent does not take delivery of the

goods.

b) The transit is at an end, when the buyer or his agent obtains delivery before the arrival of the goods at

their destination.

c) The transit is at an end, if the carrier or other bailee acknowledges to the buyer after the arrival of the

goods at the destination the he holds the possession of goods as a bailee for the buyer.

d) The goods are in transit, if the buyer or his agent rejects the goods.

e) The transit is at an end if the carrier or other bailee wrongfully refuses to deliver the goods to the

buyer.

The unpaid vendor must give notice of his claim to the carrier or other bailee, who is in possession of the

goods, in order to exercise this right of stoppage. Such notice takes effect when it reaches the carrier or

his agent who is in actual possession of goods. On receipt of notice of the stoppage, the carrier must re-

deliver the goods to or according to the directions of the seller. The seller shall have to bear the expenses

of such re-delivery.

3. Right of Re-Sale

The unpaid vendor can re-sell the goods —

1) without notice to the buyer if the goods are perishable goods and

2) with notice to the buyer of his intention to re-sell, if the goods are not perishable.

He can retain the profit resulting from such re-sale and claim damages from the original buyer for loss if

any. But if he does not give notice to the buyer of his intention to re-sell the goods where necessary, he

must pay back the surplus or profit to the original buyer and bear the loss, if any.

rights of an unpaid seller against the buyer personally

These are the rights which an unpaid seller may enforce against the buyer personally, in addition

to his rights against the goods.

1. Suit for Price

Where property has passed to the buyer and the buyer wrongfully neglects or refuses to pay for the goods,

the seller may sue him for the price of the goods.

2. Suit for damages for non-acceptance

Where the buyer wrongfully neglects or refuses to accept and pay for the goods, the seller may

sue him for non-acceptance and claim damages.

3. Repudiation of contract before due date

Where the buyer repudiates the contract before the date of delivery, the seller may either –

(a) treat the contract as subsisting and wait till the date of delivery, or

(b) he may treat the contract as rescinded and sue for damages for the breach.

4. Suit for interest

Where there is a specific agreement between the seller and the buyer as to interest on the price of

the goods from the date on which payment becomes due, the seller may recover interest from the buyer.

remedies for breach of contract of sale

The Sale of Goods Act gives the following remedies to a seller and a buyer for breach of a

contract of sale:

Remedies available to the Seller:

(a) Sue buyer for price

(b) Sue buyer for damages for non-acceptance of the goods

(c) Sue buyer for damages for repudiation of contract by the buyer before due date

(d) Sue buyer for interest.

Remedies available to the Buyer:

(a) Sue the seller for damages for non-delivery of the goods

(b) Sue the seller for specific performance

(c) Sue the seller for breach of warranty

(d) Sue the seller for damages for repudiation of contract by the seller before due date

(e) Sue the seller for interest

review questions

1. Distinguish between sale and agreement to sell.

2. What are the implied conditions and warranties laid down under the Sale of Goods Act?

3. What are the rights and duties of buyer and seller?

4. What are the rights of an unpaid seller?

5. When the sale by non-owner is valid?

� � �

LESSON - 12

CONSUMER PROTECTION ACT, 1986

The Consumer Protection Act, 1986 marks the growth of the enlightened consumer movement in

our country. It intends to provide simple, speedy and inexpensive redressal to consumer grievances,

particularly against unfair trade practices or unscrupulous exploitation of consumers.

scheme of the act

The salient features of the act are summed up as under:

� The act applies to all goods and services unless specifically exempted by the Central Government.

� It covers all the sectors whether private, public or cooperative.

� The provisions of the act are compensatory in nature.

It enshrines the following rights of the consumers:

(i) the right to be protected against the marketing of goods which are hazardous to life and property;

(ii) the right to be informed about the quality, quantity, potency, purity, standard and price of goods so

as to protect the consumer against unfair trade practices.

(iii) the right to be assured, wherever possible, access to a variety of goods at competitive prices;

(iv) the right to be heard and to be assured that consumers’ interests will receive due consideration at

appropriate forums;

(v) the right to seek redressal against unfair trade practices or unscrupulous exploitation of consumers;

and

(vi) the right to consumers education.

The act envisages establishment of Consumer Protection Councils at the Central and State levels whose

main object will be to promote the rights of the consumers.

To provide simple, speedy and inexpensive redressal of consumer grievances, the act envisages a

three-tier quasi-judicial machinery at the National, State and District levels. At the national level, these

will be a National Consumer Disputes Redressal Commission (to be known as the ‘National

Commission’). At the state level, there will be Consumer Disputes Redressal Commissions (to be known

as ‘State Commission’) and at the district level, District Consumer Disputes Redressal Forums (to be

known as ‘District Forums’).

The provisions of this act are in addition to and not in derogation of the provisions of any other

law for the time being in force.

who is a consumer?

All of us are consumers of goods and services. The producers of some goods and services also

consume various other goods and services produced by others. In the Consumer Protection Act, the word

‘consumer’ has been defined separately for the purpose of goods and services.

For the purpose of goods, a consumer means a person belonging to the following categories:

(1) One who buys any goods for a consideration which has been paid or promised or partly paid and

partly promised or under any system of deferred payment.

(2) It includes any user of such goods other than the person who actually buys goods and such use is

made with the approval of the purchaser.

(3) One who hires any service or services for a consideration which has been paid or promised or partly

promised or under any system of deferred payment.

(4) It includes any beneficiary of such service other than the one who actually hires the service for

consideration and such services are availed with the approval of such person.

who can file a complaint?

Following categories of persons may file a complaint under the act:

� A consumer

� Any voluntary consumer organization, registered under the Societies Registration Act, 1860 or the

Companies Act, 1956 or under any other law for the time being in force.

� The Central Government

� The State Government or Union Territory Administrations.

what constitutes a complaint?

Under the Act, complaint means any allegation in writing made by a complainant in regard to one or more

of the following:

(1) That he has suffered loss or damages as a result of any unfair trade practices adopted by any trader.

(2) That the goods mentioned in the complaint suffer from one or more defects.

(3) That services mentioned in the complaints suffer from deficiencies in any respect.

(4) That a trader has charged for the goods mentioned in the complaint, a price in excess of the price.

(i) fixed by or under any law for the time in force; or

(ii) displayed on goods; or

(iii) displayed on any packet containing such goods.

where to file a complaint?

If the cost of the goods or services and compensation asked for, is less than Rs. 20 lakhs, then the

complaint can be filed in the District Forum.

If the cost of the goods or services and compensation asked for is more than Rs.20 lakhs but less

than Rs.1 crore, the complaint can be filed before the State Commission.

If the cost of goods or services and compensation asked for, exceeds Rs.1 crore, the complaint can be

filed before the National Commission at New Delhi.

how to file a complaint?

Procedures for filing complaints and seeking redressal are simple and speedy.

There is no fees for filing a complaint before the District Forum, the State Commission or the

National Commission.

The complaint or his authorised agent can present the complaint in person.

The complaint can be sent by post to the appropriate Forum Commission.

A complaint should contain the following information:

a) The name, description and the address of the complainant;

b) the name, description and address of the opposite party or parties, as the case maybe, as far as they

can be ascertained;

c) the facts relating to complaint and when and where it arose;

d) documents, if any, in support of the allegations contained in the complaint;

e) the relief which the complainant is seeking.

The complaint should be signed by the complainant or his authorised agent.

relief available to consumers

Depending on the nature of relief sought by the consumer and facts, the Redressal Forums may

give orders for one or more of the following reliefs:

a) removal of defects from the goods;

b) replacement of the goods;

c) refund of the price paid; or

d) award of compensation for the loss or injury suffered.

procedure for filing the appeal

Appeal against the decision of a District Forum can be filed before the State Commission within a

period of thirty days. Appeal against the decision of a State Commission can be filed before the National

Commission within a period of 30 days. Appeal against the orders of the National Commission can be

filed before the Supreme Court within a period of 30days.

There is no fee for filing appeal before the State Commission or the National Commission.

Procedure for filing the appeal is the same as that of complaint, except that the application should

be accompanied by the orders of the District Forum/ State Commission, as the case may be, and reasons

for filing the appeal should be specified.

time limit for deciding complaint/ appeal

The thrust of the act is to provide simple, speedy and inexpensive redressal to consumer

grievances. To ensure speedy disposal of consumer grievance, the following provisions have been

incorporated in the Act and the rules framed thereunder:

It is obligatory on the complainant or appellant or their authorised agents and the opposite parties

to appear before the Forum/ Commission on the date of hearing or any other date to which hearing could

be adjourned.

The National Commission, State Commission and District Forums are required to decide

complaints, as far as possible, within a period of 3 months from the date of notice received by the

opposite party where complaint does not require analysis or testing of the commodities and within five

months if it requires analysis or testing of commodities.

The National Commission and State Commission are required to decide the appeal, as far as

possible, within 90 days from the first date of hearing.

review questions

1. What is the object of Consumer Protection Act? Specify the rights of consumers.

2. Discuss the procedure of filing complaint under Consumer Protection Act.

3. What is the procedure for appeal under Consumer Protection Act?

� � �

LESSON - 13

NEGOTIABLE INSTRUMENTS ACT, 1881

Section 13 of the Negotiable Instruments Act defines that a negotiable instrument

means a promissory note, bill of exchange or cheque, payable either to order or bearer.

FEATURES

1. The property in it passes either by mere delivery or by endorsement and delivery.

2. The holder in due course is not affected by the defect in the title of his transferor or

any previous party.

3. The holder in due course, can sue in his own name. He need not give notice to the

debtor that he has become the holder.

4. He is not affected by certain defects like fraud to which he is not a party.

5. Consideration is presumed to have passed.

6. It is convenient method of discharging payments.

The Act does not stipulate that only bills of exchange, promissory notes and

cheques are only the negotiable instruments. So, other instruments may also be added to

the list of negotiable instruments provided:

� they are transferable by mere delivery and

� the holder in due course can sue in his own name.

Hence, Dividend Warrants, Port Trust or Improvement Trust Debentures, Railway

Bonds payable to bearer, or Railway Receipts having the feature of negotiability are all

negotiable instruments. So, a negotiable instrument is an ordinary chattel for chose-in-

action clothed with the feature of negotiability.

PARTIES TO NEGOTIABLE INSTRUMENTS

The parties to a bill of exchange, a promissory note and a cheque are as follows:

Parties to a Bill of Exchange: (1) Drawer, (2) Drawee, (3) Acceptor, (4) Payee,

(5) Holder, (6) Indorser, (7) Indorsee, (8) Drawee in case of need, and (9) Acceptor for

honour.

Parties to a Promissory Note: (1) Maker, (2) Payee, (3) Holder, (4) Indorser, and

(5) Indorsee.

Maker, Drawer: The person who makes a promissory note is called the “maker”.

The person who makes or draws a bill of exchange or cheque is called the “drawer”.

Drawee, Acceptor: The person on whom the bill of exchange or cheque is drawn

and who is directed to pay is called the “drawee”. In case of a cheque, the drawee is

always a banker. In case of a bill of exchage, the drawee becomes the “acceptor” when

he accepts the bill, i.e. signs his accent upon the bill and delivers the same or gives notice

of such signing to the holder or to some person on his behalf. A cheque does not require

acceptance as it is intended for immediate payment.

Payee: The person named in the bill, note or cheque, to whom or to whose order

the money is to be paid, is called the “payee”. In a bill or cheque, the drawer may

himself be the payee. Where the payee named in a bill is a fictitious or non-existing

person, the bill is treated as payable to bearer.

Indorser: The person who endorses the bill, note or cheque to another is called

the “indorser”.

Indorsee: The person to whom the bill, note or cheque is endorsed is called the

“indorsee”.

MATERIAL ALTERATION

Material alteration refers to changes introduced on a cheque which affects its

fundamental character. In other words, “any change in any instrument which makes it

speak a different language, for all legal purposes from what it spoke originally” would

constitute a material alteration. If the alteration is material, it renders the cheque invalid.

Examples of Material Alteration

There is material alteration when:

� the date of the instrument is altered;

� the time of payment is altered;

� the amount is altered;

� the rate of interest is altered;

� the place of payment is altered;

� the name of payee is altered;

� a new party is added etc.

There is no material alteration when:

� a mistake is corrected;

� alteration is made with the consent of all the parties;

� alteration is made to carry out the common intention of the parties;

� blank indorsement is converted into full indorsement.

� an inchoate instrument is completed etc.

EFFECT OF MATERIAL ALTERATION

According to Sec. 87 of the Negotiable Instruments Act, if a cheque is materially

altered, it cannot be regarded as a cheque at all. Therefore, material alteration renders

the cheque void.

CROSSING OF CHEQUES

Crossing means drawing two parallel transverse lines across the face of the cheque

with or without the words “and company” in between the lines. It is a direction to the

drawee bank not to pay the amount at the counter, but only through a bank. It is made to

guard payment against forgery by unscrupulous persons.

KINDS OF CROSSING

It is of two kinds: (1) General Crossing and (2) Special Crossing.

1. General Crossing

Sec. 123 of the Negotiable Instruments Act defines General Crossing as, “where a

cheque bears across its face an addition of the words ‘And Company’ or any

abbreviation thereof, between two parallel transverse lines or of two parallel transverse

lines simply, either with or without the words ‘not negotiable’, that addition shall be

deemed to be a crossing and the cheque shall be deemed to be crossed generally”.

Two parallel transverse lines across the face of the cheque with or without the

words, “& Co”, “Account Payee only”, “Not Negotiable”, constitute general crossing.

The cheque which is crossed generally, is payable only to banker.

Specimens of General Crossing

2. Special Crossing

Sec. 124 of the Negotiable Instruments Act defines Special Crossing as, “where a

cheque bears across its face an addition of the name of a banker, with or without the

words “not negotiable”, that addition shall be deemed a crossing and the cheque shall be

deemed to be crossed specially and to be crossed to that banker”. When a cheque is

crossed specially, the amount is payable by the drawee only, only to the bank named in

the crossing.

Specimens of Special Crossing

“Account Payee Crossing”

When the words “Account Payee”, “Account Payee only” are added to the general

or special crossing, it is called Account Payee Crossing. The collecting banker must

collect the amount of the cheque for the account of the payee only and none else.

Otherwise, it is not a collection in due course and the banker is liable if the title of the

person for whom the bank collects, turns out to be defective.

“Not Negotiable” Crossing

When the words “not negotiable” are added either in general or special crossing,

the person taking the cheque cannot have and cannot give a better title than what his

transferor has. So, a ‘not negotiable’ cheque is transferable. But the transferee gets no

better title than what the transferor has.

RULES OF CROSSING

1. An uncrossed cheque may be crossed generally or specially by the drawer or the

holder.

2. A cheque crossed generally, may be crossed specially by the holder.

3. The holder may add the words “not negotiable”.

4. The banker to whom the cheque is crossed specially, may re-cross it, but only to

another bank as his agent for collection.

5. Where an uncrossed cheque or a cheque crossed generally is sent to a banker for

collection, he may cross it specially to himself. But he cannot enjoy Statutory

protection against being sued for conversion.

INDORSEMENT

It means the writing of a person’s name (otherwise than as maker) on the face or

back of a netgotiable instrument or on a slip of paper (called allonge) annexed thereto, for

the purpose of negotition (Sec.15). The person who signs the instrument is called the

‘indorser’. The person to whom the instrument is indorsed is called the ‘indorsee’.

KINDS OF INDORSEMENTS

1. Blank Indorsement or General Indorsement

When the indorser signs his name only, it is called blank indorsement. An

instrument endorsed in blank is payable to bearer. The holder of an instrument may write

above the indorser’s signature, a direction to pay the amount to or to the another person.

When the holder does so, he does not become liable as an endorser on the instrument, as

he had not signed it.

2. Special or Full Indorsement

If the indorser signs his name and adds a direction to pay the amount to or to the

order of a certain person, it is called full indorsement.

Illustration: A bill made payable to Smith, may be endorsed in full by him as —

“Pay A or order”.

[Sd.] Smith.

An instrument having been endorsed in blank is indorsed in full, the indorser in

full is liable to the person to whom it is indorsed in full or to others who derive title

through such person.

3. Restrictive Indorsement

It is one which prohibits or restricts further negotiation or which constitute the

indorsee an agent to receive its contents for his indorser.

Examples: (1) “Pay C only” (2) “Pay D for my use” (3) “Pay D on account

of E” (4) “Pay E or order for collection”.

4. Partial Indorsement

When a part of the amount of the instrument is endorsed, it is called partial

indorsement. It is void.

Example: A holds a bill for Rs.800. A endorses thus:

“Pay Rs.400 to B or order”. (or)

“Pay B or order Rs.400 and to C or order Rs.400”.

But if the part of the amount of the instrument is already paid, the unpaid balance

may be endorsed thus: “Pay B or order Rs.400, being unpaid residue of the bill”.

5. Conditional or Qualified Indorsement

This is one which negotiates or limits the indorser’s liability, in the following

ways:

(a) By Sans Recourse Indorsement: The indorser excludes his liability by

express words in indorsement.

Examples: (1) “Pay A or order

Sans Recourse”.

(Sd.) B

(2) “Pay A at his own risk”.

(Sd.) B

(3) “Pay A without recourse to me”.

(Sd.) B

(b) By making his liability depend upon the happening of a specified event, though

such event may never happen.

Example: “Pay A or order on his marrying B”.

(c) By making the right of the indorsee to receive the amount, depend upon the

happening of a specified event, though it may never happen.

(d) By Facultative Indorsement: This is one which extends the liability of the

indorser.

Example: “Pay A or oder

Notice of dishonour waived”.

(Sd.) B

PAYMENT AND COLLECTION OF CHEQUES

The paying banker should use reasonable care and diligence in paying a cheque so

as to abstain from any action likely to damage his customer’s credit.

PRECAUTIONS BEFORE HONOURING A CHEQUE

In order to safeguard his position, the paying banker has to observe the following

precautions before honouring a cheque:

1. Presentation of Cheque

First of all a paying banker should note whether the presentation of the cheque is

correct. It can be found out by noting the following factors.

(a) Type of Cheque: Cheques may generally be of two types - open or crossed. If

it is open one, the payment may be paid at the counter. If it is crossed, the

payment must be made only to a fellow banker.

(b) Branch: The paying banker should see whether the cheque is drawn on the

branch where the account is kept.

(c) Banking Hours: The paying banker should also note whether the cheque is

presented during the banking hours on a business day.

(d) Mutilation: If the cheque is torn into pieces or cancelled or mutilated, then the

paying banker should not honour it.

2. Form of the Cheque

Before honouring a cheque, a banker should see the form of cheque and find out

whether it is regular or not.

(a) Printed Form: The customer should draw cheques only on the printed leaves

supplied by the bankers failing which the banker may refuse to honour it.

(b) Unconditional Order: The cheque should not contain any condition.

(c) Date: Before honouring a cheque, the paying banker must see whether there is

a date on the instrument. If a cheque is ante dated, it may be paid if it has not

exceeded six months from the date of its issue otherwise it will become stale

one. If a cheque is post dated, he should honour it only on its due date.

(d) Amount: The paying banker should see whether the amount stated in the

cheque both in words and figures agree with each other.

(e) Material Alteration: If there is any material alteration, the banker should

return it with a memorandum “Alteration requires drawer’s confirmation”.

(f) Sufficient Balance: If the funds available are not sufficient to honour a

cheque, the paying banker is justified in returning it.

(g) Signature of the Drawer: It is the duty of the paying banker to compare the

signature of his customer found on the cheque with that of his specimen

signature.

(h) Endorsement: The banker must verify the regularity of endorsement, if any,

that appears on the instrument.

(i) Legal Bar: The existence of legal bar like Garnishee order limits the duty of

the banker to pay a cheque.

CIRCUMSTANCES UNDER WHICH A CHEQUE MAY BE DISHONOURED

A paying banker is under a legal obligation to honour his customer’s mandate. He

is bound to do so under his contractual relationship with his customer. A wrongful

dishonour will have the worse effect on the banker. However, under the following

circumstances, the payment of a cheque may be refused:-

a) Countermanding: Countermanding is the instruction given by the customer of a bank

requesting the bank not to honour a particular cheque issued by him. When such an

order is received, the banker must refuse to pay the cheque.

b) Upon receipt of notice of death of a customer: When a banker receives written

information from an authoritative source, regarding the death of a particular

customer, he should not honour any cheque drawn by that deceased customer.

c) Upon the receipt of notice of insolvency: Once a banker has knowledge of the

insolvency of a customer he must refuse to pay cheques drawn by him.

d) Upon the receipt of notice of insanity: Where a banker receives notice of a

customer’s insanity, he is justified in refusing payment of the cheque drawn by him.

e) Upon the receipt of notice of Garnishee order: Garnishee order refers to the order

issued by a court attaching the funds of the judgement debtor (i.e. the customer)in

the hands of a third party (i.e. the banker). In such a case, the banker may refuse

payment.

f) Upon the receipt of notice of assignment: The bank balance of a customer

constitutes an asset and it can be assigned to any person by giving a letter of

assignment to the banker. In such case also the banker may refuse payment.

g) When a breach of trust is intended: In the case of trust account, mere knowledge of

the customers intention to use the trust funds for his personal use is a sufficient

reason to dishonour his cheque.

h) Defective Title: If the person who brings a cheque for payment has no title or his title

is defective, the banker should refuse to honour the cheque presented by him.

i) Other Grounds: A banker is justified in dishonouring a cheque under the following

circumstances also:

� a conditional one;

� drawn on an ordinary piece of paper;

� a stale one;

� post-dated one;

� mutilated;

� drawn on another branch where the account is not kept;

� presented during non-banking hours;

� if the words and figures differ;

� if there is no sufficient funds;

� if the signature of the customer is forged;

� if the endorsement is irregular and

� if a crossed cheque is presented at the counter.

COLLECTING BANKER

A collecting banker is one who undertakes to collect the amount of a cheque for

his customer from the paying banker.

DUTIES OF A COLLECTING BANKER

1. Exercise reasonable care and diligence in his collection work: As an agent, he

should exercise reasonable care, diligence and skill in collection work. He should

observe utmost care when presenting a cheque.

2. Present the cheque for collection without any delay: If there is any delay in

presenting the cheque for presentment by the banker, the customer may suffer losses

due to the insolvency of the drawer or insufficiency of funds in the account of the

drawee or insolvency of the banker himself. Hence the collecting banker has to

present the cheque for collection without any delay.

3. Notice to customer in case of dishonour of cheque: If the cheque he collects has

been dishonoured, he should inform his customer without any delay.

REVIEW QUESTIONS

1. Define Negotiable Instruments. What are the characteristics of negotiable

instruments?

2. What are the different kinds of crossing?

3. What is indorsement? What are the kinds of indorsements?

4. What are the precautions to be taken by a banker while honouring a cheque?

5. What are the duties of a collecting banker?

� � �

LESSON - 14

INDIAN PARTNERSHIP ACT, 1932

Section 4 of the Indian Partnership Act defines it as “the relation between persons who have

agreed to share the profits of a business carried on by all or any of them acting for all”. Persons who have

entered into partnership with one another are called individually “partners” and collectively “a firm”, and

the name under which their business is carried on, is called the “firm name”.

essentials of partnership

1. Relationship: Partnership is the abstract relationship between partners.

2. Two or More Persons: As no one can be a partner with himself, there must be at least two persons.

The maximum number of members is 10 for a partnership carrying on banking business and 20 for a

partnership carrying on any other business.

3. Agreement or Deed: Partnership arises out of an agreement but not out of status. Such agreement,

also called as deed, may be express or implied from the conduct of the parties. It may be oral or

written. It contains details relating to —

� name of the firm and the names of the partners,

� nature and place of business,

� the date of commencement and the duration of partnership,

� capital and banking account,

� sharing of profits and losses,

� management,

� accounts

� arbitration etc.

4. Business: The object of the partnership is to carry on any business, profession, vocation, trading or

calling. Such business must be lawful. Mere holding of property in common is not partnership; e.g.

co-ownership.

5. Profit Sharing: Sharing of profits is essential though it does not mean that all those who participate

in profits are necessarily partners.

6. Carried on by all or any of them acting for all: Each partner acts as an agent as well as a principal.

Each one can act in the course of business and bind the other partners by his acts. As such, he can be

called an agent. Since he is also bound by the acts of the other partners, he can be called the

principal. Thus, the law of partnership is a branch of the general law of agency as every partner has

implied power to bind other partners for the acts of the firm, done in the course of conduct of the

business.

kinds of partnership

1. Partnership at will: Where the partners have not provided in their deed, for the duration of

partnership or for the termination of partnership, the partnership is called “partnership at will”. A

partner may retire to dissolve the partnership at his will, by giving a notice to other partners, of his

intention to do so.

2. Particular partnership: A person may become a partner with another person in particular adventures

or undertakings.

3. Partnership for a fixed term: Where the partners fix the definite period or duration of partnership, it

is called a partnership for a fixed term.

test of partnership

In determining whether a partnership exists or not, or whether a person is a partner or not, the

real relation between the parties as shown by all relevant facts, must be taken into consideration.

The joint use of property in common in business for sharing of profits is evidence that a

partnership exists. But this is not conclusive evidence to show that a partnership exists. Likewise, an

active participation in the conduct of business is evidence that a partnership exists. But again, it is not

conclusive evidence to establish the fact of existence of partnership. For example, a servant may manage

the affairs of a firm. Yet he is not a partner. In the same way, a joint venture having no object of profit

sharing is not a partnership, while sharing of profits is evidence, though not conclusive, that a partnership

exists. So, Section 6 lays down that the receipt of a share of profit, or a payment contingent or varying

with the profits does not itself, make the recipient a partner. Therefore, the true test of partnership is not

sharing of the profit, but whether the relationship of agency exists or not.

kinds of partners

Following are different kinds of partners:

1. Actual or Ostensible Partner: An actual partner is one who actively participates in the conduct of the

business of the partnership.

2. Dormant or Sleeping Partner: He is a partner who is not known to third parties as such. He does not

take active part in the conduct of business. He occupies the position of an undisclosed principal.

Hence, third parties can sue him on discovering that he is a partner. While he has access to accounts

and examine and verify them, he has no duties to perform. Hence, no notice of his retirement to the

public is necessary nor the firm is dissolved when he becomes insane.

3. Partner by Estoppel: Where a person causes, by his conduct, another to believe him to be a partner

and on that belief such other person gives credit to the firm, he is estopped from denying that he is a

partner.

Example: X, Y and Z are partners of a firm. X, in the presence and within the hearing of A, represents

to D that A is a partner of their firm. A does not contradict this representation. A, on faith of that

representation, lent Rs.5000 to the firm. A, is liable as a partner.

4. Partner by Holding Out: Where a person represents himself or allows others to represent him as a

partner of a particular firm, he becomes liable to all those who act and lend money to the firm, on the

faith of such representation.

Example: A, represents himself as a partner of a particular firm. D on the faith of the representation,

lends credit to the firm. A becomes liable.

registration of firms

The Partnership Act does not provide for the compulsory registration of firms. It has left it to the

option of the firms to get themselves registered. But indirectly, by creating certain disabilities from

which an unregistered firm suffers, it has made the registration of firms compulsory.

procedure for registration

The registration of a firm may be effected at any time by filling an application in the form of a

statement, giving the necessary information, with the Registrar of Firms of the area.

The application for registration of a firm shall be accompanied by the prescribed fee. It shall

state:

(a) the name of the firm;

(b) the place or principal place of business of the firm;

(c) the names of other places where the firm carries on business;

(d) the date when each partner joined the firm;

(e) the names in full and permanent addresses of the partners;

(f) the duration of the firm.

The statement shall be signed by all the partners or by their agents specially authorised on their behalf

[Sec. 58(1)]. It shall also be verified by them in the prescribed manner [Sec. 58(2)].

When the Registrar is satisfied that the above provisions have been duly compiled with, he shall

record an entry of the statement in the Register of Firms. He shall then issue under his hand a certificate

of registration. Registration is effective from the date when the Registrar issues a Certificate of

Registration.

effects of non-registration (Sec. 69)

1. Suits between partners and firm: A partner of an unregistered firm cannot sue the firm or any

partners of the firm to enforce a right arising from a contract or conferred by the Partnership Act.

2. Suits between firm and third parties: An unregistered firm cannot sue a third party to enforce a

right arising from a contract until —

� the firm is registered, and

� the names of the persons suing appear as partners in the Register of Firms [Sec. 69(2)].

3. Claim of set-off: An unregistered firm or any partner thereof cannot claim a set-off in a proceeding

instituted against the firm by a third party to enforce a right arising from a contract, until the

registration of the firm is effected [Sec. 69(3)].

relations of partners

The relations of the partners of a firm to one another are usually governed by the agreement

among them. Such agreement may be express or implied.

rights of a partner

1. Right to take part in Business

The partnership agreement usually provides the mode of the conduct of the business. Subject to

any such agreement between the partners, every partner has a right to take part in the conduct of business

[Sec. 12(a)]. This is based on the general principle that partnership business is the common business of

all the partners.

2. Right to be Consulted

Every partner has an inherent right to be consulted in all matters affecting the business of the

partnership and express his views before any decision is taken by the partners.

3. Right of Access to Accounts

Every partner has a right to have access to and inspect and copy any of the books of the firm.

4. Right to Share in Profits

In the absence of any agreement, the partners are entitled to share equally in the profits earned

and are liable to contribute equally to the losses sustained by the firm.

5. Right to Interest on Capital

The partnership agreement may contain a clause as to the right of the partners to claim interest on

capital at a certain rate. Such interest, subject to contract between the partners, is payable only out of

profits, if any, earned by the firm.

6. Right to Interest on Advances

Where a partner makes, for the purposes of the business of the firm, any advance beyond the

amount of capital, he is entitled to interest.

7. Right to be Indemnified

A partner has authority, in an emergency, to do all such acts for the purpose of protecting the firm

from loss as would be done by a person of ordinary prudence, in his own case, acting under similar

circumstances. Such acts of the partner bind the firm. If as a consequence of any such act, the partner

incurs any liability or makes any payment, he has a right to be indemnified.

8. Right to Use of Partnership Property

Subject to contract between the partners, the property of the firm must be held and used by the

partners exclusively for the purposes of the business of the firm. No partner has a right to treat it as his

individual property. If a partner uses the property of the firm directly or indirectly for his private purpose,

he must account to the firm for the profits which he may have earned by the use of that property.

9. Right of Partner as Agent of the Firm

Every partner for the purposes of the business of the firm is the agent of the firm.

10. No New Partner to be Introduced

Every partner has a right to prevent the introduction of a new partner unless he consents to that or

unless there is an express term in the contract permitting such introduction. This is because partnership

is founded on mutual trust and confidence.

11. No Liability before Joining

A person who is introduced as a partner into a firm is not liable for any act of the firm done

before he became a partner.

12. Right to Retire

A partner has a right to retire (a) with the consent of all other partners, or (b) in accordance with

an express agreement between the partners, or (c) where the partnership is at will, by giving notice to all

the other partners of his intention to retire.

13. Right of Outgoing Partner to Share in the Subsequent Profits

Where a partner has died, or has ceased to be a partner by retirement, expulsion, insolvency, or

any other cause, the surviving or continuing partners may carry on the business with the property of the

firm without any final settlement of accounts as between them and the outgoing partner or his estate. In

such a case, legal representative of the deceased partner or the outgoing partner is entitled to such share of

the profits as is proportionate to his share in the property of the firm.

duties of a partner

Partnership is a contract of uberrimae fide. The partners must act with utmost good faith as the

very basis of partnership is mutual trust and confidence. According to Sec. 9, which deals with the

general duties of partners, partners are bound —

(a) to carry on the business of the firm to the greatest common advantage,

(b) to be just and faithful to each other, and

(c) to render true accounts and full information of all things affecting the firm to any partner or his legal

representative.

The other duties are spread over the Partnership Act. These duties are summed as under:

1. To carry on business to the greatest common advantage

Every partner is bound to carry on the business of the firm to the greatest common advantage. He

is bound, in all transactions affecting the partnership, to do his best in the common interest of the firm.

2. To observe faith

Partnership is a fiduciary relation. Every partner must be just and faithful and observe utmost

good faith towards every other partner of the firm.

3. To indemnify for fraud

Every partner is bound to indemnify the firm for any loss caused to it by his fraud in the conduct

of the business of the firm.

4. To attend diligently

It is the duty of every partner to attend diligently to his duties in the conduct of the business of the

firm [Sec. 12(b)], and to use his knowledge and skill to the common advantage of all the partners.

5. Not to claim remuneration

A partner is not entitled to receive any remuneration in any form for taking part in the conduct of

the business of the firm. It is however, usual to allow some remuneration to the working partners

provided there is a specific agreement to that effect.

6. To share losses

It is the duty of every partner to contribute to the losses of the firm. In the absence of an

agreement to the contrary, the partners are bound to contribute equally to the losses sustained by the firm.

An agreement to share profits implies an agreement to share losses also.

7. To indemnify for willful neglect

Every partner is bound to indemnify the firm for any loss caused to it by his willful neglect in the

conduct of the business of the firm.

8. To hold and use property of the firm exclusively for the firm

It is the duty of every partner of the firm to hold and use the property of the firm exclusively for

the purposes of the business of the firm.

9. To account for personal profits

If a partner derives any benefit, without the consent of the other partners, from partnership

transactions, he must account for it and pay it to the firm. This is because the relationship between

partners is a fiduciary relationship and no partner is entitled to make any personal profit.

10. To account for profits in competing business

A partner must not carry on any business of the same nature as competing with that of the firm.

If he does that he is bound to account for and pay to the firm all profits made by him in that business.

11. To act within authority

Every partner is bound to act within the scope of his actual or implied authority. Where he

exceeds the authority conferred on him and the firm suffers a loss, he shall have to compensate the firm

for any such loss.

12. To be liable jointly and severally

Every partner is liable, jointly with all the other partners and also severally, for all the acts of the

firm done while he is a partner.

13. Not to assign his rights

A partner cannot assign his rights and interest in the firm to an outsider so as to make him the

partner of the firm. He can, however, assign his share of the profit and his share in the assets of the firm.

liabilities of partners in relation to third parties

1. Liability of a partner for acts of the firm (Sec.25). Every partner is liable, jointly with all the other

partners and also severally, for all acts of the firm done while he is a partner. The significance of

joint and several liability is that for every act of the firm a partner can be sued individually and also

jointly with other partners.

2. Liability of the firm for wrongful acts of a partner (Sec.26). Where, by the wrongful act or

omission of a partner acting in the ordinary course of the business of the firm, or with the authority of

his partners, loss or injury is caused to any third party, or any penalty is incurred, the firm is liable

therefor to the same extent as the partner.

3. Liability of firm for misapplication (Sec.27). A firm is liable to make good the loss where –

• a partner acting within the scope of his apparent authority receives money or property from a third

party and misapplies it; or

• the firm in the course of its business receives money or property from a third party, and the same is

misapplied by any of the partners while it is in the custody of the firm.

minor as a partner

According to Sec.11 of the Indian Contract Act, an agreement by or with a minor is void. As

such, he is incapable of entering into a contract of partnership. But with the consent of all the partners for

the time being, a minor may be admitted to the benefits of partnership [Sec.30(1)].

The position of a minor partner may be studied under the following two heads:

1. Position before attaining majority:

Rights:

(a) He has a right to such share of the property and of profits of the firm as may have been agreed upon.

(b) He has a right to have access to and inspect and copy any of the accounts, of the firm [Sec.30(2)] but

not books.

(c) When he is not given his due share of profit, he has a right to file a suit for his share of the property of

the firm. But he can do so only if he wants to sever his connection with the firm [Sec.30(4)].

Liabilities:

(i) The liability of the minor partner is confined only to the extent of his share in the profits and

property of the firm. Over and above this, he is neither personally liable nor is his private estate

liable [Sec.30(3)].

(ii) He cannot be declared insolvent, but if the firm is declared insolvent his share in the firm vests with

the Official Receiver or Official Assignee.

2. Position on attaining majority

On attaining majority the minor partner has to decide within six months whether he shall continue

in the firm or leave it. These six months run from the date of his attaining majority or from the date when

he first comes to know that he had been admitted to the benefits of partnership whichever date is later.

Within this period he should give a public notice of his choice – to become, or not to become, a partner in

the firm. If he fails to give a public notice, he is deemed to have become a partner in the firm on the

expiry of the said six months [Sec.30(5)]. The burden of proof that he had no knowledge of his admission

until a particular date after the expiry of six months of his attaining majority lies on the person asserting

that fact [Sec.30(6)].

(1) Where he elects to become a partner:

(a) He becomes personally liable to third parties for all acts of the firm done since he was admitted to

the benefits of partnership.

(b) His share in the property and profits of the firm is the share to which he was entitled as a minor

partner [Sec.30(7)].

(2) Where he elects not to become a partner:

(a) His rights and liabilities continue to be those of a minor till the date of the notice.

(b) His share is not liable for any acts of the firm done after the date of the public notice.

(c) He is entitled to sue the partners for his share of the property and profits in the firm [Sec.30(8)].

implied authority of a partner

The authority of a partner means the capacity of a partner to bind the firm by his act. This

authority may be express or implied. Where the authority to a partner to act is expressly conferred by an

agreement, it is called express authority. But where there is no partnership agreement or where the

agreement is silent, “the act of a partner which is done to carry on, in the usual way, business of the kind

carried on by the firm, binds the firm”. This authority of a partner to bind the firm is called ostensible or

apparent or implied authority of a partner. It flows from the legal relations of the partners and is founded

on the principle of agency. It is subject to the following conditions:

1. The act done by the partner must relate to the normal or usual business of the firm.

2. The act must be such as is done within the scope of the business of the firm in the usual way.

3. The act must be done in the name of the firm, or in any other manner expressing or implying an

intention to blind the firm.

Mathura Nath Vs Sreejukta: Where one of the partners hired an elephant, without the consent of the other

partners, for the purpose of trapping wild elephants. The business of the firm is to trap wild elephants. It

was held that the act of the partner was binding on the firm.

Acts within the Implied Authority of a Partner:

The implied authority of a partner include –

(1) Purchasing goods, on behalf of the firm, in which the firm deals or which are employed in the firm’s

business;

(2) Selling the goods of the firm;

(3) Receiving payment of the debts due to the firm and giving receipts for them;

(4) Settling accounts with the persons dealing with the firm;

(5) Engaging servants for the partnership business;

(6) Borrowing money on the credit of the firm;

(7) Drawing, accepting, indorsing bills and other negotiable instruments in the name of the firm;

(8) Pledging any goods of the firm for the purpose of borrowing money; and

(9) Employing a solicitor to defend an action against the firm for goods supplied.

No Implied Authority:

In the absence of any usage or custom of trade to the contrary, the implied authority of a partner does not

empower him to –

(a) Submit a dispute relating to the business of the firm to arbitration;

(b) Open a bank account on behalf of the firm in his own name;

(c) Compromise or relinquish any claim or portion of a claim by the firm;

(d) Withdraw a suit or proceeding filed on behalf of the firm;

(e) Admit any liability in a suit or proceeding against the firm;

(f) Acquire immovable property on behalf of the firm;

(g) Transfer immovable property belonging to the firm; or

(h) Enter into partnership on behalf of the firm.

A partner can do the above acts if –

• he has specific or express authority from the partners; or

• the usage or custom of trade permits him.

All the partners of a firm can ratify an act of a partner, which has been done by him in excess of the

implied authority or without any authority, provided the act is such as could be legally done with the

authority of all the partners previously given and that the partners ratify the act with full knowledge of the

facts. Such ratification can be proved by the conduct of the partners.

dissolution of firms

Section 39 of the Indian Partnership Act lays down that the dissolution of partnership between all

the partners of a firm is called the “dissolution of the firm”. This is different from the dissolution of

partnership. A partnership may be dissolved without dissoluting the firm. But dissolution of firm

involves dissolution of partnership. In the firm of A, B and C, if C dies or retires, the firm will be

dissolved. But A and B may take in D and continue doing the business. This new firm of A, B and D is

called the new or reconstituted firm.

Dissolution of Partnership on the happening of certain contingencies

A partnership is dissolved by —

� the death of the partner;

� the completion of the adventure of partnership;

� the insolvency of a partner; and

� the retirement of a partner.

In all these cases, the remaining partners, may constitute the firm. Hence, dissolution of partnership does

not necessarily involve dissolution of the firm. If they do not continue, the firm is dissolved

automatically.

Dissolution of Firm

A partnership between all the partners is dissolved in the following ways:

1) Dissolution by Agreement: (a) By mutual consent of all the partners, or (b) in accordance with the

contract entered into by them.

2) Compulsory Dissolution: (a) By the insolvency of all the partners except one, or (b) by the

business of the partnership becoming illegal or unlawful by subsequent events.

3) Dissolution of Partnership at Will: The firm may be dissolved by any partner giving a notice to the

other partners of his intention to dissolve the firm. But the notice must be in writing and

unambiguous. Once given, it cannot be withdrawn. The firm is dissolved from the date mentioned

in the notice, or if the date is not mentioned, from the date of communication of the notice.

4) Dissolution through Court: A partnership for a fixed period will be dissolved by a court where it is

not dissolved for the reasons mentioned above.

At the suit of a partner, a firm may be dissolved on any of the following grounds:

(a) that a partner has become of unsound mind;

(b) that a partner has become permanently incapable of performing his duties;

(c) that a partner is guilty of conduct which is likely to affect prejudicially, the carrying on of the

business;

(d) that a partner persistently commits breach of agreement. For instance, a firm is dissolved when: (i) a

partner commits breach of trust, or (ii) takes away the partnership books etc.

(e) that a partner has transferred his interest to a third party or allowed his share to be charged or sold in

the recovery of arrears of land revenue.

(f) that the business of the firm cannot be carried on, save at a loss; or

(g) on any other ground which renders it just and equitable that the firm should be dissolved.

review questions

1. Define Partnership. What are the different kinds of partnership?

2. What are the rights and duties of partners?

3. What is the procedure for registration of partnership firm? What is the effect of non-registration?

4. Can a minor become a partner? What are his rights and liabilities?

5. What is meant by ostensible or implied authority of a partner?

6. What are the modes of dissolution of firm?

� � �

LESSON - 15

LAW OF INSURANCE

The Contract of Insurance is a contract whereby a person undertakes to indemnify another

against a loss arising on the happening of an event or to pay a sum of money on the happening of an

event. The person who insures is called “Insurer”. The person who effects the insurance is called the

“Insured” or “Assured”. The price for the risk undertaken by the insurer and paid by the insured to the

insurer is called “Premium” and the document which contains the contract of insurance is called “Policy”.

principles of contract of insurance

Following are the general principles of contracts of insurance:

1. Uberrimae Fidei: A contract of insurance is a contract uberrimae fidei, i.e. a contract requiring

utmost good faith of the parties. So, all material facts which are likely to influence the insurer in

deciding the amount of premium payable by the insured must be disclosed by the insured. Failure to

disclose material facts renders the contract voidable at the option of the insurer.

2. Insurable Interest: The assured must have, what is called “insurable interest” in the subject matter

of the contract of insurance. “He must be so situated with regard to the thing insured that he would

have benefit from its existence, loss from its destruction”.

3. Indemnity: Every contract of insurance such as life insurance and personal accident and sickness

insurance, is a contract of indemnity. So, the insurer pays the actual loss suffered by the insured.

He does not pay the specified amount unless this amount is the actual loss to the insured.

4. Mitigation of Loss: The insured must take reasonable precautions to save the property, in the event

of some mishap to the insured property. He must act as a prudent uninsured person would act in his

own case under similar circumstances to mitigate or minimise losses.

5. Risk must attach: The insurer must run the risk of indemnifying the insured. If he does not run the

risk, the consideration for which the premium is paid, fails and consequently, he must return the

premium paid by the insured.

6. Causa Proxima: The insurer is liable for loss which is proximately caused by the risk insured

against. The rule is “causa proxima non remota spectatur”, i.e. the proximate but not the remote

cause is to be looked to. So, the loss must be proximately caused in order that the insurer is to

become liable.

7. Period of Insurance: Except in the case of life insurance, every contract of insurance comes to an

end of the expiry of every year, unless the insured continues the same and pays the premium before

the expiry of the year.

8. Subrogation: According to the rule of subrogation, when the loss is caused to the insured by the

conduct of a third party, the insurer shall have to make good such loss and then have a right to step

into the shoes of the insured and bring an action against such third party who caused the loss to the

insured. This right of subrogation is enforceable only when there is an assignment of cause of action

by the insured in favour of the insurer. The doctrine of subrogation does not apply to life insurance.

9. Contribution: Where there are two or more insurances on one risk, the principle of contribution

applies as between different insurers. The aim of contribution is to distribute the actual amount of

loss among the different insurers who are liable for the same risk under different policies in respect of

the same subject-matter. In case of loss, any one insurer may pay to the assured the full amount of

the loss covered by the policy. Having paid this amount, he is entitled to contribution from his co-

insurers in proportion to the amount which each has undertaken to pay in case of loss of the same

subject-matter.

There are different kinds of insurance: (1) Life (2) Fire (3) Marine (4) Accident and (5)

Guarantee insurance etc.

life insurance

Life insurance is popularly referred to as life assurance. In this case, the underwriter agrees to

pay the assured or his heirs, a certain sum of money on death or on the happening of an event dependent

upon human life in consideration of premiums paid by the assured.

Section 2(11) of the Insurance Act, 1938 defines Life Insurance business as follows:

“Life Insurance Business” is the business of effecting contracts of insurance upon human life, including

any contract whereby the payment of money is assured on death (except death by accident only) or the

happening of any contingency dependant on human life and any contract which is subject to the payment

of premiums for a term dependant on human life and shall be deemed to include:

(a) The granting of disability and double or triple indemnity accident benefits if so provided in

the contract of insurance.

(b) The granting of annuities on human life; and

(c) The granting of superannuation allowances and annuities payable out of any fund applicable

solely to the relief and maintenance of persons engaged in any particular profession, trade or

employment or of the dependants of such persons”.

A contract of insurance is a contract of utmost good faith technically known as uberrimae fide.

The doctrine of disclosing all material facts is embodied in this important principles, which applies to all

forms of insurance. The Proposer, who is one of the parties to the contract, is presumed to have means of

knowledge, which are not accessible to the insurer, who is the other party to the contract. Therefore, the

proposer is bound to tell the insurer, everything affecting the judgement of the insurer. In all contract of

insurance, the proposer is bound to make full disclosure of all material facts and not merely those which

he thinks material. Misrepresentation, non-disclosure or fraud in any document leading to acceptance of

the risk automatically discharges the insurer from all liabilities under the contract.

Application of General Rules of Law of Contracts to Life Insurance

A contract of life insurance is in many respects governed by the general law of contracts. There

are also some peculiar aspects relating to life insurance contracts.

As a general rule the terms of contracts are ascertained from the document embodying the

contract. In Life Insurance, the policy is the document which expresses the contract between the insurer

and the insured. The contract comes into existence when the proposal from a party is accepted by the

insurer and the terms of the acceptance are complied with by the party. The contract will have to be

interpreted according to the policy document, though in certain circumstances, the life assured may rely

on the prospectus published by the insurer.

Offer and Acceptance

A contract of Life Insurance, like any other contract, begins with the proposal (offer). If the

insurer, after considering the proposal and other related information, is willing to issue a policy, he sends

a letter termed “letter of acceptance”. In the letter it is stated that he will grant a policy provided

remittance of the premium is received within a specified period and the state of health of the prosper

remains unchanged till the date of remittance of premium or date of the letter of acceptance whichever is

later. The letter of acceptance is a counter offer and the proposer accepts the counter offer by paying the

premium within the stipulated time. Offer and acceptance constitute an agreement and an agreement

enforceable by law is a contract. The communication of a proposal is complete when it comes to the

knowledge of the person to whom it is made.

Consideration

Consideration is something which moves from one party to the other in return for what the other

party give. In Life Insurance contract, the payment of the premium is consideration for the contract on

the part of the life assured and the undertaking of the insurer to pay a sum of money when the claim arises

is consideration on the part of the insurer.

Capacity to Contract

The parties to an assurance contract must be capable of entering into contracts. Every person is

competent to contract who is of the age of majority, who is of sound mind and is not disqualified from

contracting by any law to which he is subject.

Consent of the Parties to the Contract

Two or more persons are said to consent when they agree upon the same thing in the same sense.

Similarly, the parties to contract of Insurance, must agree the terms of agreement in the same sense.

Legality of Consideration and Object

Every agreement wherein the consideration or object is unlawful is void. Therefore, for a valid

contract there should be proper consideration and legally valid object.

reinsurance and double insurance

Reinsurance

Every insurer has a limit to the risk that he can undertake. If at any time a profitable venture

comes his way, he may insure it even if the risk involved is beyond his capacity. Then in order to

safeguard his own interest, he may insure the same risk either wholly or partially with other insurers. This

is called re-insurance. The reason for re-insurance like the reason for original insurance is the necessity

of spreading the risk.

Re-insurance can be resorted to in all kinds of insurance. The insurer has an insurable interest I

the subject-matter insured to the extent of the amount insured by him because a contract of re-insurance is

also a contract of indemnity. The re-insurers are liable to pay the amount of the loss to the original insurer

only if the original insurer has paid the amount to the assured.

The re-insurer is, however, not liable to the insured or assured. This is because there is no privity

of contract between them. But re-insurance is subject to all the conditions in the original policy and the

re-insurer is entitled to all the benefits which the original insurer is entitled to under the policy. The

policy of re-insurance, in other words, is co-extensive with the original policy. If the original policy for

any reason comes to an end or is avoided, the policy of re-insurance also comes to an end. A contract of

re-insurance is also a contract of uberrimae fidei. The original insurer, vis-à-vis the re-insurer, is in the

position of the assured. He must disclose to the re-insurer all the material facts disclosed to him. On

payment of the loss under the policy of re-insurance, the re-insurer is subrogated to all the rights of the

original insurer including the rights of the assured to which the original insurer is subrogated.

Double Insurance

Where the assured insures the same risk with two or more independent insurers, and the total sum

insured exceeds the value of the subject-matter, the assured is said to be over-insured by double

insurance. There is over-insurance where the aggregate of all the insurances exceeds the total value of the

assured’s interest at risk. If there is no express condition in a contract of insurance, both double insurance

and over-insurance are perfectly lawful.

Example: A insures his houseworth Rs.50,000 with B for Rs.40,000 and with C for Rs.30,000.

There is double insurance. If he insures his house with B and C for Rs.25,000 each, there is no double

insurance.

The rules which apply in case of double insurance are as follows:

1. Recovery of actual loss: A man may insure with as many insurers as he pleases and up to the full

value of his interest with each one. If a loss occurs, he may claim payment from the insurers in such

order as he may think fit, but in no event is he entitled to recover more than his loss, because a

contract of insurance is a contract of indemnity only. This right to sue his insurers in any order he

likes is a valuable right for the assured. It protects him against loss in the event of one or more of the

insurers becoming insolvent.

2. Excess amount recovered to the be held in trust: If an assured recovers more than the value of his

interest in case of loss, he holds the excess amount recovered for the insurers according to their

respective rights inter se, as a trustee.

3. Liability of Insurers – Contribution: The insurers as between themselves are liable to contribute to

the loss in proportion to the amount for which each one is liable. If an insurer pays more than his

ratable proportion of the loss, he has a right to recover the excess from his co-insurers who have paid

less than their ratable proportion.

4. No limit on Life Insurances: In case of Life Insurance, an assured may take any number of policies

on his life and for any amount.

group and superannuation schemes

Just like Life Insurance, Group Insurance also has developed in India to a great extent. Under the

Group Insurance Scheme, the principle involved is more or less same as in the case of Life Insurance but

the scheme is taken for a group of persons employed in an undertaking. In this scheme, the contract of life

insurance can be summed up as an undertaking to pay specified amounts of money on the happening of

certain contingencies in exchange for a previously agreed series of payments called premiums. This

contract is between an employer and the Insurance Company and the contingencies where the death of

employee in service or on survival to the retirement date. In the latter event the employer would possibly

want some pension to be given for the post retirement life time of the employee. To offer cover of death

risk, the system is to cover risk year by year. The employer is asked to pay the premium in advance and if

death occurs the insurer pays the claim.

The Group Insurance portfolio is as such employer employee oriented i.e. Organisation Sector.

This is because the employers feel the need to give insurance as one of the employee’s benefits. Also the

group has the capacity to pay the premiums regularly. There are also different types of insurances under

this scheme. The main schemes are given below:

1) Group Superannuation Scheme: Under this scheme a monthly pension is provided to the retired

employee. The employee will have the option to choose any one of the types of pensions given

below:

• A pension payable throughout his life-time.

• A pension payable during his lifetime but also guaranteed for a specific minimum number of years (5,

10 or 15). If he dies during the guaranteed period, the pension will continue to be paid to his

beneficiary for the remaining part of the period.

• A pension payable during the joint lifetime of the employee and spouse and continued thereafter

during the lifetime of the survivor.

2) Group Insurance Scheme: Under this scheme, the insurer will insure all the employees of the

undertaking with the condition that the sum assured is payable on the death of the employee while

in service. Premiums towards the scheme will be paid by the employer and will get the benefit of

tax as deductible expenditure and the same will not be treated as perquisites in the hands of the

employee.

3) Group Gratuity Scheme: A Trust Fund is created under Group Gratuity Scheme. The gratuity

liability is funded by introducing a Group Gratuity Scheme with insurers. The employer will have

to pay premium and investment of these contribution. The insurer will be making the payments to

the employees as and when the various contingencies of payment arise.

lic act

The life insurance business was nationalised on 19th January, 1956 and the Life Insurance

Corporation of India came into being on 1st September, 1956 to carry on life business in India with capital

of Rs.5 crores contributed by the Central Government. The Corporation is a body corporate having

perpetual succession with a common seal with powers to acquire, hold and dispose of property and may

by its name sue and be sued.

The functions of the Corporation shall be to carry on and develop life insurance business to the

best advantage of the community.

The Corporation shall have power –

(a) to carry on capital redemption business, annuity certain business or reinsurance business in so

far as such reinsurance business relating to life insurance business;

(b) to invest the funds of the Corporation in such manner as the Corporation may think fit and to

take all such steps as may be necessary or expedient for the protection or realisation of any

investment; including the taking over of and administering any property offered as security

for the investment until a suitable opportunity arises for its disposal;

(c) to acquire, hold and dispose of any property for the purpose of its business;

(d) to transfer the whole or any part of the life insurance business carried on outside India to any

other person or persons, if in the interest of the Corporation it is expedient so to do;

(e) to advance or lend money upon the security of any movable or immovable property or

otherwise;

(f) to borrow or raise any money in such manner and upon such security as the Corporation may

think fit;

(g) to carry on either by itself or through any subsidiary any other business in any case where

such other business was being carried on by a subsidiary of an insurer whose controlled

business has been transferred to and vested in the Corporation by this act;

(h) to carry on any other business which may seem to the Corporation to be capable of being

conveniently carried on in connection with its business and calculated directly or indirectly to

render profitable the business of the Corporation; and

(i) to do all such things as may be incidental or conducive to the proper exercise of any of the

powers of the Corporation.

(j) In the discharge of any of its functions the Corporation shall act so far as may be on business

principles.

types of life policies

(1) Whole Life Policy

(2) Endowment Policy

(3) Joint Life Endowment Policy

(4) Family Protection Policy

(5) Multipurpose Policy

(6) Convertible Whole Life Policy

(7) Money Back Policy

1. Whole Life Policy

(a) Whole Life Assurance: This is the purest form of permanent contract. Premiums are

payable throughout the Life time of the life assured and the sum assured is payable only at his

death. The element of protection of dependants is the dominating element and that of

provision for old age is totally absent.

This type of assurance provides a larger amount of “life cover” than any other permanent type of life

assurance and it is therefore the most inexpensive form of permanent protection for dependants. It has the

disadvantage that premiums continue in old age when the ability to pay them may be lessened by

contraction of income. To obviate this difficulty the Corporation had decided that under these tables

premiums are now limited to a maximum number and are payable either till age 80 or till 35 annual

premiums are paid whichever is later. For example a person aged 30 has to pay premiums for a maximum

period of 50 years if he survives this period while a person aged 50 will have to pay for a maximum

period of 35 years (i.e. not till age 80 but also beyond if he survives beyond age 80). With this benefit

extended to all policies including those issued by the previous Insurers, the Corporation has no whole life

assurance contract whereunder premiums are payable indefinitely throughout life.

(b) Whole Life Assurance by Limited Premiums: Under this type of policy, it can be arranged

that premiums cease at retirement age so that the difficulties of maintaining the premiums in

old age are removed. When the premium cease, the policy becomes fully paid-up. “With

profits” policies continue to participate in profits till the claim arises even though the

premiums have ceased.

2. Endowment Policy

This is undoubtedly the most popular form of assurance at the present time. Under this class of

contract, the sum assured is payable at the expiration of a fixed term of years or at death should that occur

previously.

This type of policy is really a combination of Life assurance and investment. In the case of

policies running for long terms the assurance element predominates while in the case of assurances

maturing at the end of comparatively shorter terms the actual cost of the life assurance is very small the

bulk of the premium being required for the investment portion.

3. Joint Life Endowment Policy

Under this plan, two lives are simultaneously insured and the sum assured is payable on the

expiry of the term or/on the death of one of the assured lives during the endowment period. The

premiums are payable throughout the endowment period or till the prior death of either of the lives

assured. It should be noted that one payment of the sum assured is envisaged even though two lives are

insured; two payments on two deaths are not contemplated as the first death will determine the contract.

4. Family Protection Policy

Many different names are given to describe policies such as “Family Protection”, “Family

Safeguard”, “Planned Protection” etc., but most of them incorporate the idea of protecting or safeguarding

the family while the family members are young. The policy provides that when the assured die during a

fixed period, from the outset annual instalments or yearly income usually 10% to 12% of the basic sum

assured shall be paid for the balance of the period. In addition the basic sum assured is paid either at the

time of death or at the expiration of the fixed period or in varying proportion at both points of time. In the

event of the life assured’s surviving the specified term, only the basic sum assured is payable either at

death or at maturity depending on the main plan of assurance. Premiums under this plan are generally

payable for a fixed term of years or till death.

5. Multipurpose Policy

Under the multi-purpose policy the basic assurance is a type of family income policy under the

endowment assurance scheme. The following benefits can be taken under the policy by paying

appropriate extra premium:

(i) School Education Provision

(ii) College Education Provision

(iii) Marriage Provision for Daughter

6. Convertible Whole Life Policy

This plan is essentially a whole life assurance with the option to convert after 5 years from

commencement, into an endowment assurance effective from inception.

This plan is suitable for a young man earning a modest income for the time being but with good

prospects of higher income after a short period. The object is to provide maximum assurance protection

at minimum immediate cost and at the same time to offer a flexible contract which can be altered to an

endowment assurance at the end of 5 years from the commencement of the policy by which time it is

expected that there would be a rise in his income which would enable him to pay the larger premium

payable after conversion.

If the conversion option is not exercised the policy would continue as whole life assurance.

7. Money Back Policy

This plan is suitable for those who besides providing for their old age and family, need lump sum

benefit at periodic intervals. The sum assured is paid in suitable instalments. Yet throughout the period of

assurance, the dependents are guaranteed the benefit of the full sum assured protection in the event of the

death of the assured, irrespective of the instalments that might have been paid. The policy is available for

4 terms – 12 years, 15 years, 20 years and 25 years to suit one’s best convenience. No loan is granted

under this plan.

fire insurance

The law relating to fire insurance in India is contained in the Insurance Act, 1938 and the General

Insurance Business Nationalisation Act, 1972. The general insurance business was nationalised in 1971.

A contract of fire insurance is a contract whereby the insurer undertakes, in consideration of the

premium paid, to make good any loss or damage caused by fire during a specific period. The contract

specifies the maximum amount which the assured can claim in case of loss. This amount is fixed by the

parties at the time of the contract. It is, however, not the measure of the loss. The loss can be ascertained

only after the fire has occurred. The insurer is liable to make good the actual amount of loss not

exceeding the maximum amount fixed by the parties.

characteristics of fire insurance contract

1. It is a contract of indemnity. The assured can, in the event of loss, recover the actual amount of loss

from the insurer. This is subject to the maximum amount for which the subject-matter is insured.

2. It is a contract of uberrimae fidei. The assured and the insurer have to disclose everything which is

in their knowledge and which will affect the contract of insurance.

3. The assured must have insurable interest in the subject-matter both at the time of insurance and at the

time of loss. The insurable interest must be capable of valuation in terms of money.

4. The risk covered by a fire insurance contract is the loss resulting from fire or some cause which is the

proximate cause of the loss.

5. It is subject to the principles of subrogation and contribution.

6. It is a contract from year to year. It comes to an end after the expiry of the year. It can, however, be

renewed if the assured pays the premium during the days of grace.

formation of contract

A contract of fire insurance is entered into by the process of a proposal by one party and its

acceptance by the insurer. The proposal is made in writing by filling up a printed form, and paying the

premium or a part of it to the insurer. On receipt of the proposal and premium, the insurer issues a

deposit receipt usually called a cover note. Subsequently if the proposal is accepted, the insurer issues a

regular policy.

average clause in fire policy

The subject-matter of the fire insurance may be over-insured or under-insured. Over-insurance is

automatically checked. In case of loss, the insurer is liable to pay the actual amount of loss, subject to the

maximum amount for which the policy is taken. For example, where a building worth Rs.5,00,000 is

insured for Rs.8,00,000 and is completely destroyed by fire, the insurer is liable to pay only Rs.5,00,000.

Where the fire causes only a partial loss to the property insured, the assured is entitled to recover

the full amount of loss provided that amount is covered by the policy. For example, where a building

worth Rs.2,00,000 is insured for Rs.1,00,000 and half of it is destroyed by fire, the assured can recover

Rs.1,00,000, since it is covered by the amount of the policy.

To save premium, people generally under-insure their property. It is rare in case of fire to

property that the whole of it would be completely destroyed. Thus whereas the insurer would fix a

relatively small premium he would have to pay the full extent of loss in case of partial loss. To protect

themselves against under-insurance, the insurers usually insert a ‘subject to the average clause’ in the fire

policy. The effect of this clause is that the assured can only recover such proportion of the actual loss

suffered as the sum insured bears to the total value of the insured property. The assured in such a case is

considered his own insurer for the difference in the actual value of the subject-matter and the value for

which it is insured.

Example: Property worth Rs.1,00,000 is insured for Rs.80,000. The policy contains an average

clause. If half of the property is burnt down, the assured can recover only Rs.40,000. This is worked out

as follows:

Value of the policy

Sum to be recovered = --------------------------------- x Actual loss

Full value of subject-matter

80,000

= ---------- x 50,000 = Rs.40,000.

1,00,000

But for the average clause in the policy, the assured could recover the full amount of Rs.50,00 (i.e. half of

Rs.1,00,000).

insurable interest

In case of fire insurance, the assured must have insurable interest in the subject-matter both at the

time of the contract and at the time of the loss. Every person has insurable interest in the goods or

property equal to the pecuniary interest he has in it.

The following persons have insurable interest in the subject-matter of insurance in the case of fire

policy: (a) owner, (b) mortgagee or pledgee, (c) insurer, (d) pawn-broker, (e) Office Receiver or

Assignee in insolvency, (f) warehouseman as regards goods of the customer, (g) wharfinger, (h) common

carrier, (i) commission agent, and (j) trustee.

causa proxima

In actions on fire policies, if the proximate cause of loss is fire, the loss is recoverable. If it is not

fire, but some other cause remotely connected with fire, the loss is not recoverable unless specifically

provided for. Thus loss caused by explosion is not covered by a fire policy unless explosion actually

causes ignition which spreads into fire. A fire policy usually covers loss by explosion incidental to fire.

But the insurer may specifically exclude his liability in which case he cannot be sued if a fire occurs after

explosion and causes damage.

The following losses are causes proximately by fire:

(1) Loss which is the necessary consequence of fire in the sense that if there had been no fire it would

not have happened.

(2) Loss which is a reasonable consequence of fire in that it results in the ordinary course of events

from the happening of fire.

(3) Loss caused by water used to extinguish fire destroying property or loss caused due to the efforts

made to arrest or extinguish fire.

(4) Loss arising as a consequence of removal of the property from the building in which fire is raging

with the intention of saving it, or loss due to theft during the confusion caused by the fire.

rights of insurer

The insurer under a fire policy has the following rights:

1. Right of avoiding the contract for no-disclosure or concealment of any material fact.

2. Right of control over the property.

3. Right of entering the property.

4. Right of subrogation.

5. Right to salvage.

6. Right of reinstatement.

7. Right of contribution.

types of fire policies

1. Specific Policy

It is a policy which covers the loss of the assured up to a specific amount which is less than the

real value of the property. Specific policy is a case of under-insurance. To check under-insurance, the

insurers usually insert average clause in the policy in which case the policy is known as average policy.

2. Comprehensive Policy

It is a policy which covers losses against risks like fire, theft, burglary, third party risks, etc. Such

a policy is also known as “all-in-one” policy. It may also cover loss of profits during the period the

business remains closed due to fire.

3. Valued Policy

It is a policy in which the amount payable in case of loss is fixed at the time the policy is taken.

In the event of loss, the fixed amount is payable irrespective of the actual amount of loss. A valued policy

can be legally challenged because it is not a contract of indemnity.

4. Floating Policy

It is a policy which covers property at different places against loss by fire. It might, for example,

cover goods lying in two warehouses at two different places. It is always subject to average clause.

5. Replacement or Reinstatement Policy

In order to prevent fraudulent devices by the assured, the insurers usually insert a clause in the

policy, called the re-instatement clause, whereby the insurer undertakes to pay the cost of the replacement

of the property damaged or destroyed by fire.

marine insurance

The law relating to marine insurance is codified in the Marine Insurance Act, 1963. Marine

Insurance Contracts are governed by the Indian Contract Act,1972, the Insurance Act, 1938, the General

Insurance Business (Nationalisation) Act, 1972 and largely by the Marine Insurance Act, 1963.

A contract of marine insurance is a contract whereby the insurer undertakes to indemnify the

insured, against marine losses, that is to say, the losses incidental to marine adventure. It is a contract of

indemnity. It is a contract ‘uberrimae fidei”. It must have insurable interest. The doctrine of

subrogation applies to it.

Marine Adventure: There is a marine adventure when –

(1) any ship, goods or movable property(i.e. insurable property) is exposed to maritime perils;

(2) the earning or acquisition of any freight, passage money, commission, profit or other pecuniary

benefit, or the security for any advances, loans or disbursements is endangered by the exposure of

insurable property to maritime perils;

(3) any inability to a third party maybe incurred by the owner of, or other person interested in, insurable

property by reason of maritime perils.

‘Insurable property’ means any ship, goods or other movables which are exposed to maritime perils.

Maritime Perils: Maritime perils mean the perils consequent on, or incidental to the navigation

of the sea. In other words, they mean perils of the sea, fire, war perils, pirates, rovers, thieves, captures,

seizures, restraints and detainments, jettisons and barratry, and any other perils which are either of the like

kind or may be designated by the policy. In simple words, ‘perils of the sea’ mean all perils and

misfortunes of a marine character or incidental to a ship which the underwriter in a marine insurance

takes upon himself.

The following losses are covered by the perils of the sea:

(1) A loss by a vessel striking upon a sunken rock.

(2) A loss by foundering, owing to a ship coming into collision with another ship, even when the

collision results from the negligence of that other ship.

(3) A loss brought about by negligent navigation.

(4) Damage caused to insured against fire and perils of the sea by heading due to the closing of

ventilators to prevent the incursion of sea waterin rought weather.

(5) Damage caused to cargo by rats making a hole in the bottom of a ship and sea water entering the

ship through the hole.

insurable interest

A person has an insurable interest if he is interested in a marine adventure in consequence of

which he may benefit by the safe arrival of insurable property, or be prejudiced, by its loss, damage or

detention. The assured must be interested in the subject-matter insured at the time of the loss, though he

need not be interested when the insurance is effected.

kinds of marine policies

1. Time Policy: It insures the subject matter for a certain specified period, not exceeding twelve

months.

2. Voyage Policy: It insures the subject-matter for a certain voyage only i.e, journey from one fixed port

to another fixed port.

3. Valued Policy: It specifies the agreed value of the subject-matter insured. Insurers are liable only

for the loss not exceeding the value mentioned in the policy.

4. Unvalued or Open Policy: It does not specify the value of the subject-matter. The value is to be

ascertained subsequently at the time of actual loss.

5. Mixed Policy: It insures the subject-matter for a specified voyage and for a particular period.

6. Floating Policy: It describes the general terms of insurance, leaving other particulars such as the

name of the ship etc. to be declared subsequently.

7. Wagering or Honour Policy: It is also known as “policy proof of interest” or “Interest or no interest

policy”. In this case, the insurer does not have insurable interest in the subject-matter of the contract.

It resembles a wager and hence void. Losses are indemnified depending on the honour of the insurer.

A marine insurance policy contains the following particulars:

1. Name of the ship.

2. Name of the parties.

3. The time of commencement and duration of the risk.

4. “Lost or not lost” clause whereby the insurer is made liable whether the goods were in existence or

not at the time when the insurance was effected, except when the insured knew that the goods were

destroyed already.

5. “Touch and Stay” clause which mentions the various parts which the ship touches and the period of

its stay at these parts.

6. Accepted perils for which the insurer undertakes to be liable.

7. “Free from capture and seizure” clause which exonerates the insurer from his liability for the loss

arising out of the capture and seizure of the ship.

8. “Free from particular average” or “Free from all average” clause whereby the insurer is exempted

from his liability for any particular average loss or for all average loss caused to the subject-matter of

the contract.

9. “Barratry” clause relates to the liability of the insurer for the loss arising out of the wrongful act of

the master or any of the crew of the ship.

10. “Sue, Labour and Travel” clause which entitles the insured to minimise the loss and claim for

expenses from insurer and to recover the goods lost by falling overboard accidentally.

11. “Collision or running down” clause whereby the owner of an insured ship shall indemnify the owner

of another ship if the former ship collides negligently with the latter.

12. “Inchmaree” clause which protects the insured against any latent defect in the machinery of the ship.

13. “Expected Perils” clause which specifies the risks not covered by the insurance policy.

A marine policy is thus a formal document signed by the insurer. It must be stamped. It contains the

terms of the insurance as explained above. It is an actionable claim and can be transferred by means of an

assignment.

warranties in a contract of marine insurance

A warranty in a contract of marine insurance is substantially the same as a condition in a contract

of sale of goods. It gives the aggrieved party the right to avoid the contract.

A warranty may be (1) express, or (2) implied.

Express Warranties:

An express warranty is one which is expressly stated in the policy of insurance. It must be

included in, or written upon, the policy, or must be contained in some document incorporated by

reference into the policy.

There is no limit to the number of express warranties but the following express warranties are

generally included in a marine policy:

(1) The ship is seaworthy on a particular day.

(2) The ship will sail on a specified day.

(3) The ship will proceed to the destination without any deviation.

(4) The ship is neutral and will remain so during the voyage.

Implied Warranties:

Implied warranties are conditions which are not incorporated in a policy but which are assumed

to have been included in the policy by law, custom or general agreement. These warranties are:

1. Seaworthiness

(1) In a voyage policy there is an implied warranty that at the commencement of the voyage the ship is

seaworthy for the purpose of the particular adventure insured. It includes the following:

• that the ship is properly constructed

• that its machinery is in proper working order

• that it has sufficient and efficient crew and master

• that it is sufficiently provided with the necessities of the voyage

• that it is not overloaded or badly loaded

• that it is sound as regards her hull and that it is properly stowed

(2) In a voyage policy, where the voyage is to be performed in stages, the ship must be seaworthy at the

commencement of each stage.

(3) Where a voyage policy attaches while the ship is in port, there is an implied warranty that she shall,

at the commencement of the risk, be reasonably fit to encounter the ordinary perils of the port.

(4) In a voyage policy on goods or other movables, there is an implied warranty that at the

commencement of the voyage the ship is not only seaworthy as a ship, but also that she is

reasonably fit to carry the goods or other movables to the destination contemplated by the policy.

2. Legality of Voyage:

There is an implied warranty that the adventure insured is a lawful one, and that, so far as the

assured can control the matter, the adventure shall be carried out in a lawful manner.

3. No-deviation:

There is an implied warranty that the ship shall not deviate from its prescribed or the usual

customary route. If it does, the insurer shall not be liable unless the deviation is lawfully excused.

voyage

The voyage to be performed by a ship must be described in the policy. The ship must follow the

course specified in the policy. If the course is not specified, it must follow the usual and customary

course. Where the place of departure is specified in the policy, and the ship, instead of sailing from that

place, sails from any other place, the risk does not attach. The risk also does not attach where the

destination is specified in the policy, and the ship instead of sailing for that destination, sails for any other

destination.

deviation of voyage

If a ship proceeds by an unusual course, or takes the ports of call by an order different from the

one mentioned in the policy, there takes place a deviation of voyage.

Where a ship, without any lawful excuse, deviates from the voyage contemplated by the policy,

the insurer is discharged from liability as from the time of deviation and it would not make any difference

even if the ship regains her route before any loss occurs. But the insurer is liable for any loss which might

have occurred prior to the deviation.

When Deviation is Excused:

A deviation or delay in prosecuting the voyage as specified in the policy is excused –

(1) Where it is authorised by any special term in the policy;

(2) Where it is caused by circumstances beyond the control of the master and his employees, e.g.

deviation caused due to rough weather, storm, cyclone etc.

(3) Where it is reasonably necessary in order to comply with an express or implied warranty;

(4) Where it is reasonably necessary for the safety of the ship or the subject-matter insured;

(5) Where it is necessary for the purpose of saving human life or aiding a ship in distress, where human

life may be in danger;

(6) Where it is reasonably necessary for the purpose of obtaining medical or surgical aid for any person

on board the ship;

(7) Where it is caused by the barratrous conduct of the master or crew if barratry is one of the perils

insured against.

(8) Where the vessel is blown out of her course by violent gales or is ordered during war by the Naval

Authorities to deviate from her ordinary course in order to avoid the danger of sub-marines.

The ship must resume her course with reasonable dispatch, as soon as the causes which excuse deviation

or delay cease to operate.

LOSSES

Unless the policy otherwise provides, the insurer is liable for any loss proximately caused by a

peril insured against. A loss may be either total or partial. Any loss other than a total loss is a partial

loss.

total loss

A total loss may be either (1) an actual total loss, or (2) a constructive total loss.

1. Actual Total Loss: An actual total loss occurs –

(a) Where the subject-matter is actually destroyed or irreparably damaged; or

(b) Where the subject-matter ceases to be a thing of the kind insured, or where it ceases to exit in

specie.

(c) Where the assured is irretrievably (irrecoverably) deprived of the subject-matter.

(d) Where the subject-matter is lost to the owner by a decree of a Court, in consequence of a peril

insured against.

An actual total loss may be presumed if a ship is missing, and after a reasonable time no news of her has

been received.

2. Constructive Total Loss

A constructive total loss occurs where the subject-matter insured is reasonably abandoned

because its actual total loss appears to be unavoidable, or because the expenditure to prevent an actual

total loss would exceed the value of the subject-matter when saved.

In particular, there is a constructive total loss –

(a) Where the assured is deprived of the possession of his ship or goods by a peril insured

against, and it is unlikely that he can recover the ship or goods, as the case may be, or the cost

of recovering the ship or goods would exceed their value when recovered;

(b) In the case of damage to a ship by a peril insured against, where the cost of repairing the

damage would exceed the value of the ship when repaired; or

(c) In the case of damage to goods, where the cost of repairing the damage and forwarding the

goods to their destination would exceed their value on arrival.

Examples of Constructive total loss:

Constructive total loss occurs where –

• a ship on fire is abandoned in mid-stream,

• a ship is sunk in deep water and cannot be raised without expenditure in excess of its value,

• a ship is so damaged that the cost of its repairs will exceed its value after repair,

• the cargo is so damaged that the cost of reconditioning it would be more than its value after its

reconditioning.

Unless a different intention appears from the terms of the policy, an insurance against total loss includes

constructive, as well as an actual, total loss.

Abandonment

Where there is a constructive total loss, the assured may treat the loss as a partial loss or abandon

the subject-matter insured tot he insurer and treat the loss as if it were an actual total loss. Where the

assured treats the loss as an actual total loss, he must give, after the receipt of the information of the loss,

notice of abandonment to the insurer. If he fails to do this, the loss will be treated as a partial loss.

Abandonment means surrendering all proprietary rights in whatever remains of the subject-

matter. In case of its loss, to the insurer in order to claim the total loss from him. If the insurer accepts

the abandonment, he pays the total loss to the assured and recovers whatever he can from the sale of the

abandoned property.

3. Partial Loss

Partial loss may be either (i) particular average loss, or (ii) general average loss.

1. Particular Average Loss: The three interests risked during the course of a sea voyage are: (a) the

ship, (b) the cargo, and (c) the freight.

As a general rule any loss which any of these interests sustains must be borne by that interest alone; this is

known as particular average loss and is to be borne by the interest incurring it. If, for example, one of

the ship’s boat is carried away in a storm, this is a particular average loss and must be borne by the ship-

owner alone.

A particular average loss is a partial loss of the subject-matter insured, caused by a peril insured against,

and which is not a general average loss. It gives no right of contribution from the other parties interested

in the adventure. It can be recovered from the insurers if it is caused by a peril insured against.

Wherever damage is caused by accident or otherwise to property in a marine adventure by the perils of

the sea and the damage is not one suffered for general benefit, it is called a particular average loss.

2. General Average Loss: Where extraordinary sacrifices are made or expenditure is incurred

voluntarily and reasonably in time of peril for the benefit of the whole adventure, the loss is known as

a general average loss and is borne by all interested in the common adventure.

There is a general average loss when:

� a ship is scuttled to avoid destruction of the whole of the ship, or forced to cut away a part of her

rigging as a consequence of collision, or forced to return to a port to execute certain repairs as a

consequence of collision, or stranded and a part of the cargo is jettisoned, or

� a part of the cargo is sold to pay for repairs to enable the ship to continue her voyage, or thrown

overboard to save the ship from the storm, or

� a cargo is damaged while being unloaded for the purpose of executing repairs to the ship necessitated

by the collision of the ship with another ship, or

� wages are paid to non-members of the crew for pumping out the water from the ship.

Where there is a general average loss, the party on whom it falls is entitled to rateable contribution from

the other parties interested and such contribution is called a general average contribution.

review questions

1. What are the general principles of Contract of Insurance?

2. What are the types of Life Insurance Policies?

3. What is the purpose of Fire Insurance? State the types of Fire policies.

4. What is Marine Insurance? What are the kinds of Marine polices?

5. What is meant by deviation of voyage in marine insurance? When is it excused?

6. What is meant by actual total loss and constructive total loss in marine insurance?

7. What are express and implied warranties in a contract of marine insurance?

8. What is meant by general average loss and particular average loss?

� � �

LESSON – 16

COMPANIES ACT, 1956

The word company ordinarily means an association of a number of persons for some common

purpose. In its legal form a company is an artificial person created by law.

Section 3(1) (i) of the Companies Act, 1956 defines a Company as, “A company formed, and registered

under this act or an existing company”. ‘An existing company’ means a company formed and registered

under any of the former Companies Act. This definition does not give the meaning of company.

Haney’s brief definition brings out clearly many of the characteristics of a company. He defines, “A

company is an incorporated association which is an artificial person created by law, having a separate

entity with a perpetual succession and a common seal”.

From the above it could be understood that a Company is a voluntary association of persons

formed for some common purpose with capital divided into parts known as shares which are freely

transferable and with a limited liability. It is an artificial person created by law with perpetual succession

and a common seal.

essential characteristics of a company

1. Registration and Legal Entity

A company must be registered. It is an artificial person created by law. A company is a distinct

legal entity and distinct from its members.

2. Limited Liability

The liability of the members of a company having share capital is limited to the extent of the

nominal value of the shares held by them. Shareholder can not be called upon to pay more than the

unpaid value of his shares, whatever may be the level of indebtedness of the company. In the case of a

guarantee company, the liability of members is limited to such amount as the members may undertake to

contribute to the assets of the company.

3. Separate Property

A company has every right to acquire as well as transfer property in its own name, as it is a legal

person. No shareholder has any legal or equitable interest in the property of the company.

4. Perpetual Succession

A company has a perpetual succession. Inspite of a change in the membership of the company its

continuity is not affected. It is said, ‘men may come and go, but the Company goes for ever’.

5. Common Seal

The company being an artificial person cannot sign its name on a contract. The common seal is

used as a substitute for its signature. The common seal bears the name and place of the company, and

date of its incorporation engraved on it.

6. Transferability of Shares

The shares of a company are freely transferable except in the case of a private company.

7. Capacity to sue and be sued

As a legal person it can sue and be sued in its own name.

concept of corporate personality

A company is a legal person, since in the eyes of law it is capable of having legal rights and

obligations just like a natural person. Like any other person it can acquire and own property, transfer

property, enter into contracts and sue and be sued in its own name. Being a legal person, a company has a

separate legal entity, a personality distinct from its members or shareholders.

The concept of separate entity of a company was established in the celebrated case of Salomon Vs

Salomon & Co. Ltd. The facts of the case are that one Salomon, a boot manufacturer, formed a company

with himself, his wife, and daughter and four sons as the sole shareholders. Salomon took 20,000 shares

of £1 each, debentures worth £10,000 secured by the assets of the company and the balance in cash. His

wife, daughter and four sons took the company and the balance in cash. His wife, daughter and four sons

took up one £1 share each. The personal business assets of Salomon were taken over by the company for

£38,782. The company contracted debts and went into liquidation. The unsecured creditors claimed

payment of their dues before the secured debentures held by Salomon on the ground that Salomon and the

company were one and same person and the company was a mere ‘alias’ or agent for Salomon. It was

held by the House of Lords that the company, being a legal person and having existence quite distinct

from its members, could not be regarded as an agent or ‘alias’ for Salomon. As such, Salomon being a

secured creditor of the company is entitled to payment out of the assets of the company in priority to the

unsecured creditors. In the words of McNaghten, L.J –

“The Company is at law a different person altogether from the subscribers to the memorandum; and,

though it may be that after incorporation the business is precisely the same as it was before, and the same

persons are managers, and the same hands receive the profits, the company is not in law the agent of the

subscribers or trustees for them. Nor are the subscribers, as members, liable, in any shape or form, except

to the extent and in the manner provided by the Act.”

Lifting or Piercing the Corporate Veil

Ordinarily, the Courts recognise the separate legal entity of the company and consider themselves

bound by the principle laid down in the case of Salomon Vs Salomon & Co. Ltd. But in reality there is no

such separation between the economic interested of the company and its members. In exceptional cases,

the Courts may disregard the concept of corporate entity to look at the persons behind the company. They

may lift the corporate veil to probe into the economic realities behind the scene. This is known as the

‘lifting or piercing the corporate veil’.

In general the Courts have made a departure from the principle of corporate entity when there was

reason to suspect that the veil of corporate personality had been used to conceal fraudulent or improper

conduct or for doing things against public policy or public interest. Lifting of the corporate veil may also

become necessary in cases where the directors or members of a company are held personally liable for

violation of statutory provisions under the Companies Act.

Some of the exceptional cases necessitating the lifting of the corporate veil may briefly be

indicated below:

1. In the Interest of Revenue: Where it appears that a company has been formed or is being used for the

only purpose of evading taxes or for avoiding tax liability, the Courts may ignore the separate entity

of the company and lift the veil to look into the persons responsible for tax evasion.

2. Avoidance of Welfare Legislation: Where it appears that the company has used the ‘veil of

incorporation’ as a means of avoiding social welfare legislation, it is the duty of the Court to lift the

corporate veil and discover the true state of affairs.

3. For checking fraud or improper conduct: Where it appears that the company has been formed for

some fraudulent purpose or to conceal the real identity of the owners, the Courts will lift the corporate

veil to find out the real owners of the company.

4. Against Public Policy: Where the principle of separate entity conflicts with public policy the Court

may lift the corporate veil in defence of the public policy.

5. Avoidance of Legal Obligation: The Court will also disregard the legal personality of a company

where the corporate veil is being used to avoid legal obligation.

6. Under Companies Act, 1956: The following instances necessitate lifting of corporate veil to identify

the persons responsible for such acts:

• Reduction in membership below the statutory minimum.

• Fradulent conduct of business.

• Failure to refund application money.

• Contracts made in personal names of directors.

• Mis-statements in Prospectus.

• Ultra vires acts.

kinds of companies

I On the Basis of Incorporation

1. Chartered Companies: Companies set up as a result of a royal charter granted by a king or queen of

a country are known as chartered companies. Example: East India Company, the Bank of England

etc.

2. Statutory Companies: Companies set up by Special Acts of Parliament or State Legislatures are

called Statutory Companies. Example: Reserve Bank of India, Life Insurance Corporation of India,

Unit Trust of India etc.

3. Registered Companies: Companies registered under the Indian Companies Act, 1956 or under any

of the previous Companies Acts are called registered companies. Most of the companies in India

belong to this category.

4. Licenced Companies: Companies established for the promotion of arts, science, religion, charity or

any other similar objects can obtain licence under Sec.25 from the Central Government and enjoy

certain privileges.

5. Foreign Companies: A company incorporated outside India under the law of the country of

incorporation but having established its business in India is called a foreign company.

II On the Basis of Liability

1. Companies with Limited Liability: It is a company where the liability of the shareholder remains

limited to the nominal value of the shares held by him.

2. Companies Limited by Guarantee: In a guarantee company the liability of a shareholder is limited

to the amount he has voluntarily undertaken to contribute towards the assets of the company to meet

out any deficiency at the time of it winding up. Such a company may or may not have a share capital.

3. Unlimited Companies: Here the liability of its members is unlimited. In other words, their liability

extends to their private properties also. Unlimited companies are almost non-existent these days

III On the Basis of Number of Members

1. Private Company: As per Section 3(1) (iii), a private company means a company which by its

Articles restricts the right to transfer its shares if any, and limits the number of its members to fifty

and prohibits invitation of shares from the public.

2. Public Company: According to Section 3(1) (iv), a public company means a company which is not a

private company.

IV On the Basis of Control

1. Holding Companies: A company exercising control over another company is called a holding

company. [Sec.4(4)].

2. Subsidiary Companies: The company so controlled is called a subsidiary company. [Sec.4(1)].

V On the Basis of Ownership

1. Government Company: Definition (Sec.617): A Government company means any company in

which not less than 51% of the paid up share capital is held by the Central Government or by any

State Government or Governments, or partly by one or more State Governments and includes a

company which is a subsidiary of a Government company.

government company

A Government Company means any company in which at least 51 percent of the paid-up share

capital is held by the Central Government or by any State Government or Governments, or partly by the

Central Government and partly by one or more State Governments.

Rules Applicable to Government Companies

1. The auditor of a Government company shall be appointed by the Central Government on the advice

of the Comptroller and Auditor-General of India.

2. The auditor of a Government company shall submit a copy of his audit report to the Comptroller and

Auditor-General of India who shall have the right to comment upon, or supplement, the audit report.

Any such comments upon, or supplement to, the audit report shall be placed before the annual general

meeting of the company.

3. The annual report shall be laid before both Houses of Parliament together with a copy of the audit

report, and any comments upon, or supplement to , the audit, made by the Comptroller and Auditor-

General of India.

Where in addition to the Central Government, any State Government is also a member of a Government

company, the State Government shall cause a copy of the above documents to be laid before the House or

both Houses of the State Legislature.

4. The Central Government may, by notification in the Official Gazette, direct that any of the provisions

of the Companies Act shall not apply to any Government company, or shall apply to any Government

company, with such exceptions, modifications and adaptations, as may be specified in the

notification.

foreign company

Foreign Company means any company incorporated outside India which as a place of business in

India.

Rules Applicable to Foreign Companies

(1) Every foreign company shall file with the Registrar the following documents:

• A certified copy of the Memorandum and Articles of the company.

• The full address of the registered or principal office of the company.

• A list of the directors and secretary of the company.

• The names and addresses of any person or persons resident in India, authorised to accept on behalf of

the company service of processes and any notices required to be served on the company.

• The full address of the principal place of business in India.

(2) The books of account to be kept by a company shall apply to foreign company also.

(3) A foreign company shall conspicuously exhibit on the outside of every office or place where it

carries on business in India the name of the company, together with the name of the country where

it is incorporated in English and in one of the local languages.

(4) The provisions relating to the registration of charges, annual returns, special audit in certain cases,

audit of cost accounts, power of Registrar to call for information, in so far as they apply to its Indian

companies shall apply to foreign companies also.

privileges and exemptions enjoyed by private companies

1. A private company can be registered with a minimum of two members.

2. It is entitled to commence business immediately after incorporation.

3. It is not required to issue a prospectus.

4. It is not required to hold a statutory meeting.

5. It can proceed to allot shares before minimum subscription is received.

6. Restrictions on further issue of capital do not apply to private companies.

7. The minimum number of directors of a private company is two only.

8. It is not necessary for the directors to file a written consent to act as directors, to the Registrar.

9. It is not necessary for directors to take up qualification shares.

10. It is not required to maintain a separate Index of Members.

11. Two members present can form a quorum in any meeting of a private company.

12. The directors are not liable to retirement by rotation.

13. The restrictions regarding remuneration of directors are not applicable to the private company.

14. Restrictions regarding appointment of Managing Director for more than five years at a time are not

applicable.

incorporation of a company

A company is said to have been incorporated or registered when it gets the Certificate of

Incorporation from the Registrar of Companies. Certain steps have to be taken and necessary legal

formalities completed for that purpose. The steps and formalities required for incorporation of company

vary according to the type of the company concerned.

Steps for the Incorporation of a Public Company limited by Shares

1. Application for approval of name: The first step is that of obtaining approval of the Registrar of

Companies for the proposed name with which the company is to be registered. A company may

adopt any name which is not prohibited under the Emblems and Names (Prevention of Improper Use)

Act, 1950 and which is not identical with or does not closely resemble the name of a company already

registered.

2. Preparation of Memorandum of Association: The next step is the preparation of the Memorandum

of Association of the company. It is the constitution of the company which defines the objects and

scope of the company’s activities and its relation with the outside world.

3. Preparation of Articles of Association: It is the document containing the rules and regulations

relating to the internal management of the company.

4. Printing, Signature and Stamping of Memorandum and Articles: The next step is to arrange for

the printing, signature and stamping of the Memorandum and Articles.

5. Preparation of other Documents:

(a) Power of Attorney

(b) Preliminary Agreements, if any.

(c) Consent of the Directors in Form No.29.

(d) Particulars of Directors in Form No.32.

(e) Notice of Registered Address in Form No.18.

(f) Statutory Declaration.

6. Filing of Documents for Registration:

The following documents are to be filed with the Registrar along with registration fee for Registration of

the Company:

(i) Memorandum of Association printed and duly stamped.

(ii) Articles of Association printed and duly stamped.

(iii) Name availability letter received form the Registrar of Companies.

(iv) The consent is to be given in Form No.29.

(v) Notice of the situation of the registered office is to be given in Form No.18.

(vi) Appointment of Director, Manager or Secretary to be filed in Form No.32.

(vii) Power of Attorney empowering the attorney of the promotors.

(viii) A declaration that all the requirements of the Companies Act, 1956 and the rules thereunder have

been complied with in respect of registration and matters precedent and incidental thereto shall be

filed with the Registrar.

7. Certificate of Incorporation

When the requisite documents are filed with the Registrar, the Registrar shall satisfy himself that

the statutory requirements regarding registration have been duly complied with. If the Registrar is

satisfied as to the compliance of statutory requirements, he retains and registers the Memorandum, the

Articles and other documents filed with him and issues a ‘Certificate of Incorporation’, i.e. of the

formation of the company. A company comes into existence as a legal person upon the issue of the

certificate of incorporation.

MEMORANDUM OF ASSOCIATION

The Memorandum of Association is the charter of the company, and provides the foundation on

which the structure of the company is built. It defines the scope of the company’s activities as well as its

relation with the outside world.

Section 2(28)of the Companies Act defines a Memorandum as “the memorandum of association

of a company as originally framed or as altered from time to time in pursuance of any previous Company

Laws or of this Act”. Section 13 of the Act specifies the contents of the memorandum.

The importance of the Memorandum is that it lays down the ambit of the powers of the company,

the area within which the company can operate and beyond which it cannot go.

The purpose of the Memorandum is to enable the shareholders, creditors and those who deal with

the company to know what is its permitted range of enterprise.

The Memorandum of Association must be (a) printed, (b) divided into paragraphs, numbered

consecutively, and (c) signed by each subscriber.

contents of the memorandum

(1) Name Clause

The Memorandum of every company must state the name of the company with the word

“Limited” as the last word of the name in the case of public limited company and with “Private Limited”

as the last words of the name in the case of private limited company.

(2) Domicile (or) Situation Clause

This clause mentions the name of the State in which the registered office of the company will be

situated. This determines the jurisdiction of the Court and indicates the domicile and nationality of the

company. The full address of the company should be communicated to the Registrar within thirty days

from the date of registration.

(3) Objects Clause

The Memorandum must include under this clause statement of (a) the main objects of the

company and objects incidental or ancillary to the main objects, and (b) any other objects. The objects

clause lays down the scope of activities of the company and defines the extent of its powers. It “states

affirmatively the ambit and extent of powers which are given to the company by law”.

(4) Liability Clause

A limited company has the liability of its members limited to the face value of the shares held by

them. The liability clause of the Memorandum contains a clear statement to this effect. The effect of

this clause is that no member can be held liable for debts of the company beyond the amount which he has

agreed to contribute to the share capital of the company. If the shares held by a member of the company

are fully paid-up, his liability in the debts of the company will be nil. Similarly, in the case of a company

limited by guarantee, the liability of the member is limited to the amount of guarantee given by him.

(5) Capital Clause

In the case of a limited company having share capital, the Companies Act requires that the

Memorandum shall state the amount of share capital with which the company is to be registered and the

division thereof into shares of a fixed amount [Sec.13(4)]. This is the maximum amount of share capital

that the company is authorised by the memorandum to raise. Hence, it is called the ‘authorised’,

‘registered’ or ‘nominal’ capital.

(6) Association Clause

Under this clause, subscribers to the Memorandum express their assent to form a company and

signify their agreement to associate for that purpose. The statement of agreement to form a company also

mentions the ‘subscribers’ consent to take the number of shares shown against their respective names.

doctrine of ultra vires

‘Ultra’ means beyond and ‘vires’ means powers. The term ultra vires a company means that the

doing of the act is beyond the legal power and authority of the company. The doctrine of ultra vires is

important in defining the limits of the powers conferred on the company by its Memorandum of

Association. According to this doctrine, the vires (power) of a company to enter into a contract or

transaction is limited by the ambit of the Objects Clause of the Memorandum and the provisions of the

Companies Act. Whatever is not permitted by the Objects Clause and the Act, is prohibited by the

doctrine of ultra vires. If a company engages in any activity or enters into any contract which is ultra

vires (outside the power conferred by) the Memorandum or Act, it will be null and void so far as the

company is concerned and it cannot be subsequently ratified or validated even if all the shareholders give

their consent. Thus under this doctrine, a company has powers to engage in only such activities or enter

into such transactions:

• which are essential to the attainment of the objects specified in the Memorandum;

• which are reasonably and fairly incidental to the main objects; and

• which are permitted by the provisions of the Companies Act.

The doctrine of ultra vires was first enunciated in the celebrated case Ashbury Railway Carriage and Iron

Co. Ltd., vs Riche. The company was registered with the following objects:

� to make, and sell, or lend on hire, railway carriages and wagons;

� to carry on the business of mechanical engineers and general contractors;

� to purchase, lease, work and sell mines, minerals, land and buildings.

The directors contracted with M/s. Riche to purchase a concession for laying a railway line in Belgium.

The contract was ratified by a special resolution. Later, the contract was repudiated by the company on

the ground of its being ultra vires and Riche brought an action on the ground of breach of contract.

It was held by the House of Lords that the contract was ultra vires the company so void ab initio.

It was also held that, not even the assent of the whole body of shareholders can ratify such a contract, as

the contract was ultra vires the objects clause.

Effects of Ultra Vires Transactions

If a company enters into transactions, which are ultra vires, it will have the following effects:

(1) Injunction: Whenever a company goes beyond the scope of the object clause, any of its members can

get an injunction from the court to restrain the company from undertaking the ultra vires act.

(2) Personal Liability of Directors: If the transaction is ultra vires, for instance, if the funds of the

company are misapplied, the directors will be held personally liable.

(3) Ultra Vires Contracts: Contracts entered into by a company, which are ultra vires, are void ab initio

and unenforceable.

(4) Property Acquired Ultra Vires: If a company acquires any property under an ultra vires transaction, it

has the right to hold the property and protect it against damage by other persons.

(5) Ultra Vires Torts: A company is not liable for torts committed by its agents or employees in the

course of ultra vires transactions.

alteration of memorandum

1. Alteration of Name Clause

A company may change its name by a special resolution and with the approval of the Company

Law Board (CLB) signified in writing. But a change of name which merely involves the deletion or

addition of the word ‘Private’ on the conversion of a private company into a public company or vice versa

does not require the approval of the CLB.

If through inadvertence or otherwise, a company is registered by a name which, in the opinion of

the CLB, is identical with, or too nearly resembles, the name of an existing company, the company –

(a) may change its name, by ordinary resolution and with the previous approval of the CLB.

(b) shall change its name if the CLB so directs within twelve months of its first registration or registration

by its new name, as the case may be.

Where a company changes its name, the Registrar shall enter the new name in the Register in the place of

the old name and issue a fresh certificate of incorporation with the necessary alterations embodied therein

to the company.

2. Alteration of Situation Clause

This may involve:

(a) Change of registered office from one place to another place in the same city, town or village.

(b) Change of registered office from one town to another town within the State.

(c) Change of registered office from one State to another State.

In case of change of registered office from one place to another place in the same city, a notice is to be

given within thirty days after the date of the change to the Registrar who shall record the same.

In case of change of registered office from one town to another town within the State, a special

resolution is required to be passed at the general meeting of the shareholders and a copy of it is to be filed

with the Registrar within thirty days. Then within thirty days of shifting of the office, a notice has to be

given to the Registrar of the new location of the office.

In case of change of registered office from one State to another State, a special resolution is

required to be passed at the general meeting of the shareholders and a copy of it is to be filed with the

Registrar within thirty days. The alteration shall take effect only when it is confirmed by the CLB. A

certified copy of the order confirming the alteration shall be filed by the company with the Registrar of

each of the States and the Registrar of each State shall register the same. All the records of the company

shall be transferred to the Registrar of the State in which the registered office of the company is

transferred.

3. Alteration of Object Clause

By Sec.17(1), the objects of a company may be altered by special resolution so as to enable the

company –

� To carry on its business more economically or more efficiently.

� To enlarge or change the local area of its operations.

� To carry on some business which under existing circumstances may conveniently or advantageously

be combined with the objects specified in the Memorandum.

� To restrict or abandon any of the objects specified in the Memorandum.

� To sell or dispose of the whole, or any part, of the undertaking, or of any of the undertakings, of the

company, or

� To amalgamate with any other company or body of persons.

4. Alteration of Liability Clause

A company limited by shares or guarantee cannot change its Memorandum so as to impose any

additional liability on the members or to compel them to buy additional shares of the company unless all

the members agree in writing to such change.

5. Alteration of Capital Clause

The procedure for alteration of capital and the power to make such alteration are generally

provided in the Articles of Association of a company. If the power and procedure are not laid down in the

Articles the company must alter the Articles by passing a special resolution. If so authorised by the

Articles, a company may alter its share capital so as to –

� increase the amount of its share capital;

� consolidate and divide its share capital into shares of higher denomination;

� subdivide the existing shares into shares of lower denomination; however, the proportion between the

amount paid and the amount, if any, unpaid on each reduced share must be the same as it was for the

share before reduction;

� cancel the unissued capital;

� convert all or any of its fully paid shares into stock and reconvert stock into shares.

ARTICLES OF ASSOCIATION

The rules and regulations which are framed for the internal management of a company are set out

in a document known as the Articles of Association. The articles are framed to enable the company to

carry out the aims and objects of the company set out in the Memorandum of Association.

Contents of Articles

The regulations and bylaws laid down in the Articles relate to the following:

• Share capital and its subdivision into different classes of shares, rights of shareholders and their

variation;

• The procedure for making allotment, calls on shares and transfer, transmission, forfeiture and

surrender of shares, including lien on shares;

• Alteration and reduction of capital;

• Borrowing powers;

• Appointment of Manager, Managing Director, Secretary;

• Declaration of dividend;

• Procedure for convening, holding and conducting different kinds of meetings, voting rights and

methods;

• Maintenance of books of account and their audit;

• Share Certificates and Share Warrants, conversion of shares into stock;

• Seal of the company;

• Winding up.

Alteration of Articles

The Articles of Association can be altered or added to by passing a special resolution in the extra-

ordinary general meeting, provided –

� the alteration is not contrary to the provision of the Act;

� it is not inconsistent with or beyond the provisions of the Memorandum; and

� it does not increase the liability of a member without his written consent by compelling him to take

more shares than he had held prior to the alteration.

Any alteration made in the Articles should be in the interest of the company as a whole, should not be

such as to cause a breach of contract and should not be such as to constitute a fraud by the majority on the

minority shareholders.

doctrine of constructive notice

The Memorandum and Articles, on registration, assume the character of public documents. The

office of the Registrar is a public office and documents registered there are open and accessible to the

public at large. Therefore, every outsider dealing with the company is deemed to have notice of the

contents of the Memorandum and Articles. This is known as Constructive Notice of Memorandum and

Articles.

Under the doctrine of ‘constructive notice’, every person dealing or proposing to enter into a

contract with the company is deemed to have constructive notice of the contents of its Memorandum and

Articles. Whether he actually reads them or not, it is presumed that he has read these documents and has

ascertained the exact powers of the company to enter into contract, the extent to which these powers have

been delegated to the directors and the limitations to such powers. He is presumed not only to have read

them, but to have understood them properly. Consequently, if a person enters into a contract which is

ultra vires the Memorandum, or beyond the authority of the directors conferred by the Articles, then the

contract becomes invalid and he cannot enforce it, not-withstanding the fact that he acted in good faith

and money was applied for the purposes of the company.

doctrine of indoor management

The doctrine of indoor management follows from the doctrine of ‘constructive notice’ laid down

in various judicial decisions. The hardships caused to outsiders dealing with a company by the rule of

‘constructive notice’ have been sought to be softened under the principle of ‘indoor management’. It

affords some protection to the outsiders against the company.

According to this doctrine, after satisfying themselves that the proposed transaction is intra vires

the memorandum and articles, persons dealing with the company are not bound to enquire whether the

internal proceedings were correctly followed. They are entitled to assume that the internal proceedings

relating to the contract are regular as per the memorandum and articles.

When an outsider enters into a contract with the company, he is presumed to have knowledge of

the provisions of memorandum and articles as per the doctrine of constructive notice. But he is not

required to go beyond that and to enquire whether the internal proceedings required by these documents

have been regularly followed by the company. They need not enquire whether the necessary meeting was

convened and held properly or whether necessary resolution was passed properly. They are entitled to

take it for granted that the company had gone through all these proceedings in a regular manner. This is

known as the Doctrine of Indoor Management.

The doctrine of indoor management was first propounded by Lord Hatherlyin the celebrated case

Royal British Bank vs. Turquand [(1856) 6E. & B.327]. The directors of the Bank had issued a bond to

Turquand. The company was empowered by its Articles to issue such bonds provided it was authorised

by a resolution of the company in general meeting. In this case no such resolution had been passed. It

was held that Turquand could recover the amount of bond from the company on the ground that he was

entitled to assume that the necessary resolution had been passed by the company.

Exceptions to the Doctrine of Indoor Management

No benefit under the doctrine of indoor management can be claimed by a person under the

following circumstances:

♦ Where a person dealing with the company has actual or constructive notice of any irregularity in the

internal proceedings of the company.

♦ Where a person did not in fact consult the Memorandum and Articles of the company and

consequently did not act on knowledge of these documents.

♦ Where a person dealing with the company was negligent and, had he not been negligent, could have

discovered the irregularity by proper enquiries.

♦ Where a person dealing with the company relies upon a forged document or the act done by the

company is void.

♦ Where a person enters into a contract with an agent or officer of the company and the act of the

agent/officer is beyond the authority granted to him.

PROSPECTUS

Sec. 2(36) defines a prospectus as, “any document described or issued as a prospectus and

includes a notice, circular, advertisement or other document inviting deposits from the public or inviting

offers from the public for the subscription or purchase of any shares in or debentures of a body

corporate”.

Thus any document inviting the public to buy its shares or debentures comes under the definition

of prospectus. It also applies to advertisements inviting deposits from the public.

contents of the prospectus

part i of schedule ii – matters to be specified

I General Information

1. Name and address of Registered Office of the Company.

2. (a) Consent of the Central Government for the present issue.

(b) Letter of content/industrial licence. Declaration of the Central Government about non-responsibility

for financial soundness on correctness of statements.

3. Name of Stock Exchanges where the present issue is to be listed.

4. Declaration about refund of the issue if minimum subscription of 90 per cent is not received within 90

days from the closure of the issue.

5. (a) Date of opening of the issue.

(b) Date of closing of the issue.

6. Date of earliest closing of the issue.

7. Name and address of auditors and lead managers.

8. Whether rating form CRISIL or any other rating agency has been obtained for the proposed

debenture/ preference share issue. If yes, the rating should be indicated.

9. Names and addresses of the underwriters and the amount underwritten by them and declaration of the

board that the underwriters have sufficient resources.

II Capital Structure of the Company

1. Authorised, issued, subscribed and paid-up capital.

2. Size of present issue giving separately reservation for preferential, allotment to promoters and others.

3. Paid-up capital after the present issue.

III Terms of the Present Issue

1. Terms of payments.

2. Rights of the instrument holders.

3. How to apply, availability of forms, prospectus and mode of payment.

4. Any special tax benefits for company and its shareholders.

IV Particulars of the Issue

1. Objects.

2. Project cost.

3. Means of financing including contribution of promoters.

V Company Management and Project

1. History and main objects and present business of the company.

2. Subsidiaries of the company, if any.

3. Names, addresses and occupations of Manager, Managing Director and other Directors including

nominee Directors, whole-time directors.

4. Location of project.

5. Plant and Machinery, technology, process etc.

6. Foreign collaboration.

7. Infrastructure facilities.

8. Schedule of the implementation of the project and progress so far made.

9. Nature of products, marketing set up and export possibilities and export obligation, if any.

10. Future prospectus – expected capacity utilisation during the first three years, from the date of

commencement of production and the expected year when the company would be able to earn cash

profit and net profit and stock market data.

VI. Particulars in regard to the company and other listed companies under the same management within

the meaning of Sec.370 IB which made any capital issue during the last three years.

VII (a) Outstanding litigation of the company.

(b) Particulars of default, if any, in meeting statutory dues, institutional dues, and towards instrument

holders like debentures, fixed deposits and arrears of cumulative preference shares etc.

(c) Any material development after the date of the latest balance sheet, and its impact on performance

and the prospects of the company.

VIII Management Perception of Risk Factors

For example, sensitivity to foreign exchange rate fluctuations, non-availability of raw materials,

cost time overrun etc.

part ii of schedule ii

A. General Information

1. Consent of directors, auditors, advocates, managers to issue, registrar of issue, bankers to the

company, bankers to the issue.

2. Expert opinion, if any.

3. Change, if any, in directors and auditors during the last three years and reasons thereof.

4. Authority for the issue and details of resolution passed for the issue.

5. Procedure and time schedule for allotment and issue of certificates.

6. Name and address of the company secretary, legal adviser, lead managers, auditors, bankers to the

company, banker to the issue and brokers to the issue.

B. Financial Information

1. Report by Auditors

A report by the auditors of the company with respect to –

(a) its profit and loss and assets and liabilities, and

(b) the dividends paid by the company during the five financial years immediately preceding the issue of

the prospectus.

2. Report by Accountants

(a) A report by the accountants who shall be named in the prospectus on the profits or losses of the

business for the preceding five financial years, and on the assets and liabilities of the business to be

acquired on a date which shall not be more than one hundred and twenty days before the date of the

issue of the prospectus.

(b) A similar report on the accounts of a body corporate by an accountant who shall be named in the

prospectus if the proceeds of the issue are to be applied in the purchase of shares of a body corporate

so that it becomes a subsidiary of the acquiring company.

(c) Statutory and other information:

1. Minimum subscription

2. Expenses of the issue

3. Underwriting commission and brokerage

4. Details of previous public or right issue

5. Issue of shares otherwise than for cash

6. Debenture and redeemable preference shares and other instruments, issued by the company

outstanding and terms of issue.

7. Option to subscribe

8. Details of purchase of property

9. Details of directors, whole-time directors, managing directors, as to their appointment, remuneration,

interest of directors, borrowing powers, qualification shares etc.

10. Rights of members regarding voting, dividend, lien on shares.

11. Restriction if any on the transfer or transmission of shares or debentures.

12. Revaluation of assets if any.

13. Material contracts and inspection of documents.

part iii of schedule ii

Provisions applying to Parts I and II of the Schedule.

(1) In the case of a company which has been carrying on business for less than five financial years,

reference to five financial years means reference to that number of financial years for which business

has been carried on.

(2) The report shall make any adjustments as respect of the figures of profits or losses or assets and

liabilities and indicate that such adjustments have been made.

(3) There should be a declaration that all the relevant provisions of the Companies Act, 1956 and the

guidelines issued by the Government have been complied with and no statement made in prospectus

is contrary to the provisions of Companies Act, 1956 and rule made thereunder.

voluntary disclosure

The prospectus is the window through which an investor can look into the soundness of the

company’s venture. The prospective buyer of shares is entitled to all true disclosures in the prospectus. It

should not conceal any matter which ought to be revealed. In a nutshell, the prospectus should tell the

truth, the whole truth and nothing but truth. This ruling is called ‘the golden rule’ for framing a

prospectus. This ruling as laid down by V.C. Kindersley in New Brunswick and Canada Railway and

Land Company vs. Muggeridge.

liabilities for mis-statement in prospectus

Under Sec.65 of the Companies Act, a prospectus will be deemed to contain an untrue statement,

if –

(a) the statement included in the prospectus is misleading in the form or in the context in which it is

included; and

(b) there is an omission from the prospectus of any matter which is calculated to misled [Sec.65(1)].

Liabilities for Mis-statement in Prospectus

Civil Liability Criminal Liability

Against the Company Against the Directors,

Promoters and Experts

To Rescind Claim for Compensation Damages for Damages under

the Contract Damages non-compliance General Law

under Sec.56

For Innocent For Fradulent

misrepresentation misrepresentation

Civil Liability for Mis-statement

Civil liability arises when there is a mis-statement or misrepresentation of fact in a prospectus or

an omission of material fact calculated to misled, and such a statement or omission has induced a

shareholder to buy shares on the faith of such statement. Every director or promoter of a company, and

all other persons including an expert who has authorised the issue of such prospectus are liable for such

misstatement or misrepresentation to the allottee of shares. The shareholder who has purchased shares on

the faith of such mis-statement has remedy in a civil action against the company, as well as directors,

promoters, experts etc. for any loss or damage suffered by him.

Remedies against the Company

For mis-statement or misrepresentation in a prospectus, the remedies available to a shareholder

against the company are: (i) rescission of the contract, and (ii) damages for deceit. Any person who takes

shares on the faith of statements contained in a prospectus, can apply to the Court for rescinding or setting

aside the contract on the ground that the statements are false or fraudulent or that some material

information has been withheld.

Remedies against Directors, Promoters etc.

Against the directors, promoters, experts and other persons, the remedies available are: (i)

damages for fraudulent misrepresentation under the general law; (ii) compensation for loss or damage

under Sec.62 of the Act; and (iii) damages or loss suffered due to omission of statement under Sec.56 of

the Act.

(1) Under the General Law, a shareholder can hold persons responsible for the issue of a prospectus

(directors, promoters etc.) liable for damages for any fraudulent misrepresentation or misstatement in

the prospectus, if he was deceived by reason of acting on the faith of such prospectus. But the

directors (or promoters etc.) will not be held liable for such mis-statement, if they honestly believed

what they said in the prospectus to be true.

(2) Compensation under Sec.62. If a person purchases shares or debentures of a company on the faith of

statements made in the prospectus and thereby suffers any damage or incurs loss, he is entitled to

claim compensation for the loss or damage in a civil action against the directors, promoters, and all

other persons who have authorised the issue of the prospectus [Sec.62(1)].

(3) Damages under Sec.56. If there is an omission from the prospectus of any matter required to be

included by Sec.56, any subscriber for shares who has suffered loss due to the omission can bring

action for damages, even if such omission does not make the prospectus false or misleading.

Criminal Liability for Mis-statement

Knowingly including an untrue statement in the prospectus or fraudulently inducing a person to

invest money in shares, gives rise to criminal liability on the part of the persons authorising the issue of

such a prospectus. Section 63 and 68 of the Companies Act provide for heavy punishment for such

criminal liability.

If a prospectus contains any untrue statement, every person who has authorised the issue of the prospectus

is punishable with imprisonment for a term which may extend to two years, or with fine which may

extend to five thousand rupees, or with both.

The Act has also laid down that if a person knowingly or recklessly makes any statement,

promise or forecast which is false, deceptive or misleading, or dishonestly conceals material facts, and

thereby induces or attempts to induce another person to subscribe to the shares of a company, he shall be

punishable with imprisonment for a term which may extend to five years, or with fine which may extend

to ten thousand rupees, or with both (Sec.68).

LESSON - 18

COMPANY MEETINGS

A ‘Meeting’ may be defined as any gathering, assembly or coming together of two or more

persons for the transaction of some lawful business of common concern. Like any other association, a

company must also hold meetings for its proper functioning. The shareholders or members of a company,

who are the real owners, must have the opportunity to collectively discuss the affairs of the company and

to exercise their ultimate control over the management of the company. Similarly, the directors, in whom

the management of the company is vested, must come together periodically to function as a team and take

collective decisions regarding the business policy of the company and to exercise overall supervision over

the management. Thus, the management of a company is really carried on through meetings of

shareholders and directors and the resolutions adopted therein.

kinds of company meetings

Broadly speaking, company meetings may be classified as follows:

1. Meetings of Shareholders or Members: This against may be of four types:

(i) Statutory Meeting

(ii) Annual General Meeting

(iii) Extraordinary General Meeting

(iv) Class Meetings

2. Meetings of Directors

(i) Meetings of Board of Directors

(ii) Meetings of Committees of Directors

3. Meetings of Creditors, Debenture holders and Contributories.

requisites of a valid meeting

If the business transacted at a meeting is to be valid and legally binding, the meeting itself must

be validly held. A meeting will be considered to be validly held, if –

� It is properly convened by proper authority and by a proper notice.

� It is properly constituted with requisite quorum of members and by duly elected Chairman.

� It is properly conducted, i.e. according to rules.

Proper Authority to Convene Meeting

A meeting must be convened or called by a proper authority. Otherwise it will not be a valid

meeting. The proper authority to convene general meetings of a company is the Board of Directors. The

decision to convene a general meeting and issue notice for the same must be taken by a resolution passed

at a validly held Board meeting.

notice of meetings

A meeting in order to be valid, must be convened by a proper notice issued by the proper

authority. It means that the notice convening the meeting be properly drafted according to the Act and the

rules, and must be served on all members who are entitled to attend and vote at the meeting.

Length of Notice:

For general meeting of any kind at least 21days notice must be given to members. A shorter

notice for Annual General Meeting will be valid, if all members entitled to vote give their consent.

The number of days in each case shall be clear days, i.e. the days must be calculated excluding

the day on which the notice is issued, a day or so for postal transit, and the day on which the meeting is to

he held.

Contents of Notice:

Every notice of meeting of a company must specify the place and the day and hour of the

meeting, and shall contain a statement of the business to be transacted thereat.

(1) Place of Meeting: Every annual general meeting of a company must be held either at the registered

office of the company or at some other place within the same city, town or village in which the

registered office of the company is situated.

(2) Day of Meeting: Every annual general meeting of a company must be held on a day that is not a

public holiday.

(3) Time of the Meeting: Every annual general meeting shall be called for a time during the business

hours of the company.

quorum

Quorum is the minimum number of members who must be present at a meeting as required by the

rules. Any business transacted at a meeting without a quorum is invalid. The main purpose of having a

quorum is to avoid decisions being taken at a meeting by a small minority which may be found to be

unacceptable to the vast majority of members.

The number constituting a quorum at any company meeting is usually laid down in the Articles of

Association. In the absence of any provision in the Articles, the provisions as to quorum laid down in the

Companies Act, 1956 (under Sec.174) will apply. The Articles may provide for a larger quorum, but it

cannot provide for a smaller quorum than that laid down in the Act. Sec.174 of Companies Act provides

that the quorum for general meetings of shareholders shall be five members personally present in case of a

public company; and two members personally present for any other company.

agenda

The word ‘agenda’ literally means ‘things to be done’. It refers to the programme of business to

be transacted at a meeting. Agenda is essential for the systematic transaction of the business of a meeting

in the proper order of importance. It is customary for all organisations to send an agenda along with the

notice of a meeting to all members. The business of the meeting must be conducted in the same order in

which the items are placed in the agenda and the order can be varied only with the consent of the meeting.

proxy

The term ‘proxy’ is used to refer to the person who is nominated by a shareholder to represent

him at a general meeting of the company. It also refers to the instrument through which such a nominee

is named and authorised to attend the meeting.

chairman of a meeting

‘Chairman’ is the person who has been designated or elected to preside over and conduct the

proceedings of a meeting. He is the chief authority in the conduct and control of the meeting.

A chairman is usually a member of the body over which he is to preside. He may be either

appointed or designated before hand as chairman by the rules or elected at the meeting itself according to

rules. In the case of a company, the Articles usually designate the Chairman of the Board of Directors to

preside over the general meetings of the company. Where the rules do not designate a chairman or the

designated chairman is absent at the commencement of the meeting, the meeting itself elects a pro tem

(temporary) chairman to preside over the meeting.

Powers and Duties of the Chairman

Powers:

(1) To maintain order and decorum.

(2) To decide points of order.

(3) To decide priority of speakers.

(4) To maintain relevancy and order in debate.

(5) To adjourn a meeting.

(6) To exercise a casting vote.

(7) To ascertain the sense of a meeting and declare the result of voting.

Duties:

1. To see that the meeting is properly convened and duly constituted.

2. To see that the proceedings of the meeting are conducted according to rules.

3. To see that no discussion is allowed unless there is a specific motion.

4. To maintain order and decorum in the meeting.

5. To see that all members, including the minority, get equal opportunity to express their views.

6. To see that the sense of the meeting is properly ascertained on each and every motion.

7. He should see that the poll is taken properly according to the provisions of the Act.

8. He must exercise his casting vote bonafide in the interest of the company.

9. He must exercise correctly his power of adjournment.

statutory meeting

This is the first meeting of the shareholders of a public company. It must be held within a period

of not less than one month nor more than 6 months from the date at which the company is entitled to

commence business. It is held only once in the lifetime of a company. A private company and a

company limited by guarantee and not having a share capital need not hold such a meeting.

The purpose of the statutory meeting with its statutory report is to put the shareholders of the company in

possession of all the important facts relating to the new company, what shares have been taken up, what

moneys received etc. This also provides an opportunity to the shareholders of meeting to discuss the

whole situation, the management and prospects of the company.

The Board of Directors must, atleast 21 days before the day on which the meeting is to be held,

forward a report, called the ‘statutory report’ to every member of the company. This report contains all

the necessary information relating to formational aspects of the company for the information of the

shareholders.

Contents of Statutory Report

(1) The total number of shares allotted, distinguishing those allotted as fully or partly paid up otherwise

than in cash, the extent to which they are partly paid up, the consideration for which they have been

allotted and total amount received in cash;

(2) An abstract of the receipts and payments under distinctive heads upto a date within seven days of

the date of report;

(3) An account of estimate of the preliminary expenses of the company.

(4) The names, addresses and occupations of the managing director, director, and also its secretary and

auditors of the company;

(5) The particulars of any contract which, and the modification or proposed modification of which, are

to be submitted to the meeting for approval;

(6) The extent to which underwriting contracts, if any, have not been carried out and the reason

therefor;

(7) The arrears, if any, due on calls from directors, managing director or manager; and

(8) The particulars of any commission or brokerage paid, or to be paid, in connection with the issue or

sale of shares to any director, managing director or manager.

Certification and Filing of Statutory Report

The Statutory Report must be carried as correct by not less than two directors of the company

including the managing director, if there is one. After the statutory report has been certified by the

directors, the auditors of the company must also certify the report in respect of the number of shares

allotted, cash received on such shares and the receipts and payments of the company upto a date within

seven days of the report. After the statutory report has been sent to the members along with the notice, a

certified copy of the report must be filed with the Registrar of Companies for registration forthwith.

Consequences of Default

If a company makes default in holding the statutory meeting within the prescribed period or in

issuing and filing the statutory report according to the provisions of Sec.165 of the Act, every director or

other officer of the company in default will be liable to pay fine which may extend to Rs.500. Moreover, a

company may be wound up by the Court, if default is made in delivering the statutory report to the

Registrar or in holding the statutory meeting.

annual general meeting

Every company must in each year (i.e. calendar year) hold, in addition to any other meetings, a

general meeting as its annual general meeting and must specify the meeting as such in the notices calling

it. A period of not more than 15 months should pass between the date of one annual general meeting of a

company and that of the next. The company may, however, hold its first annual general meeting within a

maximum period of 18 months form the date of its incorporation.

Importance of Annual General Meeting

It is only at the annual general meeting a company that the shareholders can exercise any control

over its affairs. The shareholders also get an opportunity to control over its affairs. The shareholders also

get an opportunity to discuss the affairs and review the working of the company.

Time and Place for holding AGM

Every annual general meeting of a company must be held –

� during business hours

� on a day that is not a public holiday, and

� either at the registered office of the company or at some other place within the city, town or village in

which the registered office is situated.

Business Transacted at AGM

The annul general meeting can transact both ordinary and special business.

Ordinary Business:

Under Sec.173 of the Act, the following are considered to be ordinary business.

� Consideration and approval of the accounts and balance sheet and Auditor’s Report thereon.

� Consideration and approval of the Annual Report of Directors.

� Declaration of dividends, if any.

� Appointment of directors in place of those retiring by rotation.

� Appointment of the auditors and fixing their remuneration.

The ordinary business transacted at the annual general meeting requires an ordinary resolution which can

be passed by a simple majority.

Special Business:

If the annual general meeting wants to transact any other business, other than those mentioned

above, that must be treated as ‘special business’.

Consequences of Default

If a company makes a default in holding the annual general meeting in accordance with the

provisions of Sec.166 of the Act, the Company Law Board may, on the application of any member of the

company, call the meeting or direct the company to call the meeting. The Company Law Board may also

give any other direction as it thinks fit, which may even include a direction that one person present in

person or proxy shall constitute the annual general meeting.

If a company fails to hold the annual general meeting as per Sec.166 of the Act or fails to comply

with the directions given by the Company Law Board under Sec.167, then the company and every officer

of the company in default shall be liable to be fined up to Rs.5,000 and also to a further daily fine for a

continuing default which may extend to Rs.250 for every day after the first, during which the default

continues.

extraordinary general meeting

Any general meeting other than an annual general meeting is called an extraordinary general

meeting (Art.47 of Table A, Schedule I). It is called for transacting some urgent or special business

which cannot be postponed till the next annual general meeting.

Extraordinary general meetings are required for transacting different types of business. Example:

• Alteration of the Memorandum and Articles of Association;

• Alteration of the share capital;

• Removal of director before the expiry of his term.

Authority for Convening Extraordinary General Meeting

An Extraordinary General Meeting may be called or convened:

(a) By the Board of Directors: The Articles usually empower the Board of Directors to call an

extraordinary general meeting, whenever it thinks fit.

(b) By the Board of Directors on the Requisition of Members: Section 169 of the Companies Act also

empowers the members to requisition or demand the convening of an extraordinary general meeting.

The requisition must be signed by (i) members holding atleast one-tenth of the paid-up capital

carrying voting power; or (ii) members enjoying one-tenth of the total voting power of all members

entitled to vote on the matter in view.

On receipt of the requisition, the Board of Directors must call, within 21 days on the deposit of the

requisition, an extraordinary general meeting as per requisition to be held at a date not later than 45 days

of the deposit of the requisition.

(c) By the Requisitionists: If the Board fails to call the meeting within 21 days and the meeting is not

held within 45 days of the requisition, the requisitionists themselves may call the meeting within 3

months of the date of requisition.

(d) By the Company Law Board: The Company Law Board can also order an extraordinary general

meeting to be called, held or conducted, if for any reason it is not practicable to call or hold such a

meeting. The Company Law Board may pass order for calling such a meeting on its own initiative or

on the application of any director of any member entitled to vote at the meeting.

class meetings

These are meetings held by a particular class of shareholders (e.g. Equity or Preference

Shareholders) for the purpose of making changes in the Articles of the company as regards their rights

and privileges or for the purpose of conversion of one class of shares into another. These meetings can be

attended by the shareholders or that class only. The Articles usually provide for the holding of class

meetings and lay down the rules and procedure for convening and holding such meetings.

meetings of debenture holders and creditors

These meetings are required for the purpose of:

� compromising a disputed matter with creditors or compounding of debts; or

� securing the consent of the creditor to any scheme of re-organisation, reconstruction or

amalgamation; or

� securing the consent of creditors and debenture holders at the time of winding up.

In each case, the purpose is to secure the support and approval of the creditors and debenture holders to

any scheme of rearrangement or for saving the company from financial difficulty.

Meetings of debenture holders are called by the company with the purpose of (i) varying the

terms of the security, or (ii) modifying the rights of debenture holders. These meetings are usually held

by a company to enable it to issue fresh debentures or to vary the rate of interest payable to existing

debenture holders.

meeting of board of directors

The directors are required to meet frequently to discuss and decide upon policy matters, to take

decision on matters relating to the management of the company and to review its progress. These

meetings are called Board Meetings. The Board of Directors is also usually empowered by the Articles to

appoint committees of directors for specific purposes and to help the Board in its decision-making

process. Meetings of such committees have also to be held as and when required.

requisites of board meetings

The meeting must be convened by the proper authority, by a proper notice, by the proper person

in chair, and the requisite quorum must be present. The rules regarding the holding and conduct of Board

Meetings are laid down by the Act and the Articles.

According to the provisions of the Companies Act, a Board meeting must be held at least once in

every three calendar months, and atleast four such meetings must be held in every year. However, Board

meetings may be held more frequently if the circumstances so demand.

Notice of Board Meeting

Section 286 of the Companies Act provides that, notice of every meeting of the Board of directors

of a company must be given in writing to every director for the time being in India, and at the usual

address.

Usually a week’s notice is considered sufficient. However, if the Articles provide that Board

meetings will be held on fixed days of every month or where the directors are duly informed that in future

all meetings of the Board will be held on a fixed day of every month it will be sufficient compliance with

the statute.

Board meetings must be held at anyplace other than the registered office of the company and

outside business hours and even on a public holiday, according to the convenience of the directors.

Quorum of Board Meetings

According to the provisions of Section 287 of the Companies Act, the quorum for a meeting of

the Board of directors shall be one-third or two directors, whichever is higher.

General Powers of the Board to be Exercised in the Board Meeting

♦ Determination of management policy, trading policy, etc.

♦ To appoint Managing Director

♦ Appointment, promotion and dismissal of staff

♦ Issue of shares and debentures

♦ Allotment of shares

♦ Calls on shares

♦ Forfeiture and re-issue of shares

♦ Transfer and transmission of shares

♦ Convening meeting of shareholders

♦ Determination of rates of dividend

♦ Entering into contracts with third parties

♦ Investment of company funds

♦ Borrowing on behalf of the company

♦ Filing of statutory returns

♦ Maintenance of statutory and other books of the company

minutes of the board meeting

Every company is required to have the minutes of all Board meetings. The pages of the Minutes

Book must be consecutively numbered and each page must be signed and the last page of the book must

be signed by the Chairman of the meeting.

MOTIONS AND RESOLUTIONS

A ‘motion’ is a definite proposal put before a meeting for its consideration and adoption. A

‘resolution’ on the other hand is the formal expression of the decision of a meeting. When a motion has

been duly voted upon and passed by a majority, with or without amendment, it is called a ‘resolution’. A

resolution once adopted and recorded in the minutes becomes the official decision of the meeting and

cannot be rescinded or revoked except by the consent of two-thirds majority in a meeting specially called

for the purpose.

kinds of resolutions

(1) Ordinary Resolution

(2) Special Resolution

(3) Resolution requiring Special Notice

1. Ordinary Resolution

A resolution which is passed by a simple majority of votes cast by members present in person or

by proxy is called ‘ordinary resolution’. Simple majority means that the votes cast in favour of the

resolution must be at least one more than 50 per cent of the votes cast.

An ordinary resolution must satisfy the following conditions:

(a) It must be moved at a general meeting of which due notice has been given

(b) The voting may be on show of hands or by poll

(c) Voting must be by members who are entitled to vote in person or by proxy, if allowed; and

(d) The votes cast in favour of the resolution, including the casting vote of the chairman, if any,

must exceed the votes, cast against the resolution.

Usually, ordinary resolutions are required to transact ‘ordinary business’. In addition, ordinary

resolutions are sufficient to transact following types of special business:

� Adoption of statutory report

� Removal of director from office before the expiry of his term

� Alteration of share capital

� Issue of shares at a discount

� Appointment of sole selling agents.

2. Special Resolution

A special resolution is one which is required for transacting special business and is required to be

passed by a three-fourths majority of members present and vote in the meeting.

A special resolution in order to be valid under the law must satisfy the following conditions:

� The notice of the general meeting must have been duly given as required under the Act;

� The intention to propose the resolution as a special resolution must have been duly specified in the

notice calling the general meeting or other intimation of such intention must have been given to

members;

� The voting may be on show of hands or on poll;

� Votes are cast by members who are entitled so to do, either in person or by proxy; and

� Votes cast in favour of the resolution are not less than three times the number of votes, if any, cast

against the resolution.

Special resolution is required to transact the following types of business:

� To change of name of the company

� To change of the domicile of the company

� To change the object clause

� To alter Articles of Association

� To create reserve capital

� To Reduce share capital

� To pay interest out of capital

� To decide winding up of the company

resolutions requiring special notice

Section 190 of the Companies Act, 1956 provides as follows:

(1) Where by any provision contained in this Act or in the Articles, special notice is required of any

resolution, notice of the intention to move the resolution shall be given to the company not less than

14 days before the meeting at which it is to be moved, exclusive of the day on which the notice is

served or deemed to be served and the day of the meeting.

(2) The company shall, immediately after the notice of the intention to move any such resolution has

been received by it, give its members notice of the resolution in the same manner as it gives notice

of the meeting, or if that is not practicable, shall give them notice thereof, either by advertisement in

a newspaper having an appropriate circulation or in any other mode allowed by the Articles, not less

than seven days before the meeting.

The Companies Act has specified certain types of business where such a resolution is required. If a

member wants to move such a resolution, he must give special notice to the company of his intention to

move such a resolution at least 14 days before the date of the meeting. On receipt of such notice, the

company must give notice of the resolution to its members at least 7 days before the meeting, in the same

manner as it gives notice of the meeting. If it is not practicable, notice must be given through

advertisement in newspapers or any other mode allowed by the Articles. The resolution proposed to be

moved may be an ordinary resolution or special resolution.

According to Companies Act, a resolution requiring special notice is required to transact the

following types of business:

(i) Removal of a director before the expiry of his term or to appoint another director in place of a director

so removed.

(ii) Appointment as auditor of a person other than the retiring auditors or deciding that retiring auditor

shall not be re-appointed.

Articles may provide for additional matters for which special notice is required.

MINUTES

‘Minutes’ have been defined as the written record of the business done at a meeting. The minutes

comprise the official record of the proceedings and decisions of a meeting. They constitute a clear,

concise, accurate and permanent record of the decisions and actions of a constituted body. Once

approved and signed by the chairman, they are acceptable as evidence of the proceedings in a court of

law.

Provisions of the Companies Act regarding Minutes

Section 193 of the Companies Act makes it obligatory for every company to maintain minutes of

the proceedings of every general meeting and meetings of the Board of Directors and its Committee. It

has also been laid down that minutes of company meetings kept in accordance with the provisions of this

section will be recognised as evidence of the proceedings recorded therein. Entries must be made in the

minutes book within thirty days of the conclusion of such meetings and the pages of the minutes book

must be consecutively numbered.

The minutes of each meeting must contain a fair and correct summary of the proceedings. In the

case of Board meeting, the names of the directors present and those dissenting in any resolution must also

be mentioned in the minutes.

The minutes need not include any matter which, in the opinion of the chairman, is or may be

considered to be defamatory or irrelevant or immaterial or is detrimental to the interests of the company.

The chairman will have absolute discretion in deciding whether any matter should or should not be

included on the above grounds.

Each page of every minutes book must be initialed or signed and the last page of the book must

be dated and signed by the Chairman of the same meeting.

Any default in complying with these provisions will make the company, and every officer of the

company in default, liable to fine as per the provisions of the Act.

Sec.196 of the Companies Act provides that the minutes of the proceedings of every general

meeting of the company must be kept at the registered office of the company and must remain open for

inspection by any member, free of charge, subject to any reasonable restrictions that the company may

impose by its Articles or in general meeting.

review questions:

1. What are the characteristics of a company?

2. What is a Government company? What are its features?

3. List out the documents to be filed for getting Certificate of Incorporation.

4. What is Memorandum of Association? What are its contents?

5. Describe the procedure involved in alteration of Memorandum of Association.

6. What is Articles of Association? What are its contents?

7. What is Prospectus? What are its contents? What are the consequences of mis-statements in

prospectus?

8. What is Doctrine of Ultravires? What are the effects of Ultravires transactions?

9. Explain the concept of Doctrine of Indoor Management.

10. What are the different methods of appointment of Directors?

11. What are the powers and duties of Directors?

12. What are the requisites of valid meeting?

13. What is a Statutory meeting? What are the contents of statutory report?

14. What is the Annual General Meeting? What are the usual business that are transacted in the AGM?

15. What is Extraordinary General Meeting? Who can convene it?

16. What are the different kinds of resolutions?

17. What do you understand by the Minutes? What are the provisions of the Act regarding maintenance

of minutes of the meeting?

LESSON – 17

COMPANY MANAGEMENT

A company, though a legal entity in the eyes of the law, is an artificial person, existing only in

contemplation of law. It has no physical existence. It has neither soul nor a body of its own. As such, it

cannot act in its own person. It can do so only through some human agency. The persons who are in

charge of the management of the affairs of a company are termed as directors. They are collectively

known as Board of Directors.

directors

The Companies Act defines a ‘director’ as “any person occupying the position of a director by

whatever name called” [Sec.2(13)]. This is however, an inadequate definition.

In the absence of a precise definition, we can only determine whether a person is a director or not

a director by referring to the nature of his office and functions. According to the functions performed by

him, a director may be defined as a person who directs, conducts, manages and supervises the affairs of a

company.

Only Individuals can be Directors

A body corporate, association or firm cannot be appointed director of a company. Only an

individual can be appointed as directors.

Number of Directors

Every public company shall have atleast 3 directors and every other company shall have atleast 2

directors. Subject to this statutory minimum limit, the Articles of a company may prescribe the maximum

and minimum number for its Board.

Share Qualification of Directors

The Articles of a company usually require its directors to hold a certain number of shares. Such

shares are called qualification shares. The nominal value of the qualification shares should not exceed

Rs.5,000. He should obtain his qualification shares within 2 months after his appointment as director.

Number of Directorships

A person cannot hold office at the same time as director in more than 20 companies. Where a

person already holding the office of director in 20 companies is appointed as a director of any other

company, the appointment can take effect only when such person has, within 15 days of his appointment,

effectively vacated his office as director in any of the companies in which he was already a director.

disqualification of directors

The following persons are disqualified for appointment as directors of a company:

� A person of unsound mind.

� An undischarged insolvent.

� A person who has applied to be adjudicated as an insolvent and his application is pending.

� A person who has been convicted by a Court of any offence involving moral turpitude and sentenced

to imprisonment for a minimum period of 6 months and a period of 5 years has not passed from the

date of expiry of the sentence.

� A person whose calls in respect o shares of the company held by him have been in arrear for more

than 6 months.

� A person who is disqualified for appointment as director by an order of the Court under Sec.203 on

the ground of fraud or misfeasance in relation to a company.

vacation of office of directors

The office of the director of a company becomes vacant, if –

� he fails to obtain within 2 months of his appointment or at any time thereafter ceases to hold the share

qualification;

� he is of unsound mind;

� he applies to be adjudicated an insolvent;

� he is adjudged an insolvent;

� he is convicted by a Court of any offence involving moral turpitude and sentenced in respect thereof

to imprisonment for at least 6 months.

� he fails to pay any call in respect of shares of the company held by him within 6 months from the last

date fixed for the payment of the call;

� he absents himself from 3 consecutive meetings of the Board of directors;

� he accepts a loan without the approval of the Central Government;

� he fails to make disclosures to the Board of directors with regard to any contracts with the company

in which he is directly or indirectly interested;

� he becomes disqualified by an order of the Court for guilty of fraud;

� he is removed before the expiry of his period of office by an ordinary resolution;

appointment of directors

First Directors

The first directors are usually named in the articles of association of the company. If not, they

shall be determined in writing by the subscribers of the memorandum. If this also is not done, all the

subscribers of the memorandum shall be deemed to be the first directors of the company.

Appointment of Directors by the Company

According to Sec. 255, directors are appointed by a company in a general meeting. While one-

third of the directors can be appointed permanently, the remaining two-thirds are liable to retire by

rotation. Of these, only one-third are liable to retire at any annual general meeting. Retiring directors are

also eligible for re-appointment.

Appointment of Directors by the Board of Directors

(a) As Additional Directors: (Sec.260). The Board of Directors may appoint additional directors within

the maximum strength fixed by the articles. Such additional directors hold office only upto the date

of the next annual general meeting of the company.

(b) In a Casual Vacancy: (Sec.262). Causal vacancy can be filled up by the board if the articles permit it.

A casual vacancy may arise due to reasons such as death, resignation, disqualification or failure of an

elected director to accept the office or due to any other reason. The director appointed in a causal

vacancy shall hold office only upto the date on which the director whose place has been filled up was

to retire.

(c) As an Alternate Director: (Sec.313). The Board of Directors if authorised by the articles or by the

company’s resolution at the general meeting may appoint an alternate director. Such an alternate

director is to act for the original director during his absence for a period of more than three months

from the State in which the meetings of the company are held. The alternate director can continue as

director only for the period for which the original director was eligible. Further on the return of the

original director, the alternate director must vacate the office of directorship.

Appointment of Directors by Third Parties (Sec.255)

Sometimes the articles may give a right to financial institutions, debenture holders and banking

companies which have lent money to the company to nominate directors on the board of the company

with a view to ensuring that the funds advanced by them are used by the company for the purpose for

which they are borrowed. The number of directors so nominated should not exceed one-third of the total

strength of the board and they are not to retire by rotation.

Appointment of Directors by the Central Government

The Central Government may appoint such number of directors of the board of a company as the

Company Law Board may by an order in writing specify as being necessary to effectively safeguard the

interest of the company, its shareholders or the public interest. They are appointed to prevent oppression

of the minority shareholders or to prevent mismanagement of the company or in the public interest. They

are appointed for a maximum period of three years. They are not required to hold qualification share and

are not liable to retire by rotation but they can be removed by the Central Government at any time and

other persons may be appointed by it in their place.

powers and duties of directors

The powers of the Directors can be broadly divided into two:

(i) Statutory Powers

(ii) Managerial Powers

statutory powers

These powers are laid down in the Companies Act, 1956. They confer upon the Board of

Directors is the right to exercise all such powers and do all such acts as the company itself has the

authority to exercise and do. Thus, the powers of the directors are provided in the Companies Act.

Powers to be exercised only at Board Meeting: Sec.292 of the Companies Act provides that the Board

of Directors shall exercise the following powers by means of resolutions passed at a meeting of the

Board:

• the power to make calls on shares;

• the power to issue debentures of the company;

• the power to borrow money otherwise than on debentures;

• the power to invest the funds of the company; and

• the power to make loans.

Powers to be exercised by the Board only with the consent of the Shareholders in the General

Meeting:

� sell, lease or dispose the whole or part of the company’s undertaking,

� remit or allow time for repayment of debt due by a director,

� invest any amount received on the acquisition of any property or under-excess of the maximum laid

down in the Act,

� appoint a sole selling agent for more than 5 years,

� issue bonus shares, and

� reorganise the share capital of the company.

Other Powers to be exercised at Board Meetings

� The power to appoint Additional Directors,

� The power to fill-up causal vacancy in the office of Director,

� The power to accord sanction to a Director to enter into certain specified contracts with the company.

� The power to appoint as Managing Director.

� The power to invest in any shares of any other body corporate.

� The power to make declaration of solvency in the case of members voluntary winding up.

managerial powers

(a) Power to make contracts on behalf of the company.

(b) Power to decide the terms of issue of additional shares and debentures.

(c) Power to issue, allot, forfeit and transfer shares of the company.

(d) Power to appoint Directors to fill-up any casual vacancies, Additional Directors or Alternate

Directors.

(e) Power to set organisational objectives and formulate major policies.

(f) Power of determining the organisational structure of the company.

duties of the directors

general duties

• To establish the general objectives and to determine the business of the company;

• To issue directions for the implementation of these policies and to review and check up the

performance;

• To delegate powers to any committee or the chief executive or others, if permitted by the Articles;

and

• To appoint officers and other employees, including managerial personnel, of the company.

statutory duties

� To disclose interests in contracts or arrangements proposed to be entered into by the company

(Sec.299).

� To disclose particulars of shares held in other companies (Sec.308).

� To disclose names, addresses, occupations etc. for entry in the Register of Directors.

� To determine minimum subscription and issue prospectus.

� To hold statutory and annual general meetings and lay before these meetings the reports, accounts,

returns etc. required by the Act.

� To convene extraordinary general meeting if requisitioned by members.

� To circulate and file with the Registrar the resolutions, reports accounts etc. required by the Act.

� To issue, allot, forfeit and transfer shares.

� To recommend declaration and payment of dividends as per the Act.

� To maintain books and registers required under the Act and the Articles.

� To do all other acts required under the Act and the Articles.

fiduciary duties

As agents of the company, the directors hold a position of trust in relation to the company. They

are duty bond (a) to exercise their powers honestly and bonafide for the benefit of the company as a

whole; and (b) not to place themselves in a position where there is a conflict between their duties to the

company and their personal interests.

Thus, the first duty of the directors is to act honestly and with utmost good faith. They exercise

their powers bonafide for the benefit of the company and must not use it for their own personal interests.

If they make any profit by the use of their powers, as directors, they must account for the same to the

company.

Duty of Care and Skill

The directors have a common law duty to exercise reasonable care and skill in the discharge of

their duties. If they fail to do so, they will be liable for damages under the common law.

Duty not to Delegate

directors are expected to perform his functions personally and not to delegate them to someone

else who is not a director.

Duty to Disclose Interest

Directors of a company are duty bound to disclose their interests in contracts or arrangements

proposed to be entered into by the company. This safeguard is necessary to prevent any conflict between

the personal interests of the director and his duty to the company.

remuneration of directors

The remuneration payable to the directors of a company, including any managing or whole-time

director, is determined either by the Articles of the company, or by a resolution passed by the company in

general meeting. The Articles may also require that a special resolution is to be passed for the purpose.

The amount of remuneration and its mode of payment, must be in accordance with the provisions of

Secs.198 and 309.

Overall Maximum Managerial Remuneration:

The total managerial remuneration to the managing/ whole-time directors and/or manager of a

public company or a private company which is a subsidiary of a public company in respect of any

financial year must not exceed 11 per cent of the net profits of the company for that financial year. The

percentage aforesaid shall be exclusive of any fees payable to directors for attending meetings of the

Board of directors or any committee thereof.

removal of directors

Directors may be removed by –

1. Shareholders (Sec.284)

The shareholders may, by passing an ordinary resolution at their general meeting, remove a

director before the expiry of his period of office.

2. Central Government (Secs.388-B to 388-E)

The Central Government may exercise this power where in its opinion there are circumstances

suggesting –

(a) that the director concerned in the conduct and management of the affairs of the company is or

has been guilty of fraud, misfeasance, persistent negligence or default in carrying out his

obligations and functions under the law, or breach of trust; or

(b) that the business of the company is not or has not been conducted and managed by the

director in accordance with sound business principles or prudent commercial practices; or

(c) that the company is or has been conducted and managed by the director in a manner which is

likely to cause, or has caused, serious injury or damage to the interest of the trade, industry or

business to which such company pertains; or

(d) that the business of the company is or has been conducted and managed by the director with

intent to defraud its creditors, members or any other person or against public interest.

3. Company Law Board (Sec.402)

Where, on an application to the Company Law Board for prevention of oppression or mis-

management, the Company Law Board finds that the relief ought to be granted, it may by an order

provide for the termination, setting aside or modification of any agreement between the company and the

director. When the appointment of a director is so terminated or set aside he cannot sue the company for

damages or compensation for loss of office.

liabilities of directors

The following are the liabilities of directors –

1. Liability to Third Parties

This may arise –

(1) Under the Act: Liability of directors to third parties may arise in connection with the issue of a

prospectus which contains mis-statements.

They may also incur such liability –

♦ where they fail to repay application money if minimum subscription has not been subscribed;

♦ where the allotment of shares has been irregular;

(2) Independently of the Act: Directors are personally liable while signing a negotiable instrument

without mentioning the company’s name and if they act in their own name.

2. Liability to the Company

(1) Ultra vires acts: Directors are personally liable to the company in respect of ultra vires acts.

(2) Negligence: A director may incur liability for negligence in the exercise of his duties.

(3) Breach of trust: They must discharge their duties as trustees in the best interest of the company.

They are liable to the company for any loss resulting from breach of trust.

(4) Misfeasance: Directors arealso liable to the company for misfeasance which means ‘misconduct’ of

directors for which they may be sued in a Law Court.

3. Liability for Breach of Statutory Duties

If directors fail to perform the statutory duties, they render themselves liable to penalties.

4. Criminal Liability

Apart from civil liability under the Act or under the general law, directors of a company may also

incur criminal liability under common law, as well as under the Companies Act and other statutes.

managing director

Section 2(26) of the Companies Act defines a managing director as, “a director who, by virtue of

an agreement with the company, or of a resolution passed by the company in general meeting, or by its

Board of Directors, or by virtue of its Memorandum or Articles of Association, is entrusted with

substantial powers of management which would not otherwise be exercisable by him, and includes a

director occupying the position of a managing director, by whatever name called.”

From the above definition it is clear that a managing director is also a director, but he enjoys

substantial powers to act as the chief executive under the control and supervision of the Board. Thus, he

is both a director and manager. As a director he takes a seat in the Board meeting and participates in the

policy-making function. As a manager or chief executive, he is responsible for the day-to-day

management of the company.

appointment of managing director

Usually the Articles of most companies empower the Board to appoint one of their member as

managing director by a resolution of the Board and under a separate service agreement setting out the

terms and conditions of his service. Only an individual can be appointed as a managing director.

No person can act as managing director of more than two companies at a time. No company can

appoint a person as managing director for a term exceeding five years at a time. A managing director can

be re-appointed for further periods not exceeding five years at a time.

rights, powers and duties

A managing director has two fold function – he is both a director and a manager. As a director he

takes a seat in the Board meetings and helps in the formulation of policy matters. As a manager or chief

executive he is responsible for the routine management of the company’s business. But compared to

other directors, he enjoys substantial powers of management under the control and supervision of the

Board.

The managing director derives his powers from the Memorandum and Articles of the company or

from the resolution of the general meeting or the Board or from the service agreement entered into by him

with the company. He enjoys substantial powers of management delegated to him by the Board. Thought

the Act excludes certain routine administrative acts from his substantial powers of management, he can

exercise these powers provided the Board authorises him. He also derives certain powers from the

service agreement between him and the company.

The managing director, being essentially a director, has all the rights and duties of a director. In

addition, he enjoys some other rights and has to perform many other duties in the day-to-day management

of the company. These additional rights and duties are usually provided for in the Articles and conferred

on him by the Board. The service agreement defines the limits of his powers and duties.

remuneration

A managing director may be remunerated either by way of a monthly payment or at a specified

percentage of the net profits of the company or partly by one way and partly by the other. But such

remuneration must not exceed 5% of the net profits without the sanction of the Central Government.

Where there are more than one such managing directors, the remuneration must not exceed 10 percent of

the net profits without sanction of the Central Government.

1

MODEL QUESTION PAPER

Paper 1.5: BUSINESS LAWS Time: 3 Hours Max. Marks: 100

SECTION - A (5 x 8 = 40)

Answer any Five questions

All questions carry equal marks

1. Define offer. State the legal rules relating to valid offer.

2. Define consideration. What are the legal rules relating to consideration?

3. Distinguish between the contract of indemnity and contract of guarantee.

4. Distinguish between sale and agreement to sell.

5. State the procedure of redressal of grievances under Consumer Protection

Act.

6. What is the test for partnership?

7. What are the kinds of fire policies?

8. What is corporate veil? When is it lifted?

SECTION - B (4 x 15 = 60) Answer any Four questions

Question No.15 is compulsory.

9. What are the essentials of valid contract?

10. What are the implied conditions and warranties under Sales of Goods Act?

11. What are the different methods of discharging the contract?

12. What are the rights and duties of an agent?

13. What are the general principles of insurance?

14. What are the different methods of appointment of Directors?

15. Attempt the following Cases:

2

1. A invites B to a dinner at his house on a Sunday, B hires a taxi and

reaches A’s house at the appointed time, but A fails to perform his

promise. Can B recover any damages from A?

2. A forced B to enter into a contract at the point of pistol. What remedy is

available to B, if he does not want to be bound by the contract?

3. At a meeting of a company only 15 shareholders were present, 9 voted for

a special resolution and 2 against, and 4 did not vote at all. Is this a valid

resolution?

4. What are the rules laid down in the case, (a) Royal British Bank Vs

Turquand, (b) Salomon Vs Salomon?

5. The captain of a ship, which was on the point of capture, threw overboard

a quantity of dollars lest it should fall into enemy hands. Can he claim

general average contribution?

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